DSD NOELL GMBH,NEW DELHI vs. DCIT CIRCLE -1(2)(2), INTERNATIONAL TAXATION, NEW DELHI

That the appellant may be allowed to add, supplement, revise, delete all or any grounds as raised hereinabove.”

The assessee is a company and a tax resident of Germany. The assessee is engaged in the business of engineering, designing, manufacturing and installing plants for the Hydro Electric Power Projects. The assessee entered into agreement(s) with M/s Hindustan Construction Company Ltd (HCC) for carrying out Hydro-Mechanical Works ('HM Works') in relation to set up of Kishanganga Hydro Electric Power Project. The contracts entered by the assessee was entered into in pursuance of the main contract entered between NHPC Ltd. and HCC for 330 MW (110x3) Kishanganga Hydro Electric Power Project in Jammu & Kashmir, India. In respect of HM Works, the scope of work of the assessee involved the following activities:- & Ors. DSD Noell GMBH vs. Dy./Asst. CIT a) Offshore Supply of hydro mechanical plant & equipment. b) Offshore Services which primarily involve supply of drawings and design related to the Hydromechanical Plant & Machinery supplied to HCC. c) Onshore activities involving supply of indigenous parts etc. and rendering of onshore services. 3.1. The taxability of consideration received onshore services rendered by the assessee is not in dispute before us.

During the previous years' relevant to the abovementioned assessment years, the assessee received consideration from HCC towards offshore supply of plant & equipment as well as for offshore services (involving supply of related drawings design). Such receipts were claimed as non-taxable in India under the provisions of the Act as well as under the relevant Articles of the Double Taxation Avoidance Agreement (DTAA).

The list of additions made by the Ld. AO and upheld by the Ld. CIT(A) could be captured in the following table :-

The ld. DR before us after making elaborate arguments during the course of hearing had filed the following written submissions before us:-

Decision of the Hon’ble Jurisdictional High Court in the case of Linde AG, Linde Engineering Division and another Vs Deputy Director of Income Tax (2014) 365 ITR 1 (Delhi); 3. Decision of the Hon’ble High Court of Karnataka in the case of AEG Aktiengesllschaft vs Commissioner Of Income-Tax: (2004) 267 ITR 209 (KAR) 4. Decision of the Hon’ble ITAT Kolkatta Bench in the case of M/s Gentex Merchants Pvt. Ltd. vs Dy. Director Of Income-,Tax ( 2005) 94 ITD 211 Kol, (2005) 95 TTJ Kol 956 Ishikawajima-Harima Heavy Industries Ltd vs Director Of Income Tax (SC),; In this landmark judgement, the Hon'ble Apex Court interalia enunciated the following principles of law i. It is to be seen whether obligations under contracts for Supply and Services are distinct or indistinguishable. ii. Taxable events in the execution of a contract may arise at several stages in several years. iii. The liability of the parties may also arise at several stages iv. Service obligation is considered distinct and separate from supply obligation when price for each of the component of the contract is separate. v. Service obligation is considered distinct and separate from supply obligation when the obligations have separately been dealt with in the contract. vi. The test for considering whether the contract is deemed to be one of sale and not of service is whether the object of the party sought to be taxed is that the Page 13 of 48 & Ors. DSD Noell GMBH vs. Dy./Asst. CIT chattel as chattel passes to the other party and the services rendered in connection with the installation are under a separate contract or are incidental to the execution of the contract of sale." vii. Delhi High Court decision in CIT v. Mitsui Engineering and Ship Building Co. Ltd. [259 ITR 248] is not applicable when payment for the offshore and onshore supply of goods and services was clearly demarcated and cannot be held to be a complete contract that has to be read as a whole and not in parts. viii In construing a contract, the intention of the parties is most relevant. The intention of the parties, must be judged from different types of services, different types ot prices, as also different currencies in which the prices are to be paid. ix. Under the provisions of Section 9( 1)(vii) it is necessary that the services not only be utilized within India, but also be rendered in India Hon’ble Apex Court while analyzing the scope of taxation identified the following basic issues for consideration; “ 16 Two basic issues which, thus, arise for our consideration are : (a) the taxation of the price of goods supplied, by way of offshore supply price of which is specified in Ex. D, Clause 2.1; and (b) the taxation of consideration paid for rendition of services described in the contract as offshore services at Ex. D.” Obligations under contracts are distinct, Supply Obligation is distinct from Service Obligation- In Para 17, the Hon’ble Apex Court observed as under; “ 17. The contract is a complex arrangement. Petronat and Appellant are not the only parties thereto, there are other members of the .consortium who are required to carry out different parts of the contract. The consortium included an Indian company. The fact that it has been fashioned as a