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2017 (8) TMI 416
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.... 2011-12 28/11/14 04/12/14 143 (3) 6. 2012-13 24/11/16 07/12/16 143 (3) r.w 144C 7. 2013-14 24/11/16 07/12/16 143 (3) r.w 144C Brief facts of the case are as under: 2. Assessee is a foreign company, incorporated under the laws of People's Republic of China, and is engaged in the business of supply of Boiler, Turbine and Generator (BTG) equipments to various companies for setting up of power plants in India. Ld. Counsel submitted that, assessee filed its return of income for onshore services rendered in India for assessment year 2010-11 wherein it had offered to tax the remuneration arising from supervisory services under the provisions of section 44 BBB of the Act. He submitted that no portions of income arising from offshore supplies were offered to tax since the sale of BTG equipments was concluded outside India. He submitted that no portion of profit arising from offshore sales was liable to be taxed in India. Ld. Counsel submitted that it was on the basis of assessment made for assessment year 2010-11 that the Ld. AO reopened preceding assessment years from assessment year 2007-08 to 2009-10. We shall 1st deal with facts as observed....
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.... that the supply of off shore equipment was necessary and incidental to design, manufacture and erection in India without bringing any evidence on record that any designing or manufacturing had taken place in India. 3.4 That the AO misconstrued and misapplied the judgment of the jurisdictional High Court in the case of CIT Vs. Mitsui Engineering and Ship Building (259 ITR 248) which disapproved the revenues stand to segregate a portion of revenue towards designing so as to bring such revenue to tax in India under section 9(l)(vi) of the Act when the price paid was for supply of machinery. 3.5 That the AO also grossly erred on facts and in law in concluding that the off shore portion of supplies was attributable to the supervisory PE of the Appellant in India when such PE, if any, came into existence much after the supply had taken place. 3.6 The AO also grossly erred in concluding that the Appellant had carried out the business of design, manufacture, supply, supervision of equipment from a fixed place of business in India without bringing any evidence on record in support of such conclusions. 3.7 That the AO also erred in concluding that all tra....
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.... Rosa Power Supply Company Ltd. 2. Reliance Infrastructure Ltd. (formerly known as Reliance Energy Ltd.) 3. EMCO Energy Ltd. 4. Jindal Steel and Power Ltd. 5. JSW Steel Ltd. 6. JSW Energy Ltd. 5. It was also observed that assessee had provided supervisory services for erections/commissioning of BTG equipments at project owners site. It was also observed that assessee offered supervisory service fee received under section 44 BB B of the Act. Ld. AO accordingly issued show cause vide order sheet entry dated 11.12.2012, wherein assessee was asked to submit the basis for claiming income from offshore supplies as not taxable in India. Before Ld. AO assessee submitted that: * no portion of income from supply of equipments is received directly or indirectly by it in India; * no portion of income accrues or rises to it in India; and * no portion of income could be deemed to accrue or arise in India, 6. It was submitted by assessee that, by virtue of Explanation 1 to section 9 of the Act, which inter alia clarifies that in case of such business of which all the operations are not carried out in India only such par....
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.... * IS Cable Ltd. IAAR No. 858-861 of 2009] * Joint Stock Company Foreign Economic Association "Technoproui Export" [AAR No. 827 of 2009] * Technip Italy SPA vs. Addl C1T [ITA No, 434 (Del.) 2010]. 7. Assessee placed reliance upon the double taxation avoidance agreement (DT AA) between India and China to submit that income from offshore supply is not liable to be taxed as per the provisions of India China DTAA. It was submitted that as per Article 7 (2) of India China Tax Treaty, attribution of profit to PE cannot be determined on assumption basis as PE is a distinct and separate enterprise having its own profits and distinct from foreign company. It has been submitted that only so much of profits of assessee having economic nexus with PE in India can be taxed in India. Assessee further submitted that during the assessment year 2010- 11 assessee's employees rendered supervisory services in India for more than 183 days. Accordingly it was submitted that as per Article 5 (2) (j) of India China tax treaty, assessee had supervisory PE in India, which has already been offered to tax u/s.44BBB of the Act. 8. Subsequently assessing officer issued notice to asses....
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....acceptable State to owners in India. * Although contractual activity is so prepared to show delivery of equipment outside India, but title and custody of equipment passes only at port of receipt in India where representative of owner/buyer check and intimates deficiencies etc., to for replacement. 11. Ld.AO observed that some of the clauses in the contract indicate that assessee has rendered technical services for its performance and setup of a power plant in working condition. It was also observed that the responsibility of the assessee is discharged only on issue of take over certificate by the project owner upon successful completion of all the performance guarantee tests to be conducted at the project site. Ld.AO observed that assessee was liable to pay liquidated damages in case of any shortfall in performance, after retests. Ld. AO held that it was not a simple case of supply of goods where some services were required to be carried on by assessee, incidental to sale. He observed that designing, manufacturing and supervision, erection and commissioning of BTG equipments were complete responsibility of assessee under the same contract. It was also not a case where s....
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....er section 44 BBB of the act; and B. Existence of Permanent Establishment. 17. Ld. DIT(IT)-II, held that assessee is not entitled to be taxed under section 44 BBB for onshore services and further held that income from supervisory PE in respect of onshore service revenue via assessee is taxable in India as business income with attribution at 25% on gross basis. 18. Against this order of Ld. DIT (IT)-II assessee did not prefer any appeal and accepted the same. 19. Order passed by Ld. AO, pursuant to directions of DRP, was appealed by assessee before this Tribunal. This Tribunal vide order dated 05.09.2014 in ITA No. 344/Del/2014 set aside the assessment to Ld. AO with certain directions as under: "8. Section 44 BBB is applicable for computing the profits and gains a foreign company is engaged in the business of civil construction or in certain turnkey power projects. Thus, assessee is taking contradictory stand while offering income in respect of supervisory service agreement and in respect of equipment supply agreement. Moreover the contention of Ld. DR that all the agreements relating to equipment supply and supervisory contract were not furnished before the asses....
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....on 253 (2A) which enables revenue to approach the ITAT in respect of any of its grievances against the order of the DIT. This provision was supported by Finance Act, 2012 w.e.f. 01/07/12 - i.e. He. Before the draft assessment order was made in respect of A Y 2010- 11. In these circumstances, we are of the opinion that the restricted remand to the AO was not justified. At the same time, this court is not persuaded to the submissions of revenue that the assessee considered the entirety of circumstances for the other years in its order dated 28/11/14 which lead to the final assessment order dated 04/12/2014, which is in turn is a subject matter of the assessee's appeal before the ITAT, the latter course is the most appropriate one. This is because the ITAT's impugned order in this case followed by the DRP was cryptic in its order and had nothing to say in respect of draft assessment order, initially framed on 28/03/13. In the circumstances and given the fact that the entirety of the circumstances were gone into two stages i.e. when the first draft assessment order was made and subsequently under section 263, the course of action urged by the revenue given that it also did not articula....
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....w, Ld. AEO has erred in proposing to initiate penalty proceedings under section 271 (1) (c) of the Act against the assessee, which is bad in law All the above grounds of objections are without prejudice to each other. The assessee craves for leave to add, amend, vary, omit or substitute any of the aforesaid grounds at any time before or at the time of hearing of the objections with the DRP." The DRP dealt with the objections independently. DRP observed and held as under: On perusal of contracts entered into by assessee with the project owners, DRP observed that: * there are 2 separate contracts, however these are in the nature of composite contract instead of turnkey contract as alleged by assessee; * Undisputedly the assessee has a long presence in India where it is doing activities relating to erection, testing and commissioning of equipment supplied by it; * that the obligation of assessee did not end with supply of BTG equipments, rather it continued and ended only on receipt of 'takeover certificate' issued by project owner, after erection, testing and commissioning of the equipment supplied by it and upon successful performance guarantee te....
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....aration, data collection, consultation with owners, repairs and warranty services etc. DRP then concluded as under: * perusal of the terms of the contract shows that obligation of assessee does not end after supply of BTG equipments, rather these continue and end only after erection, testing and commissioning of equipment supplied by it, and until the performance guarantee tests were performed successfully at all project site and project owners issues that takeover certificate to assessee as a proof of final acceptance of BTG. It was thus concluded that it was a composite contract * The assessee has a long presence in India where it is doing activities relating to erection, testing and commissioning of equipments supplied. These activities are economically significant and profit earning which cannot be considered in isolation. Rather, it is a continued relationship between assessee and the project owners in India. Assessee is coming to India for negotiation of contracts. The activities included like site visits and various site/geological surveys to be conducted, and therefore the criteria is as prescribed by Hon'ble Supreme Court in the case of CIT vs R.D Agarwal....
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....as recorded by authorities below in each of the assessment years under consideration. Assessment year 2007-08 to 2009-10 24. Assessee did not file return of income for assessment year 2007-08, 2008-09 and 2009-10. Accordingly, notice under section 148 was issued on 26.03.2013 requiring assessee to file its return of income for the respective assessment years, after recording the reasons which are reproduced as hereunder: "M/s Shanghai Electric group company Ltd (SEC) is a company incorporated under the laws of People's Republic of China and is engaged in the business of supply of boiler, turbine and generator (BTG) equipments to various companies (project owners) setting up of a plants in India. During the assessment proceedings for assessment year 2010-11, F EEC was engaged in exclusion of contracts with the following: Rosa Power Supply Co. Ltd., Reliance Infrastructure Ltd (formerly known as Reliance Energy Ltd) EMCO Energy Ltd, Jindal Steel & Power Ltd, JSW Ltd & JSW Energy Ltd. SEC has also provided supervisory services for erections/commissioning of such equipments at project owners site. The election and commissioning is done by 3rd parties in India ap....
