Facts of the Case

SNC Lavalin International Inc., a non-resident Canadian company, was engaged in providing consultancy services for infrastructure projects. The company entered into an agreement with the National Highways Authority of India (NHAI) for infrastructure development projects funded by the World Bank.

Under the agreement, SNC Lavalin was required to prepare detailed project reports, technical drawings, designs, cost estimates, environmental studies, rehabilitation assessments, and feasibility analyses for widening and development of National Highways NH-2 and NH-5. The services involved investigation of modern technologies, preparation of technical plans, and submission of consultancy reports to NHAI for execution of the infrastructure projects.

For these services, SNC Lavalin received consultancy fees from NHAI. The assessee contended that the receipts constituted “Fees for Included Services” under Article 12(4) of the India–Canada DTAA and were taxable at the treaty rate of 15%.

The Assessing Officer disagreed and held that the receipts were taxable as Fees for Technical Services under Section 9(1)(vii) read with Section 115A of the Income-tax Act at the rate of 20%.

The Income Tax Appellate Tribunal accepted the assessee’s contention and held that the receipts were covered under Article 12(4)(b) of the DTAA. Aggrieved by the Tribunal’s decision, the Revenue filed appeals before the Delhi High Court.

 

Issues Involved

  1. Whether the amount received by SNC Lavalin for consultancy and technical services rendered to NHAI was taxable under Section 9(1)(vii) of the Income-tax Act or under Article 12 of the India–Canada DTAA.
  2. Whether the services rendered by the assessee amounted to “Fees for Included Services” within the meaning of Article 12(4)(b) of the India–Canada DTAA.
  3. Whether development and transfer of technical plans and designs without transfer of ownership rights satisfied the requirements of Article 12(4)(b).
  4. Whether interest under Section 234B could be levied on the assessee.

 

Petitioner’s (Revenue’s) Arguments

  • The Revenue argued that the consultancy fees received by the assessee were taxable as Fees for Technical Services under Section 9(1)(vii) read with Section 115A of the Income-tax Act.
  • It was contended that Article 12(4)(b) of the DTAA required the service provider to “make available” technical knowledge, experience, skill, know-how, or processes to the recipient.
  • According to the Revenue, the words “make available” qualified the entire clause, including development and transfer of technical plans or designs.
  • The technical designs prepared by SNC Lavalin were project-specific and related only to NH-2 and NH-5 projects. Therefore, the designs could not be used independently for other projects and did not result in making technical knowledge available to NHAI.
  • Consequently, the services did not qualify as “Fees for Included Services” under Article 12(4)(b), and the benefit of the DTAA should not be granted.

 

Respondent’s (Assessee’s) Arguments

  • SNC Lavalin submitted that it had rendered consultancy and technical services involving preparation and transfer of technical plans, reports, and designs.
  • The assessee argued that Article 12(4)(b) covers two independent categories:
    1. Services that make available technical knowledge, experience, skill, know-how, or processes; and
    2. Services consisting of development and transfer of a technical plan or technical design.
  • Since the services undeniably involved development and transfer of technical plans and technical designs to NHAI, they squarely fell within the second category of Article 12(4)(b).
  • The assessee contended that there was no requirement that ownership in the technical plans must be absolutely transferred.
  • Therefore, the consultancy receipts were taxable as “Fees for Included Services” under the DTAA at the concessional treaty rate of 15%.

 

Court Findings

The Delhi High Court upheld the Tribunal’s decision and ruled in favour of the assessee.

Interpretation of Article 12(4)(b)

The Court observed that Article 12(4)(b) covers two separate categories of services:

  1. Services that make available technical knowledge, experience, skill, know-how, or processes; or
  2. Services consisting of development and transfer of a technical plan or technical design.

The Revenue’s attempt to read the phrase “make available” into the entire clause was rejected.

Development and Transfer of Technical Plans

The Court held that SNC Lavalin had admittedly developed and transferred technical plans and technical designs to NHAI.

Such services directly satisfied the second limb of Article 12(4)(b), namely development and transfer of a technical plan or technical design.

Transfer Does Not Mean Transfer of Ownership

The Court clarified that the word “transfer” in Article 12(4)(b) does not require absolute transfer of ownership rights in the technical design or plan.

The provision merely requires transfer of technical drawings, plans, or designs for use and benefit of the recipient.

Even where the recipient is permitted to use the technical design without acquiring complete ownership rights, the transaction falls within Article 12(4)(b).

Reliance on Treaty Interpretation

The Court referred to interpretative materials and examples under similarly worded treaty provisions, including the India–USA DTAA, to support its interpretation that development and transfer of technical plans is independently covered under the treaty.

 

Court Order / Decision

  • The Delhi High Court answered the principal question of law in favour of the assessee and against the Revenue.
  • It held that the consultancy services involving development and transfer of technical plans and technical designs constituted “Fees for Included Services” under Article 12(4)(b) of the India–Canada DTAA.
  • Accordingly, the receipts were taxable under the DTAA at the treaty rate of 15%.
  • On the issue of interest under Section 234B, the Court noted that the matter had already been decided in favour of the assessee in Director of Income Tax v. Mitsubishi Corporation (ITA No. 491/2008 and connected matters) and therefore no substantial question arose on that issue.

 

Important Clarification

The judgment lays down an important principle regarding Article 12(4)(b) of tax treaties:

  • Development and transfer of a technical plan or technical design is an independent category of “Fees for Included Services”.
  • The requirement of “making available” technical knowledge does not apply to the separate category relating to development and transfer of technical plans or designs.
  • Transfer under Article 12(4)(b) does not require transfer of ownership of the technical design.
  • Providing technical drawings, plans, reports, and designs for the use of the recipient is sufficient to attract the treaty provision.
  • The decision is significant for engineering consultants, infrastructure consultants, technical advisory firms, and cross-border service providers claiming DTAA benefits.

Relevant Sections / Articles Involved

Income-tax Act, 1961

  • Section 9(1)(vii) – Fees for Technical Services
  • Section 115A – Tax on Certain Income of Non-Residents
  • Section 234B – Interest for Default in Payment of Advance Tax

India–Canada Double Taxation Avoidance Agreement (DTAA)

  • Article 12(4)(b) – Fees for Included Services
  • Article 12 – Royalties and Fees for Included Services

 

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2010:DHC:9717-DB/AKS22092010ITA3262009_150329.pdf  

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