TaxTMI 
TaxTMI 
TaxTMI 
2024 (7) TMI 701
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....e learned DCIT/DRP failed to appreciate that the receipts from the Offshore Supply Contracts are not taxable in India. 4) The learned DCIT/DRP erred in charging interest under section 234A of Rs. 4.57,92,447/-. 5) The learned DCIT/DRP erred in charging interest under section 234B of Rs. 38,92,35,799/- Relief Claimed Your appellant prays that 1. The amount received under the offshore supply contracts is not taxable in India The appellant craves leave to amend or alter any of the above grounds or add a new ground, if and when necessary." 2. The assessee is a joint stock company under the Ministry of Atomic Energy, Moscow, Russian Federation engaged in the business of setting up of power projects worldwide which includes activities of construction, erection of plant and machinery and testing, commissioning of power projects. For the year under consideration the assessee filed the return of income on 10.02.2021 declaring a total income of Rs. 139,30,94,700/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer (AO) passed a draft assessment order by making an addition of Rs. 3267,27,22,775/- towards receipts....
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....f working Documentation KK 3 & 4 3,96,42,00,675 (c) Total 4,99,18,15,259 5. The assessee has also offered the income received from contact consulting service for post warranty period at Unit 1 & 2 aggregating to Rs. 18,17,88,448/- as fees for technical service and also the income from first priority design work for Unit 5 & 6 for Rs. 70,83,45,236/-. During the course of assessment, the AO noticed that the assessee has received a sum of Rs. 3267,27,22,775/- as receipt by way of offshore supply contract. The AO was of the view that the said receipt is taxable in India and should be part of the income offered to tax under section 44BBB of the Act. The AO though made note of the fact that the Co-ordinate Bench in assessee's own case for AY 2009-10, 2010-11, 2012-12, 2013-14, 2014-15 & 2015-16 has held that the receipts towards supply contracts do not form part of the business receipts for computation of income under section 44BBB of the Act made the addition towards the same for the reason that the Department is in appeal before the Hon'ble Bombay High Court and the issue should be kept alive for the year under consideration. The DRP also confirmed the addition made by ....
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....ontractual terms and cited case laws. Both Ld. AR and DR have adduced their arguments which are well reasoned and supported by various judicial pronouncements. 14.2 First of all, we note that the assessee has entered into four supply contracts pursuant to master IGA entered into between the two governments: No. Contract No. Description 1. 77-252/20500 dated 12/02/2002 Delivery of equipment with long manufacturing cycle and first priority equipment and materials 2. 77-252/22600 dated 23/08/2002 Delivery of Equipment and material 3. 77-252/22700 dated 23/08/2002 Sale of Material and equipments from third countries 4. 77-252/26000 dated 7/10/2003 The supplies from CIS countries and functions to performed by the contractor for offshore supplies We find that all the four contracts have more or less similar terms and conditions. A perusal of terms of contract No. 77-252/20500 dated 12/02/2002 reveals that as per Article 2.1, the assessee was required to make deliveries on 'FOB Russian Port basis'. As per Article 3.2, the contractee was required to carry out at his own expenses approximate transportation, loading/unloading, delivery etc. to t....
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.... one foreign company namely ASE which has entered into the agreement with the Indian company and it is not a case of Consortium of foreign companies and hence, the said instructions, in our opinion, do not apply to the present case. 14.4 Proceeding further, to understand the nature of Section 44BBB, it would be prudent to reproduce the relevant extract of this Section as follows: 'Special provision for computing profits and gains of foreign companies engaged in the business of civil construction, etc., in certain turnkey power projects. 44BBB. (1) Notwithstanding anything to the contrary contained in sections 28 to 44AA, in the case of an assessee, being a foreign company, engaged in the business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government in this behalf, a sum equal to ten per cent of the amount paid or payable (whether in or out of India) to the said assessee or to any person on his behalf on account of such civil construction, erection, testing or commissioning shall be deemed to be the profits and gains of such business chargea....
