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
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).
