TaxTMI 
TaxTMI 
2017 (4) TMI 758
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.... 5 are the only effective grounds of appeals which reads as under:- "3.The learned DDIT erred in holding that the amount received under the offshore supply contracts is covered by the provisions of Section 44BBB of the ITA and consequently liable to tax in India even though the supplies were completed outside India. 4. The learned DDIT/DRP erred in levying interest of Rs. 17.51 Crores under Section 234B of the ITA on the appellant company. 5. The learned DDIT failed to appreciate that the entire income of the appellant company is subject to tax deductible at source and therefore the interest under Section 234B is not leviable on the appellant company." 2. Facts in brief, are that the assessee namely 'Atomstroyexport' [ASE] is a non-resident foreign company who filed its return of income for the Assessment Year 2007-2008 during November, 2007 declaring total income under Section 44BBB at Rs. 7,07,61,958/-. The return was picked up for scrutiny assessment under Section 143(3) and the draft assessment order was passed by Assessing Officer [AO] on 19/11/2009 which was sent to 'Dispute Resolution Panel' [DRP] for directions under Section 144C(1). The DRP issued directions under S....
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....ayment under 'Service Contracts' which were covered under Section 44BBB but the payment made for 'offshore supply of goods and equipment' also formed part of turnover for the purpose of income computation u/s 44BBB. DRP further observed that the taxes in this case were borne by NPCIL (the Indian entity being the contractee) and hence constituted additional income of the assessee which necessitates 'grossing up' of total consideration in terms of Section 195A of the Income Tax Act. Hence, in essence, the DRP directions resulted into enhancement of the assessment of the assessee to the extent of remittances under 'offshore supply contracts' and 'grossing up'. 5. Pursuant to the directions of the DRP, the final assessment was completed by AO vide its order dated 27/09/2010 by applying provisions of Section 44BBB on total remittances made under 'Service contracts' as well as under 'Offshore Supply contracts'. Thus, the total income was determined in the following manner: Remittances for Offshore Supply contracts (INR) 1097.32 Crores Remittances for Service Contracts (INR) 70.76 Crores Total Remittances 1168.08 Crores Deemed Income @10% u/s 44BBB 116.80 Crores 6. A....
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....n in India. The 'intergovernmental agreements' referred to above outlines the role to be played by the Russian organisation and the Indian organisation for the setting up of the nuclear power project. 8. Article 1 of IGA dated 20/11/1988 enumerates the main objective of the agreement and it reads as follows:- "The government of the Republic of India and the government of the union of Soviet Socialist republics through the appropriate Indian and Soviet organisations shall cooperate in the construction and operation in India of a nuclear power station (NPS) consisting of two power units of VVER-1000 type reactor facilities at a site to be decided by the government of the Republic of India." The other terms of the IGA included, inter-alia, the obligations of respective parties and other terms and conditions of the agreement. 9. Pursuant to said arrangement / understanding, ASE and NPCIL have entered into three service contracts and four offshore supply contracts. Service contracts included supply of 'detailed project report' for nuclear power station, 'elaboration of working documentation' for the Project, 'deputation of contractors' specialists' at nuclear power plant site, 'tra....
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....t, in case of delay in the supplies, NPCIL was entitled to liquidated damages. In no circumstances, could it return back the equipments and materials to the assessee. Even in case of early termination of the contract, the assessee was entitled to the compensation in respect of the supplies made till such termination. Therefore, offshore supply contract cannot be integrated with service contracts and regarded as composite contracts. 11.2 Further, It was also an undisputed position before the Assessing Officer and the DRP that the contracts for offshore supply of the equipment and materials are separate from the service contracts. Arguments as alleged by the revenue with respect to composite nature of contract are contrary to the stand taken by the AO/DRP and also do not represent the correct position in view of the termination clause in the contract. This fact is further fortified by following factual matrix:- (i) Separate contracts for rendering of services and supply of goods have been entered into by the parties. (ii) The consideration under each of the contracts for rendering of services and supply of offshore goods is also separate. (iii) In the eventuality of termination t....
