TaxTMI 
TaxTMI 
2024 (7) TMI 701
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....tion 44BBB and consequently liable to tax in India. 3) The 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 Assessin....
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....) (a) For deputation of the contractor's specialist at site KK 3 & 4 1,02,76,14,584 (b) For elaboration of 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 ....
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....the AY 2007-08 (supra) is extracted below: "14.1 We have heard the rival contentions and perused material available on record including contractual 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 o....
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....rnkey basis with certain specified features and covered specific situations in which there is actually a consortium of foreign companies. But in the present case, we find that there is only 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 o....
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.... as the case may be, there is no reason why income relatable to supply of plant and machinery should also be taxed under the section where the assessee, as in the present case, has undertaken such function. Therefore, an assessee engaged 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 presumpt....
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....en by the AM renders otiose/redundant the provisions of section 5 inasmuch as all assessees engaged in the business of exploration of mineral oils would have their income computed for taxation purposes only with reference to section 44BB and the 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 m....
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....the order of the first appellate authority and dismiss ground No. 1 of the Revenue.' This decision has been approved by Bombay High Court in ITA No. 1328 of 2011 order dated 18/03/2014 wherein the Bombay High Court has placed reliance on the decision of Supreme Court 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. Tha....
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....hich are deemed to accrue or arise in India. The relevant of Section 9 is extracted below: 'Income deemed to accrue or arise in India. 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. 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....
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....ontracts were not dependent upon service contracts. This being the factual position, we find that explanation 1(a) comes into play in the instant case. Hence, the income which is deemed to accrue/arise in India shall be only with respect to those business operations that are carried out in India. 14.11 In the light of above discussion, we proceed to analyze the various case laws relied upon by both counsels. 14.12 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:-....
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....ant part in assessment of tax. Tax is levied on one transaction where the operations which may give rise to income may take place partly in one territory and partly in another. The question which would fall for our consideration is as to whether the income that arises out of the said transaction would be required to be proportioned to each of the territories or not. 27. Income arising out of operation in more than one jurisdiction would have territorial nexus with each 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 of....
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....be performed as per the said contract into several components based on the place where the operations were performed. It was concluded that the taxability of income arising from a receipt in India would depend upon the fact whether any operation in connection with the earning of such received was carried out in India. Applying the said principle to the assessee's case, we find that the assessee stand on a better footing as it has separate supply and service contracts, the terms of which are independent of each other. The impugned receipts were relatable to the offshore 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 cont....
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.... authoritative pronouncement of the Supreme Court in the case of Ishikawajma Harima Heavy Industries Co. Ltd. v. Director of Income tax [2007] 288 ITR 408 wherein it has been held that offshore supplies are not taxable even in the case of a turnkey contracts as long as the title passes outside the country and payments are made in foreign exchange. .............. 27. Applying the aforesaid law enunciated by the Supreme Court in the case of Ishikawajma Harima Heavy Industries Co. Ltd. (supra), there can be no manner of doubt that the offshore supplies in the instant case are not chargeable to 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 o....
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.... each other, inasmuch as the consideration in the case of offshore supply contract was received outside India through the mechanism of a Letter of Credit in foreign exchange while the consideration for onshore contract was received, for the most in Indian rupees with a nominal amount in foreign currency, the latter being for training charges. The title to the equipment supplied from outside India was transferred in favour of PGCIL outside India. In the case of Ishikawajima Harima Heavy Industries Co. Ltd. (supra), it was transferred on the high seas but in the instant case, it was transferred in the country of origin itself as soon as the 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. (s....
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....s well as installation and commissioning of the two and also after sale services. It entered into agreements with various Cellular Operators and entered into three contracts with them namely (1) Overall Agreement, (2) the Supply of Agreement and (3) the Installation Agreement. 37. In the present case, we are concerned with the income earned by the assessee as a result of supply of hardware and software licence under the Supply Agreement. If this Supply Agreement is taken as standalone Agreement, the facts on record show that such supplies under this agreement were made overseas. The property in goods had passed on to the buyer under the Supply Contract outside India where 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 cas....
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....ntinues to be in force for the assessment year relevant to the present appeals, the existence of an overall agreement should make no difference to the taxability of the equipment supplied by the assessee. ............. 41. We, find that the terms of contract make it clear that acceptance test is not a material event for passing of the title and risk in the equipment supplied. It is because of the reason that even if such test found out that the system did not conform to the contractive parameters, as per article 21.1 of the Supply Contract, the only consequence would be that the Cellular Operator would be entitled to call upon the assessee to cure the defect by repairing or replacing the defective part. If there was delay caused 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 (....
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.... in the seller if on an examination by the buyer he finds them not to be in accordance with the contract. It is not necessary to consider this aspect because in any case the ascertainment of the obligations under the contract will determine to what extent the transfer of property is subject to a condition or if the property passes conditionally whether the ownership left in the seller is the reversionary interest in the property in the event of the conditions subsequent operating to restore it to him. In any case where the performance of some condition is imposed upon the buyer but is not made a condition of the transfer of the property, the property once passed is not revested in the seller by the buyer's subsequent default." 43. Thus, Overall Agreement does not 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 Oc....
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....certained from the terms of the contract. AAR held that income from offshore supply of goods was taxable in India. But as rightly pointed by Ld. AR, the decision was rendered by 'Authority for advance Ruling' and as per Section 245S, the decision is binding only on the applicant and also in respect of those transactions in relation to which ruling has been sought. 14.17 DR contended that Madras High Court in Ansaldo Energia Spa v. (supra) distinguished the case of SC in Ishikawajma-Harima Heavy Industries Ltd. (supra) and held as under: "Therefore, what follows is, if a contract is a composite contract in spite of the apparent demarcation into separate parts, the mere fact that for offshore supply the title passed outside India alone will not decide taxability. In Ishikawajima Harima 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 a....
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....was a specific allegation that the contract was 'loaded on' to the contract price for offshore contract whereas no such allegation has been made in the case of the respondent assessee. It therefore stands on an altogether different footing. Finally in Ansaldo Energia SPA's case (supra) even after the goods were supplied from abroad, the manufacturing activities continued in India 'as a continuous and ongoing process' and there was a reference in the supply contract itself that the responsibility was with the assessee company till the local parts and the portion of the machinery which was to be designed, fabricated, manufactured and sent from abroad were fused together. In the instant case, however, no activities under the supply contract were carried out in India and there was no such overlapping of responsibilities 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....
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....rden of tax on behalf of the assessee. DRP rightly observed that 'Grossing up' of the impugned payment was required to be done as per Section 195A before applying 44BBB of the act. But Section 44 BBB has been applied on 'net payment basis' by the assessing officer. Revenue is free to recompute the income of the assessee as per the statutory provisions. With these observations, Ground No.3 of assessee's appeal is allowed. The payment towards offshore supply contracts being accruing outside India, would not form part of business receipts for the purpose of Section 44BBB." 10. It is an admitted fact that the fact with regard to the impugned issue are identical to the earlier years and that the same contract are applicable for the year under consideration, therefore respectfully following the above decision of the Co- ordinate 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 sect....