TaxTMI 
TaxTMI 
2014 (3) TMI 368
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.... Project office and Liaison office with different Permanent Account Numbers. Such returns were revised for a number of times. The assessee admitted that it was earlier under a bona fide belief that separate returns were required to be filed in respect of Liaison office and Project office. The assessee gave its nod to common assessment in respect of both the segments. A draft assessment order u/s 144C(1) was passed on 30.11.2012. The assessee filed its objection before the Dispute Resolution Panel (DRP). Upon the receipt of Directions from the DRP, the Assessing Officer passed the final confirmatory order which is impugned in the present appeal. A. INCOME FROM CONTRACT WITH STEEL AUTHORITY 4.1. We are first espousing the issue of income from contract with Steel Authority of India Ltd. The facts apropos this issue are that the assessee is a non-resident company incorporated in and also Tax resident of Korea. It is mainly engaged in Engineering and construction for Iron, energy and public works etc. It entered into a Contract Agreement dated 16.10.2007 read with the Amendment agreement dated 17.12.2008, as a Consortium consisting of the assessee (as its leader) and another partn....
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....tated that the said amount was also not chargeable to tax in any year because such designs were also supplied offshore which were part and parcel of the offshore supply of equipments. The assessee accepted before the A.O that it has a Supervisory P.E in India as per Article 5(3) of the Double Taxation Avoidance Agreement between India and Korea (hereinafter called `the DTAA'). The assessee claimed that its Permanent Establishment (PE) had no role in making such offshore supplies and Design & engineering services. The assessee agreed that Foreign Supervision Charges were in the nature of onshore services and hence exigible to tax. Similarly, it was also conceded that onshore supply of equipments was also liable for taxation in India. However, these two items were claimed to be not chargeable to tax during the year because neither any onshore services were rendered nor any onshore supply of equipments was made during the relevant financial year. Amount received @ 5% of the Contract price towards Foreign Supervision Charges and onshore supply of equipments was claimed to be in the nature of advance. 4.3. The Assessing Officer held that the assessee had a Fixed place P.E/Supervi....
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....ons on account of Foreign Supervision Charges 1,37,77,320 5. Additions on account of offshore Design & Engineering and Offshore supply 6,76,37,014 25,32,89,368.00 Total Income 24,48,85,161 4.4. The assessee is aggrieved against such computation of total income on account of offshore supply, onshore supply, onshore services and Design & Engineering services. 4.5.1. We have heard the rival submissions and perused the relevant material on record. The first question which requires to be decided and which has been strenuously argued by the ld. DR is whether it is a case of composite contract? We note that the Assessing Officer proceeded with the presumption in the earlier part of the assessment order that it is a case of a composite contract with total consideration as one unit. He, therefore, initially held that the entire Contract agreement was to be considered as composite contract without any further bifurcation into offshore and onshore supply of equipments as well as services. However, while computing the total income on the penultimate page of the assessment order, he bifurcated the income in respect of three broad categori....
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....one since all its major four components are distinctly identifiable with separate consideration for each. 4.5.3. In this connection, it is of paramount importance to consider the judgment of the Hon'ble Supreme Court in the case of Ishikawajma -Harima Heavy Industries Ltd. vs. Director of IT (2007) 288 ITR 408 (SC), which has been heavily relied on behalf of the assessee. In that case, the assessee was a resident of Japan. It was to develop, design, engineer and procure equipments and material supplies, etc. to erect and construct storage tanks of 5 MMTPA capacity. The project was to be completed in 41 months. The contract involved (i) offshore supply; (ii) offshore services; (iii) onshore supply; (iv) onshore services; and (v) construction and erection. The price was payable for offshore supply and offshore services in US Dollars and for onshore supply and onshore services and construction and erection partly in US Dollars and partly in Indian Rupees. It filed an application before the Authority for Advance Rulings for determination of its tax liability with reference to "offshore supply and offshore services". No issue was raised as regards the liability to pay income-tax ....
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....ved during the year was in the nature of advance and not income, both the sides have extensively argued on the taxability or otherwise of such amounts as has also been adjudicated by the Assessing Officer in favor of the Revenue. As such, it has become imperative to consider and decide the principles for determining the taxability, if any, of such four components of income included by the AO in the total income of the assessee, as under :- I. Income from offshore supply of equipments II. Income from onshore supply of equipments. III. Income from onshore services. IV. Income from Design & Engineering services I. INCOME FROM OFFSHORE SUPPLY OF EQUIPMENT 4.7.1. The case of the assessee is that the receipt of Euro 38,00,033 during the year related to the offshore supply of equipments and hence the profit element contained in such an amount could not be charged to tax. Per contra, the ld. strongly refuted this argument by submitting that there was no offshore supply and the title to such goods passed in India and hence the entire amount has been rightly charged to tax. In the alternative and without prejudice to his main argument, it was put forth by the ld. DR that th....
