TMI Blog2023 (12) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... nt (PE) of the assessee in India. Such consideration would only be in the nature of business income not attributable to PE in India and hence not taxable under Article 5 read with Article 7 of the India Germany DTAA. There is no case to treat the receipt of such consideration for offshore supplies of equipment as income taxable in India. Hence we direct the AO to delete the addition made on account of consideration received for offshore supplies of Plant and Equipment outside India. The grounds raised in this regard by the assessee are allowed for various years and accordingly, the issue number 1 framed hereinabove by us is decided in favour of the assessee. Taxability of offshore services - assessee s case is that the entire work related to the drawings and designs were undertaken outside India and that the property both in the designs and drawings as well as in the equipment had passed outside India - HELD THAT:- It is not in dispute that the assessee indeed had supplied offshore drawings and designs together with the supply of plant and equipment. We find that the Contract for offshore services and the Contract for the offshore supply of Plant and Equipment were entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of plant and equipment are treated as not taxable in India, the supply of drawings and designs inextricably linked to such plant and equipment had to be considered as non-taxable in India, being part of supply of plant and equipment. When the supply of drawings and designs is coupled with supply of equipment, which is manufactured in accordance with the designs supply, the amount received cannot be characterized as FTS. Thus offshore services that primarily involve offshore supply of drawings and designs are inextricably linked with the offshore supply of Plant and equipment and accordingly, the receipts from offshore services does not give rise to any income accruing or arising in India and therefore not taxable under the Act. Further, such consideration qualifies as business profits of the company in terms of the provisions of Article 7 of the DTAA, which cannot be attributed to India for computing taxable income in India. Hence, income arising therefrom should be treated as non-taxable in India. Accordingly, we have no hesitation in directing the Ld. AO to delete the addition made on account of FTS in respect of offshore designs and drawings for the various years under con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in holding that the impugned services are not covered by the exclusionary clause, provided for 'assembly', 'construction' or 'like project activities' in India, under section 9(1)(vii) of the Act. 7. Without prejudice the Ld. CIT(A) also erred in not considering the fact that the impugned contractual activities are ipso facto covered by the provisions of Section 44BBB of the Act; 8. That the Ld. CIT(A) grossly erred in considering that only income arising from the onshore activities of the power project comes under the purview of section 44BBB and thus consideration for offshore activities does not form part thereof; 9. That the learned CIT(A) has erred in not adjudicating on the initiation of penalty proceedings under section 271(1)(c) of the Act, as initiated by the Learned Associate Director of Income - tax (Ld. ADIT), provisions of which are not attracted on the facts and circumstances of the case; 10. That the appellant may be allowed to add, supplement, revise, amend grounds as raised hereinabove. ITA No.255/Del/2017 1. That the order of the Learned Commissioner of Income - tax (Appeals) [Ld. CIT(A)] is bad bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the return of income; 3. That the Ld. CIT(A) has erred in holding that consideration received by the Appellant in relation to contract for off-shore services for planning and supply of drawings and designs, is essentially in the nature of Fees for Technical Services under the provisions of section 9(1)(vii) of the Income - tax Act, 1961 (the Act) and provisions of Article 12 of the Double Taxation Avoidance Agreement between India and Germany (DTAA); 4. That the Ld. CIT(A) has erred in rejecting the contention of the Appellant that the offshore services are inextricably linked to the supply of plant equipment and thus consideration for such services partake the nature of business profits which should be taxed in terms of provisions of Article 7 of the DTAA, read with Protocol Para 1(a) and (b) thereof; 5. That the order of the Ld. CIT(A) is grossly incorrect in considering that separate payment towards the offshore services including drawings and designs indicates the severance of this contract from the contract for the supply of plant equipment; 6. That the Ld. CIT(A), while arriving at the aforesaid conclusion, has erred in not relying upon the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the supply of equipment. 