TaxTMI 
TaxTMI 
2015 (6) TMI 609
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....RP in short) Kolkata u/s 144C(5) r.w.s 144C(8) of the Act. 2. As the facts and circumstances are identical in all the three appeals, hence, we will consider the facts in the case of Outotech GmbH in ITA No. 431/Kol/14 and decided the issues first in this appeal. ITA No.431/K/2014 3. The first issue in this appeal of assessee is against the taxability of supply of equipment in India. For this, assessee has raised following grounds:- "Taxability of supply of equipment in India 2(a) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that a part of the income earned by the appellant from sale of equipment to the Indian customers accrues or arises in India and thus taxable in India under the provisions of the Act read with the provisions of India-Germany Double Taxation Avoidance Agreement (DTAA). 2(b) On the facts and in the circumstances of the case and in law Ld. AO/DRP has erred in holding that title of the equipment sold by appellant has passed on to the Indian customers in India and while reaching to this conclusion has further erred in misinterpreting various clauses of Sales of Goods Act, 1930. 2(c) On the facts and in ....
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....mined separately for each of the projects and hence for the projects for which there is no supervisory PE, the question of attribution on account of sale of equipment does not arise. 2(i) v, Ld. AO/DRP erred in holding that since the Acceptance Tests were carried out at customers' site in India the supervisory PE has a role to play in offshore sale of equipment without appreciating the fact that all the operation relating to design, fabrication and manufacture of the equipment were undertaken outside India and hence there is no role of supervisory PE in offshore sale of equipment. 2(j)On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that the Protocol [Item 1(a)] to Article 7 of the DTAA is not applicable to the Supervisory PE and hence the benefit of the same cannot be given to the appellant. 2(k) On the facts and in the circumstances of the case and in law, Ld. AO failed in holding and Ld. DRP erred in not appreciating that there is no provision of sale PE under Article 5 of the DTAA. 2(l) On the facts and in the circumstances of the case and in law, Ld.AO/DRP erred in holding that the judgment of Ishikawajma-Harima Heavy Indust....
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....uipment to the working condition. Some of the clauses which made this panel to arrive at this conclusion are discussed hereunder: Agreement with TATA Steel, Kalingangar (No. TATA-KPO/CON/SP/FOB) Scope of Work Clause 1.1.17. - Contractor's responsibility for completeness The contractor shall be fully liable and responsible for completeness of work that include all equipment, to fulfill the functional requirement of work as a whole and contractor's aforesaid responsibility shall be construed as included in the contract price. All items of equipment, whether specifically mentioned or not in the Technical Specification but which are usual and/or necessary for completion of work under the contract and are necessary for proper, efficient, sale and stable construction, operation and maintenance of the work and/or for the fulfillment of the performance guarantees, shall be supplied or provided or executed by the contractor without any additional price implication and without any dilution of this liabilities and responsibilities under contract. Clause 16 : Cold tests, integrated cold test and start up 16.1 Cold tests shall be performed on all plant and equipment and items ....
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....he above the total contract value is Euro 24,130,550 for the entire contract which included cost of equipment and designs and drawings. From the above it is clear that the scope of Contract is not confined merely to dispatch of equipment on FOB basis overseas but linked to free and trouble fee operation of the such equipment in the plant. Further acceptance of equipment is linked to the fulfillment of the performance guarantee obligations which includes Cold Test etc., As such when the acceptance of the equipment supplied is directly linked to the performance of test run, the assessee's argument fell flat. The contract is to be interpreted in the main object of the parties who have entered into such contract. Though the price of the equipment, designs is separately shown, the real intent of the Indian customer is to erect the plant. It cannot be ignored that the plant cost is more than 100 crores. When the equipment becomes the integral part of the plant and till such state is the obligation of the assessee to ensure smooth commissioning of the plant, the contract cannot be viewed in isolation and in parts. From the contacts it is noticed that the main purpose of the suppl....
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....emains contract for erecting the plant. If a question is put whether the equipment supplied by the contractor remains an equipment which is independently capable of functioning, the answer would be an obvious NO. If the enclosure 1 is closely examined, the entire equipment, designs becomes plant and this may be the reason, the liquidated damages are confined to 35% of the contract value. The absence of return of goods clause is apparently cannot be incorporated since the equipments part and parcel of the plant and cannot be goods in real sense. Enclosure-1 to the FOB contract is as under: FOB (Contd.) 260 Enclosure - 1 Break-up of price for design, manufacture and supply of imported plant, machinery and equipment with auxiliaries and initial fills, commissioning spares on F.O.B. basis for Sinter Plant at Kalinganagar, Orissa Sl. No. Item Descriptions Qty. Nos. Wt. MT s Country of Origin Currency Fixed FOB price, packed (Euro) 1.O Plant and Equipment/items, complete in all respects 1.1 1.1.1 ....
