TaxTMI 
TaxTMI 
2021 (10) TMI 272
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....08 declaring nil income. This return was revised by the assessee a number of times and finally the same was revised on 21.05.2009 declaring a loss of Rs. 84,04,207/- and value of fringe benefit of Rs. 2,35,261/-. In the original draft assessment order passed u/s. 144C(1) of the Act the AO proposed to attribute revenues earned from offshore supply of equipment made by the assessee from Korea to the PE of the assessee in India. The tax payer filed objections before the DRP and after receipt of directions from the DRP, the final assessment order was passed by the AO on 27th September, 2013 determining the total income at Rs. 24,48,85,181/-. The income of the tax payer was assessed as under:- 4. The tax payer filed appeal before the Tribunal and the Tribunal, vide order dated 26th February, 2014 in ITA No. 5787/Del/2013 set aside certain issues to be decided afresh by the AO. The Tribunal has deleted the other additions except the set aside issues for which the Revenue is in appeal before the Hon'ble High Court and we are not concerned with the same. 5. Similarly, for A.Y. 2009-10, after receipt of the directions from the DRP, the final assessment order was passed by the AO o....
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....been captioned as 'Summary of Prices' that there is a charge for supply of offshore equipment and also there is a separate charge towards 'Foreign supervision charges' to the tune of Euro 444000. The description of such foreign supervision charges has been given in Table 13B, a copy of which is available on page 1036 of the paper book. When we turn to such Table, the description of 'Foreign supervision charges' is found as : "Foreign supervision charges in India during Erection, Start up, Commissioning and Performance Guarantee tests." Getting a separate charge for foreign supervision charges for the setting up of plant makes it clear that such supervision charges are not part and parcel of the price of equipment as referred to in columns 3, 5 and 7 of Table 1B. It implies that there was distinct charge for foreign supervision charges which has been construed by the assessee itself as onshore services chargeable to tax in the relevant year. To this extent, it is manifested that foreign supervision charges do not form part of sale consideration of the equipment supplied offshore. 2.c. However, we find from Summary of Prices on Table 1B, as was rightl....
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....'Foreign supervision charges', the consideration for the 'Training charges' is 'Not quoted' and the same is 'Included', obviously in the price of equipment. The reason for our conclusion that the training charges are included in the 'Price' of the equipment is that the only other charge as per the Summary of Price for the onshore services is 'Foreign supervision charges'. When we consider the detail of such charges on page 1036 of the paper book, it transpires that there is no ad hoc consideration. In fact, it has been calculated by estimating 7400 man days for rendering such foreign supervision and there is a specific rate per man day, culminating into the calculation of total charge on this account at Euro 4440000. On having a glance at the detail of 'training charges' on page 1037, it comes out that against the column 'Estimated Man days for Employer's Personnel for Training in India', it has been mentioned as Included'. Similarly against the next column of 'Price for Training in India', again it has been mentioned as Included'. Once the foreign supervision is found to have been exclusively charg....
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....ct' on page 1135 of the Paper book has been named as 'Test and Inspection'. Para 1 of this clause reads as under:-"The contractor shall at its own expense carry out at the place of manufacture and/or on the site of such tests and/or inspections of the plant and equipment and in part of the facilities as are specified in the contract." 2.g. There are certain other clauses also which show that the assessee has undertaken to bear expenses in connection with the supply of goods. 2.h. The above discussed clauses indicate that the assessee undertook to incur some expenses towards test and inspection at site that is in India; conduct repair during defect liability period again in India etc. These expenses are to be borne by the assessee. Though the mention of words 'at its own expense' for test and inspection in Clause 23.1 and the words 'at its cost' for defect liability prima facie indicate that compensation for such liability is included in the sale price of the offshore supply of equipment, but it cannot be so concluded outrightly. The possibility of compensation for such things being included in Foreign supervision charges cannot be ruled....
