TaxTMI 
TaxTMI 
2025 (3) TMI 1826
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....me of Rs. 21,97,09,834/- as against returned income of Rs. 10,63,44,660/- revised to Rs. 4,18,74,180/-. 3. That on the facts and in the circumstances of the case and in law, the Assessing Officer erred in bringing to tax profit on offshore supply of goods alleging the same to be attributable to the installation Permanent Establishment ("PE") of the Appellant in India. 4. That on the facts and in the circumstances of the case and in law, the Assessing Officer erred in alleging that the contract for offshore supply of equipment and contract for rendition of services for installation and commissioning of the equipment was a composite contract, ignoring the separate purchase orders placed by the customers in that behalf. 5. Without prejudice, on the facts and in the circumstances of the case and in law, the Assessing Officer erred in attributing 100% of the global profits on offshore supply of goods and services to the PE in India at Rs. 21,97,09,834/-. 6. That on the facts and in the circumstances of the case and in law, the Assessing Officer erred in not allowing deduction for expenses of Rs. 29,57,92,750/- 7. That on the facts and in the ....
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.... Suzuki India Limited ("MSIL") u/s 195 of the Act. In its ITR, the assessee has shown revenue of Rs. 32,82,28,281/- from sale of services and declared income of Rs. 4,18,74,180/- The case was selected for complete scrutiny under CASS due to "Reduction of income in revised return" and "Claim of refund". The statutory notice under section 143(2) of the IT Act, 1961, was issued on 29.06.2021 which was duly served upon the assessee. In order to examine the veracity of the assessee's claims, notices u/s 142(1) along with questionnaires were issued to it from time to time. The draft assessment order u/s 144(C)(1) of the Act was passed on 26.09.2022. 4.2. In the draft assessment order, the Assessing Officer held that the assessee had a PE in India in respect of supply/ sales of equipment to the Indian customers as well since the Assessee had entered into a "composite contract" for both supply of equipment and rendering of related installation/supervisory services and he attributed entire income from offshore supply of equipment to the said PE in India. 4.3. There are mainly two issues in this appeal. Firstly, the assessee claims that the amount received for off-shore supply in r....
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.... Supervision Fee of Rs. 6,44,70,480/- were additionally claimed. These expenses had not been reported in the original ITR. As per the details submitted by the assessee, the payment for supervision fee was made during February 2020 and March 2020. This indicates that these payments were made during FY 2019-20. 10. The CBDT issued a Notification no. 28/2021 in respect of revising of the Audit report by the assessee. The same is reproduced below: "In exercise of the powers conferred by section 44AB read with section 295 of the Income tax Act (43 of 1961), the Central Board of Direct Taxes, hereby, makes the following rules further to amend the Income-tax Rules, 1962, namely:- 1. Short title and commencement.- (1) These rules may be called the Income-tax (eighth Amendment) Rules, 2021. (2) They shall come into force on the date of their publication in the Official Gazette. 2. In the Income-tax Rules, 1962,- (a) in rule 6G, after sub-rule (2), the following sub-rule shall be inserted, namely:- - (3) The report of audit furnished under this rule may be revised by the person by getting revised report of audit from an ....
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....ion rate of 1 JPY= 0.6965 INR as on 31.03.2020. During the course of proceedings, the assessee was asked to provide the details of personnel/engineers who visited India for performing works related to installation and commissioning and their duration of stay in India. However, these details were not provided by the assessee. Para No.7(v) and 8 3 Examination of financial statements of PE The Assessing Officer noted that the assessee submitted two different financial statements showing revenue of Rs. 32,82,26,281/- and expenses of Rs. 23,13,22,271/- and again a revised financial statement showing revenue of Rs. 32,82,26,281/- and expenses of Rs. 29,57,92,750/-. The Assessing Officer noted that the assessee had submitted a two page financial statement of balance sheet and P & L Account and the assessee failed to furnish the complete notes/documentation to the financial statements for both the sets of the financial statements. Para-11 at page 7 4 Claim of expenses-Rs. 22,33,94,462/- In response dated 13.09.2022, assessee claimed that the expenses of Rs. 22.03 crores was incurred on salary but in its reply dated 23.09.2022, it submitted that the expenses of Rs....