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....observed that assessee offered supervisory service fee received under section 44 BBB of the Act. In respect of the supply of BTG equipments, assessee had contended that since these are offshore supplies, the income earned were not taxable in India. Ld. AO, based on the findings and observations of his predecessor for assessment year 2010-11, attributed 25% of profit based on global profitability statement accruing from offshore supply to PE in India. 28. Against the draft assessment order passed for these assessment years assessee filed its objection before the DRP. 29. Ld. DRP based its observations, depending upon order passed for assessment year 2010-11. Accordingly DRP issued enhancement notices, to show cause as to why supervisory receipts should not be taxed considering 25% net profit rate. DRP held that it is quite reasonable to estimate the net profit at 25% of supervisory receipts. The DRP also noted that assessee had agreed to this net profit rate in the order under section 263 for assessment year 2010-11. It accordingly directed the Ld. AO to compute taxable profits out of supervisory receipts at 25%. Pursuant to these directions Ld. AO passed the impugned assessme....
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.... 2012-13 & 2013-14 1. Butibori Project 2. Rosa I project 3. Rosa II project 4. Ratnagiri project 5. Jindal project 6. Warora Project 7. Chandrapur project 8. Laguna project 37. Ld. AO observed that assessee provided supervisory services for erections/commissioning of equipments supplied by it, at the project owners site. It was observed that assessee offered supervisory service fee received, under section 44 BBB of the Act. 38. However in respect of supply of BTG equipments, assessee contended that, since these were offshore supplies, hence were not taxable in India. Ld.AO, based on the findings and observations of his predecessor for assessment year 2010-11, attributed 25% of profit based on global profitability statement accruing from offshore supply to PE in India. Against draft assessment order, for these assessment years assessee filed objection before DRP. 39. DRP based on its observations made in assessment year 2010- 11, issued enhancement notice to show cause as to why, supervisory receipts should not be taxed, considering 25% net profit rate. As assessee did not furnish any accounts pertaining to supervisory PE, DRP held that it is quite reasonable to estima....
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....c), whether the profits arising from offshore supplies could be attributed to such PE in India? 43. In our considered opinion on answering the above issues the entire controversy involved in these appeals could be resolved. Ld. Counsel submitted as under: 44. From the submissions filed in the paper book, Ld. Counsel referred to certain agreements, for examining scope of work and terms and conditions of contracts, entered into by Assessee. Reference in this regard was made to the chart titled as "Details of scope of erection, commissioning, performance guarantee tests and supervision services" submitted by Ld. Counsel, during the course of arguments which has been once again filed in a summarised manner on 02.05.2017. This chart contains page numbers referring to certain clauses of agreements like covenants/recitals, scope, contract Price, mode of payment, INCOTERMS, drawings, warranty, transportation and arbitration. However, what is of seminal importance is, where transfer of title in goods took place. Scope of work for Yamuna Contract and Kinda Contract as illustrated by Ld. Counsel is as under below: Yamuna Contract (at serial No. 1 of the Chart submitted by the Asse....
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.... these contracts would show; the Owners were building power plants in India and as such required Assessee to provide BTG equipment. He submitted that this intention of parties is apparent from a plain reading of contracts. Ld. Counsel referred to other agreements having similar clauses and submitted that these contracts are not for execution of "work" as Revenue is contending, so as to bring them within the category of composite contracts. Ld. Counsel placed reliance upon the decision of Hon'ble Supreme Court in the case of Ishikawajima Harima (supra), to distinguish the decision relied upon by Ld. CIT. DR delivered by Hon'ble Supreme Court in the case of Hindustan Shipyard (supra). Hon'ble Supreme Court in Hindustan Shipyard(supra) categorised contracts as works contracts where it is a contract for work in which the use of materials is accessory or incidental to execution of the work. Ld. Counsel submitted that this is not the situation in the assessee's case. He submitted that intention of the parties is to acquire and to provide BTG equipment, and that these contracts and not for execution of any work, as is being made out by Revenue. 53. Referring to various paragraphs from ....
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....n Korea and was subject to income tax in Korea. The transfer of title along with the attendant risks had entirely passed on to PGCIL The findings of the CIT(A) in the case of LG Cables are submitted to be as under- "The assessee impugned the above assessment in appeal before the CIT (A), rehydrating its submission that the transfer of title in the equipment supplied by it had taken place in favour of PGCIL outside India and hence income of offshore supply equipment could not be said to accrue or arise in India. After comparing and contrasting both the agreements and in particular art. 6 thereof, the CIT(A) held as under: "4.1 From the combined reading of art. 6 of both the agreements, the facts emerge: (1) Notwithstanding the award of work under two separate agreements, the contractor (the appellant) has the overall responsibility for the execution of all the work right from the beginning till the end. (2) Notwithstanding the award of work under two separate agreements, in case of default or breach under one contract the same shall automatically be deemed to be a default or breach under both the contracts', This means that if there i....
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....f the High Court were as under- "28. As regards the payment for the performance of the activities within India, the contract price aggregating to INR 59982,160 plus US dollars 88,400 was specifically and separately fixed by art. (2) of the contract titled "Contract price in terms of payment". This consideration was separate from the consideration for the supply of equipment and there appears to be no justification to intermingle the two. The consideration for the offshore supply of equipment, it is repeated at the risk of repetition, accrued when the goods were sold. The performance of duties as envisaged in the second contract, viz., the erection contract, by no stretch of imagination can be conceived to postpone the transfer of property under para 31.2 of the agreement, which property passed on to the buyer simultaneously with the "loading on to the mode of transport to be used to convey the plant and equipment from the country origin to the country of import". Although the entire consideration was not paid on shipment of equipment, but non-payment of a part of the price could not prevent the transfer of equipment. The passing of the property to the purchaser, as rightly....
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....ment to the ship with the delivery of documents to the bank under irrevocable letter of credit, the terms referred to above could not affect the passing of the property." Thus when goods were transferred outside India, the taxable income accrued outside India. It being not attributable to any operation carried out in India, no portion of the same was taxable in India. " 31. We may note also that the buyer's right to examine and repudiate the goods in law does not by itself indicate that the property in the goods had not passed, as is evident from the provisions of s. 59 of the Sale of Goods Act, which read as under: "59. Remedy for breach of warranty-(1) Where there is a breach of warranty by the seller, or where the buyer elects or is compelled to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not by reason only of such breach of warranty entitled to reject the goods, but he may- (a) Set up against the seller the breach of warranty in diminution or extinction of the price; or (b) Sue the seller for damages for breach of warranty. (2) The fact that a buyer has set up a breach ....
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.... to play an important part and the bankers' commercial credit system facilitates merchants domiciled in different countries and assures payment to the seller on the one hand and delivery of the goods contracted for to the buyer on the other. This is done by means of what are known as letters of credit which under the terms of the contract the seller may insist on the buyer to provide for in a bank doing business in the place of the seller's domicile.... " 35. In the final analysis we have no hesitation in holding hat 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, 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-Harima. In the instant case th....
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....National Thermal Power Corporation (NTPC), the applicant successfully bid the tender and three separate following contracts are entered into with the NTPC : (1) Offshore supply contract- Contract No. CS-9558-102-2-FCCOA- 4520 dt. 25th March, 2005. ('Offshore supply contract No. 4520') for design, engineering, manufacture, inspection and testing at supplier's works, packing, forwarding and dispatch from manufacturer's works to the port of disembarkation in India of all offshore plant and equipment including mandatory spares. (2) Onshore supply contract-Contract No. CS-9558-102-2-SCCOA- 4521 dt. 25th March, 2005. (3) Onshore services contract-Contract No. CS-9558-102-2-TCCOA- 4522 dt. 25th March, 2005. In this case we are concerned only with the offshore supply contract No. 4520 and therefore, it is unnecessary to delve into other contracts. The value of the offshore supply contract is US$ 391,121,452 (Rs. 17,084,185,023) to be paid in foreign currency in execution of offshore supply contract. According to the applicant, the transaction of offshore plant and equipment etc. was completed outside India and that the property in goods passed to ....
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....Power Grid before the goods were taken delivery. These facts unerringly lead to the conclusion that in accordance with the contractual stipulations, the transfer of title to the equipment and materials took place while the goods were outside the territory of India. The events match with the nomenclature offshore supply contract' and the express stipulation that the transfer of title to equipment and materials shall pass on to Power Grid at FOB Port of shipment with the negotiation of shipping documents. It is worthy of note that the applicant has not reserved the right of disposal during transit or otherwise. The fact that the applicant is not relieved of the responsibility for loss or damage to the goods until the final take over and acceptance of the goods and that the goods are left in the custody of the applicant till the stage of erection and installation are not inconsistent with the Power Grid having already become the owner of equipment well before the goods reached the Indian Port. These are special safeguards which Power Grid wanted to have keeping in view the operational exigencies and overall obligations of the applicant under the contract. It is trite that risk nee....
