SMS CONCAST AG,NEW DELHI vs. DCIT (INTERNATIONAL TAXATION), NEW DELHI

Briefly the facts relating to the issue in dispute are, the assessee is a non-resident corporate entity incorporated in Switzerland and a tax resident of Switzerland. As stated, the assessee is engaged in the business of manufacturing and supply of plant, equipment, drawings as well as rendering of services of the nature of supervision of erection and commissioning. The assessee had entered into separate contracts with JSW Steel Ltd. for the following works: i. Supply of plant and equipment from Switzerland. ii. Supply of drawings and designs in relation to such plant from Switzerland iii. Supervision of erection and commissioning of the equipments supplied.

For the assessment year under dispute, the assessee filed its return of income on 26.09.2008 declaring nil income. In course of assessment proceedings, the Assessing officer on verifying the details available on record found that in the year under consideration, the assessee has received revenue from the following activities: a) Sale of drawings and designs – Rs.2,84,92,345/- b) Receipts from sale of equipments – Euro 10,46,66,390/- c) Receipts from supervisory services or erection and commission of equipment – Euro 8,981/- (Rs.5,56,822/) 6. Noticing these facts, the Assessing Officer called upon the assessee to explain the reasons for not offering the income earned to tax. In response to the query raised SMS Concast AG by the Assessing Officer, the assessee submitted that, since, supply of plant and equipment as well as drawings and designs were made from outside India in Switzerland and sale was completed outside India as well as payments were received outside India, the amounts received are not taxable in India. Insofar as the receipt from supervisory services is concerned, the assessee submitted that since the service Permanent Establishment (PE) was for a period of less than six months, the amount received is not taxable. After considering the submissions of the assessee, the Assessing Officer observed that the receipts from supply of drawings and designs are in the nature of technical services as per the definition of FTS under Explanation 2 to section 9(1)(vii) of the Act. Referring to the contract between the assessee and JSW Steel Ltd., the Assessing Officer observed that there is no denying the fact that the assessee has technical expertise in respect of the work of drawings and designs assigned to it. Further, the assessee is bound by the technical specification provided by the client. He observed, by utilizing the technical expertise gained by the assessee over the years, the drawings and designs are made and provided to the clients, subject to, approval of the clients. He observed that the development and transfer of technical plan/design is a sequel and integrated part of the services undertaken by the assessee. Thus, he held that the preparation of detailed design and drawing is nothing but rendering of technical services. Hence, has to be treated as FTS under section 9(1)(vii) of the Act. While coming to such conclusion, he relied upon a decision of Hon’ble Karnataka High Court in case of AEG Aktiengesllschaft Vs. CIT, [2004] 267 ITR 209.

Having held so, he proceeded to examine whether the fees received can be deemed to accrue or arise in India within the meaning of section 9. While dealing with this aspect, he observed that the ratio laid down in case of Ishikawajima Harima Heavy Industries Ltd. Vs. DIT (2007) 288 ITR 408 will be of no help to the assessee due to introduction of explanation under section 9(2) of the Act, which makes it clear that the income of a non-resident shall be deemed to accrue or arise in India under clause (v) or (vii) of sub-section (1) to section 9 and shall be included in the total income of non-resident, whether or not, non-resident has a residence or place of business or business connection in India or the non-resident has rendered services in India. He held, since, the aforesaid amendment was introduced with retrospective effect from 1st June, 1976, it will apply to the assessee. Thereafter, SMS Concast AG referring to various judicial precedents as well as definition of FTS under Article 12(4) of India – Switzerland DTAA, the Assessing Officer ultimately concluded that the amount received by the assessee towards supply of drawings and designs is taxable in India as FTS. Challenging the additions so made, the assessee preferred an appeal before learned first appellate authority. However, learned Commissioner (Appeals) upheld the additions made by the Assessing Officer.

