Income Tax Appellate Tribunal - Delhi
Sms Concast Ag,New Delhi vs Dcit (International Taxation), New ... on 21 March, 2025
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'D', NEW DELHI
Before Sh. Satbeer Singh Godara, Judicial Member
&
Sh. S. Rifaur Rahman, Accountant Member
ITA No. 5414/Del/2016 : Asstt. Year: 2013-14
SMS Concast AG, Vs DCIT,
C/o Mohinder Puri & Co., CAs, International Taxation,
1 A-D, Vandhna, 11, Tolstoy Marg, Circel -3(1)(2),
New Delhi-1110001 New Delhi
(APPELLANT) (RESPONDENT)
PAN No. AADCC2848Q
Assessee by : Ms. Richa Agarwal, CA
Revenue by : Sh. Vijay B. Basanta, CIT-DR
Date of Hearing: 05.03.2025 Date of Pronouncement: 21.03.2025
ORDER
Per Satbeer Singh Godara, Judicial Member:
This assessee's appeal for Assessment Year 2013-14, arises against the CIT(A)-43, New Delhi's case N o. 91/2016-17 dated 17.08.2016, in proceedings u/s 143(3) of the Income Tax Act, 1961 (in short "the Act").
2. Heard both the parties at length. Case file perused.
3. The assessee pleads the following substantive grounds in the instant appeal:
"1. That the order of le arne d Com missioner of Income- tax (Appeals) [CI T (A)] is bad both in law and on facts of the case.2 ITA No. 5414/Del/216
SMS Concast AG
2.(a) That the lea rned CIT (A) has erred in law and on fac ts in holding that consider ation received fo r supply of drawings and designs amounting to Rs. 2,73,65,708/- forming an integral part of the supply of e quipment, receive d under va rious contracts is taxable as "Fees for Technic al Services".
(b) That the le arne d CIT (A) has failed to apprec iate that on the facts and mate rial on recor d, the receipts constituted "Business Profits" not accruing, arising or receive d in India or deemed to accrue o r ar ise or receive d in India.
(c) That the le arne d CIT (A) has erred in not accepting that supply of drawings and designs was inextricably linke d to sale of plant and equipment and represented conside ra tion of the nature of 'B usiness Profits' not lia ble to tax in India, as per the provisions of DTAA between India a nd Switze rland read with the Income-tax Act, 1961 ('the Act').
(d) That the learned C IT (A) has grossly erred in law in ignoring and not following the decisions as re lie d upon by the appe lla nt in the cases o f:
CI T vs. Oil & Natural Gas Corpo ration Limite d [2015] 376 ITR 306 (SC) CI T vs. Hy undai Heavy Industries C ompany Limited [2007] 161 Taxma nn 191 (SC) Ishikawajma - Harima He avy Indus tries Ltd. - Vs Dire ctor of Income Tax, Mumbai ( 288 ITR 408 SC) Natio nal Pe tro leum Constr uction v. DIT [2016] 66 taxmann.com 16 ( Delhi High Court) Linde AG, L inde Engineering Di vision Vs. Deputy Dire ctor of Income Tax [ 2014] 44 Taxmann.com 244 ( Delhi High C ourt) CI T Vs. Mitsui Engineering and Shipbuilding [174 CTR 66] (Delhi High Co urt DIT Vs. Nokia Ne tworks OY (25 Ta xmann.com 225) (Delhi High Court) CI T vs. Neyve li L ignite Corpo ration Ltd. (243 ITR
459) (A ndhra Pradesh Court) CI T vs. Kla yman Porcelains L td. 96 Taxmann 221 (Andhr a Pradesh High Court)' DIT vs. Nisso Lw ai Co rpo ration [ITA No. 612 o f 2013] (Andhra Pr adesh High Cour t)
3. ( a) That the order passe d by the L d. CIT(A) is erroneous to upho ld the levy of interest u/s 234B of the 3 ITA No. 5414/Del/216 SMS Concast AG Act which is no t attracte d in the la w and on facts o f the case;
(b) That the L d. C IT(A) erred in rejecting the arguments of the appellant and not follo wing the decis ions relied upon by the appella nt."
