2017 (9) TMI 1822 - AT - Income Tax

ITAT Decision: Net Profit Rate, Business Income vs. Royalty, Taxable Profits, Interest, Penalty

Outotec Gmbh Versus D.C.I.T., International Taxation-2 (1), Kolkata

The ITAT upheld the AO's application of a 27.5% net profit rate for supervisory services, determined that income from the sale of designs and drawings ... Increasing the net profit rate to 27.5% on the gross revenue from supervisory services against the net profit rate of 15.10% applied by the assessee - HELD THAT:- This issue is covered by the order of the ITAT in the assessee’s own case for the A.Y.2010-11 and A.Y.2011-12 [2015 (6) TMI 609 - ITAT KOLKATA] . The Tribunal upheld the net profit rate of 27.5% as determined by the Hon’ble ITSC. Respectfully following the decision of the co-ordinate Bench of the ITAT, we dismiss the Ground No.2 of the assessee. Income accrued in India - Sale of designs and drawings - whether is not in the nature of sale of product and the income earned from such sale is taxable under Article 12 of India-Germany DTAA and the income earned by the appellant from sale of designs and drawings is taxable as Fees for Technical Services as per Article 12 of the DTAA - HELD THAT:- In assessee company`s own case in assessment years 2007-08 to 2011-12, whereby the issue was decided in favour of the assessee company as set out above, therefore we hold that the sale of designs and drawings is sale of a copyrighted article and therefore, income earned there from is in the nature of business income. Hence, this ground of the assessee is allowed. Assessment of income with regard to the sale of equipment - AO had rejected the contentions of the assessee and held that a profit percentage of 10%, would be a reasonable percentage - HELD THAT:- As decided in assessee' own case [2015 (6) TMI 609 - ITAT KOLKATA] after considering the provisions of Sales of Goods Act held that such acceptance tests are merely in the nature of warranty provisions. Even there is no PE for sale of equipment in view of the decision of Hon'ble Supreme Court in the case of Hyundai Heavy Industries, [2007 (5) TMI 196 - SUPREME COURT] and in addition to this, there is no concept called sale PE under DTAA. In light of the facts and legal position, we hold that the profit arising to the assessee from sale of equipment is not taxable in India. This issue of assessee’s appeal is allowed Issues Involved:1. Income from Supervisory Services2. Taxability of Income from Supply of Design and Drawings3. Levy of Interest under Sections 234A and 234B of the Income Tax Act4. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act5. Revenue Appeal on Sale of EquipmentDetailed Analysis:1. Income from Supervisory Services:The primary issue was the increase in the net profit rate to 27.5% on gross revenue from supervisory services against the 15.10% applied by the assessee. The assessee admitted a supervisory PE in India but did not maintain separate books for supervisory services. The AO applied a 27.5% net profit rate based on previous years' findings by the ITSC. The DRP upheld this, and the ITAT dismissed the assessee's appeal, citing consistency with past decisions. The Tribunal noted that similar facts in previous years justified the 27.5% rate, aligning with the ITSC's ruling.2. Taxability of Income from Supply of Design and Drawings:The AO categorized the income from the sale of designs and drawings as 'Royalty' under Article 12 of the India-Germany DTAA, treating it as Fees for Technical Services (FTS). The DRP upheld this categorization. However, the ITAT sided with the assessee, referencing prior rulings in the assessee's favor. The Tribunal concluded that the sale of designs and drawings constituted the sale of a copyrighted article, thus qualifying as business income, not royalty or FTS. This decision was consistent with previous ITAT rulings for assessment years 2005-06 to 2007-08, 2010-11, and 2011-12.3. Levy of Interest under Sections 234A and 234B of the Income Tax Act:The assessee challenged the computation of interest under Sections 234A and 234B, arguing it was consequential. The ITAT noted that these grounds were consequential and required no separate adjudication, directing the AO to recompute interest accordingly.4. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act:The assessee contested the initiation of penalty proceedings under Section 271(1)(c). The ITAT deemed these grounds consequential and did not require separate adjudication.5. Revenue Appeal on Sale of Equipment:The Revenue appealed against the DRP's deletion of additions related to the sale of equipment. The AO had attributed 10% profit from the sale of equipment to the Indian PE. The DRP, referencing past ITAT decisions, ruled in favor of the assessee, stating that the sale of equipment was concluded outside India, and thus, profits were not taxable in India. The ITAT upheld this decision, confirming that the sale was on a principal-to-principal basis, with no PE in India for the sale of equipment. The Tribunal dismissed the Revenue's appeal, aligning with previous rulings for assessment years 2004-05 to 2007-08, 2010-11, and 2011-12.Conclusion:The ITAT upheld the AO's application of a 27.5% net profit rate for supervisory services, ruled that income from the sale of designs and drawings was business income, not royalty or FTS, and dismissed the Revenue's appeal on the sale of equipment, confirming that profits from such sales were not taxable in India. The issues of interest computation and penalty proceedings were deemed consequential and required no separate adjudication.