2020 (3) TMI 43 - AT - Income Tax

Tribunal upholds Assessment Order on contract nature, Permanent Establishment, profit attribution, and interest charges.

The Tribunal dismissed the appeal, upholding the Assessment Order's findings on the composite nature of contracts, the existence and role of the Permanent ... Income accrued in India - income in respect of “off-shore supply” of equipment - DTAA between India and Austria - (DTAA) between India and Austria - fixed place of business in India as per Article 5(2) - offshore supply of machinery - whether the two contracts constitute a composite contract as held by the Assessing Officer or whether the machinery supply contract was only offshore supply, independent of contract of supervision of erection of the machinery - HELD THAT:- The machinery components have been imported in India to commission a custom-made plant for the buyer and those imported goods may not be used for any other customer. The assessee has been entrusted the work of commissioning of the TPD plant in view of the expertise in this field. The service contract has a provision of termination clause in case of failure of performance and return of machinery supplied under supply contract and refund of money. All these terms make it clear that both the supply and service contract are intrinsically linked and not severable. It was not possible for the buyer to assemble or erect the plant from any other contractor without the supervision of the assessee and therefore, the buyer made its intention of getting the goods in a deliverable state of plant. The artificial division of composite contract into supply and service may be on paper but the conduct of the parties and terms and condition of the contract manifest that in substance it was a composite contract. The accounting practice followed for recognizing of revenue from service on completion of the project also support the intention of the parties to treat the erection of the plant as composite project. All the above terms and conditions of the contract cited by the Ld. DR, when read together clearly bring out the real nature and essence of both the contracts as part of one composite and turnkey works contract. Thus we hold that the Supply & Service contracts represent a single, composite turnkey work contract. Income deemed to accrue or arise in India as per Section 9(1)(i) - whether the income from supply agreement is taxable in India? - In the instant case, the transit insurance of goods has been arranged by the assessee at its own cost from the ware house of supplier to the warehouse of the purchaser, which means the risk in case of damage of goods during transit remained with the supplier. In such a scenario, the article 7.1 that ownership and risk would be transferred to the purchaser, remained only on paper and not acted upon. In the instant case the parts of the machineries have been manufactured outside India but they have not been brought in deliverable state in India as per supply agreement and thus sale cannot be said as effected outside India. In the case of Ericson AB [2011 (12) TMI 91 - DELHI HIGH COURT] the contract of erection was executed by subsidiary company and thus the Hon’ble court held that both the entity perform their own independent obligation, receive appropriate separate remuneration and are technically not dependent on each other. But in the instant case, both the contract of supply and supervision of installation or commissioning of plant has been executed/supervised by the one party, i.e., the assessee. In the instant case, the assessee has not provided the details of marketing activities or negotiation of the contract to the Assessing Officer despite repeated requests and thus, the decision relied upon is any way not assistance to the assessee. The assessee has supplied parts of goods by way of invoices raised,which have further been assembled in India to bring them in deliverable state as agreed in the supply agreement between the assessee and buyer , and thus property in goods have been passed in India and thus part of the consideration of supply agreement for offshore supply is taxable in India. We note that no information has been provided by the assessee in respect of the activity carried out in India subsequent to award of the tender to the assessee for collection of drawing of the factories of the buyer and other input information in relation to erection of plant and customized manufacturing of the parts of various section of the plant. Business connection in India - In the instant case, the part of the operations of the supply agreement have been carried out in India and sale of goods is in continuation of the process of erection of the plant , the conditions of the business connection exits. We have observed an element of continuity between the business of the assessee from supply to successful supervision of the commission of Plant. It is not the case of isolated sale of the off the self goods or stray transaction, in view of the fact that the assessee has rendered supervision of erection/commission of TPD Plant. Thus, the assess is doing business activities in India which are not isolated instances but represent real and intimate relationship between activities of assessee done outside India and those done inside India. The business operation being done in India by the assessee are revenue generating as these operations are required to earn the contract and to meet the contractual obligations. Therefore, all parameters of business connection as prescribed by above judicial authorities are satisfied in the case of the assessee.Accordingly, the income is deemed to accrue or arise in India in terms of section 9(1)(i) of the Act from the offshore supply of goods. Existence of PE in India - We do agree with the observation of the Assessing Officer that there was close proximity or connection between the PE and the assessee. The Learned Assessing Officer is correct in observing that substantial part of the business activity of the assessee of manufacturing and commissioning of TPD plant was carried out in taxable territory of the India and supply of parts of machinery for plant was incidental to service contract and for this reason a part of the profit is directly attributable to the PE in India. In the facts of the case the supervision services