The Income Tax Appellate Tribunal (ITAT) in Delhi has ruled that the consideration received by a German entity for offshore supplies should not be subject to additional taxation.
The bench, consisting of Challa Nagendra Prasad (Judicial Member) and M. Balaganesh (Accountant Member), stated that offshore services, particularly those involving the supply of drawings and designs, are closely connected to the offshore supply of plants and equipment.
As a result, the revenue generated from offshore services does not constitute taxable income under the Income Tax Act. and does not accrue or arise in India.
The appellant/assessee had entered into a contract with HCC to provide offshore services, primarily focused on the planning, designing, and engineering of hydromechanical plants and machinery for the Kishanganga project undertaken by NHPC.
The plant and equipment supplied by the assessee were customized to meet the project’s specifications and requirements. To facilitate the manufacturing and fabrication of the equipment, the assessee prepared drawings and designs that needed approval from the customer.
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These drawings and designs were also necessary for local ownership of certain parts and equipment, civil construction integration, installation, and maintenance of the imported plant.
The contract for offshore services involved the provision of designs and planning necessary for the production of the imported machinery and equipment, correct installation, and coordination with local construction and procured elements.
The assessee argued that all work related to drawings and designs took place outside India, and the property rights in the designs, drawings, and equipment were transferred outside India. The payment for these drawings and designs was also received in a foreign currency outside India.
As per the taxpayer, offshore services were a crucial component of offshore supplies. Hence, the payment received for offshore services should be treated similarly to offshore supplies.
Since both actions took place outside India and the payment was received in foreign currency outside India, none of it should be subject to taxation, as no income is considered to be earned or generated in India. This understanding is under the India-Germany Treaty.
The department, however, argued that the services provided were sheer technical and should be classified as “Fee for Technical Services (FTS)”, which brings them under the taxable category under Section 9(1)(vii) of the Income Tax Act.
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The tribunal determined that if design and engineering are inseparable from the manufacturing and fabrication of the supplied material and equipment from overseas, forming an integral part of the supply, then the rendered services should not be subject to tax as fees for technical services.
The tribunal recognized that the payment qualified as business profits under Article 7 of the Double Taxation Avoidance Agreement (DTAA), and such profits cannot be attributed to India to compute taxable income. Therefore, the income sourced from these services should be put under the category of non-taxable in India.
Consequently, the tribunal instructed the Assessing Officer (AO) to remove the additional taxation imposed on the offshore designs and drawings concerning different years under consideration.
| Case Title | DSD Noell GMBH Versus Dy./Asst. CIT |
| Citation | ITA No.3186/Del/2016 |
| Date | 21.11.2023 |
| Counsel For Appellant | Rajan Bhatia |
| Counsel For Respondent | Sanjay Kumar |
| Delhi ITAT | Read Order |