2023 (12) TMI 96 - AT - Income Tax

Taxability of income in India - amount received by the assessee under the contract for offshore supply of plant equipment as well as for offshore services (involving supply of related drawings design) - India Germany Treaty - whether receipts claimed as non-taxable in India under the provisions of the Act as well as under the relevant Articles of the Double Taxation Avoidance Agreement (DTAA)? - AR made submitted that assessee is only a sub-contractor for civil construction of dam carried out by HCC and that Hydro Electrical work is done by another party - HELD THAT - We hold that no part of consideration received outside India for offshore supplies of plant and equipment and spares could be deemed to accrue or arise in India as per section 9 of the Act in the hands of the assessee. Admittedly, there is no existence of any Permanent Establishment (PE) of the assessee in India. Such consideration would only be in the nature of business income not attributable to PE in India and hence not taxable under Article 5 read with Article 7 of the India Germany DTAA. There is no case to treat the receipt of such consideration for offshore supplies of equipment as income taxable in India. Hence we direct the AO to delete the addition made on account of consideration received for offshore supplies of Plant and Equipment outside India. The grounds raised in this regard by the assessee are allowed for various years and accordingly, the issue number 1 framed hereinabove by us is decided in favour of the assessee. Taxability of offshore services - assessee s case is that the entire work related to the drawings and designs were undertaken outside India and that the property both in the designs and drawings as well as in the equipment had passed outside India - HELD THAT - It is not in dispute that the assessee indeed had supplied offshore drawings and designs together with the supply of plant and equipment. We find that the Contract for offshore services and the Contract for the offshore supply of Plant and Equipment were entered on the same date i.e. 12.06.2009 and are inextricably connected because the supply cannot be made without the drawings. Admittedly, the drawings and designs could not be utilised by HCC to get the manufacturing of plant from another manufacturer. The drawings and designs made by the assessee are tailor made to suit the requirements of the Plant and equipment supplied by the assessee. We find that the preamble in the offshore services contract specifically defines the scope of total services to be rendered by the assessee. Offshore service contract primarily involves preparation and supply of drawings and design for imported plant equipment and thus is inextricably linked with the offshore supply of plant equipment. Considering the nature of work undertaken by the assessee as per the Contract, in our considered opinion, the drawings and design as supplied are inextricably linked with the plant and equipment supplied by the assessee. We find that the similar issue had been addressed by the Hon ble Jurisdictional High Court in the case of Linde AG, Linde Engineering Division vs DIT 2014 (4) TMI 975 - DELHI HIGH COURT Wherein it was held that if design and engineering is inextricably linked with the manufacture and fabrication of the material and equipment to be supplied from overseas, and form an integral part of the said supply, then the services rendered would not be amenable to tax as Fees for Technical Services. We find that the lower authorities had not disputed the position that the entire work related to the designs was carried out outside India and that the ownership in such designs was passed outside India. The lower authorities had relied on the provisions of section 9(1 )(vii) of the Act as well as Article 12 of the DTAA to come to the conclusion that the consideration received by the assessee is in the nature of fees for technical services and, therefore, the amount would be chargeable to tax in India on a gross basis under both the Act as well as the DTAA. We find that the issue in dispute is squarely covered by the decision of the Co-ordinate Bench of Delhi Tribunal in the case of SMS Concast AG 2023 (7) TMI 164 - ITAT DELHI wherein it has been held that supply of drawings and designs inextricably linked to sale and supply of equipment cannot be taxed in India as FTS - It was further concluded that where offshore supply of plant and equipment are treated as not taxable in India, the supply of drawings and designs inextricably linked to such plant and equipment had to be considered as non-taxable in India, being part of supply of plant and equipment. When the supply of drawings and designs is coupled with supply of equipment, which is manufactured in accordance with the designs supply, the amount received cannot be characterized as FTS. Thus offshore services that primarily involve offshore supply of drawings and designs are inextricably linked with the offshore supply of Plant and equipment and accordingly, the receipts from offshore services does not give rise to any income accruing or arising in India and therefore not taxable under the Act. Further, such consideration qualifies as business profits of the company in terms of the provisions of Article 7 of the DTAA, which cannot be attributed to India for computing taxable income in India. Hence, income arising therefrom should be treated as non-taxable in India. Accordingly, we have no hesitation in directing the Ld. AO to delete the addition made on account of FTS in respect of offshore designs and drawings for the various years under consideration. Assessee appeal allowed.

Summary

Issues Involved:
1. Taxability of consideration received for offshore supply of plant and equipment.
2. Taxability of consideration received for offshore services involving supply of drawings and designs.

Summary:

1. Taxability of Offshore Supply of Plant and Equipment:
The assessee, a tax resident of Germany, engaged in the business of engineering, designing, manufacturing, and installing plants for Hydro Electric Power Projects, entered into agreements with HCC for the Kishanganga Hydro Electric Power Project. The issue was whether the consideration received for offshore supply of plant and equipment is taxable in India. The assessee supplied plant and equipment designed and manufactured outside India, with title and risk transferred outside India. The consideration was received outside India in foreign currency. The Tribunal held that no part of the consideration for offshore supplies could be deemed to accrue or arise in India as per section 9 of the Act. There was no PE in India, and such consideration would be business income not attributable to PE in India, thus not taxable under Article 5 read with Article 7 of the India-Germany DTAA.

2. Taxability of Offshore Services Involving Supply of Drawings and Designs:
The issue was whether the consideration received for offshore services involving supply of drawings and designs is taxable in India. The offshore services contract involved planning, designing, and engineering of Hydro Mechanical Plant and Machinery, which were inextricably linked with the offshore supply of plant and equipment. The Tribunal observed that the drawings and designs were integral to the plant and equipment supplied and could not be utilized independently. The entire work related to drawings and designs was carried out outside India, and the ownership passed outside India. The Tribunal held that the consideration for offshore services, being inextricably linked with the offshore supply of plant and equipment, does not give rise to any income accruing or arising in India and is not taxable under the Act. Even assuming the consideration is characterized as FTS, it would not be chargeable to tax in India under Article 12 and Article 7 of the DTAA, as the services were rendered outside India and not attributable to PE in India.

Conclusion:
The Tribunal allowed the appeals of the assessee, holding that the consideration received for offshore supply of plant and equipment and offshore services involving supply of drawings and designs is not taxable in India.