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.... harping on the general submissions that the construction of plant, which also includes offshore acquisition of equipment, could not have become possible without the role of the PE and it was for the PE to decide as to when the equipment was to be acquired from abroad. In our considered opinion, these submissions are totally irrelevant in so far as the question of passing of title of goods is concerned. 1.c. The ld. DR then invited our attention towards various clauses of the Contract agreement to demonstrate that it was the responsibility of the assessee to provide training, testing and commissioning of such equipments in India, which showed that the assessee was required to put the equipment in a deliverable state in India. Referring to section 19 of the Sale of Goods Act, 1930, it was stated that property in the goods passes only when the parties intend it to pass. He further invited our attention towards section 21 of the Sale of Goods Act which provides that : `Where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them into a deliverable state, the property does not pass until such thing is d....
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....ore, no income can be said to have arisen in India." Thus, the contention of the ld. DR that since risk passed in India and hence the title of the goods should also be considered as passing in India, is not tenable. We further find that the facts and circumstances of the instant case are mutatis mutandis similar to those as were prevailing in the case of Ishikawajma -Harima (supra). As, both the Hon'ble Supreme Court and the Special bench of the tribunal have held that title to goods shall be considered to have passed outside India when delivery was made on high sea and the payment was also received outside India, we cannot deviate from the settled position. In our case too, the authorities below have not controverted this argument of the assessee that the delivery of goods was made outside India and also the payment was received outside India. We, therefore, hold that the title of goods in respect of said offshore supply of equipments was transferred outside India. 2. Whether sale price includes any consideration for services rendered or to be rendered in India ? 2.a. Having held that supply of such equipments was offshore, now we espouse the next argument of the ld. DR ....
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....rayal of `Training' on page 1037 of the paper book. Under the Description column it has been mentioned as : "Providing training to Employer's Technical personnel in Plant Operation and Maintenance in similar operating plants, etc." Under the next column of Price for training in India, it has been mentioned as "Included". 2.d. When we consider Table 1B (Summary of prices) in juxtaposition to Table no. 13B (Foreign supervision charges) on one hand and Table no. 14B (Training charges) on the other, the following three points emerge. First is that the training is exclusively in India. It can be seen from Table 14B that after the Description column, the next column is `Estimated Man days for Employer's Personnel for Training in India'. Then the next column is `Price for Training in India'. From these columns, it is proved beyond any shadow of doubt that the training was to be given in India. Second point is that charges for `Foreign supervision charges' are certainly distinct from `Training charges' in their connotation as well as ambit. Whereas the former are towards Foreign supervision charges in India during Erection, Start up, Commissioning and Perform....
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....s simple and plain that if a seller has to incur training expenses or repair cost during the warranty period, then either there is a specific consideration for the same and if it is not there, then such costs are to be considered as in-built in the price of equipment. Ordinarily, when any product is sold with warranty, the price charged by the seller always includes compensation for the repairs cost to be incurred during the warranty period. In contrast to that, if there is no warranty clause and similar product is sold by another seller, the sale price is bound to be at a lower level vis-a-vis the seller who sells its products with warranty. This leads us to the irresistible conclusion that when the assessee has undertaken to bear training costs at its own and there is no separate compensation for that, which is `Included', then such compensation is included in the sale price charged for offshore supply of equipments. In such a case, the sale price so charged is required to be split towards the price of goods simplicitor and compensation for training and other charges which the seller has undertaken to bear. 2.e. Apart from training charges, there are also other costs incur....
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...., we cannot reach a sure conclusion. It is palpable that if the charges for such things are not included in any other component of price, then these have to be considered as part and parcel of the sale price, which would require its splitting up to determine the amount attributable to such testing charges etc. in India. As such details are not readily available, we are of the considered opinion that it would be in the fitness of things if the impugned order on this issue is set aside and the matter is restored to the file of the Assessing Officer. He will examine as to whether the costs for tests and inspection, liquidated damages and defect liability along with any such other costs are specifically charged distinct from the sale consideration of offshore supply of equipment. If on such an analysis, he comes to the conclusion that there is no separate charge in respect of all or any of these items, then, a portion of sale price of offshore supply of equipment needs to be attributed to such activities performed in India. 2.i. It is, therefore, held that the sale price of offshore supply of equipment also includes some consideration for services rendered or to be rendered by the a....
