TaxTMI 
TaxTMI 
2023 (4) TMI 1461
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....ention of the Ld. AR has not been controverted by the Ld. DR. 4. We have vide order dated 12.04.2023 in ITA No. 2087/Del/2022 for A.Y. 2018-19 have decided the appeal of the assessee by observing as under:- "2. The facts in brief are the assessee appellant ALSTOM is a foreign company incorporated in United Kingdom and a tax resident of that country in terms of Article 4 of India-UK Double Taxation Avoidance Agreement (hereinafter referred as for short 'DTAA'). Assessee company accordingly had claimed to be governed as per the provisions of the Act or the DTAA whichever is more beneficial to the assessee in terms of beneficial provisions of Section 90(2) of the Act. Assessee is engaged in the business of designing, engineering, manufacturing and supply of electric equipment that help in the transmission and distribution of power, commissioning and servicing of transmission and distribution systems on turnkey basis. During the relevant assessment years, the assessee had earned income from various Indian customers which the assessee claimed was not taxable as income was from offshore supplies only. The case of assessee was selected for scrutiny due to large claim of refund....
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....sitions with regard to taxation of business profits u/s 9 (1)(i) of the Act and under the Article 7 of the DTAA the ld. AO concluded as follows in Para 13:- "UK Grid has been awarded a single composite (EPC) contract on a turnkey basis by PGICL to complete a power project in India. The taxability of UK Grid in India is, therefore, to be decided as per the provisions of the Income-tax Act and relevant provisions of the India-UK DTAA. From the facts of the case, there is no doubt that UK Grid has a "business connection" under section 9(1 )(i) of the Act and a 'Construction PE' under the provisions of Art. 5(2) of the India-UK DTAA. Therefore, the business profits of the PE of UK Grid are taxable in India as per the provisions of Article 7 of the India-IJK DTAA. The sub-article (2) of Article 7 of the DTAA which prescribes the mechanism is reproduced as under: "(2) Where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, the profits which that permanent establishment might be expected to make if it were a distinct and separate enterprise engaged in the same or simila....
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....essment order except to the extent directing Ld. AO to exclude the receipts on account of off-shore supplies made by assessee to GE T&D and SFO, if they are not related to PGCIL contract. 6. Thus, the assessee is in appeal raising following grounds :- "1. That on the facts and circumstances of the case and in law, the assessment order dated 28.07.2022 passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ("the Act") for assessment year 2018-19 assessing the total income of the Appellant at Rs. 131,37,79,750 is bad in law, void-ab- initio and therefore, liable to be quashed and/ or set aside. 2. That on the facts and circumstances of the case and in law, the assessment order passed under section 143(3)/ 144C(13) of the Act on 28.07.2022, being barred by limitation, is bad in law, and void-ab-initio. Re: Offshore supply receipts of Rs. 107,81,49,081 from PGCIL 3. That the DRP/ assessing officer erred on facts and in law in holding that receipts of Rs. 107,81,49,081 from offshore supplies to Power Grid Corporation of India Ltd ("PGCIL") are taxable in India under the provisions of the Act. 4. That the DRP/ as....
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....he India-UK DTAA. Re: Other grounds relating to computation of tax demand & penalty proceedings 13. That the assessing officer erred on facts and in law in levying interest under section 234A, 234B and 234C of the Act. The Appellant craves leave to add to, amend, alter or vary the above grounds of appeal at or before the time of hearing." 7. Heard and perused the record. The Bench has given thoughtful consideration to the matter before it and submissions and has gone through the law cited. The ground wise findings are as follows; 8. Ground no 1 and 2; While opening arguments, Sh. Sh. Ajay Vohra, Ld. Sr Counsel appearing for appellant assessee, has not pressed ground no. 2 and ground no. 1 is general in nature. 9. Ground no 3 to 8.Ld. Sr. Counsel for the assessee/ appellant contended that Ld. Tax Authorities below have erred in understanding the nature of three agreements entered between the assessee, its associate ALSTOM-I and employer PGCIL. It was submitted that Ld. Tax Authorities have fallen in error in concluding that there was an artificial splitting of the contract between the assessee and ALSTOM-I. Referring to the contracts executed b....