4. We next note that the instant sole issue as to whether the assessee's consideration amount of Rs.2 ,84,92,3 45/-; deserves to be assesse d at fee for technical services ("FTS") or not, already formed subject matter of adjudication be fore the earlier learned co-ordinate bench involving it's appeal ITA No. 1361/Del/2012, as it emerges from a perusal of the above extracted pleadings before us. And that the said learned co-
ordinate bench's order dated 16.06.2023 has a lready de cided the very issue in assessee's favour and against the depar tment vide following detailed discussio n:
2. The effective gro unds raised by the assessee are ground nos . 2 and 3, which rea d as unde r:
2(a) That the learned CIT (A) has erred in law and on fac ts in holding that consideration receive d for supply of drawings a nd designs amounting to 2,84,92,345/- for ming integra l part o f the supply of equipment, received under various contracts is ta xable as "Fees for Technic al Services" .
(b) That the le ar ned CIT (A) has failed to appreciate that on the facts and material on record, the re ceipts constituted "Business Profits " not accruing, aris ing or receive d in India or deemed to accrue or arise or rec eived in I ndia.
(c) That the learned CIT (A) has erred in no t acce pting that supply of drawings and designs was inextricably linke d to s ale of plant and equipment and represe nted conside ra tion of the nature o f 'Business Profits' not liable 4 ITA No. 5414/Del/216 SMS Concast AG to tax in India , as per the pro vis ions of DTA between India and Ge rmany re ad with India n Income-tax A( L.
(d) That the learned CIT (A) have grossly erred in law in ignoring and not follow ing the ratio of jurisdictional High Court of Delhi in the case of M itsui Engineering and Shipbuilding [174 CTR 66(Delhi)].
3. That the le arned CIT (A) has erred in not granting the benefit of Most F avore d Nation clause as provided in the protoco l to Indo-Switzer land treaty.
3. In ground no. 2, the assessee has r aise d the issue of taxability of an amount of Rs.2,84,92,345/- received from supply o f drawings and designs as Fee for Tec hnical Services (FTS).
4. Brie fly the facts relating to the iss ue in dis pute are, the assessee is a non-reside nt cor porate e ntity incor por ated in Switzerland and a tax resident of Switzer land. As state d, the assessee is engaged in the business o f manufacturing and supply of plant, equipm ent, drawings as well as rendering of se rvices of the nature of super vis ion o f erection and commissioning. The asse ssee had entere d into separate contr acts with JSW Steel Ltd. for the follo wing works:
i. Supply of plant and equipment from Switzerland. ii. Supply o f drawings and designs in relatio n to such plant from Switzerland iii. Supervision of er ection and commissioning of the equipments supplied.
5. For the assessment year under dispute, the assessee filed its return o f income on 26.09.2008 declaring nil income. In co ur se of assessment proceedings, the Assessing o fficer on verify ing the details available on record fo und that in the ye ar under cons ide ration, the assessee has received revenue from the following activities:
a) Sale o f drawings a nd designs - Rs.2,84,92,345/-
b) Receipts from sale of equipments - Euro 10,46,66,390/-
c) Receipts from supervisory se rvices or e rection and commission o f e quipment - Euro 8,981/- (Rs.5,56,822/)
6. Noticing these fa cts, the Assessing Officer c alled upon the assessee to explain the re asons for not offe ring the income earned to tax. In respo nse to the query raised 5 ITA No. 5414/Del/216 SMS Concast AG by the Assessing Officer , the assessee submitte d that, since, supply o f plant and e quipme nt as we ll as drawings and designs we re made from outside India i n Switze rland and sale was completed outside India as well as payments were receive d outside I ndia, the am ounts received are not taxable in India. Insofar as the re ceipt from supervisor y services is conce rned, the assessee submitted that s ince the service Perma nent Establishment (PE) was for a period of less than six months, the amount received is not taxable. After considering the submissio ns of the assessee, the Assessing Officer observed that the rec eipts from suppl y of drawings and designs are in the nature of technical se rvices as per the de finitio n o f FTS under Expla nation 2 to section 9(1)( vii) of the Act. Refe rring to the contract betwe en the assessee and JSW Steel L td., the Assessing Officer observe d that the re is no de nying the fac t that the assessee has technical exper tise in res pe ct of the work of drawings and designs a ssigne d to it. Fur ther, the assessee is bound by the technic al specification provide d by the clie nt. He obse rved, by utilizing the technical expe rtise gained by the assessee over the years , the drawings and designs a re made and pro vide d to the clients , subject to, approval of the clients. He obs erved that the de velopment and transfer o f technical plan/ de sign is a seque l and integrated part of the services undertaken by the assessee. Thus, he held that the pre paration of deta ile d design and drawing is no thing but rende ring of technical services. Hence, has to be treated as FTS under section 9( 1)(vii) of the Act. While coming to such conclus ion, he relied upo n a decisio n of Hon'ble Karnataka High Co urt in c ase of AEG Aktiengesllschaft Vs. CIT, [2004] 267 ITR 209.
