TaxTMI 
TaxTMI 
2023 (12) TMI 96
X X X X Extracts X X X X
X X X X Extracts X X X X
....oner of Income - tax (Appeals) [Ld. CIT(A)] is bad both in law and on facts of the case; 2. That the Ld. CIT(A) has erred in computing the taxable income of the Appellant at Rs. 1,89,12,640/- as against 'Nil' income as declared in the return of income; 3. That the Ld. CIT(A) has erred in holding that consideration received by the Appellant in relation to contract for off- shore services for planning and supply of drawings and designs, is essentially in the nature of "Fees for Technical Services" under the provisions of section 9(1)(vii) of the Income - tax Act, 1961 (the Act) and provisions of Article 12 of the Double Taxation Avoidance Agreement between India and Germany (DTAA); 4. That the learned CIT(A) has erred in rejecting the contention of the Appellant that the offshore services are inextricably linked to the supply of plant & equipment and thus consideration for such services partake the nature of business profits which should be taxed in terms of provisions of Article 7 of the DTAA, read with Protocol Para 1(a) and (b) thereof; 5. That the Ld. CIT(A), while arriving at the aforesaid conclusion, has erred in not relying upon the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....icably linked to the supply of plant & equipment and thus consWeration for such services partake the nature of business profits which should be taxed in terms of provisions of Article 7 of the DTAA, read with Protoco Para 1(a) and (b) thereof; 5. That the order of the Ld. CIT(A) is grossly incorrect in considering that separate payment towards the offshore services including drawings and designs indicates the severance of this contract from the contract for the supply of plant & equipment, 6. That the Ld CIT(A), while arriving at the aforesaid conclusion, has erred in not relying upon the decisions of jurisdictional High Court and Hon'ble Supreme Court of India. 7. Without prejudice, the Ld. CIT(A) has erred in holding that the impugned services are not covered by the exclusionary clause, provided for 'assembly, 'construction' like project activities' in India, under section 9(1)(vii) of the Act, 8. That the Ld CIT(A) erred in refuting the contention of the Appellant that the Project under taken by the appellant is a turnkey project and aforementioned offshore services are essential to the carrying on of onsite project activities m India ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....de by the Appellant is taxable in India as Business Profits. 2.2. That the Ld. CIT(A), based on erroneous appreciation of terms of the contracts, erred in holding that the property in the equipment did not get transferred outside India and the delivery was completed upon commissioning at site. 2.3. That without prejudice to the other grounds, the Ld. CIT(A) erred in confirming the attribution of the business profits from supply of the equipment to the extent of 20% to the supervisory PE of the Appellant in India and thus taxable @ 42.024% in India, not warranted on the facts as well as in view of provisions of Article 7 of the DTAA between India and Germany read with protocol 1(a) thereof. 3.1. That the Ld. CIT(A) has erred in holding that consideration received by the Appellant in relation to contract for off-shore services for planning and supply of drawings and designs, is in the nature of 'Fees for Technical Services' under the provisions of section 9(l)(vii) of Act and the DTAA. 3.2. That the Ld. CIT(A) has erred in rejecting the contention of the Appellant that the off-shore drawings and designs are inextricably linked to the off-shore ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at consideration received by the Appellant in relation to contract for off-shore services for planning and supply of drawings and designs, is in the nature of 'Fees for Technical Services' under the provisions of section 9(1)(vii) of Act and the DTAA. 3.2. That the Ld. CIT(A) has erred in rejecting the contention of the Appellant that the off-shore drawings and designs are inextricably linked to the off-shore supply of plant & equipment and thus consideration for such services partake the nature of business profits, not taxable in terms of provisions of Article 7 of the DTAA read with Protocol Para 1(a) and (b) thereof as well as under the provisions of Income Tax Act, 1961. 3.3. That the Ld. CIT(A) has erred in making the erroneous observation that separate payment towards off-shore drawings and designs indicates the severance of this contract from the contract for the supply of equipment. 