Outotec GmbH vs. DDIT [2015] 58 taxmann.com 232 (Kolkata – Trib.) A.Ys.: 2010-11, 2011-12, Dated: June 16, 2015

Facts:
The taxpayer was a German Company, engaged in the business of providing specialised solutions to customers in metals and minerals processing industry. During the relevant tax year, the taxpayer supplied equipment to several Indian companies. The equipment supplied by the taxpayer was to be a part of the overall plant to be installed by customers. Additionally, in relation to certain projects undertaken in India, the taxpayer constituted a supervisory permanent establishment (PE), unrelated to the supply contract. The equipment was designed outside India and was sourced by the taxpayer from vendors outside India. The taxpayer was not involved in the manufacturing of equipment.

The equipment was sold, and title ownership to the customers was transferred, outside India. In case of non- fulfilment of the performance guarantee, customer was entitled only to liquidated damages.

The taxpayer also sold basic engineering designs and drawings for installation of the equipment/plant.

The tax authority contended that since portion of purchase price was payable only upon successful completion of acceptance tests in India, part of the sale price was taxable in India. It further regarded payment towards basic engineering designs as royalty for use rejecting the contention of the taxpayer that it was a sale of copyrighted article.

Held:

• Since all the activities relating to designing, fabrication and manufacturing as also sale of equipment took place outside India and since title/ownership in the equipment stood also transferred outside India; such offshore transaction was not taxable in India.
• The acceptance tests are part of normal commercial arrangements and partake the character of trade warranties. The balance payment of contract price, to be received by the taxpayer upon completion of such tests is a deferred payment in the nature of warranty and cannot be equated with transfer of goods in India.
• Breach of warranty could result in payment of damages and does not by itself mean that the property/title in the goods did not pass to buyer outside India. The clause of acceptance tests and liquidated damages were also in the nature of warranty provision.
• The basic engineering packages sold by the taxpayer are largely designed on the basis of standard technologies available with it and modified based on customer’s requirement.
• Since Indian customers were not using designs and drawings for any commercial exploitation, it involved use of copyrighted article rather than use of a copyright to be regarded as royalty.
• In absence of any connection between the supervisory PE of the taxpayer in India and the offshore supply activity, the consideration for offshore supply cannot be regarded as attributable to the PE in India.