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....owed the directions of DRP and assessed the estimated profit @ 10% of sale of equipment. Aggrieved, assessee-company filed appeal before Tribunal. 5. Before us, Ld. counsel for the assessee Shri J.P. Khaitan, Senior Advocate argued on behalf of the assessee-company and for Revenue Shri Vijay Kumar, CITDR argued. Ld. counsel for the assesses stated facts that the AO and DRP, noted in respective orders that assessee Company does have a PE in terms of Article 5(2)(i) of the India-Germany DTAA and there has been Sale of Equipment by the Company for various projects in the year under consideration. Revenue noted that as per the contracts for sale of equipment, the conclusion of sale is subject to various accepted tests and others, and also envisages that certain percentage of the payment will be payable upon the successful completion of those tests. Clauses exist in the contracts regarding the company liable for payment of liquidated damages in the event of performance guarantee parameters not being met. Therefore, the same has concluded in India and as the existence of a PE has already been admitted by assessee, then as to why attribution of profits from sale of Equipment should not....
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.... supply of all imported Equipment on F.O.B. port of shipment basis with the time stipulated in Schedule 3 (DELIVERY). The term ""Port of Shipment" shall mean the European sea ports and sea ports of South Korea. The materials are to be suitably and securely packed for ocean shipment and for storage under tropical conditions as well as subsequent movement by road transport in India. The provisions of INCOTERMS 2000 for the term "FOB" shall be applied. 1.1.2 Supply of all equipment foundation bolts including bolts of special design and those made of alloy/special steels and imported special embedment's that may be required for the Equipment on F.O.B. Basis" Clauses related to transfer of title/property in equipment outside India "Schedule 3 1.1 Delivery of imported Equipment and Commissioning Spares The FOB Delivery of all imported Equipment as listed in break-of Price given in Enclosure-I of this Agreement, will be completed by the Contractors within twenty three months (23) months from the Contract Effective Date.... SCHEDULE 4 TERMS OF PAYMENT 4.1.1 5% of Contract price for imported Equipment and items along with related designs and drawings for imported equ....
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.... 12.11 Despatch Clearance Certificate Within 5 days of successful completion of inspection and/or tests at the Contractor's or sub-contractor's works, the purchaser/his authorised representative shall automatically issue a Despatch clearance certificate (DCC) approving thereby the concerned Plant and Equipment for shipment/dispatch. 18. Defective Plant, Materials and Workmanship 18.1 If the completed plant or any portion thereof after the performance test, be found defective due to the reasons solely attributable to the Contractor or fails to fulfill the performance guarantee parameters as per clause 3.4 of Schedule 3 of the Contract, the Purchaser shall be at liberty to inform the Contractor accordingly and give the Contractor notice as reasonably practical, setting forth particulars of such defect or failure. The Contractor shall, with all speed and at his own expense, make it comply with the requirement of the Contract. Should he fail to do so within a reasonable time, the Purchaser may repair and / or replace, at the cost of the Contractor, the whole or any portion of the plant, as the case may be, which is defective or fails to fulfill the requirements of the Contac....
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....tions are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India." (emphasis supplied) Sh. Khaitan explained the effect of section 5 read with section 9(1)(i) that income shall accrue or arise or deemed to accrue or arise in India if the same is earned through any business connection in India. However, Explanation 1(a) to section 9(1)(i) of the Act provides that where some operations are carried out in India then income only to that extent resulting from such operations can be taxed in India. In other words, if no operation is carried out in India, then no profit can be taxed in India. Thus, the point that merit consideration is whether the assessee has carried out any operation in India in relation to sale of equipment. According to Sh. Khaitanthe facts mentioned in above paragraphs including the clauses for TKPO project agreement clearly demonstrate that all the activities relating to designing, fabrication and manufacturing took placed outside India and 75% of the payment for each and every part of shipment becomes payab....