Before us, learned counsel appearing for the assessee submitted that the assessee had entered into a contract with JSW Steel Ltd. for supply and sale of plants and equipments for 1 X 8 Strand Billet Caster for Long Product Plants required by the purchaser for its project located at Vijay Nagar, District Bellary, Karnataka. He submitted, along with plants and equipments for the said project, the assessee was also required to supply and sale drawings and documents. Thus, he submitted, drawings and designs to be supplied to the contractee are inextricably linked to supply of plant and equipment for the very same project. In this context, he drew our attention to the contracts for supply of plant and equipment and supply of drawings and documents. Further, he drew our attention to the copies of the invoices placed in the paper-book and submissions filed before the Assessing Officer. He submitted, in terms with the contract the assessee manufactured/fabricated the plants and equipments in its factory in Switzerland according to the specification provided by the contractee and supplied them to the contractee in India. He submitted, the drawing and design of such plant and equipment was also made in Switzerland and sold by the assessee outside India. He submitted, the payments in respect of sale of plants and equipments as well as drawings and designs were received by the assessee outside India. Thus, he submitted, transfer of title, both in relation to drawings and designs as well as plants and equipments have passed outside India. He submitted, insofar as the amount received towards sale of plant and equipment, the first appellate authority has accepted the legal position that since the sale has taken place outside India, the receipts are not taxable in India. However, he submitted, the first appellate authority erroneously upheld the taxation of amount received towards supply of drawings and designs as FTS, though, the sale of drawing and designs has taken place outside India under similar condition as the sale of equipment. He submitted, the contracts for supply of plant and equipment and supply of SMS Concast AG drawings and designs were entered on the same date and are inextricably connected. He submitted, supply of plant and equipment could not have been made, without the drawings and designs as the contractee could not have installed and commissioned the plant and machinery. He submitted, it is not the case of the Revenue that the drawings and designs could have been utilized by the contractee to get the plant and equipment manufactured from another manufacturer. Thus, the drawings and designs are in the nature of “as built drawings” and specifically with reference to the relevant plant and equipment. He submitted, the Departmental Authorities have not disputed the fact that the entire work relating to the drawings and designs was carried out outside India and also the title over such goods passed outside India. He submitted, the inseparability of two contracts is also not disputed by the departmental authorities. Despite that, he submitted, the departmental authorities have concluded that the amount received from sale of drawings and designs in the nature of FTS both under the Act as well as under the DTAA. He submitted, had it been a case of supply of designs and drawings on standalone basis, for grant of right to use of commercial exploitation by the customer, the amount received could have been characterized, either as royalty or as FTS. However, 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 can neither be characterized as royalty, nor as FTS. He submitted, in such a scenario to ascertain the true nature of the receipt, one has to apply the test of pith and substance to determine what is the dominant object of the contract. He submitted, if the dominant object of the contract was to supply plant manufactured according to designs developed, even though, the obligation to carry out the designs may be under a separate contract and for a separate consideration, nevertheless, the character of the receipt must be that of sale price for the supply of equipment. In support of such contentions, learned counsel relied upon the following decisions: 1. Linde Engineering Division Vs. DIT, 365 ITR 1 (Delhi HC) 2. CIT Vs. Neyveli Lignite Corporation Ltd., 243 ITR 459 (Madras HC) 3. CIT Vs. Mitsui Engineering and Ship Building 259 ITR 248 (Madras HC) 4. CIT Vs. Klayman Porcelains Ltd. 229 ITR 735 (AP HC)

Strongly relying upon the observations of the Assessing Officer and learned Commissioner (Appeals), the learned Departmental Representative submitted, the assessee has entered into separate contracts with JSW Steel Ltd. for supply of plants and equipments and supply of designs and drawings. He submitted, the scope of work under both the contracts are different. Even, the considerations to be received for the work to be done under the two contracts have been separately identified. Thus, he submitted, it cannot be said that the contracts are inextricably linked to each other. Drawing our attention to the contract for supply of designs and drawings, learned Departmental Representative submitted, the designs and drawings are delivered in India. He submitted, even in case of any dispute, the seat of SMS Concast AG arbitration is also in India. Thus, he submitted, the contractual terms clearly demonstrate that the transfer of title over the drawings and designs passed in India. In any case of the matter, he submitted, drawings and designs are part of technical services. Therefore, it falls within the definition of FTS, both under the domestic law as well as treaty provision. He submitted, as per the Explanation under section 9(2) of the Act, FTS is taxable in India, irrespective of the fact, whether the recipient is a non- resident or the services are rendered in India or not. Thus, he submitted, the receipts from design and drawing has been rightly brought to tax in India. In support of his contention, learned Departmental Representative relied upon the following decisions: i. CIT Vs. Copes Vulcan Inc. [1987] 167 ITR 884 (Madras) ii. AEG Aktiengesllshaft Vs. CIT (2004) 267 ITR 209 (Karnataka) 11. We have considered rival submissions in the light of decisions relied upon and perused the materials on record. The short issue arising for consideration is, whether the amount received by the assessee for supply of drawing and design is taxable as FTS in India. Insofar as the factual aspect of the issue is concerned, there is no dispute that the designs and drawings were made outside India in Switzerland and were supplied to the contractee from Switzerland. It is a fact that the sale transaction qua the drawings and designs was completed in Switzerland and amounts were received in Switzerland. It is also a fact on record that both the supply of equipments and supply of designs and drawings are in relation to a single project of the contractee, viz., 1 X 8 Strand Billet Caster for Long Product Plants required for contractee’s project located in the state of Karnataka.

