Expl. 2 to section 9(1)(vii) - Merely because certificates have been provided by the humans after a test is carried out in a Laboratory automatically by the machines, it cannot be held that services have been provided through the human skills and the payment do not fall in the nature and category of FTS

Siemens Ltd vs CIT

Dated: 12^th Feb 2013

 

The assessee was required to make payment to "Pehla Testing Laboratory" (PTL) located at Germany for carrying out type tests of the circuit breakers manufactured by assessee in order to establish that the design and the product meets the requirement of the International Standards. Pehala Lab is accredited by National Accreditation Board for Testing & Calibration Laboratories (NABL) Germany, which carries out various kinds of tests for circuit breakers and other electronic devices to prove that the designs of the equipment meets the requirements of the international standards. This is a standard service provided by the Laboratory, which is done automatically by machines. For the purpose of the payment for making remittance to PTL, assessee moved an application under section 195(2) before the ADIT. Along with the said application assessee has given a detailed submission and reasons justifying as to why the remittance made to the PTL is not liable to tax in India under the provisions of the Income Tax Act.

 

Assessee submitted that the payment is in the nature of business income of Pehla Laboratory and since it does not have any Permanent Establishment in India, the same is not taxable in India as per the DTAA and as per the provisions of Expl. 2 to section 9(1)(vii), the payment do not fall in the nature and category of fees for technical services (FTS). The main contention in this regard was that it is not a FTS but the payment was purely for standard facility provided by the Laboratory which is done automatically by the machines without any human intervention. In support of this contention, flyer received from PTL, describing the nature and procedure of the testing was filed before the AO.

 

AO, however, rejected the assessee's contentions of assessee on the ground that firstly, type of the services provided by the Pehla Lab is of highly technical in nature and the payment is definitely covered by section 9(1)(vii) and secondly, the Explanation 2 to section 9 which was inserted by the Finance Act, 2007 with retrospective effect 1.6.1976 provides that, where the income is deemed or accrued or arise in India, such income shall be included in the total income of the non resident, whether or not the non resident has a residence or place of business or business connection in India.

 

Before the CIT (A), assessee submitted that this kind of testing certificate is required by assessee for completing the tender formalities in India and for this purpose it had to send circuit breakers, one of the product manufactured by assessee to Pehla in Germany for quality tests. The circuit breakers undergo a destructive test in the Labs and the same are not received back in India. They are sent on sample basis for the purpose of testing only and once it has cleared the test in the Lab, a certificate is issued by the PTL. This test is carried out through the use of sophisticated machines and equipment which impose both high voltage and high current on the circuit breakers to test the resistance. All this is done without human intervention and report is prepared for the test conducted. In this manner, the Pehla Lab does not offer any kind of consultancy services or technical services. This certificate is one of the formalities for completing the tender project in India by the assessee, as the ultimate sale of the product, depend on fulfillment of other tender requirements. It was further submitted that the word "technical services" as appearing in Explanation 2 to section 9(1)(vii) has to be read with the word "managerial and consultancy" which requires and involvement of human element.

 

Ld. CIT observed that Pehla carried out only type testing by using their sophisticated test equipments to impose both high voltage and high currents on the circuit breakers without human intervention and issued reports of the tests conducted" and the 'type testing' services provided by Pehla can by no stretch of imagination be considered as non technical. Moreover, Pehla carried out the said type testing by using their sophisticated test equipments to impose both high voltage and high currents on the circuit breakers and issues reports of the tests conducted which are sent to the appellant in India".

 

 Ld. CIT(A) further analyzed the provisions of section 9(1)(vii) r.w. Explanation 2 and held that firstly, fee payable to Pehla is within the meaning of FTS and secondly, the services received by assessee was utilized in India in the business of assessee and also for earning income from source within India, therefore, it has to be considered that services are rendered in India, hence taxable in India. He further made reference to the Article-12(4) of the Indo German DTAA and held that the definition of FTS given therein is similar to Explanation 2 to section 9(1)(vii) of the Income Tax Act. Regarding other contentions of assessee that testing was carried out, outside India and the payment made to Pehla cannot be charged to tax in India in view of the principles laid down by the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 (SC), he held that the said decision is not applicable after the insertion of Explanation 2 to section 9(1)(vii) with retrospective effect w.e.f. 1.6.1976. He thus upheld the reliance placed by the AO on the CBDT circular No.03 of 2008. Assessee's plea that the payment made to Pehla cannot be taxed in view of Article 7 of the DTAA as Pehla does not have a PE in India was also rejected by the CIT (A) as per the discussion given from Para 5.1 to 5.6. Accordingly assessee's entire contentions were rejected.

 

Whether the payment made to Pehla Testing Laboratories in Germany, for carrying out certain tests on circuit breakers manufactured by assessee for the purpose of certification, so as to meet the international standard, falls within the meaning of fees for technical services and is taxable within the meaning of section 9(1)(vii).

 

ITAT observed that the expression "fees for technical services" has been given as consideration for rendering managerial, technical or consultancy services. No other definition as such of the term technical services in the Act has been given. The word "technical" as appearing in Explanation 2 is preceded by the word "managerial" and succeeded by the word "consultancy". It cannot be read in isolation as it takes colour from the word "managerial and consultancy" between which it is sandwiched. The Courts have held that in such a case principle of noscitur a sociis gets attracted, which means that the meaning of the word or expression is to be gathered from the surrounding word i.e. from the context. Coupling of the words together shows that they are to be understood in the same sense. The word "managerial and consultancy" is a definite indicative of the involvement of a human element. Managerial services and consultancy services has to be given by human only and not by any means or equipment. Therefore, the word "technical" has to be construed in the same sense involving direct human involvement without that, technical services cannot be held to be made available. Where simply an equipment or sophisticated machine or standard facility is provided albeit developed or manufactured with the usage of technology, such a user cannot be characterized as providing technical services.

 

Held, if a standard facility is provided through a usage of machine or technology, it cannot be termed as rendering of technical services. Once in this case it has not been disputed that there is not much of the human involvement for carrying out the tests of circuit breakers in the Laboratory and it is mostly done by machines and is a standard facility, it cannot be held that Pehla Testing Laboratory is rendering any kind of technical services to assessee. In our conclusion, we thus hold that payment made by assessee to the PTL in Germany is not in consideration for rendering of any kind of "technical services" either in the nature of managerial or technical or consultancy services. Therefore, it does not fall within the ambit of section 9(1)(vii).