TaxTMI 
TaxTMI 
2020 (3) TMI 43
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....has erred in computing income at Rs. 16,14,04,346/- as against returned income of Rs. Nil. 3.(a) That the learned A.O. and DRP have erred in law and on facts in holding that an income of Rs. 16,14,04,346/- in relation to contract for supply of equipment, is deemed to accrue or arise in India under section 9(1 )(i) of the Indian Income-tax Act ('The Act') and consequently is taxable in India in terms of section 5(2) of the Act. (b) That the learned A.O./DRP has erred on facts and in law in holding that sale of equipment was concluded in India based on incorrect interpretation of terms and conditions of contract in respect of supply of equipment. (c) That the learned A.O./ DRP has misdirected themselves in holding the supply and service contracts in the nature of composite contract and also that the activities have been dissected for the purpose of tax avoidance. (d) That the learned AO/DRP has erroneously held that the relevant two contracts were in the nature of non-divisible 'works contract' and erroneously relied on the decision of Hindustan Shipyard (2000) 119 STC 533; (2000) 6 SCC 579, not applicable on facts and in law. (e) ....
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.... on. (m) That the learned A.O./ DRP has erred in holding that the assessee had a fixed place P.E by erroneously linking it ThyssenKrupp companies belonging to a different group. (n) That without prejudice, the learned A.O./ DRP has erred in applying FAR analysis and benchmarking of un-comparable companies in computing profit attributable in India in relation to supply of equipment at Rs. 16,14,04,346 and failed to appreciate that Global Income Statement- or Appellant was also submitted. That attribution of profits, as made, on such benchmarking by the learned AO, without providing details to the assessee, is totally unjustified and illegal and also fail to consider the result of the global accounts of the assessee. (o) Without prejudice, the learned A.O./ DRP has erroneously held that on facts, profit attributable in respect of supplies is 35% of the profit accruing from off shore supplies. The said attribution is arbitrary, highly excessive and has no rationale whatsoever, and is against the principles of attribution as laid down under the provisions of Income-tax Act, DTAA between India and Austria and various decisions of Hon'ble High Court, Supreme Co....
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....ssioning and performance test of said machinery. 2.3 During the scrutiny assessment proceedings for the year under consideration, the assessee provided details of both the contracts of equipment "supply" and "service" contracts. The summary of the contract price of equipment "supply" and "service" contract, reproduced by the Assessing Officer in the impugned order is extracted as under: Summary of supply contract price invoiced on the customer S. No. Year Offshore Supply of Equipment Drawing & Deigning Euro Euro 1. AY 2010-11 (FY 2009-10) 67,481,776 Nil 2. AY 2011-12 (FY 2010-11) 1,017,024 Nil Total 68,498,600 Nil Summary of service contract price received from the customer. S.No. Year Payment Received (Net of Taxes) Payment (Grossed up Received @10%) Euro INR Euro INR 1 AY 2010-11 (FY 2009-10) 59,400 3,631,260 66,000 4,034,734 2 AY 2011-12 (FY 2010-11) 1,889,400 114,953,535 2,099,033 127,726,150 3 AY 2012-13 (FY 2011-12) 1,496,400 96,042,812 1,662,667 106,714,236 Total 3,445,200 214,627,608 3,828,000 238,475,12....
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....uring assessment proceedings, the learned Assessing Officer examined the contracts agreements and found that both contracts of supply and service constituted as composite contract. According to the learned Assessing Officer (AO), in view of business connection, the part of the income from offshore supply of machinery was deemed to accrue or arise in India and hence taxable under section 9(1) of the Act. The AO was of the view that said part of income from offshore supply of machinery, was also taxable in India in terms of the DTAA between India and Austria. The AO issued show cause notice to the assessee that it had a Permanent Establishment (PE) in India, in the form of project office and as per article 7(1) of the DTAA between India and Austria, the profits of the enterprise attributable to the PE in India would be taxable in India. The AO computed the supply of machinery during the year at Rs. 472,97,97,680/-and in the show cause, he proposed that in offshore supplies segment, the role of PE was akin to distribution function i.e. the PE has first purchased the equipment /platform from the head office (HO) and then sold to Indian customer. According to the AO, the transaction of ....
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....stan Shipyard (2000) 119 STC 533 and concluded that the contract of supply and service in relation to commission of TPD plant is a composite contract. The finding of the Assessing officer in relation to 'composite contract' are reproduced as under: "11. I have examined facts of this case along with the ration decidendi above referred to judgment of Hon'ble Supreme Court and have noted that dictum of law for second category of contract (ii) as discussed above is squarely applicable to the identical facts of the case under consideration. In this case assessee had entered into a contract with CPPC to design, build, manufacture, supply, installation, testing and commission of machinery for TPD Plant. The supply of machines was necessary and incidental to design, manufacture, installation, testing and commission of above facility i.e. machinery for TPD Plant in India. It is not case of assessee that the contract was signed for supply of machines only and some technical work was required to be done as incidental to machines only and some technical work was required to be done as incidental to sale of equipments. Even though the assessee during the assessment proceedings, mentioned tha....
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....Plant) and spares were required to design, build manufacture, commission, calibrate and operation of above referred to machinery for TPD Plant. These equipments were part of machinery for TPD Plant. In view of these facts it is held that it is the work contract and the same cannot be held and divided as contract for sale of equipments. 13. The peculiar facts of this case is covered in favor of department by the judgment of Hon'ble Jurisdictional High Court in case of CIT vs. Mitsui Engineering and Ship Building Co. Ltd. (2003) 259 ITR 248 (Delhi) wherein the contention was that the finding that the contract for designing, engineering, manufacturing, shop testing and packing up to FOB port of embarkation could not be split up since the entire contract was to be read together and was for one complete transaction. It was in the said fact situation held that it was not possible to apportion the consideration for design on one part and the other activities on the other part. The price paid to the assessee was the total contract price which covered all the stages involved in the supply of machinery. In construing a contract, the terms and conditions thereof are to be read as a w....
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....activities in India through its deemed PE in India and these activities had contributed in earning of the profit by assessee both on account of supervisory services and supplies of equipment needed for TPD Plant. These facts have proved beyond doubts that there was a real and intimate relationship on continuous basis between the business activities carried on in India and business of the assessee who is a non-resident and this relationship had resulted in accrual of income to the assessee both on providing supervisory services and supplies of design, drawing and equipment to Indian customer. It is proved from above discussion that all the three essential features of the business connection mentioned above are present in this case. Therefore, the income accruing or arising to the assessee by way of profit from design, manufacture, supply of machines, supervision of installation, testing and commissioning of machinery for TPD Plant to Indian customer shall be deemed to accrue or arrive in India u/s 9(1 )(i) of the Act and consequently same is taxable in India under domestic law in term of section 5(2) of the Act." 2.14 The AO also held existence of the PE in India and taxability u....
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....the same. Therefore it is implied that this place of business is at the disposal of assessee for sufficiently Iona duration to be called as "Permanent Establishment". Therefore the assessee's submission that the PE came into existence after the supply under the impugned contract is completed, is not correct. In fact the PE was very much involved in the "marketing and pre-contract negotiations done by assessee. 18.3 It is evident from above referred to facts that assessee had carried out business of design, manufacture, supply and supervision of installation, testing and commissioning of machinery for TPD Plant from the PE of assessee in India. The supplies of machinery for TPD Plant were a part of a composite contract. Accordingly, a part of the profit earned by assessee on supply was attributable to fix place of PE of assessee in India." 2.15 The AO also rejected the contention of assessee that Machinery for TPD plant were delivered outside India and thus no profit from offshore supply could be attributed to the PE of the assessee, observing as under: "18.4 The claim of assessee that machinery for TPD Plants were delivered outside India in Austria, accordingly....
