Composite contract milestone deliverables are not fees for technical services when they remain preparatory to the main supply obligation.

Milestone deliverables under a composite contract for design, manufacture, supply, testing and commissioning were held not to constitute fees for technical services because the project management plan, works programme, quality assurance plan and preliminary design were preparatory submissions intrinsically linked to the main supply obligation, not separate managerial, technical or consultancy services. Interest under section 234B was held not leviable against the non-resident assessee for the relevant year, with the later amendment to section 209(1) treated as prospective. Tax deducted at source credit was remanded for verification, while the challenge to initiation of penalty proceedings under section 271(1)(c) was rejected as premature.

---

---

Issues: (i) Whether consideration received for milestone activities comprising project management plan, works programme, quality assurance plan and preliminary design was taxable as fees for technical services under Article 12(4) of the India-Germany DTAA and section 9(1)(vii) of the Income-tax Act, 1961. (ii) Whether interest under section 234B of the Income-tax Act, 1961 was chargeable from a non-resident assessee for the assessment year under appeal. (iii) Whether credit for tax deducted at source was to be allowed or restored for verification. (iv) Whether initiation of penalty proceedings under section 271(1)(c) of the Income-tax Act, 1961 was liable to be interfered with at this stage.

Issue (i): Whether consideration received for milestone activities comprising project management plan, works programme, quality assurance plan and preliminary design was taxable as fees for technical services under Article 12(4) of the India-Germany DTAA and section 9(1)(vii) of the Income-tax Act, 1961.

Analysis: The milestone activities formed part of a composite contract for design, manufacture, supply, testing, commissioning and related obligations for rolling stock. The apportionment of price into cost centres and milestones did not by itself convert the preparatory deliverables into independent services. The work done under the relevant milestones was held to be in the nature of submissions required for execution of the contract and was inextricably associated with the main supply obligation. Mere furnishing of plans, drawings, programmes and quality documents was found not to amount to managerial, technical or consultancy services within the treaty definition of fees for technical services.

Conclusion: The receipts for the relevant milestones were not taxable as fees for technical services; the issue was decided in favour of the assessee.

Issue (ii): Whether interest under section 234B of the Income-tax Act, 1961 was chargeable from a non-resident assessee for the assessment year under appeal.

Analysis: The governing legal position applied was that, for the relevant assessment year, the charging of interest under section 234B against a non-resident was not warranted in the circumstances considered by the Court. The later statutory amendment to section 209(1) was treated as prospective and not applicable to the year in question.

Conclusion: Interest under section 234B was held not leviable for the assessment year under appeal; this issue was decided in favour of the assessee.

Issue (iii): Whether credit for tax deducted at source was to be allowed or restored for verification.

Analysis: The claim for tax deducted at source credit required verification of the record by the Assessing Officer. The Tribunal did not finally quantify or decide the credit on merits and restored the matter for factual examination in accordance with law.

Conclusion: The issue was restored to the Assessing Officer for verification and appropriate grant of credit, if admissible.

Issue (iv): Whether initiation of penalty proceedings under section 271(1)(c) of the Income-tax Act, 1961 was liable to be interfered with at this stage.

Analysis: The challenge to penalty initiation was considered premature because no final penalty order had yet been passed. The issue therefore did not call for substantive interference on merits at that stage.

Conclusion: The challenge to initiation of penalty proceedings was rejected as premature.

Final Conclusion: The assessee succeeded on the principal transfer-pricing and interest issues, obtained remand on the tax deducted at source credit claim, and failed on the premature penalty challenge, resulting in partial relief overall.

Ratio Decidendi: Where milestone deliverables under a composite supply contract are merely preparatory and intrinsically connected to the main contractual obligation, they do not constitute fees for technical services absent a separate and independent rendering of managerial, technical or consultancy services; for the relevant period, interest under section 234B is not leviable against a non-resident in the manner considered here.

---