AI OCR 
TaxTMI 
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2017 (8) TMI 416
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....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 by authorities below for assessment year 2010-11, which is being considered as the lead case. The grounds raised by assesse....
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....d 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 transactions including supply of equipment had taken place with the involvement of the PE in India and for this reason profits arising on off shore supplies were attributable to the PE in India. 3.8 That the AO has e....
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....ory 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 part of income shall be deemed to accrue or arise in India as is reasonably attributable to the operations of the business carried out in India and that it has not received any portion of income pertaining to offshore supply in India, as the entire consideration was received in foreign currency through wire transfers/letter ....
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....dia 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 assessee to show cause as to why income from supervisory services should not be taxed as fee for technical services(FTS), in response to which assessee submitted vide letter dated 19.03.2013, that assessee was engaged in rendering services in connection with construction of project being power plant in India and activities of supervision of erection testing and commissioning of the power plant, against which assessee received ....
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....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 separate contract was signed by different parties to execute a project. 12. Ld. AO placed reliance upon the decision of Hon'ble Delhi High Court in the case of CIT vs. Mitsui engineering and shipbuilding Co Ltd reported in 259 ITR 248 wherein the contention was that the finding that the contract for designing, engineering, manufacturing, shop testing and backing up to F.O.B. port of embarkation could not be split up since the entire contract was to be read together and....
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....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 assessing officer has not been denied by Ld. counsel. He offered to furnish those agreements before us but when certain crucial agreements were not before the assessing officer, it would be appropriate that 1st those agreements are examined by the assessing officer and thereafter, he may take a view in accordance with law. If assessee is not satisfied with the view taken by assessing officer, he may avail appropriate remedy as may be permissible in law. In view of the above, we set aside the orde....
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....s 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 articulate grievance of the DRP's order is not appropriate. It would be in the fitness of things that the matter is remitted to the DRP rather than AO which would consider the matter referred to it (on 28/03/2013) and after hearing the submissions of the parties deal with them with proper reasoned order, but in accordance with law. The DRP shall endeavour to complete its proceedings and make final order within 8 weeks from today. It goes without saying that AO shall (on receipt of DRP's order) passed the fi....
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....erved 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 tests being conducted at the project site. * That assessee has itself offered revenue from onshore activities as taxable in its return of income under section 44 BB B of the act; * there exists a supervisory PE in India during erection, testing stage under article 5 (2) (j) of India China tax treaty; * As per Article 7 of India China Tax Treaty, business profits of assessee shall be taxable in India if it has a permanent establishment in India. It does not talk about any special type of PE for the purpose out of various kinds of PE mentioned in article 5 (1)/(2); * Th....
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....ce 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 & Co., reported in (1965) 56 ITR 20 for existence of business connection in India are fulfilled. Therefore, contracts become taxable in India under the domestic law, as there existed a business connection in India. * It has been held that it was established in India prior to start of supply of equipment in India and existence of a fixed place PE is not a pre-rquisite for bringing business profit to tax in India any kind of PE as mentioned in Article 5 of the DTAA would be enough to bring the profits arising from supplies to tax in India, if profits are directly or indirectly attributable to PE. * Although the manufacturing ....
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....ners) 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 appointed by the project owners. The assessee has offered supervisory service fee received under section 44 BB B of the act. During course of assessment proceedings it has been established that offshore supplies are taxable leaving a detailed finding that the contract entered was a composite contract and a profit of 8.29% has been taken as profit earned (on the basis of global profit rate) by the company and 25% of such profits has been attributed to permanent establishment (PE) in India. Also, during the course of assessment proceedings for a Y 2010-11, vide letter dated 13/03/13, the assessee has filed details of offshore supplies for a Y 2007-08 amounting to USD4, 36,79, 200....
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....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 assessment order for assessment years 2007- 08, 2008-09 and 2009-10. Aggrieved by the impugned assessment order is assessee is in appeal before us now. Assessment year 2011-12 30. During the reassessment proceedings Ld. AO observed that assessee had entered into following contracts for this assessment year, the details of which are as under: S. No. Asst. Yr Details of Parties with whom Contracts were executed 1. 2011-12 1. Reliance Energy Ltd. 2. JSW Energy Ltd. 3. JSW Steel Ltd. 4. Rosa Power Supply Company Ltd. 5. JSW Energy (Ratnagiri) Ltd. 6. Jindal Steel and Power Ltd 31. Ld. AO observed that assessee provided supervisory services for erections/commissioning of such equipments at the project owners site. It has furth....
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....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 estimate the net profit at 25% to the 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 Ld.AO to compute taxable profits out of supervisory receipts at 25%. Pursuant to these directions Ld.AO passed impugned assessment order for assessment years 2012-13 & 2013-14. 40. Aggrieved by the impugned assessment orders, assessee is in appeal before us for all the above assessment years. 41. Ld. Counsel at the outset submitted that, all the grounds raised in the years under consideration before us are similar and identical based on same facts. He submitted that Ground Nos. 1 and 1.1, are general in nature, which do not require adjudication, Ground No. 2 raised....
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.... 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 Assessee) (at page 335 of the Paper book part II for assessment year 2007-08) 45. It has been submitted that this contract was between Reliance Energy Ltd. (Purchaser), Shanghai Electric (Group) Corporation and Shanghai Electric Group Co. Ltd., and the contract is for equipment and mandatory spares supply and service contract. It was submitted that this contract provides the process of setting up of a 2 x 300 MW thermal power plant at Yamuna Nagar for Haryana Power Corporation Ltd.,(Owner). It was submitted by Ld. Counsel that as per the contract, the Owner has selected the Purchaser (i.e. Reliance Energy) for construction of the facility/plant in the manner described in the contract between the Owner and Purchaser. 46. It has been submitted that, the Contractor has submitted an offer for supply of Boilers, Turbines, Generators and Aux....
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.... 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 the decision of Hon'ble Supreme Court in the case of Ishikawajima Harima (supra) Ld. Counsel submitted that: "What is of seminal importance here is that the conclusion of the Court that even where there are composite contracts, the principle of attribution has to be applied. He submitted that Hon'ble Court also held that, where different parts are clearly identifiable, it cannot be held that the, profits arising from off shore supplies were liable to be taxed in India. Thus, whether the contracts were composite or not are of no consequence." 54. Ld. Counsel placed reliance on the decision of jurisdictional High Court in the case of LG Cable Vs. DIT reported in 197 Taxman 100. Ld. Counsel in the written submission dealt with this decision as under: The nature and scope of work in that case was as under- Briefly the factual matrix giving rise to t....
