2018 (4) TMI 38 - AT - Income Tax

Payment made by the assessee to the nonresident supplier constituted fees for technical services (FTS) - Services rendered in pursuance of the purchase agreement could be taxed as FIS/FTS - India-Japan DTAA - whether the payments made by the assessee to Nippon for supply of D&D, as per the agreement, constituted FTS? - Held that - D & D were not merely inextricably linked with the plant but the plant would not have been installed and commissioned without D&D. So, it can safely be said that D&D would constitute part of cost of acquisition of the Plant. In the case under consideration, it is also clear that the assessee was not exploiting the D&D for business purposes, that IPR of the D&D were retained by the non resident supplier. Considering the above, we hold that the FAA was not justified in holding that disputed amount was FTS. We have gone through the cases relied upon by the FAA. In none of the cases, referred to by him, the issue was not deliberated upon as to whether the consideration, received by a manufacturer of plant and machinery for supplying to its customer, wherein D&D was essential for installation of Plant and machinery, constituted part of cost of acquisition of plant. So, reversing the order of the FAA, we decide the effective Ground of appeal in favour of the assessee.

Summary

Issues:
Liability of deducting tax at source on payments made for supply of Designs & Drawings (D&D) for setting up a CDQ Plant as per agreements with a non-resident supplier.

Analysis:
1. The assessee, a public limited company engaged in steel business, imported plant, machinery, and D&D for a CDQ Plant from a Japanese company. The First Appellate Authority (FAA) held the payment for D&D constituted 'fees for technical services' (FTS) under the India-Japan DTAA, thus liable to tax in India. The FAA relied on precedents like Sargent & Lundy LLC, Toyo Engineering Corporation, and Servall Engineering Works P. Ltd.

2. The Authorized Representative argued that the D&D were essential for operating the CDQ Plant, not for commercial exploitation, and formed part of the plant's acquisition cost. Citing cases like Outotec GmBH and Modern Threads (India) Ltd., the AR contended that if services are integral to goods sale, they are not FTS. The Departmental Representative disagreed, supporting the FAA's view that the payment was FTS.

3. The Tribunal found the D&D critical for setting up the CDQ Plant, without which installation was impossible. Referring to legal precedents like Ishikawajma Harima Heavy Industries Ltd and Prasad Production Limited, the Tribunal held that the D&D formed part of the plant's acquisition cost and were not FTS. The Tribunal noted that the FAA's reliance on irrelevant cases led to an incorrect decision.

4. Considering the unique nature of the D&D supply agreement and its essential role in plant setup, the Tribunal reversed the FAA's decision, ruling in favor of the assessee. The Tribunal emphasized that the D&D were not exploited for business purposes and were crucial for the plant's installation, thus not constituting FTS. The appeal filed by the assessee was allowed on 1st March 2018.