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Issues: Whether the payment made for supply of designs and drawings under the agreement with the non-resident supplier constituted fees for technical services or formed part of the cost of acquisition of the plant and machinery.
Analysis: The payment related to designs and drawings that were critically essential for setting up, installing, operating and commissioning the plant. The assessee was described as purchaser under the agreement, the designs and drawings were not commercially exploited by it, and the supplier retained the intellectual property rights. In such a composite arrangement, the designs and drawings were inseparably connected with the supply of the plant and machinery and were necessary for its installation. On these facts, the consideration could not be treated as rendering of managerial, technical or consultancy services within the meaning of Explanation 2 to section 9(1)(vii) of the Income-tax Act, 1961 and was not taxable as fees for technical services under Article 12 of the India-Japan DTAA.
Conclusion: The payment for designs and drawings was part of the cost of acquisition of the plant and machinery and not fees for technical services. The issue was decided in favour of the assessee.
Ratio Decidendi: Where designs and drawings supplied by a non-resident are indispensable for installation and commissioning of plant and machinery and are not separately exploited as services, the consideration is to be treated as part of the acquisition cost and not as fees for technical services.
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