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Erection, installation, testing and commissioning charges not taxable as FTS
In a recent ruling,1 the Delhi bench of the Income-tax Appellate Tribunal (Tribunal) held that the deployment of technical personnel for execution of erection, installation, testing and commissioning contracts could not be regarded as supply of technical services.
Facts
- The taxpayer was an Indian company engaged in the business of generation of power/ implementation of power projects.
- The taxpayer had entered into a contract with a government company for availing transportation, insurance, erection, installation, testing, commissioning services and withheld tax on the payments under section 194C of Income-tax Act, 1961 (Act).
- Subsequently, the tax officer (TO) alleged that payment towards the previously mentioned services was in the nature of “fees for technical services” (FTS) subject to tax withholding under section 194J of the Act. 1 ITA No. 2922 to 2924/Del/2016 2 390 ITR 322.
- On appeal, the Commissioner of Incometax (Appeals) [CIT(A)] upheld the TO’s order.
- Aggrieved by the CIT(A)’s order, the taxpayer appealed before the Tribunal.
Issue before the Tribunal
Whether the TO was correct in holding that the payment made by the taxpayer for previously mentioned services was liable to tax withholding under section 194J of the Act?
Taxpayer’s contention
The taxpayer contended that the previously mentioned services was covered under the provisions of section 194C of the Act. These services involved “construction, assembly, mining and like projects,” which fell within the exclusion of FTS, as defined in Explanation 2 to section 9(1)(vii) of the Act.
Revenue’s contention
The Revenue contended that the previously mentioned services was complex tasks required to be performed by technically competent manpower. Therefore, the amount paid was in the nature of FTS under section 9 (1)(vii) of the Act, requiring tax withholding under section 194J of the Act.
Tribunal’s ruling
The Tribunal observed that the Punjab and Haryana High Court2 had decided an identical issue, where it was held that the technical personnel deployed for execution was not engaged for supply of technical services to the customer, but to satisfy the customer that the work had been performed as per contractual specifications.