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....l 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 is a default in any part of one contract by the appellant, both the contracts are liable to be cancelled. (3) Notwithstanding the award of work under two separate agreements, it was agreed by the appellant that the equipment/material supplied by it to PGCIL under the first contract, when erected and commissioned by the appellant under the second contract shall give satisfactory performance in accordance with the provisions of the contract. This condition has been specified in art, 6 of the onshore erection contract. This clearly shows that even in the onshore erection contract it is the responsibility of the appellant that the materials/equipment supplied by it under the offshore equipment supply contract shall give satisfactory performance. The same responsibility has been cast on the appellant in art. 6 of the offshore supply of equipment also. (4) Notwithstanding the award of contract un....
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....om 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 held by the Tribunal had, nothing to do with the payment of the entire price of the equipment. The passing of the property to the purchaser, as rightly held by the tribunal had, nothing to do with the payment of the entire price of the equipment to the seller. Even otherwise a substantial amount in this case was paid to the seller outside India and the Tribunal observed that for the unpaid price the purchaser could have resorted to the provisions of s. 46 of the Sale of Goods Act, which read as under: (1) Subject to the provisions of this act and of any law for the time being in force, notwithstanding that the property in the goods may have passed to the buyer, the unpaid seller of goods, as such has by implication of law- (a) A lien on the goods for the price while he is in possession of them; (b) In case of the insolvency of the buyer, right of stopping the goods in transit after he has parted with the possession of....
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....nst 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 of warranty in diminution or extinction of the price does not prevent him from suing for the same breach of warranty if he has suffered further damage. " 32. The aforesaid position was accepted in the case of KweiTek Chao vs. British Traders & Shippers Ltd 2 Q.B. 459 (QB) which was duly approved by the Supreme Court in the case of Mahabir Commercial Co. Ltd (supra) wherein it was held as under: "..... Where in pursuance of the contract the seller delivers the goods to the buyer or to a carrier or other bailee whether named by the buyer or not for the purposes of transmission to the buyer and does not reserve the right of disposal he is deemed to have unconditionally appropriated the goods to the contract. The buyer's assent to the passing of the property in the said circumstances is implied and that when the seller dispatches the goods and delivers them to the common carrier for purposes of transit to the buyer, the common carrier not only receives the goods as agent of the buyer but a....
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....re 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 there are two separate contracts i.e., offshore supply and the onshore services contract awarded by the PGCIL to the respondent- Assessee. As in the said case the considerations for offshore contract and onshore contract are separate and distinct from each other, in as much as the consideration in the case of offshore supply contract was received outside India through the mechanism of a letter of credit in foreign exchange while the consideration for onshore contract was received, for the most in Indian rupees with a nominal amount in foreign currency, the latter being for training charges. The title to the equipment supplied from outside India was transferred in favour of PGCIL outside India. In the case of Ishikawajma (supra), it was transferred on the high seas but in the instant case, it was transferred in the country of origin itself as soon as the goods were loaded upon the mode of transfer to be used to convey the plant and machinery, i.e., the shipping vessel, even prior to the goods reaching the high seas.....
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....g to the applicant, the transaction of offshore plant and equipment etc. was completed outside India and that the property in goods passed to NTPC outside India and no portion of income from the offshore supply accrues or arises to the applicant in India or received from the NTPC within India and therefore it is not liable to pay any tax under the IT Act. (1) The Authority made the following observations while adjudicating on the issue- (2) The applicant banks its support mainly on the judgment of the Supreme Court in Ishikawajma (supra) and also the ruling of this Authority in Hyosung Corporation, (2009) 314 ITR 343 (AAR). The Hon'ble Supreme Court in Ishikawajma's case (supra) has held as follows: (1) That only such part of the income, as is attributable to the operations carried out in India can be taxed in India. (2) Since all parts of the transaction in question, i.e. the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India. (3) The principle of apportionment, wherein the territorial jurisdiction of a particular State determines its capacity to tax an event, has ....
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....gencies and overall obligations of the applicant under the contract. It is trite that risk need not pass simultaneously with the title to goods. There could be special stipulation between the parties in this behalf. As rightly pointed out by the learned counsel for the applicant, the applicant, by taking care of goods at the site in India till installation, assumed the capacity of a bailee. As regards the stipulation that the supplier shall continue to be responsible for the quality and performance of the goods until the final take over on testing of the equipment, it cannot be construed to be a condition which postpones the transfer of title to the goods till that time. It is more in the nature of warranty provision in the contract. " Further, after referring to the decision of Supreme Court in Ishikawajma (supra), it observed: "10.7 It may be noticed that the clauses in the contract considered by the Supreme Court also contained an obligation on the part of the contractor to retain custody and control of equipment and to take due care of equipment and to take due care thereof until provisional acceptance of the work. Moreover, installation of equipment was also to be carried o....
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....f 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. Concededlv. 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 express language of S. 9(1)0). which makes the income taxable in India to the extent it arises in India. Merely because the activities, namely, the supply activity and the installation activity are to be carried out by two separate companies who are part of the same group cannot result in the transaction being treated as one composite transaction This is more so when both the entities perform their own independent obligations, receive appropriate separ....
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....ed that, from well settled legal position, submissions advanced by Revenue to raise issues of place of signing of contract, place of negotiation, acceptance tests etc. have no legs to stand on. It is apparent that no profits arising from off shore supplies could be brought to tax in India in the present case. 62. On the issue of whether any portion of the profits from off shore supplies was taxable in India in terms of Section 9 read with Explanation 1 of the Act, Ld. Counsel in rejoinder submitted as under: 63. He submitted that the fundamental issue which requires consideration of the Hon'ble Tribunal is, whether the non-resident Assessee in the present case was taxable in India in respect of the profits, arising from off shore supplies. He referred to provisions of section 5 of the Act defining the scope of total income. Section 5(2) of the Act provides as under- (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed ....
