Services provided by machines without human intervention cannot be construed as FTS – Mum ITAT


Siemens Limited v CIT(A) IT APPEAL NO. 4356 (MUM.) OF 2010 Dtd 12.02.2013 – Mumbai ITAT

Background:

Assessee hired “Pehla Testing Laboratory” (PTL) of Germany for carrying out “type tests” of the circuit breakers manufactured by assessee in order to establish that the design and the product meets the requirement of the International Standards. Pehala Lab is accredited by National Accreditation Board for Testing & Calibration Laboratories (NABL) Germany, which carries out various kinds of tests for circuit breakers and other electronic devices to prove that the designs of the equipment meets the requirements of the international standards. This is a standard service provided by the Laboratory, which is done automatically by machines.

It was submitted by the assessee during the course of assessment proceedings that the payment was purely for standard facility provided by the Laboratory which is done automatically by the machines without any human intervention. Further, the payment is in the nature of business income of PTL and since it does not have any Permanent Establishment in India, the same is not taxable in India as per the DTAA. However, the AO rejected the assessee’s contentions on the ground that the type of the services provided by the Pehla Lab is of highly technical in nature covered by section 9(1)(vii).

Assessee’s contentions:

  • No income accrues or arises in India as all services are rendered outside India and the payment is made outside India.
  • The payment is in the nature of business income of Pehla Laboratory and since it does not have any Permanent Establishment in India, the same is not taxable in India as per the DTAA.
  • The Laboratory will use their test equipment to impose both high voltage and high currents on our circuit breakers, in line with the ratings of the breakers and check the performance of the circuit breakers and give us a report of test conducted indicating all the test results. It is a standard facility provided by the laboratory.
  • The payment was purely for standard facility provided by the Laboratory which is done automatically by the machines without any human intervention. In this manner, the Pehla Lab does not offer any kind of consultancy services or technical services.
  • Reliance was placed on the judgment of the Hon’ble Delhi High Court in the case of CIT v. Bharati Cellular Ltd reported in 2009, 319 ITR 258 and Madras High Court judgment in the case of Skycell Communications Ltd. v. DCIT reported in 2001, 251 ITR 53 (Mad.) to support that the expression “Technical Services” involves a human element, whereas in the case of assessee there is no involvement of human interface.

Tax Authority’s arguments:

  • It is a highly specialized ‘technical laboratory’ fitted with the state of art equipment to conduct ‘type tests’ on the circuit breakers manufactured by the appellants to prove that the design of the equipment meets the requirements stipulated by International Standards. Thus, the ‘type testing’ services provided by Pehla can by no stretch of imagination be considered as non technical.
  • In the case of Ashapura Minichem Ltd. v. ADIT, International Taxation 1(1), Mumbai, [2010], 40 SOT 220, bauxite testing services conducted by Chinese company in its Laboratories and preparing of test report was held to be taxable under section 9(1)(vii).

HELD:

  • The word “technical” as appearing in Explanation 2 is preceded by the word “managerial” and succeeded by the word “consultancy”.
  • It cannot be read in isolation as it takes colour from the word “managerial and consultancy” between which it is sandwiched.
  • The Courts have held that in such a case principle of ‘noscitur a sociis’ gets attracted, which means that the meaning of the word or expression is to be gathered from the surrounding word i.e. from the context.
  • The word “managerial and consultancy” is a definite indicative of the involvement of a human element. Managerial services and consultancy services has to be given by human only and not by any means or equipment.
  • Therefore, the word “technical” has to be construed in the same sense involving direct human involvement without that, technical services cannot be held to be made available. 
  • Where simply an equipment or sophisticated machine or standard facility is provided albeit developed or manufactured with the usage of technology, such a user cannot be characterized as providing technical services
  • The tests are carried out in a Lab by the automatic machines though under observations of technical experts. Once these tests are done successfully by the machines, a certificate is issued by the authorities of the PTL.
  • If any person delivers any technical skills or services or make available any such services through aid of any machine, equipment or any kind of technology, then such a rendering of services can be inferred as “technical services”. In such a situation there is a constant human endeavour and the involvement of the human interface.
  • On the contrary, if any technology or machine developed by human and put to operation automatically, wherein it operates without any much of human interface or intervention, then usage of such technology cannot per se be held as rendering of “technical services” by human skills. It is obvious that in such a situation some human involvement could be there but it is not a constant endeavour of the human in the process. Merely because certificates have been provided by the humans after a test is carried out in a Laboratory automatically by the machines, it cannot be held that services have been provided through the human skills.

In this manner, the Pehla Lab does not offer any kind of consultancy services or technical services.

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