TaxTMI 
TaxTMI 
2025 (12) TMI 1766
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.... (Assessee's appeal) 3. The Ground Nos. 1, 2 and 11 raised by the assessee are general in nature and does not require any specific adjudication. 4. Ground Nos. 3 to 6 raised by the assessee are challenging taxability of supply of equipment and designs in India as per the provisions of the Act and as per the treaty. 5. We have heard the rival submissions and perused the materials available on record. The assessee is a tax resident of Germany, engaged in a business of supply of plants & equipments, supply of drawings and designs and rendering supervisory services in erection, commissioning, performance guarantee, test of equipment supply; and rendering technical services to the customers in metallurgical sector in various parts of the country. During the year under consideration, the assessee has received consideration from customers in India towards the following:- a. Offshore supply of design and engineering: b. Offshore supply of equipment and parts; c. Onshore supervision services d. Other Technical Services e. Cost reimbursement towards SAP/ Intranet It is not in dispute that all the equipments supplied to various customer....
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....td. Esmech Equipment Pvt Ltd and Jindal Steel & Power Ltd. These receipts were not offered to tax on the ground that these services were in connection with offshore sale of plant & equipment and these receipts cannot be attributed to India for computing taxable income in India. c) Receipts from providing technical services The assessee had receipts of Rs. 5,25,70,303/-. These receipts were offered to tax as fee for technical services taxable at 10% as per DTAA between India & Germany. d) Receipts from Onshore Supervisory Services in relation to erection and commissioning (Permanent Establishment), where period of activity is more than six months: The assessee had revenue receipts of Rs. 89,18,35,644/- from M/s Bhushan Steel Ltd, JSW Steel Ltd, ESSAR Steel Ltd, Ramakrishna Forgings Ltd, and other entities on account of provision of supervisory services for erection and commissioning of plant and equipment in India during the financial year 2016-17 and has also offered for taxation as business income considering that contracts qualify as PE in India. e) Receipts from Onshore Supervisory Services in relation to erection and commiss....
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....nvolve identical substantive grounds; both in law and on facts. We thus treat "M/s. SMS Group GmbH"s ITA No. 5580/Del/2011 for AY: 2008-09 as the "lead" appeal raising the following substantive grounds: 1. That on the facts and circumstances of the case and in law the order of Additional Director of Income-tax (International Taxation), Delhi (A.O) u/s 143(3) in pursuance of direction issued u/s 144C by Dispute Resolution Panel (DRP) is perverse, bad in law and void, being contrary to law and principles of natural justice. 2. That the learned A.O./DRP has erred in computing income at Rs. 159,851,648/- as against returned income of Rs. 41,12,262/- 3.(a) That the learned A.O. and DRP have erred in law and on facts in holding that consideration received for supply of drawings and designs, forming integral part of the supply of equipment, received under various contracts is taxable as 'Fees for Technical Services', u/s 9(1)(vii) of the Act. (b) That the learned A.O. and DRP have misdirected themselves on wrong assumptions of facts and in law in not accepting the claim that supply of drawings and designs was inextricably linked to sale of plant....
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.... hereinabove. 4. Mr. Pardiwalla states very fairly that the assessee's 1^st and 2ndgrounds are general in nature. Rejected in very terms. 5. Next come assessee's third and fourth substantive grounds canvassing its inter-connected grievances that both the learned lower authorities have erred in law and on facts, inter alia, in treating its consideration received from supply of designs and drawings forming integral part of the sale/supply of equipments, received under various contracts, as taxable under section 9(1)(vii)of the Act, being in the nature of "fee for technical services" (FTS) under the above former and its receipt derived from sale of plant and equipments as alleged to have been concluded in India and assessable in India, involving varying sums; respectively. 6. We now advert to the basic relevant facts. The assessee herein "M/s. SMS Seimag AG" formerly known as "M/s. SMS Demag AG", is a German company engaged in the business(es) of supply of plant, equipment, drawings & rendering of technical services to customers in the metallurgical sector world-wide. Learned Assessing Officer's assessment herein dated13.10.2011 suggests that he treated the ....