3.4. That, without prejudice, the Ld. CIT(A) has erred in not appreciating that even on a standalone basis the off-shore design and drawings were in the nature of goods, the transfer of which constitutes outright sale of goods, not taxable in India. 3.5. That,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and drawings are not covered by the exclusionary clause under section 9(1)(vii) of the Act, providing for exclusion of 'assembly', 'construction' or 'like project activities' from the ambit of 'Fees for Technical Services'. 3. That the appeal is within time as the order of the Ld. CIT(A) was received on December 18, 2020. 4. That the appellant may be allowed to add, supplement, revise, delete all or any grounds as raised hereinabove. ITA No.1619/Del/2022 All of the below grounds of appeal are without prejudice and notwithstanding each other. 1. That the order of the Learned Commissioner of Income-Tax (Appeals)-42, New Delhi [Ld. CIT(A)] is bad both in law and on facts of the case. 2. That the Ld. CIT(A) has erred in upholding the computation of taxable income of the Appellant at Rs. 1,15,39,186 as against the nil returned income. 3.1. That the Ld. CIT(A) has erred in upholding that consideration of Rs. 1,07,56,599/- received in relation to contract for offshore services for planning and supply of drawings and designs, is in the nature of 'Fees for Technical Services' under the provisions of secti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Works') in relation to set up of Kishanganga Hydro Electric Power Project. The contracts entered by the assessee was entered into in pursuance of the main contract entered between NHPC Ltd. and HCC for 330 MW (110 x 3) Kishanganga Hydro Electric Power Project in Jammu & Kashmir, India. In respect of HM Works, the scope of work of the assessee involved the following activities:- a) Offshore Supply of hydro mechanical plant & equipment. b) Offshore Services which primarily involve supply of drawings and design related to the Hydromechanical Plant & Machinery supplied to HCC. c) Onshore activities involving supply of indigenous parts etc. and rendering of onshore services. 3.1. The taxability of consideration received onshore services rendered by the assessee is not in dispute before us. 4. During the previous years' relevant to the above mentioned assessment years, the assessee received consideration from HCC towards offshore supply of plant & equipment as well as for offshore services (involving supply of related drawings design). Such receipts were claimed as non-taxable in India under the provisions of the Act as well as under the relevant....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... - 1,89,12,640/ 2012-13 - 1,62,20,418/ (Interest Income of 77,28,097/ 2014-15 - 3,26,09,861/- - 2015-16 20,550 4,64,78,944 Rs 3,33,245/ reduced to Rs 132898/ by Ld C1T(A) Total offshore supplies 1,58,96,915/- 2016-17 25,92014/(Interest Income) 14,91,66,928/ 24,89,914/ reduced to Rs 9,95,685/ by Ld CIT(A) Total offshore supplies 9,95,96,358/ 2017-18 Nil 3,49,48,713/ NIL 2018-19 Nil 1,15,39,186/ Nil Total 30,98,76,690/ 11,28,674/ Rs 11,54,93,273 From the above it could be seen that offshore services related to the Drawings and designs have been provided in all the assessment years under appeal whereas, there were no offshore supplies during the A Y. 2011-12, 2012-13 & 2014-15 Supplies of plants and equipments started from A.Y. 2015-16 only. However, there were no offshore supplies in the A.Y.2017- 18 & 2018-19 too though offshore services continued in these assessment years also. For offshore service total consideration received during the year was Rs 30.98 Cr whereas, the aggregate considerations for offshore su....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dered in connection with the installation are under a separate contract or are incidental to the execution of the contract of sale." vii. Delhi High Court decision in CIT v. Mitsui Engineering and Ship Building Co. Ltd. [259 ITR 248] is not applicable when payment for the offshore and onshore supply of goods and services was clearly demarcated and cannot be held to be a complete contract that has to be read as a whole and not in parts. viii In construing a contract, the intention of the parties is most relevant. The intention of the parties, must be judged from different types of services, different types ot prices, as also different currencies in which the prices are to be paid. ix. Under the provisions