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....for the sale of goods, the property is transferred to a buyer at such time as the parties to the contract intend it to be transferred. However section 19(2) of the Act provides that for the purpose of ascertaining the intention of the parties, regard shall be had to: a. the terms of the contract; b. the conduct of the parties; and c. the circumstances of the case b. The contract has to be read as a whole to ascertain the intention of the parties. c. The definition of these terms clearly indicates that the entire risk is borne by the supplier and carriage and insurance charges paid till their delivery at airport/ seaport in India. The repeated reference by the Assessee to Incoterms 2000 does not alter the situation because the expression by its very definition in the agreement means the obligation to bear the carriage and insurance charges upto airport/ seaport in India. It would be illogical to read that the parties particularly Century Pulp and Paper Company in India, can agree to the delivery at any airport/ seaport outside India. 19.2 In view of all the above referred clauses, if the agreement is read as a whole, the intent o....
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....ss until such thing is done and the buyer has notice thereof. In the present case, the sale is not of standard goods but of components of passenger boarding bridges, unless these components are assembled, installed, commissioned" and tested, these supplies would be worthless. These components and equipments reached the deliverable state only when their installation is completed and performance established through the provisional or final testing. The assessee has definite obligation to achieve this milestone and unless this is done the property cannot pass. Unlike other kinds of overseas supplies where the supplier has no other obligation beyond the point of shipment, in the present case, the obligation of the supplier extends to the geographical limits of India where he has to put the supply into a deliverable state. In the equipments being discussed in the present case, the various components are integral part of the wholesome technology and these cannot be viewed independently." 2.18 The AO also referred to section 41(1) and 41(2) of SGA , which provides that where goods are delivered to the buyer , which he has not previously examined , he is not deemed to have accepted them....
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....ection between the assessee and PE in India i.e. PE and assessee company were same and one. It is a proven fact that supply of equipment were incidental and essential to design, build, manufacture, commission machinery for TPD Plant and is part of one and composite agreement. The assessee had earned supervision fee and income from supplies only from its business activities carried on through PE in India. All the transaction including supply of equipment offshore had taken place with the involvement of the PE of assessee in India. The above referred to factual matrix of this case that substantial part of the business activities of assessee of manufacturing and commissioning of machinery for TPD Plant were carried out in taxable territory of India and supply of machinery for TPD Plant was incidental to work contract and for this reason a part of profit on supply is directly attributable to the PE of assessee in India. 21.1 It is not case of a project where supervision services were required to fix up a plant and machinery i.e. technical services were incidental to sale of plant and machinery. In the case of assessee a contract was signed between assessee and CPPC to design, ....
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....e outside India but marketing and related activities and Supervision of errection and commissioning is done in India. As discussed supra, PE is played role in marketing and related activities and supervision. 21.1 Taking guidance from Rolls Royce 35% of the profit accruing from the offshore supplies to the Indian Operations for the role played by the PE can be attributed. Profit from offshore supplies can be computed based on the assessee's global profitability after making certain adjustments for depreciation and provisions etc. Another method can be to estimate a percentage of gross amounts received as offshore supply. For this, the profit margins of some comparable companies doing similar activity can be adopted as a guidance and profits attributable can be worked out. 21.2 The assessee has submitted Global consolidated annual account which cannot be relied upon as it consolidates all the subsidiary companies accounts also. In absence of standalone annual account a profit of 9.75% (Profit margin estimated as per Para 7 above) is assumed as profit earned by the company and 35% of such profits are attributed to PE. With these remarks, the total income of....
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....he assessee has entered into two contracts with 'CPPC', a division of M/s Century Textile and Industries Ltd: (a) Equipment Supply Contract dated 19/06/2008 -for engineering, designing, manufacturing, drawing and supplying of machinery for "620 TPD multilayer packaging coated board plant". (b) Service contract dated 19/06/2008- for supervision of erection, start-up, training, commissioning and performance test of said machinery. Both the above contracts have been signed in India on same date. 3.5 In the facts of the case, the contention of the assessee is that the supply of equipment is from outside India, which is only a offshore supply and no income corresponding to the same accrued or arisen in India in terms of Act. The assessee has refuted contention of the Income-tax authorities that contract of supply and contract of the service both constitute a composite contact for setting up of the TPD plant. The assessee has also contested that there was no fixed placed PE as far as supply contract is concerned and therefore no provisions of the DTAA are applicable for income from supply of the contract is concerned. 3.6 The various issues have been rais....
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....11] - Intention of the purchaser-"Whereas the Purchaser desires to Install a 620 TPD Multilayer Packaging Coated Board Plant......"[PB for 2010-11, p.157&186]and the assessee is committed to the success of the 'project'. [15, p.179] - The term 'plant' as used in the contract has a very wide ambit that includes in its sweep not only the 'machinery' provided by supplier (3.1; p.162) but also the machinery otherwise procured by the purchaser (3.2; p.163)] to be erected on site. [p.160] - The term 'machinery' also has a wide connotation that include 'supports, embedment' etc. [3.1.2; p.162] - Examination of the nature of goods supplied under supply contract i.e. 'Press Section' and 'Press Rolls' [p.14, 36]; 'wire Section' and 'Coating Section' [p.19,36,45]; 'Dryer Cylinder'[p.24 & 32]; 'Head Box' [p.28];'Mechanical Drive'[p.36,49]; 'MCS' [p.36]; 'DCS' [p.36];'MG Dryer' [p.41]; 'Parts for Head Box' [p.45]; 'Parts for Master Reel' [p.45];'Control Cabinets' [p.45];'QCS with CD Controls' [p.45];'Air Drying System' [p.49];'MG Hood' [p.54];'Hood& Ventilation System' [p.58];'Dewatering System' [p.58]; 'Pneumatic System' [p.58];'Control Room Equipment' [p.58....
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....st. Thus, as per Art-6 "The machinery will not be deemed to have been formally finally acceptedby the purchaser until performance guarantees have been achieved..... After fulfillment of the performance guarantee, the purchaser will issue to the supplier a final acceptance certificate." [6.1, 6.2 & 6.3; p.166] Similarly, insufficient fulfillment of the performance guarantee parameters will liable the supplier for liquidated damages. [Art-15.2, p.173]If this is not sufficient, as per Art-7.3 of the General Terms of Contract "If the supplier should commit a breach of non-fulfillment of the minimum performance guarantees........then the purchaser shall have the right to terminate the contract." [p.177] - The service contract, on the other hand specifically provides in the scope of services provision for "personnel services for supervision of erection, start-up, training, commissioning and PERFORMANCE TEST(s)". [p.186, 191] Even though as per Art-6.1(a) of the Specific Terms & Conditions of Contract provides that [and the assessee argues that] the purchaser shall carry out the erection, commissioning, startup and performance test(s) under the supervision of the supplier [p.193]....
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.... provision of advance payment of "remuneration"/supervision fee payable under the Service contract the assessee itself, accounts for the supervision fee received under Service contract as "advance received" "Work in Progress"[p.95 to 97]under completion of contract method although it follows a "Cash" system of accounting. In the notes to the accounts for A.Y. 2012-13, the assessee states "3. The service contract dated June 19 2008 was completed on March 19, 2012 and PE in India ceased to exist after the said date. The completion certificate has also been received from CPP. Accordingly, the income earlier treated as Advance from Customer have now been offered to tax and cost earlier treated as WIP has been transferred to P&L. 4(b) In relation to the agreement dt. June 19, 2008, companies personnel visited customer's site and as per the number of days visited and duration of the contract, PE came into existence in terms of provisions of DTAA between India and Germany. Completed contract method has been followed by VPS in regard to this project. The contract was executed and completion certificate was obtained in the current FY 2011-12 and all the payments were also received during th....
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.... assessee was involved in supply of the same. The Plant in itself is not a set of machinery only but the contractor was required to construct a facility of manufacturing the products of the buyer. The various machineries supplied like 'Press section', 'Press rolls', 'Wire section' ,'Coating section', 'Dryer section' etc. are kind of components of the Plant to be constructed or erected under the supervision of the assessee. These goods in itself are components of plants, which has been delivered by the assessee. The intention of the parties was to provide to the buyer a plant in deliverable state which is also clear from the other terms of contract like date of completion of delivery as last date of delivery of last consignment, provision of monthly progress report both in supply and service contract, performance warrantee clause. The final acceptance of the supply of goods was dependent on the success of performance warrantee test. The service contract has a provision of termination clause in case of failure of performance and return of machinery supplied under supply contract and refund of money. All these terms make it clear that both the supply and service contract are intrinsic....