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....he BTG equipment happened outside India. Thus, what is left is to determine as to whether the taxable event of transfer of goods to the customers happened in India or such event happened outside the Indian territories. 68. It has been submitted that term CFR has been explained as Cost and Freight (CFR) and means that the seller pays for transportation to the port of shipment, loading and freight. The buyer pays for the insurance and transportation of the goods from the port of destination to his factory. The passing of risk occurs when the goods pass the ship's rail at the port of shipment. 69. Ld. Counsel tried to establish that title and risk in goods passed on outside India. It has been submitted that this position has not been disputed by the Revenue. He submitted that authorities below are of the opinion that since these are composite contracts the liability of the Assessee does not end here and continues till the actual handing over after completion of PG testing. It has been submitted that this argument of Revenue has been discarded by Hon'ble Supreme Court as well as the jurisdictional High Court, and it has been held that this is not a determinative test. Ld. Counsel the....
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....quipment passed in favour of Reliance overseas. However, the AO, CIT (A) and ITAT did not consider the same to be relevant as according to them, the equipment continued to be in the possession of the "Nortel Group' till its final acceptance by Reliance. In our view, even if it is accepted that the equipment supplied overseas continued to be in possession of Nortel India till the final acceptance by Reliance, the same would not imply that the Assessee's income from supply of equipment could be taxed under the Act. Clause (a) of Explanation 1 to Section 9(l)(i) of the Act postulates the principle of apportionment and only such income that can be ~ reasonably attributed to operations in India would be chargeable to tax under the Act. The position in Ishikawajima-Harima Heavy Industries (supra) was also similar. There too, the equipments were supplied overseas and the contractor continued to retain control of equipment and material till the provisional acceptance of the work or the termination of the contract. 71. Ld. Counsel submitted that mere existence of a business connection is not enough to trigger taxability in India and that to apply the principle of apportionment as envi....
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....greement. It would thus, be essential to first examine whether any amount receivable/received by Linde in respect of design and engineering or for supply of equipment is liable to tax under the Act. In the event, a portion of income is not exigible to tax under the Act, it would not be necessary to consider whether the DTAA is applicable. 73. Thus, Ld. counsel concluded by submitting that in absence of taxability under the provisions of the Act, no portion of the profits arising from off shore supplies could be brought to tax in India in the present case. On the contrary, Ld CIT DR submitted as under: 74. During the course of hearing Ld. CIT (DR) submitted that he would raise three contentions sequentially which are as under: 1. On composite nature of contract entered into by assessee; 2. Existence of PE in India; 3. Attribution to income to such PE. On composite nature of contracts. 75. The first contention of Ld. CIT (DR) was that, contracts entered into by assessee with the Project owners were composite contracts. In support of this contention, he referred to Rosa -I Contract. Referring to terms of the contract, Ld. CIT DR submitted that the contract were for Engineeri....
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....puted that assessee had a supervisory PE in India, ever since January, 2007. Ld. CIT.DR emphasized that, keeping in view Article 5(1) read with Article 5(2) (j) of DTAA, the supervision PE had to be aggregated as under Article 5(2)(j). He submitted that the term permanent establishment includes a building, site or construction installation or assembly Project or supervisory activities in connection there with, where such site project or activities continued for a period of more than 183 days,. Ld. CIT DR placed reliance upon the decision of Hon'ble Delhi High Court in the case of E-Funds IT solution reported in (2014) 364 ITR 256, to buttress his arguments. Attribution of profit: 79. Under this head Ld. CIT DR submitted the bottom line case by placing reliance on the decision of Hon'ble Delhi High Court in the case of POSCO Engineering and Constructions Company Ltd. Vs. ADIT reported in 2014 Taxmnn.com 500 (Delhi Tri). 80. He submitted that the price of equipment included compensation for certain activities which were carried out at site. He submitted that the contracts entered into by assessee with the project owners are indivisible in nature and that the responsibility of the....
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....se in Ansaldo (supra). Ld.Counsel submitted that there is no such allegation in the present case and revenue received in respect of supervision activity were in excess of 77 crores. He submitted that, none of the averments made out by Ld.CIT DR have any bearing on this matter. 83. Ld. Counsel then referred to the decision of the Hon'ble Supreme Court in Hindustan Shipyard Ltd. Vs. State of Andhra Pradesh (2000) 6 SCC 579, which has been relied by Ld. CIT DR. It is submitted by Ld. Counsel that the assessing officer had also referred to this judgment to draw a conclusion that the facts of the present case were fitting in the two of the categories, which referred to a contract for work in which the use of material is accessory or incidental to the execution of the work. Ld. Counsel submitted that assessee's case is that it is essentially a contract for supply of goods where some work is required to be done as incidental to the sale. He further submitted that the decision of Hindustan Shipyard Ltd. (supra) has been considered by Hon'ble Supreme Court in the case of Ishikawajima - Harima Heavy Industries Ltd. (supra) wherein, Hon'ble Supreme Court observed that, it is ....
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....of the offshore supplies and supervision activities for erection and commissioning, it is pointed out that same has been clearly indicated as such in the chart submitted by Assessee before this Tribunal, and is not a new material fact being brought to the attention of this Hon'ble Tribunal. He submitted that in-spite of the fact that there may be an overlapping period between the offshore supplies and the supervision services, the department, still has to apply the test of attribution, as far as the offshore supplies is concerned. Ld. Counsel submitted that the fundamental principle which has been enunciated by the Court repeatedly is that whether provisions of domestic law are applied or DTAA, still one has to satisfy the attribution rule and it is only the profit arising from such activities carried out in India that can be brought to tax in India. He submitted that in the entire submission made by the Ld. CIT DR, not a word has been said as to how any activity pertaining to the offshore supplies was carried out in India. Ld.Counsel, submitted that the argument of an overlapping period lacks substance and has no bearing on the matter. 86. Ld. Counsel then adverted to the arg....
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....e condition of Article 5(1) i.e. Fixed Place PE must also be satisfied. He submitted that in Para 84 of the judgment while recording the contentions of the revenue, the court took note of the contention put forth by revenue, that once conditions laid out in Article 5 (2) was satisfied, nothing further was required to hold the existence of a PE. As regards the contention of revenue it was submitted that the provisions of Article 5(1) and 5 (2) do not have to be read together. It was submitted by Ld. Counsel that if, conditions of Article 5 (1) are to be read with the ones stipulated in Article 5 (2), then that would make Article 5(2) otiose and unnecessary. He submitted that Article 5(2) cannot be read on a standalone basis. Ld. Counsel referred to the observations made by this Hon'ble Tribunal in Linkletters LLP (supra) as under:- "88. The face's admitted omitted where the Article 5(1) of the India UK tax treaty refers to the requirements of, what is often termed as, basic rule PE. This refers to a fixed place of business through which business of the enterprise is wholly or partly carried out. Elaborating upon the scope of this provision, a co-ordinate Bench of this Tribunal, in....
