ITAT Delhi: Replacement Of Defective Parts Is Work Contract, Not ‘Fees For Technical Services’; Deletes TDS Demand Against HAL Offshore Ltd.
Pranav B Prem
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that the replacement of defective parts is not covered under the ambit of ‘Fees for Technical Services’ (FTS) as defined under Section 9(1)(vii) of the Income Tax Act, 1961, and corresponding provisions under the India–Norway Double Taxation Avoidance Agreement (DTAA). The Division Bench comprising Yogesh Kumar U.S. (Judicial Member) and S. Rifaur Rahman (Accountant Member) observed that the contract entered into by the assessee was primarily for the sale of spare parts, and the replacement of defective parts was merely incidental to that sale. Hence, the entire arrangement was in the nature of a work contract, not a technical service engagement.
Background
The assessee, M/s HAL Offshore Ltd., had made certain remittances to a non-resident entity, M/s Brunvoll AS, Norway, without deducting tax at source. As per the Central Action Plan circulated by the Central Board of Direct Taxes (CBDT), cases involving foreign remittances without TDS were to be identified and verified by the jurisdictional Assessing Officers (AOs). Pursuant to this, the AO initiated enquiries under Section 133(6) of the Act and later passed an order under Sections 201(1) and 201(1A), raising a total demand of Rs. 16,80,590/- on the ground that the payments made by the assessee to the Norwegian company constituted Fees for Technical Services taxable in India.
Assessee’s Arguments
Appearing for the assessee, Advocate Dr. Rakesh Gupta, assisted by Advocate Somil Agrawal, contended that the lower authorities had erred in treating HAL Offshore Ltd. as an ‘assessee in default’. It was submitted that the Norwegian entity had no Permanent Establishment (PE) in India, and hence its income was not taxable in India under Article 7 of the India–Norway DTAA. The counsel pointed out that the personnel of the foreign vendor stayed in India for only 29 days, which was less than the three-month threshold specified in Article 5(3) of the DTAA for constituting a PE. Even if the activities were considered as an installation contract, the income was not taxable in India.
It was further submitted that the contract was primarily for the sale of spare parts, and the replacement of defective parts by the vendor’s personnel was merely incidental to such sale. Consequently, the contract partook the character of a work contract, not one involving the rendering of technical services. The payments therefore could not be treated as ‘Fees for Technical Services’ under Section 9(1)(vii) or Article 12 of the DTAA.
Revenue’s Stand
The Departmental Representative argued that the services rendered by the Norwegian company were technical in nature and were made available to the assessee whenever required. Since the services were utilized for HAL Offshore’s business in India, they fell within the meaning of Fees for Technical Services under Section 9(1)(vii) of the Act and Article 12(3) of the DTAA. Accordingly, the assessee was liable to deduct tax at source under Section 195 read with Section 115A of the Act.
Tribunal’s Observations
After considering the submissions and examining the material on record, the Tribunal noted that M/s Brunvoll AS had undertaken replacement of defective parts of the assessee’s ship during dry dock. The activity was purely in the nature of a work contract and not one involving rendering of technical services. It was not disputed that the vendor’s personnel stayed in India for only 29 days and that the company was a tax resident of Norway without a PE in India. Consequently, the income arising from the said activities was not taxable in India under Article 7 of the DTAA. The Tribunal further observed that even if the work was treated as an installation contract, it would still fall outside the taxable scope since the period of stay was less than three months.
The Bench also relied on precedents such as Lufthansa Cargo India Pvt. Ltd. v. DCIT [(2004) 91 ITD 133 (Del)] and Addl. DIT v. BHEL-GE Gas Turbine Services Pvt. Ltd. (ITA No. 976/Hyd/2011), which held that routine maintenance and repair activities do not amount to Fees for Technical Services. Referring to the ratio in Lufthansa Cargo, the Tribunal reiterated that where the foreign contractor merely undertakes the repair or replacement of components and the work is carried out in the normal course of business without transfer of technical knowledge or managerial expertise, the payments cannot be categorized as FTS. Quoting from the BHEL-GE Gas Turbine decision, the Tribunal observed that “routine repairs do not constitute technical services; technical repairs are different from technical services.”
Holding that the authorities below had erred in treating the assessee as an ‘assessee in default’ for non-deduction of tax at source, the Tribunal deleted the entire addition of Rs. 16,80,590/- confirmed by the CIT(A). Accordingly, the appeal filed by HAL Offshore Ltd. was allowed, and it was held that payments made for the replacement of defective parts were not liable to tax in India as Fees for Technical Services under either the Income Tax Act or the India–Norway DTAA.
Appearance
Counsel for the Assessee: Dr. Rakesh Gupta, Adv, and Somil Agrawal, Adv
Revenue Department by: Vikram Singh Sharma, Sr. DR
Cause Title: M/s Hal Offshore Ltd. v/s Income Tax Officer
Case No: ITA No. 2084 /Del/2023 (A.Y. 2018-19)
Coram: Yogesh Kumar U.S. (Judicial Member), S. Rifaur Rahman (Accountant Member)