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....on and commission of the plant. The relevant paragraph is reproduced as under: "11. I have examined facts of this case along with the ration decidendi above referred to judgment of Hon'ble Supreme Court and have noted that dictum of law for second category of contract (ii) as discussed above is squarely applicable to the identical facts of the case under consideration. In this case assessee had entered into a contract with CPPC to design, build, manufacture, supply, installation, testing and commission of machinery for TPD Plant. The supply of machines was necessary and incidental to design, manufacture, installation, testing and commission of above facility i.e. machinery for TPD Plant in India. It is not case of assessee that the contract was signed for supply of machines only and some technical work was required to be done as incidental to machines only and some technical work was required to be done as incidental to sale of equipments. Even though the assessee during the assessment proceedings, mentioned that the supply of machinery for TPD Plant and the installation and commissioning services are separate and independent of each other, a careful perusal of this docume....
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....pinion, the transfer of design, if any, vis-a-vis other would not come within the purview of the said Explanation. This aspect of the matter is covered by a Division Bench judgment of the Madras High Court in the case of CIT v. Neyveli Lignite Corporation Ltd. [2000] 243 ITR 459, 463, where it was held as under : "In a contract for the design, manufacture, supply, erection and commissioning of machinery which does not involve license of the patent concerning the machinery, or copyright of its design, mere supply of drawings before the manufacture is commenced to ensure that the buyer's requirements are fully taken care of and the supply of diagram and other details to enable the buyer to operate the machines, and also to assure the buyer, that the machines will perform to the specification required by the buyer, such supply is only incidental to the performance of the total contract which includes design, manufacture and supply of the machinery. The price paid by the assessed to the supplier is a total contract price which covers all the stages involved in the supply of machinery from the stage of design to the stage of commissioning. The design supplied is no....
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....quipment. While in-built safeguards are provided in all the contracts to ensure quality of the material, and effective performance of the erection contract, the supply contracts, in substance, do not absolve the petitioners-contractors of their obligations of erection and installation of equipment after the goods are sold by them to the owner. The petitioners-contractors' obligations, under both the supply and erection contracts, cease only after the turn-key project becomes operational, and after final payment is made both for supply of material and for erection and installation of equipment." 5.6 Similarly, the Hon'ble Andhra Pradesh High Court again quoted Hon'ble SC in the case of Indure Ltd. v. CTO (2010) [2010-TIOL-79-SC-CT] and observed that "32. ...The goods supplied to the owner, under the supply contracts, are tailor made goods, and cannot be bought off the shelf. Such goods cannot, ordinarily, be sold to another except for its use in turnkey projects of a similar nature. The petitioners have been entrusted with the work mainly for their expertise in erection and installation of plants in the execution of turn-key projects. As they were entrusted with the work of e....
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....s. Union of India (2006) 3 STT 245 45. The relevant paragraph of the order of the Tribunal is reproduced as under: "215. Hon'ble Supreme Court's observation in the case of Bharat Sanchar Nigam Ltd. v. Union of India [2006] 3 STT 245 are relevant Shanghai Electric Groups Co. Ltd. Vs. DCIT ITA No. 224 to 227/Del/2015 ITA no. 3552/Del/2015 ITA No. 58 & 59/Del/2017 to understand the "dominant nature of an agreement". The relevant portions of the same has been extracted herewith: "The reason why these services do not involve a sale for the purposes of Entry 54 of List - II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley 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 b....
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....a is deemed to accruing or arising in India. The relevant part of the section is reproduced as under: "9. (1) The following incomes shall be deemed to accrue or arise in India :- (i) all income accruing or arising, whether directly or indirectly, through or from any business 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 the transfer of a capital asset situate in India." 6.1 The assessee has objected the business connection on the ground that Sale of the property has been made from outside India and thus offshore supply is not taxable in India as per section 9(1)(i) of the Act. 6.2 Now we take up the contention of the assessee that supply of machinery was only offshore supply and not liable for tax in India in terms of section 9(1)(i) of the Act in view of no business connection in India. 6.3 The Ld. counsel of the assessee in relation to the issue submitted three factual aspects of the contract. Firstly, he submitted that the title of goods in dispute was transferred by the assessee to the purchaser outside India. He referred to article 7.1 of the appendix-A (specific t....
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....Terms and mode of Payment ........................................ 9.6The payment stated under Article 9.1.2 shall be made through an irrevocable Letter of Credit to be opened by the PURCHASER in favour of the SUPPLIER within 30 (thirty) days after signing of the CONTRACT, which shall be valid until 1 (one) month beyond the contractual FOB delivery time. The Letter of Credit shall allow for partial shipments. In general, Transshipment will not be allowed but based on specific request, discrepancy in Letter of Credit may be accepted by us. The Letter of Credit shall be payable in the country of the SUPPLIER and confirmed by a International Bank and the confirmation charges will be borne by the PURCHASER. " 6.6 With regard to the contention that sale of equipment effected outside India and thus no income accrues or arise in India on supply of goods, the Ld. counsel relied on the decision of Hon'ble Supreme Court in the case of Pushalal Mansinghka (P) Ltd Vs CIT 66 ITR 159 (SC)and the decision of the Hon'ble Supreme Court in the case of Mahabir Commercial Co. Ltd. Vs CIT 186 ITR 417 (SC).The Ld Counsel emphasized that sale of goods had taken place outside India du....
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....d by the Voith outside India and the entire activities essential for transfer of the title of the equipment took place outside India and therefore property in equipment shall be vested in CPPC at the port of shipment. He further submitted that bill of lading (BOL) constituted a document of title of the equipment and the same was drawn to shown CPPC as the consignee which further substantiated property in equipment had been intended to be transferred to CPP at the point of dispatch of equipment. He also referred to section 1 of Indian Bills of Lading Act, 1856, according to which consignee of goods named in the bill of leading to have vested all rights of suit and subject to the same liabilities in respect of such goods, if the contract contained in the bill of leading has been made with himself. 6.9 Further, the Ld. counsel elaborated that no income deemed to accrue arise in India because no income accrued or arisen to the assessee whether directly or indirectly, through or from any business connection in India as it specified in section 9 of the Act, due to following reasons: - the sales were independently made by the assessee to CPP on principal to principal basis. ....
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....n'ble Delhi High Court in the case of Motorola Inc. Vs. DCIT [2005-TII-10-ITAT-DEL-SB-INTL] held as under - "155. In our opinion, this argument cannot be accepted because CIF as understood in INCO terms, no where contemplates passing of title simultaneously with passing of risk. CIF Chennai Airport implies that up to Chennai Airport, the supply is to be arranged by seller. Seller has topay cost, insurance, freight and risk during the carriage of goods. However, loss or damage to the goods and risk is to be borne by the purchaser. This does not imply that ownership has also passed to purchaser. 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 sec. 19 of the Sale of Goods Act, it is primarily the intention of the parties when the title to the goods is to pass. The true test is when the buyer gets the right to dispose off the goods i.e. when the buyer acquires the control over the goods....... Therefore, the intention is to be gathered from the deed itself." 6.13 He submitted that In the light of the above, the ITAT after examining the terms of the contract concluded that- ....
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....ale of goods, the relevant factor and determinative factor would be as to where the property in the goods passes. In the present case, the finding is that property passed on the high seas. Concededly, in the present case, the goods were manufactured outside India and even the sale has taken place outside India. Once that fact is established, even in those cases where it is one composite contract (though it is not found to be so in the present case) supply has to be segregated from the installation and the only then would question of apportionment arise having regard to the expressed language of Section 9 (1) (i) of the Act, which makes the income taxable in India to the extent it arises in India." 7.1 In the instant case also, the contract agreements have been signed in India, which in view of the above decisions are not relevant consideration for determining the taxability of offshore supply by the assessee. 7.2 In the case of Ishikawajma-Harima Heavy Industries Ltd. (supra), wherein the contractor retained care, custody and control of the equipment and had to exercise due care thereof until (a) provisional acceptance of the work (b) termination of the contract, although the....