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.... 31.12.2010. The assessee filed it"s statutory objections before the learned DRP which stood rejected in the former's directions dated 30th September, 2011, as follows: "2. The grounds of objection, filed as Appendix A with Form No. 35A, are as under: 1. That the order of learned Assessing Officer is bad both in law and on facts of the case. 2. That the learned Assessing Officer has erred in computing income at Rs. 176,00,77,547/- as against returned income of Rs. 41,12,262/- 3. That the learned Assessing Officer has erred in making assessment without providing adequate opportunity and thus acted contrary to principals of Natural Justice, which is illegal. 4. (a) That the learned Assessing Officer(A.O.) has erred in holding that consideration received by the assessee in relation to contract for supply of drawings and designs, is essentially in the nature of "Fees for Technical Services under the provisions of Section 9(1)(vil) of the Indian Income-Tax Act. (b) That the learned Assessing Officer has made erroneous observations, a assumptions on facts, erroneous interpretation of terms of the contract, incoming to the conclusion t....
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....ried on. (e) That the learned Assessing Officer has erred in not considering the provisions of Protocol 1(a) of the DTAA between India and Germany as relied upon by the assessee, in terms of which, on the facts, no part of consideration for supply of equipment from Head Office, is attributed, to P.E., if any, in India. (f) That without prejudice the learned Assessing Officer has erred in invoking the Rule 10 of the Income-Tax Rules, in computing profit attributable in India in relation to supply of equipment. The said Rule has no application on facts. (g) Without prejudice, the learned Assessing Officer has erroneously held that on facts, profit attributable in respect of supplies was 75% of global profit rate. The said attribution is arbitrary, highly excessive and has no rationale whatsoever, and is against the principals of attribution as laid down under the provisions of Income-Tax, Act, DTAA between India and Germany and various decisions of Hon'ble High Court, Supreme Court of India. 6. That the Learned Assessing Officer has erred in erroneously holding the amounts received towards reimbursement of cost towards intranet, SAP are liable ....
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.... question are taxable in India as fees for technical services in view of the provisions of Explanation to sub section (2) of sec 9 of the IT Act. 4.2 The assessee has made the following submissions contesting the above proposal: "1. At the outset it is submitted that payments received in respect of supplies of drawings and designs cannot be subject to tax in India as the same are inextricably linked to supplies of equipments and not pertaining to rendering of technical services. The Explanation 2 to Section 9(1)(vii) that defines fees for technical services does not apply where the consideration is for outright sale of plant with essential drawings and designs and not for rendering of engineering and technical services. Such payments would fall in the definition of business profits and cannot be subjected to tax unless the assessee had a P.E. and supplies are connected therewith. 2. A separate price is stipulated under the Agreements for such supplies, which is payable outside India. Terms of delivery, involving transfer of title outside India are specified under the Agreements. During course of hearing specific evidence regarding supply of drawings and d....
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....tural designs and drawings. The company in response to a tender agreed to prepare drawings and designs for construction of a complex for Tamil Nadu Legislative Assembly. The scope of work in this case related to consultancy work and preparation of architectural designs and drawings. The ratio of these cases therefore do not help the case of revenue as essentially the contract here is of supply of plant and equipment along with drawings and designs. 4.3 The above submissions have been considered by this Panel. The main thrust of the assessee's argument is that all acts relating to the transaction have taken place outside India and that the designs and drawings are connected to the sale of the equipment and not for any engineering or technical services to the assessee. In order to come to a proper conclusion it would be appropriate to examine the terms of the relevant agreements. For this purpose the contract for supply of drawings and documents for Steel Melt Shop with JSW Steel Ltd. India can be looked into. i. From the Terms of Payment as given in Article 7 it is seen that 5% of the unit wise contract price for drawing and document shall be payable on complet....