of Section 9(1)(vii) it is necessary that the services not only be utilized within India, but also be rendered in India Hon'ble Apex Court while analyzing the scope of taxation identified the following basic issues for consideration; "16 Two basic issues which, thus, arise for our consideration are : (a) the taxation of the price of goods supplied, by way of offshore supply price of which is specified in Ex. D, Clause 2.1; and (b) the ta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the prices to be paid in respect of offshore supplies and offshore services, onshore supply and onshore services, construction and erection. Payment schedule has also been separately specified in respect of each of the components separately. Sale and Service contract distinguishable , reliance upon earlier decision in State of Rajasthan Vs M/s Man Industrial Corporation Ltd (1969) 1SCC 567; " 35 In M/s Man. Industrial Corporation Ltd. (supra), this Court held : "16. Our attention was invited to a judgment of the Court of Appeal in Love v. Norman Wright (Builders) Ltd. [1944] 1 K.B. 484 In that case the respondents contracted with the Secretary of State for War to do the work and supply the material mentioned in the Schedules to the contract, including the supply of black- out curtains, curtain rails and battens and their erection at a number of police stations. It was held by the Court of Appeal that the respondents were liable to pay purchase-tax. Reliance was placed upon the observations made by Godiard, L.J. at p. 482: "If one orders another to make and fix curtains at his house the contract is one of sale though work and labour are not involv....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in different places, the principle of apportionment can be applied, to determine which fiscal jurisdiction can tax that particular part of the transaction. This principle helps determine, where the territorial jurisdiction of a particular state lies, to determine its capacity to tax an event. Applying it to composite transactions which have some operations in one territory and some in others, is essential to determine the taxability of various operations. 70. We would in the aforementioned context consider the question of division of taxable income of offshore services. Parties were ad idem that there existed a distinction between onshore supply and offshore supply. The intention of the parties, thus, must be judged from different types of services, different types of prices, as also different currencies in which the prices are to be paid. (Emphasis supplied) Thereafter, the Hon'ble Apex Court on the issue of taxability of receipts from offshore services held, "For Section 9(1)(vii) to be applicable, it is necessary that the services not only be utilized within India, but also be rendered in India or have such a "live link" with India that the entire inc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sfer of a capital asset outside India which was sought to be taxed by the Income Tax Authorities under Section 9(1)(i) of the Act. The subject matter of controversy was a transaction of sale and purchase of a share of an overseas company (capital asset) This capital asset was sold by a non-resident company to another non-resident company. The Revenue contended that the capital gains arising from this transaction was eligible to tax under the Act by virtue of Section 9(1)(i) of the Act as the transaction also implied transfer of control and assets of the Indian subsidiary of the overseas company, whose share had been sold and purchased. The Supreme Court observed that the last sub-clause of Section 9(1)(i) of the Act referred to income arising from "transfer of capital asset in India". The Court further explained that Section 9(1) of the Act created a legal fiction which had a limited scope and could not be expanded. Accordingly, transfer of capital asset situated outside India could not be taxed by virtue of Section 9(1)(i) of the Act. The expression "look through" had been used by the Supreme Court in this context. The relevant extract of the judgment is as under:- 88 The....