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....certificate were enclosed. The terms of contract and the above documents go to show that the transaction of offshore plant and equipment was completed in the high seas and the property in goods passed to the NTPC outside India. As per cl. 31 of General Conditions of Contract the ownership of plant and equipment supplied under the ownership contract No. 4520 shall pass on to NTPC upon lading on the ship and upon endorsement of the dispatch documents in favour of the NTPC. The consideration of sale of offshore was remitted to the applicant directly outside India by means of establishing LlC. Hence no portion of consideration for offshore supply was received or could be deemed to have been received in India and therefore not liable to tax. Further no income accrues or arises in India to the applicant attracting income-tax. 58. Ld. Counsel placed reliance upon decision of Hon'ble Delhi High Court in the case of DIT Vs. Ericsson AB (343 ITR 470) and submitted that observations made by Hon'ble High Court have bearing on the issue at hand. He submitted that Hon'ble Court held as under: The place of negotiation. the place of signing of agreement. or formal acceptan....
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....took place outside India with the passing of the property from seller to buyer and acceptance test was not determinative of this factor". 60. He submitted that in Nokia (supra) Hon'ble Delhi High Court observed as under:- Thus the places of negotiation. the place of signing of agreement or formal acceptance thereof 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. 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 only then would question of apportionment arise having regard to the expressed language of s. 9 (1) (i) of 48 the Act, which makes the income taxable in India to the extent it arises in India." 61. He submitted that, from well settled legal position, submissi....
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....f Assessee in India. He submitted that after holding that the contracts were composite in nature and could not be split up, Ld.AO proceeded to hold the existence of a supervisory PE and attributed income to such PE which has upheld by DRP. 66. Ld. Counsel thus tried to emphasis that there is no scope of applicability of section 9 of the Act. He submitted that as per settled principle of law, that in absence of any finding of existence of a business connection, Assessee could not be brought to tax in India. He further submitted that, without prejudice, and assuming but not admitting that there did exist a "business connection" of Assessee in India, the principle of attribution would immediately become applicable as envisaged in Explanation 1 and 3 to section 9(1) of the Act. 67. It was submitted that, what is of seminal importance and crux of the issue involved herein is that, the entire endeavour of the Revenue is to bring portion of the profits arising from the offshore supplies to tax in India. Ld counsel submitted that what is critical to keep in mind is, the event of supply of BTG equipment. It is an admitted factual position that the manufacture of the BTG equipment happ....
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....ions carried out in India would be taxable. Thus, if it is accepted that the Assessee has received only the consideration for the equipment manufactured and delivered overseas, it would be difficult to uphold the view that any part of Assessee's income is chargeable to tax under the Act as no portion of the said income could be attributed to operations in India. 44. There is little material on record to hold that Nortel India habitually exercises any authority on behalf of the Assessee or Nortel Canada to conclude contracts on their behalf. There is also no material on record which would indicate that Nortel India maintained any stocks of goods or merchandise in India from which goods were regularly delivered on behalf of the Assessee or Nortel Canada. Thus, by „ virtue of Explanation 2 read with Explanation 3 to Section 9(l)(i) of the Act, no part of Assessee's income could be brought to tax under the Act. It is only when a non-resident Assessee's income is taxable under the Act that the question whether any benefit under the Double Taxation Avoidance Treaty is required to be examined. 47. As noticed earlier, there seems to be no dispute that the title to t....
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....Para 47/ Pg. 21 of copy of judgement provided on 2.05.2017) 83. Reliance was also placed on the decision of the jurisdictional High Court in the case of Linde AG Vs. DIT (365 ITR 1) (Delhi) where in this context the Hon'ble Court held as under- "73. It is apparent that the above questions are in two parts. The first being whether the income received/receivable in respect of the specified items of work is liable to tax in India under the provisions of the Act. The second part is whether the income received in respect of the specified items of work is taxable under the DTAA. Double Taxation Avoidance Agreements do not contain any charging provisions by virtue of which income tax is levied. Income tax is charged by virtue of Section 4 read with Section 5 of the Act. It is only in the event that an assessee is liable to pay tax under the Income Tax Act (de hors any Double Taxation Avoidance Asreements) that the question of examining whether the assessee is entitled to any benefit under the relevant Double Taxation Avoidance Agreement would arise. Any income which is not liable to tax under the normal provisions of the Act would not be bought to tax only by virtue of a Doubl....
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.... * Madras High Court in the case of Ansaldo Energia SPA 178 Taxmann 57; Ruling of the Authority for Advance Ruling in case of Roxar Maximum Reservoir Performance WLL 207 Taxmann Page 293/349 ITR 189. 77. Ld. CIT DR submitted that the goods have been actually delivered to the project owners within the territories of India as per the port of destination agreed upon between the parties in the respective agreements. The Ld. CIT.DR submitted that while objections raised by assessee were pending before DRP, the DRP repeatedly called upon assessee to furnish information and documents relating to invitation to tender, RFP, minutes of meeting, correspondence regarding negotiations of the Agreement, details of expenses incurred in India etc. It was submitted that these documents would have a bearing on whether assessee had a PE in India which were not complied with. Permanent Establishment 78. He filed a detailed written submission of his arguments which is placed on record. While submitting arguments to prove the existence of PE Ld. CIT.DR submitted that there is an overlap in respect of period in which supplies were made, and supervision surveys commenced. In the written s....
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....be installed at the site is a boiler, and the piecemeal equipment and the parts required for assembling the boiler have no independent existence and therefore, the supplies, equipment and material are integrally connected with the erection of the boiler in India. The AAR rejected this argument which was made to distinguish the judgment in Ishikawajima - Harima Heavy Industries Ltd. (Supra) and held that there was nothing in law which prevented the parties from entering into a contract for sale of material for a specified consideration although they were meant to be utilized in the fabrication and installation of complete plant or unit. 82. Ld. Counsel referring to the decision Vodafone International Holdings reported 341 ITR 1, relied by Ld.CIT DR submitted that for the purpose of income the "look at test" must be applied. Reliance was placed on AAR Ruling in Roxar Maximum Reservoir Performance WLL(supra) where the authority apparently seems to have applied the "look at" test and concluded that the Hon'ble Supreme Court's decision of Ishikawajima Harima Heavy Industries Ltd.(supra). Ld.Counsel submitted that it would be relevant to address the issue which the Ld.CIT.DR has raise....
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....completion of acceptance test are of no consequence. Ld. Counsel drew our attention on the decision of this Tribunal in the case of DCIT Vs. Roxon OY (2007) 106 ITD 489. It was submitted that this decision has been rendered in context of the principle of attribution where a PE also comes into existence and was a case of supplies under a turn-key contract. He submitted that the principle of attribution has been explained in the judgment and basically it is held that what can be brought to tax in India is only the profits arising from the activities carried out in India. Ld. Counsel emphasized that provisions of Section 9 read with Explanation 1 canvases this approach, which is in consistence with Double Tax Avoidance Agreements. He submitted that in a recent judgment of the Delhi High Court in the case of Nortel Networks India International Inc. (2016) 386 ITR 353 on the facts of that case, Hon'ble High Court held that profits arising from offshore supplies cannot be brought to tax in India given the specific mandate of Explanation 1, which is the attribution rule. 85. On the issue of existence of permanent establishment, Ld. Counsel submitted as under: Ld. Counsel submitted t....
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....ticle 5(1) should be independently satisfied. He submitted that the observations of the Court were rendered in context of examples of a mine, and oil or gas well, a quarry or any other place of extraction of natural resources and were not even examined by the Court in the context of subclause (j) which relates to building site or construction, installation or assembly project or supervisory activities in connection therewith. He submitted that second line of paragraph 25 clearly shows this and hence the proposition that Ld.CIT.DR extracted out of this paragraph does not exist. 87. Ld. Counsel submitted that the contention put forth by the Ld. CIT.DR regarding the existence of a fixed place PE owing to a supervision PE is completely misplaced. He submitted that correct enunciation of law regarding the inter play between the provisions of Article 5(1) and Article 5 (2) of the treaty has been explained by Mumbai ITAT in the case of Linklaters LLP Vs. ITO [(2010)132 TTJ 0020/(2011) 9 ITR 217]. Ld. Counsel submitted that assessee has taken a plea that the provision of Article 5 (2) where specific instances of PE had been indicated would have to also meet the requirements of Article 5....
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.... i.e., illustrative of the basic rule, clauses (j) and (k), as we understand, form part of the second category, i. e., extensions of the basic rule. The descriptions in these two categories are listed under separate sub-articles in OECD Model Conventions, UN Model Convention and even under US Model Conventions. The very fact that these two categories have been segregated in these model conventions also shows that these two categories belong to different genus.... .......90. A plain reading of article 5(2) of India-UK tax treaty, in the light of the above discussions, clearly shows article 5(2) of India- UK tax treaty is a mixture of what is usually contained in article 5(2) and article 5(3) in all major model conventions i.e., UN Model Convention, OECD Model Convention an US Model Convention. The clauses consisting in article 5(2) of India-UK tax treaty are, therefore, not homogeneous and these clauses do not belong to the same genus. One cannot therefore proceed on the basis, as has been urged by the learned senior counsel for the Assessee, that some degree of uniformity in treatment of all these subclauses is warranted. What applies to clauses (a) to (i) of this article ....