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....eable to tax in India." 9. So far as the issue regarding attribution of income to the services rendered in India (from the sale price of offshore equipments), the Tribunal, vide para 4d. and 4e. of its order has held as under:- "4.d.....it can be easily deduced that the Revenue has proved beyond doubt that the price charged by the assessee for supply of offshore equipment also includes consideration for certain services rendered in India. This makes it clear that the price for such services is liable to be considered for taxation as per Sec. 9(1)(i) of the Act and also Article 7(1) of the DTAA. 4.e. Reverting to the issue of apportionment of profit to the services rendered in India, we find that such attribution cannot be done in an arbitrary manner. It is a question of fact which varies from case to case. In a given case, the nature of services to be rendered may be quite cost or labour intensive, while in another case, it may not be so. There cannot be any straitjacket sacrosanct formula for such attribution. As we have restored a part of this issue to the file of the AO as per point 2 above for determining as to whether the testing charges in India and repai....
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....amages may arise only due to delay in completion of facilities. d) This being the initial years of the project, none of the above mentioned events have occurred to trigger such liability. e) Assessee produced a certificate issued by SAIL, wherein it has been certified that none of the said instances have taken place in the subject year. 12. As regards the revenue received for design and engineering services is concerned, it was submitted that: a) Design and Engineering sold by the Assessee to SAIL have been designed largely on the basis of standard technologies available with it. b) Consideration received by the assessee was for the sale of a product which is indispensable part of offshore supply, hence not taxable. c) Primarily the work relating to the sale of designs and engineering was done outside the territory of India and the sale was also affected outside India. d) Even if the consideration for off-shore designs is treated as for services, then too both under the Act as well as under Double Taxation Avoidance Treaty (DTAA), there would be nil taxation in. India. e) This is because these services are in no way ....
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....rtaken in India. 4.1 That on the facts and circumstances of the case, the Ld. AO/DRP failed to appreciate that, the assessee since had not to provide any training to the employees of SAIL in India, and as such, training was to be provided to the employees of SAIL outside India, and that too, free of cost, accordingly no income could be said to have accrued to the assessee in India. 4.2 That the Ld. AO has erred in disregarding the facts and the circumstances of the case that, the training activities, being incidental to the supplies made by the assessee from outside India, cannot have separate taxability. 5. On the facts and in the circumstances of the case and in law, the Ld. AO/DRP has erred in holding that cost for Defect liability & liquidated damages charges is to be included in the income of the assessee despite of fact that these incidental obligations are in the nature of trade warranties. 5.1 While doing so the Ld. AO/DRP has grossly ignored the fact that the same are contingent in nature and can arise only on the happening of certain specific instances mentioned in the contract and none of such event has taken place in the subject year.....
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....ct along with the assessment order dated December 26, 2016. That the above grounds of appeal are without prejudice to the other grounds of appeal." 16. The ld. Counsel for the assessee, referring to the additional grounds, submitted that these are purely legal in nature and no fresh facts are required to be investigated. Referring to the decision of the Hon'ble Supreme Court in the case of Jute Corporation of India Ltd. vs. CIT, reported in 187 ITR 688 and various other decisions, he submitted that the additional ground raised by the assessee may kindly be admitted and necessary relief be granted to the assessee. 17. The ld. DR, on the other hand, opposed the additional grounds. 18. After hearing both the sides, we find that the additional ground raised by the assessee are purely legal in nature. Therefore, relying on the decisions of the Hon'ble Supreme Court in the case of NTPC Ltd. vs. CIT, 229 ITR 383 and the decision in the case of Jute Corporation of India cited (supra), we admit the additional grounds raised by the assessee for adjudication. 19. The d. counsel for the assessee submitted that the AO was supposed to pass the draft assessment order.....
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.... approached the DRP and the DRP has passed the order on 18th September, 2017 and, thereafter, the AO has passed the final order on 30th October, 2017. Since the ld. Counsel for the assessee could not substantiate with evidence to the satisfaction of the Bench that the AO has issued the demand notice and challan along with the draft assessment order, therefore, the additional ground raised by the assessee are dismissed. 22. The ld. Counsel for the assessee strongly challenged the order of the AO. He submitted that the Tribunal in the original proceedings has held that the sale price of offshore supply of equipment also includes some consideration towards training activities and it directed the AO to verify the date of actual rendition of training and determine the value of training as per man day rate. He submitted that the Assessee in the remand proceedings before the AO had submitted that the training would be provided to SAIL staff post installation and commissioning for the purpose of operation and maintenance of the plant. Since, no training had been provided in the years under consideration, the question of attributing an amount towards training in the year under considerat....
