TaxTMI 
TaxTMI 
TaxTMI 
2009 (6) TMI 118
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...., supply and supervision of installation and testing, commissioning of integrated optical fibre communication system between Dumdum-Tollygunj section of Metro Railway Calcutta; (ii) that as per art. 7(1)(b) of the DTAA between India and Australia, the force of attraction is applicable, hence offshore supplies or business activities of the same or similar kind although performed from outside India would be attributable to the PE in India and would be taxable." 3. Briefly stated the facts of the case, as recorded by the AO are that the assessee-company was resident of Australia. It executed many contracts through its PE in India. These contracts were described as (i) Skoda contract, (ii) Metro Rail contract, and (iii) IPCL contract. In respect of Metro Rail contract the assessee had not accounted for supply made by the head office although the single contract for offshore and onshore supply was entered into and formed integral part of the contract. The assessee was called upon to explain as to why the offshore supply should also not be considered for working out the profits from its Indian PE. The assessee explained that such profit was exempt under Circular No. 23, dt. 23rd July, ....
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....al submissions and perused the relevant material on record. The dispute in this ground revolves around the taxability or otherwise of receipt of Rs. 3.17 crores by the assessee from offshore supplies of Metro Rail project. At this juncture, it would be relevant to consider the facts a little more elaborately. The assessee entered into contract with Metro Railways for supply and supervision of installation and testing, commissioning of the integrated optical fibre communication system. Letter of acceptance dt. 30th June, 1992 of Metro Rails addressed to the assessee, which constitutes contract in this case, has been placed at p. 105 onwards of the paper book. Clause 1.1 of this contract states that the total value of the contract on FOB basis for the supply and services works out to Rs. 4.32 crores. It is split into three parts. The first is total imported supplies on FOB basis at 2231054 A$ (approximately Rs. 3.16 crores). The second item is total imported services at 722180 A$ (approximately Rs. 1.05 crores). The third item is indigenous services valued in Indian Rs. 11,50,000. From the order of the learned CIT(A) for asst. yr. 1997-98, which is also under appeal, it emerges that ....
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....ment because it is included in the compound contract for supply as well as for rendering of services. In our considered opinion it is the substance of the matter rather than its form, which is crucial for the determination of the tax liability. If the transaction is recorded in a particular form, that cannot change its real character and nature. So long as the intention of the parties to the contract is dearly flowing from the terms of the contract, then it is impermissible to negate it and infer something else. Adverting to the facts of the instant case, we find that the disputed amount has been stated to be the consideration for the offshore supply of equipment to the Metro Rail project. No part of it is relatable to the rendering of any services. It is the consideration for outright sale of equipment. 7. It will be relevant to consider the judgment of the Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. vs. Director of IT (2007) 207 CTR (SC) 361 : (2007) 288 ITR 408 (SC), which has been heavily relied on behalf of the assessee. In this case the assessee was a resident of Japan. It was to develop, design, engineer and procure equipments and material ....
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....ration for rendition of services. As the component of supply contract and that of the rendition of services is with the same party and for a common purpose, we are unable to find any logic in treating the entire amount as the composite payment attributable commonly both to the supply of equipment and rendering of services, more so when there is a specific identifiable amount relatable to the supply of equipments. There is no qualitative difference between two situations, viz., firstly when one contract is made for two or more items specifying the consideration for each part separately and when two or more separate contracts are made in respect of the same transaction. 9. Now let us examine the facts of the instant case to determine if the income from sale of offshore equipment is taxable in India as per the provisions of the IT Act. The offshore supply of equipment from abroad, in common parlance, means that the supply of goods is made outside India. Ordinarily in such a case, the Indian party opens a letter of credit and nominates a bank to issue irrevocable LC favouring the foreign party. Equipment is handed over to ship and bill of lading etc. are delivered to the nominated ban....
