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Facts
Bombardier Transportation GmbH, a German company, in consortium with an Indian entity, secured a contract from DMRC for the design, manufacture, supply, testing, commissioning, training, and technology transfer of 340 Electrical Multiple Units. The contract price was lump sum, apportioned into cost centers and milestones. The Assessing Officer treated payments received by the assessee for milestones related to project management, works programme, quality assurance, and preliminary design as Fees for Technical Services (FTS) under Article 12(4) of the India-Germany DTAA and Section 9(1)(vii) of the Income Tax Act.
Held
The Tribunal held that payments for milestones involving plans, designs, and drawings are inextricably linked to the supply of rolling stock and do not constitute managerial, technical, or consultancy services, hence not FTS under Article 12(4) of the DTAA. It further ruled that interest under Section 234B of the Income Tax Act is not leviable on non-residents for the A.Y. 2008-09. Penalty proceedings u/s 271(1)(c) were dismissed as premature, and the issue of TDS credit was remanded for verification.
Key Issues
1. Whether payments for milestones related to design, plans, and project management in a composite supply contract constitute Fees for Technical Services (FTS) under the India-Germany DTAA and Income Tax Act. 2. Whether interest under Section 234B of the Income Tax Act is chargeable to a non-resident assessee for A.Y. 2008-09.
Sections Cited
Section 143(3) of Income Tax Act, 1961, Section 144C(13) of Income Tax Act, 1961, Section 234B of Income Tax Act, 1961, Section 271(1)(c) of Income Tax Act, 1961, Section 9(1)(vii) of Income Tax Act, 1961, Section 209(1) of Income Tax Act, 1961, Article 12(4) of India-Germany DTAA
AI-generated summary — verify with the full judgment below
अपीलार्थी द्वारा/ Appellant by : S/Shri Deepak Chopra, Anmol Anand & Ms. Priya Tandon Advocates प्रधििािीद्वारा/Respondent by : Ms. Ekta Jain CIT-DR & Shri Om Prakash, Sr. DR सुिवाई की निथर्थ/ Date of hearing : 10/10/2025 घोषणा की निथर्थ/ Date of pronouncement : 07/01/2026 आदेश/ORDER PER VIKAS AWASTHY, JM:
The appeal of the assessee for AY 2008-09 and cross appeals for AY 2009-10 are taken up together as the issues raised in appeals for the impugned assessment years germinate from same set of facts. For the sake convivence, the appeals are decided in seriatim of assessment year. The facts are narrated from the appeal of assessee for AY 2008-09, hence, the said appeal is taken up as a lead case.
ITA No. 5732/Del/2019 (AY 2008-09)
2. This appeal by the assessee is directed against the assessment order dated 05.10.2011, passed u/s. 143(3) r.w.s 144C(13) of the Income Tax Act,1961(hereinafter referred to as ‘the Act’), for Assessment Year 2008-09.
The assessee in appeal has assailed the assessment order on following grounds:
“1. The Ld AO grossly erred in holding that the events represented by Milestones Al-Project Management Plan, A3-Works Programme, A5-Quality Assurance Plan and A10-Preliminary Design, which are inextricably linked to supply of Rolling Stock (RS2) to Delhi Metro Rail Corporation Limited (DMRC), are severable and thus chargeable to tax as FTS per Article 12 of the DTAA.
2. The Ld AO erred in not appreciating that the events represented by Milestones A1-Project Management Plan, A3-Works Programme, A5-Quality Assurance Plan and A10-Preliminary & 4511/Del/2017 (AY 2009-10) Design did not involve rendering of services and thus taxability per article 12(4) of the DTAA does not arise.
3. The Ld AO erred in not allowing credit of tax withheld, amounting to Rs 34,70,606, from payments made per Milestones Al-Project Management Plan, A3-Works Programme, A5- Quality Assurance Plan and A10-Preliminary Design by DMRC.
4. The Ld AO erred in levying interest under section 234B of the Income-tax Act, 1961 ('the Act').
5. The Ld AO grossly erred in initiating penalty proceedings u/s.271(1)(c) of the act for concealment of income or furnishing inaccurate particulars of income.” Factual Matrix:
The assessee is a company incorporated in Germany and is a tax resident of Germany. The assessee is engaged in the business of manufacturing and supply of passenger rolling stock (trains) and railway applications. Delhi Metro Rail Corporation (DMRC) had floated an International Competitive Bid for design, manufacture, supply, testing, commissioning, training and transfer of technology of 340 Electrical Multiple Units (EMU) known as RS2 Contract. For participating in the bid, the assessee formed a consortium with Bombardiar Transportation India Ltd. (BILT). A Memorandum of Understanding (MoU) with BTIL was executed to collectively participate in the bid. The assessee was a successful bidder in an international competitor bidding for supply of rolling stock and railway applications DMRC. A Contract Agreement-RS2 was entered into between DMRC and a consortium on 19.07.2007 (at page 335 of the paper book Vol-II) for the designing and construction of a rail-based mass rapid transport system by procuring the design, execution & completion and remedying any defects in the works of the design manufactures, supply, testing, commissioning, training and transfer of technology of 340 electrical multiple units (passenger rolling stock) including training of operation and maintenance personal, supply unit exchange spares, consumable spares and Operation and Maintenance Manuals and transfer of technology. As per the Contract Agreement, for the execution of entire work the assessee was to receive lump sum price as under:-
i. INR 11,152,278,293/-; and ii. In foreign currency of: a. Euro 1,156,430,656 b. SEK 731,347,000 (Swedish Kroner) The above price does not include the price for transfer of technology.
