India: Ruling on taxing installation or commissioning activities in composite contracts
Recently, in the case of Birla Corporation (Taxpayer), the Jabalpur Income Tax Appellate Tribunal (Tribunal) ruled on the taxability of payment towards installation and commissioning (I&C) activities in connection with plant and machinery (P&M) supplied from outside India. The Taxpayer was an Indian company engaged in the business of manufacturing and selling cement. During the relevant tax years, Taxpayer imported P&M from vendors located in seven countries (Austria, Belgium, China, Germany, Switzerland, UK and US). Technicians of the respective vendor visited India for providing services for I&C of P&M. Taxpayer made remittance to vendors without withholding taxes in India on the basis that payments were for the offshore supply of P&M, and hence, not taxable in India. The tax authority contended that the arrangement is in the nature of "composite contracts" and raised a withholding tax demand on the total consideration payable under the contract. Aggrieved, Taxpayer preferred an appeal before the Tribunal.
The Tribunal held that installation permanent establishment (PE) is not created under all the applicable treaties since the prescribed time threshold was not fulfilled. Further, it analysed the interplay between installation PE and fees for technical/included services (FTS/FIS) provisions and observed that:
In case of conflict or overlap, specific provision of PE must prevail over general provisions of FTS/FIS. Once fees for I&C services are covered under specific PE clause, provisions of taxability as FTS/FIS will not apply;
FTS/FIS provisions cannot be invoked for taxing a non-resident on the basis of accrual of liability (without actual payment being made) or on the notions of fiction of an element of FTS or FIS being embedded in business receipts for sale of P&M;
Even if FTS/FIS provision is applied in the present case, the payment may not satisfy the "make available" condition under India-UK or India-US treaty since I&C services do not involve transfer of technology in the sense that Taxpayer cannot perform the services on its own without recourse to service provider. A similar view can be adopted in respect of payments made to vendors in Belgium by invoking the "most favoured nation" clause under the India-Belgium treaty.
Accordingly, it was held that the receipt in the hands of vendors is business income, not taxable in India in the absence of creation of a PE under the relevant tax treaties.
The interplay between applicability of FTS or PE rule is a contentious issue. In this ruling, the Tribunal has taken a view on non-applicability of FTS/FIS provision where the services are covered under a specific PE clause. Most of India tax treaties contain a provision in article 7 (for taxation as PE profits) providing that any income which is dealt with separately in other articles (say, FTS/FIS), then provisions of article 7 may not apply to such incomes. The Tribunal has perhaps not considered the impact of this provision for tax treatment of payments before it.
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