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....Commentary, and, for this reason, we are unable to approve learned counsel's argument that article 5(2) of India- UK tax treaty only provides examples of situations covered by article 5 (1), (emphasis supplied) 88. Ld. Counsel controverted the contention of Ld. CIT. DR regarding continuous existence of PE ever since January 2007 owing to the overlapping of the time periods of the supplies and supervision services and the argument that the supervision was a core revenue generating business activity and that such supervision income was through such PE. He submitted that it has no bearing on the matter because what needs to be determined in the present cases is that, in-spite of the existence of the supervisory PE, whether any part of the activity relating to offshore supplies was carried out in India. He submitted that Ld. CIT. DR has not been able to bring any evidence on record that, any portion of such activities was carried out in India. He submitted that even if there was an existing Supervisory PE ever since January 2007, still no profits arising from the offshore supplies could be brought to tax in India. 89. Ld. Counsel very strongly emphasized that the question ....
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....tion has been rightly construed by the Tribunal to be in the nature of a trade warranty and the Tribunal in this regard has rightly observed as follows:" 91. He submitted that the contention of Ld. CIT. DR regarding composite nature of contracts as well as transfer of title not being complete till the final acceptance by owners has no legs to stand on. Ld. Counsel submitted that the arguments advanced by Ld. CIT. DR are nothing but an effort to reinvent the wheel, which has been functioning normally ever since the decision of the Hon'ble Supreme Court in the case of Ishikawajima - Harima Heavy Industries Ltd. (supra.) 92. On the issue attribution of profits Ld. Counsel submits as under: Ld. Counsel referred to the written submission filed by Ld. CIT DR, wherein reliance has been placed on the POSCO Engineering & Construction Co. Ltd. (supra) judgment. Ld. CIT DR had referred to Butibori Project and Rosa-I project. He submitted that this reliance was placed only to establish that supervision activity was relating to the PG testing of the BTG Package and not any other activity, thus, would result in income to be attributed to such activity. Ld. Counsel submitted that Hon....
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....g of some services in connection with installation and commissioning of equipment of India, then to that extent income should be brought to tax in India. In Para 4.7.2, this Tribunal also noted the position of revenue that transfer of title outside India was not relevant and it was the performance guarantee which was important and decisive of the taxability of income. As has been the consistent position of the Department, Ld. Counsel submitted that DR failed to show any such activity, and Tribunal notes in the said paragraph that the DR kept harping on the general submissions that the construction of the plant which included offshore supplies could not have been completed without involvement of PE. Ld. Counsel submitted that in Para 4.7.2 (lc), Ld. CIT DR's contention were noted by the Tribunal on the facts of that case in offshore supply contract, that the Assessee therein was to provide training, instillation, testing, commissioning of such equipment in India which showed that the Assessee was required to put the equipment in a deliverable state in India. He submitted that the Tribunal noted in this paragraph the contention of the revenue that since so many activities were to....
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....tax by the department. Thus, according to him reliance placed on POSCO(supra) by Ld.CIT.DR is of no consequence and does not apply to the facts of the present case. 97. Ld. Counsel Submitted that much emphasis was paid by Ld. CIT.DR on training of the owner's personnel by Assessee vis- avis the operation of BTG equipment. This submission by Ld. CIT. DR was in support of his overall contention that, if original price of the equipment included certain activities to be carried out in India then the same should be brought to tax in India. Ld. Counsel submitted that the entire endeavor of Ld. CIT.DR is to confuse the facts, with the ultimate objective of seeking a remand. It was submitted by Ld. CIT.DR that a bare perusal of the Botiboori project, terms and conditions where the prices in respect of the said project indicated that lump-sum price indicate, (a) a price of 111 Million Dollars as full consideration for the equipment supply price on CFR Indian Port, and (b) a price of 4 Million Dollars has been given as full consideration for the aggregate services price for the erection of turbine and generator, supervision of erection of balance BTG Package, supervision of testing an....
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....Assessment Year 2010-11, where the scope of work has been given on Page 989 Clause I. He submitted that a closer perusal of scope of work reveals that at point no. g, that the training of owner's personnel for use of the equipment is included in the price of the contract. 102. Ld. Counsel submitted that in first blush it would be seen that the training would form part of the offshore supplies but a closer scrutiny of the contract reveals otherwise. He submitted that on Page 1022 of the same Paper book, the general conditions of the contract provides for training to be provided at site for a period of 9 months and which is generally to be provided for training the personnel to be able to operate the equipment. Ld. Counsel submitted that the question which arises is, whether this can be the training having its own existence or whether such activity has to be treated as merely incidental to the supply of equipment. Ld. Counsel submitted that this peculiar aspect was considered by the Hyderabad Bench of the Tribunal in the case of Pirelli Cavi E Sisteni vs. ACIT (2014) 151 1TD 19. In para 13 (C) of its judgment, the Tribunal has accepted the submission of assessee therein, that ....
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....he amount attributable to such testing charges in India. Since the information was not available, the Tribunal found it fit to restore the matter to the A.O. to make such determination. 105. Ld. Counsel referred to the facts of Butibori Project, and submitted that Article 10 on Page 117 covers the Acceptance Procedures. Article 10.1.1 deals with the contractor performing Shop Tests at the place of manufacture. Article 10.2 deals with mechanical completion. Ld. Counsel submitted that the Ld. CIT DR tried to emphasise the point that since the contractor was assisting in mechanical completion and such activities were not forming part of the onshore services, some portion of the revenues were to be attributed to India. He submitted that the provisions of the contract have not been carefully referred to and as such wrong conclusion have been drawn. He submitted that endeavor of Ld.CIT.DR was to somehow establish that apart from the PG testing, certain other tests were being carried out by assessee in India, for which revenue needed to be attributed. Ld. Counsel submitted that close reading of Clause 10.2 on Page 117 which refers to Mechanical Completion reveals that the contractor i.....
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....uidated damages arise in India and as such by necessary implication this is a revenue generating activity as the price of the equipment would include a provision for such damages. He submitted that bare perusal of Article 9 would show that the liquidated damages are provided for in respect of the delay in the delivery of equipment and liquidated damages for the steam turbine generator, steam turbine heat, steam turbine efficiency and auxiliary power consumption. To some up Ld. Counsel submitted that liquidated damages could be levied by the owner in the event the Assessee delayed the delivery of the equipment and secondly if the equipment did not perform in terms of specifications given by the owner. Ld. Counsel submitted that assessee fails to understand that if it was required to suffer liquidated damages, it would actually be a cost in his hands and not a revenue generating activity. Also, in every business transaction relating to supplies, performance guarantee are always tendered without recourse to which the user of the equipment would never be able to secure his rights in the event the equipment was defective or did not perform in terms of the specification. Ld. Counsel subm....
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....he designing and engineering part only as incidental to the supply of equipment. He submitted that Ld. CIT DR relied on Butibori Project where the scope of work has been given on Page 2 and the intention of the parties has been expressed in so many terms and where the contractor has expressed its willingness and the purchaser desires that the contractor shall provide supply of and services for BTG equipment. He submitted that predominant scope of work covers the design, engineering, manufacturing etc. Thus, the facts of POSCO's case are completely different because in that case designing and engineering was of the complete plant and for which separate revenue was attributed. On the facts of that case, the Assessee pleaded that since the drawing and designs related to the equipment thus revenue attributable to the said activity could also not be brought to tax in India. This argument was rejected by the Tribunal. To support the above contentions Ld. Counsel drew our attention Rosa 1 Contract where at Page 1269 in para 6.9, manufacturing drawings have been defined. The Clause specifically provides for the contractor to provide to the employer or the engineer in-charge over the pr....
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....on the basis that the offshore services falling within the scope of services by Linde are inextricably linked with (he Offshore supply of equipment and material and cannot be considered as technical services on a standalone basis. This is a question of fact which would have to be considered at an appropriate stage. However, if it is accepted that the services provided by Linde relating to design and engineering are inextricably linked with the manufacture and fabrication of the material and equipment to be supplied overseas and form an integral part of the said supplies, then the services rendered by Linde would not be amenable to tax under Section 9(1)(vii) of the Act. Consideration for such services would not be considered as "Fees for Technical Services" for the purposes of Section 9(1)(vii) of the Act. 114. We have perused the submissions advanced by both the sides in the light of records and the judicial precedents relied upon by them placed before us. Assessee has filed before us respondent's paper book which has been verified and examined carefully. 115. During the course of hearing held on 21.03.2017, 22.03.2017, 23.03.2017, 10.04.2017, 12.04.2017, 01.05.2017 and 02/0....
