Services of Construction & Installation Cannot be termed as “Fees for Technical Services”: Delhi HC [Read Judgment]

The Delhi High Court in a recent decision held that the services of construction and installation cannot be treated as “fees for technical services.” The Court was considering the validity of an order passed by the Authority of Advance Ruling in a petition filed by M/s Technip Singapore PET Ltd. the highlights of the decision are as follows.

The Petitioner is a leading solutions provider of offshore construction, engineering, project management, and support services to the oil and gas industry worldwide. On 5th September 2008, the Petitioner signed a contract with IOCL for an offshore construction work involving the installation of IOCL supplied SPM including anchor chains, floating and subsea hoses.

On 25th May 2010, the Petitioner filed an application in the AAR under Chapter XIX B of the Income Tax Act, 1961 for determination of certain questions regarding its tax liability in respect of the services rendered by it under the above contract. The ITO (International Taxation) (Respondent No. 2) in response to the above application filed a report dated 6th September 2011 before the AAR. According to Respondent No.2, the income of the Petitioner under the contract was taxable in India as fees for technical services („FTS‟) both under the Act and the DTAA.

By the impugned order dated 15th February 2012, the AAR held the following;

1. The contract could not be said to be for installation alone. If during the activity of installation, the income in the nature of royalty or fees or FTS or interest or of any other nature arises then such income has to be assessed under that head.
2. IOCL paid for each of the items of work separately although the work was a composite one. In the present contract, the payment made for use of equipment, i.e., the barges, and stated as mobilization and demobilization expenses comprised a substantial part of the payment and therefore fell within the definition of royalty under Article 12.3(b) of the DTAA.
3. The Supreme Court in Ishikawajima-Harima Heavy IndustriesLtd. v. DIT (2007) 288 ITR 408 held that the consideration for each portion of the contract, if separately specified, can be separated from the whole. In the present case, the contract was a divisible one. The expenses were loaded in favor of mobilization. As observed in the State of Madras v. Richardson (1968) 21 STC 245, even in the works contract, a contract of sale of material utilized in the works can be inferred.
4. Installation was to be carried out by locating the ends of anchor chains, cross tensioning of the anchor chains, adding to the length of the anchor chain where it is falling short of the desired length, towing and setting up the Buoy from the port to the location and fixing the chain to the SPM Buoy, testing the leakages of the floating hose strings, affixing the umbilical to the valves outlets and installing all end connection, installing navigational aids, pressure gauge.
5. As the installation was ancillary and subsidiary to the use of equipment or enjoyment of the right for such use, the payment for the installation would fall under the definition of FTS in terms of Article 12.4(a) of the DTAA. 17.

The High Court found that the payment of mobilization/demobilization cannot be termed as royalty, the question of treating the work of installation as ancillary to such work and the payment for installation as FTS does not arise. Further, in terms of the contract with IOCL, the Petitioner provides services of construction and installation of SPM. This does not involve any transfer of any technology, skill, experience or know-how, to enable IOCL to undertake such activities on its own.

While quashing the impugned order of the AAR, it was observed that payment of mobilization/demobilization cannot be termed as royalty, the question of treating the work of installation as ancillary to such work and the payment for installation as FTS does not arise. Further, in terms of the contract with IOCL, the Petitioner provides services of construction and installation of SPM. This does not involve any transfer of any technology, skill, experience or know-how, to enable IOCL to undertake such activities on its own.

Read the full text of the Judgment below.