Materials on record reveal that the drawings and designs are in relation to basic engineering, which means, basic data as well as draft drawings, schematic drawings or layouts, diagrams, configuration and calculations necessary to design the equipment, structure and systems, as the case may be. It also includes, the necessary calculations, functional descriptions, final equipment list, preliminary bills of materials for media systems, line routing drawings, main cables routings, foundation outlines with load data, motors and components list. It also includes reference component drawings with reference bills of material where applicable. Details design consists SMS Concast AG of the final design engineering to procure or manufacture the equipment and plants. It means the detail design of the equipment includes all necessary calculations, arrangement drawings, detail drawings for manufacturing where applicable, bills of materials, engineering of electrical components as well as associated standard and catalogue parts, instructions for manufacturing, assembly, inspection and construction if applicable, spare part lists, operation and maintenance instructions as the case may be.

On a reading of both the contracts, it is observed, though, the contracts have been separately executed, one for supply of plant and equipment and the other one for supply of drawings and designs, however, they have been executed on the 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 vested with the right to terminate the contract unilaterally, inter alia, due to the delay in delivery of the equipment in excess of 120 days for the reasons solely attributable to the seller and seller fails to take necessary remedial action. Thus, from the aforesaid condition imposed in the contract, it is very much clear that failure to supply plant and equipment within the stipulated time period can also determine the contract for supply of drawing and design and the purchaser can terminate the contract for supply of design and drawing in that eventuality. Thus, the aforesaid fact makes it clear that the contract for supply of drawings and designs is inextricably linked to the contract for supply of plant and equipment.

Undisputedly, though, the Assessing Officer has brought to tax the receipts from supply of plant and equipment by treating it as business profit of the assessee connected to the PE, however, learned first appellate authority has reversed the decision of the Assessing Officer by holding that since the plants and equipments were supplied from outside India and the sale transaction has concluded outside India, the receipts cannot be taxed in India. Admittedly, against the aforesaid decision of the first appellate authority, the Revenue is not in appeal. Thus, when the supply of plant and equipment has been treated as sale transaction completed outside India, SMS Concast AG hence, not taxable in India, the sale and supply of drawings and designs being inextricably linked to sale and supply of plant and equipment has to be considered cumulatively and as a part of sale and supply of plant and equipment.

In case of Linde Engineering Division Vs. DIT (supra), the Hon’ble Jurisdictional High Court has observed that, in case, design and engineering are inextricable linked with the manufacture and fabrication of material and equipments to be supplied overseas and form an integral part of the supplies, then such services rendered would not be available to tax under section 9(1)(vii) of the Act as FTS. The Hon’ble Court further held that in order 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 interlinked that the services in question are not capable of being considered as services on standalone basis and are, therefore, subsumed as a part of the supplies. In the facts of the present case, in our view, the supply of drawing and design cannot be considered on standalone basis as the purchaser could not have utilized such drawings and designs without the supply of plants and equipments. Even, it is not the case of the department that by purchasing the drawings and designs, the purchaser could have got the plants and equipments manufactured by a third party. Therefore, in our view, the ratio laid down by the Hon’ble Jurisdictional High Court in the aforesaid decision squarely apply to the facts of the present appeal.

In case of CIT Vs. Andhra Petrochemicals Ltd. reported in [2015] 373 ITR 207, the Hon’ble Andhra Pradesh High court has observed that different components of the contract cannot be read in isolation. Similar view has also been expressed by the Hon’ble Delhi High Court in case of CIT Vs. Mitsui Engineering and Ship Building (supra).

Insofar as the decision of the Hon’ble Karnataka High Court in case of AEG Aktiengesllshaft Vs. CIT (supra), in view of the ratio laid down by the Hon’ble High Court in case of Linde Engineering Division Vs. DIT (supra), there is no need for much deliberation on the said decision.

At this stage, we must address some of the submissions made by learned Departmental Representative. Before us, learned Departmental Representative has submitted that the amount received for SMS Concast AG supply of drawings and designs is taxable in India, as, they have been delivered at Bangalore Airport and the seat of arbitration is in India. We do not find much substance in the said submission of learned Departmental Representative, as, in respect of the contract for supply of plant and equipment, as well, the delivery has been made at Chennai Airport and the seat of arbitration is also in India. Therefore, once the income from supply of plant and equipment is held to be not taxable in India, since, the sale transaction was completed outside India, the same logic applies even to the amount received from supply of drawings and designs. Thus, after considering the totality of facts and circumstances, we hold that the amount received by the assessee from supply of drawings and designs is not taxable in India as FTS. This ground is allowed.”

This assessee’s appeal is allowed. Order Pronounced in the Open Court on 21/03/2025.