No royalty or technical services tax where offshore crane design review made no technical knowledge available and no PE existed.

Payments for crane design review and audit services rendered outside India were held not to be royalty or fees for technical services because no technical plan, design, knowledge, skill or know-how was made available, and no Indian permanent establishment was shown; accordingly, no withholding tax obligation arose. The crane supply consideration payable to the Chinese supplier was not partly taxable as embedded service income because the supply and service contracts were separate, the service payments were already taxed, and the installation permanent establishment threshold was not met on the actual presence and activity record. The Indian intermediary was also not an agency permanent establishment because it lacked authority to conclude contracts and was not devoted exclusively to the supplier's business.

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Issues: (i) Whether the payment made to the US consultant for review of pre-determined design and construction audit of cranes was royalty or fees for technical services, and whether tax was deductible at source; (ii) Whether part of the crane supply consideration payable to the Chinese supplier was taxable in India as embedded service income, and whether the supplier had a permanent establishment in India; (iii) Whether the Indian intermediary constituted an agency permanent establishment of the Chinese supplier.

Issue (i): Whether the payment made to the US consultant for review of pre-determined design and construction audit of cranes was royalty or fees for technical services, and whether tax was deductible at source.

Analysis: The services were rendered outside India in connection with review and audit of the crane designs, and the consultant had engaged a sub-contractor without the assessee being a party to that arrangement. The material did not show transfer of any technical plan or design to the assessee, nor any making available of technical knowledge, skill, or know-how so as to attract the treaty provision for fees for included services. In the absence of a permanent establishment in India, the amount could not be treated as business income of the non-resident. The CBDT instruction relied on by the Revenue was found inapplicable to the facts of the case.

Conclusion: The payment was neither royalty nor fees for technical services, and the assessee was not liable to deduct tax at source.

Issue (ii): Whether part of the crane supply consideration payable to the Chinese supplier was taxable in India as embedded service income, and whether the supplier had a permanent establishment in India.

Analysis: The supply contracts and the separate service contracts were distinct. The service contracts specifically covered unloading, installation, commissioning, testing, and training, and tax had already been deducted on those payments. The purchase consideration could not be artificially recharacterised as containing an embedded element of taxable technical services. For permanent establishment purposes, the relevant period had to be computed on the basis of actual presence and actual installation activity, and not by adding periods of absence or by counting the contractual after-sales period as if personnel were present throughout. On the material available, the threshold for a construction or installation permanent establishment was not crossed.

Conclusion: No part of the purchase consideration was taxable in India on account of an embedded service element, and the Chinese supplier did not have an installation permanent establishment in India.

Issue (iii): Whether the Indian intermediary constituted an agency permanent establishment of the Chinese supplier.

Analysis: The intermediary acted as a sub-contractor and did not have authority to conclude contracts on behalf of the Chinese supplier. It also rendered services to other parties and was not shown to be devoted exclusively to the supplier's business. The factual foundation necessary to treat it as a dependent or agency permanent establishment was absent.

Conclusion: The intermediary did not constitute an agency permanent establishment of the Chinese supplier.

Final Conclusion: The assessee succeeded on all substantive grounds, and the withholding tax demand and related default finding were set aside.

Ratio Decidendi: Where services are rendered outside India without making available technical knowledge or transferring a technical plan or design, and the non-resident has no permanent establishment in India, the payment is not taxable as royalty or fees for technical services and no withholding obligation arises; similarly, a distinct supply contract cannot be recharacterised as service income in the absence of actual installation permanent establishment or agency permanent establishment.

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