TaxTMI 
TaxTMI 
2024 (7) TMI 1013
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....cific adjudication 3. In ground no. 3, the assessee has challenged taxability of amount received towards offshore supply of design and engineering as Fees for Technical Services (FTS), both under section 9(1)(vii) of the Income-tax Act, 1961 (in short 'the Act') as well as Article 12 of India - Austria Double Taxation Avoidance Agreement (DTAA). 4. Briefly the facts are, the assessee is a non-resident corporate entity and a tax resident of Austria on the strength of Tax Residency Certification (TRC) issued in its favour. As stated by the Assessing Officer, the assessee is engaged in the business of supplying plants and services for hydropower, pulp and paper, metals and other specialized industries. The assessee had entered into contracts with Steel Authority of India Limited (SAIL) for its plants located at Salem and Bokaro. Further, the assessee had also entered into a contract with Jindal Stainless Limited. The contracts entered into with SAIL have the following three components: (i) Offshore supply of design and engineering. (ii) Offshore supply of plants and equipments. (iii) Onshore supply of supervisory services. 5. The assessee generated revenue in India from the a....
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.... in case of CIT Vs. Mitsui Engineering and Ship Building is not applicable to the assessee's case, however, he held that, the very fact that the assessee separately paid fees towards design and engineering indicates that the supplier otherwise was not obliged to furnish the drawings and designs and the customers are required to pay for them independent of supply of equipment. Thus, holding that design and engineering is independent of offshore supply of equipment, learned first appellate authority upheld the decision of the Assessing Officer. While doing so, he relied upon a decision of the Karnataka High Court in case of AEG AKTIENGESELLSCHAFT Vs. CIT [2004-TII-05-HC-KAR-INTL]. 8. Before us, learned Senior Counsel appearing for the assessee drew our attention to a copy of the contract agreement placed in the paper-book and submitted that design and engineering services are inextricably linked to supply of plant and equipment. He submitted, the Assessing Officer has accepted the fact that the contract with the assessee is a composite contract. In that scenario, the Assessing Officer cannot disassociate offshore supply of design and engineering from onshore supply of plants and equ....
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....ces, the departmental authorities have held that such services are independent to the supply of plant and equipment. This, in our view, is untenable as on a reading of the contract as a whole it does not appear that the offshore supply is a completely separate transaction having no relation to the supply of plant and equipments. 11. On the contrary, the terms of contract would make it clear that the design and engineering services inextricably linked with the manufacturing and supply of equipments. It is not the case of the department that the offshore supply of design and engineering would have enabled the contractee to manufacture the plant and equipment through any other party independent of the assessee. Thus, it has to be held that offshore supply of design and engineering, being closely linked to the offshore supply of plant and equipment, it cannot be segregated from the offshore supply of plant and machinery, as the basic nature and character of both the transactions are identical. Therefore, when offshore supply of plant and equipment is not taxable, offshore supply of design and engineering cannot be made taxable. 12. Pertinently, identical nature of dispute arose in ca....
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....ection and construction if applicable, spare part lists, operation and maintenance instructions as the case may be. 13. Thus, from the details of design and drawings as well as documentation submission, schedule of drawings and designs, it is quite clear that drawings and designs supplied by the assessee are specifically related to the supply of plant and equipments for the JSW Steel Project. 13. On a reading of both the contracts, it is observed, though, the contracts have been separately executed, one for supply of plant and equipment and the other one for supply of drawings and designs, however, they have been executed on the very same date. One more crucial fact emerging from the drawing and design contract is, as per clause 17.1.1(iii), the purchaser is vested with the right to terminate the contract unilaterally, inter alia, due to the delay in delivery of the equipment in excess of 120 days for the reasons solely attributable to the seller and seller fails to take necessary remedial action. Thus, from the aforesaid condition imposed in the contract, it is very much clear that failure to supply plant and equipment within the stipulated time period can also determine the c....
