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2020 (2) TMI 1053
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....A.Y. 2008-09. 3. Since common issues are involved in all these appeals, therefore, these appeals were heard together and are being disposed of by this common order for the sake of convenience. ITA No.2801/Del/2011 (by the Revenue) (A.Y. 2006-07) 4. Facts of the case, in brief, are that the assessee is a foreign company incorporated in Japan and is one of the biggest trading house of the world. It is involved in trading from needle to airplane engines. It has established a Liaison Office in New Delhi and undertakes several projects in connection with big industrial installations and power projects. It filed its return of income on 13th December, 2006 declaring total income at Rs. 2,71,37,369/-. During the course of assessment proceedings, the AO noted that the assessee has received consideration for executing two projects, namely, Teesta & Purulia Projects. The assessee has entered into contracts with National Hydroelectric Power Corporation Ltd. (NHPC) for carrying out Electrical & Mechanical Works of "Teesta H.E. Project" [3 X170 MW (Stage-V) (Sikkim, India)]. These agreements are - a) First Contract - For CIF/CIP Supply of all offshore equipments and materials includi....
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.... section 44D read with section 115 of the IT Act. 7.1 The assessee made a detailed submission explaining as to why such offshore supplies should not be attributed to the project office in India. However, the AO was not satisfied with the arguments advanced by the assessee and held that on reading of section 44BBB, 10% of the amount paid or payable whether in or outside India to the assessee or any person on his behalf on account such civil construction, erection, testing or commissioning shall be deemed to be the income chargeable to tax under the head 'Profit and gains from business or profession.' Accordingly, the income received for offshore supplies in respect of Teesta and Purulia projects are chargeable to tax @ 10%. He further held that everything directly or indirectly relating to the said business should be considered under the ambit of section 44BBB of the Act. He accordingly concluded that income for the purpose of this section should also include offshore receipts for the supply of equipment. He noted that the assessee is engaged in offshore supplies as well as onshore supplies in respect of Teesta and Purulia projects. It is also engaged in the installation and comm....
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....itutes DAPE of the assessee as has been held in A.Y 2005-06. Further, alternatively MIPL also constitutes DAPE of the assessee as has been held in A.Y. 2005-06. For the purposes of arriving at the profits attributable to Indian Operations, combined figures of LOs and MIPL were adopted. 9. The assessee was asked to furnish the details of the sales made through the LOs in India. The assessee furnished the details and also took the plea that the offshore supplies in respect of the Teesta & Purulia projects have also been included in such sales through LOs in India. The AO asked the assessee vide letter dated 26.12.2008, to substantiate its claim. However, the assessee could not provide any documentary evidence so as to prove that the offshore supplies in respect of Teesta & Purulia Projects are already included in the turnover of the LO. Therefore, the AO held that no benefit can be given to the assessee on this ground. 10. The AO noted that in the consolidated accounts the assessee has shown profit rate of 5.486%. Also, during the year, as per the assessee, total sales in India related to LOs, P.O.s and MIPL are JPY 64,193,681,300. Out of which, turn over of JPY 546,257,232 and....
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....intent behind the introduction of section 44BB was simplification in the matter of determination of the income accruing or arising in India to a foreign company which often involved complications. As held by the Hon'ble ITAT, Delhi Bench in case of Saipem S.P.A.vs DCIT(supra), the provision of Section 44BB were intended only to replace the system of computation of income earlier envisaged by the application of the provision of Sections 28 to 41 and Sections 43 and 43 A of the Act. It was not to replace the provision of Section 5 of the Act, which would remain intact and was not to be superceded by the provision of section 44BB. The provisions of section 44BBB are para- materia with the provision of section 44BB. The order of the Tribunal, therefore, applies also to Sections 44BBB. The non-obstante clause with which Section 44BBB starts only supercedes Sections 28 to 44AA. 3.7 In this context reference may also be made to the judgment of the Supreme Court in CIT vs. Hyundai Heavy Industries Company Ltd. 291 ITR 482 (SC). This was a case which related to Section 44BB of the Act, where an agreement was entered into by ONGC with M/s Hyundai Heavy Industries Co. Ltd., a non-res....
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....d for computing income on presumptive basis. This is clear from the finding given in paras 15(a) and 15(b) above. The income from operations outside India has been held to be non-taxable (as per para 15 (a)} and income only from operations attributable to Indian Permanent establishment has been held to be taxable in India @ 10% on presumptive basis {as per para 15(b)}. Thus, the offshore receipts in the present case cannot be subjected to tax merely on the ground that the appellant has chosen to be assessed on presumptive basis. The question whether such receipts will be taxable in India will have to be considered independently on their own merits which is the subject matter of separate arguments which follow hereinafter. It is, therefore held that the AO was not justified in holding that Section 44BBB requires that the offshore receipts have necessarily to be taxed in India. As a result, Ground of appeal No. 1 & 1.1 are allowed granting relief of Rs. 23,91,98,358/-." 13. The ld.CIT(A) further held that the income from offshore supplies in respect of Teesta and Purulia projects were not liable to be taxed under the provisions of Article 7 r.w. paragraph 6 of the protocol to the ....
