2023 (7) TMI 164 - AT - Income Tax

Accrual of Income in India - Fee for Technical Services (FTS) - taxability of an amount received from supply of drawings and designs - HELD THAT - Undisputedly, though, AO has brought to tax the receipts from supply of plant and equipment by treating it as business profit of the assessee connected to the PE, however, learned first appellate authority has reversed the decision of the AO by holding that since the plants and equipments were supplied from outside India and the sale transaction has concluded outside India, the receipts cannot be taxed in India. Admittedly, against the aforesaid decision of the first appellate authority, the Revenue is not in appeal. Thus, when the supply of plant and equipment has been treated as sale transaction completed outside India, hence, not taxable in India, the sale and supply of drawings and designs being inextricably linked to sale and supply of plant and equipment has to be considered cumulatively and as a part of sale and supply of plant and equipment. Once the income from supply of plant and equipment is held to be not taxable in India, since, the sale transaction was completed outside India, the same logic applies even to the amount received from supply of drawings and designs. Thus, we hold that the amount received by the assessee from supply of drawings and designs is not taxable in India as FTS. This ground is allowed. FTS under Article 12 of India Switzerland DTAA - supervisory services relating to erection and commissioning - HELD THAT - As assessee had entered into a contract for supply of electromagnetic stirrer. As per the scope of the contract, the assessee shall engineer, manufacture and deliver the plant and equipment. The scope of contract also included supervision, erection and commissioning of plant and equipment. As per assessee s own admission, technical personnel were deputed to supervise the erection and commissioning of the plant and equipment. Thus, it is quite clear, in course of such supervisory activity, the qualified technical personnel deputed by the assessee must have imparted technical services for erection and commissioning of the plant and equipment. Therefore, in our considered opinion, the amount received clearly falls within the definition of FTS, both under the domestic law as well as under the treaty provision. Once the receipts fall within the definition of FTS u/s 12(4) of the DTAA as well as the domestic law, it becomes immaterial whether the assessee has a PE in India or not. Therefore, amount in dispute having qualified as FTS, has rightly been brought to tax at the hands of the assessee. This ground is dismissed.

Issues Involved:
1. Taxability of consideration received for supply of drawings and designs as "Fees for Technical Services" (FTS).
2. Applicability of the Most Favored Nation clause under the Indo-Switzerland treaty.
3. Taxability of receipts from supervisory services for erection and commissioning of equipment.

Summary:

Issue 1: Taxability of Consideration for Supply of Drawings and Designs as FTS

The primary issue is whether the amount of Rs. 2,84,92,345/- received by the assessee for the supply of drawings and designs is taxable as FTS in India. The assessee, a non-resident corporate entity incorporated in Switzerland, argued that the supply of drawings and designs was inextricably linked to the sale of plant and equipment, and thus, the receipts should be considered as "Business Profits" not liable to tax in India. The Assessing Officer, however, treated the receipts as FTS under Explanation 2 to section 9(1)(vii) of the Act, and this view was upheld by the Commissioner (Appeals).

The Tribunal found that the supply of drawings and designs was indeed linked to the supply of plant and equipment, as the contracts for both were executed on the same date and were interdependent. The Tribunal relied on the decision of the Hon'ble Jurisdictional High Court in the case of Linde Engineering Division Vs. DIT, which held that services inextricably linked with the supply of equipment are not taxable as FTS. Consequently, the Tribunal concluded that the amount received for the supply of drawings and designs is not taxable in India as FTS.

Issue 2: Applicability of the Most Favored Nation Clause

The assessee contended that the benefit of the Most Favored Nation clause under the Indo-Switzerland treaty should be granted. However, since the Tribunal concluded that the amount received for the supply of drawings and designs is not taxable as FTS, this issue became moot and was not separately addressed.

Issue 3: Taxability of Receipts from Supervisory Services

The assessee received Euro 8,981 (Rs. 5,56,822/-) for supervisory services related to the erection and commissioning of equipment. The assessee claimed that these receipts were in the nature of business profits and not taxable in India due to the absence of a Permanent Establishment (PE). The Assessing Officer and the Commissioner (Appeals) treated the receipts as FTS under Article 12 of the India-Switzerland DTAA.

The Tribunal upheld the view of the Assessing Officer and the Commissioner (Appeals), stating that the supervisory services provided by the assessee, which included the deputation of technical personnel, clearly fell within the definition of FTS under both domestic law and the treaty. Therefore, the receipts were rightly brought to tax in India.

Conclusion:

The appeal was partly allowed. The Tribunal held that the amount received for the supply of drawings and designs is not taxable in India as FTS, while the receipts from supervisory services were rightly taxed as FTS.

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