3.4. That, without prejudice, the Ld. CIT(A) has erred in not appreciating that even on a standalone basis the off-shore design and drawings were in the nature of goods, the transfer of which constitutes outright sale of goods, not taxable in India. 3.5. That, without prejudice, the Ld. CIT(A) has erred in holding that the impugned design and drawings are not covered by the exclusionary clause under section 9(1)(vii) of the Act, providing for exclusion of 'assembly', 'construction' or 'like project activities' from the ambit Fees for Technical Services . 4. That the appeal is within time as the order of the Ld. CIT(A) was received on September 12. 2018. 5. That the appellant may be allowed to add, supplement, revise, delete all or any grounds as raised hereinabove. ITA No.7282/Del/2019 1. That the order of the Learned Commissioner of Income-Tax (Appeals)-42, New Delhi [Ld. CIT(A)] is bad both in law and on facts of the case. 2.1. That the Ld. CIT(A) has erred in concluding that the offshore supply of plant and equipment made by the Appellant is taxable in India as Business Profits. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l or any grounds as raised hereinabove. ITA No.115/Del/2021 1. That the order of the Learned Commissioner of Income-Tax (Appeals)-42, New Delhi [Ld. CIT(A)] is bad both in law and on facts of the case. 2.1. That the Ld. CIT(A) has erred in holding that consideration received by the Appellant in relation to contract for offshore services for planning and supply of drawings and designs, is in the nature of Fees for Technical Services under the provisions of section 9(1)(vii) of Act and Article 12 of the Double Taxation Avoidance Agreement between India and Germany ( DTAA ). 2.2. That the Ld. CIT(A) has erred in rejecting the contention of the Appellant that such offshore drawings and designs, prepared and transferred from Germany, are inextricably linked to the offshore supply of plant equipment and thus consideration for such services partake the nature of business profits, not taxable in terms of provisions of Article 7 of the DTAA read with Protocol Para 1 (a) and (b) thereof as well as under the provisions of Income Tax Act, 1961. 2.3. That the Ld. CIT(A) has erred in making the erroneous observation that separate payment towards offshore draw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.3 That the Ld. CIT(A) has erred in making the erroneous observation that separate payment towards offshore drawings and designs indicates the severance of this contract from the contract for the supply of equipment. 3.4. That, without prejudice, the Ld. CIT(A) has erred in refuting the claim of the Appellant that even on a standalone basis the offshore design and drawings were in the nature of goods, the transfer of which constitutes outright sale of goods, not taxable in India. 3.5. That, without prejudice, the Ld. CIT(A) has erred in holding that the impugned design and drawings are not covered by the exclusionary clause under section 9(1)(vii) of the Act, providing for exclusion of 'assembly', 'construction' or 'like project activities' from the ambit of Fees for Technical Services . 3. That the Ld. CIT(A) has erred in considering the amount of Rs. 7,82,587/- towards offshore supply of plant and equipment as receipts towards drawings and design and thus taxed the same as Fees for Technical Services ( FTS ). 4. That the appeal is within time as the order of the Ld. CIT(A) was received on May, 20, 2022. 5. That the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fshore supplies Remarks 2011-12 1,89,12,640/- 2012-13 1,62,20,418/- (Int. Income of 77,28,097/- offered by assessee and taxed as such) 2014-15 3,26,09,861/- 2015-16 20,550/- 4,64,78,944/- Rs 3,33,245/-CIT(A) confirmed Rs 1,32,898/- Total offshore supplies Rs 1,58,96,915/- 2016-17 25,92,014/- (Interest Income) 14,91,66,928/- Rs 24,89,914/-CIT(A) confirmed Rs 9,95,685/- Total Offshore supplies Rs 9,95,96,358/- 2017-18 Nil 3,49,48,713/- NIL 2018-19 Nil 1,15,39,186/- Nil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs 11,54,93,273 From the above it could be seen that offshore services related to the Drawings and designs have been provided in all the assessment years under appeal whereas, there were no offshore supplies during the A Y. 2011-12, 2012-13 2014-15 Supplies of plants and equipments started from A.Y. 2015-16 only. However, there were no offshore supplies in the A.Y.2017- 18 2018-19 too though offshore services continued in these assessment years also. For offshore service total consideration received during the year was Rs 30.98 Cr whereas, the aggregate considerations for offshore supply of plant and machinery during the period were Rs 11.54 Cr. It is the contention of the appellant that offshore services in the form of drawings and designs are inextricably linked to the offshore supply of plant and equipments and therefore have to treated as part of offshore supplies of plant and equipments only. Most humbly it is submitted that the issue of chargeability to tax in India of income arising from offshore supply of Drawings and designs