Tribunal Rules Drawings Supply Not Taxable as Technical Services; Supervisory Service Receipts Taxable Under FTS.

The ITAT partly allowed the appeal, ruling that the consideration received for the supply of drawings and designs is not taxable in India as "Fees for Technical Services" (FTS) due to its inextricable link with the supply of equipment. However, the Tribunal upheld the taxability of receipts from supervisory services as FTS, aligning with both domestic law and the India-Switzerland DTAA. The Most Favored Nation clause issue was deemed moot given the Tribunal's decision on the drawings and designs.

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Issues Involved:
1. Taxability of consideration received for supply of drawings and designs as "Fees for Technical Services" (FTS).
2. Applicability of the Most Favored Nation clause under the Indo-Switzerland treaty.
3. Taxability of receipts from supervisory services for erection and commissioning of equipment.

Summary:

Issue 1: Taxability of Consideration for Supply of Drawings and Designs as FTS

The primary issue is whether the amount of Rs. 2,84,92,345/- received by the assessee for the supply of drawings and designs is taxable as FTS in India. The assessee, a non-resident corporate entity incorporated in Switzerland, argued that the supply of drawings and designs was inextricably linked to the sale of plant and equipment, and thus, the receipts should be considered as "Business Profits" not liable to tax in India. The Assessing Officer, however, treated the receipts as FTS under Explanation 2 to section 9(1)(vii) of the Act, and this view was upheld by the Commissioner (Appeals).

The Tribunal found that the supply of drawings and designs was indeed linked to the supply of plant and equipment, as the contracts for both were executed on the same date and were interdependent. The Tribunal relied on the decision of the Hon'ble Jurisdictional High Court in the case of Linde Engineering Division Vs. DIT, which held that services inextricably linked with the supply of equipment are not taxable as FTS. Consequently, the Tribunal concluded that the amount received for the supply of drawings and designs is not taxable in India as FTS.

Issue 2: Applicability of the Most Favored Nation Clause

The assessee contended that the benefit of the Most Favored Nation clause under the Indo-Switzerland treaty should be granted. However, since the Tribunal concluded that the amount received for the supply of drawings and designs is not taxable as FTS, this issue became moot and was not separately addressed.

Issue 3: Taxability of Receipts from Supervisory Services

The assessee received Euro 8,981 (Rs. 5,56,822/-) for supervisory services related to the erection and commissioning of equipment. The assessee claimed that these receipts were in the nature of business profits and not taxable in India due to the absence of a Permanent Establishment (PE). The Assessing Officer and the Commissioner (Appeals) treated the receipts as FTS under Article 12 of the India-Switzerland DTAA.

The Tribunal upheld the view of the Assessing Officer and the Commissioner (Appeals), stating that the supervisory services provided by the assessee, which included the deputation of technical personnel, clearly fell within the definition of FTS under both domestic law and the treaty. Therefore, the receipts were rightly brought to tax in India.

Conclusion:

The appeal was partly allowed. The Tribunal held that the amount received for the supply of drawings and designs is not taxable in India as FTS, while the receipts from supervisory services were rightly taxed as FTS.

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