Engineering fees for drawings and designs were taxable as technical services under the treaty, not business profits.

Engineering fees paid for supply of drawings, designs and documentation were taxable as fees for technical services under the amended India-Germany DTAA and the Income-tax Act, because the treaty definition covered technical, managerial and consultancy services and the assessee did not establish any exclusion based on construction or assembly activity. The alternative plea that the receipts were supplementary consideration for plant and machinery failed because the contract separately provided for engineering fees, and the assessee did not prove that description was unreal. The specific treaty article on royalties and fees for technical services prevailed over the business profits article, and receipt basis taxation of amounts actually received did not alter their taxability.

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Issues: (i) Whether the engineering fees received for supply of drawings, designs and documentation were taxable as fees for technical services under the amended India-Germany double taxation agreement and the Income-tax Act, 1961. (ii) Whether the assessee could claim that the receipts were supplementary consideration for plant and machinery or were assessable, if at all, only under the business profits article or on accrual basis.

Issue (i): Whether the engineering fees received for supply of drawings, designs and documentation were taxable as fees for technical services under the amended India-Germany double taxation agreement and the Income-tax Act, 1961.

Analysis: The payments were made in consideration of technical services consisting of supply of drawings, designs and documentation for the project. The treaty definition of fees for technical services covered payments for technical, managerial or consultancy services, and the restrictive words found in the domestic explanation to section 9(1)(vii) did not assist the assessee on the facts. The assessee was acting as a sub-contractor and was not shown to be undertaking a construction or assembly project so as to exclude the receipts from the treaty definition.

Conclusion: The receipts were taxable as fees for technical services and the finding was against the assessee.

Issue (ii): Whether the assessee could claim that the receipts were supplementary consideration for plant and machinery or were assessable, if at all, only under the business profits article or on accrual basis.

Analysis: The agreement itself provided separate payments for plant and machinery and for engineering fees, and the assessee did not discharge the burden of proving that the apparent contractual description was unreal. Since the treaty article specifically governing royalties and fees for technical services applied, the business profits article could not prevail. The receipts had been assessed on receipt basis, and the question of accrual in India did not alter the taxability of the amounts actually received.

Conclusion: The alternative contentions were rejected and the assessee was not entitled to relief on these grounds.

Final Conclusion: The engineering fees were held taxable under the specific treaty provision governing technical services, and all appeals failed.

Ratio Decidendi: Where a treaty specifically brings technical-service receipts within taxability, a taxpayer cannot recast separately described engineering-fee consideration as part of plant-and-machinery price without proof, and the specific treaty article prevails over the general business-profits article.

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