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....ies have fallen in error in considering the associate M/s. ALSTOM-I to be Agency PE. It was submitted that there was no legal and financial dependency between the assessee and its associates. 9.4 Ld. Sr. Counsel submitted that the assessee had earned revenues from offshores supplies and no activity was performed in India for earning its revenue. He specifically stressed on fact that no employee of the assessee visited India and as such there is no branch or place of business in India. 9.4.1 As with regard to Dependent PE it was submitted the Tax Authorities have not discussed any evidence and an incorrect observation is made by Ld. AO that GE India was actively involved in soliciting business for the assessee as the assessee had procured the contract by way of open bidding. 9.5 It was submitted that the Associate was engaged in independent contracts under the bid and was independent entity. Referring to the financial statements of GE T &D India Limited, available on page no. 429 to 437 for F.Y. 2017-18 and 438-445 for F.Y. 2018-19 it was submitted that related party transactions have been disclosed and it was submitted that the Indian associates has several independent sou....
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....egard to law on Dependent Agent Permanent Establishment ("PE") under the India-UK DTAA he referred to the Copy of India-UK DTAA and section 182 of Indian Contract Act, 1872. He also cited judgments in National Petroleum Construction Company vs DIT: 383 ITR 648 (Del), Western Union Financial Services Incvs ADIT: 101 TTJ 56 (Del Trib.),Mitsui & Co Ltd vs ACIT: ITA No.4764/Del/2016 (Del Trib.), ITO vs International Reinsurance and Insurance Consultancy & Broking Services (P) Ltd: 142 taxmann.com 509 (Mum Trib.), DCIT vs Adobe Systems Software Ireland Ltd: ITA Nos.l978/Del/2019 &Ors. dated 27.07.2022 (Del Trib.), Net App BV vs DDIT: [2017] 78 taxmann.com 97 (Del Trib.), TVM Ltd vs CIT: 237 ITR 230 (AAR) and KronesAktiengesellschaftvs CIT: ITA No.907/Del/2017 dated 30.12.2022 (Del Trib.) 9.8.5 The Ld. Sr. Counsel stressed that the onus is on Department to prove existence of PE and for that he relied CIT vs eFunds IT Solution: 399 ITR 34 (SC), DIT vs Samsung Heavy Industries Co Ltd: 426 ITR 1 (SC), DIT vs Mitsui & Co Ltd: 399 ITR 505 (Del) and AB SciexPte Ltd vs ACIT: 195 ITD 384 (Del Trib.) 9.8.6 As with regard to principles of attribution to business connection/ PE he relied DIT ....
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....dingly it too concluded that Associate as PE was involved throughout the contract period. DRP observed that the off-shore supply of equipments by the assessee would have been rendered meaningless in the absence of service of supervision, erection, commissioning etc. all of which was an integral and indivisible part of the contract. 13. So the key question is if this was independent contract as claimed by assessee or there was artificial spilt of one contract to the benefit of assessee, into three contracts leading to evasion of tax. The first and a very important concept that has to kept in mind is that the controversy regarding taxability event, in case of complex arrangement of contacts, may arise at several stages and with different tax incidences. The adjudication of an issue should be on basis of wholesome reading of the contract and context of terms. In regard to this principle of law the Hon'ble Supreme Court in Ishikawajma-Harima Heavy Industries Ltd. (supra) has observed in para no. 60 as follows :- "In construing a contract, the terms and conditions there of are to be read as a whole. A contract must be construed keeping in view the intention of the parties. N....
