ITAT Deletes Addition On Consideration Received By German Entity For Offshore Supplies

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that addition on consideration received by the German entity for offshore supplies.

The bench of Challa Nagendra Prasad (Judicial Member) and M. Balaganesh (Accountant Member) has observed that the offshore services that primarily involve the offshore supply of drawings and designs are inextricably linked with the offshore supply of plants and equipment, and accordingly, the receipts from offshore services do not give rise to any income accruing or arising in India and therefore are not taxable under the Income Tax Act.

The appellant/assessee entered into a contract with HCC for rendering offshore services, which mainly consisted of ‘Planning, Designing, and Engineering' of Hydro Mechanical Plants and Machinery and 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. 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 and design of the plant and equipment to be manufactured or fabricated and get the same approved by the customer. The drawings and 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, for arranging installation and civil works, as well as for the purpose of operation and maintenance of the plant.

The offshore services contract involves the supply of drawings and designs that are required for the manufacturing of the 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 and that the property both in the designs and drawings as well as in the equipment had passed outside India. The consideration for such drawings and designs is also received outside India in foreign currency.

The assessee contended that offshore services are an integral part of the offshore supply of plant and equipment. Therefore, the consideration received for offshore services should be given the same treatment as offshore supplies, as both were carried out outside India and consideration received in foreign currency outside India, and accordingly, no part of it would become taxable as no income shall be deemed to accrue or arise in India. It would not be taxable as per the India-Germany Treaty.

The department contended that the services were purely technical in nature and hence had to be construed as ‘Fee for Technical Services’ (FTS) by making them taxable under Section 9(1)(vii) of the Income Tax Act.

The tribunal observed that if design and engineering are inextricably linked with the manufacture and fabrication of the material and equipment to be supplied from overseas and form an integral part of the said supply, then the services rendered would not be amenable to tax as fees for technical services.

The tribunal noted that the 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.

The tribunal directs the AO to delete the additions made on account of FTS with respect to offshore designs and drawings for the various years under consideration.

Counsel For Appellant: Rajan Bhatia

Counsel For Respondent: Sanjay Kumar

Case Title: DSD Noell GMBH Versus Dy./Asst. CIT

Case No.: ITA No.3186/Del/2016

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