turnkey contract by itself may not be of much significance. The project is a turnkey project. The contract may also be a turnkey contract, but the same by itself would not mean that even for the purpose of taxability the entire contract must be considered to be an integrated one so as to make the appellant to pay tax in India. The taxable events in execution of a contract may arise at several stages in several years. The liability of the parties may also arise at several stages. Obligations under the contract are distinct ones Supply obligation is distinct and separate from service obligation. Price for each of the component of the contract is separate. Similarly offshore supply and offshore services have separately been dealt with. Prices in each of the segment are also different (Emphasis supplied) Specifying supply segment and service segment in different parts of the contract would saddle the appellant with different liabilities .; Further, in para 18 the Honble Apex Court categorically held as under; “18. The very fact that in the contract, the supply segment and service segment have been specified in different parts of the contract is a pointer to show that the liability of the appellant there under would also be different.” Different and identifiable scope of work under supply contract and services contract & Ors. DSD Noell GMBH vs. Dy./Asst. CIT “Para 20. Scope of work is contained in clause 2.1 of Ex. A appended to the contract which includes supply of equipment, materials and facilities. The said exhibit spells out different systems to be set in place. It imposes an obligation on the contractor to supply equipments required therefor. It was to arrange for the engineering services in relation thereto. It was also required to render various other services within India. Ex. D, however, provides for the prices to be paid in respect of offshore supplies and offshore services, onshore supply and onshore services, construction and erection. Payment schedule has also been separately specified in respect of each of the components separately. Sale and Service contract distinguishable , reliance upon earlier decision in State of Rajasthan Vs M/s Man Industrial Corporation Ltd (1969) 1SCC 567; “ 35 In M/s Man. Industrial Corporation Ltd. (supra), this Court held : "16. Our attention was invited to a judgment of the Court of Appeal in Love v. Norman Wright (Builders) Ltd. [1944] 1 K.B. 484 In that case the respondents contracted with the Secretary of State for War to do the work and supply the material mentioned in the Schedules to the contract, including the supply of black- out curtains, curtain rails and battens and their erection at a number of police stations. It was held by the Court of Appeal that the respondents were liable to pay purchase-tax. Reliance was placed upon the observations made by Godiard, L.J. at p. 482: "If one orders another to make and fix curtains at his house the contract is one of sale though work and labour are not involved in the making and fixing, nor does it matter that ultimately the property was to pass to the War Office under the head contract. As between the plaintiff and the defendants the former passed the property in the goods to the defendants who passed it on to the War Office." We do not think that these observations furnish a universal test that whenever there is a contract to "fix" certain articles made by a manufacturer the contract must be deemed one for sale and not of service. The test in each case is whether the object of the party sought to be taxed is that the chattel as chattel passes to the other party and the services rendered in connection with the installation are under a separate contract or are incidental to the execution of the contract of sale. (Emphasis supplied) Delhi High Court decision in CIT v. Mitsui Engineering and Ship Building Co. Ltd. [259 ITR 248] distinguished; “Para 46. In CIT v. Mitsui Engineering and Ship Building Co. Ltd. [259 ITR 248], on which reliance was placed; the contention was that the finding that the contract for designing, engineering, manufacturing, shop testing and packing up to f.o.b port of embarkation could not be split up since the entire contract was to be read together and was for one complete transaction. It was in the said fact situation held that it was not possible to apportion the consideration for design on one part and the other activities on the other part. The price paid to the assessee was the total contract price which covered all the stages involved in the supply of machinery. & Ors. DSD Noell GMBH vs. Dy./Asst. CIT 47 This case is clearly distinguishable from the facts of the present case, since the payment for the offshore and onshore supply of goods and services was in itself clearly demarcated and cannot be held to be a complete contract that has to be read as a whole and not in parts. Intention of the parties relevant for construing the contract; “62. In construing a contract, the terms and conditions thereof are to be read as a whole. A contract must be construed keeping in view the intention of the parties. No doubt, the applicability of the tax laws would depend upon the nature of the contract, but the same should not be construed keeping in view the taxing provisions.