under the provisions of Indian Income Tax Act and the provisions of DTAA is no more res integra. In this re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fferent types ot prices, as also different currencies in which the prices are to be paid. ix. Under the provisions of Section 9(1)(vii) it is necessary that the services not only be utilized within India, but also be rendered in India Hon ble Apex Court while analyzing the scope of taxation identified the following basic issues for consideration; 16 Two basic issues which, thus, arise for our consideration are : (a) the taxation of the price of goods supplied, by way of offshore supply price of which is specified in Ex. D, Clause 2.1; and (b) the taxation of consideration paid for rendition of services described in the contract as offshore services at Ex. D. Obligations under contracts are distinct, Supply Obligation is distinct from Service Obligation- In Para 17, the Hon ble Apex Court observed as under; 17. The contract is a complex arrangement. Petronat and Appellant are not the only parties thereto, there are other members of the .consortium who are required to carry out different parts of the contract. The consortium included an Indian company. The fact that it has been fashioned as a turnkey contract by itself may not be of much significance. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondents contracted with the Secretary of State for War to do the work and supply the material mentioned in the Schedules to the contract, including the supply of black- out curtains, curtain rails and battens and their erection at a number of police stations. It was held by the Court of Appeal that the respondents were liable to pay purchase-tax. Reliance was placed upon the observations made by Godiard, L.J. at p. 482: If one orders another to make and fix curtains at his house the contract is one of sale though work and labour are not involved in the making and fixing, nor does it matter that ultimately the property was to pass to the War Office under the head contract. As between the plaintiff and the defendants the former passed the property in the goods to the defendants who passed it on to the War Office. We do not think that these observations furnish a universal test that whenever there is a contract to fix certain articles made by a manufacturer the contract must be deemed one for sale and not of service. The test in each case is whether the object of the party sought to be taxed is that the chattel as chattel passes to the other party and the services r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shore supply and offshore supply. The intention of the parties, thus, must be judged from different types of services, different types of prices, as also different currencies in which the prices are to be paid. (Emphasis supplied) Thereafter, the Hon ble Apex Court on the issue of taxability of receipts from offshore services held, For Section 9(1)(vii) to be applicable, it is necessary that the services not only be utilized within India, but also be rendered in India or have such a live link with India that the entire income from fees as envisaged in Article 12 of DTAA becomes taxable in India. Since, subsequent to the decision of the Hon ble Apex Court, amendment has been made in the Income Tax Act, the above ratio that services should also be rendered in India is no more applicable as has been held by the Hon ble Delhi High Court in the case of Linde AG Vs DDIT (2014) 365 ITR 1 (Delhi) Para 96. It is clarified that in the event, it is found that the offshore services rendered by Linde are not inextricably linked to the manufacture and fabrication of equipment overseas so as to form an integral part of the supply of the said equipment, the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved that the last sub-clause of Section 9(1)(i) of the Act referred to income arising from transfer of capital asset in India . The Court further explained that Section 9(1) of the Act created a legal fiction which had a limited scope and could not be expanded. Accordingly, transfer of capital asset situated outside India could not be taxed by virtue of Section 9(1)(i) of the Act. The expression look through had been used by the Supreme Court in this context. The relevant extract of the judgment is as under:- 88 The Supreme Court also reiterated the look at principle as was enunciated in W.T. Ramsay Ltd. v. IRC: (1981) 1 All ER 865 (HL). That matter related to a combination of transactions where gains in one transaction were sought to be counteracted by another, so as to avoid tax The set of transactions was designed to create an artificial loss in one transaction which was counteracted by a gain in another. The House of Lords' dismissed the appeal of the tax payer by holding that the Courts would look at the entire combination of transactions. It was held that the Revenue or the Courts were not limited to consider the genuineness or otherwise of each individual tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (KAR) held