As er the Tender documents the entire Work including designs was divided into cost centers. Each of the cost centers represents major items associated with the work. The lumpsum price for the whole work was apportioned among various cost centers. Each cost centers were further classified into milestones. The apportioned lumpsum price was to be disbursed to the assessee on raising an invoice at different stages on achieving milestone activities. The work description i.e. milestone activity, milestone number, amount apportioned and the timeline for achieving each milestone is tabulated at page 444 of the paper book. During the impugned assessment year, the assessee had achieved milestone A1, A3, A5 and A10.
Against the invoices raised by the assessee, following amounts were received by the assessee from DMRC during the Financial Year ended on 31.03.2008:-
Currency amount INR Equivalent Amount Taxes deducted at Net Amount source EURO 17,432,172 1,0165,600,575 12,478,249 1,004,122,326 SEK 89,179,401 551,710,793 9,317,485 542,393,308 INR 1,045,638,662 1,045,638,662 13,070,484 1,032,568,178 & 4511/Del/2017 (AY 2009-10) 7. In Draft Assessment proceedings, the AO held that the payment received by the assessee against the milestone activities specified by the assessee falls within the purview of Article 12(4) of India-Germany DTAA and treated the payments as income of the assessee in the nature of Fee for Technical Services (FTS) and accordingly made addition of Rs.28,04,14,234/-. The assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide directions dated 10.08.2011 upheld the view of Assessing Officer that the payments made by DMRC to the assessee during the period relevant to impugned assessment year are covered by Article 12(4) of the DTAA and are chargeable to tax as FTS. The Final Assessment Order/impugned order was passed by the AO in light of findings of the DRP. Hence, the present appeal by the assessee.
Submissions of the Assessee:
Shri Deepak Chopra, appearing on behalf of the assessee submits that the assessee had entered into Contract Agreement RS2. A perusal of the same would show that the lump sum price agreed between the parties is with regard to the activities of supply of rolling stock and the work related thereto the said price does not include the price for transfer of technology. He referred to Annexure ITT-2A to Tender RS2 at page 431 Vol-II of the paper book to substantiate that lump sum price is the consideration for design, manufacture, supply, testing and commissioning of passenger rolling stock comprising 85 numbers of 25KV AC trains and is not for transfer of technology. He further referred to; Clause B of the said document relating to Apportionment of Lump Sum price to the Cost Center and Milestone under each Cost Center to contend that the said payments are not for transfer of technology but for the work specified under each milestone achievement; Clause D of the document that specifies Milestone achievement periods and Clause E that provides for & 4511/Del/2017 (AY 2009-10) Milestone payment schedule. The ld. Counsel in support of his submissions that each Cost Center is further divided into milestone activity referred to the pricing document at pages 443 and 444 of the paper book. The ld. Counsel in order to substantiate that each milestone has specific activities to be performed referred to employers requirement general specification at page 635 of the paper book wherein the activities to be performed under each milestone are elaborately explained. The ld. Counsel submitted that milestones are not an independent activity in itself they are incidental and inextricably linked to the supply of rolling stock. The activities carried out in achieving the milestone are part of the ultimate work of supply of rolling stock. The activities carried out by the assessee for achieving the milestones are as per the requirement of the Tender issued by DMRC.
8.1 The ld. Counsel contended that the DRP has erred in ignoring the vital terms and conditions the contract RS2 describing the nature and object of the plans. The observations of DRP/AO are merely on surmises and conjectures without any basis. He contended that provision of plans does not amount to rendering of any managerial, technical or consultancy services. The fact that no supplies were made in the impugned assessment year does not mean that the plans are not incidental to execution of the contract for manufacture and sale of 340 trains. The DRP has ignored the fact the RS2 is a complex contract involving separate parts to be executed over a period of five years. The RS2 contract was signed on 19.07.2007 and the first lot of 9 trains were envisaged to be delivered after a lapse of 84 weeks from the deemed commencement date 08.06.2007 on 16.01.2009. The delivery of rest of the train and the integrated testing commissioning and service trails would commence on 13.03.2009 and would continue till the whole of project is completed in January 2011.