In cases such as this, where different severable parts of the composite contract is performed in different places, the principle of apportionment can be applied, to determine which fiscal jurisdiction can tax that particular part of the transaction. This principle helps determine, where the territorial jurisdiction of a particular state lies, to determine its capacity to tax an event. Applying it to composite transactions which have some operations in one territory and some in others, is essential to determine the taxability of various operations.

We would in the aforementioned context consider the question of division of taxable income of offshore services. Parties were ad idem that there existed a distinction between onshore supply and offshore supply. The intention of the parties, thus, must be judged from different tvnes of services, different types of prices, as also different currencies in which the prices are to be paid. (Emphasis supplied) Thereafter, the Hon’ble Apex Court on the issue of taxability of receipts from offshore services held, “For Section 9(l)(vii) to be applicable, it is necessary that the services not only be utilized within India, but also be rendered in India or have such a "live link" with India that the entire income from fees as envisaged in Article 12 of DTAA becomes taxable in India.” Since, subsequent to the decision of the Hon’ble Apex Court, amendment has been made in the Income Tax Act, the above ratio that services should also be rendered in India is no more applicable as has been held by the Hon’ble Delhi High Court in the case of Linde AG Vs DDIT (2014) 365 ITR 1 (Delhi) “ Para 96. It is clarified that in the event, it is found that the offshore services rendered by Linde are not inextricably linked to the manufacture and fabrication of equipment overseas so as to form an integral part of the supply of the said equipment, the income arising from the said services would be taxable in India as fees for technical services. By virtue of Section 9(1)(vii) of the Act, fees for technical services paid by a resident are taxable in India (except where such fees are payable in respect of services utilised by such person in business and profession carried outside India). In view of the Explanation to Section 9(2) as substituted by Finance Act 2010 with retrospective effect from 01.06.1976, the decision of the Supreme Court in Ishikawaiima-Harima Heavy Industries (supra), in so far as it holds that in order to tax fees for technical services under the Act, the services must be rendered Page 16 of 48 & Ors. DSD Noell GMBH vs. Dy./Asst. CIT in India, is no longer applicable. Therefore, in the event the services in question are not considered as an integral and inextricable part of equipment and material supplied, it would be necessary to examine whether any relief in respect of such income would be available to Linde by virtue of the DTAA between Germany and India.” (Emphasis supplied) From the decision of the Hon’ble Apex Court it is evident that the obligations to tax under the contract for offshore supply of equipment and offshore supply of services are distinct. Decision of the Hon’ble High Court in Linde case (2014) 365 ITR 1 (Delhi); Hon’ble High Court dismisses ‘ Look through’ approach applied by the AAR; The Hon’ble High Court while disapproving of the look through approach adopted by the AAR observed as under; “ 86. The reference of the Authority to the decision of the Supreme Court in the case of Vodafone International Holdings B V. ,(supra) is also not apposite. In that case, the Supreme Court was considering a matter which, inter alia, involved a transfer of a capital asset outside India which was sought to be taxed by the Income Tax Authorities under Section 9(1 )(i) of the Act. The subject matter of controversy was a transaction of sale and purchase of a share of an overseas company (capital asset) This capital asset was sold by a non-resident company to another non-resident company. The Revenue contended that the capital gains arising from this transaction was eligible to tax under the Act by virtue of Section 9(1 )(i) of the Act as the transaction also implied transfer of control and assets of the Indian subsidiary of the overseas company, whose share had been sold and purchased. The Supreme Court observed that the last sub-clause of Section 9(1 )(i) of the Act referred to income arising from "transfer of capital asset in India". The Court further explained that Section 9(1) of the Act created a legal fiction which had a limited scope and could not be expanded. Accordingly, transfer of capital asset situated outside India could not be taxed by virtue of Section 9(1 )(i) of the Act. The expression "look through" had been used by the Supreme Court in this context. The relevant extract of the judgment is as under:- 88 The Supreme Court also reiterated the "look at" principle as was enunciated in W.T. Ramsay Ltd. v. IRC: (1981) 1 All ER 865 (HL). That matter related to a combination of transactions where gains in one transaction were sought to be counteracted by another, so as to avoid tax The set of transactions was designed to create an artificial loss in one transaction which was counteracted by a gain in another. The House of Lords' dismissed the appeal of the tax payer by holding that the Courts would "look at the entire combination of transactions. It was held that the Revenue or the Courts were not limited to consider the genuineness or otherwise of each individual transaction in the scheme but could consider the scheme as a whole The contentions being considered by the Supreme Court in the Vodafone International Holdings B.V. (supra) as well as the House of Lords' in Ramsay Ltd. (supra) were in respect of schemes which were contended to be for the purposes avoiding tax. The Supreme Court held that the "look at" principle must be applied to see the transaction as it existed and piercing of the Corporate Veil was not necessary Page 17 of 48 & Ors. DSD Noell GMBH vs. Dy./Asst. CIT where the transactions were genuine and had commercial substance. In the present case, there is no controversy which involves lifting of the corporate veil or "looking at" any scheme to find whether a transaction is a sham or has any substance. Both the Revenue and Linde are accepting the Contract as it stands and the controversy only revolves around the situs of the income accruing or arising from the contract. To our minds, the Authority has read the principles applied by the Supreme Court in Vodafone International Holdings B.V. (supra) completely out of context. To fall outside the scope of section 9(1 (vii) , the link between the supply of equipment and services must be so strong and interlinked that the services in question are not capable of being considered as services on a standalone basis and are therefore subsumed as a part of the supplies; -- The Hon’ble Delhi High Court held that services are taxable u/s 9(l)(vii) of the Act, however, only when services cannot be considered as services on standalone basis and are subsumed in the supplies ,only then services can be considered taxable along with the supplies . In this regard, Para 95 of the decision is reproduced as under; “ 95. It is clarified that in order to fall outside the scope of Section 9(l)(vn) of the Act, the link between the supply of equipment and services must be so strong and interlinked that the services in question are not capable of being considered as services on a standalone basis and are therefore subsumed as a part of the supplies. Given the fact that its Linde's case that the consideration for the supplies are separately specified, this aspect would require a closer scrutiny and determination of facts, which we do not propose to do in the present proceedings. (Emphasis supplied) Hon’ble Karnataka High Court in Aeg Aktiengesllschaft vs Commissioner Of Income- Tax: (2004) 267 ITR 209 (KAR) held that burden is on the assessee to show that the payment received were not for technical services; “ 10. Further, at paragraph 8 of the order, the Tribunal has observed that since the agreement provides for two different payments and the payments under consideration have clearly been termed in the agreement as "engineering fees", there is no reason for it to think otherwise than that the payment was actually made was not in the nature of "fee paid for technical services". It has also found that since the burden is on the assessee to show that