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....nancial statements submitted by the assessee were not complete and could not be relied upon because the revenue does not reflect the actual receipts of the assessee from India. Accordingly, the Assessing Officer issued a show-cause notice dated 14.09.2022 asking the assessee to explain why the receipts from suppliers, claimed as exempt, should not be treated as taxable in India on account of the assessee constituting a PE in India in terms of Article-5 of India Japan DTAA. According to the Assessing Officer, the assessee in its response submitted that it had not earned any revenue from supplies, which according to the Assessing Officer was in direct contradiction by the response received from SMG and MSIL in response to notice u/s 133(6) of the Act, wherein, these entities provided a clear break-up of the amounts paid to the assessee on account of supply of equipments and amounts paid for installation and commissioning. The Assessing Officer held that the response of the assessee was not found to be correct and was not acceptable. The Assessing Officer also noted that the assessee had to received an amount of Rs. 394,78,27,555/- and Rs. 1,80,53,930/- from SMG and MSIL respectively ....
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....t. 29. Accordingly, the profit of the PE is determined as under: During the year under consideration, the receipts that accrued or arose in India are receipts from supply of equipment (goods) and services. The profit from such receipts are to be taxed on net basis being a business receipt. The Arm's Length profit would be arrived by applying global operating profit margin as shown by the assessee in similar services on the Indian receipts. The operating profit margin is to be taken as 5.54%. Total receipts of the PE in India= Rs. 396,58,81,485/- Accordingly, the arm's length profit for receipts = 5.54% of 396,58,81,485/- = Rs. 21,97,09,834/- Total profit of PE = Rs. 21,97,09,834/- Income from Business (which would be chargeable to tax at 40%) = Rs. 21,97,09,834/- Penalty u/s 270A of the I.T. Act, 1961 is also proposed to be initiated as I am satisfied, in view of the above, that the assessee has under reported its income by way of misreporting." 5.4. Aggrieved with the said draft assessment order, the assessee filed objections before the Ld. DRP. The Ld. DRP agreed with the Assessing Officer and the ....
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....itted extensive evidences before the Ld. Assessing Officer and the Hon'ble DRP to substantiate its claim that the supply of equipment from Japan to Indian customers qualified as offshore supplies and therefore income for such supplies could not be taxed in India in view of the principles laid down by the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. vs DIT[2007] 288 ITR 408 (SC). The ld. Sr. Counsel submitted that the perusal of the POs, invoices, bill of lading, letter of credit substantiated its claim that the title in equipment was passed on to the Indian customers outside India and also the consideration was also received outside India and therefore its case was fully covered by the decision of the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. vs DIT (supra). In this regard, ld. Sr. Counsel also referred to the copies of invoices in support of expenses claimed on account of rendering services. It was further submitted that even if it is assumed to be a 'composite contract' for the sake of argument, no part of consideration received from offshore supplies can be taxed in India for want of economic nexus of such su....
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....d Maruti Suzuki India Limited ("MSIL") and also provided installation and commissioning services of such equipment including supervision of such activities at the factory premises/ site of SMG and MSIL 1.2 While filing ITR, the Appellant admitted existence of an Installation Permanent Establishment ("PE") in India and offered net income from installation services of Rs. 4,18,74,180 (i.e., total receipts of Rs. 33,76,66.931 less expenses of Rs. 29,57,92,750) to tax @ 40% plus surcharge 1.3 The Appellant submitted extensive evidence with the Ld. AO and Hon'ble DRP to substantiate that supply of equipment from Japan to Indian customers qualified as "offshore-supplies and therefore income for such supplies could not be taxed in India as per principles laid down by the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd v. DIT [2007] 288 ITR 408 (SC). Such evidence comprised of copies of Purchase Orders (POs"), Invoices, Bill of Lading, Letter of credit substantiating that title in equipment was passed on to the Indian customers outside India and consideration was also received outside India by the Appellant Further, the Appel....
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....dy reference: "The Purchase Order issued by SMG provides a break-up of the amount charged separately for supply of the machines and spares, supervision fees and installation and commissioning of the machines." 2.4 Apropos the above, the Appellant submits that its case is squarely covered by the Hon'ble Supreme Court's decision in the case of Ishikawajima Harima (supra) wherein it was held that no income could be attributed to India if the sales made by foreign company did not have any economic nexus with India 2.5 Without prejudice to same, the Appellant submits that even in case of composite contracts encompassing both goods and services, the Hon'ble courts have held that if it can be demonstrated that the goods were manufactured and sold outside India, then the service portion must be segregated from the supply of goods and only then would question of This is in consonance with the principle advocated by section 9(1)(i) of apportionment arise the Act, which states that income is taxable in India only to the extent it arises in India In this regard, attention is invited to Hon'ble Supreme Court decision in the case of Ishikawajma Harima (supr....