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....tion 1 of section 9 of Income tax Act. Ld. CIT.DR contended that Permanent Establishment stood established, as per article 5 of Indo-China tax treaty. * Ld. CIT.DR submitted that the agreements entered into by assessee with various project owners for setting up of power plants in India are composite contract though entered into separately. He submitted that separate agreements entered into for supply of equipment as well as service contract, however on perusal of these contracts, it can be ascertained that these are mutually inclusive with each other. * He further submitted that delivery of equipments would not be completed till the goods are supplied and commissioned on site which eventually was the responsibility of assessee. * Ld. CIT.DR submitted that, goods having been sold offshore hence not taxable in India, cannot be accepted, as these goods has finally arrived at the project site in India and has been utilised for the purposes of setting up of power project by assessee itself. * Ld. CIT.DR submitted that there is no dispute regarding Service PE existing in India, for the relevant transaction. And therefore income has deemed to have arise....
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....contracts with the owner, being: 1. "Supply of Boilers and Steam Turbine Generator Set and Auxiliaries" placed in the paper book Part -II for assessment year 2010-11;and 2. "Services Contract" placed at pages 1894 to 1918 in the paper book part III for A.Y.2010-11. Both these agreements have been executed between the parties on 20/06/06. 121. It has been submitted by the Ld. Counsel that assessee has received payments separately for supply of BTG equipments as well as for services rendered under the service contract. It has been argued that since the BTG equipments has been supplied outside the territories of India and the payments received lease under a separate contract, it cannot be deemed to have been arisen in India. He thus submitted that the payments received by assessee for supply of BTG equipments cannot be taxed in India. 122. On the contrary the Ld. CIT.DR submitted that the agreement entered into by assessee with JSW Energy is actually a composite contract and therefore the payments alleged to have been received by assessee cannot be considered to be not arising in India. 123. To resolve this controversy we thought it proper to analys....
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....ure, suppliers tax (whether direct, indirect or ancillary) incurred by or imposed on the supplier in any supplying the equipment, all profits licence, royalty and other fees the cost of all mandatory spare parts, accessories, consumable materials and special tools to be provided under the contract as per division of work in Annexure -2, design and drawings, engineering, manuals manufacturing, inspection, shop testing, supplier of spares and other supplies, packing loading, forwarding, shipping and unloading at the port of destination." 12.3 the contract price for supplies CFR INCOTERMS 2000 12.4 the contract prices inclusive of right in respect of the equipment 12.5 the contract price excludes any duties and taxes in India and withholding taxes. 14.2 Transportation the supplier shall be responsible for packing, loading, transporting, unloading at the port of destination all equipment, without limitation the supplier shall be responsible for loading and shipping equipment and or other material. It is also acknowledged by the supplier that the responsibility set out in this clause are included in the contract prices. In respect of....
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.... schedule VI (b) the owner shall make payments as per schedule IV. Schedule VI has not been placed on record as on the relevant page, it has been mentioned as the Supplier shall submit it within two weeks. Schedule IV is placed at page 972 Schedule IV -payment schedule 1. Contract price and terms of payment 1.1. As full and composite compensation for the suppliers performance of the work and obligations under this contract, the owner shall be to the supplier a fixed lump sum referred to as the contract price including ocean right up to the port of destination in India as per clause 12 of general conditions of contract. The contract price for this contract on CFR basis is USD 188,400,000 (One hundred and Eighty Eight million Four hundred thousand only). The breakup of total contract price shall be as per schedule VI. 1.2. Terms of payment on supply of equipment and mandatory spare 1.2.1. 9% of the contract price amounting to USD16,956,000 shall be paid as advance payment (interest-free) on fulfillment of the following by the supplier: * signing of the contract * submission of invoice for advance payments ....
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.... payments under the contract shall be made through irrevocable letter of credit payable at site as per schedule V (format of letter of credit and exited page 974 -978). 134. Clause 47 of the agreement at page 956 deals with Training of owners personnel. It says that the supplier shall provide the training to 40 man months and that the supplier shall provide a reasonable office space for this purpose at the locations where these services are being performed. It is also been agreed that equipment specific training is included in the contract price. It has been agreed by the supplier to furnish a security for the performance of the equipment supplied by assessee in lieu of which the supplier provides a bank guarantee to the owner which shall be valid until the expiry of warranty period of each unit under the contract. 135. Clause 53 (performance security) the intention of the parties appears to be very clear that the supplier is responsible for the performance of the equipment supplied by it to the owner and that the supplier shall be responsible for the care of equipment, materials and supplies as per CFR INCOTERMS 2000. Service Contract 136. Between the same parties p....
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....10-11 Kinda Pahse IV 140. This agreement has also been entered into between assessee and JSW Steel Ltd., dated 14.03.08, on similar terms and conditions as stipulated herein above in identical manner. This agreement has been placed at page 1073 of paper book III, filed for assessment year 2010-11. A Plain and cumulative reading of terms and conditions of these contract entered into between assessee with owner for all the above referred contracts clearly shows that it was one and the same transaction. One cannot be read in isolation with the other. The supply of equipments was same contract. In fact supply was part and parcel of the main contract and the same cannot be severed and treated differently. The service Contract entered was in fact for the purpose of meeting out expenses by assessee in terms of its employees in India. Hisar: 141. Assessee entered into agreement with Reliance energy Ltd, called as "Equipment and Mandatory Spares Supply & Services Contract Agreement", on 05.02.2007 for setting up of 2 x 600 MW thermal power plant at Hissar Hariyana. This agreement has been placed at page 980-1072 of paper book part -II, for assessment year 2010-11. 142. Art....
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....he contract agreement for the scope of works shall be treated as the contract price." Equipment contract price shall mean the CFR value of the imported equipment and the material and delivery at site (inclusive of packing, forwarding and transit insurance and transportation up to site) prize of in the genius equipment and material" 3.4 Taxes and Duties 3.4.1 the contract shall bear and pay all taxes, duties, levies and charges assessed on the contract, its subcontractors or their employees by all relevant municipal, state or national government authorities in connection with the contract applicable to the local portion. The contract shall supply all equipment/material on CFR Indian port basis. The contract shall pay all taxes and duties in the country of origin of goods. The purchaser shall bear the cost of customs duty and CVD in India (if applicable), Madurai and transit insurance and transportation from Indian port to site." Laguna 147. This contract has been entered into between assessee and reliance energy Ltd, dated 27.02.2008, on similar and identical terms. This agreement has been placed at page 1552 of paper book- IV filed for asse....
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....on 22/02/04 F. Consortium agreement G. Tender issued by the employer I. S EC's proposal Article 3 Conditions and Covenants 3.1 as mutually agreed between the consortium members and consented by the employer, the scope of work is divided into 4 parts and this contract shall accordingly operate as a combination of following contracts; the 1st part (hereinafter called the 1st contract) which shall cover supply of all equipment and materials for 2 sets of boilers, turbines and generators including associated accessories and mandatory spares, sourced outside India on CFR Indian port ( Kandla) basis. The 2nd part (hereinafter called the 2nd contract) which shall cover supervision of rejection, supervision of commissioning and performance guarantee testing of the equipment and material covered under 1st contract. The details S EC's scope of work, that is the 1st contract and the 2nd contract has been stipulated and defined in Annexure A and Annexure-B and Annexure C. .................. The scope of work under the 1st and the 2nd contract shall hereinafter also be referred to as the "BTG package" whic....
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.... such remedy will work. 3.5 is expressly understood and agreed under this contract that, liability of S EC shall be basic on and limited to the section prize of the BTG package only and not the entire value of the contract. SEC's contractual liability for the time for completion and liquidated damages for the 1st contract and the 2nd contract and more specifically defined under Annexure D to this contract. 3.6 notwithstanding anything to the contrary stated herein above, employer shall be solely responsible for the payment of SEC for the BTG package and UEEPL for the balance EPC work respectively. There would not be any payment transaction between S EC and UEEPL. ........ Article 4 (a) Contract Price the contractor agrees that it shall perform or cause to be performed the entire scope of work of the contract for fixed and lump sum consideration of USD 208, 500, 000 (US dollar 208 million and five hundred thousand only) would and INR 11, 267, 700, 000 (Indian Rs.Eleven billion 267 million and Seven hundred thousand only) inclusive of all applicable Indian taxes and duties ("contract price") payable by employer to the contractor. The above contract....
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....ntract price as per the Annexure towards advance payment bond * submission of an unconditional bank guarantee equivalent to 15% of the 1st contract price as per Annexure towards performance security 150. It is observed that under both these parts the assessee is providing with unconditional bank guarantee towards performance and security. Had the intention of the parties was to consider the supply independently without having any connection with that of services rendered by assessee in India, assessee would not have agreed for providing an unconditional performance and security guarantee towards the supply of equipment also. This implies that the supply is in extremely linked/connected to the services rendered by assessee in terms of direction of the project. In the paper book assessee has not placed the division of work (Annexure 8) and terminal point (Annexure-B), other documents (Annexure C). The next document placed at page 1254 is the conditions of the contract wherein specific references made to the following clauses: Clause 1.1: Definitions "Contract" means the agreement between the employer and the contractor for the execution of the work....