are not incidental to sale of the plant and machinery and it is otherwise that for commissioning of the plant, assessee has brought component of the machinery to India under supply agreement. It is not the case that the assessee is a pure trader or seller of the part of the machineries to be utilized for commissioning of the TPD plant, but the assessee is having domain expertise of commissioning of such plants. Existence of service PE has not be denied by the assessee. In the case of the assessee, the employees of the assessee were in India at the time of entry of the part of the machinery on the Indian soil. Those employees were instrumental in supervising the entire activity of inspection of part of the machinery imported into India and assembling of those machinery to bring into the deliverable state mentioned in the supply agreement. The service PE has also played the role in completing the supply agreement between the assessee and the buyer. The part of the equipment or the machinery needed for erection or commissioning of the TPD plant though has been manufactured in Austria but same have been utilized for creation of TPD plant in India. The part of the operations of supply agreement have definitely been carried out in India by the permanent establishment of the assessee and for which part of the profit from the supply agreement also need to be taxed in India in terms of the treaty between India and the Austria as the assessee relied on the treaty provisions for considering taxation of the supply agreement. Attribution of profit to permanent establishment - In the instant case, in addition to the marketing activities or engineering survey pre or post awarding of contract (for which no information has been filed by the assessee), the service PE has played role in assembling and bringing the equipment to deliverable state as agreed under the supply agreement. In such facts and circumstances, in our opinion, the 35% of the profit attributed to the PE is justified. Accordingly, we uphold the same. Interest as under section 234A/234B/234D - The assessee has accepted the existence of the PE before the AO and in that circumstances, it cannot take benefit that it was the responsibility of the deductor to deduct tax at source. In view of facts of the case being identical to the facts of the above case, we don’t find any error in the order of the Assessing Officer on the issue in dispute. Accordingly, the ground No. 4 of the appeal of the assessee is dismissed. Issues Involved:1. Validity of the assessment order under section 143(3) read with section 144C.2. Computation of income at Rs. 16,14,04,346/- against returned income of Nil.3. Taxability of income from the contract for supply of equipment under section 9(1)(i) of the Income-tax Act.4. Nature of the contracts as composite or divisible.5. Existence and role of Permanent Establishment (PE) in India.6. Attribution of profits to the PE.7. Charging of interest under sections 234A, 234B, and 234D.8. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Validity of the Assessment Order:The assessee challenged the assessment order dated 02/01/2014, passed by the Deputy Director of Income Tax, International Taxation, New Delhi, as being contrary to law and principles of natural justice. The Tribunal did not specifically adjudicate on this issue, considering it general in nature.2. Computation of Income:The AO computed income at Rs. 16,14,04,346/- against the returned income of Nil. The assessee argued that this computation was erroneous and not in accordance with the law. The Tribunal upheld the AO's computation, attributing part of the offshore supply income to the PE in India.3. Taxability of Income from Supply Contract:The AO held that income from the supply contract accrued or arose in India under section 9(1)(i) of the Act. The assessee contended that the supply of equipment was an offshore transaction, and no income accrued in India. The Tribunal, after analyzing the contract terms and the conduct of the parties, concluded that the supply and service contracts were composite contracts. The Tribunal held that the income from the offshore supply was taxable in India as it was part of a composite contract involving significant activities in India.4. Nature of Contracts:The AO considered the contracts as composite, involving supply and services for setting up a plant. The assessee argued that the contracts were separate and independent. The Tribunal, examining various clauses of the contracts, concluded that both contracts were intrinsically linked and formed a composite contract for setting up the plant. The Tribunal relied on the decision in Hindustan Shipyard and Mitsui Engineering to support its conclusion.5. Existence and Role of Permanent Establishment (PE):The AO found that the assessee had a PE in India, involved in marketing and pre-contract negotiations. The assessee admitted the existence of a service PE but contended it had no role in the offshore supply. The Tribunal upheld the AO's finding, noting that the PE played a significant role in the overall contract, including supervision of erection and commissioning of the plant.6. Attribution of Profits to the PE:The AO attributed 35% of the profit from offshore supplies to the PE in India, based on the decision in Rolls Royce Plc. The assessee argued that this attribution was arbitrary and excessive. The Tribunal upheld the AO's attribution, considering the significant role played by the PE in the composite contract.7. Charging of Interest:The AO directed charging interest under sections 234A, 234B, and 234D. The assessee contended that interest under section 234B was not applicable as tax was deductible at source. The Tribunal, relying on the decision in Alcatel Lucent, upheld the AO's charging of interest, noting that the assessee had accepted the existence of the PE and the consequent tax liability.8. Initiation of Penalty Proceedings:The AO initiated penalty proceedings under section 271(1)(c). The Tribunal dismissed the ground as premature and infructuous at this stage.Conclusion:The appeal of the assessee was dismissed, with the Tribunal upholding the AO's findings on the composite nature of the contracts, the existence and role of the PE, the attribution of profits, and the charging of interest under sections 234A, 234B, and 234D.