AAR : The Machinery sold by HESS to the purchaser (Grasim Industries Limited, Mumbai, India) are chargeable to tax under section 195 of Income-tax Act, 1961 or as per Article 12 para 5 read with para 6.(a) of the Double Taxation Avoidance Agreement (DTAA) with the Netherlands

Authority For Advance Rulings (Income Tax), New Delhi

Hess Acc Systems B.V., In Re

Section : 9,195

Justice P.K. Balasubramanyan, Chairman

A.A.R. No. 1033 Of 2010

August 27, 2012

RULING

1. The applicant, a company, claiming to be a resident of The Netherlands has approached this Authority with the present application under section 245 Q of the Income-tax Act, seeking advance rulings on the questions formulated in the application. According to the applicant, it entered into a contract with Grasim Industries Ltd., Mumbai on 7.8.2008 for supply of machinery, spare and wearing parts and technical documentation for the production of Autoclared Areated Concrete. On the same day, it entered into another contract with Grasim Industries Ltd for the supply of project service for erection and installation of the machinery supplied as against the first contract. The contract for supply of machinery has been fulfilled by 5.12.2009. According to the applicant, for payments received by it from Grasim thereunder, the liability under section 195 of the Act did not arise.

2. The fulfilment of the second contract on which now ruling is sought is to commence from March 2011. According to the applicant, for receipt by it of the consideration thereunder, the withholding provision under section 195 of the Act will have no application as what it renders under the contract, though technical services, is really services that are ancillary and subsidiary as well as inextricably and essentially linked to the sale of property. Hence it is excluded under from taxation. It is in this context that the applicant approached this Authority with the present application.

3. After hearing the applicant and the Revenue, this Authority allowed the application under section 245R(2) of the Act to render a ruling on the following question even while reserving for consideration the question whether the transaction is one designed for avoidance of tax in India when considering the application under section 245R(4) of the Act for a ruling.

“Whether the payment under the Contract No.A30.02411.2-PS dated 7th August 2008 entered into between Grasim Industries Ltd. And HESS ACC System B.V, (HESS) for supply of project services in relation to the Machinery sold by HESS to the purchaser (Grasim Industries Limited, Mumbai, India) are chargeable to tax under section 195 of Income-tax Act, 1961 or as per Article 12 para 5 read with para 6.(a) of the Double Taxation Avoidance Agreement (DTAA) with the Netherlands?”

4. It is submitted on behalf of the applicant that the two contracts were entered into the same day and the contract that is the subject matter of this application is really part of the same transaction. The consideration mentioned in both the contracts are dependent on each other. The contract for Project Services involved here is ancillary and inextricably linked to the Supply Contract. Hence, the consideration received thereunder will come within the exclusion contained in clause (a) of paragraph 6 of Article 12 of the Double Taxation Avoidance Convention (DTAC) between India and The Netherlands. The Revenue submits that the applicant and Grasim themselves have treated the two contracts as separate contracts and it is not now open to the applicant to plead that this was ancillary and subsidiary to the contract for supply. The contract was for supply, erection, commissioning, testing and delivery of a project. The contracts if treated as one would mean that the applicant is liable to pay tax on its income from the entire contract. The applicant asserts that there was no obligation under section 195 of the Act to withhold tax on the amount received by it under the supply contract. That is on the basis of treating it as an independent contract. The service contract was for rendering technical services and the income was chargeable to tax as such. This was really a scheme for avoidance of tax.

5. It is not disputed by the applicant that what is payable under the transaction involved herein is fees for technical services. The only contention raised is that under the DTAC the consideration received is “for services that are ancillary and subsidiary as well as inextricably and essentially linked to the sale of property” in terms of paragraph 6(a) of Article 12 of the DTAC.

6. Both the contracts executed on 7.8.2008 are produced. On going through them, it is clear that the contract was neither for sale of property simplicitor nor for erection and service connected therewith. It was really an indivisible contract for supply, erection, commissioning testing etc. of a project. The applicant and Grasim have chosen deliberately to split up the contract into two. The applicant, according to it, has taken advantage of the splitting up by adopting the stand that the consideration for supply is not chargeable to tax in India.

7. I find that the splitting up was totally artificial and a ruse adopted to ward off liability to tax on the whole of the transaction. Nothing stood in the way of the parties entertaining into a composite contract. They have created two contracts independent of each other for their own reasons. This may be a case of an attempt to avoid the payment of taxes in India.

8. Be that as it may, now it is not open to the applicant to come up with a claim that the present contract is for services that are ancillary and subsidiary as well as inextricably and essentially linked to the sale of the property. The supply under the supply contract was completed on 5.12.2009. The work under the present contract is “expected to commence from March, 2011” when the present application was filed before this Authority in December 2010 or January, 2011. This is also showing lack of proximity. The Revenue argues that the supply contract itself was not for sale of property coming under the exception in paragraph 6 of Article 12 of DTAC. The first contract was for “the supply of machinery, spare and wearing parts and technical documentation for the production of Autoclaved Aerated Concrete”. The applicant has agreed “to undertake the design, engineering, supply and delivery of machinery, spare and wearing parts and technical documentation forming part of the Project”. This cannot be taken to be a contract for “the sale of property”. I am satisfied that the exception relied on by the applicant is not attracted.

9. Thus, I hold that the consideration received would be fees for technical services under the Act and under the DTAC.

10. I, therefore, rule on the question formulated that the transaction in question generates fees for technical services in the hands of the applicant and it does not come under the exception in paragraph 6(a) of Article 12 of the DTAC and that it is chargeable to tax in India.

[Citation : 349 ITR 529]

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