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....y. The rights and obligations of the purchaser and the Seller continue for a much longer period (five years). The designs and drawings also enable the purchaser to be able to perform all the functions relating to repair and maintenance of the equipment. To this extent it cannot be denied that there is no transfer of know how or 'making available' technical know-how by the Seller to the assessee Further even though the drawings and designs etc. are linked to the sale of equipment, the fact remains that a separate contract has been made between the two parties spelling out separate terms and conditions that govern this transaction. Therefore, the sale of equipment and the transfer of know-how under the agreement in respect of drawings, designs etc cannot be confounded with each other. Had it been inextricably linked with supply of equipment there would have been no reason to enter into two separate agreements. Taking into consideration the facts of the case the Panel is of the view that the transaction is not of the nature the profit from which would be taxable as business profits but fees for technical services. The objection made by the assessee is therefore rejected." ....
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....o the following entities:- I Tata Iron Steel Co. Ltd. Rs.7,69,20,032/- ii. ISPAT Industries Ltd. Rs.3,96,701/- iii SMS Demag Pvt. Ltd. Rs.38,81,330/- Rs. 8,11,98,063/- 6. The assessee has recognized the above revenue and offered to tax as "Fee for technical services" @ 10% as per the DTAA between India and Germany. 7. During the course of assessment proceedings, the AO observed that the receipts from Jindal Steel and Power Limited amounting to Euro 12,15,200 (Rs.6,94,96,347/-) was shown as exempt in the return of income originally filed. The said Indian company had not deducted/paid any income-tax on the said consideration on the ground that the same is not liable to tax in India. Accordingly, a claim of exemption was made in the return of income filed by the assessee. However, the AO observed that the nature of receipts is same as that made from other Indian company in relation to supply of drawings and designs, the same have been offered for taxation @ 10%, therefore, consideration received in relation to drawings and designs from Jindal Steel and Power Limited should also be taxed @ 10% on the gross amount. Acco....
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....ssee, ld. CIT (A) rejected the plea of the assessee on the jurisdictional issue and with regard to merits, ld. CIT (A) partly allowed the grounds raised by the assessee with the following observations :- "10.1 I have gone through various submissions made by the appellant and other material placed on record. At the outset, it is seen that the appellant has filed return in response to notice u/s 148 wherein certain incomes have been claimed as non-taxable which were offered to tax in original and revised returns. This action of the appellant is not as per law on the issue as Hon'ble Supreme Court has long ago in its decision in case of CIT v Sun Engineering Works Pvt. Ltd. 198 ITR 297 has laid down that reassessment jurisdiction is available only to the AO and not to the assessee and the assessee in reassessment proceedings cannot claim that certain incomes originally declared as taxable are not taxable. Therefore, the AO has rightly considered the income returned in the revised return as starting point and not the income returned in response to notice u/s 147 of the Act. 10.2 I have also gone through copies of invoices pertaining to receipts from Jindal Steel a....
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....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 Act. (d) That the learned CIT (A) has 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)] and other decisions as relied upon by the assessee. 4. That the learned CIT(A) has erred in ignoring the decision of Hon'ble High Court of Delhi in the case of DIT Vs Jacabs Civil Inc and other High Courts and upholding the chargeability of interest under section 234B, not attracted on facts of the case. 5. That the assessee may be allowed to add, supplement, revise, amend grounds as raised hereinabove." 11. At the time of hearing, ld. AR for the assessee brought to our notice relevant facts on record and he brought to our notice page 9 of the factual paper book which is the original return of income filed by the assessee wherein assessee has clearly disclosed that three invoices raised to Jindal Steel and Power Limited which ass....
