Payment for repairs not always taxable

FORIEGN ENTERPRISES

It is not infrequent that sophisticated machines, advanced computers, etc., are sent abroad for repairs because of lack of adequate facilities in India. However, in certain cases foreign companies undertaking the repair work depute experts to carry out repairs in India.

The issue is whether the amount paid by an Indian resident to a foreign company for repairs will be taxable as fees for technical services or will it be in the nature of business profits in the hands of the foreign company.

This problem has been considered in several tribunal judgments, where it appears that contradictory views have been taken by different benches of the tribunal.

The first case to be considered was Mannesmann Demag Lauchhammer vs commissioner of income tax 26 ITD 198 (affirmed by High Court in 238 ITR 861).

An Indian company had, after expiry of the warranty period, approached the foreign supplier for repair of certain machines. The foreign company deputed an engineer to carry out the repair work in India.

In this case, the tribunal ruled: "It might be possible to argue that in merely repairing certain machineries for which the warranty period had already expired, there is no consultancy services, either managerial or technical. But, the Explanation 2 to Section 9 (1)(vii) had expanded the scope of such services by including the provision of technical or other personnel".

Therefore, the amount paid by the Indian company was held taxable in India as "fees for technical services".

In Sahara Airlines Ltd. (2002) 83 ITD 11, the Indian company, under the Sahara-Sochata contract, had made a payment to a French company for repairs of aircraft engines.

The tribunal held that the payment was in the nature of "fees for technical services".

The last case to be considered""which in fact clinches the issue""is reported in 274 ITR 20 (AT). Lufthansa Cargo India (P) Ltd., an Indian company, made certain payments to Technik and other foreign companies on account of overhaul, repairs, of its aircraft in workshops abroad.

The main issue referred to the tribunal was whether the payments was chargeable to tax in India. It was submitted that the repairs""overhauling of components in foreign workshops ""were routine maintenance repairs and that no foreign personnel was deputed to India for rendering any technical or advisory services to the assessee.

The tribunal differentiated the facts from Sahara's case (Supra) by observing that "the dominant object of the Sahara-Sochata contract was that of supervision and management of a successful programme by Sochata for keeping Sahara's aircraft in airworthy condition.

A Sochata expert was assigned to India for ensuring smooth running of such a programme. Thus, elements of managerial, consultancy and advisory services together with direct participation of personnel constituted "technical services".

"These elements are absent in the contract between Technik and the assessee", the tribunal ruled. It was held that the payment made was clearly business receipts in the hands of the German party and did not constitute payment for fees for technical services.

agar@nda.vsnl.net.in