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....ll supply operation and maintenance manuals together with drawings of the works as built. These shall be in such detail as well enable the employer to operate, maintain, adjust and repair all parts of the works and shall be in such form as stated in the contract. 28.7 Consequence of Failure to Pass Test on Completion If a section fails to pass the tests on the reputation thereof under the sub clause 28.5.1 and has not made to even the minimum acceptable limit, the engineer after due consideration with the employer and the contractor shall be entitled to: a. order for the reputation of the test under the condition of sub clause 28.5; or b. reject the works and such section notwithstanding that either section of the works may have been taken over or provisionally taken over, in which even the employer shall do the ex-illusion of any remedy under clause 45 be entitled to recover all sums paid in respect of the works, together with the cost of dismantling the sets, clearing the site and returning the plant to the contractor, otherwise disposing off in accordance with the contractor's instructions; or c. issue at taking over certificate if th....
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.... supply, assembly, erection and installation are interlinked and everything culminates into one plant. Assessee has to formulate its own design and engineering as per the requirement placed by the owner/employer based on which the plants and materials are procured. There are no bifurcations between supply and erection/installation in the contract. And Ld. Counsel's reliance on one portion clause 4 of the main contract is an artificial bifurcations which is flawed. The assessee is responsible for selection and supply of materials, shipping to the site and installation and all works, commissioning and placing the plant into service. Butiburi Project: 154. This contract has been entered into by assessee with Vidarbha industries power Ltd being the owners of this project to be set up at Butiboori, Nagpur, Maharashtra. 155. The owner has appointed Reliance Infra Projects (UK) Ltd., a company incorporated under the laws of United Kingdom's as purchaser, being the subsidiary of Reliance Infrastructure Ltd.,. The understanding between the parties are that Reliance infra projects UK shall procure the equipments and provide all necessary services to be rendered outside India. Wherea....
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....rposes of equipment supply price has been placed as Appendix 5 at page 14-17 of paper book. It is very interesting to note that though there is a segregation of prise for supply of equipment and services rendered for erection; supervision etc 5% of the final payment of supply of equipment, would be paid on issuance of the final completion certificate by the purchaser. 158. The parties have also entered into a General Condition Contract (GCC), placed at page 79-163 of paper book 160. Article 2 of the GCC specifies the contractor's (assessee) work and obligations. Here it has been agreed that assessee shall provide all work, supplies and services necessary for design, engineering, manufacturing, procurement, supply, transportation to designated placed in India on CFR basis (" INCO 2000), erection of turbine and generator, supervision of election for balance BTG prep package, supervision of testing and of commissioning, conducting of performance testing, training of owners/purchasers personnel, achievement of provisional raking over and final completion of BTG package. 161. On perusal of Article 2 at page 96- 99, it is discernible that the training of owners/ Purchaser's Pers....
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....been submitted to have been offered to tax in India. On a co-joint reading of both these agreement, it appears to us that payments are linked with each other at different stages of design, drawing, supply and commissioning of the entire project. We, therefore under such facts and circumstances of the case before us, do not hesitate to hold that, activities rendered by assessee are inextricably linked with each other, and all the responsibility from supply till successful commissioning of projects, rested on assessee. We observe a continuous activity is being carried on by the assessee from supply of equipments till the setting up of the power projects. It is also observed in the payment clause agreed upon between the parties under contract for supply of equipments, that the prise of service contract has been loaded thereon. 169. Ld. Counsel has been harping upon the argument that goods have been delivered to the buyer (owner of the project) outside Indian territories, in high sea as per INCOTERMS 2000. Before venturing into the aspect of where exactly the goods have been delivered by assessee, it is imperative to understand what INCOTERMS 2000 are. International Commercial Terms....
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....nloading of the goods or the potting and the discharge of the containers as well as the operations of inspection. e) To fix respective obligations for the achievement of the formalities of exportation and /or importation, the payment of the rights and taxes of importation as well as the supply of the documents. INCOTERMS are most frequently listed by categories like, FOB, CIN, CFR, FCA, FAS etc., 172. Ld. Counsel has submitted before us that entire transaction has taken place as per CFR basis INCOTERMS 2000. Even as per agreements, goods have been transferred to buyer on CFR basis Incoterms 2000 by assessee. CFR - the abbreviation would mean Cost & Freight (named port of destination). Cost and Freight means that the seller (exporter) delivers when the goods pass the ship's rail in the port of shipment. The seller (exporter) must pay the costs and freight necessary to bring the goods to the named port of destination and the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller (exporter) to the buyer (importer). 173. Under such circumstances, it is imperative to exam....
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.... the Indian customs house. In the bill of lading placed at page 2035 where the equipments have been shipped through the shipping Corporation of India Ltd being the shipping house. However the customs duty has been borne by assessee, which is clear from the document. 178. If the sale of equipment has taken place on high sea outside India as submitted by Ld. Counsel, then how is that assessee is paying custom duty in India and delivering the same to its project site ? 179. It is further pertinent to note that in the agreements entered into by assessee with various project owners, payment in the contract schedule are not related with sale of equipments. But payments are linked with the different stages like signing of contract, raising of invoice, submission of invoice for advance payments, submission of advance bank guarantee, submission of performance bank guarantee, design, drawing, successful commissioning of power plant. In all, the payments are related to entire work entrusted upon assessee includes, supervisory services that assessee has to render in India. It has been consistently observed in all contracts that, major milestone in payment schedule does not mention about ....
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.... contract price per individual package as shown in the breakup of contract price (schedule VI) shall be paid on receipt of related documentation for the erection of the equipment supplied in case the documents are received in advance at the shipment is delayed then the payment for the same shall be made along with the delivery of equipment; 2.2.5. 10% of contract price each unit as shown in the breakup of contract price (schedule) shall be paid on issuance of taking over certificate or deemed takeover date of each unit. 2.3. Mode of payment: 2.3.1. The payment towards advance and milestone payments had been made through telegraphic transfer/Swift. All other payment under this contract shall be paid through an irrecoverable letter of credit (L/C) payable at site as per schedule V. The L/C shall be established through a band acceptable to the supplier. 2.3.2. The revolving L/C shall be received by the supplier within 3 months from the effective date of the contract. 2.3.3. L/C may be confirmed at the option of the supplier. All cost charges connected with the L/C shall be borne by the owner except following to the account of the supplier: ....
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....nd materials supplied by the supplier present to the terms of contract shall pass on to the owners, on CFR Basis (Incoterms2000). Transfer of Title shall not mean completion of the contract. The supplier shall continue to be responsible for the risk to, quality and performance, of such equipment and/or materials and for their complaint with the contract specifications until Take-over, in terms of the Performance warranties. The above referred clause is common to all 14 arguments. Warora Agreement This agreement is placed at page 1737 of paper book part IV for A. Y. 2010-11. Between assessee and EMCO Article 2.10 - Packing and Transportation Article 4 - Contract Price & Payments. Assessee offers Advance payment bonds, Performance Bond. Article 11 - Title & Risk of Lacs Article 12 - Insurance. Ratnagari Project. This agreement is placed at Paperbook Part-III for A.Y. 2010-11, entered into between assessee and JSW Energy Ltd. Reference is made to clause - 10- Shipping and Forwarding Clause 10.2 - Transportation which is to be carried on by Assessee on CFR basis. 10.4. Transfer of Title. ....
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....sessee was having complete control over the goods inclusive of Risk while in transit as well as once Equipments reaches the respective site. All agreements required assessee to bring the BTG equipments to discharge port located in India in proper condition as assessee has issued a Performance Bank guarantee to the respective owners. This further strengthens the intention of parties that assessee could not have taken chance of any kind of damage being caused to the equipments, while in transit. The delivery of shipment has taken place on CFR basis, would imply that assessee was responsible to deliver the goods to the buyer at the port in India and the risk of any damage/loss would shift to the buyer only on the goods reaching the port of India. Thus title in the goods did not get transferred to the buyer outside India. All the contracts placed in the paper book specifies a schedule, which clearly emphasise, 60% as advance of the total contract price which includes income received by assessee towards supervision services rendered in India. There are no clear payments made to assessee in terms of value of goods. 187. On the basis of above discussions, we do not agree with the conte....
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....ce of the contract'. We will, for the want of a better phrase, call this the dominant nature test." (Emphasis Supplied) 216. Coming to the facts of the present assessee, the substance of all contracts very clearly indicates to be composite in form, as there is no division in the contract in respect of supply and services, as advocated by Ld. Counsel, and payments are not separately linked with services and supply, but is to be made on the basis of stages of completion of the contract irrespective of the equipments brought at the project site. 217. We draw our support from the decision of Authority of Advance Ruling in case of Roxar Maximum Reservoir Performance WLL (supra), had relied upon the judgment in Ishikawajma Harima, and held that:- "A contract has to be read as a whole. The purpose for which the contract is entered into by the parties is to be ascertained from the terms of the contract. In the case on hand, ONGC clearly called for a contract for "services for supply, installation and commissioning of 36 manometer gauges". The purpose of the contract is the installation of the gauges at site to enable ONGC to carry out its operations. I have quoted ear....
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....ged for the supply of BTG equipments. Further certain clauses indicate that assessee is responsible to incur expenses towards tests and inspection at project sites in India, conduct repair during defect liability period which is again in India etc. This again indicates that the cost so incurred is subsumed in the supply cost of the equipments, which cannot be ruled out. To be more specific, we refer to KINDA Project, where the supply schedule of equipments includes, training of personnel, selected by project owner (more specifically detailed in Schedule III 966 to 971 of paper book, the same has been reproduced herein above while discussing the terms of agreement). The training of Personnel admittedly has taken place in and outside India. Ld Counsel placed reliance upon following decision to advocate that providing training does not have its own existence and such activity has to be treated as merely incidental to the supply of equipment; * Decision of Hon'ble Delhi High Court in the case of Lind AG vs. DDIT(supra); * Decision of this Tribunal in the case of Pirelli Cavo E Sisteni vs. ACIT (supra); and * Advance Ruling in case of Rotem Company (supra). ....
