INCOME TAX ACT, 1961

--Income deemed to accrue or arise in India under section 9(1)(vii)--Business profit Fees for technical services (FTS)--Assessee was required to make payment Pehla Testing Laboratory (PTL) located at earlier, Germany for carrying out type tests of circuit breaker manufactured by assessee in order to establish that design and product meets the requirements of International Standards. This was a standard service provided by PTL, which was done automatically by machine. For purpose of payment for making remittances to PTL, assessee moved an application under section 195(2) before Assistant Director were (IT) submitting that remittance to PTL was not liable to tax in India under Income Tax Act. Assessing officer held that services provided by PTL, technical in nature and payment was covered under section 9(1)(vii) Explanation 2. Accordingly he held that payment made by assessee would quality as fees for technical services (FTS) as per DTAA between India & Germany as well as per section 9(1)(vii). Thus, assessee was directed to deduct tax at source at the rate of 10 per cent on gross payment made to PTL. Commissioner (Appeals) upheld order of assessing officer. Held: Not justified. Commissioner (Appeals) was not correct in holding that payment made by assessee to PTL was in any manner, in nature of 'fees for technical services' within the ambit of section 9(1)(vii) read with Explanation 2 and there was no requirement to deduct tax at source on such payment as there was no technical services rendered by PTL since no human element was involved.

None of the authorities have either rebutted this contention of assessee, or has given any adverse remark or findings that there was any human intervention in the process. The Commissioner (Appeals) as well as assessing officer have gone merely by the fact that such a type testing services provided by the PTL is highly sophisticated and technical, and it cannot be considered as non-technical. Therefore, being highly technical in nature, it amounts to rendering of technical services. From the perusal of the flyer (sic) as submitted by the counsel, it is seen that it describes various stages of tests which have to be carried out for testing the circuit breakers in various sophisticated machines. Such tests include switching capacity and short-circuit current carrying capacity, dielectric test, temperature rise tests, magnetic tests, climatic tests and other kind of tests. These 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. This cannot be the criteria for understanding the term 'technical services' as contemplated in Explanation 2 to section 9(1)(vii). 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. [Para 14] Commissioner (Appeals) was not correct in holding that the payment made by assessee to Pehla Testing Lab was in any manner in the nature of 'fees for technical services' within the ambit of section 9(1)(vii) read with Explanation 2 and accordingly there was no requirement in law to deduct tax at service on such payment. [Para 18]