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ll outside the scope of Section 9(1)(vii) of the Act, the link between the supply of equipment and services must be so strong and interlinked that the services in question are not capable of being considered as services on a standalone basis and are therefore subsumed as a part of the supplies. Given the fact that its Linde's case that the consideration for the supplies are separately specified, this aspect would require a closer scrutiny and determination of facts, which we do not propose to do in the present proceedings. (Emphasis supplied) Hon'ble Karnataka High Court in Aeg Aktiengesllschaft vs Commissioner Of Income- Tax: (2004) 267 ITR 209 (KAR) held that burden is on the assessee to show that the payment received were not for technical services; "10. Further, at paragraph 8 of the order, the Tribunal has observed that since the agreement provides for two different payments and the payments under consideration have clearly been termed in the agreement as "engineering fees", there is no reason for it to think otherwise than that the payment was actually made was not in the nature of "fee paid for technical services". It has also found that since ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that since the manufacture of equipment has to be in accordance with the design and drawing and without design and drawing no erection can be done and therefore the design, drawing technical data, etc., should be treated as cost of plant and machinery and have to be added to the cost. Even for the purpose of manufacture of equipment, technical services may have to be given. As noticed by us earlier, the format or the method of technical services may vary depending upon the nature of the work undertaken or entrusted. It is for the parties to agree upon what should be the nature of technical assistance or service to be rendered. In a given case, supply of design and drawing also could be in the nature of technical services. Supply of design and drawing cannot, in all circumstances, be treated as cost of plant and machinery. In a matter where installation of sophisticated machinery or where the manufacturing process is involved through the machinery, in that case, the supply of necessary designs and drawings, which would enable the working of the machinery, in our view, can be considered as technical services rendered. Just as information or advice tendered by a lawyer either could b....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., that is of no assistance to support the contention of Sri Sarangan that the payments were not made for rendering the technical services". As noticed by us earlier, the Tribunal has negatived the claim of the assessee that the payment made to the assessee by MECON should be construed towards the plant and machinery supplied by it on the ground that undisputedly there is a separate provision made in the agreement for making payment by MECON to the assessee towards cost of plant and machinery. The Tribunal also has not accepted the plea that a separate provision for payment towards plant and machinery and for engineering services was made in the agreement only for the sake of convenience In this connection, it is useful to refer to the observation made by the Tribunal at paragraph 8 ot the order, which reads: "8. The other contention of the assessee that the payments under consideration represented supplemental payments towards cost of the plant and machinery supplied by it may also be examined by us now. It is an admitted fact that there is a separate provision tor making of payment by the Indian company to the assessee towards such cost of plant and machinery The represen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and only on completion of all phases the scope of work envisaged in the agreement stood fulfilled. It is, therefore, incorrect to say that the agreement merely provided for giving advice to the appellant and there was no transfer of any design or knowledge. The reading of the agreement clearly indicates that the appellant company was to execute the water features at 22 Aurangazeb Road, New Delhi in accordance with the designs, drawings and technical specifications provided by the American company and the American company was to ensure that the features executed by the contractors at the site conformed to the drawings, designs specifications provided by the American company. From the agreement between the assessee and the foreign company, it is also quite clear that the American company was not only to provide the Schematic ideas but also to provide technical designs, drawings and information on the basis of which alone the Indian company was to execute and install the Water Features. Article 12(4)(b) provides that fees for included services shall include "services which makes available technical knowledge, experience, skill, know-how or consists of development and transfer of techn....
