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2024 (7) TMI 1013 - AT - Income TaxIncome deemed to accrue or arise in India - taxability of amount received towards offshore supply of design and engineering - Fees for Technical Services (FTS), both u/s 9(1)(vii) of IT Act as well as Article 12 of India Austria DTAA - assessee is a non-resident corporate entity engaged in the business of supplying plants and services for hydropower, pulp and paper, metals and other specialized industries - HELD THAT - As terms of contract would make it clear that the design and engineering services inextricably linked with the manufacturing and supply of equipments. It is not the case of the department that the offshore supply of design and engineering would have enabled the contractee to manufacture the plant and equipment through any other party independent of the assessee. Thus, it has to be held that offshore supply of design and engineering, being closely linked to the offshore supply of plant and equipment, it cannot be segregated from the offshore supply of plant and machinery, as the basic nature and character of both the transactions are identical. Therefore, when offshore supply of plant and equipment is not taxable, offshore supply of design and engineering cannot be made taxable. As we analyze with the fact involved in case of SMS Concast AG 2023 (7) TMI 164 - ITAT DELHI it would be clear that assessee s case stands on a better footing as the contracts under which the assessee has received the payment are composite contracts. Therefore, the ratio laid down in case of SMS Concast AG (supra) squarely applies to assessee s case. Identical view has been expressed by the Coordinate Bench in case of DSD Noell GMBH (supra). Therefore, respectfully following the decisions of the Coordinate Bench, as noted above, we hold that the amount in dispute is not taxable in India. Taxability of amount received towards onshore supervisory services as FTS by applying the rate of 10% on gross basis - HELD THAT - It is a fact that the departmental authorities have treated the amount received from onshore services as FTS. Article 12(4) of the treaty deals with FTS and paragraph 2 of Article 12 provides that both royalty and FTS shall be taxed on gross basis by applying the rate of 10%. However, paragraph 5 of Article 12 carves out an exception by providing that in a case where royalty and FTS are connected with PE in the source country, then the provisions of Article 7 or Article 14 would apply. In other words, even though, the receipts are in the nature of FTS, however, if it is connected to the PE, it has to be treated as business profit under Article 7. Therefore, in our view, the departmental authorities fell into error in taxing the receipts from onshore supervisory services as FTS under Article 12(4) of the treaty on gross basis. We hold that the receipts from onshore services, being attached to the supervisory PE in India, have to be taxed on net basis under Article 7 of the treaty. As per Article 7(5) of the treaty, the business profits of the PE has to be determined by the same method year by year, unless there is good and sufficient reasons to depart from the said method. Before us assessee as submitted that the assessee has followed project completion method year by year and the department has also accepted it in all other assessment years. In fact, it is his submission that in assessment year 2014-15, the entire receipts from onshore supervisory services has been offered by the assessee and the AO has assessed it. Keeping submission of the assessee, we direct the AO to factually verify, whether the receipts in dispute were offered to tax by the assessee in assessment year 2014-15 and, in case, it is found to be so, no further addition can be made in the impugned assessment year. Ground is allowed for statistical purposes. Taxability of certain other supervisory fee in India - We find that the contracts, under which the assessee carried out onshore supervisory activities, are composite contracts involving both supply of plant and equipment, drawings and design, provision of supervisory services, erection, commissioning etc. Therefore, the services provided by the assessee, being technical in nature, receipts have to be treated as FTS under Article 12(4) of India Austria DTAA. That being the fact on record, the supervisory fee received by the assessee is taxable in India in terms of Article 12(4) of tax treaty, irrespective of the fact whether the assessee had a PE in India or not. As relying on SMS Concast AG 2023 (7) TMI 164 - ITAT DELHI 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 under Article 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, in our view, the amount in dispute having qualified as FTS, has rightly been brought to tax at the hands of the assessee. Decided against assessee. Taxability of reimbursement of expenses from Indian group companies as FTS - assessee had entered into a cost contribution contract with other group entities for group information and business services - HELD THAT - Cost incurred by the assessee for providing such services are allocated by way of specific allocation key to all the group companies, including the Indian entities. The cost incurred for providing such services was invoiced to all the entities including Indian entities and the assessee received the reimbursement of cost without any market up. The issue arising before us is, whether such cost reimbursement would be taxable as FTS. In our view, what the assessee has done is, shared the expenditure incurred for running the business with all its group entities. The cost has been recovered without any markup. Therefore, there is no profit element embedded in the payments received. That being the case, the receipts cannot be treated as FTS and brought to tax in India.
