Facts of the Case

M/s 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, the assessee was required to provide technical drawings, technical reports, and detailed project reports relating to the widening and development of National Highways, including NH-2 and NH-5. The services included:

  • Preparation of detailed project reports;
  • Technical studies regarding feasibility and viability of modern technologies;
  • Development of technical plans and designs;
  • Cost estimation exercises;
  • Environmental, rehabilitation and resettlement studies;
  • Consultancy services relating to highway infrastructure development.

The assessee received consideration from NHAI for rendering these services.

The assessee contended that the consideration received constituted “Fees for Included Services” under Article 12(4) of the India–Canada DTAA and was taxable at 15%.

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

The Income Tax Appellate Tribunal accepted the assessee’s contention. Aggrieved by the Tribunal’s decision, the Revenue filed appeals before the Delhi High Court.

 

Issues Involved

  1. Whether the amount received by the assessee for providing consultancy and technical services 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” under Article 12(4)(b) of the India–Canada DTAA?
  3. Whether the development and transfer of technical plans and technical designs by the assessee attracted Article 12(4)(b) even if ownership rights in such plans/designs were not transferred?
  4. Whether interest under Section 234B was chargeable in the facts of the case?

 

Petitioner’s Arguments (Revenue)

The Revenue argued that:

  • The services rendered by the assessee were technical and consultancy services.
  • Such services were taxable as Fees for Technical Services under Section 9(1)(vii) read with Section 115A of the Income-tax Act.
  • Article 12(4)(b) of the India–Canada DTAA should be interpreted to mean that the expression “make available” qualifies all the services mentioned in the provision.
  • Unless technical knowledge, experience, skill, know-how or processes were made available to NHAI for independent future use, the assessee could not claim the benefit of Article 12(4)(b).
  • The technical drawings and designs supplied by the assessee were prepared only for specific highway projects and could not be treated as technology made available for other projects.
  • Therefore, the receipts should not be classified as “Fees for Included Services” taxable at the concessional DTAA rate.
  • Interest under Section 234B was also chargeable.

 

Respondent’s Arguments (Assessee)

The assessee contended that:

  • It had provided technical consultancy services involving preparation and transfer of technical plans, reports and designs.
  • Article 12(4)(b) specifically covers services consisting of the development and transfer of a technical plan or technical design.
  • The provision contains two independent categories:
    • Making available technical knowledge, experience, skill, know-how or processes; and
    • Development and transfer of a technical plan or technical design.
  • The services rendered by the assessee clearly fell within the second category.
  • Transfer of ownership rights in the technical designs was not required under Article 12(4)(b).
  • Once technical plans and designs were developed and delivered to NHAI, the requirements of Article 12(4)(b) stood satisfied.
  • Consequently, the receipts were taxable as “Fees for Included Services” under the India–Canada DTAA at the treaty rate of 15%.

 

Court Findings

The Delhi High Court upheld the decision of the Income Tax Appellate Tribunal and ruled in favour of the assessee.

The Court observed that:

  • There was no dispute that the assessee had rendered technical and consultancy services.
  • The services involved the development and transfer of technical plans and technical designs.
  • Article 12(4)(b) of the India–Canada DTAA covers two distinct categories:
    1. Services that make available technical knowledge, experience, skill, know-how or processes; and
    2. Services consisting of the development and transfer of a technical plan or technical design.
  • The Revenue's attempt to read the phrase “make available” as qualifying the entire provision was not supported by the language of the treaty.
  • Such an interpretation would render certain portions of the clause redundant and create ambiguity.
  • The Court relied upon the explanatory material and examples contained in the treaty framework and noted that the provision specifically contemplates development and transfer of technical plans or technical designs as a separate category.
  • The assessee had supplied technical drawings, designs and project reports to NHAI, which squarely fell within Article 12(4)(b).

Accordingly, the Tribunal had correctly held that the consideration received by the assessee was taxable under the DTAA as Fees for Included Services.

 

Important Clarification by the Court

The Court made a significant clarification regarding the meaning of the expression “transfer” in Article 12(4)(b).

According to the Court:

  • The term “transfer” does not require absolute transfer of ownership rights in the technical plan or design.
  • It is sufficient if technical drawings, plans or designs are provided by a resident of one contracting state to a resident of the other contracting state for use and benefit.
  • Article 12(4)(b) does not require transfer of all proprietary rights, title or interest in the technical plan or design.
  • Even where a technical design or plan is supplied only for use in a specific project and ownership remains with the creator, the provision can still apply.

This clarification became an important precedent in determining whether consultancy and engineering services involving technical plans and designs qualify as “Fees for Included Services” under treaty provisions.

 

Court Order

  • The Delhi High Court answered the substantial question of law in favour of the assessee and against the Revenue.
  • The Court held that the consultancy services involving development and transfer of technical plans and designs fell within Article 12(4)(b) of the India–Canada DTAA.
  • The receipts were taxable as “Fees for Included Services” under the treaty and entitled to the treaty rate of taxation.
  • The Revenue’s appeals were dismissed.
  • The issue relating to Section 234B interest was already covered by the earlier Delhi High Court decision in Director of Income Tax vs. Mitsubishi Corporation, and therefore did not survive for separate consideration.

 

Relevant Sections / Articles Involved

Income-tax Act, 1961

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

India–Canada Double Taxation Avoidance Agreement (DTAA)

  • Article 12(4) – Fees for Included Services
  • Article 12(4)(b) – Development and Transfer of Technical Plan or Technical Design
  • Article 12 – Taxation of Fees for Included Services

 

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2010:DHC:9846-DB/AKS22092010ITA10272009_160316.pdf 

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