TaxTMI 
TaxTMI 
2015 (6) TMI 765
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the appellant. 4. Without prejudice the Ground No. 3, Ld. A.O./DRP erred in attributing the entire gross Revenue of Rs. 5,16,57,291 pertaining to supply of spares from outside India for the GMR project to the Chennai PE. 5. Illegally determining the profit of the PE from operations inside India contrary to the show-cause notice dated 20.3.2013 wherein (as in the case other FTWW projects) the appellant was asked to explain as to why such profit should not be estimated at 25 percent of the gross Revenue from the GMR project. 6. In arbitrarily determining the profit from operations Inside India at Rs. 11.23 crores as against gross Revenue of Rs. 15.80 crore. 7. Holding that the Mumbai Office constitutes a fixed place PE under Article 5(1) of the DTAA for the purpose of taxing royalties received from its 100% subsidiary Hyundai Construction Equipment India (Pvt.) Ltd. (HCEIPL), Pune. 8. In taxing the appellant's income by way of royalties from HCEIPL as business income under Article 7 of the DTAA read with sec. 44DA of the Act. 9. Taxing the receipt of 'interest' from HCEIPL for delay in payment of royalties as business income instead of taxing it as 'income from ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Office is fixed placed PE under Article 5 of DTAA with Korea for the purpose of taxing royalties received from HCEIPL and interest earned on delayed payment of royalty as business income? (Ground Nos. 7 to 9). ii) As to whether the Assessing Officer is justified in attributing income from supply of spares FOB, Ulsan, Korea as per contract with GMR Power Ltd. ? (Ground Nos. 3 to 6). 7. Issue No.1: The Assessing Officer has dealt with the issue at page Nos. 1 to 3, 6, 10 to 12 of the assessment order. The learned DRP has dealt with the issue at page No. 8 of the order. 8. The relevant facts are that the assessee is engaged in the business of offshore construction and power project. During the year under consideration, the assessee received revenues from the following projects: Sl. No. Name of Project Name of the Company Scope of work Revenue for the year 2008-09 1. Mumbai Uran Trunk Pipeline Project (MUT) Oil & Natural Gas Corporation Ltd. (ONGC) EPC contract for complete new oil and gas trunk pipelines on Uran Terminal Nil 2. GMR Diesel Generator Power Project (GMR O & M) GMR Operations and maintenance 153,721,278 3. Hyundai Construction Equipment I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....DRP at pg. 44/AM). Interest is on delay in payment of royaly by HCEIPL and therefore taxable @ 15 percent under Art. 12 of DTAA, being interest on Debt claim. According to AO, it is business receipt & therefore taxable @ 40%. ii) Tata & Nissan Installation Projects lasted for period beyond 9 months prescribed in Art. 5(3) of DTAA. The assessee offered it for tax as FTS tax @ 10% of gross receipt. The AO taxes it as business income u/s 44DA read with Art. 7 of DTAA by estimating profit @ 25% of gross receipt. Issue academic. Tax effect same. iii) No project this year has nexus with Mumbai L.O. The AO has mere cut and paste Assessment orders for earlier years, relating to ONGC projects, which also have not been accepted by Tribunal earlier (Pg. 631G/Vol-IV). There is no ONGC project this year. iv) Though HHI had claimed expenses of Rs. 94.93 lakhs in respect of MUT contract with ONGC. The claim was withdrawn as all contracts with ONGC were completed in earlier years. 12. The contention of the Learned CIT(DR) remained that the agreement is dated 20.3.2008 and provisions of sec. 44DA will apply if the royalty received is effectively connected to the PE of the assessee. He s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....% as per Article 12 of the DTAA with Korea. 14. Considering the above submission, we find that since beginning the Revenue's contention has been that the assessee's Mumbai office is a fixed placed Permanent Establishment (PE) within the meaning of Article 5(1) and 5(2) of the Treaty. The assessee on the other hand has always maintained a position that wherever the projects duration exceeds a period of nine months stipulated in Article 5(3) of the Treaty, it has an installation PE, else it does not have any PE in India. The DRP has noted that the assessee had relied upon the principles of generalia specialibusnon derogant and accordingly has taken a stand that Article 5(3) being a more specific provision override Article 5(1) and 5(2). However, the learned DRP found that the above proposition of the Assessing Officer on similar facts has been confirmed by them in earlier years. The learned DRP has noted further that there is no change in assessee's business and the liaison office at Mumbai is a fixed place of business available to the assessee as per assessee's own admission. The learned DRP has upheld the proposition of the Assessing Officer that assessee had a PE in India. In t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o whether Mumbai Liaison Office is fixed place PE in relation to contract with ONGC under Article 5 of the Treaty with Korea has not been disputed by the assessee in the assessment year 2007-08 before the ITAT and the same has been followed in the assessment year 2008-09 in the order of the ITAT in this regard. 