TaxTMI 
TaxTMI 
2017 (2) TMI 634
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....a ("AAI") for rendering services and supply of equipments. The Assessee received payments in respect of performance of services and supply of equipment under the following contracts in India: * Supply, installation, testing and commissioning of Advances Surface Movement Guidance Control System (,ASMGCS') at Chennai, Mumbai and Kolkata airports by Airport Authority of India ('AAI') (Airport Authority of India (Mumbai, Chennai and Kolkata airport) * Supply, installation, testing and commissioning of Air Traffic Control system at the Delhi airport by AAI (Airport Authority of India (Delhi airport) * Establishment of Yes se I Traffic Service system in the Gulf of Kuchchh (GOK contract) * Contract to provide annual maintenance of the Y ATMS system installed by ONGC (ONGC AVTMS - Annual Maintenance Contract) * Contract to provide interface between the VATMS network and the naval network to enable down load of data by navy from the Y ATMS (ONGC V ATMS - Extra Work) 3. The nature of activities undertaken by the Assessee and receipts from the said activities during the subject year for each project was as follows: HITT Holland Institute of Traffic Technology....
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....upply of Services 10,000 9,570 430 25,641 Onshore Supply of Services 182,174 182,174 0 0 Total 192,174 191,744 430 25,641 ONGC (Extra Work)Project Offshore Supply of Services 54,419 10,116 44,303 2,641,759 GRAND TOTAL 1,803,493 1,606,808 196,685 11,692,346 Note : The profits earned by the Assessee are in foreign currency - USD for GOK Project and Euro for other projects. Such profits have been converted to INR as per the mechanism prescribed under Rule 115 of the Income tax Rules, 1962 ('Rules ') using an exchange rate Euro = INR 59.63 and USD = INR 44.67. 5. The assessee had established a Project Office ('PO') in India in the year 2005 for the GOK Project, However, it has not performed any activity in relation to any of its contracts in India from the said PO. The project office has only been used to collect money and pay certain expenses on behalf of the Assessee through its bank account. Therefore, no part of the contract execution has been carried out through the PO in India. Therefore the Assessee did not have a Permanent Establishment (PE) in India. This has been accepted by the....
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....r taxing income/profits from direct transactions effected by the non-resident, provided the transactions are of the same or similar kind as that effected through the PE, which is referred to as "Limited Force of Attraction" principle. Some provide for taxing profits/income from all transactions whether they are attributable to PE or not or whether they are of the same kind of transactions carried on by the PE or not, which is referred to as "Full Force of Attraction" principle. As to which principle is applicable in a given case depends on the clauses of the convention between two countries. Article 7(1) of the DTAA between India and Netherlands provides for taxing profits of the enterprise in the other state only to the extent they are attributable to the PE in the other state, adopting "No Force of Attraction" principle. With the above broad principles in mind we will now consider the facts of the present case and the rival contentions on behalf of the assessee and the revenue on the various grounds of appeal raised by the Assessee before us. 7. For the subject year, the assessee filed its return of income for the subject AY declaring income of INR 1,19,26,000 pertaining to tr....
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....sessee in the same order in which grounds of appeal have been raised by the Assessee before us. 10. Ground "A" raised by the Assessee reads as follows: A. Airports Authority of India (Mumbai, Chennai and Kolkata Airport) Project: 1. The Deputy Director oflncome-tax (International Taxation)-l(l), Kolkata (hereinafter referred to as 'the Ld.AO') has erred in proposing and the Hon'ble Dispute Resolution Panel, Kolkata (hereinafter referred to as the 'Hon 'ble DRP') has further erred in confirming that all the revenue from separate and distinct transactions, being part of a single and composite contract should be offered to tax in India since such contract is indivisible for tax purposes. 11. The Assessee was awarded a contract by Airports Authority of India (AAI) for Supply, Installation, Testing & Commissioning (SITC) of Advance Surface Movement Guidance Control System (ASMGC) at Chennai, Mumbai and Kolkata Airports. The Purchase order of AAI was dated 15.4.2008. Annexure-I to the said purchase order gives the details of items to the supplied. Clause-1 of the said purchase order reads thus: "1. PRICE: The items in the Annexure-I and Annexure ....