that burden is on the assessee to show that the payment received were not for technical services; 10. Further, at paragraph 8 of the order, the Tribunal has observed that since the agreement provides for two different payments and the payments under consideration have clearly been termed in the agreement as engineering fees , there is no reason for it to think otherwise than that the payment was actually made was not in the nature of fee paid for technical services . It has also found that since the burden is on the assessee to show that the payments made were not for technical services and the assessee has failed to discharge the burden by showing that what is apparent in the agreement between the two parties is not the real state of affairs ; and the engineering fees , as stipulated in the agreement, really represented the engineering fees only and therefore, such fees, in accordance with Article VIIIA of amended DTA Agreement must be considered as payments made for technical services. Thus, the Tribunal affirmed the finding recorded by the Commissioner (Appeals) and the Assessing Officer. We do not find any error in the said conclusion reached by the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also could be in the nature of technical services. Supply of design and drawing cannot, in all circumstances, be treated as cost of plant and machinery. In a matter where installation of sophisticated machinery or where the manufacturing process is involved through the machinery, in that case, the supply of necessary designs and drawings, which would enable the working of the machinery, in our view, can be considered as technical services rendered. Just as information or advice tendered by a lawyer either could be oral or writing, in our view, supply of technical services in the nature of printed documents by way of design, chart or drawing and depending upon the nature of the services rendered, can be treated as technical service . Ultimately, the question is how the parties have understood with regard to the nature and purpose for which the payment is made. In the instant case, as rightly concluded by the Tribunal and the subordinate authorities, the engineering fees paid have to be understood as payment made for technical services The decisions in the case of Associated Cement Companies Ltd.; Parasrampuria Synthetics ltd.; Klayman Porcelains Ltd. ; Neyveli Lignite Corporatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... convenience In this connection, it is useful to refer to the observation made by the Tribunal at paragraph 8 ot the order, which reads: 8. The other contention of the assessee that the payments under consideration represented supplemental payments towards cost of the plant and machinery supplied by it may also be examined by us now. It is an admitted fact that there is a separate provision tor making of payment by the Indian company to the assessee towards such cost of plant and machinery The representative of the assessee has merely stated that for the sake of convenience only the supplemental payment for that purpose was stipulated as engineering fees in the contract between the two parties. The said representative has not, however, come up with any concrete reasons or evidence in support of this particular contention. Since the agreement shows two different payments and the payment under consideration has clearly been termed in the agreement as 'engineering fees', there is no reason for us to think otherwise that this payment is also actually supplemental to the other payment. In any case, the onus lies heavily on the assessee to prove its contention in this regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement between the assessee and the foreign company, it is also quite clear that the American company was not only to provide the Schematic ideas but also to provide technical designs, drawings and information on the basis of which alone the Indian company was to execute and install the Water Features. Article 12(4)(b) provides that fees for included services shall include services which makes available technical knowledge, experience, skill, know-how or consists of development and transfer of technical plan or technical design . The Ld. A/R placed reliance on the fact that the assessee did not become the owner of the technical drawings or designs and the Intellectual Property Rights in the drawings always retained with the American company It was argued that since the assessee did not acquire the ownership rights nor he could transfer or alienate the designs or information to any third party the assessee got mere right to use for which payment was effected For deciding the issue under Article 12(4) it is not material as to whether the . assessee acquired on outright basis any technical knowledge, know-how, technical plan or design. The said Article 12(4) is attracted the momen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since the payment made under the agreement in the present case falls within the