the payments made were not for technical services and the assessee has failed to discharge the burden by showing that what is apparent in the agreement between the two parties is not the real state of affairs ; and the "engineering fees", as stipulated in the agreement, really represented the "engineering fees" only and therefore, such fees, in accordance with Article VIIIA of amended DTA Agreement must be considered as payments made for technical services. Thus, the Tribunal affirmed the finding recorded by the Commissioner (Appeals) and the Assessing Officer. We do not find any error in the said conclusion reached by the Tribunal It is necessary to point out that the return filed by the asses-see shows that the assessee itself has shown it as "engineering fees". The Tribunal negatived the contention of the assessee that the engineering fees paid should be treated as plant and machinery as the drawings and designs were prepared outside India and delivered outside India. In our view, the decision in & Ors. DSD Noell GMBH vs. Dy./Asst. CIT the case of Scientific Engineering House Pvt. Ltd. relied upon by Sri Sarangan is of no assistance to him... ” (Emphasis Supplied) There is no repugnancy between the decision of the Hon’ble Karnataka High Court and the decision of the Hon’ble Delhi High Court so far as the issue of taxability of receipts in respect of Engineering, Drawing and design inextricably linked to the supply of goods is concerned. The Honble High Court of Karnataka noted that supply of drawing and designs cannot, in all circumstances be treated as cost of plant and machinery. (Emphasis Supplied) The Hon’ble High Court observed as under: “11. That is not the position here. In the present case, the assessee has undertaken the electrical contract for light and medium merchant mill and in that connection, it had prepared certain documents and drawings which were handed over to the Indian company—MECON. It is necessary to point out that separate payments were made towards drawings and designs. It cannot be disputed that depending upon the nature of the work entrusted, the nature of technical services rendered also varies. Therefore, it cannot be laid down in strait-jacket formula what could be considered as technical services which can have universal application. We are also unable to accede to the submission of Sri Sarangan that since the manufacture of equipment has to be in accordance with the design and drawing and without design and drawing no erection can be done and therefore the design, drawing technical data, etc., should be treated as cost of plant and machinery and have to be added to the cost. Even for the purpose of manufacture of equipment, technical services may have to be given. As noticed by us earlier, the format or the method of technical services may vary depending upon the nature of the work undertaken or entrusted. It is for the parties to agree upon what should be the nature of technical assistance or service to be rendered. In a given case, supply of design and drawing also could be in the nature of technical services. Supply of design and drawing cannot, in all circumstances, be treated as cost of plant and machinery. In a matter where installation of sophisticated machinery or where the manufacturing process is involved through the machinery, in that case, the supply of necessary designs and drawings, which would enable the working of the machinery, in our view, can be considered as technical services rendered. Just as information or advice tendered by a lawyer either could be oral or writing, in our view, supply of technical services in the nature of printed documents by way of design, chart or drawing and depending upon the nature of the services rendered, can be treated as "technical service". Ultimately, the question is how the parties have understood with regard to the nature and purpose for which the payment is made. In the instant case, as rightly concluded by the Tribunal and the subordinate authorities, the engineering fees paid have to be understood as "payment made for technical services" The decisions in the case of Associated Cement Companies Ltd. ; Parasrampuria Synthetics ltd. ; Klayman Porcelains Ltd. ; Neyveli Lignite Corporation Ltd. and in the case of Energomach Exports , relied upon by Sri Sarangan, in our view, will not be of any assistance to him. “20. We also do not find any merit in the submission of Sri Sarangan that the manufacture of the equipment is required to be made in accordance with the design and drawing and without design and drawing, no erection can be done or the & Ors. DSD Noell GMBH vs. Dy./Asst. CIT equipment operated, and therefore, the design, drawing and chart, etc., should be treated as plant and machinery and are required to be added to the cost. It is necessary to point out that this was not the case pleaded before the Assessing Officer. The assessee cannot be permitted to make out a new case, which was not pleaded before the Assessing Officer. Further, as noticed by us earlier, if the object of the preparation of designs and drawings is to bring home the point as to how the manufactured equipment is required to be erected, the same should also be considered as technical advice rendered. The technical service rendered cannot be given a restricted meaning to understand only as oral advice given, etc. It could, as noticed by us earlier, be in the nature of preparation of designs and drawings. So long as the parties have treated it as technical advice, the parties are bound by it and when the question of liability to pay tax arises, the assessee cannot be permitted to turn around and say that the supply , of designs, drawings, etc.. are part of plant and machinery and must be added to the cost. Since the contract in question deals with the execution of several works, merely because the provision is made for security deposit/guarantee or provision for levy of. liquidated damages for execution of the project, in our view, that is of no assistance to support the contention of Sri Sarangan that the payments were not made for rendering the technical services”. As noticed by us earlier, the Tribunal has negatived the claim of the assessee that the payment made to the assessee by MECON should be construed towards the plant and machinery supplied by it on the ground that undisputedly there is a separate provision made in the agreement for making payment by MECON to the assessee towards cost of plant and machinery. The Tribunal also has not accepted the plea that a separate provision for payment towards plant and machinery and for engineering services was made in the agreement only for the sake of convenience In this connection, it is useful to refer to the observation made by the Tribunal at paragraph 8 ot the order, which reads : "8. The other contention of the assessee that the payments under consideration represented supplemental payments towards cost of the plant and machinery supplied by it may also be examined by us now. It is an admitted fact that there is a separate provision tor making of payment by the Indian company to the assessee towards such cost of plant and machinery The representative of the assessee has merely stated that for the sake of convenience only the supplemental payment for that purpose was stipulated as engineering fees in the contract between the two parties. The said representative has not, however, come up with any concrete reasons or evidence in support of this particular contention. Since the agreement shows two different payments and the payment under consideration has clearly been termed in the agreement as 'engineering fees', there is no reason for us to think otherwise that this payment is also actually supplemental to the other payment. In any case, the onus lies heavily on the assessee to prove its contention in this regard by showing that what is apparent in the agreement between the two parties is not the real state of affairs. The assessee has not undertaken any care to discharge its onus. In the face of such facts and circumstances, we must come to the conclusion that the engineering fees as stipulated in the agreement really represented engineering fees only, and therefore, such fees in accordance with Article VI1IA of the amended Double Taxation Avoidance Agreement between the two parties or even in terms of Section 9(l)(vii) read with Explanation 2 to the said section." Page 20 of 48 & Ors. DSD Noell GMBH vs. Dy./Asst. CIT