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....t the AO was not correct in treating the aforesaid defunct PO as the PE of the assessee in India. The DRP in their directions held that the PO was not involved in the business activity related to the said project and hence, no part of the profits can be attributed to the PO. The Revenue has accepted the above directions of the DRP. In view of the above, the above ground has no impact on income. The learned counsel for the Assessee therefore prayed that the relevant ground may be treated as infructuous. Ground A is accordingly dismissed as infructuous. 13. Ground "B" raised by the Assessee relates to Airport Authority of India (Delhi Airport) Project. The Assessee was awarded a turnkey contract for supply, installation, testing and commissioning ('SITC') of Air Traffic Control ('ATC') at the Delhi airport by Airports Authority of India ('AAI') in the year 2008. The copy of the purchase order for supply, installation, testing and commission (SITC) of Air Traffic Control (ATC) systems at New Delhi Airport dated 4.12.2008 is placed at page 242 to 250 of the Assessee's paper book. The operative portion of the purchase order reads thus: "Airports Authority of India (AA....
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....different activities. 14. The AO however held that since the Assessee had a PE in India the revenue from off shore supply of equipment was also liable to be taxed. Applying Sec.44DA of the Act, the AO brought to tax rupee equivalent of 50% of euro 240155 (Euro 274165 minus Euro 34010 being receipts towards offshore supply of hardware) to tax. 15. The DRP accepted the contention of the Assessee that the PE of the Assessee in India had nothing to do with the contract in question and that the action of the AO in treating the receipts as business income was not correct. The DRP nevertheless directed that AO to treat the payment made for supply of software and its license viz., (Rupee equivalent of Euro 85,500 ) as payment towards royalty u/s.9(1)(vi) of the Act. The DRP also held that all revenues arising from separate and distinct transactions, are part of a composite contract and that these contracts were indivisible and dependent contract for different activities. It can be seen from Annexure-2 to this order which is part of the purchase order of AAI that the Assessee had to install, test, commission and train persons to use the machine. The consideration attributable to the s....
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....e and imbedded therein. The AO or the DRP have not in their orders given any finding that the software and licenses are independent of the hardware as no specific plea in this regard was put forth by the Assessee before them. We however hold, in the given facts and circumstances of the case and the overall evidence on record, that the software and licenses are part of the hardware supplied by the Assessee. 17. It is the plea of the learned counsel for the Assessee that Software dedicated to Hardware equipment supplied is not 'Royalty'. In this regard it was submitted that embedded software supplied along with equipment merely facilitates its operation/ functioning and there is no independent existence/ use of such loaded software. The software so supplied is an integral part of the equipment supplied and hence, amounts of sale of hardware, not taxable as 'royalty'. In this regard, the learned counsel for the Assessee placed reliance on the certain judicial pronouncements. Our attention was drawn to the decision of the Hon'ble Delhi High Court in the case of DIT v. Ericsson AB (2012) 343 ITR 470 (Delhi HC) wherein it was held that if software supply is an inte....
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....e has no P.E. in India, as per admitted facts on record, the amount of profit arising on receipt of sale consideration of machine would not be liable to be taxed in its hands in India." 19. Similar views have been propounded in the following judicial pronouncements: DIT v. Nokia Networks O.Y. (2013) 358 ITR 259 (Delhi HC) CIT v. Alcatel Lucent Canada (2015) 372 ITR 476 (Delhi HC) DOIT vs Reliance Industries Ltd. (20 J 6) 69 taxmann.com 3 11 (Mumbai ITAT) Motorola Inc. v/s DCIT (2005) 95 ITD 269 (Delhi SB) ADIT vs Siemens Aktiengesellschaft (2013) 19 ITR(T) 336 (Mumbai ITAT) 20. The learned DR relied on the directions of the DRP. We have considered the rival contentions. In the light of the judicial pronouncements referred to above, we are of the view that the sale of equipment and its accessories with software imbedded in the equipments cannot be taxed in the hands of the assessee as business income as the Asssessee does not have a PE in India to which the profits can be said to be attributable. In the circumstances, the revenue cannot bifurcate the consideration towards software and license embedded in the equipment from the combined sale value of the equipment a....
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....t the Assessee "has granted software and licenses to use the software for the purpose of operating the equipment supplied". * Accordingly, it cannot be held that the consideration received by the Assessee for supply of such software/ licenses for the mere purpose of operating the equipment is for a 'copyright' in such software. Accordingly, such consideration is for the purchase of a 'copyrighted article' and hence not taxable as 'royalty' 22. It was further submitted that Explanation 4 to Section 9(1) (vi) of the Act introduced with retrospective effect from 1 April 1976 cannot be read into India- Netherlands DTAA * The Finance Act, 2012, has inserted Explanation 4 to section 9( 1 )(vi) of the Act, with retrospective effect from 01 April 1976, clarifying that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use computer software. Based on this amendment, the Hon 'ble DRP has held that the amount of consideration for supply of software in the present case also amounts to 'royalty'. * In this regard, reliance was placed o....