said definition, the assessee cannot get benefit of the decision of the Mumbai Bench which was rendered in the context of DTAA between India and U.K. As regards the decision of the Coordinate Bench of the IT AT, Calcutta in the case of CESC Ltd. we find that under the agreement the role of the foreign company was limited to review and give opinion to the Indian Resident rather than to design and direct the project. On these facts the Tribunal had found that making suggestions for corrections was only the incidental part of the agreement and it was not the substance of the agreement between the parties. On the contrary we find that the substance of the present agreement envisaged that the American Company shall not only advice the Indian company but in fact it will prepare all the designs and drawings necessary for implementing the Water Features and also assist the Indian company in actual erection and commissioning of water features. We thus find that from the very inception of preparing schematic designs and drawings till the actual implementation and commissioning of the water features the American ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary input to contractor to preparation and submission of Overall Planning Report for this project, for fully defining the HM works, accompanied by all necessary layout drawing. This report shall form the basis 3 Detailed Design Preparation submission for review / approval or the Contractor Owner of design briefs / design memorandum along with layout drawings of all components of the HM Works, as part of the entire project. Preparation submission for review/approval of the Contractor/Owner of design criteria, arrangement drawings and specifications of al HM Works. Coordination of design of Hydro mechanical Works with design of Civil Works and Electro-mechanical Works. Preparation submission for review / approval of Contractor/ Owner, of detailed design and calculations, Drawings, quality assurance plan specifications, installation, testing and commissioning schedules and operation and maintenance manuals for HM Works. Preparation submission for information of the Owner/Contractor, of manufacturers detailed specifications, sub assembly drawings and detailed fabricati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 3) A The scope of work under this section shall include and cover provision of all labour, plant, materials and performance of all Works necessary for: a) Detailed Specifications b) Detailed Design detailed drawings Fabrication drawings of all Hydro-mechanical Plant Machinery as per scope of supply given in Article 2.7 of Project Profile (Vol. I) and Part II of Owner's Requirements (Vol. III) including all necessary embedded parts, spares and other works necessary for proper completion and functioning of Works including any revisions and amendment thereto defined in the Main Contract except as excluded from the scope of Subcontractor under HM Works as defined under SI. No. 2.0 below. The scope of work under this section shall include and cover provision of all labour, plant, materials and performance of all Works necessary for: c) Detailed Specifications d) Detailed Design detailed drawings Fabrication drawings of all Hydromechanical Plant Machinery as per scope of supply given in Article 2.7 of Project Profile (Vol. I) and Part II of Owner's Requirements (Vol. Ill) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orks and guarantee of the following permanent equipment, along with all auxiliary equipment in the designated location of the project as specified in the following sections. The description in the following section as well as the Owner s requirement Volume III, Part-II, does not specify complete details of Plant Machinery. However, the subcontractor shall design the equipment which will meet in all respects, the requirements in regard to performance, durability and satisfactory operation. All the equipment designed shall conform to the relevant Indian Standard Wherever Indian standards are non-existent or silent, relevant international Standards, (as agreed The broad scope of works to be more fully defined by the subcontractor in the documents to be submitted and shall include the design engineering for equipment plant and material and of all incidentals not specified but are necessary for proper completion and satisfactory functioning of works and guarantee of the following permanent equipment, along with all auxiliary equipment in the designated location of the project as specified in the following sections. The description in the following section as well as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Low Level Spillway Stoplog Equipment i) One set of stoplog for opening size 8.0 m (w) x 12.0 m (H) j) Three sets of embedded parts Including dogging arrangement and storage grooves. k) One no Lifting beam for spillway slop log. ci) One no, travelling gantry crane for handing the sloping along with crane, rails, embedded parts etc. Crest Spillway Vortical Gatos e) Two nos. vertical