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....duced below: "ARTICLE 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. He stated that the assessee did not have any office or place of business in India for the year under consideration. Further, it has already been explained in the preceding paragraphs, that all the activities relating to manufacturing and sale of equipment took place outside India. Therefore, the assessee wishes to submit that no PE has been constituted in India with respect to sale of equipment and hence no profits from sale of equipment can be taxed in India. Further, for the projects for which supervisory PE has been constituted in India, it is submitted to designing, fabrication and manufacturing of equipment was done outside India and sale has also taken place outside India and hence profits arising from sale of equipment is ....
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....e or construction, assembly or installation project there shall be attributed to that permanent establishment in the contracting state in which the permanent establishment is situated only the profits resulting from the activities of the permanent establishment as such. If machinery or equipment is delivered from the head office or another permanent establishment of the enterprise (situated outside that contracting state) or a third person (situated outside that contracting state) in connection with those activities or independently there from there shall not be attributed to the profits of the building site or construction, assembly or installation project the value of such deliveries". (Emphasis Supplied) Thus the profits, if any, of the offshore supply of equipment will not be attributable to the PE even if the equipment is delivered in connection with the activities of the said PE." 8. On the other hand, Ld. CIT, DR Shri Vijay Kumar only relied on the orders of DRP and that of the AO. According to him, the assessee provided drawings, designs & engineering documents relating to steel industry to Indian customers for the operation and maintenance of the plant and claimed....
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....ce there have been no change on facts and circumstances even in the assessment year under consideration, there is no reason to make a departure from the ITSC's decision on the same issue. He explained that under the contact, the assessee had actually granted a license to use i.e. right to use know-how and engineering information to enable the Indian customers not only to design, engineer, erect and set up the plant but also to commission, operate, test and maintain the plant and to manufacture the product in the plant. Certainly the payment in question covered consideration for information concerning industrial, commercial or scientific experience. The term "industrial, commercial or scientific experience" alludes to the concept of "knowhow" (vide paragraph 11 of the OECD Commentary on Article 12). As commonly understood, 'know-how' is the accumulated fund of knowledge acquired by years of observation, research, experimentation and experience. It grows in the shape of a formula, drawings, patterns, blue prints, specifications and so on. The material form it takes, not only facilitates preservation, collation and reference, but also makes it perceptible and visible and easily capabl....
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....la Protection de la Propriete Industrielle), know-how is "undivulged technical information that is necessary for the industrial reproduction of a product or process, directly and under some conditions, inasmuch as it is derived from experience, know-how represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the process of technique." (ii) In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remains unrevealed to the public. (iii) In the know-how contract "the grantor is not required to play any part himself in the application of the formula and does not guarantee the results thereof". (iv) The provision of know-how must be distinguished from the "provision of services, in which one of the parties undertakes to use customary skills of his calling to execute work himself for the other party". Viewed from the above perspective and development of law on the subject, both the AO and DRP have correctly applied the law to the facts of the present case. The secrecy & confidentiality clause in the agreement under which the ....
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....he title/ownership in the equipment was transferred outside India i.e. before the equipment reached India. Even the consideration/payment for sale of equipment was received outside India in foreign currency and majority of the payment (80% - 85% including 10% advance) for each and every part of shipment becomes payable upon delivery of equipment on FOB foreign port of shipment once shipping and other documents are send to the customer. Such payments are made through irrevocable letter of credit. From the documents and evidences it is very much clear that the buyers were the Indian customers who were independent and unrelated parties and purchased the equipment from the assessee on their own account. From the agreements it can be gathered that the contracts for the sale of equipment were concluded on a 'principal to principal' basis. Under the contracts, customers' inspection of the equipment was to be taken place outside India and assessee did not have any office or place of business in India. We have gone through judgments relied upon by assessee, wherein it has been decided that the income from offshore sale of equipment is not taxable in India. The case law of Hon'ble Suprem....
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....State through its PE. The said para (1) further lays down hat only so much of the profits attributable to the PE s taxable. Para (1) of Article 7 further lays down that the attributable profit can be determined by the apportionment of the total profits of the assessee to its various part OR on the basis of an assumption that the PE is a distinct and separate enterprise having its own profits and distinct from GE. Applying the above test to the facts of the present case, we find that profits earned by the Korean GE on supplies of fabricated platforms cannot be made attributable to its Indian PE as the installation PE came into existence only after the transaction stood materialized. The installation PE came into existence only on conclusion of the transaction giving rise to the supplies of the fabricated platforms. The Installation PE emerged only after the contract with ONGC stood concluded. It emerged only after the fabricated platform was delivered in Korea to the Agents of ONGC. Therefore, the profits on such supplies of fabricated platforms cannot be said to be attributable to the PE. There is one more reason for coming to the aforestated conclusion. In terms of para (1) of Art....