We do not find any error in the said conclusion reached by the Tribunal. We have no hesitation to approve the conclusion reached by the Tribunal that the engineering fees paid to the assessee were for technical services as contemplated under Section 9(l)(vii) of the Act. In the light of the above conclusion, the second question referred to us by the Tribunal is required, unhesitatingly, to be answered against the assessee and in favour of the Revenue. Income Tax Appellate Tribunal - Kolkata Gentex Merchants Pvt. Ltd. vs Dy. Director Of Income-Tax ( 2005) 94 1TD 211 Kol, (2005) 95 TTJ Kol 956 on identical facts held as under; “9. On reading of the Agreement between the parties as a whole, we note that various phases contemplated in the agreement were composite and cumulative. Every phase was related to each other and the contract was a single composite contract and the American company was to undertake the work on cumulative basis for which composite non-divisible fee was to be paid. It is clear from the agreement that each phase was depended on the other and each phase was carried out in succession and only on completion of all phases the scope of work envisaged in the agreement stood fulfilled. It is, therefore, incorrect to say that the agreement merely provided for giving advice to the appellant and there was no transfer of any design or knowledge. The reading of the agreement clearly indicates that the appellant company was to execute the water features at 22 Aurangazeb Road, New Delhi in accordance with the designs, drawings and technical specifications provided by the American company and the American company was to ensure that the features executed by the contractors at the site conformed to the drawings, designs specifications provided by the American company. From the agreement between the assessee and the foreign company, it is also quite clear that the American company was not only to provide the Schematic ideas but also to provide technical designs, drawings and information on the basis of which alone the Indian company was to execute and install the Water Features. Article 12(4)(b) provides that fees for included services shall include "services which makes available technical knowledge, experience, skill, know-how or consists of development and transfer of technical plan or technical design". The Ld. A/R placed reliance on the fact that the assessee did not become the owner of the technical drawings or designs and the Intellectual Property Rights in the drawings always retained with the American company It was argued that since the assessee did not acquire the ownership rights nor he could transfer or alienate the designs or information to any third party the assessee got mere right to use for which payment was effected For deciding the issue under Article 12(4) it is not material as to whether the . assessee acquired on outright basis any technical knowledge, know-how, technical plan or design. The said Article 12(4) is attracted the moment a person resident of one State makes available technical knowledge, experience or transfers a technical plan or technical design to the person of other contracting state. From the agreement between the assessee and the American company it is apparent that the later was to deliver the technical drawings and designs to the former for its own use and benefit in India. The term transfer as used in Article 12(4) does not refer to the absolute transfer of rights of ownership. It refers to the transfer of technical drawing or designs to be effected by the Resident of one State to the Resident of other State which is to be used by or for the benefit of Resident of other state The said Article 12(4)(b), in our opinion, does not & Ors. DSD Noell GMBH vs. Dy./Asst. CIT contemplate transfer of all rights, title and interest in such technical design or plan. Even where the technical design or plan is transferred for the purpose of mere use of such design or plan by the person of other contracting state and for which payment is to be made. Article 12(4)(b) will be attracted The facts on record clearly indicate that under the agreement the American company was required to deliver such technical designs or plan for the sole use by the assessee company in India. In fact, the assessee did use these technical plans and drawing for constructing and / or installing the Water Feature at 22 Aurangazeb Road, New Delhi. In the above circumstances we are of the opinion that the payments effected under the agreement with the American company squarely fell within the definition of "fees for included services" and therefore the assessee was liable to deduct tax @15% of the amount payable, Under Section 195 of the Act. We also note that the case laws cited by the assessee are not applicable to the facts of the case. In the case of Raymond Ltd. the payment was effected by the assessee to a company, Resident of U.K. The nature of activities contemplated in the contract between the Indian company and the U.K. company were totally different as the question was whether the amount so paid were tees tor technical services In that case although Tribunal held that services rendered were technical services; due to specific clauses of DTAA between U.K. and India, income was not taxable. Moreover, since there is a specific clause included in Article 12(4) of DTAA with the USA which defines the term fees for included services and further since the payment made under the agreement in the present case falls within the said definition, the assessee cannot get benefit of the decision of the Mumbai Bench which was rendered in the context of DTAA between India and U.K. As regards the decision of the Coordinate Bench of the IT AT, Calcutta in the case of CESC Ltd. we find that under the agreement the role of the foreign company was limited to review and give opinion to the Indian Resident rather than to design and direct the project. On these facts the Tribunal had found that making suggestions for corrections was only the incidental part of the agreement and it was not the substance of the agreement between the parties. On the contrary we find that the substance of the present agreement envisaged that the American Company shall not only advice the Indian company but in fact it will prepare all the designs and drawings necessary for implementing the Water Features and also assist the Indian company in actual erection and commissioning of water features. We thus find that from the very inception of preparing schematic designs and drawings till the actual implementation and commissioning of the water features the American company was intimately connected with the project and in fact the whole project was intended to be conducted at the behest direction and supervision of the American company. In the circumstances the decision of the Coordinate Bench in the case of CESC Ltd. cannot be applied. We, therefore, agree with the view taken by the CIT (A) that the amounts payable to American company were "fees for included services" within the meaning of Article 12(4)(b) of the DTAA with the USA and therefore liable for withholding of tax Under Section 195 of the Act. Accordingly we dismiss the appeal of the assessee.” Thus, from the conjoint reading of all the above decisions it is evident that in the facts of the present case when obligations under supply and services contract are distinct, prices are distinct, no further enquiry as to the inextricable nature of the 2 contracts for supply and services is required and the receipts from provision of offshore services relating to the supply Page 22 of 48 & Ors. DSD Noell GMBH vs. Dy./Asst. CIT of drawings and designs is clearly taxable u/s 9(l)(vii) of the Income Tax Act and Article 12 of the applicable DTAAs. Facts of the present case as culled out from the contract agreement- From the contract agreement filed by the appellant in its paper book, it is seen that the contract No 1 (SC/100/KGHEP/004-1 ) defines the scope of service to be provided offshore, whereas Contract No 2 & 3 are in respect of offshore supply of plants and equipments and onshore supply of plants and equipments respectively. The overall scope of work defined in the subcontract (assessee is a sub contractor and main contractor is Hindustan Construction company Ltd. ) for offshore service is reproduced as under: “2. Scope of Work: 2.1 Planning of Hydro-Mechanical Plant & Machineries -The Sub-Contractors Scope of Works shall Include but not limited to the following: SL. No Description Contract for Offshore planning Design and Item Engineering Review of Existing • Review of technical parameters for HM Works is specified 1 Data/Studies in the Main Contract. 2 Overall and detailed • Providing necessary input to contractor to preparation planning of the project and submission of “ Overall Planning Report for this project, for fully defining the HM works, accompanied by all necessary layout drawing. This report shall form the basis 3 Detailed Design for detailed design • Preparation & submission for review / approval or the Contractor Owner of design briefs / design memorandum along with layout drawings of all components of the HM Works, as part of the entire project. • Preparation & submission for review / approval of the Contractor/Owner of design criteria, arrangement drawings and specifications of al HM Works. • Coordination of design of Hydro mechanical Works with design of Civil Works and Electro- mechanical Works. • Preparation & submission for review / approval of Contractor/Owner, of detailed design and calculations, Drawings, quality assurance plan specifications, installation, testing and commissioning schedules and operation and maintenance manuals for HM Works. • Preparation & submission for information of the Owner/Contractor, of manufacturers detailed specifications, sub assembly drawings and detailed fabrication drawings 4 Project completion • Furnishing of Input to Contractor for HM Works for Report Preparation and submission of Project Completion Report for the Project to the Owner, based on earlier & Ors. DSD Noell GMBH vs. Dy./Asst. CIT • 5 Liaison support for Design liaison support for the contractor, with the contractor, with the Owner in Faridabad, from the start of the Owner Subcontract and until commissioning of the last generating unit and completion of warranty / defect liability period, for obtaining necessary approval from owner. • Preparation of Monthly Reports on the progress of the HM Works for information of the Contractor/Owner. • To participate in co-ordination / progress review meetings between the members of the Consortium and the Owner on regular.