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....by the assessee in India. The expression 'income deemed to be received' in India has been defined under s. 7 of the Act, which refers to the annual accretion in the previous year to the balance at the credit of an employee participating in a recognized provident fund, etc. It is apparent that the nature of amount under consideration is quite distinct from the items specified in this section. Then cl. (b) of section 5(2) talks of income which accrues or arises or is deemed to accrue or arise in India. There can be no dispute as regards the scope of income which accrues or arises in India. Sec. 9 of the Act enlists certain incomes which are `deemed to accrue or arise in India'. Income from supply of offshore equipments cannot be in the nature of 'Salaries', `Dividend', `Interest', `Royalty' or `Fees for technical services', which items of income have been specifically dealt with in cls. (ii) to (vii) of s. 9(1). 3.c. Then comes cl. (i) of section 9(1), which mandates that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India or through or from an....
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....RTICLE 7 Business profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through permanent establishment situated therein, there shall be in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. ............................". 3.f. The ld. AR has candidly admitted the assessee of having a PE in India as per Article 5 of the DTAA during the year in question. Art. 7(1) of the DTAA states that the profi....
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.... India. (2) Since all parts of the transaction in question, i.e. the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India. (3) The principle of apportionment, wherein the territorial jurisdiction of a particular State determines its capacity to tax an event, has to be followed. (4) The fact that the contract was signed in India is of no material consequence, since all activities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country. .........." 3.h. After holding that no income was chargeable to tax because no part of the consideration was towards the services to be rendered in India, the Hon'ble Supreme Court in CIT & Anr. VS. Hyundai Heavy Industries Co. Ltd. (2007) 291 ITR 482 (SC) has further held that : `No such taxability can also arise in the present case as there was no allegation made by the Department that the price at which billing was done for the supplies included any element for services rendered by the PE.' It follows that if a part of some composite income is attributable to the operati....
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....ld that no profits out of the sale proceeds of supply of offshore equipment could be attributed to the operation carried out in India. 4.c. On a proper analysis of this judgment, we find that the facts of the instant case are quite distinguishable. In that case, the assessee entered into contract with ONGC and received certain amount of money. The Assessing Officer held that 25% of the revenue received allegedly for 'outside India activities' should be brought within the taxing network of this country. The Hon'ble High Court observed that the assessee was tax resident of Korea. It observed that : "There was no finding anywhere that the revenue earned and said to have been on account of out of India activity earned was, in fact, on account of within India activity". It was in view of such finding that the Hon'ble High Court came to hold that 25% of gross receipts could not be attributed to the activities carried out in India. In contrast to this judgment, we find that there is sufficient material to indicate that several activities concerned with offshore supply of equipments were to be carried out in India. The ld. DR has invited our attention towards several cla....
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....ermining as to whether the testing charges in India and repair charges during the defect liability period etc. were included in sale price of goods, it would be appropriate if the AO after such determination gives value to such services if these are included in the sale price of offshore supply of equipments. As regards training expenses, we have already held that compensation for such training in India is part and parcel of the sale price of offshore supply of equipments. The value to such training is directed to be assigned by the AO after considering the number of man days and rate per man day for such training and considered for taxation. We order accordingly. II. INCOME FROM ONSHORE SUPPLY OF EQUIPMENTS 5. Though as per original Contract Agreement dated 16.12.2007, the assessee was not to make any onshore supply of equipments, which was in the exclusive domain of NCC, the assessee agreed to supply some onshore equipment as per the Amendment agreement dated 17.12.2008. It has been admitted by the assessee before the AO that it received Rs.15.03 crore from SAIL through NCC during the financial year relevant to the assessment year under consideration. This amount has been i....
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.... chargeable to tax in India. The Assessing Officer held that the equivalent amount of Euro 150900 received on account of Design and engineering was royalty as per Sec. 9(1)(vi) of the Act (as para 8 of the assessment order) or alternatively fees for technical services as per Sec. 9(1)(vi) of the Act (as per para 9 of the assessment order). However, while computing the total income, he clubbed it with offshore supply of equipment and attributed 90% of the profit to the Permanent Establishment and hence included in the total income. 7.2. The ld. AR contended that the amount for Design and engineering was wholly related to the offshore supply of equipments. Such Drawings and engineering was also done outside India. Since the assessee is a non-resident, the income accruing outside India should not be charged to tax. 7.3. We are not convinced with the submissions advanced on behalf of the assessee in this regard. The primary question for our consideration is to decide the nature of Drawings and Documents for which such amount has been received. Page 1042 onwards of the paper book, which is a part of Appendix-2, being the Time Schedule to the Contract agreement, throws light on the....