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....ing with the issue as to whether the two contracts (Offshore Supply and Onshore Supply) could have been regarded as a single composite contract and the consideration for offshore supply of equipment was attributable to India, the Hon'ble Delhi Court a page no. 462 and 463 of the report, held as under:- "In the final analysis we have no hesitation in holding that viewed from any angle, the fact situation in the instant case is almost identical to that in the case of Ishikawajma (supra) and the law as enunciated by the Supreme Court in the said case will squarely apply to the facts of the present case. If at all there is a difference, the facts in the present case stand on a better footing than in Ishikawajma (supra). In Ishikawajma (supra) there was a turnkey contract with four separate component activities turnkey contract with four separate component activities, viz., offshore supply, offshore services, onshore supply and onshore services awarded by Petronet LNG to a consortium of companies led by the Japanese company Ishikawajma-Harsima. In the instant case there are two separate contracts i.e., offshore supply and the onshore services contract awarded by the PGCIL to the ....
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....could be deemed to have accrued or arisen in India whether directly or indirectly or through any business connection in India." 12. The Authority for Advance Ruling (AAR in short)in the case of Joint Stock Company Foreign Economic Association "Technopromexport", In re. (2010) 322 ITR 409(AAR) discussed the issue that the assessee, a Russian Company, entered into three contracts, namely, (i) offshore supply contract; (ii) onshore supply contract; and (iii) onshore services contract, with NTPC. An issue similar to assessee's case arose for consideration before Authority for Advance Ruling ("AAR") that whether the consideration from offshore supply of all plant and machinery can be taxed in India under the provisions of the Act and India-Russia Tax Treaty. The AAR while deciding the case in favour of the assessee, at page no. 420 of the report held as under: "In view of our above analysis, perusal of documents and case laws, we find that no portion of consideration is received by the applicant in India. Further, no income accrues or arises in India to the applicant as all the transactions took place outside India. The materials were shipped outside India, the title and property ....
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....ome in India, the decision of the Tribunal is directly in point. We share the same view as the Tribunal has taken on this aspect." 13. Further, the coordinate bench of this Tribunal in the case of DCIT Vs. Roxon Oy (2007) 291 ITR (AT) 275 (Mum.) discussed that this case relates to a Finland entity, having a PE in India. The Finnish entity was awarded a turnkey contract by Nava Seva Port Trust (NSPT) to design, manufacture, deliver, erect, test and commission, certain bulk-handing facility. As per the terms of the contact, the taxpayer entity supplied the required equipment from outside India and sent its employees for erection, commissioning and training purposes. In this case, while dealing with the taxability of equipment supplied from outside India, it was held that the direct sale of equipment by the Finnish entity from outside India to the Indian customers is not taxable in India. The Mumbai Bench of this Tribunal, at page no 291 of the report, held as under: "...As per art 7(2) profits attributable to a PE are 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 ....
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....in payment would be payable upon successful completion of those tests and there are clauses for liquidated damages if performance guarantee parameters are not being met. Now, we have to examine the acceptance tests referred by assessee to contend that the sale has taken place in India are the integrated cold tests, performance tests etc conducted at the customer site in India. Before advancing the argument as to how such tests by any stretch of imagination cannot be construed to mean that the sale has taken place in India, the assessee placed the clauses relating to such acceptance tests for TKPO project, which reads as under:- "Clauses relating to acceptance tests Schedule 6 ... ... "16.0 COLD TESTS, INTEGRATED COLD TEST AND START UP ... ... ... 16.5 The Purchaser shall promptly issue the Integrated Cold Test Certificate upon successful completion of Integrated Cold Tests. 17. PROVISIONAL ACCEPTANCE ... ... ... ... ... 17.7 On the satisfactory completion of the performance test and on signing of the Completion protocol between the purchaser and the Contractor, the Purchaser will promptly issue a Provisional Acceptance Certificate for the plant ... ... ... .. ....