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....aid down by the Hon'ble Jurisdictional High Court in the aforesaid decision squarely apply to the facts of the present appeal. 16. In case of CIT Vs. Andhra Petrochemicals Ltd. reported in [2015] 373 ITR 207, the Hon'ble Andhra Pradesh High court has observed that different components of the contract cannot be read in isolation. Similar view has also been expressed by the Hon'ble Delhi High Court in case of CIT Vs. Mitsui Engineering and Ship Building (supra). 17. Insofar as the decision of the Hon'ble Karnataka High Court in case of AEG Aktiengesllshaft Vs. CIT (supra), in view of the ratio laid down by the Hon'ble High Court in case of Linde Engineering Division Vs. DIT (supra), there is no need for much deliberation on the said decision. 18. At this stage, we must address some of the submissions made by learned Departmental Representative. Before us, learned Departmental Representative has submitted that the amount received for supply of drawings and designs is taxable in India, as, they have been delivered at Bangalore Airport and the seat of arbitration is in India. We do not find much substance in the said submission of learned Departmental Representative, as, in respec....
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....wever, it was unsuccessful. 16. At the very outset, learned Senior Counsel appearing for the assessee did not dispute the fact that the assessee had supervisory PE in India in respect of onshore supervisory services provided to SAIL. However, he submitted, the assessee, being a tax resident of Austria, is entitled to the benefits provided under India - Austria DTAA. Drawing our attention to India - Austria Tax Treaty, he submitted that as per Article 7(5) & (6) read with Article 12(5) of the treaty, even assuming that onshore supervisory charges received by the assessee are in the nature of FTS, since they are effectively connected with the supervisory PE, they have to be taxed as business profits under Article 7 of the DTAA. He submitted, in that event, it has to be taxed on net basis after deduction of all expenses. Proceeding further, he submitted, the assessee followed accountancy policy of recognizing revenue from onshore supervisory services through project completion method. He submitted, since all the projects with SAIL were ongoing during the year under consideration, the assessee offered the income to tax on completion of projects in assessment year 2014-15 and the Asses....
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....r Article 14 would apply. In other words, even though, the receipts are in the nature of FTS, however, if it is connected to the PE, it has to be treated as business profit under Article 7. Therefore, in our view, the departmental authorities fell into error in taxing the receipts from onshore supervisory services as FTS under Article 12(4) of the treaty on gross basis. We hold that the receipts from onshore services, being attached to the supervisory PE in India, have to be taxed on net basis under Article 7 of the treaty. 20. Having held so, now we will deal with other aspect of the issue. It is the case of the assessee that the revenue from onshore supervisory services, is recognized based on project completion method followed year by year. It is the specific case of the assessee that since the project in respect of which it has received the supervisory charges were completed in financial year 2013- 14, relevant to assessment year 2014-15, the assessee has offered the entire receipts in assessment year 2014-15 on net basis in terms of Article 7 of the treaty. In this context, learned counsel appearing for the assessee had drawn our attention to the return of income filed for as....
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....ot taxable in India in absence of PE. However, he fairly submitted that identical issue has been decided against the assessee in the case of SMS Concast AG (supra). 26. Learned Departmental Representative relied upon the observations of the Assessing Officer and learned first appellate authority. 27. Having considered rival submissions and perused the materials on record, we find that the contracts, under which the assessee carried out onshore supervisory activities, are composite contracts involving both supply of plant and equipment, drawings and design, provision of supervisory services, erection, commissioning etc. Therefore, the services provided by the assessee, being technical in nature, receipts have to be treated as FTS under Article 12(4) of India - Austria DTAA. That being the fact on record, the supervisory fee received by the assessee is taxable in India in terms of Article 12(4) of tax treaty, irrespective of the fact whether the assessee had a PE in India or not. While deciding identical issue in case of SMS Concast AG (supra), the Coordinate Bench has held as under: "21. We have considered rival submissions and perused the materials on record. From the facts on ....
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.... ensure the achievement of the strategic/budgeted targets, with respect to o The organizational structure o Personnel o Investments o Projects * Consulting an monitoring the process of projects through project reviews * Consulting with regard to new IS activities. * Provision of all services listed in appendix 2 * All additional services ordered from the assessee. 31. Cost incurred by the assessee for providing such services are allocated by way of specific allocation key to all the group companies, including the Indian entities. The cost incurred for providing such services was invoiced to all the entities including Indian entities and the assessee received the reimbursement of cost without any market up. The issue arising before us is, whether such cost reimbursement would be taxable as FTS. In our view, what the assessee has done is, shared the expenditure incurred for running the business with all its group entities. The cost has been recovered without any markup. Therefore, there is no profit element embedded in the payments received. That being the case, the receipts cannot be treated as FTS and brought to tax in India. For coming to such conclusion, we rely ....