2026 (1) TMI 917 - AT - Income Tax

Fee for Technical Services under India-Germany DTAA: preparatory designs and drawings not FTS, payments not taxable.

Dispute concerned whether milestone payments for designs, plans and drawings furnished by a foreign company fall within Article 12(4) of the India-Germany ... Fee for Technical Services - design, plans, drawings provided by the assessee to Delhi Metro/DMRC - Scope of Article 12(4) of the India-Germany DTAA u/s.9(1)(vii) of the Income-tax Act, 1961 - rendering of services in the nature of managerial, technical and consultancy within the meaning of Article 12(4) of the DTAA - milestone payments - Work including designs was divided into cost centers - events represented by Milestones Al-Project Management Plan, A3-Works Programme, A5-Quality Assurance Plan and A10-Preliminary Design, which are inextricably linked to supply of Rolling Stock (RS2) to Delhi Metro Rail Corporation Limited (DMRC), are severable and thus chargeable to tax as FTS per Article 12 of the DTAA - assessee is a company incorporated in Germany HELD THAT:- After detailed examination of work under each milestone we are of considered view that the work achieved by the assessee under the aforesaid milestones does not fall within the meaning of managerial, technical or consultancy services. The assessee has merely furnished diagrams indicating organizational structure, qualification of personnel to be deployed etc. Work plan involves submission of proposed work programme and proposed design submission programme. Under quality assurance plan, the assessee is required to furnish the proposed method of achieving the Tenderer’s quality objectives with regard to requirement of the contract. The preliminary design activity requires the assessee to design the overall system and system configuration, identification of functioning of each system, sub-system, equipment, etc. In our humble view mere furnishing of plans, designs and drawings as mentioned above does not amount to rendering of services in the nature of managerial, technical and consultancy within the meaning of Article 12(4) of the DTAA. In any case, the plans, drawings and designs furnished by the assessee in compliance of Cost Center A1, A3, A5 and A10 is not an independent activity in itself. The said activity is only a stepping stone for achieving the ultimate object of supply, installation and maintenance of rolling stock. The activities underlined under Cost Center A are inextricably associated with design, execution and installation of rolling stock. In so far as the argument of the Department that since the payments for each Cost Center are allocated, therefore, the activity for each Cost Center is severable, we are not in agreement with the said argument with respect to “Cost Centre A”. The apportionment of the Cost for each milestone under each Cost Center is a pre-requisite of the Tender conditions. The activities/milestones detailed under Cost Centre A do not give rise to separate independent activity that can be severed from the main object. Furnishing of plans, drawings and designs as required in Cost Center A is primarily to ensure that the assessee has understood the final task and the path to be followed for reaching the final objective ensuring tenderer’s requirement and ensuring quality checks. Furnishing of plans, designs, etc. as envisaged in Cost Center A is only a step in the direction of commencement of rendering of service and Milestone A1, A3, A5 and A10 are preparatory. In so far as other Cost Centers are concerned, the activities under each Cost Center have to be examined for determining whether they are in the nature of technical, managerial or consultancy services within the meaning of Article 12(4) of India-Germany DTAA and whether they are dissociable? - The nature of activities carried out by the assessee so far in Cost Center A and in particular to milestones A1, A3, A5 and A10 are not in the nature of managerial, technical and consultancy services. So the payments for the same does not fall within the ambit of FTS as defined in Article 12(4) of the DTAA. Hence, in our considered view the decision in the case of Rio Tinto Technical Services [2012 (1) TMI 5 - DELHI HIGH COURT] does not support the cause of Revenue. Ergo, ground no. 1 to 3 of the assessee’s appeal are allowed. Charging of interest u/s. 234B - We find that the Hon’ble Supreme Court of India in the case of DIT vs. Mistibushi Corporation [2021 (9) TMI 875 - SUPREME COURT] has held that the proviso to section 209(1) of the Act inserted by Finance Act, 2012 would operate prospectively after AY 