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....larly, the above clauses relating to liquidated damages (clause 3.4 of Schedule 3) clearly indicates that when the performance tests do not provide the desired output, the assessee is liable to pay liquidated damages. This is also a normal commercial arrangement agreed in common parlance in the industrial world. This cannot be construed to mean all the contracts should be clubbed together or that the title in equipment did not pass outside India. Reliance in this regard is placed on LG Cable Ltd. (supra). Under identical circumstances, Hon'ble Delhi High Court in LG Cable Ltd. (supra) held that income from offshore supply of equipment cannot be taxed in India despite the fact that such clauses existed in the agreement entered for such sale of equipment. In the connection of tests, Hon'ble Delhi High Court, at page no. 460 of the report, has held as under:- "29. Thus, the mere fact that 15% of the payment was to be retained by the PHCIL to be period 30 days after operational acceptance on erection and completion of the system cannot be construed to mean that the title in goods did not pass to the buyer in the contrary of origin. 30. Then again, in our considered opinion, u....
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....ed transaction. It was a part and parcel of the business venture, or business connection, between the assessee and the non-resident. The sale of machinery was in pursuance of and one of the things to be performed under and in pursuance of the agreement entered into between them. This is also the view expressed by a Bench of this Court in Bharat Heavy Plate and Vessels Ltd. vs Additional, Commissioner of Income-tax (1979) 119 ITR 986. The same view is expressed in the subsequent decision in Skoda Export vs. Additional, Commissioner of Income-tax (1983) 143 ITR 452 (AP) as well. We may also mention that learned standing counsel for the Department challenged the finding of the Tribunal that the sale of machinery was completed outside India. According to him, the sale was completed only in India, inasmuch as the assessee was entitled to inspect and satisfy itself about the quality and standard of the machinery supplied. We do not see any substance in this contention. The various clauses in the agreement referred to above make it clear that the sale of machinery was F.O.B. European port, and the time of fulfillment of delivery was prescribed as the date of the bills of lading. The pa....
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.... not pass to buyer outside India. Accordingly, the clause of acceptance tests and liquidated damages are nothing but merely in the nature of warranty provision and its remedial measures. Hence, undue importance cannot be given to such clauses and the same cannot be construed to mean that any portion from the sale of equipment can be taxed in India. The fact that the acceptance test would not have any impact on the transfer of title has also been agreed and accepted by the ITSC in the order passed for Financial Years 2007-08 and 2008-09. 17. Further, the alternative plea of the assessee that the acceptance tests would not have any impact on conclusion of sale in India and hence no attribution can be made to the supervisory PE on this account, the assessee argued that in case of supervisory PE only the income arising on account of supervisory activities can be taxed in India since the PE has been constituted merely on account of rendition of supervisory services under Article 5(2)(i) of the DTAA which provides that "The term "permanent establishment: includes especially, - (i) a building site or construction, installation or assembly project or supervisory activities in connection....
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....question of any attribution being made for supply of equipment to the supervisory PE does not all. The fact that the PE under the DTAA has to be determined separately for each of the project is clearly evident from the wording of Article 5(2)(i) of the DTAA which reads as under:- 'The term "permanent establishment" includes especially, - (i) a building site ors construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities continue for a period exceeding six months.' The word "such project, project or activities" mentioned under Article 5(2)(i) of India-Germany DTAA clearly indicates that the supervisory PE has to be examined separately for each of the project. The above legal position has also been confirmed by the Mumbai. This position has also been affirmed by the Mumbai Tribunal in the case of M/s Krupp Udhe GmbH vs Addl. CIT (28 SOT 254), which is also based on India-Germany DTAA. In this regard, the Mumbai Tribunal has held as under:- "24. We have gone through the various treaties referred to by the learned counsel for the assessee. The perusal of such treaties shows that whenever the contracti....
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....ld be regarded as a singe unit, even if it is based on several contracts, provided that it forms a coherent whole, commercially and geographically.' 27. We may also refer to the decision of the co-ordinate Bench in the case of Sumitumo Corporation (supra) wherein it has been held that could be different PE's with reference to different unconnected contracts even though each contracts may be entered into by the same parties. In that case, MarutiUdyog Limited awarded various supervisory contracts on Sumitumo Corporation which were to be executed independently at different sites in the factory of MarutiUdyog Ltd., Since there was no effective connection between such contracts, it was held that minimum period of 130 days was to be separately for each contract and could not be aggregated." 28. In view of the above discussion, it is held that in computing the minimum period of 6 months, various sites cannot be considered together particularly when different contracts had no effective interconnection with each other. In the present case, the assessee had entered into various contracts with various parties in respect of various independent projects located at different places. Hence,....