The ld. AR made submitted that assessee is only a sub-contractor for civil construction of dam carried out by HCC and that Hydro Electrical work is done by another party. Supplies are made by the assessee offshore ; payments received overseas ; designs are manufactured abroad and shipped from abroad ; designs are also ‘plant’ and hence monies received is for equipment ; & Ors. DSD Noell GMBH vs. Dy./Asst. CIT that the designs are used for own use and hence the provisions of section 9(1)(vii) of the Act are not applicable and that accordingly the ld AO was not justified in taxing the designs as Fee for Technical Services (FTS) ; designs are machine related supply and hence the same are to be looked along with the offshore supplies ; dominant purpose of the agreement is only supply of machinery ; that the designs cannot be used independently since they are tailor made to the equipment supplied ; the pith and substance of the agreement is only supply of plant and hence designs should be looked into as plant ; that no control over equipment happens in India as the title has passed from overseas ; that admittedly there is no PE at all in India for Asst Year 2011-12 ; that designs gets subsumed in the supply; 95% of consideration is received at the time of supply of machineries itself .

The ld. AR also placed on record the approval copy of Kishanganga Project by the Central Government vide approval dated 20.07.2007 as Additional Evidence in terms of Rule 29 of ITAT Rules before us. This approval letter dated 20.7.2007 enabled National Hydroelectric Power Corporation (NHPC) Limited to set up the Kishanganga Hydroelectric Project (3 * 110MW) in the Central Sector in Jammu & Kashmir at a total cost of Rs 2238.67 crores including IDC & FC Charges of Rs 165.12 crores based on November 2005 price levels. It was submitted that provisions of section 44BBB of the Act deals with the taxability of income in relation to such activities and that one of the conditions prescribed in section 44BBB of the Act is that the power project must be approved by the Central Government. The applicability of provisions of section 44BBB of the Act had been taken by the assessee vide Ground No. 9 and that similar ground was also taken before the ld. CIT(A). Since this approval papers could not be placed on record by the assessee before the lower authorities, it is now placed in the form of additional evidence. It was also submitted that this document in any case is available in public domain and that the same is placed on record only to assist the bench for better & Ors. DSD Noell GMBH vs. Dy./Asst. CIT appreciation of facts. The ld. DR before us did not raise any objections for admission of these additional evidences by the bench. Either way, the copy of sub-contract No. SC/100/KGHEP/004-1 dated 12.6.2009 between HCC and assessee for HM works excluding pressure shaft liners (off shore services) for Kishanganga Hydroelectric Project and copy of sub-contract No. SC/100/KGHEP/004-2 dated 12.6.2009 between HCC and assessee for HM works excluding pressure shaft liners (off shore supply) for Kishanganga Hydroelectric Project is already on record before us. In any case, we find that without this approval, the project per se could not have taken off and hence we deem this as only an additional document to support the transactions carried out by the assessee. Accordingly, the said document is taken on record for the purpose of adjudication without taking recourse to sending back to the file of the lower authorities.

The ld. AR also placed reliance on the decision of co-ordinate bench of Delhi Tribunal in the case of SMS Concast AG vs DDIT in dated 16.6.2023 which in his opinion, squarely covers the entire dispute before us. The ld. AR also placed reliance on the following decisions in support of his contentions:- a) Decision of Hon’ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd reported in 288 ITR 408 (SC) ; b) Decision of Hon’ble Jurisdictional High Court in the case of DIT vs LG Cables Ltd reported in 197 Taxman 100 (Del) ; c) Decision of Hon’ble Jurisdictional High Court in the case of Linde AG, Linde Engineering Division vs DIT reported in 365 ITR 1 (Del); d) Decision of Hon’ble Supreme Court in the case of Mahabir Commercial Co. Ltd vs CIT reported in 86 ITR 417 (SC); ITA No.3186/Del/2016 & Ors. DSD Noell GMBH vs. Dy./Asst. CIT e) Decision of Hon’ble Jurisdictional High Court in the case of National Petroleum Construction vs DIT reported in 66 taxmann.com 16 (Del); f) Decision of Hon’ble Jurisdictional High Court in the case of DIT vs Ericsson AB reported in 204 Taxman 192 (Del); g) Decision of Hon’ble Jurisdictional High Court in the case of CIT vs Mitsui Engineering reported in 123 Taxman 182 (Del) ; h) Decision of Hon’ble Supreme Court in the case of ONGC Ltd vs CIT reported in 376 ITR 306 (SC); i) Decision of Hon’ble Supreme Court in the case of CIT vs Hyundai Heavy Industries Co. Ltd reported in 291 ITR 482 (SC) j) Decision of Delhi Tribunal in the case of SMS Concast AG vs DDIT in ITA No. 1361/Del/2012 dated 16.6.2023

We have heard the rival submissions , perused the materials available on record and the case laws that were relied upon by the parties before us. We find that the issues to be decided in these appeals are as under:- a) Whether the amount received by the assessee under the contract for offshore supply of plant & equipment during the previous years' relevant to abovementioned assessment years, from HCC is chargeable to tax in India as per the provisions of the Act as well as under the India Germany Treaty? b) Whether the amount received from HCC under the contract for offshore services is chargeable to tax as per the provisions of the Act as well as under the India Germany Treaty?

It is not in dispute that during the relevant years, the assessee had supplied plant and equipment to HCC which were designed and manufactured Page 35 of 48 & Ors. DSD Noell GMBH vs. Dy./Asst. CIT outside India. The title to the said plant and equipment was duly passed on to the customer outside India on FOB basis. The consideration for such offshore supplies was also received outside India in foreign currency either through letter of credit or through bank transfer. All activities such as manufacturing, fabrication, designing etc. of plant & equipment has been undertaken outside India. The assessee in order to substantiate the fact that the transfer of title and risk had happened outside India had submitted the proof together with documentary evidences by enclosing the copy of invoices, bill of lading, shipping documents etc before the Ld. AO. On perusal of the contract for offshore supply of plant and equipment entered into by the assessee, we find that though the custom clearances shall be the responsibility of the assessee, however, all the plant & machinery and materials received shall remain absolute property of the owner and shall at all time open for inspection. The Ld. DR before us vehemently harped on the point that assessee had taken insurance for the said plant and equipment. In this regard , we find that as per Clause 8.4. of the Contract , HCC is also the co-insurer in the Insurance policy and Clause 8.7. thereon clearly specifies that plant and equipment shall remain absolute property of HCC. The Ld. DR further submitted that the title and custody of equipment passed only after successful commissioning of the plant and equipment at project site in India. We find that the Ld. AR before us had buttressed this argument of the revenue by stating that it is factually incorrect as separate agreement (onshore services agreement) has been entered for installation, erection, commissioning and supervision thereof at project site in India and consideration received separately for the same. We find that the Hon’ble Jurisdictional High Court had also addressed the very same argument of the revenue before us in the case of DIT vs LG Cables Ltd reported in 197 Taxman 100 (Del) by observing as under:-