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....ngaged only during construction or erection or testing or commissioning of plant and machinery in connection with a turnkey power project would be in a better position than a person who supplies the plant and machinery (which is otherwise not taxable) along-with such activities. The only manner in which such absurdity could be avoided by applying the provisions of section 44BBB only to those receipts which are chargeable to tax under regular charging provisions of the act. Reliance has been placed on the decision of Hon'ble Supreme Court in CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482] wherein the court approved computation of income arising from installation and commissioning receipts as per Section 44BB of the act, while simultaneously holding that receipts under the supply contract was not taxable. Hence, as per Hon'ble Supreme Court also the provisions of section 44BB of the act, which is one of the section dealing with presumptive taxation, would apply only to such income which is chargeable under the provisions of the act. Further, Reliance was also placed on the decision of third member of Delhi bench of the tribunal in Saipem S.P.A. v. Dy. CIT [ 2010 ....
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.... entire exercise of deciding the question of accrual of income or the place of accrual would become inoperative. There would be no need to refer to the provisions of section 5 or for that matter section 9. In considering the background leading to the introduction of section 44BB, this was never the intention of the legislature and provisions of sections 5 and 9 were always meant to operate and remain effective online statue book. Section 5 is the charging provision and no income can be brought to tax unless it falls within the scope, of the said section and the use of the expression "subject to other provisions of the Act" in section 5 would mean that if any other section operates to exclude from the total income of any person any income, which otherwise falls within the broad framework of his total income as laid down in section 5 such section would prevail. To emphasis, the provisions of section 44AB vis-a vis the legislative intent only mean that the replace the system of computation of income earlier envisaged by application of the provisions of sections 28 to 41 and sections 43 and 43A, but the provisions of section 5, which is the charging section would remain intact and thes....
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.... in Hyundai Heavy Industries Co. Ltd. (supra). Similar view has been taken by Bombay High Court in DIT v. Sonat Offshore Drilling Inc. [IT Appeal No. 508 of 2007, dated 16-9-2008] and also in Vodafone India Services (P.) Ltd. v. Union of India [2014] 50 taxmann.com 300/368 ITR 1/[2015] 228 Taxman 25 ( Bom .). Further, the Machinery Section of the act cannot be read de-hors charging section. The act has to be read as integrated manner. Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294, held that: "No doubt there is a qualitative difference between the charging provision and a computation provision. And ordinarily the operation of the charging provision cannot be affected by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is pressed on the charging provision. That pertains to the fundamental integrity of the statutory scheme provided for each head." AR further contended that reliance placed by DR on the decisions of Uttarakhand High Court in Sedco Forex International Inc.(supra) and Halliburton Offshore Services Inc.(supra) are contrary to vi....
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....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. Explanation 1-For the purposes of this clause- (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operation carried out in India; (b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export ; .............. .............. .............. Explanation 4.-For the removal of doubts, it is hereby clarified that the expression "through" shall mean and include and shall be deemed to have always meant and included "by means of", "in consequence of" or "by reason of".' We find that Explanation 4 has clarified the meaning of expression of the word 'through'. The word 'through' as been used in Article 7(1) of the DTAA and as per the Article 3(2) of the said trea....
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....2 In the case of Ishikawajma-Harima Heavy Industries Ltd. (supra), the assessee along with other consortium partners entered into a Turnkey Project which involved both offshore supply/services as well as onshore supply/services and construction and erection to be carried out by the non-resident assessee and assessee received consideration under all the heads. The title in goods was to pass outside India but the contractor was required to retain care, custody and control of such equipment and materials and exercise due care even after they were transferred to the buyer. The supplier had a 'business connection' for the purposes of the act and a 'permanent establishment' for the purposes of the DTAA in India. The apex court observed as under:- "17. The contract is a complex arrangement. Petronet and Appellant are not the only parties thereto, there are other members of the consortium who are required to carry out different parts of the contract. The consortium included an Indian company. The fact that it has been fashioned as a turnkey contract by itself may not be of much significance. The project is a turnkey project. The contract may also be a turnkey contract, bu....
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....of the jurisdiction on actual basis. If that be so, it may not be correct to contend that the entire income 'accrues or arises' in each of the jurisdiction. The Authority has proceeded on the basis that supplies in question had taken place offshore. It, however, has rendered its opinion on the premise that offshore supplies or offshore services were intimately connected with the turnkey project." In the above judgment the Apex Court referred to its own decisions in the case of Anglo- French Textile Co. Ltd. v. CIT [1954] 25 ITR 27 (SC), and also ITO v. Sriram Bearings Ltd. [1997] 224 ITR 724 (SC). After detailed discussion, the Hon'ble Court summarized its conclusion in respect of the offshore supply contract in the following manner: "79. We, therefore, hold as under : Re : Offshore Supply : (1) That only such part of the income, as is attributable to the operations carried out in India can be taxed in India. (2) Since all parts of the transaction in question, i.e. the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India. (3) The principle of apportionment, wherein t....