16. In view of the above discussion, we find that the authorities below has simply followed its orders for earlier assessment years on the issue of treating the Mumbai Liasioning Office as PE. However, to decide the issue as to whether Mumbai Liaisoning is PE for the purpose of HCEIPL as well for the purpose of taxing royalties received from HCEIPL and interest earned on delayed payment of royalty as business income, verification of the above aspects of the facts/contentions raised by the Learned AR is required to be made afresh to meet out the ends of justice. We thus set aside the matter to the file of the Assessing Officer to decided the issue raised in ground Nos. 7 to 9 afresh after affording opportunity of being heard to the assessee under the above stated background. The ground Nos. 7 to 9 are thus allowed for statistical purposes. 17. Issue No. 2: The Revenue's....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., manufacture, transport, demonstration, testing, commissioning and startup of the units and facilities in respect of a 200 Mg. capacity diesel engine based power generating facilities consisting of four units of 50 Mg. near basing bridge, Chennai. 19. The assessee submitted that the GMR contract was an old contract running from assessment year 1998-99 and since assessment year 1998-99, the assessee has been claiming part of receipts from GMR contract on account of operations carried outside India, to be not taxable in accordance with the provisions of sec. 5(2) read with sec. 9 of the Act and also Article-7 of the DTAA. It was pointed out that the issue with regard to taxability of Revenue from operations carried outside India, in respect of this year contract, has been a subject of dispute with the Revenue right from the assessment year 1998-99 and has travelled up to the ITAT and has also been decided in favour of the assessee i.e. the appellate authorities have confirmed the same to be not taxable in India. It was pointed out that for the assessment years 1998-99 to 2004-05, the ITAT vide its order dated 29.5.2009 (31 SOT 482) held that income from offshore operations cannot....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he goods included any element of service rendered by the Chennai PE in India, there is nothing left for attribution to the PE? d) Whether the income of Chennai PE from GMR project should not be assessed u/s 44DA read with Sec. 115A in the same manner as in the case of other FTS projects and as show-caused by the AO as order sheet entry dated 20.3.2013? 22. In support of the issue No.2 consisting of the above sub-issues, the Learned AR submitted as under: GMR Project GMR Contract (Annexure 6/ Paper Book) 22.1 The assessee had constructed & installed 200 megawatt diesel power plant consisting of 4 units 50 mega watts each for GMR Vasavi Power Corporation Ltd., Chennai (GMR) (a listed Indian Company) in 1997-98. Apart from supply, installation and commissioning of the said plant, the Agreement also provided for maintenance, operations and supply of spares & tools for next ten years after the expiry of initial warranty period. The contract between two unrelated parties, which describes the operator's obligations therein. 22.2. The Contract dated 15.5.1997 for 'Operation and Maintenance', of the Power Plant is in two parts:- i) Operations & Maintenance s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he assessee has to submit the Annual Plan forecasting the requirement of spares, tools and material to be procured and supplied domestically and abroad for every forthcoming financial year. On approval of the Annual Plan by GMR the forecast the year's requirement of supplies is broken down into 12 monthly invoices for procurement and supply of spares & tools etc. (Cl. 10 r.w. Schedule IV, V & VA of the Contract). The monthly invoices are duly verified by GMR before making payment. Any surplus inventory procured for GMR at the end of a year, it is carried forward and adjusted against requirement forecast for next year. A summary of the terms of the GMR contract is annexed. 22.9 The Custom duty and clearing charges etc. are fully reimbursed by GMR on the basis of invoices raised on the assessee by the C&F Agent (Pg. 250/Vol.-II). The Revenue has never treated this amount of reimbursement of custom duty, clearing charges and internal transport to the site as income of the PE. There is no dispute on this issue. Price of spares etc. imported from Korea at arm's length:- 22.10 The revenue has always accepted the value and quantum of the imports of spare parts and tools by G....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 5,16,57,291) to GMR by raising an invoice of USD 94,372 each month for 11 months and USD 87,796 for the month of April 2008. This amount of USD 1,125,889 has not been offered to tax for the reason that supply of spares is made from outside India on FOB basis, as per the terms of O & M contract with GMR. GMR has deducted tax out of these payments (page 110 P.B). The assessee had earlier supplied and installed the power plant and has been operating and maintaining the power plant. It has been operating and maintaining the power plan on regular basis pursuant to the Operation and Maintenance Agreement with GMR entered on 15.5.1997. 2. Page 8 of the assessment order notes that it is a conceded fact the assessee's Chennai Project Office (In respect of GMR Contract) constitutes a PE under the provisions of Article 5(3) of the DTAA. Article 5.1, 5.2, 6.3, 6.4 of the Operation and Maintenance Agreement explicitly refers to Project site that constitutes a fixed place PE as per paragraph 1 of Article 5 of the DTAA. Schedule 7 of the Agreement contains information on Manpower for operation and maintenance of the Project that include 4 supervisor of HHI (Hyundai Heavy Industries) and 78 In....