& 4511/Del/2017 (AY 2009-10) 8.2 Sh. Chopra submitted that the payments received by the assessee upon achieving the milestones during the relevant period are as per the terms of the Contract RS-2. The assessee raised invoices against milestones A1, A3, A5 and A10 towards projrct management plan, works programme, quality assurance plan and preliminary design in connection with the supply of passenger rolling stock. The same does not involve rendering of any independent service to DMRC. To buttress his submissions, the ld. Counsel placed reliance on the decision rendered by Authority for Advance Rulings (AAR) in the case of Rotem Company vs. Director of Income Tax reported as 279 ITR 165 (ARR).
In respect of ground no. 4 of appeal assailing charging of interest u/s.234B of the Act, the ld. Counsel submits that the provisions of section 234B of the Act does not apply to non-resident in the impugned assessment year. Hence, no interest under said section is leviable on the assessee. In support of his submissions, he placed reliance on the decision in the case of Director of Income Tax vs. Mitsubishi Corporation, 130 taxmann.com 276 (SC).
Submissions of the Department:
Per contra, Ms. Ekta Jain representing the department submitted that the contention of the assessee that cost center ‘A’ is integral to supply of train & designs, services is inextricably connected with the sales/supply of train/rolling stock is without any basis. The total lump sum contract price is divided into various cost centers and price for each cost center has been given separately. Thus, the each cost center is severable. The ld. DR further submitted the India-Germany DTAA does not exclude consideration for services that are ancillary and subsidiary as well as inextricably and essentially linked to the sale of property from the scope of FTS. Placing reliance on the judgement rendered in the case of Rio Tinto Technical & 4511/Del/2017 (AY 2009-10) Services, 17 taxmann.com 70 (Del.), the ld. DR submitted that even in a case of composite contract for supply of goods/equipment/machinery and for providing technical services, bifurcation, if already made in the contract, has to be considered and accordingly the income has to be taxed. In absence of bifurcation, estimated allocation is justified and has to be made for the purpose of tax. In respect of the decision relied by the Counsel for the assessee on the case of Rotem & Company (supra), the ld. DR submits that in the light of the decision rendered by the Hon’ble Jurisdictional High Court in the case of Rio Tinto Technical Services (supra), the decision rendered by AAR in Rotem & Company cannot be held to be a good law.
10.1. On the submissions of the assessee that provisions of plan/design furnished by the assessee does not amount to rendering of service, the ld. DR submits that plans, designs, drawing is a result of services. Rendering of technical and managerial service led to development of plans, designs and drawings. In the case of Rio Tinto Technical Services (supra) the payment received for furnishing of evaluation report was held to be taxable. Controverting the submissions of assessee that plans and design were required to be submitted by the proposed contractor along with tender documents, the ld. DR submits that the assessee provide all the deliverables after the contract was awarded to it. These deliverables were checked by the engineers of DMRC and it was only when NOC was issued after checking of the deliverables that the assessee raised invoices. Even, the documents which were furnished at the preliminary stage with the bids were further developed. The assessee received payment for providing detailed plans designs and drawings, subsequently and not for the plans/drawings furnished at the preliminary stage before awarding of contract.
& 4511/Del/2017 (AY 2009-10) 10.2. The ld. DR submits that the assessee provided plans, designs and drawings and has also ensured to make available its designers having experience and capabilities to make necessary changes in the existing design and to make further design for the project, available for the project. This clearly shows that the assessee is providing services of managerial and technical nature and also service of technical persons. Accordingly, consideration received for cost centers A1, A3, A5 and A10 are in the nature of FTS, both as per the provisions of section 9(1)(vii) of the Act as well as Article 12(4) of India-Germany DTAA.
To conclude her arguments, she submitted that design, plans, drawings provided by the assessee are the result of technical services. Hence, she prayed for confirming findings of the AO in holding the payment for the same as FTS.
Rebuttal by the assessee:
Controverting the arguments made on behalf of the Department, the ld. Counsel submits that the designs, plans and drawing are inextricably linked to the final product i.e. rolling stock. Without prejudice, the ld. Counsel submits that the designs and drawings were made outside India and the same was provided to DMRC in India. The designs that were made and supplied from outside India, therefore, revenue in respect of such designs cannot be taxed in India. The ld. Counsel for the assessee in support of his submissions placed reliance on the decision on DSD Noell GMBH vs. Deputy/Assistant CIT, 157 taxmann.com 64 (Delhi-Trib.).
Findings:
We have extensively heard submissions made by rival sides, examined the orders of authorities below and have considered the documents and the judgments referred by both sides during the course of their submissions.