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....the present case, offshore supply contract has nothing to do with the activities of the permanent establishment. In the instant case 'India Russia DTAA' is involved and Article 7(1) of the treaty refers only to attribution simplicitor and do not use the term 'directly or indirectly' and hence, from this point of view also, the assessee stands on a better footing. Hence, 'Force of Attraction' rule could have been applied only when the attribution of profits in Article 7(1) also included indirect attribution. It does not apply to case in hand as Article 7(1) of India Russia Treaty do not provide for indirect attribution. 11.5 Further, the contracts have been entered into between two Government representatives and hence the contracts are real and not bogus or sham and therefore no question of tax evasion arises. For this proposition, the assessee has relied upon the decision of Bombay High Court dated 16/10/2008 in ITA No. 389 of 2008 CIT Vs. The West Coast Paper Mills Ltd. 11.6 To sum up, the ld. AR primarily contended that no operations in respect of OSC has been performed in India and therefore, not taxable as per Explanation 1(a) to Section 9(1)(i). Going Further, AR placed rel....
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....lear power plants, inter-alia, envisages construction of nuclear reactors which is a complex scientific device used to initiate and control a sustained nuclear chain reaction. Nuclear reactors are used at nuclear power plants for electricity generation. ASE was under contractual obligation to construct complete Nuclear reactors along-with connected infrastructure so as to hand over a complete and functional power station to NPCIL. Nuclear reactors are the most vital part of the Nuclear Power Station. What an engine is to automobile, a nuclear reactor is to a nuclear power station. In nutshell, all the contracts whether supply contracts or service contracts sprung from one master agreement, the sole purpose of which was to set up nuclear power station in India and therefore, part and parcel of the same transaction. The assessee has only offered the service part to taxation which is basically in the nature of 'Royalty' / 'Fees for Technical services' and therefore, as the contract is composite one, the total consideration which springs out of the master agreement whether supply of goods or services should be offered to taxation. Offshore supply contracts are not merely a sale simplic....
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....takes into account the principle of apportionment of income on the basis of territorial nexus while taxing the income calculated @10% of the total receipts. 12.6 CBDT Instruction No. 1829 dated 21/09/1989 Instruction No. 1829 21/09/1989 applies only to 'hydroelectric project' only. The same has been withdrawn subsequently by Instruction No. 5 of 2009 dated 20/07/2009 primarily to counter loading of offshore supply vis-à-vis onshore supply/services. The present case under consideration deals with Nuclear Power Projects and hence of no help to assessee. 12.7 Explanation 4 to 9(1)(i) The Ld. DR has contended that explanation 4 has been added by Finance Act, 2012 retrospectively w.e.f. 01/04/1962, which is subsequent to the judgment of Supreme Court in Ishikawajima-Harima Heavy Industries Ltd. (supra) and it has widened the meaning of the word 'through' used in Section 9(1)(i). Explanation 4 to Section 9(1)(i) reads as follows: "Explanation 4.-For the removal of doubts, it is hereby clarified that the expression "through" shall mean and include and shall be deemed to have always meant and included "by means of", "in consequence of" or "by reason of". The word through ha....
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....rakash L.Shah [115 ITD 167] wherein the court observed that the Ld. DR cannot go beyond the assessment order and bring altogether different case, thereby undoing what has been done by the Assessing Officer. The power to modify the assessment order to the advantage of the revenue, apart from suo-moto action by the assessing officer under sections 147 or 154, lies only with the CIT under Section 263, which cannot be usurped by the ld. DR while arguing the appeal. The scope of the arguments of the ld. DR is restricted to support the view taken by the assessing officer. He can strengthen the view taken by the Assessing Officer from any angle, he like, but cannot bring out an altogether difference case de hors the view of the Assessing Officer. His area of argument is unlimited but within the boundary limits set by the Assessing Officer. Similar view has been expressed in Mahindra & Mahindra Ltd. V DCIT [313 ITR 263]. Moreover, new legal points could be taken by revenue for the first time before the Tribunal only if the revenue was in appeal and was seeking to raise an additional ground. But this being the assessee's appeal, the revenue cannot be permitted to raise any new issues. 13.2....