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.... operation and maintenance of the facilities. It is further axiomatic that such drawings and other related documents are customized for this project of SAIL. Such drawings are not useful for any other project. In order to categorize the consideration as `Royalty', it is sine qua non that the same must pass through the definition of "royalty" given in Explanation 2 to Sec. 9(1)(vi) as under : - Explanation 2.--For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for-- (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, ....
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....orized as 'Fees for technical services'. The Hon'ble jurisdictional High Court in Rio Tinto Technical Services (supra) vide para 22 of this judgment in the context of remuneration for such services has held that the Tribunal has not specifically examined Explanation 2 to Sec. 9(1)(vii) which defines 'fees for technical services'. 7.8. At this stage it is relevant to deal with the contention of the ld. AR that if such amount is considered as fees for technical services, then the same should be held as not chargeable to tax as per the judgment of the Hon'ble Supreme Court in the case of Ishikawajma -Harima (supra). It can be seen from para 16 read with para 23 of this judgment that only two issues were dealt with viz, : (a) the taxation of the price of goods supplied, by way of offshore supply price of which was specified in Ex. D, cl. 2.1; and (b) the taxation of consideration paid for rendition of services described in the contract as offshore services at Ex. D. For the time being, we are concerned only with the price of design and engineering, which has been considered as offshore services in the case of Ishikawajma -Harima (supra) as under :- 1. xxxx....
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.... also covering the year under consideration, the view canvassed by the ld. AR that since such services were not rendered in India and hence no tax liability should arise, has been rendered unsustainable. 7.11. We come back to the prescription of Sec. 9(1)(vii)(b) as per which income by way of fees of technical services payable by a person who is resident of India shall be deemed to accrue or arise in India except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India. The positive mandate of this provision is fully applicable to the present facts as the fees for technical services has been paid by SAIL, who is resident of India, and further the services provided by the assessee are not going to be used by SAIL for carrying on its business outside India or for earning income from any source outside India. 7.12. The ld. AR has not disputed that the language of Article 13 of the DTAA, in so far as the facts of the instant case are concerned, is not different from that of Sec. 9(1)(vii). We, therefore, hold in principle that the....
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....ore the Assessing Officer that the amounts received by it were only in the nature of 5% advance of the Contract price and no activity was carried out in the financial year relevant to the assessment year under consideration. The Assessing Officer rejected this contention by observing from clause 12 of the `General Conditions of Contract' on page 1093 of the Paper book, which provides that: `No initial mobilization advance will be provided to the Contractor and the payments will be linked with the progress.' It is in the light of this clause that the AO repelled the contention of the assessee that amount received during the year was only in the nature of advance and neither any goods were supplied nor services rendered. On the other hand, the assessee drew support for its contention from clause 2.1 of Appendix 3 which provides as under : - "2.1.1 Five per cent (5%) of the Total Contract Price specified in the Appendix-1 excluding Taxes, Duties and Training Charges shall be released on submission of following drawings/documents/data. a) Area layout of BF Complex showing location & disposition of all units of BF complex b) Preliminary Technological layout of BF comple....
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....ause 12 of the `General Conditions of Contract' on one hand which supports the stand of the Revenue that the payment will be linked with the progress and no initial mobilization advance will be provided; and clause clause 2.1 of Appendix 3 on the other, which supports the point of view of the assessee. Mechanism for resolving such conflicts has been provided in Article 1 of the Contract agreement itself. Clause 1.2 of Article 1 gives detail of `Contract Documents' by mentioning as under: "The following documents shall constitute the Contract between the Employer and the Contractor, and each shall be read and construed as an integral part of the Contract: (a) This Contract Agreement and Appendices hereto (b) Special Conditions of Contract and Annexures hereto (c) General Conditions of Contract and Annexures hereto (d) Contract Technical Specifications and Drawings (e) General Technical Specification 8.6. Clause 1.3 of Article 1 gives the `Order of Precedence' as under: "In the event of any ambiguity or conflict between the Contract Documents listed above, the order of precedence shall be the order in which the Contract Documents are listed in Arti....