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.... as Off-Shore Contract), 'Second Contract' for Ex-works supply of Plant and Equipment including mandatory Spares from within India and Type Test to be conducted within India (also referred to as On-Shore Supply Contract), and Third Contract' for all services to be performed in India covering, inter alia, port handling, port clearance, inland transportation, insurance, delivery at site, handling, storage, erection including associated civil works, testing and commissioning of all equipment and materials, including the equipment supplied under the First Contract end the Second Contract, Training in India etc. (also referred to as On-Shore Services Contract). WHEREAS M/s. ALSTOM Grid UK Limited in their Bid, had proposed M/s. ALSOM T&D India Limited having its Registered Office at A-18, First Floor, Okhla Noida-201301, U.P. Area, Phase-ll, New Delhi-110020 and business address as A-7, Sector-65, : ca-201301, (hereinafter referred to as "ALSTOM-l" as their Associate for the purpose of executing the On-Shore Supply Contract and On-Shore Services Contract) and furnished "ALSTOM-l" written unequivocal consent vide their letter dated 26.11.2011 (enclosed in their....
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....r and the Contractor's Associate - ALSTOM-I has also been made on 17.08.2012, respectively for the On-Shore Supply Contract (also referred to as the 'Second Contract') and On-Shore Services Contract (also referred to as the Third Contract'). The scope of 'Second Contract' includes Design, engineering, manufacture, testing at manufacturer's works and Ex-works supply of all the equipment and materials including mandatory spares from within India and Type Testing, as detailed in the Contract Documents of said contract, required' for the complete execution of +/-800kV, 3000 MW HVDC Terminal Package associated with Western / Northern Region Interconnector for IPP Projects in Chhattisgarh under "National Grid Improvement Project". The scope of 'Third Contract' includes all services to be performed covering, inter alia, port handling, port clearance, inland transportation, insurance, delivery at site, handling, storage, erection including associated civil works, testing and commissioning of all the Plant and Equipment including mandatory Spares supplied under the Off- Shore Contract and On-Shore Supply Contract, Training in India etc. and any other services specified in the Contr....
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....Shore Services Contract (refer para 2.2 below) and furnished ALSTOM INDIA'S written unequivocal consent vide their letter dated 26.11.2011. ..... 12.1 We confirm having accepted your Bid referred to at para 1.3, 1.7 & 1.8 above) read in conjunction with all the specifications, terms & conditions of the Bidding Documents (referred to at para 1.2, 1.2.1, 1.2.2, 1.2.3 & 1.6 above) and your confirmations as per the documents referred above, and award on you the 'Off-Shore Contract' (also referred to as the 'First Contract') covering inter-alia supply on CIF Indian Port of Entry of all equipment and materials, mandatory spares including Type Testing to be conducted outside India, Training to be imparted abroad for the complete execution of the +/-800kV, 3000 MW HVDC Terminal Package associated with Western / Northern Region Interconnector for IPP Projects in Chhattisgarh under "National Grid Improvement Project", as detailed in the Bidding Documents referred hereinabove. The scope of work inter-alia includes the following: Design, engineering, manufacture, testing at manufacturer's works and CIF supply of all off-shore equipment and materials from country(ies) outside ....
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....d with Western / Northern Region Interconnector for IPP Projects in Chhattisgarh under "National Grid Improvement Project" Notwithstanding the award of work under three separate Contracts in the aforesaid manner, you shall be overall responsible to ensure the execution of all the three Contracts to achieve successful completion and taking over of the works under the package by the Employer as per the requirements stipulated in the Bidding Documents. It is expressly understood and agreed by you that any default or breach by your Associate, M/s. ALSTOM T&D India Limited under the 'Second Contract' and/or the Third Contract' shall automatically be deemed as a default or breach of this 'First Contract' also and vice-versa, and any such default or breach or occurrence „ giving us a right to terminate the 'Second Contract' and/or 'Third Contract', either in full or in part, and/or recover damages under those contract(s), shall give us an absolute right to terminate this Contract, at your risk, cost and responsibility, either in full or in part and/or recover damages under this 'First Contract' as well. However, such default or breach or occurrence in the 'Second Co....