The assessee is a successful bidder for design and execution of a rail-based mass rapid transport system. As per the Contract Agreement RS2, the assessee was required to design execute complete, supply, testing, commissioning training and transfer of technology of 340 electrical multiple units including training of operation and maintenance personal, supply of unit exchange spares, consumable spares, Operation & Maintenance Manuals and transfer of technology. As per Contract RS2 executed on 19.07.2007 between DMRC on the one side and the assessee and BTIL as consortium on the other side. To understand the nature of work and documentation required for execution of work, it would be imperative to refer to Clause 1 to the said Contract. The same is extracted herein below:-
“Clause 1 DMRC agrees to hire and the Contractor agrees to be hired to implement the Design, Manufacture. Supply, Testing, Commissioning, Training and Transfer of Technology Of 340 Electrical Multiple Units (Passenger Rolling Stock) of Contract RS2 of the Mass Rapid Transport System - Phase I/ Project under the terms and conditions specified in this Contract Agreement and the other Contract Documents attached hereto as follows: a. This Contract Agreement b. The Letter of Acceptance and its unconditional acceptance c. The Tender i.e. 'Annexure ITT-2A' and Annexure ITT-2B Pricing Document' (duly priced) to "Instructions to Tenderers' d. Employer's Requirements- Technical Specification duly amended by incorporating Addenda e. Employer's Requirements - General Specification duly amended by incorporating Addenda 1 to 7 f. Special Conditions of Contract including the Schedules duly amended by incorporating Addenda 1 to 7 & 4511/Del/2017 (AY 2009-10) g. General Conditions of Contract duly amended by incorporating Addenda 1 to 7 h. Contractor's clarifications/confirmations in response to Employer's Queries i. Contractor's Proposal j. Any other documents forming part of the Contract All the foregoing documents, together with this Contract Agreement, are referred to herein as the Contract Documents. Also incorporated into these Contract Documents, and made part hereof, are standard specifications, and similar requirements that are referred to therein. In the event of a conflict ambiguity or discrepancy between the contents of the Contract Documents, the order of precedence of the Contract Documents shall be in the order as listed above. The modifications to the tender documents communicated through the addenda (seven numbers) issued to the Tenderers at the time of tender have been incorporated in the consolidated documents included in the contract documents. Hence, the addenda (seven numbers) are not included separately in the contract documents. In case of any discrepancy between the corrections incorporated in the consolidated documents and the Addenda, the provisions of the Addenda shall prevail. A set of reference drawings were issued to the Contractor along with the tender documents. These drawings have been retained separately by the Employer and could be referred to as and when required.” As per Clause 4 of the said Contract, the assessee was to receive lump sum price for the work carried out by it as part of its obligations, responsibilities and liabilities. The agreed lump sum price is as under:- i. INR 111,522,78,293/-; & ii. in foreign currency of: a. Euro 1156430656 b. SEK 731347000 (Swedish Kroner) A further perusal of Clause 4 of the agreement shows that the above price does not include the price for transfer of technology.
A perusal of Clause 1 c. above would show that there is reference to certain Annexures i.e. Annexure ITT-2A and ITT-2B that are part of the Contract to be executed. Annexure ITT-2B-1 is a Schedule of amounts apportioned to cost center & 4511/Del/2017 (AY 2009-10) and the description of cost centers. The said Schedule was required to be submitted as part of the form of Tender. For the sake of ready reference, the Schedule including cost center descriptions is reproduced herein below:-
INSTRUCTION TO TENDERERS PRICING DOCUMENT Annexure ITT-2B-1 SCHEDULE OF AMOUNTS APPORTIONEU TO COST CENTRES COST CENTRE DESCRIPTIONS (To be Completed and Submitted as part of Appendix FT-2 to the Form of Tender) COST CENTRE No. A - PRELIMINARIES & GENERAL REQUIREMENTS AND DESIGN OF ROLLING STOCK AND PROVISION OF MOCKUPS. This Cost Centre comprises all those obligations and ongoing activities throughout the Contract not associated directly with any other Cost Centre. This includes but is riot limited to: • Submission of Project Management Plan; • submission of interface Management Plan and Detailed Interface Documents; • submission of Works Programme’ • submission of Design Submission Programme; • submission of Quality Assurance Plan; • submission of Safety Assurance Plan and Site Safety Plan; , • Submission of Environmental Plan; • submission of Software Quality Assurance Plan; • submission of Inspection, Testing & Commissioning (including Integrated Testing & Commissioning) Plan; liaison with other Designated Contractors during the design process; • Submission of the Preliminary Design, the pre-Finai Design, the Final Design; • Submission of the Final Design Document; • Submission of “As-Built drawings"; • Preparation of Mock-up for Rolling Stock; • Any other item considered necessary to comply with the Scope of Work. Note: The maximum amount that can be apportioned in this Cost Centre shall not exceed 6% of the amount apportioned in Cost Centres A, B, C, D, E and F.
