ITAT Deletes Addition On Consideration Received For Offshore Supplies By German Entity
States that it was not taxable under the India-Germany Double Taxation Avoidance Agreement
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has rejected the addition on consideration received by the German entity for offshore supplies.
The bench comprising Challa Nagendra Prasad (Judicial Member) and M. Balaganesh (Accountant Member) observed that the offshore services that primarily involve the supply of drawings and designs are inextricably linked with the offshore supply of plants and equipment. Accordingly, the receipts from such services do not give rise to any income accruing or arising in India. Hence, are not taxable under the Income Tax Act, 1961.
The appellant/assessee entered a contract with HCC for rendering offshore services comprising planning, designing, and engineering of hydro-mechanical plants and machinery. It included the overall and detailed planning of the project.
The plant and equipment supplied by the assessee from outside India are tailor-made to suit the specifications and requirements of the Kishanganga Project undertaken by NHPC Limited.
Considering the nature, size, and specific purpose of the plant and equipment to be supplied, it was necessary for the assessee to first prepare the drawing and design of the plant and equipment to be manufactured or fabricated and get the same approved by the customer.
The drawings and designs were also required by the customer for locally procuring certain parts, equipment, and other civil construction to be integrated with the imported plant. These were for arranging installation and civil works and the plant’s operation and maintenance.
The offshore services contract involved the supply of drawings and designs required for manufacturing imported plant and equipment, the proper installation of equipment, and the synchronization of it with civil construction and locally procured equipment and parts.
The assessee submitted that the entire work related to the drawings and designs was undertaken outside India. The property in the designs and drawings and the equipment had passed outside India. The consideration for these was also received outside India in foreign currency.
It was further contended by the assessee that offshore services were an integral part of the offshore supply of plant and equipment. Therefore, the consideration received should be given the same treatment as offshore supplies, as both were carried outside India. Since the consideration was received in foreign currency outside India, no part of it should be taxable, as no income was deemed to accrue in India. It would not be taxable as per the Double Taxation Avoidance Agreement (DTAA) between India and Germany.
The revenue department contended that the services were purely technical. Hence, was construed as the ‘Fee for Technical Services’ (FTS) by making them taxable under Section 9(1)(vii) of the IT Act.
However, the tribunal observed that the design and engineering were inextricably linked with the manufacture and fabrication of the material and equipment to be supplied overseas. These formed an integral part of the supply. Hence, were not amenable to tax as FTS.
The bench noted that the consideration qualified as business profits of the company under the provisions of Article 7 of the DTAA. It could not be attributed to India for computing taxable income in the country. Hence, the income arising from it was not taxable in India.
Accordingly, the tribunal directed the assessing officer to delete the additions made on account of the FTS regarding offshore designs and drawings.