India: Fees For Supply Of Design And Engineering Drawings Not Be Subjected To Income Tax In Case Preparation And Delivery Takes Place Outside India

It has always been an issue under surveillance by the Income Tax Authorities in India to catch hold of transactions which amount to income raised, received or being accrued in India. Section 9 of the Income Tax Act, 1961 deals with the issue of 'arising or accruing or receiving of income in India' resulting in the taxation of such income in India.

Furthermore, Section 9(1) (vii) specifies that fees for technical services are deemed to accrue or arise in India, which includes fees for technical services received from a resident.

Here, at this juncture it is important to understand what exactly the term means. The term "Fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personal) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". Furthermore, for a particular stream of income to be characterized as "Fees for technical service", it is necessary that some sort of "managerial", "technical" or consultancy service have been rendered for a consideration. Here, it shall be important to mention that the word technical would have to be construed as a service involving the human element.

In the recent case of Director of Income Tax [International Taxation] Vs. M/s Nisso Lwai Corporation, Japan reported in I.T.A No. 612/2013, the Assessee company i.e Nisso Japan had provided design and engineering services, manufacture, delivery, technical assistance through supervision of erection and commissioning etc., to establish compressor house-I for M/s RINL. There was a single issue which was raised as to whether the fees for design and engineering documentation received by the Assessee Company is taxable in India.

The facts of the case which are important to be taken note of were that the payments were made by M/s RINL separately for each of the services/equipments provided/supplied by the Assessee. And these payments also included the payments made towards the supply of design and engineering drawings.

Contentions made by the Assessee:

According to the Assessee the payments received by them were not taxable under the Indian Income tax Act as the said transaction was a transaction of sale and had taken place outside India. In support of the contention of the Assessee that the supply of the design and drawings documents have taken place outside India, they reproduced the relevant clauses of the agreement entered into by them with RINL which read as follows:

"a) 1.2 Supply of drawing and documentation: The Prime Contractor shall supply the drawings and documentation as detailed in Article-11 of the Purchaser's General Conditions of Contract.

b) 2.4.1. The Prime Contractor shall transfer, deliver and impart the designs and drawing to the representative designated for that purpose by Purchaser in Japan or at the request of the Purchaser by transmitting the same either by surface mail or air mail or through a carrier in which case the post office or such carrier in Japan shall be the agent of the Purchaser.

c) Property in the designs and drawings shall vest with the Purchaser on the same being transferred, delivered and imparted to the representative of the Purchaser in Japan or when the packet containing the design and drawings is delivered either to the post office or to a carrier designated by the Purchaser in Japan as the case may be."

It was furthermore submitted by the Assessee that design and drawing constitutes a PLANT and the payments have been made for outright purchase of design and engineering drawing , and hence it cannot be taken as a fee for technical services as provided u/s 9(1)(vii) of the Act.

Observations by the Hon'ble High Court:

The Hon'ble High Court of Andhra Pradesh observed that there was no dispute that the supply had taken place in Japan and also that the clauses in the agreement were very clear on the fact that the preparation and delivery of design and drawings had to take place in Japan.

On the basis of the facts and the clauses of the contract, the Hon'ble High Court took a view that the amount received by the Assessee for supply of design and engineering drawings was in the nature of the plant and since the preparation and delivery had taken place outside the Indian territories, the same was not subject to tax in India.

The Hon'ble Court while observing the view also relied on the judgment of the Hon'ble Supreme Court of India in the case of Ishikawajimma Harima Heavy Industries Ltd.' Vs. Dir. of IT reported in IT [288 ITR 408] wherein it was held that "in the case of offshore supply of goods, if all the parts of the transaction, i.e the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India. In the instant case also, all the parts of the transactions have taken place outside the Indian soil and hence the impugned transaction falls outside the purview of Indian taxation."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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