Consideration for Off-shore Supply of Equipment and Designs cannot Be Taxed in India: ITAT allows Appeal by SMS Group GmbH [Read Order]

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that consideration received for offshore supply of plant, equipment, drawings and designs by a foreign company cannot be taxed in India when the entire transaction is concluded outside the country and no part of the income is attributable to India.

SMS Group GmbH, a tax resident of Germany, appealed against orders passed under Section 143(3) read with Section 144C ofthe Income Tax Act, 1961, for multiple assessment years ranging from 2017-18 to 2022-23. The assessee was engaged in the business of supplying metallurgical plants and equipment, along with drawings, designs and related engineering documentation, to Indian customers. It also rendered supervisory services for erection and commissioning of the equipment at project sites in India.

During the relevant years, the assessee did not offer to tax receipts arising from offshore supply on the ground that the design, manufacture, fabrication and transfer of title took place outside India, with payments also received outside India. However, receipts from technical services and supervisory activities exceeding the threshold were offered to tax.

But the Assessing Officer proceeded to tax not only supervisory service income but also profits from offshore supply of equipment and designs, attributing a portion of global profits to the Indian permanent establishment. The Dispute Resolution Panel upheld this view, leading to the appeals before the Tribunal.

The Tribunal, comprising M. Balaganesh (Accountant Member) and Vimal Kumar (Judicial Member), noted that identical issues had consistently come up in assessee’s own case for earlier assessment years and decided in its favour by coordinate benches. Relying on those decisions, the Tribunal observed that the supply of equipment and the accompanying drawings and designs were integral to offshore sale contracts and could not be separated to treat the design component as fees for technical services.

It was emphasised that the activities relating to offshore supply, including design, manufacture, fabrication, transfer of title and receipt of consideration, took place outside India. In such circumstances, the income could not be said to accrue or arise in India under Sections 5(2) or 9(1)(i) of the Act, nor could it be attributed to the supervision of permanent establishment under Article 7 of the India-Germany Double Taxation Avoidance Agreement (DTAA).

Accordingly, all the appeals of the assessee were partly allowed.

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