2021 (10) TMI 272 - AT - Income Tax

Tax Tribunal Appeals: Training & Damages Excluded, Design Services Taxable. Procedural Challenge Dismissed.

Posco Engineering and Construction Company Versus DCIT, International Taxation, Civic Centre, Gurgaon

The Tribunal partly allowed the appeals by deleting additions made by the AO for training services and defect liability/liquidated damages. The taxability ... Attribution of income - Addition on account of training charges, defect liabilities and design and engineering services - HELD THAT:- AO cannot attribute any amount on account of training services specifically when the same have not been imported in the year under consideration - we find merit in the submission of the ld. Counsel that the consideration of these services has already been included in the amount received for foreign supervisor activity and since the revenue from the aforesaid activities have already been offered to tax, no further attribution can be made by the AO. In this view of the matter, we hold that the addition made by the AO on account of training services is not justified. Accordingly, the same is directed to be deleted. Liquidated damages and defect liability - As damages have to be paid by the assessee in case of delay i.e., a contingent event, therefore, the said liquidated damages under no circumstances can be concluded to be a part of consideration. We, therefore, find merit in the argument of the ld. Counsel that the conclusion of the AO that the same form part of the revenue earned from offshore supply is incorrect and against the settled principle of law. Further, this being the initial year of contract for the project, no such occasion had arisen and, therefore, in absence of any material with the AO, he was not justified in making the addition. We find, the Kolkata Bench of the Tribunal in the case of Outotec GmbH [2015 (6) TMI 609 - ITAT KOLKATA] has held that clauses like liquidated damages, performance guarantee and defect liability are part of normal commercial arrangements generally agreed in common trade parlance and cannot form the basis for attributing revenue earned from offshore supply of equipment to India. We hold that no portion of revenue earned from the sale of equipment can be taxed in India by virtue of commercial clauses like performance guarantee, defect liability and liquidated damages. We, therefore, set aside the order of the AO and direct him to delete the addition. Grounds of appeal No. 4 and 5 are accordingly allowed. Revenue received for design and engineering services - AO held that design and engineering are chargeable to tax u/s. 9(1)(vii) of the Act as well as Article 13 of the India-Korea DTAA - submission of assessee that the consideration for design and engineering is not taxable in India since such designs and drawings are treated as inseparable part of offshore supplies - ITAT set aside the issue to AO - HELD THAT:- Tribunal has given the finding which are specific and unequivocal regarding the taxability of design and engineering services. Since the issue is settled at the level of ITAT and which was not set aside to the file of the AO for any enquiry or verification, we do not find any infirmity in the order of the AO holding that design and engineering services are chargeable to tax u/s. 9(1)(vii) of the Act as well as Article 13 of the India-Korea DTAA. The ld. Counsel for the assessee has also not brought anything before us to take a contrary view than the view taken by the AO on this issue. Accordingly, the ground raised by the assessee on this issue as per ground of appeal No. 6 is dismissed. Issues Involved:1. Taxability of consideration for training services rendered in India.2. Attribution of income for defect liability and liquidated damages.3. Taxability of revenue received for design and engineering services.4. Validity of the assessment order and procedural compliance under section 144C.5. Levy of interest under Section 234B.6. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Taxability of Consideration for Training Services Rendered in India:The Tribunal examined whether the consideration for training services was included in the revenue received from offshore supply of equipment. It was held that the sale price of the offshore supply of equipment includes some consideration for services rendered in India, specifically training charges. The Tribunal directed the AO to verify the actual rendition of training and determine the value of training as per man-day rate. The AO concluded that training was provided in India and attributed specific amounts for training services. However, the Tribunal found that no training had been conducted in the relevant assessment years and the consideration for training services was included in the amount received for foreign supervision services, as certified by SAIL. Consequently, the addition made by the AO on account of training services was deleted.2. Attribution of Income for Defect Liability and Liquidated Damages:The Tribunal considered whether the consideration for defect liability and liquidated damages was included in the offshore supply revenue. The AO attributed 2% of the consideration for offshore supply as the price for liquidated damages and defect liability, assuming an ad hoc profit rate of 50%. The Tribunal found that these were contingent liabilities and no such events had occurred in the relevant assessment years. The Tribunal referred to the contract clauses and a certificate from SAIL confirming no liability had arisen. It was concluded that clauses like liquidated damages, performance guarantee, and defect liability are part of normal commercial arrangements and cannot form the basis for attributing revenue earned from offshore supply of equipment to India. Therefore, the addition made by the AO was deleted.3. Taxability of Revenue Received for Design and Engineering Services:The Tribunal addressed whether the consideration for design and engineering services was taxable in India. The AO held that design and engineering services are chargeable to tax under section 9(1)(vii) of the Act and Article 13 of the India-Korea DTAA. The Tribunal confirmed that the consideration for design and engineering services qualifies as 'fees for technical services' and is taxable in India. The Tribunal's findings were specific and unequivocal, and the AO's order was upheld on this issue.4. Validity of the Assessment Order and Procedural Compliance under Section 144C:The assessee raised additional grounds challenging the validity of the assessment order, arguing that the AO issued a final order instead of a draft assessment order, violating section 144C. The Tribunal found that no demand notice or show cause notice for penalty was issued along with the draft assessment order, and the final order was passed subsequently. Therefore, the additional grounds were dismissed.5. Levy of Interest under Section 234B:The Tribunal noted that the levy of interest under Section 234B is mandatory and consequential in nature. Hence, this ground was dismissed.6. Initiation of Penalty Proceedings under Section 271(1)(c):The Tribunal found that the initiation of penalty proceedings under section 271(1)(c) was premature at this juncture and dismissed this ground.Conclusion:The appeals were partly allowed, with the Tribunal deleting the additions made by the AO on account of training services and defect liability/liquidated damages, while upholding the taxability of design and engineering services. The procedural challenge under section 144C was dismissed, and the levy of interest and initiation of penalty proceedings were also dismissed.