The assessee while submitting Tender in compliance of terms of Contract gave the cost apportionment of the various milestones as mentioned in the Cost Center A, including the time line for completion of milestone from the date of commencement. The details provided by the assessee incompliance of above are as under:-
“COST CENTRE No. A - PRELIMINARIES & GENERAL REQUIREMENTS AND DESIGN OF ROLLING STOCK AND PROVISION OF MOCKUPS APPORTIONED AMOUNT WEEKS FOR WORK DESCRIPTION COMPLETION MILESTONE 0F MILESTONE NUMBER EURO SEK INR FROM MILESTONE ACTIVITY COMMENCE- MENT DATE Obtain the “Notice of No Objection” or “Notice of No Objection Subject to —“ from the Engineer for: A1 Project Management Plan. 848,887 3,983,139 - 3 Interface Management Plan and detailed A2 848,882 3,983,136 - 6 Interface- Documents. A3 Works Programme. . 848,882 3,983,136 - 6 A4 Design Submission Programme. 848,882 3,983,136 6 A5 Quality Assurance Plan 424,441 1,991,568 - 4 System Safety Assurance Plan and Site A6 424,441 1,991,568 - 24 Safety Pian. A7 Environmental Plan. 424,441 1,991,568 - 12 A8 Software Quality Assurance Plan. 848,882 3,983,136 - 15 Inspection, Testing, and Commissioning A9 and Integrated Testing and 848,882 3,983,135 - 17 Commissioning Plan. A10 Preliminary Design Submission. 848,882 3,983,136 - 8 A 11 Pre-Final Design Submission. 565,922 2,655,424 - 18 A12 Final Design Submission. 565,922 2,655,424 - 32 A13 Final Design Document Delivery. 848.882 3,983,136 - 36 r“As-Built Drawings" delivery. A14 424,441 1,991,568 - 160 Mock Up at Contractor’s Offshore - A15 6,253,433 29,342,438 28 Factory. Any other item considered necessary by A16 the contractor to comply with the Scope - of Work. COST CENTRE TOTAL 15,874,102 74,484,649 - Note: The maximum amount that can be apportioned in this Cost Centre shall not exceed 6% of the amount apportioned in Cost Centres A, B, C, D, E and F.”
Here it would also be relevant to refer to some of the important dates. The relevant dates and the events are tabulated as under:-
EVENT DATE i. Date of issue of tender for Rs-2 by DMRC 23.11.2006 & 4511/Del/2017 (AY 2009-10) ii. Date of opening of bids 27.02.2007 iii. Deemed date of “Commencement” 08.06.2007 Acceptance letter iv. Date of acceptance of LOA by the assessee 12.06.2007 v. Date of furnishing bank guarantee 18.07.2007 vi. Date of contract RS-2 19.07.2007 There is no dispute with regard to two important dates i.e. the date of Commencement of Contract and the date of execution of Contract RS2. The milestones referred to in Cost Center A are to be achieved with reference to the date of commencement of project.
In the impugned assessment year, the assessee reached milestones A1, A3, A5 and A10. The work description for each of the milestones achieved is as under: • Project Management Plan-A1, • Works Program A-3 • Quality Assurance Plan, A-5 • Preliminary Design Submissions, A-10 The assessee after reaching the milestone A1, A3, A5 and A10 raised the invoices during the Financial Year 2007-08 i.e. relevant to AY 2008-09. The invoice for milestone A5 is at page 308 and 309 and invoices for milestone A10, A3 and A1 are at page 310 and 311 of the paper book. The detailed description of work to be carried out under milestone A1, A3, A5 and A10 are given in Chapter 2 of the Employer’s Requirement – General Specifications Tender ‘RS2’ Volume 3 (at pages 635 to 747, Vol-III of the paper book).
We have examined the work description given in Chapter 2 of Employer’s Requirements - General Specification. The work description of each milestone is as under:
Milestone A1 Project Management Plan: “2.2
2. 2. 1 The Project Management Plan shall provide a clear over-view of the Contractor's organization, the management system and methods to be used for completion of the works. The organization resources for the design, procurement, manufacture, installation, testing and commissioning, and setting to work, shall be clearly defined.
2.2. 2 The Tenderer shall submit a Project Management Plan as a part of the Tender, which shall provide the following information:
(i) A diagram showing the organizational structure for the management of the Contract, with locations, names and position titles of staff and their line and staff relationship. The diagram shall include associate organizations and sub-contractors and show clearly the individuals and lines of responsibility linking the various groups. It shall also identify the persons designated as contacts with the Employer's Representative.
(ii) The names, qualifications, positions and current resumes of key executive, supervisory and engineering staff to be employed full time for the works, separately for principals and sub-contractors.
(iii) A narrative describing the sequence, nature and interrelationship of the main Contract activities including timing for exchange of information.
(iv) Procedure for documentation control.
(v) The Tenderer shall nominate a suitably qualified and experienced English speaking engineer from his staff to be Project Manager. The nominee shall be subject to acceptance of the Employer's Representative, who shall have the right to demand his replacement at any time after the work commences, should the Employer's Representative consider this to be in the best interest of the Project.
(vi) The Tenderer shall also nominate a senior engineer to co-ordinate activities of the design offices and manufacturing works. The engineer shall be responsible to the Project Manager for all works executed outside India and in India for ensuring that effective co-ordination is maintained with the various manufacturing units of the Contractor, sub-Contractors and Suppliers and that contract delivery schedules are met.