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....ia. None of the activities related to supply of equipment took place in India and even the Ld. CIT DR could not point to any evidence in support of the same. Apropos the above, the Appellant reiterates that no part of revenue from offshore supplies is attributable to India. 2.8 The Appellant offered full revenue earned from rendering of installation services to tax in India after claiming the corresponding expenses. The Assessing Officer brought to tax the gross revenue from rendering installation services, applying the global net profit rate The Assessing Officer disallowed deduction for expenses on the ground that necessary details in that behalf were not furnished by the Appellant, despite the same having been filed both before the Assessing Officer during the assessment proceedings and also before the Hon'ble DRP The details on record clearly demonstrate the incurring of expenses for earning income from rendition of installation services, by way of travelling expenses, payment to third parties for deputation of consultants/ engineers to the installation sites in India. The Assessing Officer without examining the same has rejected the claim for expenses incurred in rend....
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.... from internal pages 1 to 13 at running pages no. 4 to 16 and documents from pages 17 to 170 of the paper book. The same was forwarded by the Ld. DRP vide letter dated 15.03.2023 and subsequent reminders were sent to the Assessing Officer. However, as noted by the DRP in para no.4.5 of its order that the said remand report was not received by the Ld. DRP and the DRP passed its directions on 30.05.2023. The said noting of the DRP in para 4.5 is reproduced as under:- "4.5 The Panel has gone through the draft assessment order, the rival averment by the assessee and the additional evidences submitted by the assessee. A remand report was sought from the assessing officer vide letter from the Secretary DRP on 15.03.2023 and through subsequent reminders. The AO has not furnished the remand report till date. The case is being decided on the basis of available documents." 9.1. The assessee in its submission dated 27.04.2023 before the Ld. DRP in para no.2.5 had inter alia submitted as under:- 1) The employees or any other personnel associated with the Applicant did not visit India to negotiate discuss, deliberate, finalize, etc. the terms of the sale of equipment with t....
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....ate that the supply of equipment took place outside India, the Applicant has enclosed the following details/ documents: ii. A copy of PO no. 12498 as Annexure-3 which was issued by one of the customers i.e., SMG to the Applicant for purchase of a "Grinding Machine". iii. In the invoice issued by Applicant against such PO (enclosed as Annexure-4), it is clearly mentioned that the sales consideration for such equipment is JPY 61,90,00,000 on FOB basis i.e., the responsibility of freight, transit insurance and other such related costs are to be borne by the Indian customer and not the Applicant. iv. Further, your goodself would appreciate that the bill of lading (enclosed as Annexure-5) has been issued in the name of purchaser i.e., Suzuki Motor Gujarat Private Limited. Therefore, the Applicant was only responsible for equipment ill the port of shipment i.., Japanese port and it was the responsibility of Indian customer to arrange for transport from the Japanese Port and then receive the same at the Indian port. v. The relevant Letter of Credit No. ILC-792-190200 is also enclosed as Annexure-6. 85% of total sales consideration is received by the App....
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...., it was submitted that such sale of equipment qualifies as "Offshore sales/ supplies" 9.6. Thus, on perusal of the above details, it is seen that the assessee submitted the following documents as depicted in the tabular form as below:- Sr. No. Documents Annexure No. Page no. of the paper book Claim of the assessee 1. Copy of PO Number 12498 regarding PO of a grinding machine by SMG 3 42 -- 2. Invoice issued by the assessee 4 43 it is clearly mentioned that the sales consideration for such equipment is JPY 61,90,00,000 on FOB basis i.e., the responsibility of freight, transit insurance and other such related costs are to be borne by the Indian customer and not the Applicant. 3. Bill of lading issued by SMG 5 44-45 The bill of lading has been issued in the name of purchaser i.e., Suzuki Motor Gujarat Private Limited. Therefore, the Applicant was only responsible for equipment till the port of shipment i.e., Japanese port and it was the responsibility of Indian customer to arrange for transport from the Japanese Port and then receive the same at the Indian port. 4. Letter of credit no.ILC - 792-190-2000 6 46-5....
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....he basis of which the Assessing Officer framed the assessment order. 9.9. Further, the assessee submitted that it was incorrectly noted in the impugned order that the applicant did not submit any details pertaining to expenses incurred against revenue earned by the assessee. However, the assessee also admitted in para no.3.1 of its letter dated 27.04.2023 that the assessee was a Japan based company and has been filing tax returns in India since AY 2011-12. The assessee further submitted that the tax return filed for the subject year i.e., AY 2020-21 was the first instance for which assessment proceedings were initiated u/s 143(3) of the Act for the Applicant and therefore, the Assessee did not have prior experience with the said proceedings. 9.10. Therefore, the claim of the expenses amounting to Rs. 23,13,22,271/- in the original return and further claim of Rs. 6,44,70,480/- in the revised return also needs to be examined by the Assessing Officer as per law, which was not done in the assessment proceedings and also no remand report was submitted by Assessing Officer to the Ld. DRP with respect to the above claim of the assessee before the DRP issued its directions on 30.05.2....