X X X X Extracts X X X X
X X X X Extracts X X X X
....month on account of spares and toll kits in USD irrespective of actual purchases and use of spares and tool kits in the maintenance. Pages 250 and 251 of the PB show that assessee is incurring expenses on clearing and forwarding. It is paying customs duty on import of spares. This indicates that the assessee is purchasing/importing spares against fixed payments made by GMR. Spares import by the assessee is for the GMR Project. Its clearing agency is customs clearing the spares. It is importing the spares (of what amount during the year, information on invoices and amount not on record) for the project against which it is receiving the amount from GMR the difference of receipts and expenses is its income and should have been offered to tax. 7. The reliance of the assessee on the order of the Hon'ble Supreme Court in its own case (2911TR 482) does not help its case in this year as that decision was based on the facts in the contract with the ONGC. Assessee has relied on paragraph 11 of the decision (page 230 of PB-II). In that case the sales were directly billed to the Indian customer (ONGC). In this case as mentioned above the assessee did not make any sale to GMR and utilize....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t affect the taxability of transactions under the Income Tax Act and the DTAA. Transfer of title may be relevant for the purpose of deciding the place of accrual of income but not for the purposes of income deemed to accrue or arise in India. The income attributable to the activities performed/operations carried out in India is taxable in India. The Revenue places reliance on the decisions of the Hon'ble Apex Court in the case of CIT v. Ahmedbhai Umarbhai and Co. [1950] 18 ITR 472 (SC), Anglo French Textile Company Ltd v. CIT [1954] 25 ITR 27 (SC) and Carborandum Co. V. CIT [1977] 108 ITR 335 (SC) in this regard. The Hon'ble Supreme Court in the case of Carborandum Co. (page 343) has held that income accruing or arising from any business connection in the taxable territories - even though the income may accrue or arise outside the taxable territories- will be deemed to be income accruing or arising in such territory provided operations in connection with such business, either all or a part, are carried out in the taxable territories. This principle of apportionment of profit is also authorised by clause (a) of Explanation 1 to section 9(1) (i) of the Act and this principle ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... At the end of the year, necessary adjustment entries are passed by GMR adjusting the closing unused inventory towards next year's annual plan for imports. Schedule 4 bifurcates "imported portion" and "Local rupee portion". Schedule 5 gives the list of "repair Kits costs US $ (FOB Ulsan)" and item-wise number of spares and parts required to be unported by GMR. Similar list in respect "Deisel Engines" "FOB Ulsan" is enumerated in Schedule 5A. Thus, the Schedules to the Agreement makes it clear spareparts are exported FOB from Korean port (Ulsan). ii) DR's Contention "Page 250-251 of the PB show that the assessee is incurring expenses on clearing and forwarding". Rejoinder: Pages 250-51 (Vol. II) is the copy of clearing & forwarding A/c in the Ledger. The bills raised by C & F Agent on N. Jamnadas & Co. and JM Baxi & Co. are paid and reimbursements are received from GMR. Neither these payment are booked as expense and nor is the reimbursement from GMR is booked as income ever since FY 1995-96. This position prevails this year also. The Ld. AO has accepted this position and has not interfused with it. Thus, the assessee, for the sake of convenience, deals with C & ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ase in 291 ITR 482. There is another reason as to why the addition made by AO is not justifiable. The order sheet entry dated 20.3.2013, reads as under:- "GMR Project - "you are requested to show-cause why profit may not be estimated @ 25% on GMR project". (Pg.661/ Vol. IV) However, when the Ld. AO realized later that the assessee had declared profit, which was about 30% of gross receipts from GMR (both inside & outside India), he suo-motu and without giving any notice to assessee estimated 100% of gross receipt from sale of spares from outside India and about 70% of the gross receipts of the PE for O &M service inside India as business profit attributable to the PE. This is clearly illegal Ld. D.R.'s reply is silent on this aspect of the matter. HCEIPL HCEIPL is 100% subsidiary of the assessee company. HCEIPL has set up plant in Pune for manufacturing construction & earth moving equipment. It obtains technology and know-how from the assessee under an agreement dt. 20the March, 2008. It pays FTS/Royalty to the assessee, which has been found to be at arm's length price by the TPO. The assessee has no PE in India as the technology including training, is provided to HCE....