(vii) The Project Manager shall be continuously on site in New Delhi and devote himself full time to the Project, commencing not later than Thirty (30) calendar days from the date of the Notice to proceed and shall continue up to the end of Defects Liability Period.
2. 3 The Contractor will submit a Project Management Plan within the specified schedule. The Engineer will review the Contractor's Project Management Plan and shall have the right to require the Contractor to make amendments as deemed necessary by the Engineer. The Contractor shall submit a detailed revised plan within 10 days of the review of the Engineer.
Milestone A3 “2.4 Work Plan (Works Programme And Design Submission Programme). 2.4.1 The Tenderer shall submit a Work Plan as a part of the tender which shall contain the following : (i) proposed Works Programme. (ii) proposed Design Submission Programme. 2.4.2 The Tenderer's proposed Works Programme shall indicate how the tenderer intends to organise and carry out the Works and achieve stages and complete the whole of The Works by the appropriate Key Dales. The Works Programme shall be preparer! in terms of weeks from the Date of Commencement of Works. 2.4.3 The Tenderer's Design Submission Programme shall cover the Design phase and include a schedule identifying, describing, cross-ceferencing and explaining the Design Packages and submissions, which he intends to submit. 2.4.4 The Design Submission Programme should take due account of the design coordination interface periods with other Designated Contractors and be consistent with the Works Programme 2.4.5 The Works Programme and Design Submission Programme shall include details as stipulated in Chapter and 5 of this Employer's Requirements - General Specification, for review by the Engineer.” Milestone A5 “2.5 Quality Assurance Plan: 2.5.1 The Tenderer shall submit an Outline Quality plan, illustrating the intended means of compliance with Chapter 2 of the Employer's Requirements - Technical Specification, and setting out in summary form an adequate basis & 4511/Del/2017 (AY 2009-10) for the development of the more detailed document. The outline Quality Plan shall contain sufficient information to demonstrate clearly the proposed method of achieving the Tenderer's quality objectives with regard to the requirements of the Contract. 2.52 The Plan shall be based on acceptable international standards. The Quality Assurance Plan shall embrace all activities of contractors, sub-contractors of any tiers including its suppliers and design consultants, if any. The Quality Assurance Plan shall indicate the approach and structure that the detailed plan will take and shall include the following: (i) a summary of the Project requirements including all proposed quality activities; (ii) all quality assurance and quality control procedures proposed by the Contractor for his use in the execution of the Works: (iii) a list of all the Codes of Practice, Standards and Specifications that the Contractor proposes to apply to his work; (iv) the Contractor's proposals for internal and sub-contractor quality assurance audits; (v) a statement detailing the records that the Contractor proposes to keep, the time during which they will be prepared and the subsequent period and manner in which they will be stored; (vi) inspection and test plans for every activity requiring inspection. The plans shall identify the level of inspection required, Quality Control Points and Quality Hold Points. (vii) procedure for maintenance of records of inspection/tests. 2.5.3 The Quality Assurance System shall be applied without prejudice to, or without in any way limiting, any Quality Assurance System that the Contractor already maintains.” Milestone A10 “5.7 Preliminary Design 5.7.1 The purposes of the Preliminary Design submission are as follows: (i) State the design criteria; (ii) Design the overall system, and propose the system configuration; & 4511/Del/2017 (AY 2009-10) (iii) Identify the functions of each system, sub-system, equipment or other element within the overall design, and specify the relationships and interfaces between elements of the system; (iv) Identify the functions of each system, sub-system, equipment or other element within the overall design, and identify the relationships and interfaces between elements of the Contractor's system and those of other Designated Contractors; and (v) Verify the tender designs and calculations.”
After detailed examination of work under each milestone we are of considered view that the work achieved by the assessee under the aforesaid milestones does not fall within the meaning of managerial, technical or consultancy services. The assessee has merely furnished diagrams indicating organizational structure, qualification of personnel to be deployed etc. Work plan involves submission of proposed work programme and proposed design submission programme. Under quality assurance plan, the assessee is required to furnish the proposed method of achieving the Tenderer’s quality objectives with regard to requirement of the contract. The preliminary design activity requires the assessee to design the overall system and system configuration, identification of functioning of each system, sub- system, equipment, etc.
Here it is also relevant to refer to the relevant Clause of India-Germany DTAA i.e. Article 12(4) of the DTAA that defines FTS. The same reads as under:-
“4. The term "fees for technical services as used in this Article means payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical or other personnel, but does not include payments for services mentioned in Article 15 of this Agreement.