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....tegory of permanent establishments, i.e., under clauses {a) to ( i), OECD Model Convention Commentary which is also adopted by the UN Model Convention Commentary, does state that the second paragraph of model conventions, "it contains a list, by no means exhaustive, of examples, each of which can be regarded, prima facie, constituting a permanent establishment", and that "as these examples are to be seen against the background of general definition given in paragraph 1, it is assumed that the Contracting States interpret the items listed, 'a place of management', 'a branch', 'an office' etc., in such a way that such places constitute permanent establishment only if they meet the requirement of paragraph 1". Even by the OECD Model Convention Commentaries, however, this theory is not extended to the items in second category i.e., (i) and (k }. So far as paragraph 3 of the OECD Model Conventions dealing with these items are concerned, OCED Model Convention Commentary states as follows :- "This paragraph provides expressly that a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve month....
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....f Section 9(1) of the Income Tax Act. He submitted that whole question of whether there was a PE or not, and whether profits arising from the offshore supplies could be brought to tax, would be redundant, if taxability is not established in Section 9(1). He placed reliance on the observations by Hon'ble Delhi High Court in the case of Nortel Networks India International Inc. Vs. DIT (supra) wherein, dismissed the plea that the profits arising from offshore supplies were being brought to tax in India by the Department, owing to the allegation of a fixed place of a business in the form of the Indian subsidiary. Hon'ble High Court examined the provisions of Section 9 read with Explanation 1, and while following the settled principle of law in terms of the judgment of the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. Vs. DIT (supra), held that under Section 9 of the Act itself, taxability was not established and hence there was no occasion to even refer to the provision of DTAA. He submitted that this position was earlier enumerated by Hon'ble Delhi High Court in the case of DIT Vs. Nokia Networks [(2013) 358 ITR 259] wherein Hon'ble Court held that....
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....f reading judgments out of context, and without appreciating the difference in facts. Ld.Counsel submitted that Ld. CIT DR has compared Apples with Oranges, without explaining the scope of work in POSCO Engineering & Construction Co. Ltd. (supra). Ld. Counsel submitted that facts in POSCO Engineering & Construction Co. Ltd. (supra) are that POSCO Engineering, Nagarjuna Construction Company and Steel Authority of India, formed a consortium for setting up of a Blast Furnace Complex in West Bengal. He submitted that this Tribunal therein dealt with the question raised by Department, whether the contract in that case was a composite contract. Ld. Counsel submitted that in the facts of that case there were four contracts being, offshore supplies of equipment, onshore supply of equipment, onshore services and design and engineering services He submitted that the Tribunal therein noted that, one contract had been entered into by the Assessee with Steel Authority of India wherein the preamble of contract indicated that it had been entered into for setting up a Blast Furnace Complex. Thereafter, the Tribunal noted that each activity has been demarcated, and prices has been indicated in the ....
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....pass only on completion of such activities in India. In Para 4.7.2 (ld), the Tribunal gave its finding that on the facts of that case there was material on record to indicate that apart from training the Assessee was obliged to carry out certain activities associated with the erection and commissioning of the equipment in India. 94. Ld. Counsel submitted that in the case of POSCO(supra), Tribunal addressed the question that, irrespective of such activities in India the decisive question to be answered was whether the title in the goods passed in India or offshore. Ld. Counsel submitted that revenue's arguments were rejected by Tribunal by following the Special Bench decision in the case of Motorola Inc v. DCIT [2005] 95 ITD 269 as well as that of the Supreme Court in Ishikawajima (supra) judgment. 95. The next question decided by Tribunal in POSCO was whether the sale price included any consideration for services rendered or to be rendered in India. While referring to the summary of prices in Para 4.7.2 (2.b), the Tribunal found that the schedule of summary of prices included Foreign supervision charges which were Supervision charges in India during Erection, Start up, Commis....
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....be seen that the component of training is already included in the services portion, for which separate value has been indicated. Thus, the entire case of the revenue that training was built into the price of the equipment falls flat into its case. 99. Ld. Counsel referred Kinda Phase IV contract, which is on Page 1280 in Vol.-II of Paper book for Assessment Year 2012-13 and 2013-14. He submitted that in this contract, the scope of contract has been given on Page 1287 which provides for supply of BTG equipment to the owner. The contract price is given in Clause 13 on Page 1304 which is USD 106 Million 25,000 only which includes USD 150000 towards training of the owner's personnel as provided in Clause 40. Clause 40 of the agreement is at Page 1327 of the Paper book which provides that the supplier, i.e the Assessee shall provide training in English to the owner's personnel for 10 months in People Republic of China. Thus, the argument of the DR that training was carried out in India is unsubstantiated and at best only a wild and general averment which the Department usually makes, as noted by the Tribunal in POSCO(supra) judgment in para 4.7.2 (l.b). This averment is further....
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....ons were made by the Hon'ble Delhi High Court in the case of Linde AG Vs. DDIT (2014) 365 ITR l(Del), where the question that was being considered was that, whether in a case of supply, activities relating to design and engineering could be separately brought to tax as fee for technical services. In pares 94 and 95, Hon'ble Court was of the opinion that in every contract for manufacture and installation there are certain services which are inextricable linked with such manufacture, installation and supply and cannot be separately evaluated for treating them as fee for technical services. While doing so, Hon'ble Court referred to the decision of AAR in the case of Rotem Company, 279 ITR 165. 103. Ld. Counsel thus concluded the rebuttal in respect of Ld. CIT.DR's argument relating to training services, by trying to establish that, where training services were included in the offshore supply portion, they were carried out in China and where the training was to be done in India it formed part of the onshore services portion of the contracts for which revenue has already brought to tax. He also submitted that, be that as it may, in view of the settled principles of law, such tr....
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....ctor shall assist the purchaser in preparing (i) mechanical completion check lists for the BTG Package and (ii) a plan of pre-commissioning tests for the systematic checking. Clause 10.3.2 provides that the contractor shall assist the purchaser in performing the Pre- Commissioning Tests to demonstrate that such BTG Package confirms to the requirements of the contract. Clause 10.4 refers to the contractor assisting the purchaser in preparing a mechanical completion report. Clause 30.5 refers to Initial Operation it is provided that the contractor shall supervise the purchaser's testing the unit for continuous operation for 14 days. Ld. Counsel submitted that it is clear that all that the contractor was doing was assisting the purchaser in carrying out these tests and this activity form part of the overall supervision activity and that there is no substance in the argument of Ld. CIT DR that the assessee was carrying out any activity in India for which the price was built in the overall price of offshore supplies. 106. He submitted that certain Clause in Butibori Project emphasises that there are certain tests which were being carried out in India, for which Ld. CIT.DR submitted....
