9911796707
TMI Blog2025 (4) TMI 794X X X X Extracts X X X X X X X X Extracts X X X X ..... 08-09 M/s. SMS Siemag AG Addl. DIT, Range- 2, Intl. Taxation, New Delhi Addl. DIT, New Delhi's order dated 13.10.2011 involving proceedings under Section 144C r.w.s. 143(3) of the Act. 03.03.2025 2. 2144/Del/2012 for AY: 2007-08 M/s. SMS Siemag AG DDIT (Intl. Taxation), Circle-2(2), New Delhi DIT [Intl. Taxation]-II, New Delhi's order dated 23.03.2012 involving proceedings under Section 263(1) of the Act. 11.03.2025 3. 1074/Del/2014 for AY: 2007-08 M/s. SMS Siemag AG DDIT (Intl. Taxation), Circle-2(2), New Delhi DDIT, Intl. Taxation, New Delhi's order dated 23.12.2013 involving proceedings under Sections 143(3) r.w.s. 144C/263 of the Act. 11.03.2025 4. 6106/Del/2012 for AY: 2009-10 M/s. SMS Siemag AG DDIT (Intl. Taxation), Circle-2(2), New Delhi DDIT, Intl. Taxation, New Delhi's order dated 28.09.2012 involving proceedings under Sections 143(3) r.w.s. 144C of the Act. 03.03.2025 5. 6359/Del/2014 for AY: 2010-11 M/s. SMS Siemag AG DDIT (Intl. Taxation), Circle-2(2), New Delhi DDIT, Intl. Taxation, New Delhi's order dated 23.09.2014 involving proceedings under Sections 143(3) of the Act. 03.03.2025 6. 6161/Del/2015 for AY: 2011-12 M/s. SMS Seimag AG DD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fourteen cases involve identical substantive grounds; both in law and on facts. We thus treat 'M/s. SMS Group GmbH's ITA No. 5580/Del/2011 for AY: 2008-09 as the "lead" appeal raising the following substantive grounds: 1. That on the facts and circumstances of the case and in law the order of Additional Director of Income-tax (International Taxation), Delhi (A.O) u/s 143(3) in pursuance of direction issued u/s 144C by Dispute Resolution Panel (DRP) is perverse, bad in law and void, being contrary to law and principles of natural justice. 2. That the learned A.O./DRP has erred in computing income at Rs. 159,851,648/- as against returned income of Rs. 41,12,262/- 3.(a) That the learned A.O. and DRP have erred in law and on facts in holding that consideration received for supply of drawings and designs, forming integral part of the supply of equipment, received under various contracts is taxable as 'Fees for Technical Services', u/s 9(1)(vii) of the Act. (b) That the learned A.O. and DRP have misdirected themselves on wrong assumptions of facts and in law in not accepting the claim that supply of drawings and designs was inextricably linked to sale of plant and equip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see's 1st and 2nd grounds are general in nature. Rejected in very terms. 5. Next come assessee's third and fourth substantive grounds canvassing its inter-connected grievances that both the learned lower authorities have erred in law and on facts, inter alia, in treating its consideration received from supply of designs and drawings forming integral part of the sale/supply of equipments, received under various contracts, as taxable under section 9(1)(vii) of the Act, being in the nature of "fee for technical services" (FTS) under the above former and its receipt derived from sale of plant and equipments as alleged to have been concluded in India and assessable in India, involving varying sums; respectively. 6. We now advert to the basic relevant facts. The assessee herein "M/s. SMS Seimag AG" formerly known as "M/s. SMS Demag AG", is a German company engaged in the business(es) of supply of plant, equipment, drawings & rendering of technical services to customers in the metallurgical sector world-wide. Learned Assessing Officer's assessment herein dated13.10.2011 suggests that he treated the assessee's business activities in four heads i.e. supply of plant and equipment from Germ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e former's directions dated 30th September, 2011, as follows: "2. The grounds of objection, filed as Appendix A with Form No. 35A, are as under: 1. That the order of learned Assessing Officer is bad both in law and on facts of the case. 2. That the learned Assessing Officer has erred in computing income at Rs. 176,00,77,547/- as against returned income of Rs. 41,12,262/- 3. That the learned Assessing Officer has erred in making assessment without providing adequate opportunity and thus acted contrary to principals of Natural Justice, which is illegal. 4. (a) That the learned Assessing Officer(A.O.) has erred in holding that consideration received by the assessee in relation to contract for supply of drawings and designs, is essentially in the nature of "Fees for Technical Services under the provisions of Section 9(1)(vil) of the Indian Income-Tax Act. (b) That the learned Assessing Officer has made erroneous observations, a assumptions on facts, erroneous interpretation of terms of the contract, incoming to the conclusion that the amounts received by the assessee were taxable as 'Fees for Technical Services' (c) That the learned Assessing Officer has erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of consideration for supply of equipment from Head Office, is attributed, to P.E., if any, in India. (f) That without prejudice the learned Assessing Officer has erred in invoking the Rule 10 of the Income-Tax Rules, in computing profit attributable in India in relation to supply of equipment. The said Rule has no application on facts. (g) Without prejudice, the learned Assessing Officer has erroneously held that on facts, profit attributable in respect of supplies was 75% of global profit rate. The said attribution is arbitrary, highly excessive and has no rationale whatsoever, and is against the principals of attribution as laid down under the provisions of Income-Tax, Act, DTAA between India and Germany and various decisions of Hon'ble High Court, Supreme Court of India. 