lift gates for opening size 5.25 m (w) x 1 2 m (H) f) Two sets of embedded parts including latching/clogging arrangement g) Two sets of suitable operating mechanism for gates Low Level Spillway Stoplog Equipment a) One no, travelling gantry crane for handing the sloping along with crane, rails, embedded parts etc. Crest Spillway Vortical Gatos a) a) Two sets of suitable operating mechanism for gate Low Level Spillway Stoplog Equipment a) One set of stoplog for opening size 8.0 m (w) x 12.0 m (H) b) Three sets of embedded parts Including dogging arrangement and storage grooves, c) One no Lifting beam for spillway slop log. Crest Spillway Vortic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ft Gate as defined under Clause 1.1.4 of Part II of Volume 111 viz. a) One set of electromechanical hoist with hoist supporting structures and controls Surge Shaft Gate as defined under Clause 1.1.4 of Part II of Volume 111 viz. a) One no slide type gate for opening size 3.5 in (w) x 5.0 m(H) b) One set of embedded parts including latching arrangement Tall Race Stoplog Equipment as defined under Clause 1.1.5 of Part II of Volume III viz a) One set of stoplogs for opening size of 4.0 m (w) x 7.0 in (H) b) Three. sets of embedded parts including dogging arrangement c) One no Lifting beam to handle tail race stoplog. (d) One travelling gantry crane for handing the stoplogs along with crane rails and Tall Race Stoplog Equipment as defined under Clause 1.1.5 of Part II of Volume 111 viz a) One travelling gantry crane for handing the stoplogs along with crane rails and Tall Race Stoplog Equipment as defined under Clause 1.1.5 of Part II of Volume III viz a) One set of stoplogs for opening size of 4.0 m (w) x 7.0 in (H) b) Three, sets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Adit Inspection Gates as defined under Clause 1.1.8 of Part II of Volume Clause 1.1.11 of Part II of Volume III vis. a) Three nos. 'hinged type gates for opening size 2.5 m (w) x 2.5 m (H) b) Three sets of embedded parts including locking device c)Three sets of embedded steel drain pipes along with valves and pressure gauge. Adit Inspection Gates as defined under Clause 1.1.8 of Part of Volume III viz. Part II of Volume III viz. p) Three nos. hinged type gates for opening size 2.5 m (w) x 2.5 m (H) q) Three sets of embedded parts including locking device r) Three sets of embedded steel drain pipes along with valves and pressure gauge. One no. DG Set (500 kVA, 415 V) as defined under Clause 1.1.9 of Part II of Volume 111 a) One D. G set of 500 kVA, 415 V, 50 Hz output three phase synchronous type along with all accessories, equipment, instrument and wiring for DG set. One no. D.G Set (500 kVA, 415 V) as defined under Clause 1.1.9 of Part II of Volume 111 a) One D. G set of 500 kVA, 415 V, 50 Hz output three phase synchronous type al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including special tools required for repair and maintenance of the equipment for HM works. - Tools as defined under Clause 1.1 12 of Part II of Volume 111 Two sets of tools and equipment including special tools required for repair and maintenance of the equipment for HM works. - Tools as defined under Clause 1.1 12 of Part II of Volume 111 Two sets of tools and equipment including special tools required for repair and maintenance of the equipment for HM works. Installation and Commissioning Procedure (four sets) as defined under Clause 1.1.13 of Part II of Volume 111 Four sets of installation and commissioning procedures indicating the supervisory services to be provided, tolerances to be achieved, equipment to be deployed, procedure to be followed including site inspections, quality control checks, in-site performance testing etc. Installation and Commissioning Procedure (four sets) as defined under Clause 1.1.13 of Part II of Volume 111 Four sets of installation and commissioning procedures indicating the supervisory services to be provided, tolerances to be ach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pection and quality assurance plan Inspection and Quality Assurance Plan as defined under Clause 1.1 15 of Part II of Volume III a) Four sets of Inspection and quality assurance plan Thus it is evident that offshore services related to supply of drawings and designs are not confined to the plant machinery supplied overseas alone. Offshore service are predominately in respect of drawings and designs of plants Machinery supplied onshore and therefore, chargeable to tax in India under the applicable DTAA as well as under the provisions of Section 9(1)(vii) of Indian Income Tax Act. Decision of the Hon ble ITAT in the case of M/s SMS Concast not applicable to the facts of the present case- It is submitted, that the decision of the Hon ble ITAT in the case of M/s SMS Concast cannot be applied to the facts of the present case as the decision is applicable to the facts of that case alone where the Hon ble Bench after considering the obligations under service and supply have come to a firm conclusion that the obligations under 2 contracts are not disjoint and any default leading to the cancelation of contract of supply will lead to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be used independently since they are tailor made to the equipment supplied; the pith and substance of the agreement is only supply of plant and hence designs should be looked into as plant ; that no control over equipment happens in India as the title has passed from overseas; that admittedly there is no PE at all in India for Asst Year 2011-12; that designs gets subsumed in the supply; 95% of consideration is received at the time of supply of machineries itself . 