X X X X Extracts X X X X
X X X X Extracts X X X X
....laws cited by the assessee are not applicable to the facts of the case. In the case of Raymond Ltd. the payment was effected by the assessee to a company, Resident of U.K. The nature of activities contemplated in the contract between the Indian company and the U.K. company were totally different as the question was whether the amount so paid were tees tor technical services In that case although Tribunal held that services rendered were technical services; due to specific clauses of DTAA between U.K. and India, income was not taxable. Moreover, since there is a specific clause included in Article 12(4) of DTAA with the USA which defines the term fees for included services and further since the payment made under the agreement in the present case falls within the said definition, the assessee cannot get benefit of the decision of the Mumbai Bench which was rendered in the context of DTAA between India and U.K. As regards the decision of the Coordinate Bench of the IT AT, Calcutta in the case of CESC Ltd. we find that under the agreement the role of the foreign company was limited to review and give opinion to the Indian Resident rather than to design and direct the project. On these....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nder: "2. Scope of Work: 2.1 Planning of Hydro-Mechanical Plant & Machineries -The Sub-Contractors Scope of Works shall Include but not limited to the following: SL. No Item Description Contract for Offshore planning Design and Engineering SL. No Item Description Contract for Offshore planning Design and Engineering 1 Review of Existing Data/Studies • Review of technical parameters for HM Works is specified in the Main Contract. 2 Overall and detailed planning of the project • Providing necessary input to contractor to preparation and submission of "Overall Planning Report for this project, for fully defining the HM works, accompanied by all necessary layout drawing. This report shall form the basis 3 Detailed Design • Preparation & submission for review / approval or the Contractor Owner of design briefs / design memorandum along with layout drawings of all components of the HM Works, as part of the entire project. • Preparation & submission for review/approval of the Contractor/Owner of design criteria, arrangement drawings and specifications of al HM Works. • Coordinatio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Hydro Mechanical Plant and Machinery Overall Design and Engineering work as per contract No 1 (contract for services) Design and engineering work as per Contract No 1 related to Plant and equipments to be supplied offshore (refer Contract No 2) Design and engineering work as per Contract No 1, related to Plant and equipments to be supplied onshore (refer Contract No 3) A The scope of work under this section shall include and cover provision of all labour, plant, materials and performance of all Works necessary for: a) Detailed Specifications b) Detailed Design & detailed drawings Fabrication drawings of all Hydro-mechanical Plant & Machinery as per scope of supply given in Article 2.7 of Project Profile (Vol. I) and Part - II of Owner's Requirements (Vol. III) including all necessary embedded parts, spares and other works necessary for proper completion and functioning of Works including any revisions and amendment thereto defined in the Main Contract except as excluded from the scope of Subcontractor under HM Works as defined under SI. No. 2.0 below. The scope of work under this section shall include and cover provision of all labour, plant, m....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... more fully defined by the subcontractor in the documents to be submitted and shall include the design & engineering for equipment plant and material and of all incidentals not specified but are necessary for proper completion and satisfactory functioning of works and guarantee of the following permanent equipment, along with all auxiliary equipment in the designated location of the project as specified in the following sections. The description in the following section as well as the Owner's requirement Volume III, Part-II, does not specify complete details of Plant & Machinery. However, the subcontractor shall design the equipment which will meet in all respects, the requirements in regard to performance, durability and satisfactory operation. All the equipment designed shall conform to the relevant Indian Standard Wherever Indian standards are non-existent or silent, relevant international Standards, (as agreed The broad scope of works to be more fully defined by the subcontractor in the documents to be submitted and shall include the design & engineering for equipment plant and material and of all incidentals not specified but are necessary for proper completion and satisfac....