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....that there is some profit embedded in the sale price of the equipment? Similar is the case for warranties and latent defect. 108. Ld. Counsel submitted that these are again contingent events, i.e. it may or may not happen. The very fact that there is an uncertainty attached to it, the same cannot be a basis for bringing any profits to tax in India on account of offshore supplies. 109. Ld. Counsel submitted that all these issues do not have any bearing on the matter since what is to be considered transfer of title in goods which has taken place outside India and thus no taxable event took place in India. Whether the Assessee may have to incur subsequent costs on repair, warranties etc. do not have any bearing on the said taxable event i.e. offshore supplies. Be that as it may, these product warranties etc. are normal trade warranties which are attached to all equipment whether it is for industrial use or personal use. Ld. Counsel placed reliance on the decision of the Delhi High Court in the case of L.G. Cable Ltd. (supra). 110. Ld. Counsel submitted that as far as the decision of the Tribunal in POSCO's case is concerned the Tribunal failed to considered the decision of the ....
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....for the power project as a whole and as such the observations made in the POSCO case are of no consequence. He submitted that further even in the Butibori Project, the designing and engineering is discussed at Page 99 and Clause 2.3.1 specifically provides that the contractor shall be responsible for the designing and engineering of the BTG Package which confirms to the design criteria including safety and environmental standard set forth in the technical specifications for this contract. The term technical specifications has been defined on Page 94 and means the general specifications, technical documents and specifications and design criteria setting out a description and specification for the works. 112. Ld. Counsel further to illustrate this he referred to JSW Contract on Page 1082, where the term drawings has been explained in Clause 3.11 which provides that the drawings shall mean auxiliary and instrumental supply under the contract and includes any drawings furnished and/or provided by the owner or the engineer as a basis for proposal and forming part of specification. He submitted that similarly, in Butibori Project the term drawings have been discussed. Here also it is pr....
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....ounsel as per his submissions on the last date of hearing, submitted on 15.05.2017, detailed submission incorporating the oral arguments advanced by Ld. Counsel himself, oral arguments advanced by Ld. CIT. DR in the light of written submissions, and the rejoinder of Ld. Counsel. It was agreed by Ld. CIT.DR that, on receipt of the same, by him or his office, in the event any further submission needs to be advanced by Department, the same would be completed on or before 30/05/17. It has been agreed upon by both the sides that, nothing would be submitted in writing by either parties beyond 30.05.2017. We have not received any further submissions from Ld. CIT.DR, as on 30.05.2017. Hon'ble Delhi High Court was pleased to grant extension vide order dated 18.05.2017, to pass order in these appeal by 30.06.2017, We proceed to decide the issues on the basis of materials placed on record as well as the noting made by us while the matter was being heard in the court. 116. Detailed submissions advanced by both the sides have been reproduced hereinabove however; in a nutshell the same is summarized as under: Ld. Counsel emphasised as under: * Two transactions and its considerations have been....
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....includes profits arising from transactions in which the permanent establishment has been involved and such profit shall be regarded as attributable to the permanent establishment to the extent appropriate to the part played by the permanent establishment in those transactions even if those transactions are made or replaced directly with overseas head office of the enterprise rather than with the permanent establishment. 117. Our entire exercise revolves around the issue, whether there existed a Business connection of assesee in India, and if so whether the supply of BTG equipment by assessee and payments received by assessee for supply could be attributed to the supervisory PE under deeming provision of section 9 of the Act. Bearing in mind all the prepositions advanced by both the sides stated above, we will examine the facts of the present case vis -a-vis the agreements entered into between assessee and project owners as per the directions of Hon'ble High Court. 118. Before taking up the issues in hand, it is imperative to set out important portions of all contracts for 2 reasons; (a) the issue can be considered only on the basis of intention of parties to the contracts the te....
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....ract in a nutshell. It has been agreed upon between parties in sub clause 1.1 that the scope of supply of BTG equipments and auxiliaries would be as per Annexure-2 of the contract. Reading of Clause 1.2, suggests that along with supply, the contract requires assessee for performing or providing or furnishing or causing the provision, furnishing and performance of such additional or incidental items necessary in order for the supplier to satisfy the performance guarantee and warranties set forth in the contract and to supply the equipment and make the equipment operable and capable of performing as specified in the specifications or as otherwise necessary in order to comply with the requirements of this contract, then the same shall be considered as a part of the scope of supply. 125. Clause 1.3 requires a supplier to perform all its obligations and responsibilities under the supply contract at its own risk, cost and expenses. And that the supplier would also ensure functioning of equipments for intended purpose as per the contract. 126. Clause 3.25 defines Port of Destination which means Chennai, for consignment coming by sea and is Bangalore for consignment by air. 127. Clause ....
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....le shall not mean acceptance, and the consequent takeover of equipment. The supplier shall continue to be responsible for the risk to quality and performance of such equipment and/or materials and for their compliance with the specifications until takeover in terms of the performance warranties. 130. On a joint reading of clause 14.5.1 and 14.5.2 it is very clear that the supplier/assessee continues to have control over the equipments while in transit and there is no actual custody of the equipments by the buyer from the supplier outside India. From the clauses referred herein above the supplier is solely responsible for delivery of the equipments to the territory of India each time they are loaded on the ship. It is also agreed between the parties that the entire cost incurred by assessee on behalf of the owners. The assessing officer has done what has been agreed between the parties. As per clause 26 the contract is completed only when the warranty period expires or the supplier has issued a certificate for commercial use of the equipment after the completion of performance guarantee test. 131. Clause 38.1 refers to Mode of Payment which is as under: "38.1 Mode of Payment th....
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....2.3. 60% of the contract price amounting to USD113,040,000 per individual package as shown in the building breakup (schedule VI) shall be paid on dispatch, against satisfactory evidence of shipment. 1.2.4. 5% of the 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; 1.2.5. 10% of contract price each unit as shown in the breakup of contract price (scheduleVI) shall be paid on issuance of taking over certificate or deemed takeover date of each unit. 1.3. Mode of payment: 1.3.1. 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. 1.3.2. The revolving L/C shall be received by the supplier within 3 months from the effective date of the....