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.... proposition that income from offshore supply was not taxable in India. The reasoning given in clause (vii) of para 6 also does not advance the case of the AO, so long as particular material was supplied outside India and the delivery thereof has been taken outside India. The Purulia Project also has similar facts and for the similar reasons the taxability of the offshore supply also is not liable to be taxable in respect of this contract. 4.5 The appellant has also placed reliance upon the judgment in CIT vs. Hyundai Heavy Industries Company Ltd.(supra). The facts of that case are identical and for the reasons given by the Hon'ble Supreme Court the relevant portion of which had been quoted in para 14.1 of the submissions of the appellant, the offshore supplies in the present case are not liable to tax in India. 4.6 The AO has relied upon the judgment in the case of Ansaldo Energia SPA vs ITAT(2009) 310 ITR 237 (Mad): 222 CTR (Mad)55.The said judgment has been distinguished by the Hon'ble Delhi High Court in the case of LG Cables (supra), the relevant portion of which have been extracted by the appellant in its reply in paras 15 & 15.1. Needless to mention that An....
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....eria with the case of the appellant in assessment years 1998-99, 1999-2000, 2003-04 ,2004-05 and 2005-06, for the reasons as discussed in the aforesaid orders of the undersigned, it is held that the Liaison Office does not constitute a "Permanent Establishment" and there was no income liable to tax in India. In this context, it may be apposite to reproduce the findings of the undersigned in Para 4.4 of the appellate order for assessment year 2003-04 referred to above :- "4.4 I have carefully considered the submissions made on behalf of the appellant and have also looked into the records. Perusal of the assessment order passed by the Assessing Officer shows that it has been completed following the combined order passed by the CIT(A) for the assessment years 2000-01and 2001-02 on 18-2-2005. The order of the CIT(A) has been set aside by the Hon'ble Tribunal. In their order the Tribunal has dealt with the contentions of the revenue as also the appellant and after looking into the material discovered in the course of survey gave a finding both in law and on facts and specifically held that LO does not constitute a P.E. liable to tax in India. The Hon 'ble Tribunal concluded the....
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....nce on the order of the IT AT, Bombay Bench in DDIT vs. Set Satellite (Singapore) Pte Ltd. (2007) 106 ITD 175( Mumbai): (2007) 108 TTJ (Mumbai)445 which has been set aside by the Hon'ble Bombay High Court by their judgment dated 22nd August, 2008 reported in 307 ITR 205 (Bombay):218 CTR (Bom) 452: 173 Taxman 475:11 DTR 313(Bom). The matter is directly covered by that judgment in which the Bombay High Court has followed the judgment of DIT, International Taxation, Vs Morgan Stanley & Co. (2007) 292 ITR 416 (SC). The AO has no doubt taken note of the judgment of the DIT, International Taxation vs Morgan Stanley & Co. (supra), but he has referred to that judgment to state that the attribution of profits would depend upon the functional and factual analysis in each case. 5.5 In this regard it has been clarified on behalf of the appellant that in the present case the Transfer Pricing Officer has specifically stated in his order that transfer pricing documentation, which contains the functional and economic analysis of comparables and of the assessee, has been examined and placed on record and in view of the functional and economic analysis of the assessee and of the comparables....
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.... the provisions of section 44BBB of the IT Act, 1961 cannot be applied for subjecting to tax the income from off-shore supplies in respect of Teesta Purulia Projects and has therefore erred in deleting the addition of Rs. 23,91,98,358/-made by the AO. 2. On the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the income form offshore supplies in respect of Teesta and Purulia Projects were not liable to taxed under the provisions of Article 7 read with paragraph 6 of the protocol to the DTAA between India and Japan. 3. On the facts of the and in law, the Ld. CIT(A has erred in holding that The Liaison Office of the assessee does not constitute PE. 4. On the facts of the case and in law, the Ld. CIT(A) erred in holding that no income is liable to be attributed in India even if Mitsui & Co. India Pvt. Ltd. (MIPL) constituted a Dependent Agency Permanent Establishment (DAPE) of the assessee in India and has therefore erred in deleting the addition of Rs. 18,27,64,936/-. The appellant craves to add, amend, modify or alter any grounds of appeal at the time or before the hearing of appeal" 17. The ld. DR st....
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....ssee whether in or out of India irrespective of whether towards "offshore supply" or towards "onshore services" become income u/s 5 and 9 of the Act by fiction created u/s u/s 44BBB of the Act. 18. Without prejudice to the above, he submitted that the offshore supplies are also taxable qua PE under Article 5(1), 5(2)(c), 5(3) and 5(4) of the DTAA. Referring to the various clauses of the contracts between the assessee and WBSEB and NHPC, he submitted that clearly it not only establishes their unitary and composite nature, but also the active involvement of the PE in the form of project office in the execution of such contracts. Since both the agreements between the Mitsui & Co. and WBSEB are identical, the ld. DR drew the attention of the Bench to the details with respect to NHPC contract which, according to him, will be applicable equally to WBSEB contract. The ld. DR drew the attention of the Bench to the following facts in his written synopsis:- "Composite Contract with NHPC - The assessee entered into 3 contracts with NHPC on 6.12.2001 - i.First Contract for the Supply of all Offshore Equipments and Materials including mandatory Spares, [p.14-17 of ....
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....ponsibilities - cl.9 of GCC ,p.l07] • "Facilities" means the Plant & Equipment to be supplied and installed, as well as the Installation Services including design, fabrication, manufacture, supply, transportation, erection, testing and commissioning to be carried out by the Contractor under the Contract, [cl.1.1 of GCC, p.98] • "Plant & Equipment" means permanent plant, equipment, machinery, apparatus, articles and things of all kinds to be provided and incorporated in the Facilities by the Contractor under Contract (including spare parts to be supplied by the contractor under GCC Sub-Clause 7.3 hereof), but does not include Contractor's equipment, [cl.1.1 of GCC, p.99] • "Installation Services" means all those services ancillary to the supply of Plant & Equipments for the Facilities, to be provided by the Contractor under the Contract e.g. transportation and provision of marine or other similar insurance, inspection, expediting Site preparation works (including the provision and use of Contractor's equipment and the supply of all construction materials required), installation, testing, pre-commissioning, commissioning, operations, mai....