9. The ld. AR also placed on record the approval copy of Kishanganga Project by the Central Government vide approval dated 20.07.2007 as Additional Evidence in terms of Rule 29 of ITAT Rules before us. This approval letter dated 20.7.2007 enabled National Hydroelectric Power Corporation (NHPC) Limited to set up the Kishanganga Hydroelectric Project (3 * 110MW) in the Central Sector in Jammu Kashmir at a total cost of Rs 2238.67 crores including IDC FC Charges of Rs 165.12 crores based on November 2005 price levels. It was submitted that provisions of section 44BBB of the Act deals with the taxability of income in relation to such activities and that one of the conditions prescribed in section 44BBB of the Act is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstruction vs DIT reported in 66 taxmann.com 16 (Del); f) Decision of Hon ble Jurisdictional High Court in the case of DIT vs Ericsson AB reported in 204 Taxman 192 (Del); g) Decision of Hon ble Jurisdictional High Court in the case of CIT vs Mitsui Engineering reported in 123 Taxman 182 (Del) ; h) Decision of Hon ble Supreme Court in the case of ONGC Ltd vs CIT reported in 376 ITR 306 (SC); i) Decision of Hon ble Supreme Court in the case of CIT vs Hyundai Heavy Industries Co. Ltd reported in 291 ITR 482 (SC) j) Decision of Delhi Tribunal in the case of SMS Concast AG vs DDIT in ITA No. 1361/Del/2012 dated 16.6.2023 11. We have heard the rival submissions, perused the materials available on record and the case laws that were relied upon by the parties before us. We find that the issues to be decided in these appeals are as under:- a) Whether the amount received by the assessee under the contract for offshore supply of plant equipment during the previous years' relevant to abovementioned assessment years, from HCC is chargeable to tax in India as per the provisions of the Act as well as under the India Germany Treaty? b) Whether the amount received fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onshore contract was under a separate agreement and for separate consideration. There is, therefore, in our opinion, no justification to mix the consideration for the offshore and onshore contracts. None of the stipulations of the onshore contract could conceivably postpone the transfer of property of the equipment supplied under the offshore contract, which, in accordance with the agreement, had been unconditionally appropriated at the time of delivery, at the port of shipment. When the equipment was transferred outside India, necessarily the taxable income also accrued outside India, and hence no portion of such income was taxable in India. (Emphasis Supplied by us) 13. We find that the lower authorities had made an observation in their orders that 100% supply of machinery is not preceded to the formation of Project Office in India which is inconclusive to hold that the offshore supply is taxable in India. This has to be looked into from the size of the project undertaken by the assessee by appreciating the fact that several machineries were supplied at different point of time from outside India and for all the machineries that were supplied, the title had been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uipment. The passing of the property to the purchaser, as rightly held by the Tribunal had nothing to do with the payment of the entire price of the equipment 4 to the seller. Thus, the mere fact that 15 percent of the payment was to be retained by the PGCIL to be paid 30 days after operational acceptance on erection and completion of the system cannot be construed to mean that the title in the goods did not pass to the buyer in the country of origin. 15. Our aforesaid observations are further fortified by the decision of the Hon ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Limited reported in 288 ITR 408 (SC), wherein, it was held that where the property in respect of the goods is transferred to the buyer outside India, the sale of such goods has to be regarded as having completed outside the taxable territories of India and hence, the income from such sale is not liable to tax in India. Similar view is also expressed by the Hon ble Jurisdictional High Court in the case of National Petroleum Construction vs DIT reported in 66 taxmann.com 16 (Del). 