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....lhi airport (purchase order at PB page 242-250 and Invoice dated 11 December 2008 at PB Page 251). From the invoice (which has been extracted in the earlier part of this order), it can be seen that the net consideration for these services is EUR 154,655 (equivalent to INR 9,222,093) which has been assumed as FTS in the assessment order. It was the plea of the Assessee that the AO has wrongly assumed the entire consideration amount towards training of employees for assessing it as FTS. From the purchase order, it would be clear that the consideration amount is for various other services and training of employees is only for ½ day, which is only to familiarize the customer with the use/ operation of the equipment supplied under this project. The legal issue at hand is whether the consideration received for provisions of such services is taxable as FTS under the provisions of India- Netherlands DTAA or not. 26. In this regard the submission of the learned counsel for the Assessee was that under Article 12(5) of the India-Netherlands DTAA, FTS is taxable in the other country only when the FTS "make available" technical knowledge, experience, skill, know-how or process. Articl....
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....) 25 ITR(T) 639 (Kolkata ITA T) B4U International Holdings Ltd. (2012) 18 ITR(T) 62 (Mumbai JT AT) Ernst and Young (P) Ltd. in re (2010) 323 ITR 184 (AAR) Mahindra and Mahindra Ltd. vs. DCJT (2009) 313 ITR 263 (IT A T Mumbai -SB)] Worley Parsons Services (P) Ltd., In re (2009) 313 ITR 74 (AAR) ACJT vs Viceroy Hotels Ltd.(20 12) 18 ITR(T) 282 (ITAT Hyd) R.R. Donnelley India Outsource Private Limited (2011) 335 ITR 122 (AAR) ADIT v. WNS Global Service Private Ltd. (2011) 45 SOT 119 (Mumbai ITAT) 28. In the context of installation, testing and commissioning services, the Hon'ble Jabalpur ITAT in the case of Birla Corporation Limited vs. ACIT (2015) 153 ITD 679 (Jabalpur ITAT) has held that installation, commissioning or assembly activities do not involve transfer of technology and are hence not taxable as FTS. The relevant extract of the judgment has been reproduced below: "By no stretch of logic, installation or assembly activities even involve transfer of technology in the sense that recipient of these services can perform such services on his own without recourse to the service provider, nor has it been the case of/he authorities below. For this short....
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....as also made to the following other decisions laying down identical proposition United Helicharters (P) Ltd. (2013) 60 SOT 58 (Mumbai ITAT) Lloyds Register Industrial Services (India) (P.) Ltd. (2010) 36 SOT 293 (Mumbai ITAT). 31. The learned DR relied on the Directions of the DRP. After considering the rival contentions, we are of the view that the action of the DRP in directing the treat the sum of Euro 154655 as FTS cannot be sustained. A perusal of the invoice in this regard together with the purchase order clearly shows that what the Assessee did was installation, testing and commission and training. The training was half-day training and was intended to familiarize the Assessee with the operation of the equipment. In the light of the India-Netherlands DTAA Article 12(5)(b) and in the light of the various judicial pronouncements referred to in the earlier paragraphs on this issue, it cannot be said that the services rendered "make available" technical knowledge, experience, skill, know-how or process etc. It cannot be said that the sum in question was in the nature of FTS chargeable to tax under the Treaty. We therefore allow Gr.B-3 raised by the Assessee. 32. The next d....
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....ment under this project has not been concluded at the off shore level but has been concluded in India, since the goods were 'accepted' by the customer in India. Ground 3 The Ld.AO has erred in proposing and Hon'ble DRP has further erred in confirming an ad-hoc attribution amounting to INR 4,305,071.25 (being 10% of the total income earned during the year) to the alleged Installation PE of the appellant in India." 33. During the previous year, the Assessee had undertaken off-shore supply of equipment and offshore provision of services under this project. The Ld. AO in the draft assessment order had alleged that the PO of the Assessee is a Fixed Place PE of the appellant in India and that the appellant also had an 'Installation PE' in India as per Article 5(3) of the India-Netherlands DTAA. However, the Hon 'ble DRP Panel held that since no business activity has been carried out by the defunct PO, the same cannot be treated as a PE of the Assessee. However, the allegation of constitution of an 'Installation PE' was still upheld by the Hon'ble DRP. After holding that the Assessee has an 'Installation PE' in India, the Ld. AO has att....