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....he assessee on completion of various tests. In case these tests are unsuccessful Tata Steel or the party concerned can claim liquidated damages not exceeding 35% of the contract price. Accordingly, the clause of acceptance tests is merely in the nature of warranty provisions. Even the reliance placed by AO on various clauses of Sales of Goods Act is misplaced. Since the Hon'ble Delhi High Court in the case of LG Cables Ltd., supra 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, supra 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. 20. The next issue in this appeal of the assessee is against the order of DRP and that of the AO in assessing the income from supervisory services. For this, assessee has raised following grounds: "Income from Supervisory S....
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....n to the above, it is argued that the net profit rate of 27.5% as considered by the AO is excessive for the relevant year and thus not acceptable to the assessee. Aggrieve, assessee preferred appeal before Tribunal. 22. We have heard rival contentions and gone through facts and circumstances of the case. We find that DRP has decided this issue of taxability of income earned from supervisory services in India by the assessee and adopted the profit margins at 27.5% of profit attribution by relying on the decision of the ITSC for FY 2007-08 and 2008-09 by observing as under: "The AO has relied on the order of the ITSC for the FY 2007-08 and 2008-09 wherein a profit percentage of 27.5% of gross revenue was determined supervisory services. The AO has concluded that the facts for the current year were similar to the aforesaid two years and thus considered it reasonable to apply a profit percentage of 27.5% on the income earned by the assessee from providing supervisory services. The assessee contended that the profit percentage of 17.93% is based on the margins earned by the similar Indian comparable companies. The AO cannot simply reject the same without showing any basis. The ....
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....fore us also the assessee could not demonstrate the functional similarity of services of the comparable companies so as to consider the comparability and accept the profit margin. In view of the above we upheld the profit margin adopted by the AO and reject the objection of the assessee on the issue of profit margin on supervisory services." 23. Before us the assessee contended that it has computed the profit percentage at 17.93% based on margins earned by similar Indian comparable companies. The DRP as well as AO in its orders has mentioned that profit margins of some Indian companies, per se, will not justify the profit margins admitted by assessee as the assessee failed to demonstrate the functional similarity of the services of the comparable companies. The assessee contended that the comparable companies relied on by the assessee are involved in the business of engineering and technical services and such comparable companies have been rightly relied upon by assessee in order to arrive at the net profit margin of 17.93% on gross revenue earned from supervisory services. It was contended that the final order of the ITSC for FY 2007- 08 and 2008-09, the margins of comparabl....
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....nt from sale of designs and drawings is taxable as Royalty merely based on the conclusion of the Hon'ble Income Tax Settlement Commissioner (ITSC) in the past years ignoring that the conclusion of ITSC is not as per the provision of the law and the appellant has accepted the decision of Hon'ble ITSC merely to buy peace. 4(c) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that the sale of designs and drawings by the appellant as granting of license allowing the Indian customer to use it without appreciating the fact that the customers use these designs and drawings for internal purpose of setting up their plants and not for commercial exploitation. 4(d) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that merely because the intellectual property in designs and drawings has not been transferred to the customer the nature of transaction will change from sale of goods to use of license." 26. Brief facts relating to this issue are that the assessee provided drawings, designs & engineering documents relating to steel industry in India to the customers for the operation and maintenance of....
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....sion of Hon'ble Jaipur ITAT is reproduced herein below: 'Having regard to the facts, material on records and ratio of various decisions(s) cited I come to the irresistible conclusion that the amount payable to Italian company for supply of technical know-how and basic process engineering documentation for setting of the plant in India for manufacturing of PTA is the business profit in the hands of Italian company and the Italian company having no permanent in India the same is taxable in Italy and not in India. The Revenue authorities are, therefore, not justified in taxing the said payments in India treating the same as royalty...' 3. Retaining intellectual property in designs and drawings is similar in nature to the retaining of patented rights in any goods / machinery. Restriction on the intellectual property in designs and drawings sold by the assessee for the purpose of setting up a plant in India does not change the character of the transaction from the sale of the product to the use of license/know-how. 4. The mere fact that the word license has been used in the agreement would not make any difference in the taxability of the income. 5. Although Hon'ble I....
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....has to be treated as royalty in terms of Section 9(1)(vi) Explanation 2 because under the agreement the applicant companies had granted license to the Indian companies to use the technical know-how for setting up the plants. It is also important to realize that the know-how was to remain exclusive property of the applicant companies and the Indian companies had to maintain secrecy of the know-how which could not be disclosed to other parties, and it could be re-used by them only after further payment to the applicant companies as per future separate agreements. The case laws relied upon by the Ld. AR do not specifically deal with such set of facts which are peculiar to the applicant's case, and are hence not applicable in the case of the applicants. The applicants' case is thus primarily covered by Explanation (2) of Section 9(1)(vi) of the IT Act, which define royalty. 77. We have closely examined the TDS certificate filed before us by the Ld. AR and observe that some of the payments on which TDS has been deducted are on account of technical services. We further observe that the technical know-how provided by the applicants is so highly specialized that the clients have to heav....