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....shore supply contracts, which have been entirely performed outside India. The revenue has nowhere pointed out which part of the operation relating to offshore supply contracts is carried out in India. With respect to attribution of profits to a permanent establishment it has been held that the state of the permanent establishment can tax only those profits which are economically attributable to the permanent establishment i.e. which result from the activities of the permanent establishment or which arises economically from the business carried on by the permanent establishment. In the present case, offshore supply contract has nothing to do with the activities of the permanent establishment. In the above-cited case, the court was concerned with India Japan treaty where article 7(1) for attribution of profits which referred to profits 'directly or indirectly' attributable to the permanent establishment. The phrase 'directly or indirectly' widens the scope of attribution of profits. Whereas in the present case 'India Russia DTAA' is involved and Article 7(1) of the treaty refers only to attribution simplicitor and do not use the term 'directly or indirectl....
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....tax in India. The instant case, in fact, in our view stands on a better footing as two separate contracts have been entered into between the parties, albeit on the same day, one for the offshore supply and the other for the onshore services, but even assuming that both these contracts need to be read together as a composite contract, the issue in controversy is nevertheless squarely covered by the decision of the Supreme Court in Ishikawajma Harima Heavy Industries Co. Ltd. 's case (supra) . It is beyond dispute that PGCIL had issued irrevocable letter of credit in favour of the respondent assessee and in paragraph 31.2 agreed that the property in the goods will pass to the buyer (PGCIL) as and when the respondent assessee loads the equipment onto the mode of transport for transportation from the country of origin. The stipulation in the second agreement (Erection Contract) relating to certain performances by the respondent assessee including port handling, custom clearance, transportation, insurance, handling on site, unloading at transportation site, testing and commissioning to the satisfaction of the buyer are in a separate agreement for a separate consideration which is cl....
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....he goods were loaded upon the mode of transfer to be used to convey the plant and machinery, i.e., the shipping vessel, even prior to the goods reaching the high seas. Once the title was transferred in the aforesaid manner, there was no provision either in the agreement or in law providing a recourse to the respondents to take back the title. 36. With regard to the setting up of a permanent establishment also, the permanent establishment of the respondent in the instant case, as in the case of Ishikawajima Harima Heavy Industries Co. Ltd. (supra), had no role to play in the execution of the offshore supply contract and as a matter of fact was set up for the sole purpose of enabling the performance of the onshore services contract. 37. The contract, however, in the instant case as in the case of Ishikawajma Harima Heavy Industries Co. Ltd. (supra) would be said to have been successfully performed only after the satisfactory commissioning and erection of the plant and equipments. Since the permanent establishment was not at all involved in the transaction of the offshore supply of equipment, the existence of the permanent establishment [which as held in Ishikawajima Harima Heavy ....
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....ere the equipment was manufactured. As per the judgment of Supreme Court in Ishikawajima Harima Heavy Industries Ltd.'s (supra), such agreement would not be taxable in India. In Ishikawajima Harima Heavy Industries Ltd.'s case (supra ) the Supreme Court held that no part of profit arising from the supply of equipment outside India would be chargeable to tax in India. Mr. Dastur is right in his analysis of the present case on the basis of the ratio of Ishikawajima Harima Heavy Industries Ltd.'s case (supra) inasmuch as : (i) In both the cases the property in the equipment passed outside India and in the assessee's case even the risk passed outside India; (ii) In the case of Ishikawajima Harima Heavy Industries Ltd's case (supra) even though it was to perform onshore services including the erection and commissioning of the equipment supplied by it, nevertheless, the Supreme Court held that no part of the profit on the offshore supply of the equipment was taxable in India as a consequence of the performance of such activities in India. In the assessee's case the assessee does not perform any service in India in connection with the installation of the equipm....