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.... Further, he referred to page 1 of supplementary paper book, which are the submissions made before the ld. CIT (A) dated 19.11.2013 and he also brought to our notice page 2 of the assessment order and page 20 of the paper book which is the return of income filed in response to notice u/s 148 of the Act. He submitted that the assessee has rightly computed taxable income. He brought to our notice page 5 of the first appellate order and submitted that ld. CIT (A) has rejected the plea of the assessee wherein AO has made a reasoned observation that receipts for drawings and designs received from some clients is taxable then similar receipts from Jindal Steel and Power Limited should also be taxable and the assessee has wrongly taken these receipts as non-taxable. It was submitted that even if the AO has treated these receipts as FTS in reassessment order instead of treating them as business receipts as mentioned in the reasons recorded. However, ld. CIT (A) observed that it does not vitiate the reassessment proceedings because some receipts as mentioned in the reasons recorded has been brought to tax in the reassessment order though after characterizing them differently. 13. W....
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....,500 relates to supply of drawings and designs to Jindal Steel and Power Limited and which is exempt from tax on the basis of ITAT, Vishakhapatnam decision which is in favour of the assessee (it is decided in the case of M/s. SMS Schloemann Siemag AG Germany vs. DCIT which is the sister concern of the assessee). With regard to third invoice of Euro 9,49,600, it was submitted before the ld. CIT (A) that it is relating to supply of equipment. We observed that ld. CIT (A) appreciated the above facts on record and deleted the addition made by the AO relating to supply of equipments. However, he did not consider the decision of ITAT, Vishakhapatnam relating to supply of drawings and designs as royalty/FTS and he proceeded to sustain the addition on the two invoices which assessee has not declared in their return of income. After considering the factual matrix on record, we observed that the ITAT, Vizag has considered the similar issue on record and decided the issue of supply of drawings and designs in favour of the assessee even though as royalties. However, the provisions of royalties and FTS are similar in nature, therefore, we are inclined to accept the submissions of the assessee a....
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....al 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, engineering of electrical components as well as associated standard and catalogue parts, instructions for manufacturing, assembly, inspection 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 contr....
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.... 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 and designs, the purchaser could have got the plants and equipments manufactured by a third party. Therefore, in our view, the ratio laid 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 Bui....
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.... 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 being no PE, amount is not taxable. 21. We have considered rival submissions and perused the materials on record. From the facts on record, it is observed, the assessee had entered into a contract for supply of electromagnetic stirrer. As per the scope of the contract, the assessee shall engineer, manufacture and deliver the plant and equipment. The scope of contract also included supervision, erection and commissioning of plant and equipment. As per assessee's own admission, technical personnel were deputed to supervise the erection and commissio....
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....effective opportunities. We make it clear that it shall be the assessee's onus only to plead and prove the relevant facts in the consequential reconciliation. These assessee's third and fourth substantive grounds succeed in very terms. " 10. In the instant case, the assessee had already bifurcated FTS portion taxable in India and paid due taxes in India. Hence we do not deem it fit to restore this issue to the file of ld AO for the aforesaid reason. However, the other observations made thereon by this Tribunal which are reproduced supra shall continue to govern the case in dispute before us. We find that the ld DRP had merely followed its own directions in assessee's own case for AY 2015-16 qua the Ground Nos. 3 to 6 raised before us. Since the appeal for the said assessment year 2015-16 is already disposed of by the Tribunal by making aforesaid observations, we do not deem it fit to deviate from the said observations, except the short point of restoration to the file of ld AO as explained above. Further, we find that the coordinate bench of this Tribunal in assessee's own case in ITA No. 1915 and 1073/Del/2014 for AY 2005-06 dated 06.01.2025 had also observed as under:- ....