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....own in the bidding document. Article 6 of this document dated 17.08.2012 specifically makes reference to ALSTOM-I's 'written unequivocal consent to work as the independent contractor of PGCIL' and that separate contracts have been entered between PGCIL and Indian Associate of the assessee, ALSTOM- I, on the same date 17.08.2012 for the second and third contract. 18. The aforesaid discussion of the relevant clauses leave no doubt in the mind of this Bench that at the stage of bid itself ALSTOM-I had joined the assessee in terms of the requirement of the bid. These clauses and stipulations go on to establish that there was a collaborative effort of the assessee and the Indian associate and as such there was not actually a consortium to which one contract was awarded with bifurcation at level of the members of Consortium. The award of separate off shore contract by the PGCIL to assessee and on shore contracts to the permitted associate ALSTOMI, which was classified as independent contractor of employer, coupled with the execution of separate contracts with defined scope of work of each contract, required each party to perform its obligation under the respective contracts awarded to....
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....and executed on 17.08.2012, the issues discussed in the meeting between 03.07.2012 and 05.07.2012 became superfluous but Ld. DRP has unnecessarily stressed upon the same to draw a conclusion that primary commitment in all the three contracts was of the assessee. 20.2 Further in para 5.2, the Ld. DRP has reproduced para 3.2 of the notification of award dated 21.06.2012 without understanding the context in which the same was made. As for the convenience para 5.2 of the order of DRP is reproduced as below :- "5.2 It has also been clarified at para 3.2 therein that- "3.2 Notwithstanding the break-up of the Contract Price, the Contract shall, at all times, be construed as a single source responsibility Contract and any breach in any part of the Contract shall be treated as a breach of the entire Contract." As a matter of fact that this para 3.2 is part of clause 3.0 in notification of award, which makes reference to contract price and it will be beneficial to reproduce the whole of it, from the notification of award dated 21.06.2012, available at page no. 127 of paper book as under :- "3.0 Contract Price 3.1 The total Contract Price for the enti....
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....tracts the ultimate responsibility of execution and liability in case of breach remained with the assessee. In this context, the Bench is of considered opinion that the business prudence involving such major infrastructure projects cannot be examined and questioned by the revenue authorities attributing bare motives and to assume that the different contracts under one bid are with only intention to escape taxation. Such arrangements are more out of business prudence and usually for the safeguard of the rights of Indian entity, like PGCIL, which negotiates and gets executed such infrastructural facility contracts. The intention being successful commissioning of the project and that it is not abandoned or frustrated due to involvement of many parties, each performing some part, by shouldering any delay or latches, on other unrelated party. 21.1 In this context, reliance can be placed on the judgment of Hon'ble Delhi High Court in Linde AG, Linde Engineering Division (supra) wherein dealing with the reasons for having such clauses to make parties to a consortium being joint and safely liable under a contract, Hon'ble High Court observed in para 53 and 55 as follows : "53. ....
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....space for electrical contractors is available for them to perform their work. The work of Interior finishing can take place only after the civil works are complete. The fact that each of the aforesaid agencies, namely, the architect, the civil and electrical contractors are required to complete their work in a predetermined sequence and are required to cooperate with each other in providing the necessary information and adhering to a specified schedule would not necessarily imply that the architect, civil contractors and electrical contractors had formed an Association of Persons. In this illustration each one of the participants works towards a common project with a certain level of cooperation. However, since the said participants do not act as a single cohesive entity, but perform their independent allocated works, they cannot be considered as an Association of Persons. In order to consider independent agencies as an Association of Persons, it is necessary that they form a joint enterprise with a greater level of common management. An element of mutual agency and joint action for mutual purpose is also necessary. Mere obligation to exchange information, between independent agenc....
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....e contract. 24. On the basis of aforesaid discussion the question of assessee having a permanent establishment (PE) can be examined. Ld. AO has not given any substantial reason on the basis of evidence while what weighted heavily in the mind of Ld. DRP was that the supply of equipment on the basis of offshore contract would have been rendered meaningless in the absence of services of supervision, erection commissioning etc. all of which was an indivisible part of the contract. 25. The Bench is of considered opinion that when the allegation of the Revenue about an artificial split of contract is not sustained and it is established that the assessee has entered into the 'First Contract', in its independent capacity, there is no force in the finding of Ld. AO that GE India ( Alostom-I) was actively involved in soliciting business for the assessee. In fact, there is substance in the contention of Ld. Sr. Counsel that in the bidding structure of present nature there is no question of someone 'soliciting' the business, as it was a case of open bid to which Indian and Foreign entities, both, were eligible to make the offer of bid. 25.1 There is no question of any agent and princi....