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.... due to the acceptance test not being complied with, Article 19 of the Supply Contract provided for damages. Thus, the taxable event took place outside India with the passing of the property from seller to buyer and acceptance test was not determinative of this factor. 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 Skoda Export Prabha (supra), the Andhra Pradesh High Court dealt this issue in the following manner: "We may also mention that learned standing counsel for the Department challenged the finding of the Tribunal that the sale of machinery was completed outside India; According to him, the sale was completed only in India, inasmuch as the assessee was entitled to inspect and satisfy itself about the quality and standard of the machinery supplied. We do not see any substance in this contention. The various clauses in the agreement referred to above make it clear that the sale of machinery was F. O. B., European port, and the time of fulfilment of delivery was prescribed as the date of the bills of lading. The payment was also to be made outside India. The agreement fur....
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....ot result the income accruing in India. The execution of an overall agreement is prompted by purely commercial considerations as the India Cellular Operator would be desirous of having a single entity that he could liaise with, a fact which even the Board has noted in its Instruction No.1829 dated 21st September, 1989. Although Instruction number 1829 stands withdrawn by virtue of Circular No.7/2008 dated 22nd October, 2009, such withdrawal can have no retrospective effect and the principle laid down in Instruction No. 1829 must continue to govern the assessment for the relevant year. 44. The aforesaid analysis will bring forth the legal position that the place of negotiation, the place of signing of agreement, or formal acceptance thereof or overall responsibility of the assessee are irrelevant circumstances. Since the transaction relates to the sale of goods, the relevant factor and determinative factor would be as to where the property in the goods passes. In the present case, the f inding 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 establ....
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....a Heavy Industries Ltd.'s case (supra), both the title and consideration passed outside the taxable territory and very importantly, it was found that it was not a composite contract, nor was there any involvement of the PE in the transaction. It was further factually found that the contract was a divisible one segregating the supply segment and service segment, and that by agreement the parties had decided when title passed. We find that in his case, after holding that the splitting of contract into four and assigning the onshore work to a subsidiary was a façade, the Hon'ble Madras High court not only held that the assessee had a PE in India in the form of project office but also held that the assessee's income from offshore supply was taxable in India. We find the same also distinguishable on the ground that in this case, there were allegations of loading of supply contracts to compensate for services. Further, Tribunal, accepting the assessee's contentions, had held that 25% of total receipts were attributable to operations performed outside India and hence, not chargeable to tax. Moreover, this decision has been distinguished by Delhi High Court in L.G.....
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....sponsibilities envisaged under the Supply Contract and the Erection Contract performed by the respondent through its head office and permanent establishment. Ansaldo Energia SPA's case (supra) is thus clearly inapplicable to the fact situation in the present case and is therefore of no avail to the revenue." 14.18 DR has further relied upon Mumbai ITAT decision in Orpak Systems Ltd. (supra) where it was has held that even though the consideration in respect of offshore supply was received outside India in foreign exchange, the same was taxable in India as the contract was a composite contract entered by the assessee in single bid and the assessee being responsible for the entire project till the commissioning stage. After holding that the sub-contracting of onshore installation work to a third party by the assessee was only a method of execution of a composite contract, the Hon'ble Tribunal in this case not only held that the assessee had PE in India, it also held that the assessee's income from offshore supply was taxable in India. But we find the same also distinguishable on the ground that assessee was awarded a contract for supply, installation, implementation and....
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....e Bench, we hold that for the year under consideration also the impugned income do not form part of business receipts for computation of income under section 44BBB of the Act. 11. During the course of hearing, the ld. DR made a without prejudice submission that the service contract income of the assessee should not have been tax under section 44BBB of the Act but should have been taxed as fee for technical service under section 91(1)(7) of the Act. The ld. DR in this regard presented a detailed written submission and also arguments during the course of hearing. The ld. DR prayed that the issue should be set-aside to the AO with regard to the applicability of section 44BBB of the Act in assessee's case. 12. On the other hand, the ld. AR submitted that the revenue has been accepting the taxability of income from service contract under section 44BBB of the Act from AY 2009-10 and even for the year under consideration, the AO has considered the income from supply contract also as taxable under section 44BBB of the Act. The ld. AR therefore, submitted that the revenue has never disputed the taxability of the receipts under section 44BBB of the Act and that the DR cannot raise this....