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 9.5 m (H) b) Three sets of embedded parts and anchorage for radial gates including dogging arrangement Low Level Spillway Stoplog Equipment i) One set of stoplog for opening size 8.0 m (w) x 12.0 m (H) j) Three sets of embedded parts Including dogging arrangement and storage grooves. k) One no Lifting beam for spillway slop log. ci) One no, travelling gantry crane for handing the sloping along with crane, rails, embedded parts etc. Crest Spillway Vortical Gatos e) Two nos. vertical lift gates for opening size 5.25 m (w) x 1 2 m (H) f) Two sets of embedded parts including latching/clogging arrangement g) Two sets of suitable operating mechanism for gates Low Level Spillway Stoplog Equipment a) One no, travelling gantry crane for handing the sloping along with crane, rails, embedded parts etc. Crest Spillway Vortical Gatos a) a) Two sets of suitable operating mechanism for gate Low Level Spillway Stoplog Equipment a) One set of stoplog for opening size 8.0 m (w) x 12.0 m (H) b) Three sets of embedded parts Including dogging arrangement and storage grooves, c) One no Lifting beam for spillway slop log. Crest Spill....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ned under Clause 1.1.4 of Part II of Volume 111 viz. a) One no slide type gate for opening size 3.5 in (w) x 5.0 m(H) b) One set of embedded parts including latching arrangement Tall Race Stoplog Equipment as defined under Clause 1.1.5 of Part II of Volume III viz a) One set of stoplogs for opening size of 4.0 m (w) x 7.0 in (H) b) Three. sets of embedded parts including dogging arrangement c) One no Lifting beam to handle tail race stoplog. (d) One travelling gantry crane for handing the stoplogs along with crane rails and Tall Race Stoplog Equipment as defined under Clause 1.1.5 of Part II of Volume 111 viz a) One travelling gantry crane for handing the stoplogs along with crane rails and Tall Race Stoplog Equipment as defined under Clause 1.1.5 of Part II of Volume III viz a) One set of stoplogs for opening size of 4.0 m (w) x 7.0 in (H) b) Three, sets of embedded parts including dogging arrangement c) One no Lifting beam to handle tail race stoplog. Automatic Reservoir Monitoring and Control System as defined under clause Ch. 1,1.6 of Part 11 of Volume III PLC based remote control system for opera....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se 1.1.8 of Part of Volume III viz. Part II of Volume III viz. p) Three nos. hinged type gates for opening size 2.5 m (w) x 2.5 m (H) q) Three sets of embedded parts including locking device r) Three sets of embedded steel drain pipes along with valves and pressure gauge. One no. DG Set (500 kVA, 415 V) as defined under Clause 1.1.9 of Part II of Volume 111 a) One D. G set of 500 kVA, 415 V, 50 Hz output three phase synchronous type along with all accessories, equipment, instrument and wiring for DG set. One no. D.G Set (500 kVA, 415 V) as defined under Clause 1.1.9 of Part II of Volume 111 a) One D. G set of 500 kVA, 415 V, 50 Hz output three phase synchronous type along with all accessories, equipment, instrument and wiring for DG set. Local Control Panel as defined under Clause 1.1.10 of Part II of Volume III Local Control Panel as defined under Clause 1.1.10 of Part II of Volume III Local Control Panel as defined under Clause 1.1.10 of Part II of Volume III Main Distribution Board in Dam Area including cables and cabling to local starter cum control panel of various HM equipments....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hieved, equipment to be deployed, procedure to be followed including site inspections, quality control checks, in-site performance testing etc. Installation and Commissioning Procedure (four sets) as defined under Clause 1.1.13 of Part II of Volume 111 Four sets of installation and commissioning procedures indicating the supervisory services to be provided, tolerances to be achieved, equipment to be deployed, procedure to be followed including site inspections, quality control checks, insite performance testing etc. Installation and Commissioning Procedure (four sets) as defined under Clause 1.1.13 of Part II of Volume 111 Four sets of installation and commissioning procedures indicating the supervisory services to be provided, tolerances to be achieved, equipment to be deployed, procedure to be followed including site inspections, quality control checks, insite performance testing etc. -Operation and Maintenance Manual as defined under Clause 1.1.14 of Part II of Volume III s) 20 sets of operation and maintenance manual containing drawings, all related catalogues and brochures for plants and machinery, handling procedures for assemblies and sub asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Hon'ble Bench after considering the obligations under service and supply have come to a firm conclusion that the obligations under 2 contracts are not disjoint and any default leading to the cancelation of contract of supply will lead to the cancelation of the other contract too in addition to recording a finding that drawing and designs supplied in that case were specifically related to the supply of plant and equipments. It is therefore submitted that the said decision is not applicable without examining the facts in the light of principles of law laid down by the Hon'ble Supreme Court in the case of Ishikawajma Harima Heavy Industries Ltd. In the present case, it is undisputed fact amply demonstrated from the contract agreement in the above paras