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....ntention of the parties as to the time at which the property and goods is to passed to the buyer. The relevant section of the Sale of Goods Act, 1930 are reproduced for ready reference: "Section 2. Definitions:- '(4) ' 'document of title to goods' includes bill of lading, dock warrant, warehouse keeper's certificate, wharfingers' certificate, railway receipt, [multimodal transport document], warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof of the possession or control of goods or authorizing or purporting to authorize, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented'. '(6) future goods ' means goods to be manufactured or produced or acquired by the seller after making of the contract of sale '. Section 18: Goods must be ascertained:- 'Where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained'. Section 19: Property passes when intended to pass:- (1) Where there is a contract for the sa....
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....k, which reads as under: "Supply contract "Whereas the PURCHASER desires to install a 620 TPD MULTILAYER PACKAGING COATED BOARD PLANT in connection with PURCHASER'S Expansion Project. And WHEREAS the SUPLIER is capable and desirous of designing, engineering, manufacturing and supplying imported MACHINERY for the 620 TPD MULTILAYER PACKAGING COATED BOARD PLANT as set-forth in this CONTRACT." Service contract Whereas the PURCHASER desires to install 620 TPD MULTILAYER PACKAGING COATED BOARD PLANT in connection with PURCHASER'S Expansion project. And Whereas the SUPPLIER is desirous of providing services for supervision of erection, start-up, training, commissioning and performance test(s) of the 620 TPD MULTILAYER PACKAGING COATED BOARD PLANT." 7.6 The clause 3.2 of the agreement, which is available on page 163 of the paper book, also refers that as far as purchaser's scope of supply was concerned, it was "the PLANT". 7.7 Under the supply agreement, the supplier has warranted the performance of the Plant. The terms of guaranteed performance, available on page 163 of the paper book, reads as under: "4.2 DEMONSTRATION OF GU....
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....period of MACHINERY supplied by SUPPLIER shall be 12 (twelve) months from the date of commissioning but not more than 21 (twenty-one) months from the date of delivery at port of Shipment of last consignment of MACHINERY excepting minor items or spares, which do not effect the erection and commission schedule of the plant During the warranty period if any part of the MACHINERY requires repair and/or replacement, the warranty period for the newly repaired part and/or the replacement shall also be 12 (twelve) months from the date on which they are put into operation, but not more than 21 (twenty-one) months after the date of delivery at site of each part, in case the operation of the MACHINERY is stopped for a period of, or over 14 (fourteen) days caused by the repair or replacement due to SUPPLIER'S responsibility, then the warranty period for the MACHINERY shall be prolonged according to the stoppage correspondingly. 5.3 During the warranty period, if any defect of MACHINERY is found due to SUPPLIER'S responsibility (except for normal wear and tear) the PURCHASER shall inform the SUPPLIER in detail specifying the nature of the defect by fax/e-mail immediately. The PURCHASER....
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....e PURCHASER has decided to waive off such liquidated damages, then the MULTILAVER PACKAGING COATED BOARD PLANT will be deemed to be finally accepted by the PURCHASER. " 7.10 The Annexure-B of the supply agreement contains termination clause. In the event of termination, supplier was bound to return the price already paid against the machinery. The relevant clause is reproduced as under: "7.5 In the event of termination according to Article 7.2 for reasons attributable to the SUPPLIER the exclusive consequence for both PARTIES shall be the SUPPLIER'S waiver for payment of the unexecuted part of the CONTRACT and the PURCHASER'S waiver for delivery of the unexecuted part of the CONTRACT. In the event of termination according to Article 7.3 for reasons attributable to the SUPPLIER the exclusive consequence for both PARTIES shall be the re-exchange of the executed parts of the CONTRACT, i.e. repayment of the price already paid by the PURCHASER against returning of MACHINERY already delivered." 7.11 The said repayment for return of machinery was also provided in the service contract, which read as under: "6.4 in the event of termination according to Article 6.....
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....unsel agree that as per the provisions of section 23(1) of the SG Act, property in future goods is transferred to the buyer when the goods are ascertained and when the good being in a deliverable state are unconditionally appropriated to the contract by the seller with the ascent of the buyer. But, we find that AO has made analysis of the provisions of the Sale of Goods Act and referred to various sections to hold that title of goods passed in India. For ready reference, the findings of the AO are reproduced as under: "Section 19(1) of the Sale of Goods Act provides in a contract for the sale of goods, the property is transferred to a buyer at such time as the parties to the contract intend it to be transferred. However section 19(2) of the Act provides that for the purpose of ascertaining the intention of the parties, regard shall be had to: a. the terms of the contract; b. the conduct of the parties; and c. the circumstances of the case b. The contract has to be read as a whole to ascertain the intention of the parties. c. The definition of these terms clearly indicates that the entire risk is borne by the supplier and carriag....
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....er is bound to do something to goods for the purpose of putting them in a deliverable state the property does not pass until such thing is done and the buyer has notice thereof. In the present case, the sale is not of standard goods but of components of passenger boarding bridges, unless these components are assembled, installed, commissioned and tested, these supplies would be worthless. These components and equipments reached the deliverable state only when their installation is completed and performance established through the provisional or final testing. The assessee has definite obligation to achieve this milestone and unless this is done the property cannot pass. Unlike other kinds of overseas supplies where the supplier has no other obligation beyond the point of shipment, in the present case, the obligation of the supplier extends to the geographical limits of India where he has to put the supply into a deliverable state. In the equipments being discussed in the present case, the various components are integral part of the wholesome technology and these cannot be viewed independently. 19.5 In view of the above, there is no room for any doubt that the title to the ....
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....le state, the property does not pass until such thing is done and the buyer has notice thereof. This clearly shows that operationalisation and full and guaranteed working condition in accordance with technical specifications are the requirements for the contracted goods to be put into a deliverable state and the Property does not pass until such thing is done ie working condition as per technical 'specifications and the buyer has notice thereof though the provisional acceptance .est. As per terms and conditions of above referred agreements and the discussion in the para above it is amply clear that assessee was responsible for procurement, transport, receiving., uploading and safe keeping of all the equipment required in the completion of work which include the supply of 620 TPD Plant from Austria. In term and condition of the agreement, the offshore supplies become the property of the employer only when the same was delivered at site even thereafter the contractor i.e. assessee continued to bear the risk in respect of such item as the same I in its custody till installation, commissioning and testing." 7.15 On perusal of the list of machinery mentioned in the clause 3.1 of the ....
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.... in 133 wooden boxes. The invoice no. 401391 dated 19/11/2009 available on page 24 of the paper book contains parts of dryer cylinder packed in 24 boxes. Other invoices also contains components of Head box, dyer cylinder, wire section, press section, mechanical devices, MCS with Power supply, MG-dryer, parts of master Reel, coating section, control cabinets, strips for dewatering system, air drying system, MG-hood, hood and ventilation system, hydraulic system, lubrication system, approach flow system etc. It is evident that items which have been imported through different invoices are not the machineries, which have been mentioned in the supply agreement but these are various components packed in wooden boxes, which have been brought into shape of different section of the plant as listed in agreement, only after assembling at the site of the buyer. After perusal of these invoices, it clear that the goods supplied by the assessee through various invoices are not in deliverable state. 7.17 The learned counsel of the assessee has relied on the decision of the Hon'ble Delhi High Court in the case of DIT Vs. Ericson AB (supra) to support that acceptance test by the Indian Customer w....
