ITAT Rules Offshore Supply of Equipment and Designs Not Taxable in India
Tribunal Allows Appeal by SMS Group GmbH, Citing India-Germany Tax Treaty
Ruling Strengthens Clarity on Offshore Transactions and Cross-Border Taxation
By Our Legal Reporter
New Delhi: January 09, 2026:
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) delivered a landmark judgment in favour of SMS Group GmbH, a German multinational specializing in metallurgical plant engineering. The tribunal held that consideration received for offshore supply of equipment, drawings, and designs cannot be taxed in India, as the supplies were made outside Indian territory and were not linked to any permanent establishment (PE) in India.
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This ruling is significant for multinational corporations engaged in cross-border projects, as it clarifies the tax treatment of offshore supplies under the India-Germany Double Taxation Avoidance Agreement (DTAA).
Case Background
- Company: SMS Group GmbH, tax resident of Germany.
- Business: Supplies metallurgical equipment, plant designs, and technical drawings to Indian companies.
- Assessment Years: 2017–18, 2018–19, 2020–21, 2021–22, and 2022–23.
- Tax Authority’s Position: The Assessing Officer sought to tax receipts from offshore supplies, treating them as fees for technical services (FTS) or business income arising in India.
- Company’s Argument: Supplies were made outside India; payments were linked to offshore contracts and not attributable to any Indian PE.
- Tribunal’s Decision: Offshore supplies are not taxable in India; only services rendered within India can be taxed.
Tribunal’s Observations
The ITAT bench, comprising Shri M. Balaganesh (Accountant Member) and Shri Vimal Kumar (Judicial Member), made the following key observations:
- Offshore Supplies: Consideration for equipment, drawings, and designs supplied from Germany does not accrue or arise in India.
- No PE in India: Since SMS Group GmbH had no permanent establishment in India for these transactions, business profits cannot be taxed under Article 7 of the DTAA.
- Not FTS: Offshore supplies linked to equipment sale are not “fees for technical services” under Section 9(1)(vii) of the Income Tax Act.
- DTAA Protection: The India-Germany DTAA overrides domestic law, ensuring that offshore supplies remain outside India’s tax jurisdiction.
Why This Ruling Matters
- Cross-Border Clarity: Provides certainty to foreign companies supplying equipment and designs to India.
- Investor Confidence: Encourages multinational corporations to engage in Indian projects without fear of double taxation.
- Legal Precedent: Reinforces earlier rulings where offshore supplies were held non-taxable in India.
- Ease of Doing Business: Aligns India’s tax regime with global practices, supporting its ambition to attract foreign investment.
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Impact on Multinational Corporations
- Engineering & Infrastructure Firms: Companies supplying machinery, designs, or technical drawings from abroad gain clarity on tax liability.
- Technology Providers: IT and software firms offering offshore design services benefit from reduced litigation risk.
- Joint Ventures: Indian companies partnering with foreign firms can structure contracts more efficiently.
Expert Opinions
- Tax Analysts: Welcome the ruling as a reaffirmation of India’s commitment to DTAA principles.
- Corporate Lawyers: Stress that careful contract drafting is essential to separate offshore supplies from onshore services.
- Industry Leaders: Believe the judgment will boost confidence among foreign suppliers in sectors like steel, power, and infrastructure.
Broader Context
India has often witnessed disputes over the taxability of offshore supplies. While the Supreme Court and ITAT have consistently held that offshore supplies are not taxable unless linked to a PE in India, tax authorities continue to raise demands.
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This ruling aligns with global tax norms and strengthens India’s position as a reliable jurisdiction for cross-border transactions.
Conclusion
The ITAT’s decision in favour of SMS Group GmbH is a landmark ruling that clarifies the tax treatment of offshore supplies. By holding that consideration for equipment, drawings, and designs supplied from abroad cannot be taxed in India, the tribunal has reinforced the principle of territorial taxation and DTAA supremacy.
For multinational corporations, the ruling provides much-needed certainty, reduces litigation risk, and strengthens India’s reputation as a business-friendly destination.
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