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....roject. Deployment schedule for supervisory staff shall be mutually discussed and agreed between JSWEL and SEC * BG test for boiler, turbine and generator shall be carried out by SEC. Any special tools, tackles and instrument shall be arranged by SEC. Providing support services to the SEC's supervisory staff example construction of site offices, temporarily stores, transport to work site for SEC'S personnel, insurance cover, watch and ward for security and safety of the materials under SEC's custody etc as required. Maintaining proper documentation of all the site activities pertaining to SEC as specified by JSWEL. 137. Clause 8 of this agreement reads as under: 8. Transportation, receiving, Handling and Storage 8.1. SEC shall provide all necessary information to JS WEL for JSWEL's property handling, storing, utilising and disposing of any project materials considered has added under the governmental or local law, regulation, statute or ordinance in effect at the job sites. 8.2. SEC shall provide supervision services to JSW in unloading, inspection, storage and preservation of materials and equipment in the scope of supply of SEC. Necessary storage handling reservati....
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....pares related PTG package on CFR Kandla Port. It has also been agreed that the contractor shall be responsible for the entire scope of work constituting the 1st part of contract and the 2nd part of contract and that any breach under or with respect to either of the part of contract shall automatically constitute to be deemed breach. In respect of delivery of goods the terms that have been agreed between the parties have been narrated in the scope of work under Ocean transportation at page 991 which reads as under: 8. Ocean transportation 145. The contractor shall be responsible for the transport of the plant and equipment from their place of origin to the port of destination in accordance with CFR INCOTERMS 2000. 146. The contractor shall check the capacity and availability of the loading facility which will be utilized in connection with the transport operation. The shipment of all the consignment relating to equipment and materials will be arranged by the contract of. Supplier will also ensure that the consignments are shipped by vessel of the following classification but not limited to........... The contractor shall arrange shipment of all imported materials and eq....
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....ortium members) and collectively called as contractor with the owner/Employer, being Rosa power supply company. The recital in which the understanding between the parties performing work are as under: AND WHEREAS SEC had submitted its offer and employer after examining the offer shortlisted SEC for award of EPC and after subsequent discussions and negotiations agreed to award the EPC to the consortium of SEC and UEEPL on terms and conditions contained in this contract for engineering, procurement and construction activities for the project and the documents referred to therein, which have been mutually accepted by both the parties and reduced into writing being these presents. Article 2: Contract Documents 2.1 the following documents together with the respective attachments and appendices (hereinafter referred to as "contract documents") shall together constitute this contract between the employer and the contract and the term "contract" in all such documents shall be construed accordingly. A. The contract and the append assessed to are: Appendix I (a)& (b) breakdown of the contract price and mandatory spares Appendix II terms of payment and letter of credit B.....
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....ilities and liabilities respectively imposed by this contract and for the avoidance of doubt, each consortium members shall be solely responsible to the employer for its own scope of work and responsibility and liability as defined in Annexure A to D for SEC and Annexure A to G for UEEPL under this contract and it satisfactory performance in accordance with the specifications and parameters under the contract. 3.4 Each consortium member shall be responsible for the execution of its scope of work in accordance with the provisions of the contract. In executing its scope of work each consortium member on an individual basis shall owe a duty to the employer to ensure that all the plant, material and equipment used by 8 and the design (to the extent necessary) thereof is fit for the purpose of for which it is required and that all the work undertaken by such concerted member is executed in a good and work man like manner by appropriately scaled, qualified and experienced personnel. If any part of the works performed by a consortium member within its scope of work, (including drawings and information prepared by the said consortium member) shall be or become defective and required ....
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.... payment on supply of equipment and mandatory spares: 1.2.1 5% of 1st contract price shall be paid as 1st initial advance (interest-free) on fulfillment of the following by the contract: * signing of the contract * submission of invoice for the 1st initial advance of 5% of the 1st contract price * submission of an unconditional bank guarantee equal into 5% of the 1st contract 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 The above referred terms read with the other terms of payment does not indicate any separate reference to offshore supply and onshore services provided by assessee. In respect of the contract price and terms of payment for 2nd contract which has been produced at page 1241 of the paper book reads as under: 2. contract price and terms of payment for 2nd contract 2.1 as full and complete compensation for the contract's performance of work and obligations under this contract, the employer shall pay the contract of fixed lump sum fee for services rendered to as the 2nd contract price as per Appendix ....
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.... the contract for incorporation in the work. "Provisional takeover" means the takeover of a section of the works pursuant to sub clause 28.5 and provisionally taken over shall have the corresponding meaning. "Risk Transfer Date" means the date as determined in sub clause 38.2 where the risk or loss of or damage to the work passes from the contractor to the employer in accordance with sub clause 39.1 "Site" means a place or places provided or made available by the employer where work is to be done by the contract or to which plant is to be delivered, together with so much of the area surrounding the same as the contract shall with the consent of the employer use in connection with the works otherwise than merely for the purpose of access. 6.5 Erection Information The contractor shall provide with the times stated in the contract or in the program drawings showing how the plant is to be affixed and any other information required for: a. preparation by the contract of suitable foundations or other means of support; and b. providing suitable access on the site for the plant and any necessary equipment to the place where the plant is to be erected; and c. making ....
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....arliest of either: a. the date of issue of taking over certificate or b. with respect to the relevant section only the date of provisional takeover or c. the date when the engineer is deemed to have sure the taking over certificate or the works are deemed to have been taken over in accordance with clause 29 or d. the date of expiry of the notice of termination when the contract is terminated by the employer or the contractor are in accordance with these conditions. Rosa II 151. This contract has been executed between assessee and Rosa Parks supply company limited for setting up of 2 x 300 MW thermal power plants at Utterpradesh, being Rosa -II. The said agreement has been entered into between the parties on 23.03.2008 on similar terms and conditions as has been reproduced hereinabove. Yamuna 152. This project is entered into by assessee with Reliance energy Ltd on identical terms of payments and scope of work. 153. Thus on perusal of the contracts being Rosa -I and Rosa II, it is blatantly clear that there is only one contract to be executed by assessee for the entire erection, commissioning and successful running of the above project. The design, engineering, su....