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....erent 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. 7.18 However, the facts of the assessee before us is not the same as in the case of DIT vs. Ericson AB (supra).In the case of Ericson (supra), the assessee, a non-resident company, supplied the equipments to the operators, while the other two companies (EFC and ECL) were in the business of installations of equipments and granting marketing support to the assessee. All the entities were assessed in respect of the income that accrued to them and it was not the case that only one assessment had to made treating the transaction as one works contract. As against the above facts in the case of Ericson (supra), in the case of the assessee, the assessee alone is responsible for supply of equipments and supervision of installation of equipment. In the case of Ericson (supra), it is held that overall agreement does not result in income accruing in India and execution of the overall agreement was prompte....
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....nd not recognized as revenue. This is another fact which distinguishes the case of the assessee from that of, Ishikawajima Harima and Ericsson. 7.19 We find that the Hon'ble high Court in the cases of Erriction (supra) held that acceptance test" was not a material event for passing of the title and risk in the equipment supplied and if the system did not conform to the specifications, the only consequence was that the assessee had to cure the defect. But there is a caveat attached to the finding that 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. In the instant case, the said clause of repayment on return of machinery on failure of acceptance test is available and reproduced above by us .Thus , the decision of the Hon'ble High court in the case of DIT Vs Erriction in a way support the contention of the Revenue. 7.20 In the instant case, the transit insurance of goods has been arranged by the assessee at its own cost from the ware house of supplier to the warehouse of the purchaser, which means the risk in case of damage of goods during transit remained with the supplier. In ....
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....ision of the Hon'ble Supreme Court in the case of Usha Beltron Ltd. (supra) wherein various provisions of the sale of goods Act, 1930 have been analyzed and held that wherever the supply contracts contain and inspection or a certification clause , the title in the goods does not pass till the inspection and certification are successful and the buyer /owner has indicated his approval. The relevant parts of Hon'ble High Court as applicable to the present case are reproduced hereunder: "6. After extracting Sections 3(b) and 5(2) of the CST Act, the assessing authority held that these provisions refer to a 'sale' which is effected by transfer of documents of title while the goods are under movement from one State to another (Section 3(b))State of Gujarat v. Chem-Dyes Corporation(1991) 83 STC 488 (Gujarat High Court) (DB), the Gujarat High Court had held that during the period, i.e at the time of endorsement of documents of title to the goods, what was inexistence was an 'agreement to sell', and Section 3(b) did not apply. 45. For a sale to fall under Section 3(b), the sale must be effected by the transfer of documents of title to the goods. The transfe....
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....een successfully carried out; and, while issuance of such a certificate would certify receipt of goods in a safe and sound condition, it would not discharge the supplier of their warranty obligations. Clause 6.1 of the bid document stipulated that delivery of the goods shall be made by the supplier in accordance with the terms of the contract; and the goods were to remain at the risk of the supplier until delivery was completed. The Supreme Court held that clause 5.5 and 6.1 of the bid document clearly indicated that the property in the goods remained at the risk of the appellant till delivery was completed; it showed that delivery would be completed only after the take-over certificate was issued; as per Section 19 of the Sale of Goods Act, the property in the goods passes when the parties intended it to pass; in this case the contract provided that property in the goods does not pass till after delivery, and after successful testing and issuance of the take-over certificate; and the High Court was right in concluding that the property in the goods had not passed at the time the goods entered the municipal limits. 98. Section 23 of the 1930 Act stipulates that title, in a....
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....e accepted the goods when he intimates to the seller that he has accepted them, or when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller. The post-delivery inspection clauses, in the supply contracts, are in conformity with Section 41(2), and the certification clauses therein accord with the requirement of Section 42 of the 1930 Act." 7.25 The Ld. counsel of the assessee tried to distinguish the decisions of Hon'ble Supreme Court in the case of Usha Belltron Ltd. [supra] and that of Hon'ble AP High Court in the case of L&T Ltd. [supra] on the ground that the said decisions were delivered in the context of Octroi and hence not applicable to the present case. However, the above contentions of the learned counsel are not acceptable since in both the above cases as in the case of the assessee, the issue involved is identical i.e. place where the title and risk to the property passed for the purpose of tax liability. The only superficial difference if any] being that while in the case of Usha Belltron the boundary between the taxing jurisdictions was the "municipal limit", inthe case of L&T Ltd involve....
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.... apparently, stray or isolated transaction is not normally regarded as a business connection. 8.3 The learned counsel of the assessee has submitted that in support all the aforesaid conditions are conspicuous by their absence in the case of the assessee and therefore, no 'Business Connection' of the appellant could be deemed to exist in India. In support of the same, he invited our attentions to the following submissions: • The sales were independently made by the appellant to CPP on principal to principal basis; • The sales were concluded outside India; • In connection with the Contract in question, no business operations were carried out by the appellant in India. 8.4 In view of the learned counsel of the assessee, income flowing from the Contract in question is not liable to tax in India since the appellant does not have any Business Connection in India, and thus no part of the income can be said to be deemed to accrue or arise in India. 8.5 In CIT 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): ....
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....vision enacted in section 40(2). Income not taxable under section 4 of the Act of a non-resident becomes taxable under section 42(1) if there subsists a connection between the activity in the taxable territories and the business of the non-resident, and if through or from that connection income directly or indirectly arises.................. The expression 'business connection' postulates a real and intimate relation between trading activity carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the nonresident in his trading activity". 8.6 In CIT v. Hindustan Shipyard Ltd. [1977] 109 ITR 158 (AP) a Division Bench of this court had construed the word "business connection". The facts in this case were that;- The nonresident company supplied diesel engines with accessories. The terms of the sale were that 90% of the value must be paid against original set of documents, to be submitted duly to the State Bank of India within fifteen days and the balance within six months. The net price included 5% commission payable to the nonresident company at Bombay. The propert....
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....se, the part of the operations of the supply agreement have been carried out in India and sale of goods is in continuation of the process of erection of the plant , the conditions of the business connection exits. We have observed an element of continuity between the business of the assessee from supply to successful supervision of the commission of Plant. It is not the case of isolated sale of the off the self goods or stray transaction, in view of the fact that the assessee has rendered supervision of erection/commission of TPD Plant. Thus, the assess is doing business activities in India which are not isolated instances but represent real and intimate relationship between activities of assessee done outside India and those done inside India. The business operation being done in India by the assessee are revenue generating as these operations are required to earn the contract and to meet the contractual obligations. Therefore, all parameters of business connection as prescribed by above judicial authorities are satisfied in the case of the assessee.Accordingly, the income is deemed to accrue or arise in India in terms of section 9(1)(i) of the Act from the offshore supply of good....
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....assessee. In view of the Assessing Officer books of accounts being maintained on computers systems were located at thar place and return of income have been filed for the last many years. The Assessing Officer rejected the contention of the assessee that PE came into existence after the supply under the impugned contract completed. According to him the place of the business was at the disposal of the assessee for sufficiently long duration and in fact PE was very much involved in the marketing and pre-contract negotiation done by the assessee. In view of the above observations, the learnedAssessing Officer concluded that the assessee had carried out business, supply and supervision of installation, testing and commissioning of machinery for TPD plant from the PE of the assessee in India. 9.4 The Ld. counsel of the assessee before the Assessing Officer submitted that the activities relating to design and manufacturing were carried out outside India and the Indian PE of the assessee had no role whatsoever in design, build and manufacturing of the machinery, which is evident from the fact that the assessee company has no office or manufacturing facilities in India. The learned Asse....
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....the involvement of the Indian PE. 9.6 As regard the address of the 'Mohinder Puri & Co.' chartered accountants, the learned Counsel submitted that said address was for communication purpose since the said firm was engaged by the assessee for providing professional services related to accounting and taxation and said firm had no role in the business of the assessee company. The learned Counsel also submitted that the claim of the Assessing Officer that return of income was being filed in India by the assessee for last many years was factually incorrect and the assessee had filed return of income for the first time for the subject assessment year 2010-11. 9.7 On the contrary, on the issue of existence of Fixed Place PE, the Ld. DR first submitted that requisite details were not provided before the lower authorities. The submissions of the Ld DR in this regard are reproduced as under: i. No details regarding pre-contract activities and the personnel involved in such activities were furnished despite repeated requests by AO. The AO vide letter dt. 22/2/13 asked the assessee to explain "pre-contract details" i.e. how you are chosen for the referred work with reference to ....