7. Hav ing held so, he proceeded to examine whethe r the fees received can be deemed to accrue or aris e in India withi n the meaning o f sectio n 9. While dealing with this as pect, he observed that the ratio laid dow n in case of Ishikawaj ima Ha rima Heav y Industries Ltd. Vs. DIT (2007) 288 ITR 408 will be of no help to the assessee due to introduction of explana tion under s ection 9( 2) o f the Act, whic h makes it clear that the inco me of a non-resident shall be deemed to accrue o r arise in India unde r clause
(v) or (vii) of sub-sectio n ( 1) to section 9 and shall be include d in the to tal income of non-reside nt, whe ther or not, non- resident has a residence o r place o f busines s or business conne ction in India o r the non-resident has rende red services in India. He held, since, the afo resaid amendment was introduce d with retrospective effect from 1 s t June, 1976, it will apply to the assessee. Thereafter, 6 ITA No. 5414/Del/216 SMS Concast AG referring to various judicia l pre cedents as we ll as definitio n of FTS under Article 12( 4) of India - Sw itzer land DTAA, the Assessing Officer ultimately conclude d that the amount received by the assesse e towar ds supply of drawings and designs is taxable in India as FTS. Cha llenging the additio ns so made, the assessee preferred an appeal befo re learned first appellate authority. However, learne d Commissioner ( Appeals) upheld the additions made by the Assessing Officer.
8. Before us, le arned counsel appearing for the assessee submitted that the assessee had entere d into a contr act with JSW Steel Ltd. fo r supply and sale of plants and e quipments for 1 X 8 Strand Billet Caster for Long Product Pla nts required by the purchase r for its project locate d at Vijay Nagar, District Bella ry, Karnataka. He submitted, alo ng with plants and equipments fo r the said project, the assessee was also required to supply and sale drawings and documents. Thus, he submitted, drawings and des igns to be supplied to the co ntracte e are inextrica bly linke d to supply of plant and equipment for the very s ame project. In this context, he drew our atte ntion to the contracts fo r supply o f plant and equipment and supply o f drawi ngs and documents . Further, he drew our attentio n to the copies of the invo ices placed in the pape r-book and submissions filed before the Assessing Office r. He submitted, in te rms with the co ntract the assessee manufactured/fabricate d the plants and equipments in its factory in Sw itze rland according to the specification prov ided by the contractee and supplie d them to the contractee in India. He submitted, the drawing and design of such plant and equipment was also made in S witzerland and sold by the assessee outside India. He submitted, the payments in respect o f sale of plants and equipments as we ll as drawings and designs were received by the asse ssee outsi de India. Thus, he submitte d, transfe r of title , both in relatio n to drawings and designs as we ll as plants and equipments have passed o utside India. He subm itte d, insofar as the amount rece ive d tow ards sale of plant and equipment, the first appellate autho rity has accepte d the lega l pos ition that since the sale has taken place o utside India, the receipts are no t ta xable in India. Howeve r, he submitted, the first appellate autho rity erroneously upheld the taxation o f amount receive d towards suppl y of drawings and des igns as FTS, tho ugh, the s ale o f drawing and des igns has taken place outside India unde r s imilar conditio n as the sale of e quipment. He submitted, the contr acts for supply of plant and equipment and supply of 7 ITA No. 5414/Del/216 SMS Concast AG drawings a nd de signs were e ntered on the same date and are ine xtric ably connected. He submitted, supply o f plant and equipment could not have been made, without the drawings and designs as the contr actee could no t have installed and commissioned the plant and machine ry. He submitted, it is