Kolkata Tribunal rules on offshore supply of equipment, designs and drawings (Outotec)

We are pleased to release a Tax Alert which summarizes a recent decision of Kolkata Income Tax Appellate Tribunal (Tribunal) in the case of Outotec GmbH (Taxpayer) on the issue whether the sale of equipment, designs and drawings can be regarded as taxable under the provisions of the India-Germany Double Taxation Avoidance Agreement (DTAA) and Indian Tax Laws (ITL). The Tribunal, based on the facts, ruled that income from the sale of equipment, the property in which stood transferred outside India, will not be taxable in India merely because some of the acceptance tests for the installation of equipment were carried out in India. Further, on facts, drawings and designs supplied by the Taxpayer to the Indian customers for the purpose of setting up of plants, were not characterized as “Royalty” but regarded as sale of product outside India and, hence, not taxable under the provisions of the DTAA and the ITL.

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 some of the tests for the installation of equipment have been carried out in India. Furthermore, the decision also provides guidance on taxability of designs and reiterates that a restriction on the intellectual property in the designs and drawings does not change the character of the transaction from sale of product to the use of license/know-how. One may note that the Tribunal has not looked into the aspect of whether the supply of designs and drawings could be regarded as a service contract and, hence, one may evaluate the same based on the facts of the case.