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....vidences in the form of copies of their passport etc. were filed in support of the claim that Andreas Christian Schwab, Site Representative & Hubert Grossman, Supervisor stayed in India only between 14/12/09 & 31/3/10. As has already been discussed in Part-B of this submission above, it is not the contention of the assessee that no personnel had came to India or involved in the pre-contract and negotiation activities. It accepts that its employees were present in India for pre-contract activities and contract negotiations, but it did not produce the details regarding their stay and the functions they carried out in India. On the face of it, it can't be accepted that Century entered into a high value contract with the assessee without any tender, bidding, negotiations etc. It is not the claim of the assessee that there is a LO to take care of part of such activities. The assessee in its return of income as well as in its TDS returns/certificates given its address as - 1A-D, Vandhana Building, 11 Tolstoy Marg, New Delhi It may be noted that this address is different from the site office at Lalkua, Nainital, UP [p.94] which constitutes the ....
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.... of fixed place PE on account of nonavailability of details of pre-contract activities and employee visits Para B (iv) and C.1, Panes 1-2 of the Ld. CIT(DR) 's submission] The Ld. CIT(DR) has alleged that the appellant failed to furnish the details of pre-contract activities despite the same being specifically called for by the assessing officer and that no evidences have been furnished in support of the appellant's claim that the employees, i.e. Mr. Andreas Christian Schwab and Mr. Hubert Grossman stayed in India from 14.12.2009 and 31.03.2009 for undertaking supervisory activities. It has been alleged that the subject contract for supply of equipment, being a high value contract, could not have been carried out without any tenders, bidding, negotiations, etc. Further, the Ld. CIT(DR) has reiterated the allegation of the assessing officer that since the appellant has been maintaining its books of account and filing its income tax return in India for the past many years, with the address stated as "1A-D, Vandhana Building, 11 Tolstoy Marg, New Delhi", the aforementioned address constitutes fixed place of business from where activities of supply of equipment took p....
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....ervices performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges, for specific services performed or for management, or, except in the case of a banking enterprise by way of interest on moneys lent to the head office of the enterprise or any of its other offices. 4. 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. 5. For the purposes of the preceding paragraphs, 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. ....
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....ely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; (f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e). provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character." Paragraph 1 of Article 5 of the Treaty, which defines the term PE to mean a "fixed place of business through which the business of an enterprise is wholly or partly carried on", is similarly worded as paragraph 1 of Article 5 of the OECD Model Convention. The OECD Commentary on Article 5 of the OECD Model Convention, states that the following conditions should exist in order to constitute "fixed place of business" for the purpose of paragraph 1 of that Article: • the existence of a ....
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....ndertaking other business activities of the foreign company in India. Relevant extracts of the decision are as under: "32.................Some of the instances given by Vogel in this behalf, of relative standards ofcontrol, are as under: By contrast, in the case of a self-employed engineer who had free access to his customer's premises to perform the services required by his contract, the Canadian Federal Court of Appeal ruled that the engineer had no control because he had access only during the customer's regular office hours and was not entitled to carry on business of his own on the premises. 66. As per Article 5 of the DTAA, the PE has to be a fixed place of business 'through' which business of an enterprise is wholly or partly carried on. Some examples offixed place are given in Article 5(2), by way of an inclusion. Article 5(3), on the other hand, excludes certain places which would not be treated as PE, i.e. what is mentioned in clauses (a) to(f) as the 'negative list'. A combined reading of sub-articles (1), (2) and (3) of Article 5 would clearly show that only certain forms of establishment are excluded as mentioned in Articl....
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....or 5(5) will create a PE and not the said facts as highlighted in the impugned orders. Therefore, we will now examine the facts found and refer to Articles 5(4) and 5(5) of DTAA." The aforesaid decision has been upheld by the Supreme Court and is reported in 399 ITR 34. To reiterate, fixed place PE would be constituted if the foreign enterprise has a fixed place available at its disposal in the other contracting state, through which core business activities of such enterprise are carried out. This proposition is reinforced by virtue of the exception carved out in Article 5(4) of the Treaty to exclude the use of facilities solely for the purpose of collecting information for the enterprise or for other activities which have a preparatory or auxiliary character. The provisions of Article 5(4) of the Treaty are designed to prevent an enterprise of one Contracting State from being taxed in the other Contracting State, if it uses facilities solely for the purpose of collecting information for the enterprise or carries on in that other State, activities of a purely preparatory or auxiliary character. It is recognized that the services performed by such a place ....
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....which the business of an enterprise is carried on. Thus, a building site or an assembly project could be construed as a fixed place of business only when an enterprise commences its activity at the project site. An activity which may be related or incidental to the project but which is not carried out at the site in the source country would clearly not be construed as a PE as it would not comply with the essential conditions as stated in paragraph 1 of Article 5 of the DT.AA It is necessary to understand that a building site or a construction assembly project doe s not necessarily require an attendant office; the site or the attendant office in respect of the site/project itself would constitute a fixed place of business once an Assessee commences its work at site. Thus, for clause (h) of paragraph 2 of Article 5 to be applicable, it is essential that the work at site or the project commences - it is not relevant whether the work relates to planning or actual execution of construction works or assembly activities................" 37. In the present case, the Assessee claims that the survey was conducted by an independent third party engaged by the Assessee and that too for....
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....vity of economic substance or active work qua that project cannot be construed as carrying out any activity of installation or construction. Clause (g) of Article 5(2) ostensibly refers to activity based PE, because the main emphasis is on "where such site project or activity continues for a period of more than 12 months." The duration of 12 months per se is activity specific qua the site, construction, assembly or installation project. If the contract would not have been awarded, then any kind of preparatory work for tendering of contract cannot be reckoned for carrying out any activity as stipulated in this clause. Hence, in this case all such preparatory work for tendering purpose before entering into contract cannot be counted while calculating the threshold period. Situation would be different if after the contract/work has been awarded/assigned and then if any kind of active work of preparatory or auxiliary nature is carried out, it could be counted for determining the time period. Reference is further made to the decision of the Special Bench of the Tribunal in the case of Motorola vs. DCIT: 95 ITD 269 (Del.) wherein the Tribunal held that the basic operations to be....
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....otential business partners and with local Government agencies on industrial policy and regulations. (2) Provide product information and training to distributors and OEMs, assist distributors, to provide potential equipment users with technical and price information, ensure that distributors meet warranty obligations, and maintain technical standards consistent with the high quality, reliability and state of art technology of Motorola equipment, assist distributors to make technical presentations to potential users, act as an interface between Motorola and endusers in dealing with issues of technical performance of equipment, selection of equipment or price of equipment. (3) Develop market opportunities for Motorola products and services by introducing Motorola products and services and by providing product and service information to potential customers and partners in liaison and support of Motorola and provide warranty and after sales services in connection with the products sold. (4) Engage in sourcing and procurement activity on behalf of Motorola for raw materials or components to be incorporated or used in conjunction with products manufactured on a ....
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....ng officer as well as of the Ld. CIT(DR) that since the appellant has been filing its return of income for the past many years from the aforementioned address (premises of Chartered Accountant), the same would constitute fixed place PE, is grossly incorrect inasmuch as the year under consideration i.e., assessment year 2010-11 was the first year for which return of income was filed by the appellant. As regards the address mentioned in the return of income and Form 27A filed by the appellant, it is respectfully submitted that the same belongs to M/s. Mohinder Puri & Co., Chartered Accountants ("MPCO") who were engaged by the appellant for preparing the books of accounts and for undertaking tax compliances in respect of onshore activities (supervisory activities) undertaken by the appellant in India. The address of the Chartered Accountant was mentioned in the return of income and Form 27A merely for administrative convenience and to communicate with Indian tax authorities and the Chartered Accountant firm has no role in the business of the appellant company. It is respectfully reiterated that the all activities involved in supply of equipment viz. designing, manufacturing etc. were ....