We find that the lower authorities had made an observation in their orders that 100% supply of machinery is not preceded to the formation of Project Office in India which is inconclusive to hold that the offshore supply is taxable in India. This has to be looked into from the size of the project undertaken by the assessee by appreciating the fact that several machineries were supplied at different point of time from outside India and for all the machineries that were supplied, the title had been transferred outside India. With regard to the Defects Liability Clause addressed by the Ld. AO and consequentially conclude that the ownership in the Plant and Equipment is transferred subsequent to the Defects Liability Period, it had to be understood in a practical manner that the Defects Liability Clause would be incorporated in every contract to take care of a contingent event. This has got nothing to do with the passing of title to the equipment. We find that this aspect is also addressed by the Hon’ble Jurisdictional High Court in the case of DIT vs LG Cables Ltd reported in 197 Taxman 100 (Del) by observing as under:-

Our aforesaid observations are further fortified by the decision of the Hon’ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Limited reported in 288 ITR 408 (SC), wherein, it was held that where the property in respect of the goods is transferred to the buyer outside India, the sale of such goods has to be regarded as having completed outside the taxable territories of India and hence, the income from such sale is not liable to tax in India. Similar view is also expressed by the Hon’ble Jurisdictional & Ors. DSD Noell GMBH vs. Dy./Asst. CIT High Court in the case of National Petroleum Construction vs DIT reported in 66 taxmann.com 16 (Del).

In view of the aforesaid observations and respectfully following the various judicial precedents relied upon hereinabove, we hold that no part of consideration received outside India for offshore supplies of plant and equipment and spares could be deemed to accrue or arise in India as per section 9 of the Act in the hands of the assessee. Admittedly , there is no existence of any Permanent Establishment (PE) of the assessee in India. Such consideration would only be in the nature of business income not attributable to PE in India and hence not taxable under Article 5 read with Article 7 of the India Germany DTAA. In this regard, it would also be relevant to reproduce the provisions of Protocol of India Germany Treaty for better appreciation of law :-

With reference to Article 7 (a) in the determination of the profits of a building site or construction, assembly or installation project there shall be attributed to that permanent establishment in the Contracting State in which the permanent establishment is situated only the profits resulting from the activities of the permanent establishment as such. If machinery or equipment is delivered from the head office or another permanent establishment of the enterprise (situated outside that Contracting State) or a third person (situated outside the Contracting State) in connection with those activities or independently therefrom there shall not be attributed to the profits of the building site or construction, assembly or installation project the value of such deliveries. Page 39 of 48 & Ors. DSD Noell GMBH vs. Dy./Asst. CIT 17. Accordingly, there is no case to treat the receipt of such consideration for offshore supplies of equipment as income taxable in India. Hence we direct the Ld. AO to delete the addition made on account of consideration received for offshore supplies of Plant and Equipment outside India. The grounds raised in this regard by the assessee are allowed for various years and accordingly, the issue number 1 framed hereinabove by us is decided in favour of the assessee.

It is not in dispute that the assessee indeed had supplied offshore drawings and designs together with the supply of plant and equipment. We find that the Contract for offshore services and the Contract for the offshore supply of Plant and Equipment were entered on the same date i.e. 12.06.2009 and are inextricably connected because the supply cannot be made without the drawings. Admittedly, the drawings and designs could not be utilised by HCC to get the manufacturing of plant from another manufacturer. The drawings and designs made by the assessee are tailor made to suit the requirements of the Plant and equipment supplied by the assessee. We find that the preamble in the offshore services contract specifically defines the scope of total services to be rendered by the assessee. For the sake of convenience, the Preamble to the offshore services contract is reproduced hereunder:- & Ors. DSD Noell GMBH vs. Dy./Asst. CIT Preamble This Subcontract Agreement for “Planning, Design, & Engineering of Hvdro Mechanical Plant & Machinery excluding Pressure Shaft Steel Liners (hereinafter referred as “HM Works”) for Kishanganga Hydroelectric Project of 330MW (3x110MW) in J&K, India is made and entered on this day of 12 June 2009.

From the abovementioned scope of work and Preamble, it is evident that offshore service contract primarily involves preparation and supply of drawings and design for imported plant & equipment and thus is inextricably linked with the offshore supply of plant & equipment. Considering the nature of work undertaken by the assessee as per the Contract, in our considered opinion, the drawings and design as supplied are inextricably linked with the plant and equipment supplied by the assessee. We find that the similar issue had been addressed by the Hon’ble Jurisdictional High Court in the case of Linde AG, Linde Engineering Division vs DIT reported in 365 ITR 1 (Del) wherein it was held that if design and engineering is inextricably linked with the manufacture and fabrication of the material and equipment to be supplied from overseas, and form an integral part of the said supply, then the services rendered would not be amenable to tax as Fees for Technical Services. & Ors. DSD Noell GMBH vs. Dy./Asst. CIT 23. We find that the lower authorities had not disputed the position that the entire work related to the designs was carried out outside India and that the ownership in such designs was passed outside India. The lower authorities had relied on the provisions of section 9(1 )(vii) of the Act as well as Article 12 of the DTAA to come to the conclusion that the consideration received by the assessee is in the nature of fees for technical services and, therefore, the amount would be chargeable to tax in India on a gross basis under both the Act as well as the DTAA. In coming to this conclusion, the lower authorities had relied on the judgment of the Hon’ble Karnataka High Court in AEG Aktiengesllschaft vs. CIT reported in 267 ITR 209 (Kar). This decision was also heavily relied upon by the Ld. DR before us. In this regard, we find that the Hon’ble Jurisdictional High Court in case of Linde AG, Linde Engineering Division vs. DIT reported in 365 ITR 1 (Del) had considered the very same issue and the decision of the Hon’ble Karnataka High Court is contrary to the decision of Hon’ble Jurisdictional High Court. In any case, the decision of the Hon’ble Jurisdictional High Court is binding on this Tribunal. Moreover, the Hon’ble Karnataka High Court in case of AEG (supra) did not allow that assessee to make an argument that design and engineering should be treated akin to plant and machinery as this was not the case pleaded by that assessee before their Assessing Officer. In this regard, the observations made by the Hon’ble Karnataka High Court in para 11 in case of AEG (supra) would be relevant as under:-