not the case of the Revenue that the drawings and designs co uld have been utilize d by the contr actee to ge t the plant and equipment manufac tured from another manufacture r. Thus, the drawings and designs are in the nature of "as built drawings" and specific ally with reference to the relevant plant and equipment. He submitted, the De par tmental Authorities have not dispute d the fact that the entire work relating to the drawings and designs was carried out outside India and also the title over such goods pas sed o utside India. He submitted, the inseparability of two contracts is also not dis puted by the departmental authorities. Despite that, he submitted, the departm ental autho rities have concluded tha t the amount received from sale of drawings and designs in the nature of FTS both under the A ct as well as under the DTAA. He submitted, had it been a case of supply of designs and drawings on standalo ne bas is, for grant of right to use of commercial exploitatio n by the customer, the amount received could have been char acte rized, either as roy alty or as FTS. Ho wever, when the s upply of drawings and designs is co upled with supply of equipment, which is manufactured in acco rdance with the des igns supply, the amount re ceived can ne ithe r be char acte rized as roya lty, nor as FTS. He submitte d, in such a scenario to ascertain the true nature of the rec eipt, one has to apply the test of pith and s ubs tanc e to determine what is the dominant o bject of the co ntrac t. He submitted, if the dominant o bject o f the contract was to supply pla nt manufacture d accor ding to designs develo ped, even though, the obligation to ca rry out the designs may be under a se parate contract and for a separate conside ra tion, ne vertheless, the characte r of the receipt must be that of sale price for the supply o f equipment. In suppo rt o f such contentions, le arned counsel relied upon the following decisions:
1. Linde Engineering Divis ion Vs. DIT, 365 ITR 1 (Delhi HC)
2. CI T Vs. Ney veli Lignite Cor poration Ltd., 243 ITR 459 (Madras HC)
3. CI T Vs. Mitsui Engineering and Ship Building 259 ITR 248 (Madras HC)
4. CI T Vs. Klayman Porcelains L td. 229 ITR 735 (AP HC) 8 ITA No. 5414/Del/216 SMS Concast AG
5. DIT International Tax Vs. Nissho IWAI Corporatio n (ITA No.612 o f 2013)
6. Quotech GmbHH Vs. DCIT , 58 taxmann.com 232
9. He submitted, the decisio n of the Hon'ble Karnataka High Co urt in case of AEG Aktiengesllschaft Vs. CIT (supra) is no t germane to the issue at hand. Without prejudice , he submitted, in any case, if in the said decis ion the view take is co ntrary to the vie w taken by the Hon'ble Jurisdictio nal High Court, then the decis ion cannot be followed. Without prejudice to the afore said submiss ion, lea rned counsel subm itte d, even ass uming that the receipts are to be characterize d as FTS, still, it will no t be cha rge able to tax in India, having re gar d to the provisio n of Article 12 and Article 7 of India-Switzerland DTAA. He submitted, the supe rv isory ac tivity rendered in connection with the installa tio n of plant and equipment extended fo r a period more than six months. The refo re, in terms of Article 5(2)(j) of the DTA A, the assessee had a service PE in India. He submitted, once the assessee had a PE in India by virtue of exceptio ns pro vided unde r par agraph 6 of Article 12 o f the DT AA, the provisions of Artic le 12 would have no applicatio n to the receipts from supply of designs and draw ings, as, such amount can only be brought to ta x in te rms of Article 7 of the DTAA. However, he submitted, para (1) of Artic le 7 of the DTAA provides that only so much of the profit attributable to the PE ca n be brought to tax. He submitted, since, in the facts of the present case, the entire work of preparing the designs and drawings was carried out outs ide India, the PE hav ing no ro le to play, the amount cannot be taxe d in India. He submitte d, the amount received is not taxable as FTS.