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....nership & Risks GCC 31.1 Ownership of plant and equipment shall be transferred to the employer upon loading on to the mode of transport and upon endorsement of dispatch documents in favor of the employer p.141 31.5 r.w.32 Notwithstanding the transfer of ownership of the plant & eauipment, the responsibility for care and custody thereof together with the risk of loss and damage thereto shall remain with the contractor p.141 32 Contractor shall make good at its own cost anv loss or damage 142 the facilities p.141- 31.4 Ownership of anv plant and equipment in excess of the requirements shall revert to the contractor p.141 C. Procurement, Transport & Custom Clearance GCC- 21.1 Contractor shall manufacture or procure and transport all the plant & equipment to the site. p.121 GCC- 21.3 Contractor shall at its own risk and expense transport all the plant & equipment to the site as per mode of transport of its choice p.122 21.3.2 Contractor shall arrange sea shipment p.122 21.3.4 Contractor shall obtain all approvals for transportation of olant & equipment to the site. It will indemnify and hold harmless the empl....
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.... breach in one contract shall automatically be construed as a breach of the other contract. p.55 Supp. 5.4 In case the option is not exercised by the contractor.... Both p.55 contracts shall contain the aforesaid cross-fall breach clause H. PO/PE Installation PE AO, App-4 Time Schedule 1.11.01 to 31.05.06 p.38 17.2 Appointment of Contractor's representative to represent and act for the contractor p.115 20.1 & 9.1 Contractor shall execute the basic and detailed design and engineering work in compliance with the provisions of the p.119 & p.107 20.3 Approval of technical documents by EIC p.119 28.4 Defect Liability p.139 15.1 Intellectual Property will be with contractor p.113 17.2.4 & 22.1.2 Presence of Construction Manager for the duration from commencement of installation facilities till operational p.116 & p.124 18.1 Presence of Contractor's Organization p.117 22.2 Presence of Contractor's Equipments p.125 App-5 Subcontractors p.39 • As evident from the above, not only all three contracts are umbilically link....
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....ipment at the point(s) of import..[cl.21.4 of GCC, p.123] - The Contractor shall provide and maintain at its own expense all lighting, fencing and watching...for the proper execution and the protection of the Facilities, [cl.22.7 of GCC, P-127] - Contractor shall at its expense take out and maintain insurance [cl.34 of GCC, p.144- 146] & Consolidated Insurance coverage for all 3 contracts[App-3, p. 36] • Another factor that points to the fact that the title & risk over the goods remain with the assessee (at least) till the goods reach the site is the payment schedule for the offshore supplies. Thus, Interest free advance (10%) will be reduced in proportion to the value of the plant & equipment delivered to the site as evidenced by delivery documents. [AO, p.25] Similarly, major part of the value of offshore supplies (65%) shall be payableon delivery of the goods at the site. [AO, p.25] Thus, the entire contract is negotiated and executed not on the basis of delivery of supplies outside India, but on the context of delivery at the site. It is very clear that the supplier/assessee continues to have control over the equipments while in transit a....
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....im of the assessee that a part of the transaction should be treated as a contract for offshore supply that is not liable to be taxed in India. Thus, for the purpose of taxation, the contract must be taken as one, for installation and commissioning of a project in India. In support of its afore stated claims, in addition to the decisions relied upon by AO, revenue relies upon the following decisions: • In support of its claim on the indivisibility of the contracts and claim on 'composite contract' revenue likes to rely upon the following decisions - Mitsui Engg and Ship Building Co Ltd [2003-TII-23-HC-DEL-INTL] - Shanghai Electric Group Company Ltd [017-TII-119-ITAT-DELINTL] • In support of its claim on the importance and implications of 'cross-fall breach' clause in the contracts, revenue likes to rely upon the following decisions - - The Indure Ltd and another [2010-TIOL-79-SC-CT] - M/s Larsen and Toubro Ltd [2015-TIOL-3055-HC-AP-CT] Dongfang electric corporation [2012-TII-66-ITAT-KOL-INTL] - Decision of Hon'ble West Bengal AAR for GST in Order No. 04/WBAAR/2018-19 dated 11/05/2018 ....
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....s held by the and accepted by the assessee. It may not be out of context that during A.Y. the CIT(A) has also confirmed the action of the AO holding MIPL as DAPE. 19. The ld. DR also relied on the following decisions:- (i) The Indure Ltd. and Another, 2010-TIOL-79-SC-CT; (ii) M/s Larsen and Toubro Ltd., 2015-TIOL-3055-HC-AP-CT; (iii) Shanghai Electric Group Company Ltd., 2017-TII-119-ITAT-DEL-INTL; & (iv) Dongfang Electric Corporation, 2012-TII-66-ITAT-KOL-INTL; 19.1 He accordingly submitted that the order of the ld.CIT(A) be reversed and that of the AO be restored. 20. The ld. Counsel for the assessee, on the other hand, strongly supported the order of the CIT(A). He submitted that the issue as to whether the liaison office of the assessee does not constitute a PE and that no income is liable to be attracted in India to tax even if Mitsuit & Co. Ltd. Constituted an Dependent Agency Permanent Establishment of the assessee in India has been decided in favour of the assessee by the decision of the Tribunal. So far as the issue relating to Ground of appeal No.1 by the Revenue that the provisions of section 44BBB of the Act cannot be applied....