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....ishment situated in India and only so much of it as is attributable to the activity of such permanent establishment. As assessee has only service PE in India and hence the profit attributable to such activity alone could be brought to tax. This PE has no role to play in offshore supply contracts and therefore, cannot be brought to tax even as per the provisions of DTAA. 13.4 For the proposition that explanation 4 cannot be read into DTAA, AR has relied upon the decision of Delhi High Court in DIT Vs New Skies Satellite BV & Others [95 CCH 32] which in turn rely upon Bombay High Court in CIT Vs Siemens Aktiongesellshaft [310 ITR 320]. 13.5 Per contra, DR relies on following judgments where it is held otherwise:- i. Madras High Court in Poompuhar Shipping corporation Ltd v ITO [360 ITR 257] ii. Madras High Court in Verizone communication Singapore Pvt Ltd V ITO [361 ITR 575] iii. Mumbai Tribunal in Viacom 18 Media P Ltd [162 TTJ 336] iv. Mumbai Tribunal in NGC Network Asia LLC V JDIT [45 CCH 335] v. Mumbai Tribunal in ADIT Vs Clifford Chance [33 Taxmann.com 200] 13.6 On the contrary, AR has distinguished the ratio of judgment in Verizone Communications Singapore Pte Ltd.....
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..../2002 Delivery of Equipment and material 3. 77-252/22700 dated 23/08/2002 Sale of Material and equipments from third countries 4. 77-252/26000 dated 7/10/2003 The supplies from CIS countries and functions to be performed by the contractor for offshore supplies We find that all the four contracts have more or less similar terms and conditions. A perusal of terms of contract No. 77-252/20500 dated 12/02/2002 reveals that as per Article 2.1, the assessee was required to make deliveries on 'FOB Russian Port basis'. As per Article 3.2, the contractee was required to carry out at his own expenses approximate transportation, loading/unloading, delivery etc. to the place of erection for supplies as well as take care of the storage of the supplied goods. As per Article 5.2.1, the date of delivery for supply was to be considered as the date of Clean Bill of Lading for FOB "Incoterms 2000" supplies. As per Article 9.4, the ownership/title of supplies under the contract was to pass at the moment the cargo crossed ship's rail at the port of dispatch or handed over to the air carriers. As per Article 9.5, the contract was to be carried out on 'FOB basis at Saint-Petersburg S....
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....wer projects. 44BBB. (1) Notwithstanding anything to the contrary contained in sections 28 to 44AA, in the case of an assessee, being a foreign company, engaged in the business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government in this behalf, a sum equal to ten per cent of the amount paid or payable (whether in or out of India) to the said assessee or to any person on his behalf on account of such civil construction, erection, testing or commissioning shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession" . ...... We find that 44BBB forms part of Part-D in chapter IV dealing with computation of profits and gains of business or profession. The said section starts with a non-obstante clause with respect to sections 28 to 44AA and those sections deals with computation of profits and gains of business of profession. 14.5 Further, Section 44BBB applies to a foreign company engaged in the business of civil construction or the business of erection of plant and mac....
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....ndai Heavy Industries Co. Ltd. [291 ITR 482] wherein the court approved computation of income arising from installation and commissioning receipts as per Section 44BB of the act, while simultaneously holding that receipts under the supply contract was not taxable. Hence, as per Hon'ble Supreme Court also the provisions of section 44BB of the act, which is one of the section dealing with presumptive taxation, would apply only to such income which is chargeable under the provisions of the act. Further, Reliance was also placed on the decision of third member of Delhi bench of the tribunal in Saipem S.P.A. v DCIT [88 ITD 213]. This decision has been followed by Mumbai Bench of Tribunal in the case of J.Ray Mcdermott Eastern Hemisphere Ltd 2010 42 SOT 26 wherein following observations have been made:- "8. In such a situation, in our considered opinion the first appellate authority has rightly observed that section 9(1)(i) Explanation 1 provides that the income from 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. We also agree with the finding that the income in q....
