AI Drafter 
TaxTMI 
TaxTMI 
2016 (7) TMI 953
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.... the business of manufacturing of fertilizers, urea and chemicals had entered into an agreement with SnamProgetti, SpA Italy (SP), a resident of Italy for supply of 'Basic Engineering Design Package' (BEDP) besides other work and services for its capacity augmentation for production of urea on 26th April, 2007. As per the agreement, SP Italy has to supply basic design of 'Capacity Augmentation Project', which has been termed as "BEDP". All the work related to the "BEDP" was to be carried out by the SP in Italy. Thereafter a detailed engineering was to be done by a local engineering firm engaged by assessee on approval of SP in Italy. In terms of the agreement, the SP had granted non-exclusive and non-transferable right and licenses to be used in BEDP prepared on the basis of necessary information and documents supplied by the assessee to SP. A sum of EUR 490,000 has been paid to SP for providing BEDP. The entire scope of the work including BEDP in the agreement was defined as under: "Scope of Work SP's scope of work for the CAPACITY AUGMENTATION PROJECT as per the terms of the AGREEMENT ("SCOPE OF WORK") consists of the following: 2.1 Advance During Pre Basic Test: SP s....
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....ied in Appendix V to this AGREEMENT, SP shall provide mandatory, Technical Assistance Services (hereinafter referred to as "TAS") during the implementation of the CAPACITY AUGMENTATION PROJECT as per para 5 of Appendix.". 3. Thus, as per the agreement, for different work and services four different identified payments have to be made. So far as the payment for BEDP is concerned, for supply, drawing and design in Italy, the same was performed by SP in Italy and not in India which is evident from clause 2.4 as reproduced above. The assessee, accordingly, moved an application dated 23rd August, 2007 under section 195 before the Dy. Director of Income-tax (International Taxation)-2(1), Mumbai (AO). The AO held that, the amount paid is to be taxed in India as "fee for technical services" under section 9(1)(vii) and is governed by provisions of section 115A. The relevant observation and direction of the AO in his order under section 195(2) is reproduced hereunder:- "The applicant is purchasing such Basic Engineering Design Package for its capacity augmentation project and BEDP will be supplied by S.P. in Italy. Detailed engineering design will be prepared by local engineering firm ....
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.... skills or expertise as to how designs were made to the appellant company but only supplying the BEDP after studying the documents supplied by the appellant company. 3. Further, SP Italy just has to reproduce the existing material after the requirements as laid down in the documents received from the appellant company by SP in Italy are matched with the designs available with the SP. Since the major activity of developing a standard designs have already been developed by SP therefore, no major expenditures are to be incurred for supplying the designs. xxxxxxxx xxxxxxx xxxxxx xxxxxxxx xxxxxxxxx • The payment made was for the development and transfer of the design, and being an out and out transfer on sale of such designs and drawings, the payments for such would not constitute FTS. • The contract was not a contract of service as in the case of service, the supplier undertakes to perform services, which required the use by the supplier of special knowledge, skills and expertise to the other party. • The assessee distinguished the sale transaction from a service transaction by submitting that in the case of a sale, it presupposes the title ....
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....ithdrawn by the CBDT vide Circular No.7 dt. 22.10.2009. The Memorandum explaining the intent of Legislature behind Explanation 2 below section 9(2) clearly states that only 'Fees for Technical Services' paid for services, irrespective of situs of rendition of services, is taxable in India, if the services are utilized in a business of assessee in India. This explanation has been introduced with the sole objective to overcome the effect of judgment of Supreme Court in case of Ishikawajma Harima Heavy Industries Ltd. and Karnataka High Court in case of Jindal Thermal Power Company Ltd". On the same reasoning, he did not follow the decisions of Hon'ble Jurisdictional High Court in the case of Clifford Chance vs DCIT, (supra) that this decision again is based on the same Supreme Court decisions and is not applicable in view of new Explanation (supra). Thereafter, he proceeded to analyze in detail as to why such a payment amounts to "fees for technical services" in terms of section 9(1)(vii). His detailed reasoning given in the order are not being dealt with us for the reason that the issue which has been contested before us by the parties is that, whether assessee can be hel....
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....reckoned as "fee for technical services" as held by the AO as well as by the CIT(A), then whether the assessee was liable to deduct TDS even though admittedly the said payment was made for rendering of services outside India. As stated earlier, clause 2.4 of the 'agreement' with regard BEDP for which payment of EUR 490,000 was made by the assessee, has been made available by SP in Italy. Other payments which have been made with regard to other work and services in terms of other clauses is not in dispute before us, although the Ld. Counsel at the time of hearing has stated that the assessee has later on deducted TDS for all the payments. It is an admitted position that in wake of decision of Hon'ble Supreme Court in Ishikawajma Harima Heavy Industries Ltd vs. DIT (supra) which has been followed by the Hon'ble jurisdictional High Court also in Clifford Chance vs DCIT (supra), the position of law as it stood then, including the taxing of the income under section 9(1)(vii) was that, if the services which are source of income is sought to be taxed, have to be rendered in India as well has to be utilized in India so as to be held to be taxable in India. Both the conditions have to be sa....