Mumbai Tribunal regards installation and commissioning of supplied equipment as “assembly” services, not taxable as fees for technical services

  

This Tax Alert summarizes a recent ruling of the Mumbai Income Tax Appellate Tribunal (Tribunal) in the case of M/s Bennet Coleman & Co. Ltd.  (Taxpayer) on the issue of taxability of various services involved in connection with installation and commissioning of equipment, which also included training services provided by a foreign company. This was examined both under the provisions of the Indian Tax Laws (ITL) and the India-Switzerland Double Taxation Avoidance Agreement (DTAA).

The Taxpayer, which was engaged in the business of printing and publishing newspapers, made payments to a Switzerland-based company (SwissCo) for installation/commissioning and training services, without withholding tax at source. The Tribunal held that installation and commissioning services qualify as “assembly” and, hence, were excluded from the purview of taxation as Fees for Technical Services (FTS) under the ITL. The Tribunal further held that, under the DTAA, the Independent Personal Services (IPS) article which overrides the FTS article of the DTAA, applies not only to individuals but also to non-individual taxpayers and, hence, the Taxpayer, in the present case, can avail of the benefit of the same. As the services of installation and commissioning do not meet the threshold requirement under the IPS article, such services cannot be taxed in India.

With respect to training services, the Tribunal ruled that the FTS article applies to classroom training services provided by the foreign company but does not apply to shop floor training as to how to operate the mail room equipment. Accordingly, having regard to the nature of training, the Tribunal regarded 25% of the training cost as being towards classroom training, requiring taxes to be withheld under the FTS article of the DTAA.

It is very common to see arrangements where an entity supplying equipment also undertakes the activity of installing it. In cases involving complex equipment or numerous individual components to be assembled, these require the skill and expertise of technical personnel specifically trained for the purpose of performing such services. They may also be required to provide training to the employees of the purchaser so as to enable proper use of the supplied equipment. In this context, a question that often arises is whether the entire payment can be considered as towards supply of equipment or the services component should be segregated and taxed as FTS.

This ruling highlights that, where there are separate contracts with distinct rights and obligations between contracting parties, the services of installation/ training can be regarded as separate from the supply part.

In some DTAAs, such as the one under consideration with Switzerland, the IPS article does not specifically state that it applies only to individuals , but instead, suggests that it applies to income derived by a resident of the treaty jurisdiction. Given the context of the IPS article, whether this expression should be considered as restrictive and, hence, applicable only to individuals has been a matter of controversy with many divergent decisions on the issue. The Tribunal, in this case, has taken a view that the benefit of the IPS article can be availed of by non-individuals, such as companies, as well.