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....ty, the assessee could not be said to have an 'Installation PE' in India: Andhra Pradesh High Court in Commissioner v . Visakhapatnam Port Trust (1983) 144 ITR 146 (AP HC) Uhde Gmbh V. Deputy Commissioner Of Income-Tax (1997) 57 TTJ 447 (Mumbai IT AT) Deputy Commissioner of Income-tax v. CIT Alcatel (1993) 47 ITD 275 (Delhi ITAT) In light of the above submissions, it was argued that it cannot be concluded that 'Installation PE' in terms of Article 5(3) of the India Netherlands DTAA got created since no installation activity has been carried out by the Assessee in India in the subject year. 35. The learned DR relied on the directions of the DRP contained in para 3.1.4 & 3.1.5 of the DRP's directions wherein it has been observed as follows on this aspect: "3.1.4 On the issue of Installation PE being constituted, the project in which the Assessee company has been involved through a contractual agreement with DGLL and consortium agreement with TCIL and MDL was basically an installation project which is squarely covered under Article 5(3) of the India- Netherlands DTAA. The Assessee's claim that no installation activity has happened during the subject asse....
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....able to uphold the findings of the DRP that there existed an Installation PE of the Assessee and profit arising out of off-shore supply of equipments are attributable to the installation PE and therefore taxable in India as business profits. Since the Assessee did not have a PE in India, such profits cannot be brought to tax in India. We hold and decide the issue accordingly. 37. In view of the above conclusion on Gr.C 1, the other grounds Gr.C2 to 6 do not require any consideration. The learned counsel has in support of Gr.C-2 to 6 submitted that the off shore sale of equipment was on CIF basis to TCIL and TCIL further sold it to DGLL on high sea sales basis wherein the title in the goods passed outside India and the payment in respect of the same also was received outside India. Accordingly, income from such off-shore supply of equipment was not offered to tax in India by the appellant since the same did not accrue/ arise in India. It was the plea of the Assessee that the purchase order raised by TCIL on the Assessee clearly states that sale of equipment by the Assessee is on "high seas sales" basis. It gives reference to the high seas sale agreement between TCIL and DGLL whic....
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.... the Assessee provided AMC services for the VATMS equipment installed by it in earlier years. These maintenance services were performed both off-shore, remotely from the Netherlands and on-shore in India. The on-shore services were subcontracted to a local independent contractor viz. Elcome Marine Service Private Limited ("Elcome") and included regular maintenance activities such as visiting the sites for cleaning, checks, local fault repair etc. In general, these were all activities of a service nature. It is the plea of the Assessee that it did not perform any installation activity during the subject year and only maintenance services were undertaken (through a contractor in India). The copy of relevant invoices of this project is at 300 to 303 of the paperbook. It was also the plea of the Assessee that during the previous year, the presence of its personnel in India was merely for a period of 54 days, the purpose of which was mainly for discussions with customers about the status of the project, hurdles faced etc. Such personnel did not utilize any fixed place during their visit to India and largely stayed at hotels, visited offices of the customers etc. 40. The revenue broug....
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....C in its letter dated 1 October 2008 has specifically confirmed that the system/ equipment was installed/ completed on 1 October 2007 and had therefore requested the Assessee for commencing the maintenance services thereafter. It was pointed out that these maintenance services included visiting the sites for cleaning, checks, local fault repair etc., by the local contractor and limited remote assistance by the Assessee from the Netherlands. Accordingly, such maintenance services cannot be considered as 'installation activity' leading to creation of an 'Installation PE' of the appellant in India under Article 5(3) of the India-Netherlands DTAA. It was therefore submitted that in view of the above stated facts, since the essential condition of carrying out' Installation activity' is not fulfilled in the case of the appellant, it cannot be held that the Assessee has an 'Installation PE' in lndia during the subject year. The learned counsel for the Assessee placed reliance on the following judicial precedents in which it has been held that in the absence of installation activity, the Assessee could not be said to have an 'Installation PE' in Indi....