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....ia and in that view of the matter the casual connection between offshore supply and onshore services being interlinked with the entire project is explicit; * by reason of DTAA, the parties thereto can always locate the jurisdiction to tax the entire income attributable set to such permanent establishment to the country in which it is established; * supply of goods whether offshore or onshore as well as rendering of services whether offshore or onshore are attributable to the turnkey project and thus it would be wrong to contend that in terms of Article 7 of DTAA, no tax could be levied upon the assessee. As has been observed by Hon'ble Supreme Court in the case of Ishikawajima Harima (supra); "the concept of turnkey execution of the project involves total and complete responsibilities of the persons undertaking the contracts for commissioning the project and they are accordingly required to furnish performance guarantee is for the timely completion." 224. To be clearer we shall refer to section 19 of Sales of Goods Act which reads as under: "Section 19 (1) Where there is a contract for the sale of specific or ascertained goods the proper....
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....s the facts relating to transfer of title, the contract, responsibilities of supplier, and role of PE. a. In the case of Ishikawajma - Harima Heavy Industries Ltd. (supra) the supply segment and service segment were specified in different parts of the contract. The equipment supplied stood transferred upon delivery thereof outside India on high sea basis. All parts of the transaction in question, i.e. the transfer of property in goods as well as the payments, were carried outside India. The permanent establishment was not involved in the transactions. As regards offshore supply it was held that since all parts of the transaction in question, i.e., the transfer of property in goods as well as the payment, was carried outside the Indian soil, the transaction could not have been taxed in India. In this case the Hon'ble Court had reproduced all relevant clauses of the contract to show that clause 14.8 showed separate payment in US dollars and Indian rupees depending on the nature of supply viz. offshore supply and offshore services and onshore supply and onshore services. Exhibit D-2.1 mentioned that offshore supply was the price of Equipment & Material (including cost of ....
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....portation from the country of origin. It was further observed that the PE had no role to play in the execution of offshore supply contract and as a matter of fact was set up for sole purpose of enabling the purpose of the onshore services contract, which was a separate one. c. In the case of Nokia GSM(supra) equipment manufactured in Finland was sold to Indian Telecom Operators from outside India on a principle to principle basis, under independent buyer and seller arrangement. Installation activities were undertaken by Indian subsidiary under its independent contracts with Indian Telecom Operators. Per Contra In the facts of the present case, supply as well as supervision activity is carried on by assessee in India and further assessee has total control and domain over the equipments supplied as well as the site where instillation and erection of plants at site take place, until successful commissioning of the project. d) In the case of DIT vs. Ericson AB (supra), facts before Hon'ble Delhi High Court were as under: 228. The assessee, a Swedish company, entered into contracts with ten cellular operators for the supply of hardware equipment an....
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....ts for erection, commissioning and successful performance of the project to be set up at various sites in India. It is for the purpose of this project that the assessee supplied the BTG equipments. Further admittedly there is a business connection in India by way of supervision PE, established for supervising the erection and commissioning work carried out by assessee in India. On these two grounds, this decision relied upon by Ld.Counsel cannot be of any help to assessee, as they are factually different. e) In the case of Lind AG vs.DDIT(supra), facts before Hon'ble Delhi High Court were as under: 231. In the instant case Linde AG, Linde Engineering Division, Pullach, Germany ("Linde") and Samsung Engineering Company Ltd., Seoul, Korea ("Samsung") formed a consortium to bid for a particular project that was being floated by ONGC Petro Additions Limited ("Project Owner"). Linde and Samsung ("collectively referred to as the "Consortium") had technical expertise in their respective fields and had jointly submitted the bid in order to fulfil the requisite criteria. 232. Thereafter, the proposal submitted by the Consortium was accepted by the Project Owner and the notifi....
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....cify the amounts that are payable with respect to the various activities carried on by Linde /Samsung. Income may accrue or arise at various stages and on account of varied activities. In case of a nonresident tax entity any income which accrues or arises from an activity outside India, would not be taxable unless the same falls within the deeming provision contained in Section 9(1) of the Act. In these circumstances, following the decision of the Supreme Court in Ishikawajma-Harima Heavy Industries Ltd's. case (supra), it would not be apposite to consider the contract as a composite one for the purposes of imposition of tax under the Act. 83. The Authority concluded that although, payments for each item or work were specified or that the amounts payable for the work to be performed by individual members of the Consortium was recognized under the Contract, the same would not alter the nature of the Contract in any manner. The Authority concluded that the Contract would have to be considered as one indivisible contract and the income from the same would be taxable in India as the object of Contract was to set up a facility in India. The Authority further held that the M....
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....o accrue or arise in India. 85. The principle of apportionment of income on the basis of territorial nexus is now well accepted. Explanation 1(a) to section 9(1)(i) of the Act also specifies that only that part of income which is attributable to operations in India would be deemed to accrue or arise in India. It necessarily follows that in cases where a contract entails only a part of the operations to be carried on in India, the assessee would not be liable for the part of income that arises from operations conducted outside India. In such a case, the income from the venture would have to be appropriately apportioned. The Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. (supra) had considered this aspect and held that merely because a project is a turnkey project would not necessarily imply that for the purposes of taxability, the entire contract be considered as an integrated one. The taxable income in execution of a contract may arise at several stages and the same would have to be considered on the anvil of territorial nexus. The decision in the case of Ishikawajma-Harima Heavy Industries Ltd. (supra) is clearly applicable to the facts of the prese....
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....h interpretation is to transform the concept of chargeability which is also there in Section 9(1)(i), particularly when one reads Section 9(1)(i) with Section 5(2)(b) of the Act. What is contended on behalf of the Revenue is that under Section 9(1)(i) it can "look through" the transfer of shares of a foreign company holding shares in an Indian company and treat the transfer of shares of the foreign company as equivalent to the transfer of the shares of the Indian company on the premise that Section 9(1)(i) covers direct and indirect transfers of capital assets. 91. For the above reason, Section 9(1)(i) cannot by a process of interpretation be extended to cover indirect transfers of capital assets/property situate in India. To do so, would amount to changing the content and ambit of Section 9(1)(i)." 87. In the present case also, Linde has contended that it being a nonresident is not liable to pay tax in India and the sweep of Section 9(1) of the Act cannot be extended to income which has not accrued or arisen in India. 88. The Supreme Court also reiterated the "look at" principle as was enunciated in W.T. Ramsay Ltd. v. IRC [1981] 1 All ER 865 (HL). That ....
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....subcontractors." 90. FOB is an abbreviation of "Free on Board" and clearly indicates that the ownership of the material to be supplied by Linde would transfer to OPAL, the moment, the materials were placed for shipment. The petitioner had pointed out that shipping Documents/Bill of Lading also recorded the name of Linde as a Consignor and OPAL as a Consignee. In terms of the Contract, Linde and Samsung were fully responsible for any damage/loss during the transportation of the equipment and material. However, the same would not in any manner contradict the position that the ownership of the material in question was transferred to OPAL overseas. The petitioner has also submitted that the payment for design and engineering, supply, insurance and spares and consumables was to be paid to Linde in Euros and for the balance onshore work the payments were to be made in INR. According to the petitioner, this also indicated the portion of work that was required to be done overseas. 94. It has been contended by Linde that the above steps are only for the purposes of manufacturing and fabricating the equipment that was to be supplied overseas. It is submitted that the work r....
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....ces rendered by Linde are not inextricably linked to the manufacture and fabrication of equipment overseas so as to form an integral part of the supply of the said equipment, the income arising from the said services would be taxable in India as fees for technical services. By virtue of Section 9(1)(vii) of the Act, fees for technical services paid by a resident are taxable in India (except where such fees are payable in respect of services utilised by such person in business and profession carried outside India). In view of the Explanation to Section 9(2) as substituted by Finance Act 2010 with retrospective effect from 01.06.1976, the decision of the Supreme Court in Ishikawajma-Harima Heavy Industries Ltd's. case (supra), in so far as it holds that in order to tax fees for technical services under the Act the services must be rendered in India, is no longer applicable. Therefore, in the event the services in question are not considered as an integral and inextricable part of equipment and material supplied, it would be necessary to examine whether any relief in respect of such income would be available to Linde by virtue of the DTAA between Germany and India. 238. It is v....
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....ectly to the assessee. 241. The equipments supplied to Reliance were manufactured by Nortel Canada. The same was invoiced by the assessee directly to Reliance and consideration for the same was also received directly by the assessee. It was asserted by the Assessing Officer that the equipment supplied to Reliance was sourced from Nortel Canada at a much higher price than the price charged to Reliance and this resulted in the assessee suffering a loss during the relevant period. 242. The Assessing Officer was of the view that the assessee had been incorporated solely with the motive to evade the taxes arising out of supply contract in India and in substance, the contracts were performed by Nortel Canada along with its LO and Nortel India, acted in unison to identify, negotiate, appraise, secure, execute, manufacture, supply, install, commission and provide warranty and after sales service in respect of the contract entered into with Reliance. 243. On the basis of such findings, Assessing Officer concluded that Nortel India and Nortel LO constituted assessee's PE in India (both Fixed Place PE as well as Dependent Agent PE). 244. The Commissioner (Appeals) upheld the o....