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....per book filed for assessment year 2012-13 and 2013-14. It has been agreed between the parties that the effective date of the contract shall be the date on which the following events occur: * the contractor (assessee) and the purchaser (reliance infra project UK) has signed the contract; * the contractor has submitted the performance guarantee being 5% of the contract price; * contractor has submitted advance payment guarantee being 5% of the contract price; and * an advance payment of 5% of the contract price has been received by the contract. 157. It is observed that assessee has received lump-sum payment of US $ 111,000,000 as full consideration from the purchaser for equipment supply price on CFR Indian port basis. A detailed breakup of price for this project has been listed at appendix 1 placed at page 8-10 of paper book. On perusal of the same it is observed that payments for the purposes of services rendered being supervision service for injection, a direction for turbine and generator, services for performance guarantee tests, commissioning, training has been aggregated at USD4,000,000. The payment schedule for the purposes of equipment supply price has been place....
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.... contractor has to provide various guarantees like advance bank guarantees, and performance guarantee to the owner in terms of the quality of the equipments provided. 167. Ld. Counsel vehemently argued that considerations have been bifurcated into supplies and service contract rendered separately. However on perusal of the agreement nowhere it suggests that the contract bifurcation is available. There is no mention of 2 transactions. The fact is that the contract ascribes the entire scope of work and it is incorrect to pick up one particular clause to show that it represents an independent scope of work. 168. On perusal of all contracts, commonly it has been observed that in the payment schedule the payments are received at various stages. For example in KINDA Project, (relevant clauses which have been reproduced herein above), it is observed that 15% of the total payments received by assessee in the supply of equipment contract is on completion of performance guarantee tests. It is also observed that assessee with some of the project owners has separately received payment under Service contract, which it has been submitted to have been offered to tax in India. On a co-joint read....
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....ansport, type of transport, insurances and delivery. Its first function is about a distribution of transport charges. The second role of the Incoterms 2000 is to define the place of transfer and the transport risks involved in order to justify the ownership for support and damage of goods by shipments sent by the seller (exporter) or the buyer (importer) in an event of execution of transport. Incoterms, safeguard the following issues in the Foreign Trade contract or International Trade Contract: a) To determine the critical point of the transfer of the risks of the seller to the buyer in the process forwarding of the goods (risks of loss, deterioration, robbery of the goods) allow the person who supports these risks to make arrangements in particular in term of insurance. b) To specify is going to subscribe the contract of carriage that is to say the seller or the buyer. c) To distribute between the seller and the buyer the logistic and administrative expenses at the various stages of the process. d) To define who is responsible for packaging, marking, operations of handling, loading and unloading of the goods or the potting and the discharge of the containers as well as the o....
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....s- CFR Visakhapatnam, INCOTERMS 2000 175. In all the above referred invoices, the shipper/suppliers/beneficiary carries the name of assessee, on the certificate of origin exporter is the assessee, consignee is - 'made out of order of industrial development bank of India Ltd.' in the case of document relating to invoice dated 02.11.2009 and 19.09.2010 and in case of the certificate of origin issued against invoice dated 19.08.2009, shows the consignee to be Jindal steel and power Ltd. 176. Bill of lading shows the fright to be prepaid, shipper being the assessee and consignee has been referred to as-' made out of order of industrial development bank of India Ltd.' in all the 3 cases referred herein above; similar is the noting recorded in bill of entry placed at the respective pages. 177. On analysis of the above documents it appears that assessee was responsible for payment of the entire customs duty in respect of the goods shipped from China to the respective port of discharge mentioned in the bill of lading and the bill of entry which has been issued by the Indian customs house. In the bill of lading placed at page 2035 where the equipments have been shipped through the shippi....
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....e VI. 2.2. Terms of payment on supply of equipment and mandatory spare 2.2.1. 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 * submission of advance bank guarantee equivalent to 9% of the total contract price as per schedule I 2.2.2. 16% of the contract price amounting to USD30,144,000 shall be paid towards milestone payment as follows: * USD 5,400,000 in January 2007 * USD 5,400,000 in February 2007 * USD 5,400,000 in March 2007 * USD 5,400,000 in April 2007 * USD 5,400,000 in November 2007 * USD 3,144,000 in December 2007 2.2.3. 60% of the contract price amounting to USD113,040,000 per individual package as shown in the building breakup (schedule VI) shall be paid on dispatch, against satisfactory evidence of shipment. 2.2.4. 5% of the 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 ....
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....clear that property in good passes when the parties intended to pass. It was submitted by Ld. Counsel in rejoinder to Ld.DR's submission as under; "It is a settled principle of law that in a supply contract the revenue arises only once the supplies has been made and does not arise at any preceding or subsequent stage." 183. That being the circumstances, in each and every contract entered into by assessee with project owners, why would terms in payment schedule start with assessee providing Performance Bank Guarantee, assessee providing an Advance Bank Guarantee (the performer of which has been attached as an Annexure/Appendix to each and every contract) and then the Owner issuing a percentage of contract price as advance, without there being an identifiable payment exclusively made for supply of equipments. Transfer of Tile Transfer of title in respect of Equipment and 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 mate....
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....oncerned, passed on to the buyer outside India was very clear. Similar was the observation of this Tribunal in POSCO(supra), as assessee therein entered into three different contract and the sale of equipment and transfer of title on the buyer was explicit and the payment for sale of equipment could be identifiable and the entire payment of value of goods supplied was received outside India. 186. Coming to the facts of the present case, the moment assessee/seller agreed to give a performance Bank Guarantee, clause relating to failure to pass Test on completion makes assessee liable for successful functioning of the BTG equipment in India upon installation on site. None of the contracts specifies clear intention of parties to transfer the title and the goods outside India. In fact the seller/ Assessee 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 asse....
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....y case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366 (29-A) continues to be: Did the parties have in mind or intend separate rights arising out of the sale of goods? If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is "the substance 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 servi....
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....parties before us with assessee, we observe that assessee has trained personnel regarding the functioning/handling/maintenance of BTG equipments which is an admitted position. By and large it is observed that assessee has not been separately compensated for providing training have expressly agreed that cost of training would be included in the total contract price. In our considered opinion, it does not help the assessee in any case, as training given to owners personal is finally consumed in India. Whether the payment is paid separately or not, and whether it has been given in India and or in China, does not change the situs of consumption of such services rendered by assessee. This leads to the conclusion that the training cost is included in the sale price charged 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....