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....5 would mean that if any other section operates to exclude from the total income of any person any income, which otherwise falls within the broad framework of his total income as laid down in section 5 such section would prevail. To emphasis, the provisions of section 44AB vis-a-vis the legislative intent only mean that the replace the system of computation of income earlier envisaged by application of the provisions of sections 28 to 41 and sections 43 and 43A, but the provisions of section 5, which is the charging section would remain intact and these by no maxim of interpretation would be superseded by the provisions of section 44BB. As per Circular No. 495, dated 22nd Sept., 1987, section 44BB was no doubt described as a special provision for computing profits and gains in connection with the business of exploration of mineral oil but these were a measure of simplification providing for determination of income of such taxpayers at 10 per cent of the aggregate of a certain amount ... 9. Similarly the Mumbai D-Bench of the Tribunal in the case of Mcdermott ETPM Inc. v. Dy. CIT [2005] 92 ITD 385 held as follows:- "This the assessee can be charged only in accordance with secti....
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....ed by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is pressed on the charging provision. That pertains to the fundamental integrity of the statutory scheme provided for each head. AR further contended that reliance placed by DR on the decisions of Uttarakhand High Court in Sedco Forex International Inc.(supra) and CIT Vs Halliburton Offshore Services Inc.(supra) are contrary to views expressed by Supreme Court in Hyundai Heavy Industries (supra) and Bombay High Court in J.Ray Mcdermott Eastern Hemisphere Ltd(supra) and Sonat Offshore Drilling Inc. Further, the decision of ADIT Vs Valentine Maritime Gulf LLC(supra) is distinguishable as the said decision was not concerned with the application of Section 44BB. The only dispute was with respect to application of Section 44BB to a particular receipt. 14.6 Concurring with the above legal position, and following Hon'ble Apex Court fortified by Hon'ble Bombay High Court judgments, we are of the considered opinion that Section 44BBB is computational provision and hence, it cannot enlarge the scope of total inc....
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...... ...... ...... Explanation 4.-For the removal of doubts, it is hereby clarified that the expression "through" shall mean and include and shall be deemed to have always meant and included "by means of", "in consequence of" or "by reason of". We find that explanation 4 has clarified the meaning of expression of the word 'through'. The word 'through' as been used in Article 7(1) of the DTAA and as per the Article 3(2) of the said treaty, the expressions not defined in the treaty could derive their meaning from the domestic law. Therefore, harmoniously reading all the provisions, we conclude that expression 'through' not defined by the treaty could derive its meaning from the domestic law as contained in explanation 4 of Section 9(1). Though we are conscious of the fact that as per the provisions of Section 90(2), in case of assessee to whom DTAA applies, the provisions of the act apply to the extent they are more beneficial to the assessee but here is a case where we are dealing with interpretation of certain words and not enlarging the scope of total income as per DTAA vis-à-vis domestic taxation laws. Hence, in our considered opinion, the meanings given to certain e....
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....The contract is a complex arrangement. Petronet and Appellant are not the only parties thereto, there are other members of the consortium who are required to carry out different parts of the contract. The consortium included an Indian company. The fact that it has been fashioned as a turnkey contract by itself may not be of much significance. The project is a turnkey project. The contract may also be a turnkey contract, but the same by itself would not mean that even for the purpose of taxability the entire contract must be considered to be an integrated one so as to make the appellant to pay tax in India. The taxable events in execution of a contract may arise at several stages in several years. The liability of the parties may also arise at several stages. Obligations under the contract are distinct ones. Supply obligation is distinct and separate from service obligation. Price for each of the component of the contract is separate. Similarly offshore supply and offshore services have separately been dealt with. Prices in each of the segment are also different. 18. The very fact that in the contract, the supply segment and service segment have been specified in different parts o....