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....early shows that revenue for Performance Guarantee Tests was included in the Foreign Supervisory Charges. Hence, the finding of the AO that price for rectifying any defect in the equipment is included in revenue earned from offshore supply is incorrect. He submitted that as far as liquidated damages are concerned, the same may arise due to delay in completion of facilities. For the above, he drew the attention of the Bench to Clause 29.2 of the agreement copy of which is placed at page 246 of the paper book. Referring to Clause 29.2.1 of the contract (Page 246 of the Convenience Compilation) he submitted that the said clause clearly quantify the same as 0.5% of contract value per week of delay with a cap of 5%. The said damages are penal in nature and exist only to protect the interest of the buyer. These damages have to be paid by the assessee in case of delay i.e. a contingent event. The said liquidated damages under no circumstance can be concluded to be a part of the consideration. Hence, the AO's conclusion that the same forms part of the revenue earned from offshore supply is incorrect and against the settled principles of contract law. 27. He submitted that the clause....
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....O has incorrectly assumed a profit rate of 50% and disregarded the global profit rates of the company submitted during the assessment proceedings. Referring to the paper book page 106 to 110, he submitted that the assessee's global profit rate during the calendar year 2007 and 2008 was 9.7% and 5.3% respectively. However, the AO completely disregarded the financials and applied 50% as profit rate without any cogent reason or explanation. He submitted that the DRP in its directions also directed the AO to compute the profit rate as per the global financials of the assessee but the AO failed to follow the said direction of the DRP as well. He accordingly submitted that the AO should be directed to follow the aforesaid directions of the Ld. DRP and compute profit rate in line with the global profit rate of the assessee during the calendar year 2007 and 2008 i.e. 9.7% and 5.3% respectively. 31. The ld. DR, on the other hand, heavily relied on the order of the AO. He submitted that in this case the Tribunal had set aside the matter to the file of the AO on specific points with a clear-cut finding that the services included in sale consideration for offshore sale are chargeable to....
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.... submitted that while basic induction training for all categories of staff and for all job positions will be provided by the employer, the contractor shall identify from the manpower requirements as per sub-clause 18.6 thereof, the key positions and number of persons to be trained for efficient running of the plant. Employer will depute personnel with appropriate qualification and experience for training. He submitted that in the absence of specific time period of training in the year under consideration, the AO has referred to the technical specifications which mentions that the taxpayer will be providing 1200 man days of training to the staff of SAIL and for the training services, no separate charge has been made. He accordingly submitted that the AO was justified in computing the training cost of 1200 man days at the rate of 600 Euros per man day. 34. So far as liquidated damages are concerned, he submitted that the certificate submitted by the assessee that no such event of incurring defect liability took place in the concerned period cannot be accepted in absence of filing of any evidence where such services for defect resolution have been separately charged during the enti....
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....at the consideration for training services is included in the amount being received by the company for foreign supervision services. The relevant extract of the certificate placed in the paper book reads as under:- "I, P.V.S.U. Mahesh son of Late P.L. Narasimham aged 46 years, in the capacity of Assistant General Manager (Finance), IISCO Steel Plant, Steel Authority of India Limited (hereinafter referred to as "SAIL"), do hereby certify that as per the contract agreement dated October 16, 2007 between SAIL and consortium comprising of M/s. POSCO Engineering & Construction Company Limited, South Korea (hereinafter referred to as "POSCO") and M/s. Nagarjuna Construction Company Limited (hereinafter referred to as "NCC"), POSCO is under an obligation to provide training to SAIL staff in India [Refer clause 7.8, page 73]. It is further certified that no training has been conducted till date in India and as and when training shall be imparted to SAIL staff POSCO shall not be entitled to any separate consideration [Refer Pricing Schedule - Table 14B. page 27] because hours to be spent by POSCO in imparting training in India had been considered to be a part of consideration for F....
