TaxTMI 
TaxTMI 
2014 (3) TMI 368
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....ermanent 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 partner, Nagarjuna Construction Company (NCC) on one hand an....
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....gns 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/Supervisory P.E/Services P.E in terms of Article 5 of the DTAA and was also having business conn....
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....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 categories, viz., onshore activities, Foreign Supervision Charges (that is, onshore services) and offshore supply clubbed with offshore Design & Engineering. ....
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.... 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 on onshore supply, onshore services and its activity relating to construction and erection. It was contended before the Authority that the contract was a ....
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....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 the said sale consideration includes compensation towards rendering some services in connection with installation and commissioning of equipments in India and to that exten....
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....t 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 done and the buyer has notice thereof.' Accentuating on these provisions of the Sale of Goods Act, it was argued that since so many activities were to be done in India in connection wit....
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....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 that the sale price also includes some consideration for services rendered or to be rendered in India. The ld. DR vehemently argued that certain costs for doing of some activities in India in re....
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....enance 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 Performance Guarantee tests, the later are towards providing training to Employer's Technical personnel in Plant Operation and Maintenance in similar operating plants, etc. These two things are distinct....
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.... 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 incurred by the assessee in connection with supply of such offshore equipments. `General Conditions of Contract' which is part of the Contract Agreement contains Clause no. 30 which has been referred to as....
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.... 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 assessee in India. In so far as training charges are concerned, these are surely included in the sale price, but the question of consideration for other factors, such as tests and inspection, liquidated damages and de....
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....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 any asset or source of income in India or through the transfer of a capital asset situated in India shall be deemed to accrue or arise in India. The Hon'ble Supreme Court in CIT vs. R.D. Aggarwal & Co. (1965) 56 ITR 20 (SC....
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....ated 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 profits can be taxed in India only to such extent which are attributable to the PE in the other contracting State. To put it simply, the business profits of a resident of Korea can be taxed in India to the extent which are attributable to its PE....
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....ment, 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 operations carried on in India and other part is not, then such part of income as is so attributable to the operations carried out in India has to be charged to tax. In the case of Ishikawajma -Harima (supra), the income from onshore supply and onshore services w....
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...., 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 clauses of the Contract agreement which amply indicate that not only certain training was to be imparted on Indian soil, but also repairs and maintenance of machinery along with test and inspection was also to be done by the assessee in India at its own expense. When....
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....le 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 included by the Assessing Officer in the total income of the assessee. The assessee agrees in principle that the income from onshore supply of equipment is chargeable to tax in India. However, the case of the assessee is that since the above amount was in the nature of adv....
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.... 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 nature of Drawings and Documents. It starts with the Basic Engineering and extends to Drawings/Documents for Information/Review and then to As-Built Drawings and Documents. When we peruse the details under such broad categories, it can be seen that it refers to Site plan, Process fl....
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....n 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, industrial, commercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB ; (v) the transfer of all or any rights (including the granting of a licence) in resp....
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....es '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. xxxxxx 2........... 3. Offshore services (Exhibit D-2.2) is the price of design and engineering including detail engineering in relation to supplies, services and construction and erection and cost of any other services to be rendered from outside India. 4........." 7.9. The Hon'ble Apex Court considered the ....
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....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 consideration for Designs and drawings is liable for inclusion in the total income of the assessee u/s 9(1)(vii) of the Act. On a specific query from the Bench, it was admitted by the ld. AR that he wanted the taxability of this amount to be considered only under the Act and not the DTAA. As such, we are desisting from examining th....
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....; 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 complex indicating the location & disposition of different technological units. c) General Arrangement and elevation drawings for BF proper, hot blast stoves, Gas cleaning plant. d) Basic process flow diagram and major process parameters for main technological units like BF, stove, stock house, water system, Gas facilities, GCP. e) Electrical single ....
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....ontract 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 Article 1.2 (Contract Documents) above." 8.7. On going through clause 1.3 in juxtaposition to clause 1.2 of Article 1 of the Contract Agreement, it becomes easy to understand that in the event of any conflict, as is prevailing before us, the order of precedence shall be the order in which the Contract Documents are listed in clause 1.2. Clause 2.1 on page 1048 of the paper book favoring the assessee ha....
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....ause 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 to tax during the year in question. It can be further seen that the assessee has claimed deduction of more than Rs.1 crore towards expenses incurred on this project. It goes on establish that the assessee did some activity in respect of the SAIL project during the year in question. 8.8. The ld. AR referred to certain bills issued by the assessee in the year 2009 coinciding with the completion stage of....
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....tual 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 of actual supply of offshore equipments taking place in the next year and see if any pre-supply training etc. in this regard was given by the assessee to the personnel of SAIL in India during the year under consideration. If it was so given, then he will compute the value of such training as discussed supra and charge the relevant amount to tax. II. Income from onshore supply of equipments Income from onshore ....
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....e 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 AE for the construction of plant at Bawal, Haryana. The contract was awarded to the assessee in June, 2007 which was to be completed by March, 2008. The assessee sub-contracted the project to an independent third party, namely, ENG Construction Pvt. Ltd. It received consideration for construction contract from its AE at Rs. 19,80,58,253/- which was declared as an international transaction. There was another international transaction ....
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....mputed 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 initially started with `Cost plus method'. However, during the course of proceedings before the TPO, TNMM was suggested and the TPO has worked out ALP by applying such method. The assessee has not raised any objection before us on the application of TNMM. The modus operandi for computation of ALP as per TNMM has been prescribed in Rule 10B(1)(e). Sub-clause (i) of Rule 10B (1)(e) states that the net profit margin realized by the e....
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....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 change its components for the asessee vis-à-vis the comparables. As the TPO has embarked upon the determination of ALP by considering the denominator of `total cost', all the aspects of `total operating cost' such as cost of goods sold, administration, selling, distribution expenses and depreciation etc. are required to be considered both for the assessee and comparables as well. 13. When we mull over the first comput....