Further, we find that the Co-ordinate Bench of Delhi Tribunal in the case of SMS Concast AG vs DDIT in dated 16.6.2023 also observed that in so far as the decision of the Hon’ble Karnataka High Court in ITA No.3186/Del/2016 & Ors. DSD Noell GMBH vs. Dy./Asst. CIT AEG Aktiengesllshaft Vs. CIT (supra) is concerned, in view of the ratio laid down by the Hon’ble Jurisdictional High Court in case of Linde Engineering Division Vs. DIT (supra), there is no need for much deliberation on the said decision. We find that the issue in dispute is squarely covered by the decision of the Co-ordinate Bench of Delhi Tribunal in the case of SMS Concast AG referred supra, wherein it has been held that supply of drawings and designs inextricably linked to sale and supply of equipment cannot be taxed in India as FTS. It was observed by the Tribual in SMS Concast AG (supra) that the supply of drawing and design could not be considered on standalone basis as the purchaser could not have utilized such drawings and designs without the supply of plant and equipment. It was further concluded that where offshore supply of plant and equipment are treated as not taxable in India, the supply of drawings and designs inextricably linked to such plant and equipment had to be considered as non-taxable in India, being part of supply of plant and equipment. Moreover, the decision of SMS Concast AG supra had also considered the aspect of entering separate contracts for supply of equipment and offshore services but the same had been executed on the very same date.

We find that the Ld. DR argued that the value of contract for offshore services is more than the contract value of offshore supply of plant and equipment. This was buttressed by the Ld. AR by submitting that the setting up of HM works for the power project mainly involve supply of gates, stop log equipment, control panel, automatic reservoir monitoring and control system, remote control system, cables, de-icing / heating arrangements etc. The Ld. AR before us submitted that the equipment supplied by the assessee vis a vis the complete plant for power project may not be sizeable, however the drawings and designs to be supplied by the assessee is not only required for the manufacture of such equipment supplied but also to integrate the same & Ors. DSD Noell GMBH vs. Dy./Asst. CIT with the entire plant. The importance of drawings and design is increased with the fact that functioning of the equipment supplied by the assessee in an integrated manner is of paramount importance for the proper functioning of entire plant & machinery used to set up the Kishanganga project. Owing to such facts, the drawings and designs have a higher monetary value than the offshore supply of plant & equipment.

Further we find that the dominant object of the contract entered by the assessee with HCC was to supply a plant manufactured according to the designs developed, then, even though the obligation to carry out the designs may be under a separate contract of same date and a separate consideration is mentioned therein, the character of the receipt must be that of a sale price for the supply of the equipment. Reliance in this regard has been rightly placed by the Ld. AR on the decision of the Hon’ble Supreme Court in the case of ONGC vs CIT reported in 376 ITR 306 (SC), wherein it was held that for determining the nature and taxability, the pith and substance, the dominant purpose of the agreement under which payment is to be made, is to be seen.

In view of the above observations, it could be safely concluded that 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 cannot be characterized as FTS.

We find that the Ld. AR fairly addressed the taxability of offshore designs and drawings in the event of existence of a Permanent Establishment (PE) in India on without prejudice basis. The Ld. AR submitted that even assuming the consideration is to be characterized as FTS, then, also, the amount would not be chargeable to tax in India having regard to the provisions of Article 12 and Article 7 of the DTAA. From AY 2012-13 onwards, the activities undertaken by the assessee in India has resulted in the constitution of & Ors. DSD Noell GMBH vs. Dy./Asst. CIT deemed PE in terms of Article 5(2)(i) of the DTAA. The Ld. AR submitted that once it is undisputed that there exists a PE, then, having regard to the provisions of paragraph 6 of Article 12, it would be clear that the provisions of Article 12 would have no application to bring to tax the consideration received from the sale of the designs and plant and such consideration could only be brought to tax in terms of Article 7 of the DTAA. The Ld. AR submitted that undoubtedly, paragraph 1 of Article 7 would get attracted because the assessee does have a PE in India but the mere existence of the PE is not sufficient to bring to tax the consideration of the nature of Business Profits. Paragraph 1 of Article 7 postulates that it is only so much of the profits as are attributable to the permanent establishment that could be brought to tax. We find that in the present case, the entire work of preparing the designs and drawings is carried out outside India, the question of bringing to tax any part of the consideration in accordance with Article 7 cannot be sustained. This aspect of the matter is concluded by the judgment of the Hon’ble Supreme Court in the case of Ishikawajima-Harima Heavy Industry Ltd vs DIT reported in 288 ITR 408 (SC), wherein the Hon’ble Apex Court laid down the principle that if the permanent establishment had no role to play in the rendering of the offshore services, then, in that event, the consideration for the services cannot be brought to tax in terms of Article 7 of the DTAA. Similar views were expressed by the Hon’ble Supreme Court in the case of CIT vs Hyundai Heavy Industries Co. Ltd reported in 291 ITR 482 (SC). Further, we find that as per the Protocol to the DTAA, when technical services were rendered outside India, the consideration received thereon shall not be attributable to the PE in India. The relevant text of Protocol 1(b) is reproduced below for the sake of convenience:-

In view of the aforesaid observations, it could be safely concluded that in the facts and circumstances of the instant case, the offshore services that primarily involve offshore supply of drawings and designs are inextricably linked with the offshore supply of Plant and equipment and accordingly, the receipts from offshore services does not give rise to any income accruing or arising in India and therefore not taxable under the Act. Further, such consideration qualifies as business profits of the company in terms of the provisions of Article 7 of the DTAA, which cannot be attributed to India for computing taxable income in India. Hence, income arising therefrom should be treated as non-taxable in India. Accordingly, we have no hesitation in directing the Ld. AO to delete the addition made on account of FTS in respect of offshore designs and drawings for the various years under consideration.

In the result, the appeals of the assessee are allowed. Order pronounced in the open court on 21st November, 2023.