Flight Testing Services Provided To Hindustan Aeronautics Not Taxable As Fees For Technical Services: Bangalore ITAT
The ITAT Bangalore Bench, consisting of members George George K (Judicial Member) and Padmavathy S (Accountant Member), has ruled that flight testing services provided to Hindustan Aeronautics Limited cannot be taxed as fees for technical services and therefore no TDS is required to be collected on it. The Assessee Hindustan Aeronautics Limited (HAL), a public sector undertaking of...
The ITAT Bangalore Bench, consisting of members George George K (Judicial Member) and Padmavathy S (Accountant Member), has ruled that flight testing services provided to Hindustan Aeronautics Limited cannot be taxed as fees for technical services and therefore no TDS is required to be collected on it.
The Assessee Hindustan Aeronautics Limited (HAL), a public sector undertaking of the Government of India, had filed its income tax return which was selected for scrutiny by the Assessing Officer (AO). Thereafter, a notice was issued under Section 148 of the Act and the AO had made an addition to HAL's taxable income for not deducting tax on the payments made to CGTM France towards flight testing services provided by it to HAL. HAL had filed an appeal before the Commissioner of Income Tax (Appeals) (CIT (A)). The CIT (A) had held that the payments made by HAL were in the nature of fees for technical services and had upheld the disallowance of payments made to CGTM France as HAL had not deducted TDS on the payments under Section 195 of the Act. HAL had filed an appeal before the ITAT against the order of the CIT (A).
HAL had submitted before the ITAT that no technology was made available to HAL by CGTM France and therefore the payments made to CGTM for flight testing services were not in the nature of fess for technical services and thus there was no requirement to deduct tax at source under Section 195 of the Act. The departmental representative had submitted that the services rendered by CGTM France in the form of flight testing services resulted in making technical knowledge available to HAL towards manufacturing of air worthy helicopters. Therefore, the departmental representative had contended that disallowance of payments made for such testing services must be upheld since HAL had failed to deduct TDS on the amount.
Section 9 (1)(vii) of the Income Tax Act provides that income by way of fees for technical services payable by a resident shall be deemed to accrue or arise in India, except where the fees are payable for the purposes of earning any income from any source outside India. Explanation 2 to the said provision provides that "fees for technical services" means any consideration for rendering any managerial, technical or consultancy services. Also, Section 195 of the Act provides that any person responsible for paying any sum chargeable under the provisions of the Act outside India shall, at the time of credit of such income to the account of the payee or at the time of payment, whichever is earlier, deduct income tax on it. Section 40(a)(i) provides that where TDS is required to be deducted under the Act on fees for technical services paid to a non-resident and such tax has not been deducted, the fees for technical services paid shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession".
The ITAT observed that the fees paid in the present case was purely towards the testing of "Shakti Engines", i.e., the helicopter engines of HAL, in order to identify certain issues. The ITAT observed that the subsequent action of HAL to carry out the improvement based on the test results given by CGTM France could not be considered as a basis for holding that a technology was made available by CGTM to HAL. The ITAT held that conducting the test and subsequent improvement to the engines based on the test results were independent activities and could not be considered together.
The ITAT ruled that mere rendering of services would not be taxable as fees for technical services unless the person receiving the said service was enabled to utilize such service on its own in the future without having recourse to the person providing it. The ITAT observed that in the present case the test conducted by CGTM France could not be independently carried out by HAL in the future without the support of engineers from CGTM, and hence the services provided by CGTM did not satisfy the condition of 'making available' a technology to HAL. Since the said condition was not satisfied, the ITAT observed that the fees paid by HAL to CGTM France could not be said to be in the nature of fees for technical services and hence it did not attract the provisions of Section 195 for deduction of TDS.
"As contended by the assessee, the test conducted by CGTM France cannot be independently carried out by the assessee without the support of engineers from CGTM France and hence does not satisfy the conditions of 'make available' that the services rendered by CGTM France to the assessee. It is settled law that mere rendering of services would not be taxable unless the person receiving the services is enabled to utilize such services on its own in the future without having recourse to the person providing the service. "
The ITAT therefore held that no disallowance under Section 40(a)(i) was warranted and allowed the appeal of HAL.
Case Title: M/S Hindustan Aeronautics Ltd. Versus ACIT, Bengaluru
Representative For The Assessee: Ajit Kumar Jain And Siddhesh Chaugule
Representative For The Revenue Department: S Praveena, CIT (DRP-2)