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....ly obligation being distinct from service obligation. There is no such distinction in the present case. * In these cases price for each component was separately specified. However, cost value centre in the present case mentions the price of entire contract. * In all these cases all parts of transactions were completed outside India but in the present case the sale was not completed outside India. * In Ishikawajma Harima the insurance for goods supplied was in owner's name whereas in this case the insurance was in assessee's name, covering the risk till completion. * In all these cases PE had no role to play in offshore supply as observed by Hon'ble High Court whereas in this case, admittedly there exists a superiority PE and assessee was involved. in design, selection and procurements of materials to be used in the facade related work in India, clearance of goods through customs in India and payment of customs duty in India. 249. The agreements placed before us are clearly of composite nature for providing services. The scope of work listed in each agreements describes the nature of work in detail( which has been reproduced herein above), ....
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.... s. 9(1)(i) of the act. The expression "business connection" is not defined in the I.T. Act, though the word "business" is defined. The expression "business connection" has been considered in several cases. In CIT v. Remington Typewriter Co. (Bombay) Ltd., AIR 1931 PC 42, a question arose whether there was a business connection between the assessee-company and the foreign company. The facts were that the assessee purchased the goodwill of its business in certain territory in India and towards consideration of the same allotted 60,000 shares to the non-resident company in the assesseecompany. The capital of the assessee was divided into 60,000 shares only and by allotment of 60,000 shares to the non-resident company, the non-resident company became the owner of all the shares. It was held that the ultimate and complete control of the assessee was vested in the foreign company which owned all its shares and hence a business connection existed between the assessee and the non-resident company. 254. A Full Bench of the Rangoon High Court observed in CIT v. Visalakshi Achi [1937] 5 ITR 448 (Rang) [FB] that the expression "business connection" must denote a connection which produce....
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....f trade, commerce or manufacture, but the Act contains no definition of the expression 'business connection' and its precise connotation is vague and indefinite. The expression 'business connection' undoubtedly means something more than 'business'. A business connection in section 42 involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories: a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms: it may include carrying on a part of the main business or activity incidental to the main business of the non-resident through an agent, or it may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In each case, the question whether there is a business connection from or through which in....
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....rvision of the erector and a supervising engineer was placed at the disposal of the purchaser by the nonresident company. It was held that; "business connection" can be said to be established when "the thread of mutual interest runs through the fabric of the trading activities carried on outside and inside the taxable territory and there must be real and intimate connection between the two. The commonness of interest may be by way of management control or financial control or by way of sharing profits". 258. Having regard to the facts of the said case, the Hon'ble Court held that there was no business connection between the assessee and non-resident company, as the services rendered by nonresident company were connected with the effective fulfillment of the contract of sale and were merely incidental to the contract. 259. We are of the opinion that the activities referred to in the agreements placed before us satisfy/establishes "business connection" of assessee in India. There is an element of continuity between the businesses by assessee from supply to successful commissioning of the Plants. It is not a case of a mere stray or isolated transaction, as contended by Ld. Co....
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.... this Tribunal in the case of Linklaters LLP (supra) in rejoinder, to submit that provisions of Article 5 (2) where specific instances of PE had been indicated, would have to also meet the requirements of Article 5 (1). Ld Counsel by placing reliance upon Linklaters LLP (supra) submitted that, in order to establish PE in India in terms of Article 5 (2), conditions of Article 5 (1) must also be satisfied. In the written submission Ld. Counsel has extracted relevant paragraphs that suggest this preposition. To our understanding paragraph 91 referred by Ld. Counsel does not come to rescue assessee and further do not support the arguments advanced by him, which has been reproduced herein below: "91. It is thus clear that, even as per the OECD Model Convention, one of the items included in article 5(2), i.e., 5(2)(j), of India-UK tax treaty is such that it would not constitute permanent establishment under the basic rule of article 5(1), and it is only on account of deeming fiction provided by the provision of article 5(2)(j), it can be treated as a permanent establishment. We are in considered agreement with this analysis in OECD Model Convention Commentary, and, for this reas....
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....installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 183 days; (k) the furnishing of services other than technical services as defined in Article 12 (Royalties and Fees for Technical Services), by an enterprise of a Contracting State through employees or other personnel in the other Contracting State, but only if activities of that nature continue within that other Contracting State for a period or periods aggregating more than 183 days. (3)........ (4) Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom the provisions of paragraph 5 apply - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, has and habitually exercises an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State in respect of any activities which that person undertakes for the enterprise, unless the ....
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....existence of PE, to the facts of the present case, the contentions of Ld. Counsel cannot be accepted for the following reasons: * Para 2 of Article 5 of DTAA provides the circumstances under which permanent establishment arises in a Contracting State. Para 2 provides for specific instances over and above the general provisions contained in para 1 of Article 4 e.g., duration of construction contract, furnishing of services other than technical services, etc. It is a well accepted principle that specific provisions prevail over the general provisions. Therefore, if the conditions provided in para 2 of Article 5 are satisfied, it will amount to a permanent establishment, irrespective of the fact whether the general provisions of article 5(1) cover such a situation or not. * The permanent establishment under Article 5(2)(j), encompasses a building site, a construction, assembly or installation project or supervisory activities in connection therewith, only if such site, project or activities last more than six months(183 days), which is an admitted position in all the contracts entered into by assessee in the previous years, relevant to assessment years under consider....
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....r the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Contracting State in which the permanent establishment is situated or elsewhere in accordance with the provisions of tax law of that Contracting State. 5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. 6. For the purposes of paragraphs 1 to 5, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. 7. Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article." 265. Article 7 (1) states that profits can be taxed in India only to such extent that is attributable to the PE in India. In other words if there is no PE then business profits of assessee cannot be taxed in India. On the facts of the present case, the assessee has already admitte....
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....which provides that in addition to the 'profits attributable to the permanent establishment' the taxability of PE profits will also extend to '(b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment'. The connotations of 'profits indirectly attributable to permanent establishment' will extend to these two categories. These categories clearly incorporate a force of attraction rule. The basic philosophy underlying the force of attraction rule is that when an enterprise sets up a permanent establishment in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can properly tax all profits that the enterprise derives from that country whether the transactions are routed and performed through the PE or not. 269. The provisions of Article 7(1) of India China DTAA, include same results as sought to be achieved by article 7(1)(c) of UN MC. As to the scope of this provision, one may find gui....
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....such a degree that such another country can properly tax all profits that the enterprise derives from that country whether the transactions are routed and performed through the PE or not. In effect, profits relating to services rendered by assessee, whether rendered in India or outside India, in respect of Indian projects are taxable in India, and are attributable to the supervisory PE of assessee in India, as they are effectively connected with each other. Attribution of Income computed by Ld.AO Based on FAR analysis, activities performed by PE, was summarized by AO is under: * Drawing & Designing; * Manufacturing; * Supply of Equipments; * Marketing and related activities; * Supervision & related activities. Ld.AO computed attributed 25% from offshore supply to be accruing from off shore supplies to PE in India, based on Global profitability statement submitted by assessee, for assessment year under consideration, as under: ITA no. 224/Del/2015 (A.Y. 2008-09) Particulars FY 2006-07(AY 2007-08) Gross offshore supply revenues (USD(A) 4,36,79,200.00 Exchange rate @ 43.77 on 30.03.2007 43.77 ....
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.... basis of Global profit and loss account (5.78%) Rs. 79,81,99,677.58 Attribution in India (%) 25% Taxable Income Rs. 19,95,49,919.39 Tax Liability @ 42.23% Rs.8,42,69,930.% ITA no. 58/Del/2017 (AY 2012-13) Particulars FY 2011-12 Gross offshore supply revenues (USD) (A) 39,92,37,285.00 Gross offshore supply revenues (EURO) (B) 1,86,57,376.00 Exchange rate of USD on 31.03.2012 (Al) @ 50.71 Exchange rate of Euro on 31.03.2012 (Bl) @ 67.44 Gross offshore supply revenues (Rs) (AxAl + BxBl) in aggregate Rs. 21,50,35,76,160 Profit on the basis of Global profit and loss account (6%) Rs. 1,29,02,14,569 Attribution in India (%) 25% Taxable Income (X) Rs. 32,25,53,642 ITA no. 59/Del/2017 (AY 2013-14) Particulars FY 2012-13 Gross offshore supply revenues (USD) (A) 11,74,67,337.00 Gross offshore supply revenues (EURO) (B) 55,52,259.00 Exchange rate of USD on 31.03.2013 (Al) @ 53.98 Exchange rate of Euro on 31.03.2013 (Bl) @ 68.69 Gross offshore supply revenues (Rs) (AxAl + BxBl) in aggregate Rs. 6,72,22,71,551 Profit on the basis of Global profit and loss account (8.57%)....