As per the provisions of Section 9(1)(vii) of the Act payment by resident to non-resident is liable to tax in India if the payment is towards ‘Fees for Technical Services’ (“FTS”).  Explanation 2 under Section 9(1)(vii) defines the term FTS.  FTS is defined to include consideration for services of managerial, technical or consultancy nature, including provision of services by technical and other personnel.

Similarly section 194J provides for TDS on payment made to residents towards FTS.  Section 194J refers back to Explanation 2 under section 9(1)(vii) for the meaning of FTS.

 A ‘technical service’ means a service requiring expertise in technology or scientific knowledge or experience.  Therefore, services where skills or knowledge or education related to a technical field is required to render services, such services will qualify as technical services.  Further, human intervention is necessary for a service to qualify as FTS[i].  However, in case of standard facility or fully automated services, same will not qualify as FTS[ii]

The taxpayer may make payment for repair services.  The repairs may be routine repair services or may involve technical skill.  The issue has arose before various courts as to whether repair services qualify as FTS and are liable for TDS.  The Courts have taken a view that routine repair services do not qualify as FTS.  However, when repair services entail technical skill, Courts have taken a view that same will qualify as FTS.

These decisions and Circulars are discussed below:

Circular :No. 715, dated 8-8-1995.

Question 29 : Whether a maintenance contract including supply of spares would be covered under section 194C or 194J of the Act ?

Answer : Routine, normal maintenance contracts which includes supply of spares will be covered under section 194C. However, where technical services are rendered, the provision of section 194J will apply in regard to tax deduction at source.

Cases where held that repair services do not qualify as FTS

CIT(TDS) vs. Mumbai Metropolitan Regional Development Authority; [2018] 97 461 (Bom HC) – The assessee made payments in respect of maintenance contracts which related to minor repairs, replacement of some spare parts, greasing of machinery etc. The Tribunal held that the assessee had made payments only in respect of maintenance contracts which relate to minor repairs, replacement of some spare parts, greasing of machinery etc. These services do not require any technical expertise, and therefore, could not be categorized as ‘technical services’ as contemplated u/s. 194J.  The Tribunal held that in the facts and circumstances of the present case, the assessee had correctly deducted TDS under the provisions of section 194C.  The HC upheld the finding and observed that these services did not required any technical expertise, same could not be categorised as ‘technical services’ as contemplated u/s. 194J.

DCIT- (TDS) Vs M/S SBI Life Insurance Company LTD No.- ITA No.2398/Mum/2017, (2018) TaxCorp (A.T.) 68549 (ITAT-MUMBAI) – The AO while framing the order under section 201(1) of the Act held that the assessee is liable to deduct tax at source on payments of annual maintenance contract/routine repair under section 194J as the same was in the nature of technical services and thus, assessee wrongly deducted tax at source under section 194C.  The CIT(A) reversed the decision.  The ITAT upheld the CIT(A) Order and dismissed Revenue appeal.

HCL Comnet Ltd. [TS-456-ITAT-2016(DEL)] – The Assessee made payment to an Israel based company under annual maintenance contract (‘AMC’).  The ITAT held that payment towards AMC was in the nature of routine repairs/ replacement and maintenance and not in the nature of FTS absent managerial, technical or consultancy services being provided to assessee.

Ad. DIT v BHEL-GE-Gas Turbine Servicing P Ltd [2012] 24 25 (Hyderabad) – The Assessee made payment to non-residents towards repair or refurbishing of items such as turbines.  The ITAT held that same is payment towards routine repair services and is not FTS.

Kandla Port Trust vs. DCIT (2011) 16 273 (Rajkot-Trib.) – The Assessee made payment towards repairs and maintenance of machineries such as heavy cranes, weigh bridge, elevator, EPBX systems.  The Assessee deducted TDS u/s 194C.  AO applied section 194J.  The ITAT held that payment is towards annual maintenance of machineries and not for technical services.  The ITAT held that same is not technical services.

Hero MotoCorp Ltd. (Formerly known as Hero Honda Motors Ltd.) V Ad CIT (2013) 7 TaxCorp (A.T.) 33215 (DELHI) / [2013] 36 103 (Delhi – Trib.): The taxpayer issued free service coupons to customers for service/repair of vehicles along with the vehicles sold.  Free service was carried out by dealers for which reimbursement was made by assessee to dealers on presentation of free service coupons handed over by the customers to dealers. The AO held that dealers rendered technical service of repairing the vehicle to assessee and, therefore, the assessee was liable to deduct tax therefrom under section 194J. Accordingly, the Assessing Officer made disallowance under section 40(a)(ia). 

The ITAT held that the repair/maintenance services provided by the dealer to the customers was not in the nature of “technical service”, as defined in section 9(1)(vii) read with section 194J of the Act. The ITAT held that Routine repairs which includes supply of spares does not attract Sec. 9(1)(vii) of the Act and hence there is no liability for TDS u/s 194J.

Cases where held that repair services qualify as FTS

Lufthansa Cargo India Pvt. Ltd. DCIT (2004) 91 ITD 133 (Delhi ITAT) – Assessee made payment to a non-resident company towards overhaul, repairs of its aircrafts, engines sub-assemblies and rotables (components) in workshops abroad.  The ITAT held that the overhaul repairs involved were routine maintenance repairs and it could not be said that the Payee rendered any managerial, technical or consultancy service to the assessee. Therefore, the payments made by the assessee to non-residents’ workshops outside India did not constitute payment of fees for managerial, consultancy or technical services as defined in Explanation 2 to section 9(1)(vii).

However, the above view of the ITAT, was reversed by the Delhi High Court in Lufthansa Cargo India [2015] 60 187 (Delhi).  The High Court held that unlike normal machinery repair, aircraft maintenance and repairs inherently are such as at no given point of time can be compared with contracts such as cleaning etc. Component overhaul and maintenance by its very nature cannot be undertaken by all and sundry entities. Level of technical expertise and ability required in such cases is not only exacting but specific.  Aircraft supplied by manufacturer has to be serviced and its components maintained, serviced or overhauled by designated centres. It is this specification which makes the aircraft safe and airworthy because international and national domestic regulatory authorities mandate that certification of such component safety is a condition precedent for their airworthiness. The HC held that exclusive nature of these services lead to the inference that they are technical services within the meaning of section 9(1)(vii).

[i] Bharti Cellular (2011) 330 ITR 239 (SC)

[ii] Kotak Securities (2016) 383 ITR 1 (SC)

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