ITAT Holds Offshore Supply of Drawings, Designs and Equipment by German Company Not Taxable in India

The assessee, SMS Group GmbH, a tax resident of Germany, was engaged in supplying plant and equipment, drawings and designs, and rendering supervisory and technical services to Indian metallurgical companies. For Assessment Years 2017-18, 2018-19, 2020-21, 2021-22 and 2022-23, the Assessing Officer, following directions of the DRP, sought to tax receipts from offshore supply of drawings, designs and equipment in India, treating them either as fees for technical services (FTS) or as business profits attributable to a Permanent Establishment (PE).

The assessee contended that design, manufacture, sale and transfer of title in equipment, along with drawings and designs, took place entirely outside India and were inextricably linked to offshore supply contracts. The assessee had already offered supervisory services and certain technical services to tax wherever applicable and disputed the taxability of offshore supplies.

Issue Before Tribunal: Whether consideration received by a German company for offshore supply of drawings, designs and equipment, linked to supply contracts executed and performed outside India, is taxable in India as fees for technical services or as business profits attributable to a PE.

ITAT’s Decision: The ITAT ruled largely in favour of the assessee. The Tribunal held that consideration received for offshore supply of drawings and designs, being inextricably linked to offshore supply of plant and equipment, could not be taxed in India as fees for technical services or business profits. The Tribunal reiterated that where design and engineering activities are integral to the offshore manufacture and sale of equipment, such receipts retain the character of offshore business profits not taxable in India in the absence of attribution under the treaty. Issues relating to levy of interest under Sections 234A, 234B and 234C were held to be consequential or subject to verification. Penalty initiation was held to be premature.

Thus, the assessee’s appeals for AYs 2017-18, 2018-19, 2020-21, and 2021-22 were partly allowed, granting substantial relief on offshore supply issues while sustaining limited additions on supervisory services.

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