Installation-linked machinery services and design drawings treated as part of purchase price, not taxable technical fees for withholding tax.

Payments for erection, commissioning, supervision and allied services linked to the import and installation of complex machinery were treated as part of the overall purchase arrangement, not as independent fees for technical services. Because the services were inseparably connected with the sale and successful installation of the machinery, no income was regarded as accruing in India and no tax deduction at source arose. Likewise, payment for designs and drawings used only to support operation and maintenance of the machinery, without independent exploitation or technology transfer, was not taxable in India. On these facts, the non-resident receipts were not subject to withholding tax.

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Issues: (i) Whether the payments made for erection, commissioning, supervision and allied services in connection with import and installation of heavy machinery were chargeable as fees for technical services and liable to tax deduction at source; (ii) Whether payment made for supply of designs and drawings for the machinery was taxable in India and liable to tax deduction at source.

Issue (i): Whether the payments made for erection, commissioning, supervision and allied services in connection with import and installation of heavy machinery were chargeable as fees for technical services and liable to tax deduction at source.

Analysis: The payments for transportation outside India and for technicians' travel did not give rise to income accruing in India. On the main controversy, the machinery was highly complex and the erection and supervision services were inextricably linked with the sale and successful installation of the machinery. The separate purchase orders did not destroy the real commercial connection between supply and installation. The services were ancillary to the sale transaction and formed part of the overall purchase consideration rather than independent technical services falling within the exclusion from the sale context. On these facts, the amounts could not be treated as taxable fees for technical services in India so as to require deduction of tax at source.

Conclusion: The payments for erection, commissioning, supervision and related services were not separately taxable as fees for technical services, and no obligation to deduct tax at source arose on those payments.

Issue (ii): Whether payment made for supply of designs and drawings for the machinery was taxable in India and liable to tax deduction at source.

Analysis: The designs and drawings were acquired only to ensure smooth performance and maintenance of the machinery and were not exploited as independent technical know-how or commercial property. No technology transfer or taxable service element was shown on the facts found. The payment was therefore treated as part of the purchase transaction and not as income chargeable in India in the hands of the foreign supplier.

Conclusion: The payment for designs and drawings was not taxable in India and no tax deduction at source was required.

Final Conclusion: The assessee succeeded on all substantive issues, while the Revenue's challenge to the treatment of the designs and drawings payment failed. The Tribunal held that the impugned non-resident payments were not liable to deduction of tax at source on the facts found.

Ratio Decidendi: Where installation, supervision or allied services are inseparably connected with the sale of complex machinery and function as part of the commercial purchase arrangement, and where designs or drawings are acquired merely for operational support without independent exploitation or technology transfer, the payments are not taxable in India as fees for technical services for TDS purposes.

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