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....offshore supply is incorrect. 38. We find, as per clause 29.2, copy of which is placed at page 246 of the paper book, liquidated damages may arise due to delay in completion of facilities. Clause 29.2.1 of the contract, copy of which is placed at page 246 of the paper book clearly quantifies the same as 0.5% of the contract value per week of delay with a cap of 5%. We find merit in the submission of the ld. Counsel that the said damage being penal in nature exist only to protect the interest of the buyer. Thus, the damages have to be paid by the assessee in case of delay i.e., a contingent event, therefore, the said liquidated damages under no circumstances can be concluded to be a part of consideration. We, therefore, find merit in the argument of the ld. Counsel that the conclusion of the AO that the same form part of the revenue earned from offshore supply is incorrect and against the settled principle of law. Further, this being the initial year of contract for the project, no such occasion had arisen and, therefore, in absence of any material with the AO, he was not justified in making the addition. 39. We further find, SAIL has issued a certificate copy of which is plac....
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....totec GmbH vs. DDIT, reported in 172 TTJ 337, has held that clauses like liquidated damages, performance guarantee and defect liability are part of normal commercial arrangements generally agreed in common trade parlance and cannot form the basis for attributing revenue earned from offshore supply of equipment to India. The relevant observation of the Tribunal read as under: "From the above observations of Delhi High Court, Tribunal and AAR, it is clear that the acceptance tests are merely in the nature of warranty provisions. Further, the observation of Delhi High Court also clarify that breach of warranty could result in payment of damages and does not by itself mean the property/title in the goods did not pass to buyer outside India. Accordingly, the clause of acceptance tests and liquidated damages are nothing but merely in the nature of warranty provision and its remedial measures. Hence, undue importance cannot be given to such clauses and the same cannot be construed to mean that any portion from the sale of equipment can be taxed in India." 41. In view of the above, we hold that no portion of revenue earned from the sale of equipment can be taxed in India by vir....
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....o 150900 was received be considered as offshore supply of equipments and hence exempted from taxation. Our view is fortified from the judgment of the Hon'ble jurisdictional High Court in Director of Income Tax Vs. Rio Tinto Technical Services (2012) 340 ITR 507 which reversed the finding given by the Tribunal that the consideration received was for a composite contract and hence could not be bifurcated. It has been held that in the absence of any bifurcation, an estimated allocation has to be made for tax purposes. From the above judgment, it is manifest that the contention of the ld. AR that the fees for design and drawing should be considered as part of supply of offshore equipment, is not sustainable." 42.1. Further, at para 7.7, the Tribunal has held as under:- "7.7. A bare perusal of this Explanation defining the term fees for technical services' makes it clear that it refers to rendering of any of technical services apart from managerial or consultancy. It also includes the provision of services of technical or other personnel. As the nature of afore-discussed drawings and designs customized to the assessee's requirements are result of the rendering of....
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....in Annexure B9 of the objections filed before the DRP. 3. That on the facts and circumstances of the case and in law, the Ld. AO/DRP erred in holding that the consideration for training services rendered or to be rendered in India is embedded in the consideration for offshore supply, and is taxable in India, despite the fact that, under the contract, no training is envisaged to be undertaken in India. 4.1 That on the facts and circumstances of the case, the Ld. AO/DRP failed to appreciate that, the assessee since had not to provide any training to the employees of SAIL in India, and as such, training was to be provided to the employees of SAIL outside India, and that too, free of cost, accordingly no income could be said to have accrued to the assessee in India. 4.2 That the Ld. AO has erred in disregarding the facts and the circumstances of the case that, the training activities, being incidental to the supplies made by the assessee from outside India, cannot have separate taxability. The Ld. AO/DRP has grossly ignored the facts the certificate issued by SAIL, wherein it has certified that no training is to be conducted in India under the terms of the co....