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....e outside India, and therefore cannot be deemed to accrue or arise in the country. (5) There exists a distinction between a business connection and a permanent establishment. As the permanent establishment cannot be said to be involved in the transaction, the aforementioned provision will have no application. The permanent establishment cannot be equated to a business connection, since the former is for the purpose of assessment of income of a non-resident under a Double Taxation Avoidance Agreement, and the latter is for the application of Section 9 of the Income Tax Act. (6) Clause (a) of Explanation 1 to S. 9(1)(i) states that only such part of the income as is attributable to the operations carried out in India, are taxable in India. (7) The existence of a permanent establishment would not constitute sufficient 'business connection', and the permanent establishment would be the taxable entity. The fiscal jurisdiction of a country would not extend to the taxing entire income attributable to the permanent establishment. (8) There exists a difference between the existence of a business connection and the income accruing or arising out of....
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....use (b) deal with the amount, which are received or deemed to be received in India. ' Thus, Supreme Court clearly held that the amount which is covered in clause (a) only will be within the purview of section 44 BB and not all the payment. It may be relevant to quote para 42 of this judgment which reads as under: "42) It is, however, pertinent to point out that Section 44BB(2) makes certain receipts as "deemed income" for the purposes of taxation in the said provision. Therefore, aid of thisprovision is to be necessarily taken to determine whether a particular amount will be "income" within the meaning of Section 5 of the Act. Likewise, Section 44BB(2) also acts as guide to determine whether a particular income is attributed as income occurred in India. Section 44BB of the Act provides for special provision for computing profits andgains. However, that would not mean that if the income is to be computed under this provision, we have to give a go-by to Sections 5 and 9 of the Act. To this extent, remarks of the High Court may not be correct. " The bold para of the above judgment makes it clear that it is only certain receipts mentioned in sub section (2) of section 44 BB which....
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....re contract. E Para 1 Page 10 The Ld. DR has tried to make a distinction that in the case of LG Cables there were two contracts whereas in assessee's case there are three contracts. It has been stated that in the absence of no offshore services, services relating to offshore supply are provided from India. This argument is without appreciating the meaning of 'offshore services'. Offshore itself means services provided outside India. Thus, there cannot be any allegation that offshore services have been provided from India. In fact in the present case, onshore services is being provided under third contract on which taxes has been paid and there is no dispute. It may be relevant to point out that in the LG. Cables Ltd. the Hon'ble High Court has referred and! relied upon the judgment of Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. 288 ITR 408 (SC) and in para 20, there were 5 contracts involving (i) offshore supply, (ii) offshore services (iii) onshore supply, (iv) onshore services (v) construction and erection. It may be noted that the nomenclatureis not significance. In one contract, there can be offshore supply and offshore services and still ....
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.... 10%) on completion and operational acceptance. The Ld. DR probably is not able to appreciate the terms of payment stated in item 2, 3, 4 and 5. These are payments to be made in advance on the basis of the progress of the Turbine and Generator drawings which are to be supplied from home country. Similarly, the Ld. DR has not been able to appreciate price variation clause which is given in appendix 2 to the contract at page 8. On going through the same it may be noted that this is an annexure of first contract and is price adjustment formula for supply of plant and equipment under this contract i.e. offshore supply. The contractor having quoted the price on the basis of the price of material and labour on the date of the tender, a clause has been inserted to make further payment in terms of this formula. It may be important to point out that all these payments are to be made in foreign currency. The issue which is important is that these payments are linked to shipment of the supplies and hence, there is no difference in I the terms of payment. G. Method of payment page 11 The Ld. DR has tried to make a distinction that method of payment is different than LG Cables....
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....in above para. As regards clause 31.4 referred by the Ld. DR firstly it is stated that it is identical to LG Cables as can be seen from the numbering. Moreover, this clause needs to be read in full and in the context in which it has been stated. It is important to point out that clause 31.4 is part of the General Conditions of Contract (GCC) which Is common to all three contracts and thus, the application of any clause will be with reference to that particular contract to which it has implication and not to other contract. Accordingly, the first line of this clause 31.4 is meant for onshore supply i.e. supplies from within India under Second contract and not under First contract i.e. Offshore supply. This becomes more clear when we read last line of this clause reads page 116 of the contract "provided quantity of any plant or equipment specifically stipulated in the contract shall be the property of the employer whether or not incorporated in the facilities." The first contract is for offshore supplies and quantity of plant and equipment has been specifically specified in schedule 1 at page 36 to page 38 of the contract. Thus, offshore supplies cannot be returned. As regards ....
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....tification to mix the consideration for the offshore and onshore contracts. None of the stipulations of the onshore contract could conceivably postpone the transfer of property of the equipments supplied under the offshore contract, which, in accordance with the agreement, had been unconditionally appropriated at the time of delivery, at the port of shipment. When the equipment was transferred outside India, necessarily the taxable income also accrued outside India, and hence no portion of such income was taxable in India J AP High Court in the case of L&T Ltd. This judgment instead of supporting the case of the Revenue supports the case of the assessee. On page 13 of the DR submission in para 155, the Court has taken note that "it is not correct to say that risk and title pass simultaneously. There can be agreement for passing of risk before passing of title per se. As per section 19 of the Sale of Goods Act, it is primarily the intention of the parties when the title to the goods is to pass." Thus, it is the intention in the agreement and the present case is clearly stipulated in clause 31.1 and 31.2. K. Delhi ITAT in the case of Shanghai Electric Group Company ....