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....e : Offshore Supply : (1) That only such part of the income, as is attributable to the operations carried out in India can be taxed in India. (2) Since all parts of the transaction in question, i.e. the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India. (3) The principle of apportionment, wherein the territorial jurisdiction of a particular state determines its capacity to tax an event, has to be followed. (4) The fact that the contract was signed in India is of no material consequence, since all activities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country. (5) There exists a distinction between a business connection and a permanent establishment. As the permanent establishment cannot be said to be involved in the transaction, the aforementioned provision will have no application. The permanent establishment cannot be equated to a business connection, since the former is for the purpose of assessment of income of a nonresident under a Double Taxation Avoidance Agreement, and the latter is for the applicat....
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....ion of profits which referred to profits 'directly or indirectly' attributable to the permanent establishment. The phrase 'directly or indirectly' widens the scope of attribution of profits. Whereas in the present case 'India Russia DTAA' is involved and Article 7(1) of the treaty refers only to attribution simplicitor and do not use the term 'directly or indirectly' and hence, from this point of view also, the assessee stands on a better footing. 14.13 Similarly in the case of DIT Vs Xelo Pty. Ltd.(Bombay High Court) (203 Taxman 475), the non-resident assessee was under an obligation to supply equipment and also provide the design, supervision, installation and testing the commissioning of Metrorail. The question before the Hon'ble court was whether the consideration received by the assessee against offshore supply could be brought to tax in India. The court upheld the judgment of Tribunal which, in turn, relied upon Apex Court's judgment in Ishikawajima-Harima Heavy Industries Ltd. (supra). The Court concluded that: "Though there was one composite contract, the terms of the contract distinctly set out the quantum of offshore supplies to be made by the assessee to the Metro rail....
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....e of transport for transportation from the country of origin. The stipulation in the second agreement (Erection Contract) relating to certain performances by the respondent assessee including port handling, custom clearance, transportation, insurance, handling on site, unloading at transportation site, testing and commissioning to the satisfaction of the buyer are in a separate agreement for a separate consideration which is clearly enunciated in the second agreement as follows :- "Whereas the employer desires to engage the contractor for performance of all activities within India . . .. . . . . . . . . subject to the terms and conditions hereinafter appearing. " 30. Then again, in our considered opinion, undue importance cannot be attached to the fact that the agreement imposed on the assessee company the obligation to handover the equipment functionally completed........" Hon'ble court placed reliance on the decision of Supreme Court in Mahabir Commercial Co. Ltd. Vs CIT 86 ITR 417 and ITO Vs. Sri ram Bearings Ltd.224 ITR 724 and finally summed up the conclusion in the following manner:- "35. In the final analysis we have no hesitation in holding that viewed from any angl....
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....7. The contract, however, in the instant case as in the case of Ishikawajima Harima Heavy Industries Co. Ltd. (supra) would be said to have been successfully performed only after the satisfactory commissioning and erection of the plant and equipments. Since the permanent establishment was not at all involved in the transaction of the offshore supply of equipment, the existence of the permanent establishment [which as held in Ishikawajima Harima Heavy Industries Co. Ltd. 's case (supra) is for the purpose of assessment of income of a nonresident under the Double Taxation Avoidance Agreement], would be irrelevant in the instant case. Clause (a) of Explanation (1) to section 9(1) would not be attracted at all which provides that in the case of a business where all operations 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. In the instant case there were no operation qua the agreement for supply of equipment, which was carried out in India, and therefore, no income could be deemed to have accrued or arisen in India ....