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....t technology, pellet plant technology etc that are required for the purpose of setting up/erection of plants. Such technologies are developed after undertaking various research and development activities. The designs and drawing are largely the products of the aforesaid technologies that are sold to its Indian customers after being modified, to meet their requirements. The modification activities have been performed by the assessee in its own country i.e. the entire work has been undertaken / performed outside India. The designs and drawings sold by the assessee were used by the Indian customers for internal business purpose of setting up of their plants and not for any commercial exploitation. Sale of designs and drawings has also effected outside India. Copies of the sample airway bills evidencing that the delivery of designs and drawings for various projects has taken place outside India is enclosed in assessee's paper book. Consideration/payments for the basic engineering work were received by the assessee outside the territory of India in foreign currency. All the contracts were net of tax contracts and the liability to pay taxes was on the Indian customers. 28. The relevan....
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....he erection and commissioning of the plant, the equipment may not remain as a property and the whole contract becomes a project for plant erection. It is the assessee whoop agreed to erect the plant and for the sake of convenience the terms of supply of equipment, designs, supervision, etc., were specified. Given the fact that the assessee had a PE in existence to undertake the project, it should have undertaken a robust transfer pricing methodology while allocating prices to different work segments and the supply for equipment should have been proved by the assessee to be at arm's length, which was evidently not done by the assessee. The DRP in its order at page 18 notes that 'Thus the equipment is part of whole plant which consists of various designs, electrical and automated systems. Though the contract is split into parts, the completeness of the contract is achieved only after the successful testing of the plant. The works done by the assessee may include supply of material, equipment, drawings documents, guaranteeing the work. The responsibility of the assessee did not stop with the supply of the equipment and when the contract is for the work, the supply component need not b....
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....nsel for the assessee. Hon'ble Supreme Court in the case of Scientific Engineering House P. Ltd. Vs. CIT (SC) 157 ITR 86 dealing with the issue of whether the drawings, designs, charts, plants etc. constitute a plant and are entitled to depreciation, Hon'ble Supreme Court held in the affirmative case on page no 97 of the report as under: "Obviously, the purpose of rendering such documentation service by supplying these documents to the assessee was to enable it to undertake its trading activity of manufacturing the odolites and microscopes and there can be no doubt that these documents had a vital function to perform in the manufacture of these instruments; in fact it is with the aid of these complete and up-to-date sets of documents that the assessee was able to commence its manufacturing activity and these documents really formed the basis of the business of manufacturing the instruments in question. True, by themselves, these documents did not perform any mechanical operations or processes but that cannot militate against their being a plant since they were in a sense the basis tools of the assessee's trade having a fairly enduring utility, though owing to technological a....
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....spect of the above mentioned services, the ultimate ownership of the designs and drawings are never passed to the buyer, and only license to use the same is granted. In this way, the true nature of the receipts are Royalties under section 9(1)(vi) of the Income Tax Act, 1961 and Article 12 of India-Germany DTAA rather than Sale of designs and Drawings as a product. It was explained that the nature of retaining intellectual property in designs and drawings, due to which the ownership has never passed on to the buyer, is similar in nature to the retaining of patented rights in any goods / machinery. For example, if any customer purchases a car, in that case, the company does not transfer its patent or intellectual property to the buyer of the car but that does not change the nature of the transaction from sale of a product to use of a patent/intellectual property. Similarly, restriction on the intellectual property in designs and drawings sold by the assessee for the purpose of setting up a plant in India does not change the character of the transaction from the sale of the product to the use of license/know-how and the mere fact that the word license has been use in the agreement wo....
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....ght are limited to enable the user to operate the program, for example, where the transferee is granted limited rights to reproduce the program. This would be the common situation in transactions for the acquisition of a program copy. The rights transferred in these cases are specific to the nature of computer programs. They allow the user to copy the program, for example on to the user's computer hard drive or for archival purposes. In this context, it is important to note that the protection afforded in relation to computer programs under copyright law may differ from country to country. In some countries the act of copying the program onto the hard drive or random access memory of a computer would, without a license, constitute a breach of copyright. However, the copyright laws of many countries automatically grant this right to the owner of the software which incorporates computer program. Regardless of whether this right is granted under the law or under a license agreement with the copyright holder, copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation ....
