Supply of drawings/designs and supervision services in India-Germany deal: royalty held non-taxable; FTS/PE additions partly sustained

Receipts for supply of drawings and designs were held not taxable in India, since a coordinate bench in the taxpayer's own case had accepted non-taxability even when characterized as royalty and royalty/FTS provisions were materially similar; the AO was directed to delete the addition. Consideration for supervision of erection and commissioning for a period below six months was held to constitute FTS under domestic law and Art. 12(4) of the India-Germany DTAA, rendering PE existence immaterial; the addition was sustained. For AY 2020-21, where supervision exceeded six months, a PE was held established and profits had to be computed under Art. 7 on a net basis; as audited books showed a loss and book results were not validly rejected, no income was taxable. Interest u/s 234B was consequential and u/s 234C was restricted to returned income.

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Issues: (i) Whether amounts received for supply of drawings and designs and offshore supply of plant and equipment are taxable in India as Fees for Technical Services (FTS) or as business profits not taxable in India; (ii) Whether profits from onshore supervisory/erection & commissioning services (periods less than and more than six months) are taxable in India and/or attributable to a Permanent Establishment (PE); (iii) Whether assessed interest and penalty provisions apply as raised.

Issue (i): Whether receipts for supply of drawings and designs and offshore supply of plant and equipment are taxable in India as FTS or are business profits not taxable in India.

Analysis: The Tribunal examined contracts, contemporaneous deliveries and payment locations, and relevant precedents including coordinate-bench decisions in the assessee's earlier years. The Tribunal analysed whether drawings/designs were separable standalone technical services or inextricably linked to offshore supply of tailor-made plant/equipment; it noted separate contracts may exist but factual elements (contract terms, performance guarantees, intellectual property clauses, delivery and receipt outside India) and prior coordinate-bench findings weigh in favour of treating such receipts as connected to offshore supply. The Tribunal also considered DRP and AO determinations and prior tribunal decisions which had held similar receipts not taxable in India.

Conclusion: In favour of the Assessee. Ground Nos. 36 (taxability of drawings/designs and offshore equipment receipts) are allowed; such receipts are not taxable in India as FTS where they form part of offshore supply in the factual matrix identified by the Tribunal.

Issue (ii): Whether supervisory/erection and commissioning services rendered onshore are taxable in India and whether profit is attributable to a PE (distinguishing periods exceeding and not exceeding six months).

Analysis: The Tribunal applied treaty thresholds and prior coordinate-bench rulings. For supervisory services exceeding six months the Tribunal found presence of PE and that income must be attributed and computed under Article 7 (business profits) on a net basis; where audited books showed loss or appropriate audited margins, those figures must be respected unless reasoned rejection is recorded. For supervisory services of less than six months, the Tribunal followed precedent treating such short-duration supervisory services as FTS where the service falls within the definition, making PE irrelevant for taxation.

Conclusion: Mixed. Supervisory services > six months conclusion in favour of the Assessee for computation on net basis and rejection of arbitrary profit attribution where audited books establish loss (ground(s) allowing relief). Supervisory services < six months conclusion against the Assessee (taxable as FTS as held by Tribunal) and Ground No. 7 (for AY 2017-18) dismissed.

Issue (iii): Whether interest under sections 234A/234B/234C and penalty under section 270A are chargeable as claimed.

Analysis: The Tribunal treated interest under section 234B as consequential and directed AO to verify applicability; section 234C is chargeable only on returned income not on assessed income; penalty proceedings under section 270A were held premature for adjudication at this stage.

Conclusion: Mixed. Direction to AO to verify applicability of section 234A; section 234B treated as consequential; section 234C in favour of the Assessee as to legal principle (charged only on returned income); penalty under section 270A dismissed as premature.

Final Conclusion: The Tribunal partly allowed the assessee's appeals: substantive taxability issues regarding offshore drawings/designs and offshore supply of equipment were decided in favour of the assessee in the factual circumstances and on the basis of coordinate-bench precedents; certain supervisory-service receipts and interest/penalty issues were decided as set out above. The combined effect is that all appeals are partly allowed.

Ratio Decidendi: Where drawings and designs are functionally and contractually linked to offshore supply of tailor-made plant/equipment and the supply transaction is completed and paid outside India, such receipts are not taxable in India as Fees for Technical Services; supervisory services exceeding treaty thresholds give rise to PE-based attribution under Article 7 and must be computed on net basis in accordance with audited accounts and applicable attribution principles.

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