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....td's case (supra) even though it was to perform onshore services including the erection and commissioning of the equipment supplied by it, nevertheless, the Supreme Court held that no part of the profit on the offshore supply of the equipment was taxable in India as a consequence of the performance of such activities in India. In the assessee's case the assessee does not perform any service in India in connection with the installation of the equipment or otherwise; (iii) the performance of the acceptance test in India was not considered a relevant circumstance whilst determining whether any part of the profit on the offshore supply was chargeable to tax in India in the case of Ishikawajima, so also in the assessee's case. (iv) although admittedly a permanent establishment existed in the case of Ishikawajima, nevertheless, the Court held that no part of the profit arising from the supply of the equipment was chargeable to tax in India as the permanent establishment had no role to play in the transaction sought to be taxed as it took place abroad, whilst in the case of the assessee, it has been found as a fact by both the appellate authorities that no permanent estab....
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....nasmuch 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 fulfilment of delivery was prescribed as the date of the bills of lading. The payment was also to be made outside India. The agreement further makes it clear that the insurance risk during the course of the journey was that of the assessee and it paid for the same : even the freight charges from the European port to the place of destination were paid by the assessee. Thus, judged from any angle, the sale of machinery, which are "goods" within the meaning of the Sale of Goods Act, was completely outside India. A mere provision in the agreement that the assessee is entitled to satisfy itself about the quality and standard of the machinery in India cannot, in the circumstances of this case, detract from the fundamental position that the sale took place outside India. In such a situation, one has to apply the test of predominance and decide where the sale took place ? On a comb....
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....reof or overall responsibility of the assessee are irrelevant circumstances. Since the transaction relates to the sale of goods, the relevant factor and determinative factor would be as to where the property in the goods passes. In the present case, the finding is that property passed on the high seas. Concededly, in the present case, the goods were manufactured outside India and even the sale has taken place outside India. Once that fact is established, even in those cases where it is one composite contract (though it is not found to be so in the present case) supply has to be segregated from the installation and the only then would question of apportionment arise having regard to the expressed language of Section 9 (1) (i) of the Act, which makes the income taxable in India to the extent it arises in India. We find that, in the instant case in hand, there was no clause in the contract for return of the material to ASE and in case of default by assessee, the contract could be terminated in which eventuality the assessee was entitled to contract price attributable to the supply and services executed as at the date of termination. In case of deficiencies/default in the equipment, ....
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....me also distinguishable on the ground that in this case, there were allegations of loading of supply contracts to compensate for services. Further, Tribunal, accepting the assessee's contentions, had held that 25% of total receipts were attributable to operations performed outside India and hence, not chargeable to tax. Moreover, this decision has been distinguished by Delhi High Court in L.G.Cable Ltd. (supra) by making following observations:- "34. Heavy reliance was placed by the learned counsel for the revenue on the decision of the Madras High Court in Ansaldo Energia SPA v. ITAT [2009] 310 ITR 237. But in our view the said case is clearly distinguishable on facts. In the case of Ansaldo Energia SPA (supra) it was held by the Madras High Court that the Indian subsidiary of Ansaldo, i.e., ASPL, was a legal facade which was created for taxation purposes and was not actually engaged in executing onshore contracts. It is for this reason that the Madras High Court also noticed that the subsidiary company i. e., ASPL already existed in India prior to the award of the contract. In the instant case, there is no such allegation made by the Department and as a matter of fact also the r....
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....cting of onshore installation work to a third party by the assessee was only a method of execution of a composite contract, the Hon'ble Tribunal in this case not only held that the assessee had PE in India, it also held that the assessee's income from offshore supply was taxable in India. But we find the same also distinguishable on the ground that assessee was awarded a contract for supply, installation, implementation and support retail automation system in retail outlets of the contractee. Execution of the said contract involved supply of certain equipment and installation of automation system. The assessee entered into sub contract with one party and supplied the goods to him but raised the invoices directly upon the contractee and the payment was also made directly by the contractee to the assessee. On the premises of these facts, it was held that title of goods did not passed outside India but in India and hence taxable. But no such analogous facts are present in the instant case in hand. 15. Therefore, after analyzing the various case laws, statutory provisions, DTAA provisions and contractual terms and respectfully following judgment of Hon'ble Supreme Court in Ishikawajim....