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....ken in the Revenue's appeal are rejected and the appeal filed by the Revenue is dismissed." 11. Respectfully following the same, Ground Nos. 3 to 6 raised by the assessee are allowed. 12. Ground No. 7 raised by the assessee is with regard to challenging the action of the ld AO taxing the consideration of Rs.47,153/- received towards supervision of erection and commissioning services for a period of less than six months as taxable in India as business income attributable to the PE in India both under the Act as well as in terms of Article 7 of India-Germany DTAA. 13. We have heard the rival submissions and perused the material available on record. The ld AR fairly submitted that this issue is to be decided against the assessee in view of the decision of the coordinate bench of this Tribunal in case of sister concern of assessee named SMS Concast A.G. vs DDIT in ITA 1361/Del/2012 for AY 2008-09 dated 16.06.2023. The relevant operative portion of the order is reproduced below:- "19. In ground no. 3, the assessee has challenged the taxability of Rs. 5,56,822/-. As could be seen from the facts on record, the assessee received Euro 8,981 from rendition of supervisory se....
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.... the domestic law as well as under the treaty provision. Once the receipts fall within the definition of FTS under Article 12(4) of the DTAA as well as the domestic law, it becomes immaterial whether the assessee has a PE in India or not. Therefore, in our view, the amount in dispute having qualified as FTS, has rightly been brought to tax at the hands of the assessee. This ground is dismissed." 14. Respectfully following the same, the Ground No. 7 raised by the assessee is dismissed. 15. Ground No. 8 raised by the assessee was stated to be not pressed by the AR at the time of hearing. The same is reckoned as a statement made from the Bar and accordingly dismissed as not pressed. 16. Ground No. 9 raised by the assessee is challenging the chargeability of interest u/s 234B and 234C of the Act. The chargeability of interest u/s 234B of the Act is consequential in nature. With regard to interest u/s 234C of the Act, the law is very well settled that same shall be charged only on the returned income and not on the assessed income. 17. Ground No. 10 raised by the assessee is challenging the initiation of penalty proceedings u/s 270A of the Act which would be premature for ad....
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....In terms of Rule 11 of the Income-tax (Appellate Tribunal) Rules, the assessee prays for admission of the above additional ground. 3. The assessee had made a claim for non-taxability of consideration amounting to Rs. 20,89,59,664/- representing supply of drawings and designs linked to the supply of equipment under various contracts entered into by the assessee. Such consideration was always claimed as non-taxable in all the preceding years. However, A.O. had taxed the same @ 10% on gross amount in the preceding years, holding the same to be "Fees for Technical Services". 4. In all the earlier years, the assessee had disputed the taxability of such consideration. The Hon'ble Tribunal was pleased to accept the claim of non-taxability of such consideration in the Assessment Years 2005-06 (ITA No. 1073/DEL/2014 vide order dated 6th January 2025) and in Assessment Years 2007-08 to 2016-17 (ITA No. 5580/Del./2011 for A.Y. 2008-09) vide Appellate Order dated 09th April 2025. 5. During the relevant year, learned A.O. treated such receipts as "Business Profits" and attributed profit @ 10% and subjected the same to tax accordingly. 6. During the releva....
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.... 32. Ground Nos. 3 and 4 raised by the assessee are identical to Ground Nos. 3 to 6 raised for AY 2017-18. Hence, the decision rendered by us for AY 2017-18 shall apply mutatis mutandis for AY 2021-22 also in view of identical facts except with variance in figures. 33. Ground No. 6 raised by the assessee is identical to Ground No. 7 for AY 2017-18. Hence, the decision rendered by us for AY 2017-18 shall apply mutatis mutandis for AY 2021-22 also in view of identical facts except with variance in figures. 34. Ground No. 7 raised by the assessee was stated to be not pressed by the ld AR at the time of hearing. The same is reckoned as a statement made from the Bar and accordingly dismissed as not pressed. 35. Ground No. 5 raised by the assessee is challenging the action of the lower authorities in rejecting the loss declared as per audited books of account and applying the profit margin of 17.48% for AY 2020-21, instead of loss as claimed amounting to Rs.22,60,453/- ignoring the accepted position in previous years and the directions of the ld DRP. 36. We have heard the rival submissions and perused the material available on record. The ld AO noted that the assessee had rec....