2012-13. Hence, for the assessment year under appeal i.e. AY 2008-09 no interest shall be chargeable from the assessee, a non-resident u/s. 234B of the Act. Thus, the assessee succeeds on ground no. 4 of appeal as well. Issues: (i) Whether payments received on achieving milestones in Cost Centre A (milestones A1, A3, A5, A10 and similar) under Contract RS2 are taxable as fees for technical services (FTS) under Article 12(4) of the India-Germany DTAA / s.9(1)(vii) of the Income-tax Act, 1961; (ii) Whether interest under section 234B is leviable on the non-resident assessee for the relevant assessment years; (iii) Whether credit for tax deducted at source (TDS) is allowable in respect of taxes withheld on milestone payments; (iv) Whether initiation of penalty proceedings under section 271(1)(c) is sustainable at the stage decided.Issue (i): Whether milestone payments (Cost Centre A: project management plan, works programme, quality assurance plan, preliminary design, etc.) constitute FTS under Article 12(4) of the India-Germany DTAA and s.9(1)(vii) of the Act.Analysis: The contract is a lump-sum supply-and-services agreement with an express apportionment into cost centres and milestones. The documentary descriptions of milestones in Cost Centre A show delivery of plans, programmes, design submissions and related documents that are preparatory steps integral to eventual manufacture, supply, testing and commissioning of rolling stock. The milestone activities consist of furnishing organisational diagrams, work programmes, quality assurance procedures and preliminary design submissions that function as steps toward performance of the main contractual obligation to supply and install rolling stock. Comparable contractual terms and an AAR ruling on an analogous contract (RS1) support treating such milestone deliverables as inextricably connected with supply rather than as independent managerial, technical or consultancy services. Contrasting factual patterns where detailed technical services distinct from supply were actually rendered were considered distinguishable.Conclusion: Payments for the milestone activities in Cost Centre A do not constitute FTS and are not taxable as fees for technical services under Article 12(4) of the India-Germany DTAA or s.9(1)(vii) of the Act; finding in favour of the assessee.Issue (ii): Whether interest under section 234B is leviable on the non-resident assessee for the assessment years in question.Analysis: The applicable statutory and judicial position governing levy of interest under section 234B on non-residents for the assessment years in issue was examined; precedent establishes that the proviso to s.209(1) (as amended prospectively) does not operate retrospectively for the relevant years.Conclusion: No interest under section 234B is leviable for the relevant assessment years on the non-resident assessee; finding in favour of the assessee.Issue (iii): Whether the assessee is entitled to credit for tax deducted at source (TDS) on milestone payments.Analysis: The question of TDS credit requires verification of amounts withheld and compliance with statutory conditions; the matter was remitted for verification to allow credit if legally due.Conclusion: TDS credit is to be allowed subject to verification by the assessing officer in accordance with law; finding in favour of the assessee (restoration to AO for action).Issue (iv): Whether initiation of penalty proceedings under section 271(1)(c) is sustainable at the stage of the appeal.Analysis: The challenge to penalty initiation was considered premature for adjudication at the present appellate stage and required separate determination in accordance with procedure.Conclusion: Challenge to penalty proceedings dismissed as premature; finding against the assessee on this point.Final Conclusion: The impugned assessment adjustments treating Cost Centre A milestone payments as FTS are set aside and interest under section 234B is not chargeable for the years under consideration; TDS credit issues are remitted for verification and the penalty challenge is dismissed as premature, resulting in allowed or partly allowed appeals for the assessee and dismissal of the Revenue's cross-appeal.Ratio Decidendi: Where milestone deliverables in a composite supply-and-installation contract are preparatory, integral and inextricably linked to the ultimate supply and installation of goods, such deliverables do not constitute independent managerial, technical or consultancy services and therefore do not fall within the definition of fees for technical services under Article 12(4) of the India-Germany DTAA.