CASE LAW

2016-TII-13-ARA-IT

FOSTER WHEELER GB LTD: AUTHORITY FOR ADVANCE RULINGS (Dated: August 10, 2016)

Income Tax - Section 37 - India-UK DTAA - Articles 7 & 13.

Keywords - Delay penalty - fees for technical services - project office

Whether expenses incurred by one of the group concerns and not by the parent company in respect of Indian PO of the parent would be deductible u/s 37 - YES: AAR

Whether payments made by the Indian Project Office to non-resident third party service providers and to one of the group companies of the parent would be in the nature of fees for technical services when such services do not make available any technical skill, information or knowledge to the employees of parent deputed in the India PO - NO: AAR

Whether delay penalty would be deductible while computing profits when the invoices showed that price reduction was actually incurred in terms of the agreement - Yes: AAR

The applicant Forster Wheeler (GB) Limited (FWGB) is a company incorporated in United Kingdom and is an international engineering construction and project management contractor and power equipment supplier. FWGB was awarded a contract by Indian Oil Corporation Limited ('IOCL') for rendering the certain onshore services at Paradip in connection with the Paradip Refinery. In order to carry out the same, FWGB had set up a project office in India i.e. Foster Wheeler (G.B) Limited Project Office ('PO') along with Site Offices ('SO') at Paradip, Orissa, Gurgaon and Haryana. With regard to the propsal costs charged by FWEL to FWGB the applicant claimed that these were incurred wholly and exclusively for the purpose of applicant's projects in India and should be allowed in the hands of the PO.

The applicant also contended that it had made certain payments to third party service providers outside India in connection with expatriate movement to India in relation to the PO. Besides this, FWEL had incurred certain expenses relating to support services that are charged to FWGB under the inter Company Agreement for Services which primarily included time cost of various departments and such expenses attributable to PO's activities are charged by FWEL to FWGB. The applicant had mentioned that services rendered by third party service provider do not make available technical knowledge, experience, skill, knowhow etc and accordingly payments towards the same cannot be considered as fees for technical services and is not taxable in India. As regards payments made to FWGB, UK also for services provided by FWEL, UK the applicant has mentioned that FWEL, UK acts as the cost centre for the Group as a whole and therefore it is involved in providing the aforesaid services and the services rendered by FWEL do not fall under Article 13 of the India –UK DTAA, i.e. technical or consultancy services, as the same would be managerial in nature and, accordingly, taxability of such income is subject to provisions of Article 7 of the India-UK DTAA as business income. The applicant further mentioned that as per Article 7 of the India- UK DTAA, business income shall be taxable in India only if there is a PE in India and since FWEL does not have a PE India in relation to this service; payments made by FWGB are not taxable in the hands of FWEL.

Another question relates to allowing the provisions made in the books of accounts of the applicant on year to year basis with respect to its obligation to pay a delay penalty (price reduction) as a result of not meeting the project schedule. As per the agreement between FWGB and IOCL, FWGB would be liable to a price reduction to IOCL for non satisfaction in terms of contract with respect to the time for completion.

Having heard the parties, the Auhtority ruled that,

++ in this case the Head Office had not incurred any expenditure but some expenditure was incurred by one of the group concerns i.e. FWEL and as such, expenditure incurred by a third party cannot be allowed as a deduction, in computing the income of the project. The Revenue in its report had after verification conceded that FWGB's share of proposal costs had been charged to FWGB and FWGB had in fact paid the same to FWEL. This showed that FWEL had incurred such expenditure for the purpose of applicant's projects in India. In view of this there is no reason to disallow such expenses as the same had been incurred for business purposes and such expenditures be allowed in the year in which it was incurred;

++ the affidavit given by the applicant clarifies that the reference to time spent by engineers in the sample invoice are engineers of FWGB deputed in India PO and not any engineers of FWEL, and hence no engineering services were rendered by FWEL (as alleged by the Revenue). The services rendered by third parties and FWEL are administrative support services rendered from abroad and as explained in the Affidavit are in the nature of 'managerial services'. Such services do not make available any technical skill information or knowledge to the employees of FWGB deputed in the India PO;

++ as regards payments made to third parties other than FWEL, there is no dispute. In respect of FWEL, the applicant filed an affidavit explaining the nature of services and according to this detailed affidavit services are not in the nature of Fees for Technical Services as they do not satisfy the 'make available' clause. The mention of 'engineering services' on the invoice has also been explained as above and if this is true the same cannot satisfy 'make available' clause as these are not providing services on the basis of which the recipient can be said to acquire skills of enduring benefit nature. Department's reliance on the fact is also based on presumption that invoices have been prepared for the purpose of Services Tax Law and the description on the invoice is in the light of the definition of taxable service in Service Tax Act. However, the affidavit filed before us does not say so. We cannot go on presumption of the Department and therefore we rely on the affidavit and rule that services provided by FWEL and other third parties are not in the nature of Fees for Technical Services;

++ the invoices showed that the price reduction was incurred in terms of the agreement. As such reduction was agreed by IOCL, the same had to be allowed to the applicant in the year in which it actually accrued.

Ruled in favour of applicant