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....pply of equipments was contemplated till the invoice for the second installment of 5% was raised, which event took place in the next year. This chain of events brings us to the point that the assessee definitely submitted drawings/documents/data as per sub- clauses (a) to (f) of clause 2.1.1 of Appendix 3 and started placing the purchase orders of certain equipments to be supplied to SAIL in terms of clause 2.1.2 of Appendix 3 after approval. The release of these two installments of 5% each does not contemplate the supply of any equipment to SAIL either offshore or onshore. Thus the level of activity definitely done by the assessee for SAIL up to 31.3.2008 is restricted to the supplying of drawings/documents/data as per sub-clauses (a) to (f) of clause 2.1.1 and also some part of approval by SAIL of drawings/data and placing of purchase orders for the equipments as mentioned in sub- clauses a) to k) of clause 2.1.2. This also proves the fallacy of the assessee's contention that it did not supply any equipment or render any services to SAIL and the entire amount received by it was in the nature of advance. Thus income attributable to such services rendered in India is chargeable....
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....y of goods. The relevant point of taxation is the actual supplying of goods and actual rendering of services and not when the invoice is raised as per the peculiar terms of the contract or the amount is received. As the relevant dates of actual supply of equipments are not available, this aspect is also directed to be examined by the AO and resultantly charging income to tax for the period during which actual goods were supplied or services rendered. 8.9. With the above observations, we proceed to lay down the mechanism for determining how much income was earned by the assessee during the year under the following distinct heads:- I. Income from offshore supply of equipments. It has two components, viz., offshore supply of equipments and rendering of services in India. In so far as profit from offshore supply simplicitor is concerned, the same is not chargeable to tax in the hands of the non-resident due to transfer of title of equipments outside India. However, consideration for rendering of services in India, which is in-built in the price of equipment, is chargeable to tax at the point of rendering of such services. The Assessing Officer is directed to verify the dates o....
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....n India breaches 5% of total consideration of such services, then such higher amount should be charged to tax. Such higher amount will be deemed to be income accruing or arising to the assessee. 8.10. With the above observations, we set aside the impugned order on this issue and restore the matter to the file of the Assessing Officer for working out the income for the year under consideration in the terms as set out in the immediately preceding paras. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. B. TRANSFER PRICING ADJUSTMENT 9. The next issue raised through various grounds is against the addition of Rs.2,15,27,090/- on account of transfer pricing adjustment. 10. At the outset, we want to make it clear that the ld. AR did not press ground No.5.2 by which it was claimed that the assessee did not have any PE in terms of Article 5 (3) of the DTAA. In fact, it was accepted by the ld. AR that PE may be considered in existence during the year in question. Such ground is therefore, rejected. 11. The factual matrix of the addition on merits is that the assessee entered into a Construction contract with its A....
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....s 92CA at Rs.2,15,27,090/-. The assessee was unsuccessful before the Dispute Resolution Panel (DRP) in this regard. The Assessing Officer in the final order passed u/s 144C made the above addition. The assessee is aggrieved against such addition. 12. We have heard the rival submissions and perused the relevant material on record. Section 92(1) of the Act provides that any income arising from an international transaction shall be computed having regard to arm's length price. Computation of ALP has been prescribed u/s 92C. Sub-section (1) of section 92C, in so far as assessment year under consideration is concerned, enlists five specific methods and one general method for the computation of ALP. Sub-section (2) of Section 92C states that the most appropriate method referred to in sub-section (1) shall be applied for the determination of ALP in the manner as may be prescribed. The manner has been enshrined under Rule 10B read with Rule 10C. From the above narration of the relevant provisions, it is apparent that one of the prescribed methods is required to be adopted for the purposes of determination of ALP. Adverting to the facts of the instant case, we find that the assessee ....
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.... be necessarily seen with reference to the total costs or total sales etc. When the rule provides that net operating profit margin is numerator and total costs are denominator, if base of costs is adopted, then it is not permissible to deviate from the same. The Special Bench of the Tribunal in the case of LG Electronics India Pvt. Ltd. vs. DCIT (2013) 140 ITD 41 (Del) (SB) has held that the steps given in the Rule are required to be religiously followed for determination of ALP under the respective method. It has also been laid down by the Special Bench that : "When the Rule prescribes a particular method to be followed and the steps so given are unambiguous, it is impermissible to substitute such steps with any other mode." Proceeding with the computation of ALP under this method, we notice that there is a further requirement of having a `similar base' for comparables as has been chosen for the assessee. It is not possible to compare the net operating profit earned by the assessee with reference to the base of sales with the net operating profit margin earned by comparables with reference to total costs. In the same manner, it is equally not possible to have a common base but....