that drawing and designs are related to the onshore supply of plants and Machinery too and in fact offshore supply of plant and Machinery was a minuscule part of the total contract value. The contracts were predominantly for provision of offshore services in the form of supply of drawings, designs and basic engineering. Ottshore supply of plants and Machinery was only incidental to the provision of services and not vice versa a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s based on November 2005 price levels. It was submitted that provisions of section 44BBB of the Act deals with the taxability of income in relation to such activities and that one of the conditions prescribed in section 44BBB of the Act is that the power project must be approved by the Central Government. The applicability of provisions of section 44BBB of the Act had been taken by the assessee vide Ground No. 9 and that similar ground was also taken before the ld. CIT(A). Since this approval papers could not be placed on record by the assessee before the lower authorities, it is now placed in the form of additional evidence. It was also submitted that this document in any case is available in public domain and that the same is placed on record only to assist the bench for better appreciation of facts. The ld. DR before us did not raise any objections for admission of these additional evidences by the bench. Either way, the copy of sub-contract No. SC/100/KGHEP/004-1 dated 12.6.2009 between HCC and assessee for HM works excluding pressure shaft liners (off shore services) for Kishanganga Hydroelectric Project and copy of sub-contract No. SC/100/KGHEP/004-2 dated 12.6.2009 between H....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ved by the assessee under the contract for offshore supply of plant & equipment during the previous years' relevant to abovementioned assessment years, from HCC is chargeable to tax in India as per the provisions of the Act as well as under the India Germany Treaty? b) Whether the amount received from HCC under the contract for offshore services is chargeable to tax as per the provisions of the Act as well as under the India Germany Treaty? 12. It is not in dispute that during the relevant years, the assessee had supplied plant and equipment to HCC which were designed and manufactured outside India. The title to the said plant and equipment was duly passed on to the customer outside India on FOB basis. The consideration for such offshore supplies was also received outside India in foreign currency either through letter of credit or through bank transfer. All activities such as manufacturing, fabrication, designing etc. of plant & equipment has been undertaken outside India. The assessee in order to substantiate the fact that the transfer of title and risk had happened outside India had submitted the proof together with documentary evidences by enclosing the copy of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o hold that the offshore supply is taxable in India. This has to be looked into from the size of the project undertaken by the assessee by appreciating the fact that several machineries were supplied at different point of time from outside India and for all the machineries that were supplied, the title had been transferred outside India. With regard to the Defects Liability Clause addressed by the Ld. AO and consequentially conclude that the ownership in the Plant and Equipment is transferred subsequent to the Defects Liability Period, it had to be understood in a practical manner that the Defects Liability Clause would be incorporated in every contract to take care of a contingent event. This has got nothing to do with the passing of title to the equipment. We find that this aspect is also addressed by the Hon'ble Jurisdictional High Court in the case of DIT vs LG Cables Ltd reported in 197 Taxman 100 (Del) by observing as under:- Undue importance cannot be attached to the fact that the agreement imposed on the assessee company the obligation to handover the equipment functionally completed. This obligation has been rightly construed by the Tribunal to be in the nature of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....come from such sale is not liable to tax in India. Similar view is also expressed by the Hon'ble Jurisdictional High Court in the case of National Petroleum Construction vs DIT reported in 66 taxmann.com 16 (Del). 