Installation & Commissioning Expenses are not covered under the definition of FTS u/s 9 of Income Tax Act, 1961
The issue is no longer res integra as it has been held by Hon’ble ITAT Mumbai in case of Bennet Coleman & Co. Ltd. Vs ITO(TDS) [ITA No. 7315/Mum/2008] pronounced on 12-11-2014 wherein the assesse (Times of India) has entered into an agreement with M/s FERAG AG for supply of heavy plant and machinery along with installation and commissioning of the same. The supplier was also under an obligation for training the employees of the plaintiff. Two separate contracts were entered, one for supply of machine and other for related services. The payment was made to M/s FERAG AG and no TDS was deducted on it. The AO issued notice u/s 201(1) and imposed interest under section 201(1A) of the Act.
The assesse being aggrieved appealed before the Learned CIT(A) who allowed the appeal partially in favour of the assesse. The assesse preferred an appeal before the Hon’ble ITAT against the said order. The assesse pleaded that although two separate contracts were entered but it was one comprehensive activity and thus the contract cannot be separated and it is not taxable under FTS. This argument was declined relying on the landmark judgement of Hon’ble Apex Court in case of Ishikawajima-Harima Heavy Industries wherein it was held that
“The very fact that in the contract, the supply segment and service segment have been specified in different parts of the contract is a pointer to show that the liability of the assessee thereunder would also be different.”
The assesse then pleaded that the installation and commissioning would tantamount to assembly which is specifically excluded from the definition of FTS under Explanation 2 to Section 9(1)(vii) of the Act. This contention of the assesse was upheld by Hon’ble Tribunal. It was further held that by no stretch of imagination it can be held that training of employees of the assesse could fall within the meaning of assembly.
Further, it was observed that as per Article 14 of the India-Swiss Confederation DTAA, the said services (installation, commissioning and training) was taxable only in Switzerland. As per Article 14 of the DTAA which defines engineering services and thus the said services would not be taxable in India as the supplier does not have a PE in India. The tax would however be imposed on the training charges paid by the assesse. The appeal was partly allowed in favour of the assesse.