16. In view of the aforesaid observations and respectfully following the various judicial precedents r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich mainly comprised of Planning, designing and Engineering' of Hydro Mechanical Plant and Machinery and included the overall and detailed planning of the project. It was submitted that the plant equipment as supplied by the assessee from outside India are tailor-made to suit the specifications, requirements of the Kishanganga project undertaken by NHPC. Taking into account the nature, size and specific purpose of the plant and equipment to be supplied, it is necessary for the assessee to first prepare the drawing, design of the plant and equipment to be manufactured/fabricated and get the same approved by the customer. These drawings designs are also required by the customer for locally procuring certain parts, equipment etc. and other civil construction to be integrated with the imported plant and for arranging installation, civil works as well as for the purpose of operation and maintenance of the Plant. The offshore services contract as referred above, thus involve supply of drawings and design that are required for the manufacturing of the imported plant equipment, proper installation of such equipment and synchronisation of the same with civil construction as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21. Further we find that Clause 2 of the offshore services contract divides the scope of work in three parts which are as under:- a) Planning of Hydro-Mechanical Plant Machineries b) Design Engineering of Hydro-Mechanical Plant Machinery. c) Offshore procurement services which include procurement for offshore parts, inspection test at manufacturing facility, supervision during manufacturing and dispatch of offshore HM gates. 22. From the abovementioned scope of work and Preamble, it is evident that offshore service contract primarily involves preparation and supply of drawings and design for imported plant equipment and thus is inextricably linked with the offshore supply of plant equipment. Considering the nature of work undertaken by the assessee as per the Contract, in our considered opinion, the drawings and design as supplied are inextricably linked with the plant and equipment supplied by the assessee. We find that the similar issue had been addressed by the Hon ble Jurisdictional High Court in the case of Linde AG, Linde Engineering Division vs DIT reported in 365 ITR 1 (Del) wherein it was held that if design and engineering is inextricably linke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jurisdictional High Court in case of Linde Engineering Division Vs. DIT (supra), there is no need for much deliberation on the said decision. We find that the issue in dispute is squarely covered by the decision of the Co-ordinate Bench of Delhi Tribunal in the case of SMS Concast AG referred supra, wherein it has been held that supply of drawings and designs inextricably linked to sale and supply of equipment cannot be taxed in India as FTS. It was observed by the Tribual in SMS Concast AG (supra) that the supply of drawing and design could not be considered on standalone basis as the purchaser could not have utilized such drawings and designs without the supply of plant and equipment. It was further concluded that where offshore supply of plant and equipment are treated as not taxable in India, the supply of drawings and designs inextricably linked to such plant and equipment had to be considered as non-taxable in India, being part of supply of plant and equipment. Moreover, the decision of SMS Concast AG supra had also considered the aspect of entering separate contracts for supply of equipment and offshore services but the same had been executed on the very same date. 25. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that even assuming the consideration is to be characterized as FTS, then, also, the amount would not be chargeable to tax in India having regard to the provisions of Article 12 and Article 7 of the DTAA. From AY 2012-13 onwards, the activities undertaken by the assessee in India has resulted in the constitution of deemed PE in terms of Article 5(2)(i) of the DTAA. The Ld. AR submitted that once it is undisputed that there exists a PE, then, having regard to the provisions of paragraph 6 of Article 12, it would be clear that the provisions of Article 12 would have no application to bring to tax the consideration received from the sale of the designs and plant and such consideration could only be brought to tax in terms of Article 7 of the DTAA. The Ld. AR submitted that undoubtedly, paragraph 1 of Article 7 would get attracted because the assessee does have a PE in India but the mere existence of the PE is not sufficient to bring to tax the consideration of the nature of Business Profits. Paragraph 1 of Article 7 postulates that it is only so much of the profits as are attributable to the permanent establishment that could be brought to tax. We find that in the present case, the ent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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