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....ract of the commentary is given below: "Repair and Maintenance work performed after such formal acceptance or taking delivery is not sufficiently connected with the original-building or installation works and is therefore not counted when determining the minimum period. Whether if constitutes a permanent establishment is a matter to be decided separately from the works accomplished prior 10 acceptance or taking delivery " 44. It was therefore contended that maintenance activities cannot be considered a part of the "Installation activity" of the Assessee in India. It was also submitted that there was no fixed place PE of the Assessee in India through which it carried on business and therefore the revenue cannot take recourse to Article 5(1) of the India-Netherlands DTAA. It was reiterated that the employees of the Assessee were present in India merely for a period of 54 days during the subject year, that too for discussions with customers about the status of the projects, hurdles faced etc. Hence, it cannot be said that the Assessee has a fixed place PE in India for this Project. It was therefore contended that the Assessee does not have any PE in India for the subject year. ....
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....and 5(3) of the India-Netherlands DTAA are to be read harmoniously. It was submitted that the conditions specified under Installation PE [Article 5(3)] cannot be viewed as a water-tight compartment without taking color from other clauses of PE, such as Fixed place PE [Article 5( 1)]. The two clauses, providing for Installation PE and Fixed Place PE, should be read harmoniously, as part of the same concept. In relation to a building site and construction/ installation project, the foreign enterprise should conduct or carry on business through such construction/ installation site in India to constitute a PE in India. In support of the above submission the following judicial pronouncements were brought to our notice wherein it was held that there has to be a harmonious construction of Article 5(1) and Article 5(2)/ Article 5(3) of the DTAAs: National Petroleum Construction Company vs. ADIT (2016) 238 Taxman 40 (Delhi HC) Pintsch Bamag (2009) (318 ITR 190) (AAR) Cal Drive Marine Construction (Mauritius) Ltd (2009) 315 ITR 334 (AAR) BKI/HAM VOF vs. ACIT (200 I) 70 TTJ 480 (Delhi IT AT) Fugro Engineers B.Y. v. Assistant Commissioner of Income tax (OS D), Range-I, Dehradun (20....
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....e the VATMS equipment was already accepted and handed over to the customer in the year 2007 and no installation activity was carried out in India during the subject year, it cannot be held that the Assessee had an 'Installation PE' in India in the subject year. As far as the conclusion of the revenue that the independent contractor of the Assessee in India created a virtual presence of the Assessee in India so as to create an installation PE, given that the entire onshore maintenance contract has been performed by an independent local contractor in India, it cannot be said that the business of the Assessee has been carried out by the presence of the local contractor in India, so as to create its PE in India. The examination of whether a PE exists needs to be determined based on the activities of the foreign enterprise in India. Since no activities have been carried out by the Assessee in India with respect of such maintenance activity, it is unreasonable to conclude that the business of the Assessee was carried out in India through such subcontractor, to constitute its PE in India. We therefore hold that receipts in the form of AMC fees from ONGC on VATMS cannot be brought ....
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.... previous year the Assessee had only undertaken off-shore provision of services under the project. Such services were in relation to interface of the VATMS system with the naval network. Accordingly, no software was supplied by the Assessee during the subject year (such software was supplied by the Assessee in earlier years) and only services in relation to the integration of the software have been provided during the subject year. It was submitted that even otherwise, the software supplied would be in the nature of 'embedded software'. The same can also be seen from the proposal made to Elcome in relation to the project which states that "This software shall be installed on one of the Display processors running at MOC" (Copy enclosed 358 to 361 of the paper book). It was submitted that software installed/ embedded in the equipment merely facilitates its functioning and there is no independent existence/ use of such loaded software. By supplying such software, the appellant has not provided the codes/ program language underlying such software to the customer. The customer was handed over the equipment as a whole and did not have any knowledge of the codes/ language in the s....
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....ged under section 9(l)(vi) of the Act. For the reasons given in para 41 to 47 of this order, we hold that there was no installation PE in existence in so far as the ONGC VATMS AMC project is concerned. Therefore the receipts in question cannot be brought to tax India. We hold and direct accordingly. In view of the above conclusion, the grievance projected by the Assessee in Gr.E-2 does not require any consideration. 52. Ground F 0.1 raised by the Assessee reads thus: The Ld.AO has erred in levying interest under section 234A and section 234B of the Act despite the directions of the Hon'ble DRP to not to do so. 53. The learned counsel for the Assessee submitted that pursuant to filing of a rectification application under section 154 of the Act, the Ld. AO has deleted the levy of interest under section 234A and 234B of the Act as directed by the Hon'ble DRP. Accordingly, relief on this ground has already been given and hence, the same may not be relevant for adjudication in the appeals. Hence the ground of appeal is dismissed as infructuous. 54. In Ground F- 2, the Assessee has projected its grievance regarding the action of the AO has in not granting due credit o....