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....and the said Chartered Accountant firm did not play any role in any business activity of the appellant company. Furthermore, the appellant states with full emphasis at its command that the premises of the Chartered Accountant were never at the disposal of the employees of the appellant through which the business of the appellant was carried on in India. Even otherwise, it is respectfully submitted that maintenance of books of accounts and filing the income tax return is a preparatory and auxiliary activity and cannot, in our respectful submission, constitute PE of the appellant in India. Be that as it may, as per terms of Equipment Supply contract, i.e., Article 7.1 and the import documents such as bill of lading, etc., it is abundantly clear that the ownership in the goods passed outside India. It is further submitted that the activities relating to design and manufacturing were carried out outside India and the supervisory PE of the appellant, which came into existence on account of number of days for which appellant's employees stayed in India, had no role whatsoever in the design, fabrication and manufacture of the equipment, which is substantiated by the fact that the....
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....upplies of fabricated platforms cannot be made attributable to its Indian PE as the installation PE came into existence only after the transaction stood materialized. The installation PE came into existence only on conclusion of the transaction giving rise to the supplies of the fabricated platforms. The Installation PE emerged only after the contract with ONGC stood concluded. It emergedonly after the fabricated platform was delivered in Korea to the Agents of ONGC. Therefore, the profits on such supplies of fabricated platforms cannot be said to be attributable to the PE. There is one more reason for coming to the aforestated conclusion. In terms ofpara (I) of Article 7, the profits to be taxed in the source country were not the real profits but hypothetical profits which the PE would have earned if it was wholly independent of the GE. Therefore, even if we assume that the supplies were necessary for the purposes of installation (activity of the PE in India) and even if we assume that the supplies were an integral part, still no part of profits on such supplies can be attributed to the independent PE unless it is established by the Department that the supplies were not at arm'....
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....ivities. We have also gone through the Decision of the Hon'ble Delhi High Court in the case of GE Energy Parts (2019-TII-01-HCDEL- INTL) cited by the Ld DR. In the said decision the Hon'ble court has appreciated contribution of the presale activities i.e. process of marketing the product, understanding need of client, giving them options about available technology, address queries etc. by an assessee. The relevant finding of the Hon'ble High Court is reproduced as under: "57. This court is of the opinion that the process of sales and marketing of GE's product through its various group companies, in several segments of the economy (gas and energy, railways, power, etc.) was not simple. As noticed by the tribunal, entering into contract with stakeholders (mainly service providers in these segments) involved a complex matrix of technical specifications, commercial terms, financial terms and other policies of GE. To address these, GE had stationed several employees and officials: high ranking, and in middle level. At one end of the spectrum of their activities was information gathering and analysis- which helped develop business and commercial opportunities. At the other e....
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....lievable that after awarding the contract i.e. 19/06/2008 to the assessee ,none has visited site of the buyer prior to dispatch of the goods to the buyer. In the case, the assessee has not provided any detail of either pre-engineering survey/pre-contract activities or any post engineering survey/post contract activities, therefore, we are not commenting on the decisions relied upon by the assessee. 9.12 We do agree with the observation of the Assessing Officer that there was close proximity or connection between the PE and the assessee. The Learned Assessing Officer is correct in observing that substantial part of the business activity of the assessee of manufacturing and commissioning of TPD plant was carried out in taxable territory of the India and supply of parts of machinery for plant was incidental to service contract and for this reason a part of the profit is directly attributable to the PE in India. In the facts of the case the supervision services are not incidental to sale of the plant and machinery and it is otherwise that for commissioning of the plant, assessee has brought component of the machinery to India under supply agreement. It is not the case that the asses....
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....) 35% Total Taxable Income Rs. 16,14,04,346/- 10.1 Before us, the Learned Counsel of the assessee submitted that as per global accounts there was a net loss of 7.96% whereas the Assessing Officer has arbitrarily applied FAR analysis and benchmarking companies while computing the profit attributable. He further submitted that no basis has been given by the Assessing Officer to allocate profit of the company assigned to the Indian PE and the percentage of 35% adopted by the Assessing Officer is arbitrary without any rational. He submitted that in the case of Rolls Royce Plc (supra), sale of goods was through the liaison officer i.e. RRIL and it was remunerated for it. He submitted that RRIL carried out marketing activities in India on behalf of the Rolls-Royce PLC. According to the Ld. Counsel, however, in the instant case, two separate contracts have been awarded to the assessee company by the CPPC and there was no PE at the time of signing of the contract. According to him the deemed 'PE' came into existence by virtue of rendition of the supervision services and therefore attribution of 35% of the profit from supply of the equipment based on the decision in the Rolls- R....
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....e said to arose or accrue, the Court held. In the aforesaid case, the assessee company incorporated in the United Kingdom and having its registered office in London manufactured yarn and cloth in their mill at Pondicherry. The assessee had appointed a company in Madras at their agents. The manufactured goods were sold mostly in British India and partly outside British India. All the contracts in respect of the sales in British India were entered into in British India and deliveries were made and payments were received in British India. In regard to sales outside British India also, payments in respect of such sales were received in Madras through the agents. The assessee had shown the total world income for the year ended 30.12.1941 at Rs. 10,23,807. Profit at 10 per cent on British Indian sales which aggregated to Rs. 57,07,431 was shown at Rs. 5,70,743 and after deduction of the proportionate expenses relating to sales in British India and sundry charges was put down at the net figure of Rs. 4,58,026 which was shown as the British Indian income. It was, thus contended that the income arising in British India in the year of account did not exceed its income arisi....
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....racts with Indian customers, were carried out in India. The issue before the Special Bench was, as to what was the income attributable to the PE of the assessee in India. The Special Bench found that the assessee made global net profit of 10.8%. The aforesaid percentage was applied to the sales made to the Indian customer, and the resultant figure was held to be net profit arising in respect of the Indian sale. Having regard to the activities of the PE in India, 20% of the net profit in respect of the Indian sale w'as held to be income attributable to the PE in India. Reliance is further placed on the recent decision of the Uttarakhand High Court in the case of Samsung Heavy Industries Co. Ltd. vs. DIT: 265 CTR 109 in judgment dated 27.12.2013. The observation of the Court on the issue of attribution of income reads as" "4. In paragraph 1 of Article 7 of the said Agreement, it has been provided that profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. It, therefore, recognizes two tax identities of an enter....
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....g Authorities by furnishing return of income and, thereby, acknowledged that it has also a tax identity in India. The question is, this identity is covered by which provision of the Agreement. In terms of paragraph 1 of Article 7, assessee will acquire its tax identity in India only when it carries on business in India through a permanent establishment situated in India. By submitting the return, assessee has held out that it is carrying on business in India through a permanent establishment situated in India. In the circumstances, the contention of the assessee, whether the Project Office of the assessee opened at Mumbai can be, or cannot be said to be a permanent establishment within themeaning of the said Agreement is of no consequence. In terms of the said Agreement, as it appears to us. if an enterprise does not have a tax identity in India in the form of a permanent establishment, it has no oblisation to either submit any tax return with, or payany tax to India. The question still remains, whether it was right on the part of the Taxing Authority to assess income-tax liability of the assessee as was assessed in the instant case. In other words, can it be said that the Agreemen....
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....its customers in India. The Tribunal held that the Indian company constituted PE of the assessee in India since the assessee exercised substantial control and influence in the functional matters as is evident from the frequent and extensive visits of assessee's employees to India, secondment of assessee's employees to the key position in the Indian company and considering that the Indian company did not bear any substantial risk in relation to the functions carried out by in India. The Hon'ble Tribunal while explaining the approach of computing profits attributable to such permanent establishment, held as under: "11.17. In view of the above facts, circumstances, case law, CBDT circulars and various articles of India-USA DTAA, following conclusions are arrived at: A. xxx xxx xxx F. In our considered opinion. the correct approach to arrive at the profits attributable to the PE should be as under: Step 1: Compute Global operating Income percentage of the customer care business as per annual report/1 OK of the company. Step 2: This percentage should be applied to the end-customer revenue with regard to contracts/projects where services were ....