6. That the Learned Assessing Officer has erred in erroneously holding the amounts received towards reimbursement of cost towards intranet, SAP are liable to tax in India as 'Fees for Technical Services'. 7. That the learned Assessing Officer has erred in directing charging of interest without specifying the same, not attracted on facts. 8. That the learned Assessing Officer has erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received in respect of supplies of drawings and designs cannot be subject to tax in India as the same are inextricably linked to supplies of equipments and not pertaining to rendering of technical services. The Explanation 2 to Section 9(1)(vii) that defines fees for technical services does not apply where the consideration is for outright sale of plant with essential drawings and designs and not for rendering of engineering and technical services. Such payments would fall in the definition of business profits and cannot be subjected to tax unless the assessee had a P.E. and supplies are connected therewith. 2. A separate price is stipulated under the Agreements for such supplies, which is payable outside India. Terms of delivery, involving transfer of title outside India are specified under the Agreements. During course of hearing specific evidence regarding supply of drawings and designs, from outside India, comprising Air-shipment Bills etc. relating to some contracts were submitted to the learned Assessing Officer. 3. On bare perusal of terms of contracts executed for supply of drawings and documents, it is clear that drawings, designs and documents to be supplied are in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as essentially the contract here is of supply of plant and equipment along with drawings and designs. 4.3 The above submissions have been considered by this Panel. The main thrust of the assessee's argument is that all acts relating to the transaction have taken place outside India and that the designs and drawings are connected to the sale of the equipment and not for any engineering or technical services to the assessee. In order to come to a proper conclusion it would be appropriate to examine the terms of the relevant agreements. For this purpose the contract for supply of drawings and documents for Steel Melt Shop with JSW Steel Ltd. India can be looked into. i. From the Terms of Payment as given in Article 7 it is seen that 5% of the unit wise contract price for drawing and document shall be payable on completion of commissioning of the respective units (para 7.3). A further 5% of the unit wise price shall be paid upon successful completion of Performance Guarantee Tests of the respective units (para 7.4). The seller is to furnish a performance bank guarantee of 5% of the contract price at the time of release of payment against commissioning under Art 7.3 (para 7.4). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee Further even though the drawings and designs etc. are linked to the sale of equipment, the fact remains that a separate contract has been made between the two parties spelling out separate terms and conditions that govern this transaction. Therefore, the sale of equipment and the transfer of know-how under the agreement in respect of drawings, designs etch cannot be confounded with each other. Had it been inextricably linked with supply of equipment there would have been no reason to enter into two separate agreements. Taking into consideration the facts of the case the Panel is of the view that the transaction is not of the nature the profit from which would be taxable as business profits but fees for technical services. The objection made by the assessee is therefore rejected." This leaves the assessee aggrieved. 9. We have given our thoughtful consideration to the assessee's and the Revenue's vehement respective contentions against and in support of the impugned additions, inter alia, holding the former's receipts derived from sale of designs and drawings and off-shore sale/supply of plants/equipments as taxable in India. We first of all sought to verify the fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceipts from Jindal Steel and Power Limited amounting to Euro 12,15,200 (Rs.6,94,96,347/-) was shown as exempt in the return of income originally filed. The said Indian company had not deducted/paid any income-tax on the said consideration on the ground that the same is not liable to tax in India. Accordingly, a claim of exemption was made in the return of income filed by the assessee. However, the AO observed that the nature of receipts is same as that made from other Indian company in relation to supply of drawings and designs, the same have been offered for taxation @ 10%, therefore, consideration received in relation to drawings and designs from Jindal Steel and Power Limited should also be taxed @ 10% on the gross amount. Accordingly, he made addition of Rs.6,94,96,347/- to the income of the assessee. 