In our humble view mere furnishing of plans, designs and drawings as mentioned above does not amount to rendering of services in the nature of managerial, technical and consultancy within the meaning of Article 12(4) of the & 4511/Del/2017 (AY 2009-10) DTAA. In any case, the plans, drawings and designs furnished by the assessee in compliance of Cost Center A1, A3, A5 and A10 is not an independent activity in itself. The said activity is only a stepping stone for achieving the ultimate object of supply, installation and maintenance of rolling stock. The activities underlined under Cost Center A are inextricably associated with design, execution and installation of rolling stock. In so far as the argument of the Department that since the payments for each Cost Center are allocated, therefore, the activity for each Cost Center is severable, we are not in agreement with the said argument with respect to “Cost Centre A”. The apportionment of the Cost for each milestone under each Cost Center is a pre- requisite of the Tender conditions. The activities/milestones detailed under Cost Centre A do not give rise to separate independent activity that can be severed from the main object. Furnishing of plans, drawings and designs as required in Cost Center A is primarily to ensure that the assessee has understood the final task and the path to be followed for reaching the final objective ensuring tenderer’s requirement and ensuring quality checks. Furnishing of plans, designs, etc. as envisaged in Cost Center A is only a step in the direction of commencement of rendering of service and Milestone A1, A3, A5 and A10 are preparatory.
In so far as other Cost Centers are concerned, the activities under each Cost Center have to be examined for determining whether they are in the nature of technical, managerial or consultancy services within the meaning of Article 12(4) of India-Germany DTAA and whether they are dissociable?
In the case of Rotem Company (supra), the Authority for Advance Ruling while dealing with an identical issue where Rotem Company of Korea and Mistibusihi Corporation of Japan had formed a consortium and had entered into an agreement RS1 with DMRC for supply of rolling stock. Contract agreement RS1 was similar to Contract RS2 in the present case. The entire Work was cast into various Cost Centers and further into Milestones. The agreed lumpsum Price was apportioned into Cost Centers and milestones under cost centers. In respect of the payments made to the aforesaid companies for completion of work description provided in milestones in Cost Centre A, the revenue held the payments as FTS. The AAR after examining the contract RS1, Employer’s requirements – General Specification threadbare and after analyzing various judgements held that the payments for provision of designs, drawings and plans are not in the nature of FTS. The relevant findings of the AAR on the issue are as under:-
“27. We consider it unnecessary to burden this ruling by a discussion of each of the milestones. Suffice it to mention that we have gone through Chapters 2 and 3 of the "RS1 Employer's Requirements: General Specification" and examined milestone activities of A1 to A9 and we are satisfied that those milestone activities do not involve element of FTS. xxxx 28. In so far as cost centre 'B' is concerned, it directly deals with design of Metro Rail and Metro Corridor milestone B1 to B5 (B6 is specifically excluded by the Commissioner himself) . From a plain reading of milestone activities - B1 to B5 - and contents of chapter 5 (Design Submission Requirement) of "RS1 -Employer's Requirements : General Specification", it is evident and needs no elaboration to conclude that these milestone activities have direct nexus to the design submission programme for manufacture, sale and supply of metro trains. The services postulated by the milestone activities are also inextricably connected with the designing, sale and supply of metro trains and, therefore, the payment for these activities do not fall within the meaning of FTS.
Having examined the description and the nature of milestone activities of A1 to A8 and B1 to B5, we are of the considered view that they do not satisfy the requirements of definition of FTS. However, we hasten to add that the same cannot be said about cost centre Nos. 'G' and 'J'. Cost Centre 'G' and milestones thereunder are concerned with training of Employer's driving instructors and drivers. Cost centre 'J' and milestone J1 speak of 'Supervision of maintenance'. The milestones activities of these cost centres are services which are separate and independent of design, manufacture sale and supply of metro trains. They may be because of but are not intrinsic part of the sale/supply of metro trains. It is worth noticing that the footnote appended to milestone No. J1, specifically mentions, "This & 4511/Del/2017 (AY 2009-10) excludes Contractor's obligations and responsibilities during the Defects Liability Period". This brings out the distinction clearly because the nature of the work delineated in 12. 1(b), noted above, which the contractor has to execute at his costs, is the work inextricably connected with supply of metro trains, whereas services of cost centre 'J' are independent services for which separate payment is made by DMRC.” We find that the Contract RS1 is significantly similar to Contract RS2 in the instant case. The terms and conditions of Employer’s requirements – General Specification in the preset case are analogues to Rotem’s case. Therefore, the findings given by us are fortified by the Ruling of AAR in the case of Rotem Company (supra).
The Revenue has placed heavy reliance on the judgement rendered in the case of Rio Tinto Technical Services (supra) in support of findings of the AO. We find that in the said case the payments were received by the foreign company through Indian PE under inclusive contract of furnishing evaluation report which included technical services. In the peculiar facts of the case the Hon’ble High Court after examining the terms and conditions of the Contract came to the conclusion that the payments are in the nature of FTS. The facts in the instant case are at variance. The nature of activities carried out by the assessee so far in Cost Center A and in particular to milestones A1, A3, A5 and A10 are not in the nature of managerial, technical and consultancy services. So the payments for the same does not fall within the ambit of FTS as defined in Article 12(4) of the DTAA. Hence, in our considered view the decision in the case of Rio Tinto Technical Services (supra) does not support the cause of Revenue. Ergo, ground no. 1 to 3 of the assessee’s appeal are allowed.