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....search & development, depreciation, amortization etc. have not been considered and 50% of selling, general and administrative expenses have been ignored along with other expenses incurred by CMG outside India for earning the revenue from end customers. In our considered view, this approach is also not viable and appropriate. 11.22. As the methods for calculating the attribution profit as adopted by TPO and CIT(A) are not reliable. Ld. Counsel has further demonstrated that if both the methods are harmoniously applied, this leads to a situation where no further attribution to the assessee's income can be made. Thus a harmonious intermixed rationalization of TPO and CIT(A) method results into no further attribution of profits to Indian PE. 11.23. In this backdrop we are reminded of two case laws decided by Hon'ble Supreme Court which have dealt with attribution of the profits to the Indian PEs: (i) Anglo French Textile Company Ltd. vs CIT 23 ITR 101 (SC), in which 10% attribution has been held to be reasonable. (ii) Hukum Chand Mills Ltd. vs. CIT 103 ITR 548 (SC), in which 15% attribution hasbeen held to be reasonable. 11.24. These cases de....
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....he significant part of the profit on offshore supply of equipment under supply agreement need to be attributed to PE in India. In the case of the Rolls-Royce PLC (supra), Hon'ble High Court taken into consideration the role 50% toward manufacturing activity and 15 % towards the research and development activity and balance 35% was considered to the marketing activity. The relevant finding of the Hon'ble High Court is reproduced as under: "In the Rolls Royce case, the assessee was a British company. It supplied certain parts and equipments to Indian customers. Rolls Royce India Limited ('RRIL') was 100 per cent subsidiary of assessee set up in India, which rendered liaison services and was remunerated on a cost plus basis. The Assessing Officer, after holding that RRIL was PE of the assessee and there was business connection between the two as the marketing and sale of goods to Indian customers were carried out by the assessee through RRIL, held that profits attributable to PE were liable to tax in India in terms of article 7 of the DTAA between India. The Assessing Officer, accordingly, invoked rule 10 of the Income-tax Rules, 1962 and attributed 100 per cent of profits ea....
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.... India." 10.4 In the instant case, in addition to the marketing activities or engineering survey pre or post awarding of contract (for which no information has been filed by the assessee), the service PE has played role in assembling and bringing the equipment to deliverable state as agreed under the supply agreement. In such facts and circumstances, in our opinion, the 35% of the profit attributed to the PE is justified. Accordingly, we uphold the same. 11. The ground No. 4 of the appeal relates to interest as under section 234A/234B/234D of the Act. The Learned Counsel of the assessee has submitted as under: "Re: Ground of appeal no. 13 - No interest chargeable under section 234B of the Act: At the outset, it is submitted that since the revenues receivable by the appellant are subject to deduction of tax at source, the question of payment of advance tax and subsequent levy of interest under section 234B of the Act does not arise at all, as elaborated hereunder: As per the provisions of section 234B of the Act, an assessee who is liable to pay advance tax under section 208 will be liable to interest under the said section, if he fails to pay such t....
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....the payer. The payer will be an assessee in default, on failure to discharge the obligation to deduct tax, under Section 201 of the Act. 23. For the above reasons, this Court finds that no interest is leviable on the respondent assessees under Section 234B, even though they filed returns declaring NIL income at the stage of reassessment. The payers were obliged to determine whether the assessees were liable to tax under Section 195(1), and to what extent, by taking recourse to the mechanism provided in Section 195(2) of the Act. The failure of the payers to do so does not leave the Revenue without remedy; the payer may be regarded an assessee-in-default under Section 201, and the consequences delineated in that provision will visit the payer. The appeal of the Revenue is accordingly dismissed without any order as to costs. " Further, reliance is placed on the following decisions of the Courts/ Tribunals, wherein it has been held that interest under section 234B of the Act for non-payment of advance tax could not be levied on the non-resident assessee, since such assessee was not liable to pay any advance tax considering that all payments made to the assessee were ....
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....in-default, on failure to discharge the obligation to deduct tax under section 201 of the Act. But the instant case is prior to the amendment or change brought by the Finance Act, 2012. In the case of Alcatel Lucent World Services (ITA No. 326/2012, 329/2012 and 336/2012), the Hon'ble Delhi High Court has reproduced facts of the case as under: "5. The Assessing Officer however did not accept the assessee's stand and in the assessment order passed on 23.03.2010 attributed 2.5% of the sale proceeds of the hardware as profit attributable to the PE in India, which came to Rs. 21,02,58,238/- for the assessment year 2007-08. Similar re-assessments were made in all the years in respect of both the assessees. In the re-assessment order, in addition to the aforesaid income, the Assessing Officer also directed that interest under Sections 234A, 234B and 234C shall be charged. Demand notices were accordingly issued. 6. Appeals were taken by the assessee in respect of all the assessment years before the CIT (Appeals). Three grounds were taken in the appeals. The first ground was that the Assessing Officer erred in computing the income of the assessee as was done in the re....
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....able on the estimated income. It was further held that the position would be so even if the income tax was not in fact deducted from the remittance because Section 209 (1)(d) of the Act permitted the non-resident assessee to take credit, while computing its advance tax liability, for the amount of income tax that was "deductible" from the remittance, though not actually deducted. It was furthermore held in the judgment that once it was found that the liability was that of the payer under Section 201 of the Income Tax Act, which permitted recovery of the tax from the payer by treating him as an assessee in default and also recovery of interest under Section 201 (1A) for the default in not deducting the tax, there can be no liability fastened upon the non-resident assessee to pay interest under Section 234B." 11.3 In view of the facts of the case, the Hon'ble Court held that the assessee was liable for interests u/s 234B, observing as under: "....24. The learned counsel for the assessee submitted in the course of his arguments that the assessee and the Indian telecom equipment dealers cannot contract out of the statute and, therefore, even if such an arrangement had been ....
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....introduced as a PAYE Scheme - "pay as you earn". It is not open to the assessee, after accepting the assessment at the first appellate stage to claim that the Indian payers ought to have deducted the tax irrespective of the fact that the assessee itself claimed the Indian income to be not taxable. We can understand an assessee who admits its tax liability right from the beginning to contend that it was the responsibility of the payers to deduct the tax and if they did not, even then the tax which ought to have been deducted by them should be set off against the assessee's advance tax liabilities. That is the type of case dealt with in the decision of this Court in Jacabs (supra). We were not referred to a single case where on facts similar to the case of the assessee before us, the Court took the view that no interest under Section 234B was chargeable. The case of Mitsubishi Corporation decided along with the case of Jacabs, was on facts similar to the assessee's case. However, as pointed out by us earlier, this Court in Jacabs case proceeded on the assumption that the facts in Mitsubishi Corporation were similar to those in Jacabs. That assumption, as we have earlier demon....
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....1) 82 ITR 570 (SC), Hegde, J., opined thus: "It is true that equitable considerations are irrelevant in interpreting tax laws. But, those laws, like all other laws, have to be interpreted reasonably and in consonance with justice". In CIT v. J.H. Gotla : (1985) 156 ITR 323 (SC), it was held by the Supreme Court that though equity and taxation are often strangers, attempts should be made (to ensure) that they do not always remain so and if a construction results in equity rather than injustice, that should be preferred to the literal or strict construction. In Calcutta Jute Manufacturing Co. v. Commercial Tax Officer : (AIR 1997 SC 2920) the Supreme Court held that if there is a provision in a taxing statute to compensate the state by charging interest, that provision need not be strictly construed but may be so construed as to effectuate its purpose. The Court held: "10. The State is empowered by the legislature to raise revenue through the mode prescribed in the Act so the State should not be the sufferer on account of the delay caused by the taxpayer in payment of the tax due. The provision for charging interest would have been introduced in order to compensate the State (or the ....