Issues Involved:
1. Taxability of offshore supply of design and engineering services as Fees for Technical Services (FTS). 2. Taxability of onshore supervisory services as FTS. 3. Taxability of other supervisory fees. 4. Taxability of reimbursement of expenses from Indian group companies as FTS. 5. Levy of interest under section 234D and withdrawal of interest under section 244A of the Income-tax Act. 6. Levy of interest under section 234B of the Income-tax Act. Issue-wise Detailed Analysis: 1. Taxability of Offshore Supply of Design and Engineering Services as Fees for Technical Services (FTS): The assessee, a non-resident corporate entity and tax resident of Austria, challenged the taxability of the amount received for offshore supply of design and engineering services under section 9(1)(vii) of the Income-tax Act, 1961, and Article 12 of the India-Austria Double Taxation Avoidance Agreement (DTAA). The Assessing Officer (AO) considered these services as technical and taxable as FTS. However, the Tribunal found that the design and engineering services were inextricably linked to the offshore supply of plant and equipment, which was not taxable. The Tribunal referred to similar cases (SMS Concast AG and DSD Noell GMBH) and concluded that the offshore supply of design and engineering services should not be taxed separately as FTS, as they are part of a composite contract and closely linked to the offshore supply of plant and equipment. 2. Taxability of Onshore Supervisory Services as FTS: The assessee admitted having a supervisory Permanent Establishment (PE) in India for providing onshore supervisory services to SAIL but did not offer the revenue received from such services in the return of income. The AO taxed these receipts as FTS at 10% on a gross basis. The Tribunal held that since the onshore supervisory services were connected to the supervisory PE, they should be taxed as business profits under Article 7 of the DTAA on a net basis after deducting expenses. The Tribunal directed the AO to verify if the income was offered in the assessment year 2014-15 and, if so, avoid double taxation. 3. Taxability of Other Supervisory Fees: The assessee provided supervisory services to Pragati Papers Industries Ltd. and Andritz Hydro Pvt. Ltd. and claimed these fees as non-taxable business profits in the absence of a PE. The AO taxed these receipts as FTS on a gross basis. The Tribunal, following the decision in SMS Concast AG, held that the services provided were technical and taxable as FTS under Article 12(4) of the India-Austria DTAA, irrespective of the presence of a PE. 4. Taxability of Reimbursement of Expenses from Indian Group Companies as FTS: The assessee entered into a cost contribution contract with group entities for group information and business services, recovering costs without any markup. The Tribunal held that the reimbursement of costs without a profit element should not be treated as FTS and referred to decisions in DIT vs. A.P. Moller Maersk AS and CIT vs. Expeditors International (India) Pvt. Ltd. The Tribunal allowed the ground, concluding that such receipts are not taxable as FTS. 5. Levy of Interest under Section 234D and Withdrawal of Interest under Section 244A of the Income-tax Act: The assessee contested the levy of interest under section 234D and withdrawal of interest under section 244A, claiming that the refund was computed but never granted. The Tribunal directed the AO to verify the factual claim and decide according to the law. 6. Levy of Interest under Section 234B of the Income-tax Act: The Revenue appealed against the decision of the first appellate authority regarding the levy of interest under section 234B. The Tribunal upheld the first appellate authority's decision, referencing the assessee's case in the assessment year 2011-12, where the issue was decided in favor of the assessee. Summary of Decisions: - The appeals for the assessment years 2011-12, 2012-13, and 2014-15 were partly allowed. - The Revenue's appeal for the assessment year 2012-13 was dismissed. - The Tribunal concluded that the offshore supply of design and engineering services is not taxable as FTS, the onshore supervisory services should be taxed on a net basis, and the reimbursement of expenses is not taxable as FTS. The Tribunal also directed the AO to verify certain claims to avoid double taxation and upheld the non-levy of interest under section 234B.
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