Facts of the Case

SNC Lavalin International Inc., a non-resident company engaged in infrastructure consultancy, entered into an agreement with NHAI for infrastructure development projects funded by the World Bank.

Under the agreement, the assessee was required to:

  • Prepare detailed project reports.
  • Conduct technical studies and feasibility assessments.
  • Develop technical drawings and engineering designs.
  • Provide consultancy services for widening and rehabilitation of National Highways.
  • Examine environmental rehabilitation and resettlement requirements.

The assessee received consultancy fees for these services and claimed that the receipts were taxable as “Fees for Included Services” under Article 12(4) of the India-Canada DTAA at 15%.

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

The 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 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 constituted “Fees for Included Services” within the meaning of Article 12(4) of the India-Canada DTAA?
  3. Whether the assessee was liable to pay advance tax and consequently liable for interest under Section 234B of the Income-tax Act?

 

Petitioner’s Arguments (Revenue)

The Revenue contended that:

  • The services rendered by the assessee were merely technical and consultancy services.
  • Article 12(4)(b) of the DTAA requires that technical knowledge, experience, skill, know-how, or processes must be “made available” to the recipient.
  • The technical drawings and designs prepared for NHAI were project-specific and could not be independently used for other projects.
  • Mere submission of reports and designs did not amount to making technical knowledge available.
  • Consequently, the receipts were taxable as Fees for Technical Services under Section 9(1)(vii) read with Section 115A of the Income-tax Act.

The Revenue further argued that the Tribunal incorrectly interpreted Article 12(4) of the DTAA.

 

Respondent’s Arguments (Assessee)

The assessee submitted that:

  • The agreement required preparation and transfer of detailed technical plans and engineering designs.
  • Article 12(4)(b) specifically includes services consisting of the development and transfer of a technical plan or technical design.
  • The treaty provision does not require absolute transfer of ownership in technical designs.
  • The technical plans and designs prepared by the assessee were transferred to NHAI for use in infrastructure projects.
  • Therefore, the consideration received squarely qualified as “Fees for Included Services” under Article 12(4) of the India-Canada DTAA.

The assessee also relied upon the language of the DTAA and the interpretative examples accompanying similar treaty provisions.

 

Court Findings

The Delhi High Court examined Article 12(4) of the India-Canada DTAA and observed that the provision covers services that:

  • Make available technical knowledge, experience, skill, know-how, or processes; or
  • Consist of the development and transfer of a technical plan or technical design.

The Court held that:

  • The services rendered by the assessee undeniably involved preparation and transfer of technical plans and technical designs.
  • The Revenue’s attempt to read the phrase “make available” into every part of Article 12(4)(b) was incorrect.
  • Article 12(4)(b) contains two separate categories of services.
  • Development and transfer of technical plans or designs independently qualifies as “Fees for Included Services”.
  • The expression “transfer” does not mean transfer of ownership of intellectual property or complete rights in the technical design.
  • Transfer of technical drawings or designs for use by the recipient is sufficient to satisfy the treaty requirement.

The Court also referred to interpretative guidance available under similarly worded treaty provisions and found support for this interpretation.

 

Court Order

The Delhi High Court:

  • Upheld the order of the Income Tax Appellate Tribunal.
  • Held that the consideration received by SNC Lavalin International Inc. constituted “Fees for Included Services” under Article 12(4)(b) of the India-Canada DTAA.
  • Ruled that such income was taxable at the treaty rate of 15%.
  • Decided the issue in favour of the assessee and against the Revenue.
  • Followed its earlier decision on Section 234B and held that the issue regarding interest under Section 234B stood covered in favour of the assessee.

 

Important Clarification

The judgment clarifies that:

  • Under Article 12(4)(b) of the India-Canada DTAA, development and transfer of a technical plan or technical design constitutes “Fees for Included Services”.
  • The expression “transfer” does not require transfer of ownership or complete intellectual property rights.
  • Transfer of technical drawings, reports, plans, or designs for use by the recipient is sufficient.
  • The “make available” condition cannot be artificially extended to every category covered under Article 12(4)(b).
  • Technical consultancy projects involving preparation and delivery of engineering designs may qualify for treaty benefits where the DTAA contains similar provisions.

Sections / Articles Involved

  • Section 9(1)(vii), Income-tax Act, 1961
  • Section 115A, Income-tax Act, 1961
  • Section 234B, Income-tax Act, 1961
  • Article 12(4), India-Canada Double Taxation Avoidance Agreement (DTAA)
  • Article 12, India-Canada DTAA (Fees for Included Services)


Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2010:DHC:9784-DB/AKS22092010ITA5292009_155036.pdf 

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