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.... Ltd. 86 ITR 417 The Ld. DR has placed reliance on this judgment of Supreme Court where the court observed that "intention of the parties is therefore one of the important elements in determining the situs where the property passes to the buyer in pursuance of the contract." The above judgment supports the case of the assessee as the intention of the parties in the present case are stipulated in clause 31.1 and 31.2. 22. He accordingly submitted that the contract entered into by the assessee company is on the same line as was contract entered into in the case of LG Cables Ltd. The contract in the case of LG Cables Ltd., was with Power Grid Corporation Ltd., whereas in the assessee's case it is with NHPC. Both these companies are Public Sector Companies and the contracts have been drafted by the Ministry of Power almost at the same time. Referring to the following chart as per his synopsis he submitted that the contract in the case of LG Cable Ltd., and in assessee's case the clauses in both these agreements are similar:- "2.11 The following comparative chart of the contract in the case of LG Cable Ltd., and in assessee's case demonstrate that the clauses in both t....
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....nt and machinery on hire or to be used in the prospecting for or extraction of or production of mineral oils in India. Thus, in section 44BB, there is specific coverage of the services provided which has to be taken into consideration while computing presumptive income under this section. As against this, in section 44BBB which is applicable in respect of business of civil construction, the applicability is on the amount paid or payable on account of civil construction, erection, testing or commissioning only. Thus, the amount of both the offshore supply is not covered in provisions of section 44BBB. He submitted that in the case of the assessee, the third contract entered into by the assessee with NHPC is regarding civil construction, erection, testing or commissioning and on which the assessee has paid taxes under this section. The provisions of section 44BBB are not applicable in respect of offshore supplies. He submitted that, in fact, the decision relied on by the ld.CIT, DR in the case of Sedco Forex International Inc. supports the case of the assessee wherein at para 47 of the order, it has been stated: "Thus, where clause (a) mentions the amount which is paid or payable, cl....
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....ntry of origin i.e., Japan. 24. So far as the method of payment is concerned, he submitted that it is also same. The only difference is that in the case of LG Cables Ltd., the payments were to be made within 30 days whereas in the present case it is to be paid within 60 days of the submission of the invoice. Further, in the case of LG Cables, there was a provision for pro rata payment which means pro rata shipment meaning thereby all equipments not to be shipped at one go. Similarly, in the present case, there is a provision for pro rata payment and sub-packages means that part shipment can be made and payment will be received on pro-rata basis. In the case of LG Cables, the payment was through irrevocable letter of credit whereas in the case of the assessee also the payments are through irrevocable letter of credit as per clause 3.0 at page 7 of the agreement. 24.1 He submitted that there is no difference in the transfer of ownership to the title and risk. The term of transfer of ownership in the case of the assessee is not different from that of LG Cables Ltd. Referring to various clauses of the agreement vis-à-vis the clauses of the agreement of LG Cables Ltd., he s....
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....of section 44BB of the Act. For the above proposition, the AO referred to the various clauses of the Agreement entered into by the assessee and, on this basis, reached to a conclusion that the income from offshore supplies shall be chargeable to tax in India. He further held that everything directly or indirectly relating to the said business should be considered under the ambit of section 44BBB. He, accordingly, concluded that income for the purpose of this section should also include offshore receipts for the supply of equipments. 27. We find the ld.CIT(A), on the issue of applicability of section 44BBB in respect of offshore supplies held that the same is not applicable in respect of payments received outside India for offshore supplies. He also held that as per clause 31.1 of the contract, the title of the properties in the goods was transferred outside India as soon as the goods were loaded in the ship and the shipping documents were handed over to the nominated bank. Thus, the sale was completed outside India. According to him, the PE had not played any part in the offshore supplies of the equipments. He accordingly held that the income in respect of offshore supplies accr....
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....assessment under this provision, a sum equal to 10% of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head 'profits and gains of the business or profession'. Subsection (2) mentions two kinds of amounts which shall be deemed as profits and gains of the business chargeable to tax in India. Sub-clause (a) thereof relates to amount paid or payable to the assessee or any person on his behalf on account of provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used in the prospecting for, or extraction or production of, mineral oils in India. Thus, all amounts pertaining to the aforesaid activity which are received on account of provisions of services and facilities in connection with the said facility are treated as profits and gains of the business. This clause clarifies that the amount so paid shall be taxable whether these are received in India or outside India; Clause (b) deals with amount received or deemed to be received in India in connection with such services and facilities as stipulated therein. Thus, whereas cla....
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....nt passed to the buyer only in India and this property did not pass till equipment was erected and yielded satisfactory performance in India. In para 18, the Hon'ble High Court has categorically held that none of the stipulations of the on shore contract could postpone the transfer of property supplied under the offshore contract. 31. As regards the issue that in the case of LG Cables, there were two contracts whereas in the case of the assessee there are three contracts are concerned, we find the same is without appreciating the meaning of offshore services. We find merit in the argument of the ld. Counsel for the assessee that offshore services means services provided outside India, therefore, there cannot be any allegation that offshore services have been provided from India. We find in the present case on shore services are being provided under a third contract on which tax has been paid by the assessee for which there is no dispute. 32. As regards the terms of payment in the case of LG Cables Ltd., 10% was advance payment, 75% was progressive payment and 15% was the final payment on completion of operational acceptance. As against this, we find in the case of the assesse....
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.... in South Korea. The consignor of the equipment supplied from Korea to Haldia Port was the respondent while the importer was the PGCIL. The equipment was delivered to the shipping company named in the bill of lading and the bill of lading and other documents were handed over to the nominated bank. Accordingly, with the delivery of the bill of lading to the bank, the property in the goods stood transferred to PGCIL. The cargo insurance policy was obtained by the respondent-assessee and it named the PGCIL as coinsurer. Clause 31.2 of the contract unequivocally clarified that the respondent-assessee and the PGCIL intended to transfer the title/property in the goods as soon as the goods were loaded on to the ship at the port of shipment and the shipping documents were handed over to the nominated bank where the letter of credit was opened. The sale was complete and unequivocal. There is no condition in the contract which empowers the respondent to keep control of the goods and/or to repossess the same. With the completion of this sale the income accrued outside India. There was neither any material to show that accrual of such income was attributable to any operations carried out in In....
