Thursday, 1 January 2015

Though construction, installation and assembly activities are de facto in the nature of technical services, the consideration thereof will not be assessable under Article 12 but will only be assessable under Article 7 if an “Installation PE” is created under Article 5. As Article 5 is a specific provision for installation etc, it has to prevail over Article 12

Birla Corporation Limited vs. ACIT (ITAT Jabalpur)


The Tribunal had to consider whether consideration attributable to the installation, commissioning or assembly of the plant and equipment & supervisory activities thereof is assessable to tax in India under section 5(2)(b) & 9(1)(vii) of the Act and Article 5 & 7 and Article 12 of the DTAA. HELD by the Tribunal:
(i) Under s. 5(2)(b) of the Act, the consideration attributable to the installation, commissioning or assembly of the plant and equipment & supervisory activities thereof is assessable to tax in India as
the said income accrues in India. S. 9(1)(vii) does not apply because the definition of ‘fees for technical services’ in Explanation 2 to s. 9 (1)(vii) specifically excludes “consideration for any construction, assembly, mining or like project undertaken by the recipient”. Even though the exclusion clause does not make a categorical mention about ‘installation, commissioning or erection’ of plant and equipment, these expression, belonging to the same genus as the expression ‘assembly’ used in the exclusion clause and the exclusion clause definition being illustrative, rather than exhaustive, covers installation, commissioning and erection of plant and equipment;
(ii) However, the said receipt is not assessable as business profits under Article 7(1) of the DTAA if the recipient does not have an “installation PE” in India. Under the DTAA, an installation or assembly project or supervisory activities in connection therewith can be regarded as an “Installation PE” only if the activities cross the specified threshold time limit (or in the case of Belgian & UK, where the charges payable for these services exceeds 10% of the sale value of the related machinery or equipment). The onus is on the revenue authorities to show that the conditions for permanent establishment coming into existence are satisfied. That onus has not been discharged on facts;
(iii) On the question as to whether the said receipt for installation, commissioning or assembly etc activity can be assessed as “fees for technical services”, it is seen that the DTAA has a general provision in Article 12 for rendering of technical services and a specific provision in Article 5 for rendering of technical services in the nature of construction, installation or project or supervisory services in connection therewith. As there is an overlap between Article 5 and Article 12, the special provision (Article 5) has to prevail over the general provision (Article 12). What is the point of having a PE threshold time limit for construction, installation and assembly projects if such activities, whether cross the threshold time limit or not, are taxable in the source state anyway. If we are to proceed on the basis that the provisions of PE clause as also FTS clause must apply on the same activity, and even when the project fails PE test, the taxability must be held as FTS at least, not only the PE provisions will be rendered meaningless, but for gross versus net basis of taxation, it will also be contrary to the spirit of the UN Model Convention Commentary. Accordingly, though construction, installation and assembly activities are de facto in the nature of technical services, the consideration thereof will not be assessable under Article 12 but will only be assessable under Article 7 if an “Installation PE” is created;

(iv) In any event, the said consideration cannot be assessed as “fees for technical/ included services” as the “make available” test is not satisfied. The said installation or assembly activities do not involve transfer of technology in the sense that the recipient of these services can perform such services on his own without recourse to the service provider (this is relevant only for the DTAAs that have the “make available” condition).

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