TaxTMI 
TaxTMI 
2023 (7) TMI 164
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....appreciate that on the facts and material on record, the receipts constituted "Business Profits" not accruing, arising or received in India or deemed to accrue or arise or received in India. (c) That the learned CIT (A) has erred in not accepting that supply of drawings and designs was inextricably linked to sale of plant and equipment and represented consideration of the nature of 'Business Profits' not liable to tax in India, as per the provisions of DTA between India and Germany read with Indian Income-tax A( L. (d) That the learned CIT (A) have grossly erred in law in ignoring and not following the ratio of jurisdictional High Court of Delhi in the case of Mitsui Engineering and Shipbuilding [174 CTR 66(Delhi)]. 3. That the learned CIT (A) has erred in not granting the benefit of Most Favored Nation clause as provided in the protocol to Indo-Switzerland treaty. 3. In ground no. 2, the assessee has raised the issue of taxability of an amount of Rs. 2,84,92,345/- received from supply of drawings and designs as Fee for Technical Services (FTS). 4. Briefly the facts relating to the issue in dispute are, the assessee is a non-resident corpora....
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....the technical specification provided by the client. He observed, by utilizing the technical expertise gained by the assessee over the years, the drawings and designs are made and provided to the clients, subject to, approval of the clients. He observed that the development and transfer of technical plan/design is a sequel and integrated part of the services undertaken by the assessee. Thus, he held that the preparation of detailed design and drawing is nothing but rendering of technical services. Hence, has to be treated as FTS under section 9(1)(vii) of the Act. While coming to such conclusion, he relied upon a decision of Hon'ble Karnataka High Court in case of AEG Aktiengesllschaft Vs. CIT, [2004] 267 ITR 209. 7. Having held so, he proceeded to examine whether the fees received can be deemed to accrue or arise in India within the meaning of section 9. While dealing with this aspect, he observed that the ratio laid down in case of Ishikawajima Harima Heavy Industries Ltd. Vs. DIT (2007) 288 ITR 408 will be of no help to the assessee due to introduction of explanation under section 9(2) of the Act, which makes it clear that the income of a non-resident shall be deemed to accrue....
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.... as well as plants and equipments have passed outside India. He submitted, insofar as the amount received towards sale of plant and equipment, the first appellate authority has accepted the legal position that since the sale has taken place outside India, the receipts are not taxable in India. However, he submitted, the first appellate authority erroneously upheld the taxation of amount received towards supply of drawings and designs as FTS, though, the sale of drawing and designs has taken place outside India under similar condition as the sale of equipment. He submitted, the contracts for supply of plant and equipment and supply of drawings and designs were entered on the same date and are inextricably connected. He submitted, supply of plant and equipment could not have been made, without the drawings and designs as the contractee could not have installed and commissioned the plant and machinery. He submitted, it is not the case of the Revenue that the drawings and designs could have been utilized by the contractee to get the plant and equipment manufactured from another manufacturer. Thus, the drawings and designs are in the nature of "as built drawings" and specifically with r....
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....owed. Without prejudice to the aforesaid submission, learned counsel submitted, even assuming that the receipts are to be characterized as FTS, still, it will not be chargeable to tax in India, having regard to the provision of Article 12 and Article 7 of India-Switzerland DTAA. He submitted, the supervisory activity rendered in connection with the installation of plant and equipment extended for a period more than six months. Therefore, in terms of Article 5(2)(j) of the DTAA, the assessee had a service PE in India. He submitted, once the assessee had a PE in India by virtue of exceptions provided under paragraph 6 of Article 12 of the DTAA, the provisions of Article 12 would have no application to the receipts from supply of designs and drawings, as, such amount can only be brought to tax in terms of Article 7 of the DTAA. However, he submitted, para (1) of Article 7 of the DTAA provides that only so much of the profit attributable to the PE can be brought to tax. He submitted, since, in the facts of the present case, the entire work of preparing the designs and drawings was carried out outside India, the PE having no role to play, the amount cannot be taxed in India. He submitte....
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....n record that both the supply of equipments and supply of designs and drawings are in relation to a single project of the contractee, viz., 1 X 8 Strand Billet Caster for Long Product Plants required for contractee's project located in the state of Karnataka. 12. Materials on record reveal that the drawings and designs are in relation to basic engineering, which means, basic data as well as draft drawings, schematic drawings or layouts, diagrams, configuration and calculations necessary to design the equipment, structure and systems, as the case may be. It also includes, the necessary calculations, functional descriptions, final equipment list, preliminary bills of materials for media systems, line routing drawings, main cables routings, foundation outlines with load data, motors and components list. It also includes reference component drawings with reference bills of material where applicable. Details design consists of the final design engineering to procure or manufacture the equipment and plants. It means the detail design of the equipment includes all necessary calculations, arrangement drawings, detail drawings for manufacturing where applicable, bills of materials, engin....
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....y linked to sale and supply of plant and equipment has to be considered cumulatively and as a part of sale and supply of plant and equipment. 15. In case of Linde Engineering Division Vs. DIT (supra), the Hon'ble Jurisdictional High Court has observed that, in case, design and engineering are inextricable linked with the manufacture and fabrication of material and equipments to be supplied overseas and form an integral part of the supplies, then such services rendered would not be available to tax under section 9(1)(vii) of the Act as FTS. The Hon'ble Court further held that in order to fall outside the scope of section 9(1)(vii) of the Act, the link between the supply of equipment and services must be strong and interlinked that the services in question are not capable of being considered as services on standalone basis and are, therefore, subsumed as a part of the supplies. In the facts of the present case, in our view, the supply of drawing and design cannot be considered on standalone basis as the purchaser could not have utilized such drawings and designs without the supply of plants and equipments. Even, it is not the case of the department that by purchasing the drawings ....
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....r, did not find merit in the submission of the assessee. He held that the receipts are in the nature of FTS under Article 12 of India Switzerland DTAA. Accordingly, he brought the amount to tax at the hands of the assessee. Learned first appellate authority also confirmed the addition. 20. Before us, learned counsel for the assessee submitted that as per the terms of the contract the assessee was required to provide duly qualified technical personnel for supervisory work and the consideration to be received for providing such personnel was fixed at daily rate. He submitted, fees for supervisory services being incidental to sale of plant do not fall within the ambit of Article 12 dealing with taxation of royalty and FTS. He submitted, the provision of such services is a normal part of contract of sale of plant to enable the supplier to ensure that the plant is properly erected, installed by the customer, keeping in view the performance guarantee obligation undertaken by it. He submitted, therefore, the amount is taxable as business profit, however, since, the tenure of supervisory services did not exceed the threshold limit of six months under Article 5(2)(j) of the treaty, there....