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.... concluding that the property in the goods had not passed at the time the goods entered the Municipal Limits." 38. The issue before the court in this case was to infer transfer of ownership in the absence of any clause in the agreement. The court noted that as per section 19 of the Sale of Goods Act, 1930, the property in the goods passes when the parties intend to pass. Thus, it is the agreement between the parties which will determine when the ownership will pass. 39. In the present case, a perusal of clause 31.1 and 31.2 clearly shows that the property in goods will pass when it is loaded on to the mode of transport in the country of origin. Thus, there is no ambiguity and this clause will clearly be applicable. We find the Hon'ble Delhi High Court on this very issue at para 18 of the order has observed as under:- "18. Furthermore, as noticed above, the scope of work under the onshore contract was under a separate agreement and for separate consideration. There is, therefore, in our opinion no justification to mix the consideration for the offshore and onshore contracts. None of the stipulations of the onshore contract could conceivably postpone the transfer of pr....
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....far as the decision relied on by the ld. DR in the case of The Indure Ltd. And Another (supra) is concerned, we are of the opinion that the said case is also not applicable to the facts of the present case. In that case, an issue has arisen in respect of the tax liability in the case of import. In para 43, it has been held that Indure Ltd., has imported the goods into India for completion of the project on turnkey basis of NTPC and thus, by virtue of article 286(1)(b) of the Constitution, the same will not be taxable in view of the restriction under this article on imposition of tax on sale or purchase of good where such sale or purchase takes place in the course of import into or export out of the territory of India. This is exactly the case of the assessee here though under different law that income in respect of goods supplied from outside Indie i.e., offshore supplies is not taxable in India. 43. So far as the decision of the Delhi Bench of the tribunal in the case of Shanghai Electric Group Company Ltd., is concerned, the same in our opinion is also not applicable to the facts of the instant case. In para 179 of the said order, the Tribunal has observed as under:- ....
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....rough LC outside India. Further, the PE had no role to play in offshore supplies. On all these issues the assessee's case is similar to that of the case in the case of LG Cables Ltd. We find the Hon'ble High Court, after considering the various aspects at para 35 to 37 has observed as under:- "35. In the final analysis we have no hesitation in holding that viewed from any angle, the fact situation in the instant case is almost identical to that in the case of Ishikawajma (supra) and the law as enunciated by the Supreme Court in the said case will squarely apply to the facts of the present case. If at all there is a difference, the facts in the present case stand on a better footing than in Ishikawajma (supra). In Ishikawajma (supra) there was a turnkey contract with four separate component activities, viz., offshore supply, offshore services, onshore supply and onshore services awarded by Petronet LNG to a consortium of companies led by the Japanese company Ishikawajma-Harima. In the instant case 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 fo....
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....ndia whether directly or indirectly or through any business connection in India." 45. A perusal of the decision of the Hon'ble High Court in LG Cables (supra) shows that the Hon'ble High Court has dealt with each of the issues raised by the AO in the present case. The Hon'ble High Court has also referred to the decision of the apex court in the case of Ishikawajima Harmia Heavy Industries Co. Ltd. Vs. Director of Income-tax, 288 ITR 408. In the case of Ishikawajima Harmia Heavy Industries Co. Ltd., the Apex Court has held that the existence of PE would not constitute sufficient business connection. It has further been held that there exist a difference between the existence of a business connection and the income accruing or arising out of such business connection. The Apex Court has further held that para 6 of the protocol to the DTAA is not applicable because for the profits to be attributable directly or indirectly, the PE must be involved in the activity giving rise to the profits. 46. In view of the above discussion, we are of the considered opinion that the ld.CIT(A) is correct in holding that the income from offshore supplies is not liable to tax in India both u/s 44BB....
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....tinguishable feature brought before us by the ld. DR, we do not find any infirmity in the order of the CIT(A) on this issue. Accordingly, ground No.3 filed by the Revenue is dismissed. 49. So far as ground of appeal No.4 is concerned, we find an identical issue had come up before the Tribunal in assessee's own case in the immediately preceding assessment year. We find the Tribunal, after considering the totality of the facts of the case, has held that no income is liable to be attributed in India even if Mitsui & Co. Ltd., constituted a DAPE in India. The relevant observation of the Tribunal from para 4 of the order reads as under:- "4. The second ground is regarding finding of the learned CIT (Appeals) holding that no income is liable to be attributed in India even if MIPL is considered to be Dependent Agent PE in India. On this issue the learned CITDR though stated that though in view of the TPO order under Section 92CA (3) holding the transactions between the assessee and the MIPL at arm's length, addition may not be sustainable, yet argued that MIPL be considered as Dependent Agent PE in India in terms of Article 5(7) of DTAA between India and Japan. It was contende....
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.... establishment of the other. " 4.1 As per above clause (7) a person other than an independent agent is treated as PE if he fulfills any of the three conditions, (a), (b) or (c). It is not the case of the Assessing Officer that MIPL habitually exercised authority to conclude contracts. It is also not the case of the Assessing Officer that MIPL habitually maintains a stock of goods or merchandise. Thus, the condition of (a) and (b) are not fulfilled. The third condition in (c) is habitually securing orders for the assessee. In this regard we note that the Assessing Officer has made this allegation on the basis that commission has been paid by the assessee company to the MIPL.On this basis it has been assumed that MIPL is securing orders.This contention of the Assessing Officer does not appear to be correct. As per the agreement which has been quoted by the Assessing Officer in the assessment order, MIPL is supposed to put best effort to collect information with regard to Instant Noodle project etc. to make the best effort to find the best candidate, to attend/take care of the visitor from Japan, to make the best effort to analyze the feasibility report. None of these clauses....