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(pgs. 186 & 195of PB/1) Further, there is no concept of 'supervision PE' in Korean DTAA. Even if a supervisor is deputed, no PE in India is formed. There is no fixed place 'PE' as the supervisor is deputed not for the business of the Korean company, but that of HCEIPL, an Indian company. "Supervision in connection with" a construction/ installation PE would constitute PE only if such supervisory activities continue for more than 9 months. (Article 5 (3) of the DTAA at Pg.21/ compendium). There is no allegation to this effect either by the Ld. DR on the AO/CIT (A). Hence, the interest on delayed payment of royalty by HCEIPL cannot be taxed as business income u/s 44DA @ 40%, but @ 15% as per Article 12 of the DTAA with Korea. Findings: 25. The claim of the assessee as per the above discussion remained that the offshore supplies are not taxable and Learned AR placed reliance on the decisions of the ITAT in its own case on an identical issue for the assessment years 2007-08 and 2008-09 (supra) decided in favour of the assessee. The contention of the Revenue remained that bifurcation of income from GMR Project in items of "inside India" and "outside India" is not correct. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....utable to PE of the assessee in India : a) the ONGC has floated international tender. The assessee has won the tender by giving lowest bid. Prior to filing sealed bid, it is illegal for the bidder to negotiate the bid. Even the department has not levelled any allegation to this effect,. The bidder can mail queries on technical aspect of the tender. Thus, it suggests that transactions of the assessee with the ONGC were at arm's length price and they are not associate concerns of each other. (k) All receipts for operation inside India have been offered to tax as income in earlier years as well as this year. The entire receipts from the installation work carried out in the offshore site since the arrival of material has been offered to tax." 21. The Tribunal accordingly held that the contracts are divisible. The receipts pertaining to designing, fabrication and supply of material, the activities carried out outside India is not taxable in India. Respectfully following this decision on identical issue in the assessment year under consideration we decide the issue raised in the grounds Nos. 6, 6.1 to 6.3 relating to MUT pipeline project, MSP platform project, of ONGC and GMR (o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... date of the notification of the award and not from the date when the installation activities commenced has been questioned. In ground No.10 the action of the authorities below in not following the principles of consistency also by Article 7(5) of the India Korea DTAA by adopting the new formula for estimating the income of the assessee for operation carried inside India, has been questioned. 23. We find that the issues raised in these grounds have been covered by the Tribunal in the case of assesee itself for the assessment year 2007-08 (supra) relevant para No. 32 of the order of the Tribunal has been reproduced hereinabove. 24. Respectfully following the decision taken therein in para 32 of the said order, we hold that the receipts pertaining to designing, fabrication and supply of material, the activities carried out outside India is not taxable in India. Other issues raised in these grounds have become infructuous. These grounds are accordingly disposed of". 25.1 We thus find that there is no dispute that existence of PE was there during the year and the year under consideration was last year of completing the contract. It is a well established proposition of law that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rvice tax are debited in the profit and loss account. The ground Nos. 10 & 11 are accordingly allowed for statitstical purposes. Additional Ground: 27. Interest under section 234B of the Act 27.1 The learned AR contended that the issue is covered by the decision of Hon'ble jurisdictional High Court of Uttrakhand in the case of Maersk's Shipping - 334 ITR 79 and the decision of Hon'ble Delhi High Court in the case of Alcatel - 264 CTR (Delhi) 240 is not applicable. He submitted further that the appellant is a foreign company and during the year was in receipt of income for its outside India and inside India activities from TATA Motors Ltd., Nissan Motors Ltd., HCEIPL and GMR. All receipts of the assessee were subject to deduction of tax at source as fee for technical services at 10% as prescribed under sec. 115A except those from GMR, on which that was deducted in accordance with the order obtained under sec. 197 of the Act for lower deduction of tax. The assessee also received interest income on which also tax was duly deducted at the rate of 15% in accordance with Article 12 of the DTAA as entered into between India and Republic of Korea. He submitted further that for the....