Jabalpur Tribunal rules on interplay between provisions of PE and FTS for taxing installation/commissioning activities in composite contracts (Birla Corporation)

We are pleased to release a Tax Alert which summarizes a recent ruling of the Jabalpur Income Tax Appellate Tribunal (Tribunal), in the case of Birla Corporation Ltd. (Taxpayer) , on the issue of taxability of installation and commissioning charges of machinery in India under the Indian Tax Laws (ITL) and the seven applicable double taxation avoidance agreements (DTAAs). The installation and commissioning activities were in connection with machinery/equipment supplied by vendors from outside India. The Tribunal held that such activities do not create an installation permanent establishment (PE), since the activities did not exceed the threshold provided in the DTAAs. Furthermore, the payments would not be covered under the fees for technical services (FTS)/fees for included services (FIS) articles of the DTAAs.  Hence, the payment towards installation and commissioning activities made to foreign vendors would not be taxable in India and the Taxpayer is under no obligation to deduct tax at source on such payments, under the ITL.

This ruling rules on non-applicability of FTS/FIS articles after a PE is not created under the specific PE clause of the applicable DTAA. A similar view had been upheld in the past by the Mumbai Tribunal in the case of Aditya Birla Nuvo Ltd.   Interplay between applicability of FTS or PE rule is a contentious issue. The Jabalpur Tribunal took a view that rendition of installation, commissioning or assembly services would be covered by Article 5 (on PE), being a specific article applicable in respect of services which are in the nature of construction or installation project or in the nature of supervisory services in connection with such a project