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....f the condition prescribed in Article 5(7) are fulfilled. 4.3 The second contention of the learned DR was that MIPL is economically dependent on assessee company as major revenue of MIPL is from assessee company. We are of the view that this per se cannot be ground to hold that MIPL is a Dependent Agent. For invoking this clause, first one of the three conditions needs to be fulfilled. As we have held hereinabove that MIPL does not get covered as PE under Article 5(7), it cannot be considered to be a Dependent Agent. The learned DR also made a reference to Conventions on Double Taxation by Klaus Vogel to support its contention that where a person works only for one principle such person is economically dependent on the principal. In these circumstances the agent though not legally but will be bound to obey his principal's instructions and be regarded as being Dependent Agent. This contention of the learned CIT-DR again ignores the basic requirement i.e. fulfilling one of the three conditions. It is also important to note that the DTAA provide for treating a person as Dependent Agent. The DTAA has to be strictly interpreted. The DTAA having prescribed the conditions, no fur....
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....and answer whether the business interest of the principal and the agency have merged. When there is evidence of merging of interest, then power to instruct the agent exceeds a certain level. In such cases the Principal regularly participates in the process of settling current business problems or exercises discretionary power in the said respects. OECD Commentary does not accept dependency based on financial support, supply of patents etc. as itself creating agency PE. Klaus Vogel on Double Taxation Conventions, Third Edition at page 345 in paragraph 170 states that interdependence must exist in both legal and economic respects but the independence is the main criteria. The expression "independent agent" is used with the words "brokers and general commission agents" in paragraph 5 of Article 5 will, therefore, normally not include agents who have power to conclude contracts. Paragraph 38.1 of the OECD Commentary has been quoted above (see paragraph 15). The commentary elucidates and gives illustrations and tests. 33. Earlier U.N. commentary had deviated in some respect from the OECD commentary and had observed that an agent who was wholly or almost wholly engaged by one pr....
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....n. However as per paragraph 5 of Article 5, an agent is not considered to be an independent agent if his activities are wholly or mostly wholly on behalf of foreign enterprise and the transactions between the two are not made under arm"s length conditions. The twin conditions have to be satisfied to deny an agent character of an independent agent. In case the transactions between an agent and the foreign principal are under arm"s length conditions the second stipulation in paragraph 5 of Article 5 would not be satisfied, even if the said agent is devoted wholly or almost wholly to the foreign enterprise. 36. In Morgan Stanley (supra) Supreme Court rejected the contention of the Revenue that dependent agency was created after recording that Indian subsidiary had no authority to enter into or conclude contracts on behalf of the foreign establishment / agency. The contracts were entered into in America and were concluded there. Only implementation of those contracts to the extent of back office operations were carried out in India. This legal position is relevant in the present case. 37. In TVM Ltd. vs. Commissioner of Income Tax (1999) 237 ITR 230, Authority of Adva....
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....t of the ground No. 2 in Revenue's appeal the same is being decided on merit as well. 5.1 The Assessing Officer has made the addition holding that MIPL is a Dependent Agent PE and has computed 50 per cent of the profit in respect of the turnover in India. The learned CIT (Appeals) has deleted the addition holding that Transfer Pricing Officer has specifically stated in his order that Transfer Pricing documentation which contains the functional and economic analysis of comparable and of the assessee, has been examined. The learned CIT-DR was fair enough to point out that the Assessing Officer made the addition since at the time of passing of the assessment order he was not having benefit of the order passed under Section 92CA(3) by the TPO in the case of MIPL and the learned CIT (Appeals) has deleted the addition after taking into consideration the order passed by the TPO which was available to him by that time. 5.2 It is a fact on record that the TPO has carried out functional and economic analysis of the activities performed by MIPL towards the assessee company. No adverse inference has been drawn in respect of the same. All these facts were before the TPO. It is....
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....ks that have not been considered. Therefore, in each case the data placed by the taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attribution of profits and that would depend on the functional and factual analysis to be undertaken in each case. Lastly, it may be added that taxing corp orates on the basis of the concept of economic nexus is an important feature of attributable profits (profits attributable to the P.E.). " As regard the observations of the Hon'ble Supreme Court that the situation will be different if the Transfer Pricing analysis does not adequately reflect the functions performed and the risk assumed by the enterprise. In the present case as discussed hereinabove the Transfer Pricing analysis adequately reflect the functions performed and the risk assumed. In fact it is on the basis of the same documents and facts on which Transfer Pricing analysis has been carried out, the income is being attributed to the assessee by adopting a different method of computation. 5.4 Our above view is supported by the judgment of the Hon'ble jurisdictional Delhi High Court in the case of Director of Inco....
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.... as declared by the assessee except the transaction for availing market services. The arm's length price for the international transaction for availing market support services was determined at Rs. 10,90,52,410/- instead of an amount of Rs. 7,44,30,694/- as declared by the assessee. However, since this adjustment would have the effect of reducing the income chargeable to tax or increase in the loss, as the case may be, in the case of assessee the provisions of section 92 shall not apply in this case i.e. the effect of the adjustment made in the arm's length price of the transaction availing marketing support services by the assessee shall be ignored while computing the income of the assessee. " (iv) Even if the next Assessment Year, i.e., 2003-04, the assessee had submitted the account's report in relation to its international transactions. For this year also, reference was made to TPO, which again passed the orders dated 07.3.2006, once again opining that no adverse inference could be drawn in respect of ALP. Following portion of the said order is worthwhile to quote:- " A reference under Section 92CA was received in the case of BWIPL from its assessi....
