Composite supply of drawings and designs escapes fees for technical services, while supervisory erection services remain taxable.

Where drawings and designs are supplied outside India as part of a composite equipment contract and are inseparably linked to the manufacture and supply of plant, the receipt is treated as part of the supply and not as fees for technical services; the amount was therefore not taxable in India. By contrast, supervisory services for erection and commissioning involving deputation of qualified technical personnel fell within the definition of fees for technical services under domestic law and the treaty, so the receipt remained taxable in India. The result was partial relief: the assessee succeeded on the drawings and designs issue but failed on the supervisory services issue.

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Issues: (i) Whether consideration received for supply of drawings and designs, being linked to the supply of plant and equipment under the same project, was taxable in India as Fees for Technical Services; (ii) Whether consideration received for supervisory services relating to erection and commissioning of equipment was taxable as Fees for Technical Services.

Issue (i): Whether consideration received for supply of drawings and designs, being linked to the supply of plant and equipment under the same project, was taxable in India as Fees for Technical Services.

Analysis: The drawings and designs were prepared and supplied outside India, and the transaction was completed outside India. The contracts for equipment and for drawings and designs were executed on the same date and related to a single project. The drawings and designs were specifically related to the manufacture and supply of the equipment and could not be viewed on a standalone basis. Where design and engineering are inextricably linked to the supply of equipment, the receipt is to be treated as part of the supply rather than as technical services. The contractual link and the commercial substance showed that the drawings and designs were subsumed within the composite supply.

Conclusion: The amount received for supply of drawings and designs was not taxable in India as Fees for Technical Services, and this issue was decided in favour of the assessee.

Issue (ii): Whether consideration received for supervisory services relating to erection and commissioning of equipment was taxable as Fees for Technical Services.

Analysis: The supervisory work involved deputing qualified technical personnel for erection and commissioning of equipment. Such activity necessarily involved imparting technical services in the course of performance of the contract. Once the receipt satisfied the definition of Fees for Technical Services under the domestic law and the treaty, the existence or absence of a permanent establishment became immaterial for that characterization.

Conclusion: The amount received for supervisory services was taxable in India as Fees for Technical Services, and this issue was decided against the assessee.

Final Conclusion: The appeal succeeded on the drawings and designs issue but failed on the supervisory services issue, resulting in partial relief to the assessee.

Ratio Decidendi: Where design and engineering supplies are inseparably connected with the supply of equipment under a composite commercial arrangement and are not capable of independent exploitation, the receipt is to be treated as part of the supply and not as Fees for Technical Services; separate supervisory services involving technical personnel may still constitute Fees for Technical Services.

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