German company's offshore equipment supply and design services to Indian contractor not taxable in India

DSD Noell GMBH C/o Mohinder Puri & Co., CA’s Versus Dy. /Asst. CIT Circle-1 (2) (2) International Taxation, Delhi

DSD Noell GMBH C/o Mohinder Puri & Co., CA’s Versus Dy. /Asst. CIT Circle-1 (2) (2) International Taxation, Delhi - TMI Issues Involved:
1. Taxability of consideration received for offshore supply of plant and equipment.
2. Taxability of consideration received for offshore services involving supply of drawings and designs.

Summary:

1. Taxability of Offshore Supply of Plant and Equipment:
The assessee, a tax resident of Germany, engaged in the business of engineering, designing, manufacturing, and installing plants for Hydro Electric Power Projects, entered into agreements with HCC for the Kishanganga Hydro Electric Power Project. The issue was whether the consideration received for offshore supply of plant and equipment is taxable in India. The assessee supplied plant and equipment designed and manufactured outside India, with title and risk transferred outside India. The consideration was received outside India in foreign currency. The Tribunal held that no part of the consideration for offshore supplies could be deemed to accrue or arise in India as per section 9 of the Act. There was no PE in India, and such consideration would be business income not attributable to PE in India, thus not taxable under Article 5 read with Article 7 of the India-Germany DTAA.

2. Taxability of Offshore Services Involving Supply of Drawings and Designs:
The issue was whether the consideration received for offshore services involving supply of drawings and designs is taxable in India. The offshore services contract involved planning, designing, and engineering of Hydro Mechanical Plant and Machinery, which were inextricably linked with the offshore supply of plant and equipment. The Tribunal observed that the drawings and designs were integral to the plant and equipment supplied and could not be utilized independently. The entire work related to drawings and designs was carried out outside India, and the ownership passed outside India. The Tribunal held that the consideration for offshore services, being inextricably linked with the offshore supply of plant and equipment, does not give rise to any income accruing or arising in India and is not taxable under the Act. Even assuming the consideration is characterized as FTS, it would not be chargeable to tax in India under Article 12 and Article 7 of the DTAA, as the services were rendered outside India and not attributable to PE in India.

Conclusion:
The Tribunal allowed the appeals of the assessee, holding that the consideration received for offshore supply of plant and equipment and offshore services involving supply of drawings and designs is not taxable in India.