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....icable. Thus Ld. DRP has fallen in error in sustaining application of Section 44BBB of the Act, on premises that the assessee is involved in the end to end execution of the project in India. The revenue derived by the assessee were on the basis of offshore supplies and not out of any construction, erection, testing or commissioning activities of a turnkey power project in India. Thus, the application of section 44BBB to such revenue, which is not per se taxable India, is not sustainable. 28. It also appears that the Revenue is not disputing the fact that under the 'First Contract' assessee was only supposed to make off shore supplies. Otherwise too it is appearing from the recitals of 'First Contract' that the procurement by PGCIL, was on the basis of, "CIF Indian Port of Entry supply". The title in property had passed out side India. The payments were also made outside India in terms of this contract. The settled proposition of law in this regard, rightly relied by Ld. Sr Counsel for assessee, is sustainable and the relevant conclusion in para 79, from the judgment of Hon'ble Supreme court in the case of Ishikawajma-Harima Heavy Industries Ltd. (supra)is reproduced below; ....
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.....15 of its order had specifically directed the Ld. AO that receipts on account of offshores supplies made by the assessee to GE T&D and SFO, if they are not related to the PGCIL contract, which is the basis of addition in the draft assessment order, be deleted. Ld. AO in para 20 of final assessment order observed as follows :- "20. In view of the directions of the Hon'ble DRP the receipts from GE T& D India Ltd. and SFO Technologies have been re-examined and it is held that Since the company constituted a dependent agent PE in India (GET&D) as far as the assessee's entire operations in India were concerned and the same has been upheld by the Ld. DRP. It is pertinent to mention here that once PE has been established for a transaction, it needs not to be established for each and every transaction. Moreover, the supplies are of very high technical specifications, customised machinery and given that the assessee company is a leader in its field, these supplies were to be assembled and made operational/commissioning in India only by itself or its associated enterprises (which is GE T&D in this case), thus such receipts are taxable as discussed in preceding paras. Witho....
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....vant para 6.3 of the order of ld. DRP is reproduced below :- "6.3 On perusal of the relevant Global Operation Fees Agreements for the years 2017 and 2018 entered into between GE T&D India Ltd and the assessee, which are available in the paper book filed in DRP proceedings, the following services, inter alia, are seen to be provided therein under the respective Heads a) Technical support for manufacturing process. b) Test system- which includes Test System design, Test Software development and provision for upgrades and new products, design and provision of test jigs and fixtures, providing of technical support in respect of system failure, process performance, spares and maintenance and Training of local support engineers on system. c) Project managed introduction of new products into manufacturing units d) Coordinate and manage introduction of design changes- Technical support and liaison between units and teams, E.g. R & D. e) Master Data- Creation of product configurators on Global IT system, creation of products and materials on global system for use within local unit, training for local units in adaptation of Bom's....
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....Del Trib)Ld. 34.1 Supporting his contention that Managerial services are not FTS in absence of 'managerial' word in India-UK DTAA the ld. Sr. Counsel relied Steria (India) Ltd vs CIT: 386 ITR 390 (Del) and Everest Global Incvs DDIT: 194 ITD 729 (Del Trib.). Ld. DR however, defended the findings. 35. In this context, it can be observed that the Global Operation Fees Agreement made available at page no. 372-396 of paper book along with copy of invoices available at page no. 397-403 of the paper book establish, that the assessee had agreed to provide services which included industrialization of products, sources and procurement of raw materials, setting quality standers, supply general and contracts. The industrialization support for SMP services details and descriptions have been given in appendix II available at page no. 377 of the paper book. Ld. DRP has merely taken into consideration the subheads of Global Industrialization support services, which have infact already accrued to tax. Ld. Tax Authorities below have approached the issue with the very general discussion without appreciation of any evidence and facts to show that how the other services fall into the category mak....