8. Aggrieved with the above order, assessee preferred an appeal before the ld. CIT(A)-XXIV, New Delhi. Before ld. CIT (A), assessee has raised various grounds including jurisdictional issues for initiating reassessment proceedings in the case of the assessee and also on merit, assessee has submitted before the ld. CIT (A) as under:- "9.3 It would be observed that amount of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the appellant is not as per law on the issue as Hon'ble Supreme Court has long ago in its decision in case of CIT v Sun Engineering Works Pvt. Ltd. 198 ITR 297 has laid down that reassessment jurisdiction is available only to the AO and not to the assessee and the assessee in reassessment proceedings cannot claim that certain incomes originally declared as taxable are not taxable. Therefore, the AO has rightly considered the income returned in the revised return as starting point and not the income returned in response to notice u/s 147 of the Act. 10.2 I have also gone through copies of invoices pertaining to receipts from Jindal Steel and Power Ltd. and it is seen that receipt of 949,600 Euro (Rs. 5,27,63,546) pertains to supply of equipment for an Electric Arc Furnace. The other two receipts of 235,000 and 30,600 Euros amounting to Rs. 1,67,32,800 are regarding drawing and designs. The AO in his assessment order has not alleged that there existed any PE in India for the AY under consideration. Therefore, in view of Article 7(1) of Indo-Germany DTAA, business income from sale of equipment is not taxable in India. Similar treatment has been given by the AO to business rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DIT Vs Jacabs Civil Inc and other High Courts and upholding the chargeability of interest under section 234B, not attracted on facts of the case. 5. That the assessee may be allowed to add, supplement, revise, amend grounds as raised hereinabove." 11. At the time of hearing, ld. AR for the assessee brought to our notice relevant facts on record and he brought to our notice page 9 of the factual paper book which is the original return of income filed by the assessee wherein assessee has clearly disclosed that three invoices raised to Jindal Steel and Power Limited which assessee has not offered to tax and further he brought to our notice page 11 of the paper book which is the revised computation of total income filed for the purpose of revised return of income. He submitted that the assessee has not changed the declaration made with regard to transaction with Jindal Steel and Power Limited and assessee has declared the same as exempt and at the same time, he submitted that first two invoices of Euro 2,35,000 and 30,600 are relating to drawings and designs and with regard to third invoice of Euro 9,49,600 pertains to supply of machineries. He brought to our notice page 12 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen similar receipts from Jindal Steel and Power Limited should also be taxable and the assessee has wrongly taken these receipts as non-taxable. It was submitted that even if the AO has treated these receipts as FTS in reassessment order instead of treating them as business receipts as mentioned in the reasons recorded. However, ld. CIT (A) observed that it does not vitiate the reassessment proceedings because some receipts as mentioned in the reasons recorded has been brought to tax in the reassessment order though after characterizing them differently. 13. With regard to merits, ld. AR for the assessee brought to our notice the findings at page 8 of the appellate order and submitted that ld. CIT (A) even though gave partial relief on supply of equipment but he sustained the supply of designs and engineering drawings as taxable overlooking the fact that the issue under considered is settled as far as assessee is concerned and the ITAT, Vizag has already decided the issue that it will not fall under the term royalties. He submitted that findings of ld. CIT (A) is not as per precedent. 14. On the other hand, ld. DR for the Revenue relied on the findings of the lower authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to supply of drawings and designs as royalty/FTS and he proceeded to sustain the addition on the two invoices which assessee has not declared in their return of income. After considering the factual matrix on record, we observed that the ITAT, Vizag has considered the similar issue on record and decided the issue of supply of drawings and designs in favour of the assessee even though as royalties. However, the provisions of royalties and FTS are similar in nature, therefore, we are inclined to accept the submissions of the assessee and we direct the AO to delete the additions proposed in this case. 17. In the result, the grounds raised by the assessee on merits are allowed and other grounds are dismissed. Accordingly, the appeal filed by the assessee being ITA No.1073/Del/2014 is partly allowed. 18. The Revenue in the cross appeal for AY 2005-06 has taken various issues with regard to the deletion of addition of Rs.5,27,63,546/- out of total addition of Rs.6,94,96,346/- made by the Assessing Officer on account of consideration received by the assessee from M/s. Jindal Steel & Power Ltd. for supply of drawings and designs. This issue is decided by us in the assessee's a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cturing, assembly, inspection and construction if applicable, spare part lists, operation and maintenance instructions as the case may be. 13. Thus, from the details of design and drawings as well as documentation submission, schedule of drawings and designs, it is quite clear that drawings and designs supplied by the assessee are specifically related to the supply of plant and equipments for the JSW Steel Project. 