16. In view of the aforesaid observations and respectfully following the various judicial precedents relied upon hereinabove, we hold that no part of consideration received outside India for offshore supplies of plant and equipment and spares could be deemed to accrue or arise in India as per section 9 of the Act in the hands of the assessee. Admittedly , there is no existence of any Permanent Establishment (PE) of the assessee in India. Such consideration would only be in the nature of business income not attributable to PE in India and hence not taxable under Article 5 read with Article 7 of the India Germany DTAA. In this regard, it would also be relevant to reproduce the provisions of Protocol of India Germany Treaty for better appreciation of law :- PROTOCOL The Republic of India and the Federal Republic of Germany have agreed at the signing at Bonn on 19th June, 1995 of the Agreement between the two States for the avoidance of double taxation with respect t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion and maintenance of the Plant. The offshore services contract as referred above, thus involve supply of drawings and design that are required for the manufacturing of the imported plant & equipment, proper installation of such equipment and synchronisation of the same with civil construction as well as with the locally procured equipment and parts. These facts are not in dispute before us. 19. The assessee's case is that the entire work related to the drawings and designs were undertaken outside India and that the property both in the designs and drawings as well as in the equipment had passed outside India. The consideration for such drawings and design is also received outside India in foreign currency. The Ld. AR submitted that offshore services are integral part of the offshore supply of plant and equipment and therefore the consideration received for offshore services should be given the same treatment of offshore supplies as both were carried out outside India and consideration received in foreign currency outside India and accordingly no part of it would become taxable u/s 9 of the Act as no income thereon shall be deemed to accrue or arise in India and also the same ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ricably linked with the plant and equipment supplied by the assessee. We find that the similar issue had been addressed by the Hon'ble Jurisdictional High Court in the case of Linde AG, Linde Engineering Division vs DIT reported in 365 ITR 1 (Del) wherein it was held that if design and engineering is inextricably linked with the manufacture and fabrication of the material and equipment to be supplied from overseas, and form an integral part of the said supply, then the services rendered would not be amenable to tax as Fees for Technical Services. 23. We find that the lower authorities had not disputed the position that the entire work related to the designs was carried out outside India and that the ownership in such designs was passed outside India. The lower authorities had relied on the provisions of section 9(1 )(vii) of the Act as well as Article 12 of the DTAA to come to the conclusion that the consideration received by the assessee is in the nature of fees for technical services and, therefore, the amount would be chargeable to tax in India on a gross basis under both the Act as well as the DTAA. In coming to this conclusion, the lower authorities had relied on the judgme....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and equipment had to be considered as non-taxable in India, being part of supply of plant and equipment. Moreover, the decision of SMS Concast AG supra had also considered the aspect of entering separate contracts for supply of equipment and offshore services but the same had been executed on the very same date. 25. We find that the Ld. DR argued that the value of contract for offshore services is more than the contract value of offshore supply of plant and equipment. This was buttressed by the Ld. AR by submitting that the setting up of HM works for the power project mainly involve supply of gates, stop log equipment, control panel, automatic reservoir monitoring and control system, remote control system, cables, de-icing / heating arrangements etc. The Ld. AR before us submitted that the equipment supplied by the assessee vis a vis the complete plant for power project may not be sizeable, however the drawings and designs to be supplied by the assessee is not only required for the manufacture of such equipment supplied but also to integrate the same with the entire plant. The importance of drawings and design is increased with the fact that functioning of the equipment supplied....
X X X X Extracts X X X X
X X X X Extracts X X X X
....India but the mere existence of the PE is not sufficient to bring to tax the consideration of the nature of Business Profits. Paragraph 1 of Article 7 postulates that it is only so much of the profits as are attributable to the permanent establishment that could be brought to tax. We find that in the present case, the entire work of preparing the designs and drawings is carried out outside India, the question of bringing to tax any part of the consideration in accordance with Article 7 cannot be sustained. This aspect of the matter is concluded by the judgment of the Hon'ble Supreme Court in the case of Ishikawajima-Harima Heavy Industry Ltd vs DIT reported in 288 ITR 408 (SC), wherein the Hon'ble Apex Court laid down the principle that if the permanent establishment had no role to play in the rendering of the offshore services, then, in that event, the consideration for the services cannot be brought to tax in terms of Article 7 of the DTAA. Similar views were expressed by the Hon'ble Supreme Court in the case of CIT vs Hyundai Heavy Industries Co. Ltd reported in 291 ITR 482 (SC). Further, we find that as per the Protocol to the DTAA, when technical services were rendered outside....