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....onent of s. 5(2)(b) is the income which is deemed to accrue or arise to the non-resident in India. Sec. 9 enlists certain incomes which are deemed to accrue or arise in India. The amount for the supply of offshore equipments cannot be in the nature of 'salaries', dividend, interest, royalty or fees for technical services, which items of income have been specifically dealt with in cls. (ii) to (vii) of s. 9(1). Hence we are left with examining the applicability or otherwise of cl. (i). This provision states that 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 situated in India shall be deemed to accrue or arise in India. As it is the case of sale of equipment to the Indian party, possibly only the 'business connection' needs to be probed in as the applicability of the other components of cl. (i) is ruled out. Now we will concentrate on examining if the assessee, as a result of this transaction, can be said to have any business connection in India so as to attract s. 9(1). At thi....
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.... sale of goods took place outside the taxable territories, the price received by the non-resident Indian outside that taxable territories and the delivery was given also at the outside taxable territories, the Hon'ble Supreme Court held that there results no business connection. Where there is a transaction of sale between two parties on principal-to-principal basis, it cannot be held that there is any business connection which would attract the deeming provisions of s. 9(1)(i). 12. Further Expln. 1(a) to s. 9(1) provides that for the purposes of this clause, 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 operations carried out in India. From this Explanation, it is further manifested that even if there is a business connection of the non-resident in India, then also only that part of the income shall be deemed to accrue or arise in India which is relatable to the operations carried out in India. So going by the argument of the learned Departmental Representative, even if we presume for a mom....
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....ntry, but are handed over in India against payment or acceptance, no portion of the profits will be chargeable to tax under the IT Act, if this is the only operation carried on in India on behalf of the non-resident." 14. Circular No. 786, dt. 7th Feb., 2000 [(2000) 158 CTR (St) 61] further clarifies the position qua commission and charges payable for services rendered outside India. It has been explained that no tax is deductible under s. 195 on the export commission and other related charges payable to non-resident for services rendered outside India. In this circular, the aforenoted Circular No. 23, dt. 23rd July, 1969 has also been duly considered. 15. Instruction No. 1829, dt. 21st Sept., 1989 deals with the taxability of non-resident engaged in the business of power projects on turnkey basis. Para 2 of this instruction states as under: "2. Turnkey execution of hydroelectric power projects mainly involve the following work packages: (i) Planning, design and engineering services; (ii) Supply of permanent equipment; (iii) Civil works; and (iv) Erection, testing and commissioning of electrical and mechanical equipment." Then cl. (b) of para 7 deals with profits from sale ....
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....offshore supplies were performed outside India, the income would be attributable to the payee in India and hence taxable. 19. In an earlier para, we have held that no income towards supply of offshore equipment is liable to tax in India as per IT Act, 1961. The contention of the Revenue in this part of the ground is that the provisions of DTAA will be attracted on the assessee as it has PE in India and hence the income will be taxable. In our considered opinion, this contention deserves the fate of rejection. Sec. 90(1) empowers the Central Government to enter into an agreement with the Government of any country outside India 'for the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country' etc. The logic behind the agreement for the avoidance of double taxation of income is to allow relief to the assessee. If the income is taxable as per the domestic law, then the assessee can opt for the provisions of the DTAA for extincting or marginalizing the liability so created. If the income is not taxable and there does not exist any tax liability of the assessee as per the regular provisions of the Act, it is simple an....
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....ions and perused the relevant material on record. A copy of assessee's letter dt. 6th March, 2002 addressed to the CIT(A), placed at p. 114 onwards of the paper book, indicates the reasons for which the assessee could not produce the books of account before the AO at the assessment stage. A request was made for instructing the AO to consider the books of account and supporting vouchers etc. and determine the correct amount of income, which did not find favour with the learned CIT(A). The learned counsel for the assessee contended that the books of account and relevant evidences and vouchers were available with the assessee. We observe that the AO has applied profit rate of 10 per cent on the gross receipts as against the assessee's returned loss of Rs. 2.78 crores. The learned CIT(A) has arbitrarily reduced the profit rate to 8 per cent without assigning any basis. In our considered opinion, the ends of justice will meet adequately if the impugned order is set aside and the matter is restored to the file of AO. We order accordingly and direct him to compute the income from all projects, other than "off shore supplies worth Rs. 3.17 crores for metro railway", as per the books of acc....