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....t no question of law arises. " 5.5 The above view has also been taken by the Hon'ble Bombay High Court in the case of DIT Vs. B4U International Holding Ltd. (2015) 374 ITR 453 (Bom- HC) where the Honble court has held as under " 10. This conclusion of the Commissioner has been upheld by the Tribunal. It noted the rival contentions and in great details. The Tribunal concluded that after referring to the clauses in the agreement between the assessee and B4U that B4U India is not a decision maker nor it has the authority to conclude contracts (see paragraph 29). Further, the Revenue has not brought anything on record to prove that agent has such powers and from the agreement any such conclusion could not have been drawn. Barring this agreement, there is no material or evidence with the Assessing Officer to disprove the claim of the assessee that the agent has no power to conclude the contract. This finding is rendered on a complete reading of the agreement. Thereafter Indo-Mauritius DTAA has been referred to and particularly paragraphs 5.4 and 5.5. and the Tribunal concludes that the requirement that the first enterprise in the first mentioned State has and habituall....
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....ance of tax by substituting section 92 to 92F by the Finance Act of 2001 with effect from 1st April, 2002. Therefore, such compliance has to be made with effect from assessment years 2002-03 relevant to which is the previous year commencing from 1st April, 2002. In any event, we find that the Tribunal has rightly dealt with the alternate argument by referring to the Revenue Circular 742. There, 15% is taken to be the basis for the arm's length price. Nothing contrary to the same having been brought on record by the Revenue before the Commissioner as also the Tribunal, it rightly concluded that the judgment of the Hon'ble Supreme Court in Morgan Stanley & Co. and the principle therein would apply. Similarly, the Division Bench judgment of this Court in the case of Set Satellite (Singapore) Pte. Ltd. v. Deputy Director of Income Tax (IT) &Anr. [2008] 307 ITR 265would conclude this aspect. Therefore, we are of the opinion that the Tribunal's conclusions and which are consistent with the factual materials and the principles of law laid down above are neither perverse nor vitiated by any error of law apparent on the face of the record. " 5.6 Further, this i....
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....ed. ITA No.4367/Del/2011 (by the assessee) (A.Y. 2007-08) 52. The grounds raised by the assessee are as under:- "1. That on the facts and inlaw the Commissioner of Income Tax (Appeals) erred in upholding that Mitsui India Private Limited (MIPL) constituted Dependent Agent Permanent Establishment (DAPE) of Mitsui & Co. Ltd. Japan as per Article 5(7) of the Double Taxation Avoidance Agreement between India and Japan. 2. That without prejudice to the finding that Mitsui India Pvt. Ltd. Constituted Dependent Agent Permanent Establishment the CIT(A) erred in holding that 20% of the gross trading profit was attributable to the operations and functions carried out in India through MIPL as DAPE. 2.1 That without prejudice, in any view of the matter, on facts the quantum of 20% of the gross trading profit as attributable to the operations and functions of MIPL as DAPE in India is high and excessive. 3. That the CIT(A) erred in not considering appellant's contention in Ground No.3.1 to the effect that transaction between the appellant and MIPL being at arms length no further profit is attributable in view of Supreme Court judgement in DIT vs. Morgan ....
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....ing that the profits than can be attributed to the PE of the assessee should be 20% and not 50% as determined by the AO. 3. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in holding that the assessee's income from 'Teesta' and 'Purilia' projects should be taxed on cash basis instead of Mercantile basis. 4. The appellant craves to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal." 57. So far as ground of appeal No.1 is concerned, the same relates to income of offshore supplies in respect of Teesta and Purulia projects. 58. After hearing both the sides, we find this ground is identical to ground of appeal No.1 and 2 in ITA No.2801/Del/2011 filed by the Revenue for A.Y. 2006- 07. We have already decided the issue and the grounds raised by the Revenue have been dismissed. Following similar reasonings, this ground of the Revenue is dismissed. 59. In Ground of appeal No.2, the Revenue is aggrieved by the order of the CIT(A) in holding that the profits that can be attributed to the PE of the assessee should be 20% and not 50%. After hearing both the sides, we find the issue stands cove....
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....sive. 3. That the CIT(A) erred in not considering appellant's contention in Ground No.3.1 to the effect that transaction between the appellant and MIPL being at arms length no further profit is attributable in view of Supreme Court judgement in DIT vs. Morgan Stanley & Co. Inc., 292 ITR 416(SC) and Mumbai High Court judgement in DIT vs. Set Satellite, 218 CTR 452. 4. That on the facts and in law orders of AO / CIT(A) are bad in law and void ab- initio. The appellant prays for leave to add, alter and/or vary the ground(s) of appeal at any time during the pendency of the appeal or at the time of hearing" 63. So far as ground of appeal No.1 is concerned, we find the same is identical to ground of appeal No.1 in ITA No.4367/Del/2011. We have already decided the issue and the ground raised by the assessee has been allowed. Following similar reasonings, this ground of the assessee is allowed. 64. So far as the grounds No.2 and 2.1 raised by the assessee are concerned, after hearing both the sides, we find these grounds are identical to grounds No.2 and 2.1 in ITA No.4367/Del/2011 filed by the assessee. We have already decided the issue and the grounds rai....