Kolkata Bench of Tribunal in the case of Outotec GmbH v. DDIT : ITA No. 431 & 432 of 2014 & 283 of 2015 (Kol) dealt with the issue as to whether the sale of equipment, designs and drawings would be taxable under the provisions of the India-Germany DTAA and the IT Act. In that case, the assessee, a tax resident of Germany, was engaged in the business of providing innovative and environmentally sound solutions to customers in metals and minerals processing industries. The assessing officer framed draft proposed assessment order under Section 143(3) read with Section 144C of the Act proposing to assess the income from sale of equipment as taxable in India on the ground that sale of equipment to Indian companies was concluded in India and accordingly, attributed 10% profits from sale of equipment to assessee's supervisory PE in India. The assessing officer also held that income earned by the assessee from sale of designs and drawings was taxable as “royalty” under Article 12(3) of the DTAA read with the provisions of Section 9(1)(vi) of the IT Act and was not in the nature of sale of product. Aggrieved assessee carried the matter to DRP. DRP upheld the order of the assessing officer.
The assessee filed an appeal before the Tribunal. The Tribunal, after examining the facts of the case and judicial precedents held that no portion of receipts from sale of equipment can be taxed in India either under the provisions of the Act or DTAA since – (i) all the activities relating to designing, fabrication and manufacturing took place outside India, (ii) the sale of equipment also took place outside India on principal to principal basis, (iii) Indian customers were independent parties who made purchases on their own account and hence, the transaction was at arm’s length,(iv) the consideration was also received outside India in foreign currency out of Letter of Credit guaranteed by bank upon FOB delivery; (v) the contract provided for delivery of equipment on FOB Foreign Port of Shipment through irrevocable letter of credit which makes it clear that even if the ship does not sail or deliver the goods to the destination; (vi) even the customer’s inspection for equipment took place outside India, and (vii) the assessee entered into either separate contracts each with its own scope of supply or service with separate consideration or single contract with separate scope of supply and services as well as separate consideration.
In relation to the issue as to why attribution of profits from sale of equipment should not be made, the Tribunal observed that since the clauses of acceptance tests and liquidated damages are part of normal commercial arrangements generally agreed in common trade parlance and partake the character of trade warranties, the same cannot be construed to mean that the acceptance of goods by the customer has taken place in India and any portion from sale of equipment can be taxed in India.
The Tribunal also observed that majority of the projects of the assessee did not have a supervisory PE in India under Article 5(2) (i) of the DTAA since the said work had been awarded by the customer to Outotec (India) Private Limited and in some projects the supervisory services had not commenced. Since there was no supervisory PE in India for the said projects, the question of any attribution being made for supply of equipment to the supervisory PE did not arise. With regard to the issue regarding taxation of income earned from supply of designs and drawings in India, the Tribunal on perusal of the clauses of contract and the sample copies of airway bill noticed that the entire work relating to designs and drawings was done outside the territory of India; sale was affected outside India and the consideration was also received outside India in foreign currency. In view thereof and the reasoning mentioned above with regard to income from sale of equipment, the Tribunal held that the business income earned by the assessee from the sale of designs and drawings was also not liable to tax in India both under the provisions of the Act and DTAA
Comments: The Tribunal ruling has reiterated that when the title in an equipment is transferred outside India the sale of equipment cannot be taxed in India merely because acceptance tests post installation of equipment was carried out in India. The decision also provides guidance as to taxability of designs in line with the judicial precedents, like, Ishikawajma–Harima Heavy Industries Ltd. vs DIT (2007) 288 ITR 408 (SC) and CIT and Anr vs. Hyundai Heavy Industries Co. Ltd. (2007) 291 ITR 482(SC).