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....hich when applied to the facts of the present case would be the same, as under: * Each component of the contract was directly related to the performance of the integrated contract as, violation and/or breach on the part of the parties thereto would affect the entire contract; * the contract itself providing for milestone dates the breach of any of the terms thereof would result in the breach of the entire contract and not just a particular ob ligation; * does the turnkey project contemplated a permanent establishment admittedly in India and in that view of the matter explanation appended to section 9 (1) (i) of the act is directly applicable; * the appellant has business connection in India 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 pro....
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....lation activities are carried on irrespective of whether the erection/installation activities are carried on by assessee or by any other party under the supervision of assessee. Assessee would not have been responsible for bearing such high risk, and protecting owner by providing the performance guarantee etc., till completion of the entire work of erection under the contract. Judicial Precedents relied on by Ld.Counsel 227. Ld. Counsel heavily relied on the decisions in the case of Ishikawajma - Harima Heavy Industries Ltd. (supra), LG Cable (supra) Nokia Networks OY (supra), Ericson EB(supra), Lind AG(supra), Nortel Networks(supra) as regards 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 ....
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....noted that the case of Ishikawajma Harima was clearly distinguishable from the facts of Mitsui since the payments for offshore and onshore supply of goods and services was in itself clearly demarcated and cannot be held to be a complete contract that had to be read as a whole and not in parts. b. In the case of LG Cables(supra) there were two separate contracts, one for offshore supply and other for onshore services. Hon'ble Court observed that as per the agreements between the parties therein, the property in the goods would pass on to the buyer as and when the seller loads the equipment onto the mode of transport for transportation 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 independ....
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....onform to the specifications, the only consequence was that the assessee had to cure the defect. The position might have been different if the buyer had the right to reject the equipment on the failure of the acceptance test carried out in India. Consequently, the assessee did not have a "business connection" in India. The question whether the assessee had a "Permanent Establishment" was not required to be gone into. However the facts of the assessee before us is not the same as in the case of DIT vs. Ericson AB (supra). Per Contra 230. The assessee before us has executed contracts 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:....
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....e key observations on the taxability of payments made to Linde, the matter was remanded back to the AAR for determination of whether Linde has a permanent establishment ("PE") in India or not. The relevant extract are as under: "82. The facts obtaining in the present case are quite similar to the facts as in the case of Ishikawajma-Harima Heavy Industries Ltd.(supra). It is indisputable that as far as obligations of Linde and Samsung are concerned, the Contract is an indivisible one. However, for the purposes of tax, the Contract does specify 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. ....
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....dia and income which accrues or is deemed to accrue or arise in India. It, therefore, follows that the object of inquiry would have to be to determine whether any income of Linde accrued or arose in India or whether any income could be deemed to accrue or arise in India. The fact that the contractual obligations of Linde were not limited to merely supplying equipment, but were for due performance of the entire Contract, would not necessarily imply that the entire income which was relatable to the Contract could be deemed to 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 Ishikawaj....
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....rtue of Section 9(1)(i) of the Act. The expression "look through" had been used by the Supreme Court in this context. The relevant extract of the judgment is as under:- "90. We have to give effect to the language of the section when it is unambiguous and admits of no doubt regarding its interpretation, particularly when a legal fiction is embedded in that section. A legal fiction has a limited scope. A legal fiction cannot be expanded by giving purposive interpretation particularly if the result of such 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....
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....ct is quoted below:- "7.1.1 Ownership of materials shall be transferred to the Company upon FOB shipment for imported supply and FOT for local supply subject to Contractor takes full responsibility for any damage / loss during the course of transportation until acceptance of works. 7.1.2 Deleted 7.1.3 Ownership of the construction Equipment used by the Contractor and its subcontractors in connection with the Works shall remain with the Contractor and its 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 engineerin....
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.... question are not capable of being considered as services on a standalone basis and are therefore subsumed as a part of the supplies. Given the fact that its Linde's case that the consideration for the supplies are separately specified, this aspect would require a closer scrutiny and determination of facts, which we do not propose to do in the present proceedings. 96. It is clarified that in the event, it is found that the offshore services 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 h....
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....ons to sell, supply and deliver equipment under the Equipment Contract to the assessee. Reliance and Nortel Canada were also parties to the assignment contract and in terms thereof, Nortel Canada guaranteed the performance of the Equipment Contract by the assessee (Assignee). In terms of the assignment contract, Reliance placed purchase orders directly on the assessee and also made all payments for the equipments supplied directly 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 id....
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....usion that assessee did not have a permanent establishment in India and therefore no part of supply could have been attributed to earning of income in India. Per Contra 248. The common facts in all above decisions as compared to the facts in the present case are: * In these cases there were separate contracts for offshore supply and onshore services or such distinction was specific with supply 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 procure....
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....s connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through or from any money lent at interest and brought into India in cash or in kind or through the transfer of a capital asset situate in India." 253. It is seen that the expression "business connection" occurs in 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 wa....
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....IT v. R.D. Aggarwal & Co. (1965) 56 ITR 20, Hon'ble Supreme Court had considered the scope of the expression "business connection", and it was observed as follows (pp. 24 & 28): "The expression 'business' is defined in the Act as any trade, commerce, manufacture or any adventure or concern in the nature of 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 b....
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....State Bank of India within fifteen days and the balance within six months. The net price included 5% commission payable to the non-resident company at Bombay. The property was to pass to the purchaser on delivery on board. The engine was agreed to be erected by the staff of the purchaser under the supervision 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....
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....bed by various judicial authorities as mentioned supra are satisfied. Even the assessee has not taken any contention before AO during assessment stage that it does not have business connection in India. EXISTANCE OF SUPERVISORY PE IN INDIA 262. Ld. Counsel relied upon decision of 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....
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....lation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than 183 days; (j) a building site or construction, 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 ....
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....ts involved, lasts for more than 12 months. 264. Thus on the question of 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....
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....ch are incurred for 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 admitted....
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....vides 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 guidance from ....
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.... 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 Gross offshore supply revenues (INR)(A*B) Rs. 1,91,18,38,584.00 Profit on the basis of Global pr....
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....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%) Rs. 57,60,98,671.94 Attribution in India (%) 25% Taxable Income (X) Rs. 14,40,24,667.98 271. Assessee in ground 6.9 of appeals for assessment years under consideration, has contended that segmental profit rate submitted to be applied, instead of global profit rate. However, Ld.Counsel has not submitted any justification to adopt the segmental profits. He....