13. On a reading of both the contracts, it is observed, though, the contracts have been separately executed, one for supply of plant and equipment and the other one for supply of drawings and designs, however, they have been executed on the very same date. One more crucial fact emerging from the drawing and design contract is, as per clause 17.1.1(iii), the purchaser is vested with the right to terminate the contract unilaterally, inter alia, due to the delay in delivery of the equipment in excess of 120 days for the reasons solely attributable to the seller and seller fails to take necessary remedial action. Thus, from the aforesaid condition imposed in the contract, it is very much clear that failure to supply plant and equipment within the stipulated time period c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n our view, the ratio laid down by the Hon'ble Jurisdictional High Court in the aforesaid decision squarely apply to the facts of the present appeal. 16. In case of CIT Vs. Andhra Petrochemicals Ltd. reported in [2015] 373 ITR 207, the Hon'ble Andhra Pradesh High court has observed that different components of the contract cannot be read in isolation. Similar view has also been expressed by the Hon'ble Delhi High Court in case of CIT Vs. Mitsui Engineering and Ship Building (supra). 17. Insofar as the decision of the Hon'ble Karnataka High Court in case of AEG Aktiengesllshaft Vs. CIT (supra), in view of the ratio laid down by the Hon'ble High Court in case of Linde Engineering Division Vs. DIT (supra), there is no need for much deliberation on the said decision. 18. At this stage, we must address some of the submissions made by learned Departmental Representative. Before us, learned Departmental Representative has submitted that the amount received for supply of drawings and designs is taxable in India, as, they have been delivered at Bangalore Airport and the seat of arbitration is in India. We do not find much substance in the said submission of learned Departmental Repres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... From the facts on record, it is observed, the 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 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. This ground is dismissed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 9(1)(vii) of the Act for want of any technical services being provided nor royalty under section 9(1)(vii) Explanation 1 of the Act. All these clinching intervening developments have gone unrebutted from the Revenue side. We thus adopt judicial consistency in absence of any distinction of facts or law, as the case may be, to delete the impugned addition. The assessee's firth substantive ground is accepted. 14. Lastly comes the assessee's sixth substantive ground contesting the chargeability of interest in its case under section 234B of the Act being a non-resident. Suffice to say, the case law (2021) 438 ITR 174 (SC), DIT Vs. Mitsubishi Corporation has already settled the instant issue in assessee's favour and against the department, thereby holding that section 209(1) proviso inserted in the Act vide Finance Act, 2012, carries prospective effect only. We reiterate that the assessment year before us is AY 2008- 09. That being the case, we accept the assessee's sixth substantive ground in very terms. 15. This assessee's "lead" appeal ITA Nos. 5580/Del/2011 for AY 2008-09 partly succeeds in above terms. ITA Nos.2144/Del/2012 & 1074/Del/2014 for AY: 2007-08 (M/s. SMS Siemag AG) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see's favour. 20. Lastly comes the assessee's sixth substantive grounds raising TDS credit issue, which mainly requires the Assessing Officer's afresh factual verification and computation than our substantive adjudication. The same is accordingly restored back to the learned Assessing Officer in very terms. 21. This assessee's appeal ITA No. 6106/Del/2012 is partly allowed. ITA No. 6359/Del/2014 for AY: 2010-11 (SMS Siemag AG) 22. The assessee's instant appeal admittedly raises three substantive grounds, inter alia, contesting taxability of income/receipts derived from sale of designs and drawings, offshore sale/supply of plants and equipments and charging of section 234B interest, in identical factual backdrop as in the "lead" assessment year 2008-09; and the same succeeds in very terms therefore. 23. This assessee's appeal is allowed. ITA No. 6161/Del/2015 for AY: 2011-12 (SMS Siemag AG) 24. It transpires during the course of hearing that the assessee's third, fourth and sixth substantive grounds raise as many issues of taxability of its income/receipts, derived from sale of designs and drawings, off-shore sale/supply of plants and equipment and charging of section 234B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bstantive grounds raising as many issues of taxability of its income/receipts arising from sale of designs and drawings, supply of plant and equipments and charging of section 234B interest. In identical factual backdrop, we thus accept the instant former twin substantive grounds and restore the last one of section 234B interest computation back to the learned Assessing Officer as consequential in nature in very terms. 34. This assessee's appeal ITA No. 5521/Del/2018 is partly allowed. ITA No.3070/Del/2019 for AY: 2015-16 (M/s. SMS Mevac UK Ltd.) 35. The assessee/appellant herein M/s. SMS Mevak UK Ltd. raises only its twin substantive grounds of income derived from sale of designs and drawings as not taxable in India and that of charging of section 234B interest in identical factual backdrop. We thus accept the instant former substantive grounds and restore the matter latter one of section 234B interest issue back to the learned Assessing Officer for his afresh computation as per law in very terms. 36. This assessee appeal ITA No. 3070/Del/2019 is partly allowed. ITA No.4044/Del/2019 for AY: 2016-17 (SMS Group GmbH) 37. It emerges during the course of hearing that both the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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