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....ng rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, in necessary to trigger the royalty definition. Viewed from this angle, a non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all the of the enumerated rights ingrained in a copyright. Where the purpose of the licenceors the transaction is only to establish access to the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself has been transferred to any extent. It does not make any difference even if the computer programme passed on to the user is a highly specialized one. The parting of intellectual property rights inherent in and attached to the software product in favour of the licencee/customer is what is contemplated by the definition clause in the Act as well as the Treaty. As observed earlier, those rights are incorporated in Section 14. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, in our view, am....
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....the ITSC on this issue merely to buy peace of mind and to avoid protracted litigation with the revenue. 37. From the above facts and legal position, it is clear that the basic engineering packages sold by the assessee to the Indian customers have been largely designed on the basis of standard technologies available with it. The consideration was, therefore, for the sale of the product, which is embedded in the plant set up by the Indian customers and does not constitute royalty and is in the nature of business income. Since the work was done outside India and sale was taken place outside India, such income is not taxable under the provisions of the Act and DTAA. Retaining intellectual property in designs and drawings is similar in the nature to the retaining of patented rights in any goods/machinery. Restriction on the intellectual property in designs and drawings sold by the assessee for the purpose of setting up a plant in India does not change the character of the transaction from the sale of the product to the use of licence/know-how. Normally, designs and drawings sold by foreign customers were used by Indian customers for internal business purposes for setting up of their ....
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....ion and this fact has been confirmed by the various courts/Tribunals//AAR in several judicial precedents. 2(d) On the facts and in the circumstances of the case and in law, Ld. AO erred in rejecting the reliance placed by the appellant on the decisions of DIT Vs. Ericsson A.B [343 ITR 470], DIT Vs. LG Cable Ltd.[237 CTR 438] and Director of Income Tax vs. Ms. Nokia Networks Oy [253 CTR 417] merely on the contention that such decisions are sub-judice before the Hon'ble Apex Court. 2(e) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that the contracts entered into by the appellant are composite contracts, for erection of plant purely based on surmise and conjecture and without appreciating that the contracts are for supply of equipment. 2(f) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in not appreciating the fact that no Permanent Establishment (PE) of the appellant is created in India u9nder Article 5 of the DTAA for offshore sale of equipment to the Indian customers and accordingly no income, from such sale of equipment is taxable in India under the provision of the DTAA. 2(g) That on the ....
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....ly identical to the facts and circumstances of the case of Outotec GambH for the same assessment year 2010- 11, hence, taking a consistent view and applying the same decision, we dismiss this issue of assessee's appeal in this case also. 45. The next issue in this appeal of assessee is as regards to levy of interest u/s. 234A and 234B of the Act. This charging of interest u/s. 234A and 234B of the Act is consequential in nature and AO will recompute the same accordingly. 46. Coming to ITA No. 283/K/2015 for AY 2011-12. The issue as regards to taxability of supply of equipments in India, the assessee has raised following grounds: "Taxability of supply of equipment in India 2(a) That on the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that a part of the income earned by the appellant from sale of equipment to the Indian customers accrues or arises in India and thus taxable in India under the provisions of the Act read with the provisions of India-Germany Double Taxation Avoidance Agreement (DTAA). 2(b) That on the facts and in the circumstances of the case and in law Ld. AO/DRP erred in holding that title of the equipment sold by a....
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....operation relating to design, fabrication and manufacture of the equipment were undertaken outside India and hence there is no role of supervisory PE in offshore sale of equipment. 2(j) That on the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that once there is supervisory PE for one of the projects the said PE would become applicable for other projects as well without appreciating the fact that the wording of Article 5(2)(i) of the DTAA clearly provides that PE has to be determined separately for each of the projects. 2(k) That on the facts and in the circumstances of the case and in law, Ld. AO /DRP erred in holding that the judgment of Ishikawajma-Harima Heavy Industries Ltd. Vs. DIT 288 ITR 408 and other judicial precedents relied upon by the appellant were based on their own facts without appreciating that such decisions are squarely applicable in the appellant's case." 47. As the facts and circumstances are exactly identical to the facts and circumstances of the case of Outotec GambH for the same assessment year 2010- 11, hence, taking a consistent view and applying the same decision, we allow this issue of assessee's appeal in t....