Hindustan Aeronautics flight testing services are not taxable as fees for technical services: Bangalore ITAT

The ITAT Bangalore Bench, comprising of George George K (Judicial Member) and Padmavathy S (Accountant Member), has determined in the case of M/S Hindustan Aeronautics Ltd. Versus ACIT, flight testing services provided to Hindustan Aeronautics Limited cannot be taxed as fees for technical services, and thus no TDS must be collected.

The Assessee, Hindustan Aeronautics Limited (HAL), is a government of India public sector organization, had filed an income tax return that the Assessing Officer had chosen for inspection (AO). Following that, an AO issued a notice under Section 148 of the Act, adding to HAL’s taxable income for failing to deduct tax on payments paid to CGTM France for flight testing services given to HAL. HAL appealed the decision to the Commissioner of Income Tax (Appeals) (CIT (A)). The CIT (A) found that HAL’s payments were in the form of fees for technical services and sustained the disallowance of payments to CGTM France because HAL had failed to withhold TDS on the payments as required by Section 195 of the Act. HAL had filed an appeal with the ITAT against the CIT’s decision (A).

HAL argued before the ITAT that CGTM France did not provide any technology to HAL, hence the payments made to CGTM for flight testing services were not in the form of fees for technical services, and thus there was no need to withhold tax at source under Section 195 of the Act. The departmental spokesperson claimed that the services provided by CGTM France in the form of flight testing services enabled HAL to gain technical expertise for the manufacture of safe helicopters. As a result, the departmental representative argued that the disallowance of payments for such testing services had to be upheld because HAL had failed to withhold TDS from the sum.

Income from fees for technical services payable by a resident is assumed to accrue or arise in India under Section 9 (1)(vii) of the Income Tax Act, unless the fees are paid for the purpose of deriving income from any source outside India. “Fees for technical services” means any consideration for performing any managerial, technical, or consulting services, according to Explanation 2 to the stated clause. Section 195 of the Act further states that any person responsible for paying any sum chargeable under the Act outside India must deduct income tax on it at the time of crediting such income to the payee’s account or at the time of payment, whichever comes first.

According to the ITAT, the expenses paid in this case were solely for the purpose of testing “Shakti Engines,” i.e., HAL’s helicopter engines, in order to discover specific flaws. The ITAT concluded that HAL’s subsequent action to carry out the enhancement based on the test findings provided by CGTM France could not be used to assert that CGTM made a technology available to HAL. According to the ITAT, conducting the test and then improving the engines based on the test results were two separate acts that could not be regarded together.

The ITAT decided that the simple delivery of services was not taxable as fees for technical services unless the person receiving the service was able to use it independently in the future without having to rely on the person who provided it. The ITAT found that in this situation, the test undertaken by CGTM France could not be carried out independently by HAL in the future without the assistance of CGTM engineers, and so CGTM’s services did not satisfy the criteria of ‘making available’ a technology to HAL. Because the abovementioned criteria was not met, the ITAT determined that the fees paid by HAL to CGTM France were not in the nature of payments for technical services and hence did not qualify for TDS deduction under Section 195.

The test done by CGTM France, according to the assessee, cannot be carried out independently by the assessee without the assistance of engineers from CGTM France, and so does not satisfy the conditions of’make available’ that the services offered by CGTM France to the assessee. It is well established that the mere rendering of services is not taxable unless the person receiving the services is able to use them independently in the future without having to rely on the person providing the service.

As a result, the ITAT decided that no disallowance under Section 40(a)(i) was justified and approved HAL’s appeal.