10. Strongly rely ing upon the o bs ervatio ns o f the Assessing O fficer and lea rned Commissione r (Appeals), the learned Departmental Re presentative submitted, the assessee has entered into separate contrac ts with JSW Steel Ltd. for supply of plants and equipments and s upply of designs and drawings. He submitted, the sco pe of work under both the contracts are different. Even, the conside ra tions to be rece ive d fo r the wo rk to be done under the two co ntracts have been separate ly identified. Thus, he submitte d, it cannot be said that the contr acts are ine xtricably linke d to each other. Drawing our atte ntion to the contract for supply of designs and drawings , learne d Depa rtmental Representative s ubmitted, the designs and draw ings are delive red in India. He submitted, even in case of any dispute , the se at of 9 ITA No. 5414/Del/216 SMS Concast AG arbitration is also in India. Thus, he submitted, the contr actual te rms clear ly demonstrate that the transfe r of title o ver the dra wings and designs passed in India. In any case of the matter, he submitted, drawings and de signs are part of technic al services. Therefore, it falls within the definitio n of FTS, both under the do mestic law as well as treaty provision. He submitte d, as per the Explanation under sec tion 9(2) of the Act, FT S is taxable in India, irres pective o f the fact, whether the recipient is a non- resident or the se rvices are re ndere d in India o r no t. T hus, he submitted, the receipts from design and drawing has been rightly brought to tax in India . In suppo rt of his contention, lea rned De partmental Represe ntative relied upon the following decisions:
i. CI T Vs. Copes V ulcan Inc. [ 1987] 167 ITR 884 (Madras) ii. AEG Aktie ngesllshaft Vs. CIT (2004) 267 ITR 209 (Karnataka)
11. We have conside red rival submissions in the l ight of decis ions re lied upon and pe ruse d the materials on rec ord. The shor t issue a rising for consideration is , w hethe r the amount rece ived by the assessee fo r supply of drawing and design is taxa ble as FTS in India. Insofar as the fac tual aspect of the issue is concerne d, there is no dispute that the des igns and drawings we re made outside India in Switzer land and were supplie d to the contrac tee from Switzer land. It is a fact that the sale transaction qua the drawings and designs was completed in Switzerland and amounts were received in S witze rla nd. It is also a fact on record that bo th the supply o f e quipments and supply of designs and dra wings are in relation to a single projec t of the contr actee, viz., 1 X 8 S trand Billet C aste r fo r L ong Product Plants require d for contractee's projec t lo cate d in the s ta te o f Karnataka.
12. Materials o n reco rd re veal that the drawings and designs are in relatio n to basic engineering, which m eans, basic data as wel l as draft draw ings, schematic drawings or layouts, diagrams, co nfiguration and calculat ions necessary to design the equipment, struc ture and s ystems, as the case may be. It also includes , the necessary calculatio ns, functional descr iptio ns, final equipment list, preliminary bills of materials for media systems, line routing dra wings, main cables routings, foundation outl ines with load data, motors and components list. It also inc ludes refe rence component drawings with refe rence bills of material where applicable . Details design cons ists 10 ITA No. 5414/Del/216 SMS Concast AG of the final design engineering to procure or manufacture the equipment and plants. It means the detail des ign of the equipment includes a ll ne cessar y calc ulations, arrangement draw ings, detai l drawings for manufacturing where applica ble , bills o f mate rials, engineering of electrica l components as well as associated standard and catalogue parts, instructions for manufacturing, assembly, inspec tio n and co nstr uction if applicable, spare part lists, operation and mainte nance instructions as the c ase may be.
13. Thus, from the det ails o f design and drawings as well as documentation submissio n, schedule of drawings and designs, it is quite clear that drawings and designs supplie d by the assessee are spe cifically related to the supply of plant and equipments fo r the JSW Steel Proj ect.
13. On a reading of both the contrac ts, it is obse rved, though, the contracts have been se par ate ly executed, one for supply of plant and equipment and the other one for supply of draw ings and designs, ho wever, they have been executed on t he 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 v ested with the right to terminate the contract unilaterally, inter alia, due to the dela y in de livery of the equipment in excess of 120 days for the reasons solely attributable to the selle r and seller fails to take necessary remedial action. Thus, from the afores aid condition imposed in the contrac t, it is very much cle ar tha t failure to supply plant and equipment within the s tipula ted time perio d can also dete rmine the contr act for supply o f draw ing and des ign and the purc hase r can te rminate the contract for supply of design and drawing in that eventuality. T hus, the aforesaid fact makes it clear that the contract for supply of drawings and designs is inextricably linked to the contract for s upply o f plant and equipment.