In ground no. 4 of appeal, the assessee has assailed charging of interest u/s.234B of the Act. We find that the Hon’ble Supreme Court of India in the case of DIT vs. Mistibushi Corporation (supra) has held that the proviso to section 209(1) of & 4511/Del/2017 (AY 2009-10) the Act inserted by Finance Act, 2012 would operate prospectively after AY 2012-13. Hence, for the assessment year under appeal i.e. AY 2008-09 no interest shall be chargeable from the assessee, a non-resident u/s.234B of the Act. Thus, the assessee succeeds on ground no. 4 of appeal as well.
The assessee by way of application for admission of additional ground of appeal has raised an additional ground challenging validity of assessment sans mandatory notice u/s.143(2) of the Act. The ld. Counsel for the assessee made statement at Bar that he is not pressing said application for admission of additional ground.
In the result, appeal of the assessee is allowed.
(AY 2009-10) Assessee (AY 2009-10) Revenue
These cross appeals by the assessee and the Revenue are directed against the order of Commissioner of Income Tax (Appeals)-42, (hereinafter referred to as ‘the CIT(A)’) New Delhi dated 17.04.2017, for AY 2009-10.
During the period relevant to assessment year under appeal, the assessee had received payments from the DMRC for achieving following milestones:
Milestone Date of Amount payment/credit credited EURO SEK INR A7 12.08.208 424,427 26,446,019 12.08.2008 1,991,568 13,204,096 A4+A15 09.09.2028 5,851,628 365,551,201 09.09.2008 27,457,086 181,216,768 A2+A8+A9 29.09.2008 2,537,179 170,625,282 30.09.2008 12,287,263 82,570,409
As was the case in AY 2008-09, the AO treated the aforesaid payments as FTS. The assessee carried the issue in appeal before the CIT(A) but remained unsuccessful. Hence, the present appeal.
29. The assessee in ground of appeal no. 1 to 5 has assailed findings of the CIT(A) in holding the payments as FTS as per Article 12(4) of India-Germany DTAA, as well as section 9(1)(vii) of the Act.
The ld. Counsel for the assessee submitted that the issue raised in the aforesaid grounds of appeal are identical to AY 2008-09. In fact, in the impugned assessment year the AO has not disputed the fact that the design, drawing and plans were submitted from offshore. Once it is admitted that the drawings and designs were made outside and were submitted from outside, the same would not be taxable in India. Further, the ld. Counsel reiterated his submissions as were made for AY 2008-09 and prayed for reversing findings of the CIT(A).
The ld. DR fairly stated that the controversy involved in the present appeal with regard to holding of payments as FTS is similar to AY 2008-09, hence, the submissions made for AY 2008-09 would equally apply to AY 2009-10.
Both sides heard, orders of the authorities below examined. We find that in the impugned assessment year the assessee has received payment for achieving milestone A2, A4, A6, A7, A8, A9 and A15. The milestone and the description of work has already been tabulated above in para 14. The findings given by us while & 4511/Del/2017 (AY 2009-10) adjudicating the issue in AY 2008-09 would mutatis mutandis apply to the instant appeal. For parity of reasons, ground no. 1 to 5 of assessee’s appeal are allowed.
In ground no. 6 of appeal, the assessee has assailed that AO has not allowed credit of TDS INR 14434,249/-. We deem it appropriate to restore this issue to the AO for verification and allow the credit of TDS, if any, in accordance of law. The ground no. 6 of appeal is allowed for statistical purpose.
In ground no. 7 of appeal, the assessee has assailed charging of interest u/s.234B of the Act. This issue has already been adjudicated by us in appeal of the assessee for AY 2008-09 as ground no. 4 of appeal. The findings given by us on the issue in AY 2008-09 would mutatis mutandis apply to the present appeal. For parity of reasons, ground no. 7 of appeal is allowed.
In ground no. 8 of appeal, the assessee has assailed initiation of penalty proceedings u/s.271(1)(c) of the Act. Challenge to penalty proceedings at this stage is premature, hence, ground no. 8 of appeal is dismissed.
In the result, appeal of the assessee is partly allowed.
The solitary ground raised by the Revenue in the appeal is against findings of the CIT(A) in directing withdrawal of interest u/s.234B of the Act.
The ground of appeal raised by the Revenue is corresponding to ground no.7 in the appeal by the assessee. Since, we have allowed ground no. 7 in assessee’s appeal, the ground raised by the Revenue in its appeal has to fail. Consequently, appeal of the Revenue is dismissed.
5732/Del/2011 (AY Allowed 2008-09) 4547/Del/2017 (AY Partly Allowed 2009-10) 4511/Del/2017 (AY Dismissed 2009-10)
Order pronounced in the open court on Wednesday the 07th day of January, 2026.