14. Undisputedly , though, the Assessing Office r has brought to tax the receipts from supply of plant and equipment by trea ting it a s bus iness profit of the asse ssee connecte d to the PE, howe ver, learne d firs t appe llate authority has re versed the decision of the As sessing Office r by holding that since the plants and equipments were s upplie d from outside India and the sale transaction has co ncluded outside India , the re ceipts cannot be taxed in I ndia. Admittedly , against the aforesaid decision of the first appe llate authority, the Re ve nue is not in appeal. Thus, when the supply of plant and equipment has been treated as sale tra nsactio n co mpleted o uts ide India, 11 ITA No. 5414/Del/216 SMS Concast AG hence, no t ta xable in India, the sale and supply of drawings and designs being inextricably l inke d to sale and supply o f plant and equipment has to be considered cumulatively and as a part of sale and supply o f plant and equipment.
15. In case o f Linde Engineering Division Vs. DIT (supra), the Hon' ble Jurisdictiona l High Court has obse rved that, in case, design and engine ering are inextricable linke d with the manufacture and fabric ation of material and equipments to be supplied o verseas and form an integra l par t of the supplies, then such services rendered would not be available to tax unde r section 9(1)( vii) of the Act as FTS. The Hon'ble Court further held that in o rder 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 inte rlinked that the se rvices in question are not capable of being considered as services on standalone basis and are , therefo re, subsumed as a part of the supplies . In the fa cts of the prese nt case, in o ur view, the supply of draw ing and de sign cannot be conside re d on standa lone basis as the purchaser could no t have utilized such drawings and designs without the supply o f pl ants and equipments. Even, it is not the case of the department that by purchasing the drawings and des igns, the purc hase r could have got the plants and equipments manufactured by a third party. The refore , in our view, the ratio laid down by the Ho n'ble Jurisdictional High Co urt in the aforesaid decision squarely apply to the facts o f the present appeal.
16. In case of CIT Vs. Andhr a Pe trochemicals L td. repor ted in [2015] 373 ITR 207, the Hon'ble Andhra Pradesh High court has obse rved that diffe rent components of the contract cannot be read in i solation. Similar v iew has also been e xpressed by the Hon' ble Delhi High Co urt in case of CIT Vs. Mitsui Engineering and Ship Building (supra) .
17. Insofa r as the decision of the Hon'ble Karnataka High Court in c ase of AEG Aktiengesllshaft Vs. CIT (supra), in view of the ratio laid dow n by the Hon'ble High Court in case of L inde Engineering Division Vs. DIT (supra), there is no nee d for much de liber atio n o n the said decisio n.
18. At this stage , we must addres s some of the submiss ions made by le a rned Departmental Representa tive. Before us, learne d Departmental Representa tive ha s submitte d that the amount rece ive d fo r 12 ITA No. 5414/Del/216 SMS Concast AG supply of drawings and designs is taxable in India, as, they have been de live red at Bangalo re Airpo rt and the seat of a rbitra tion is in India. We do no t find much s ubs tance in the said submission of learne d De partm ental Representa tive, as, in respect o f the contract fo r supply of plant and equipme nt, as well, the delive ry has been made at C hennai Air port and the se at o f arbitratio n is als o in India. There fore , once the income from supply of pl ant and equipment is he ld to be not taxable in India, since, the sale tra nsaction was completed o utside India, the same logic applies eve n to the amount re ceived from supply of drawings and designs. Thus , after conside ring the totality of facts and circumstances, we hold that the amount receive d by the assessee from supply of drawings and designs is not ta xable in India as FTS. This gro und is allo wed."
5. That being the case, we hereby adopt judic ial consis tency in absence of any distinction on facts or not, a nd accept the assessee's instant so le substantive ground in very terms.
Ordered accor dingly.
6. This assessee's appeal is allowed.
Order Pronounced in the Open Court on 21/03/202 5.
Sd/- Sd/-
(S. Rifaur Rahman) (Satbeer Singh Godara)
Accountant Member Judicial Member
Dated: 21/03/2025
*Subodh Kumar, Sr. PS*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR