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2024 (4) TMI 985 - ITAT DELHIIncome deemed to accrue or arise in India - Taxability of income earned from offshore supplies and attribution of profit to the permanent establishment (PE) in India - AO attributing 25% profits to the PE in India - HELD THAT:- The end to end activity covers design, supply, erection, commissioning, performance run of the entire paper mill. Thus, the assessee has to complete a single integrated project in terms of the contract. The agreement further reveals that assessee’s obligation under the contract does not end with the supply of goods and equipments, but would only end with the satisfactory commissioning and performance run of the paper mill. Only after the satisfactory performance run, the assessee can receive full payment qua the supply of goods and equipments. Thus, supply of goods and equipment from outside India cannot be treated as a standalone activity. On the contrary, as per the scope of work under the agreement, the assessee has to deliver the project of the Security Paper Mill and hand over to the contractee at deliverable stage as a complete package. The contract between the assessee and the contractee is not for purchase of plant and equipments simpliciter, but a complete paper mill to be installed and commissioned at deliverable stage. That being the factual position emerging on record, assessee’s contention that the income received from supply of plants and equipments is not chargeable to tax in India, as the supplies were made from outside India, in our view, is not acceptable. Not only the assessee has entered into a single contract providing for purchase, installation, commissioning, performance-run of a single unit of 6000 MTs Security Paper Mill, but the assessee is required to ensure proper functioning of the paper mill after commissioning through start-up and test-run. Thus, these facts clearly indicate that the contract is a composite indivisible contract of setting up the paper mill in India. That being the case, it cannot be said that the receipts from offshore supplies of plant and equipments etc. are not taxable in India. On a careful scrutiny of assessment order and first appellate order, we observe that receipts from offshore supplies are in relation to four projects in India. The departmental authorities have referred only to terms of agreement between the assessee and SPMCIL, Hoshangabad. Whereas, the terms of the agreement with other three parties, viz., J.K. Paper Ltd., Bank Note Paper Mill India Pvt. Ltd., Mysore and Tamil Nadu Newsprint and Papers Ltd., Tamilnadu, to whom the assessee has supplied plant and equipments, have not at all been examined. From the submissions of the assessee, prima facie, it appears that the terms of the contracts in different projects are not identical. In fact, in case of project at Tamil Nadu, the assessee has entered into two separate contracts, one for supply of material and other for onshore services. Therefore, if offshore supplies of plant and material do not have any relation to onshore services, they cannot be brought to tax in India. These facts have not been verified by going into the terms of the contract by the departmental authorities. Even, to what extent the PE of the assessee, if at all there is one in India, is involved in manufacture and supply of plant and equipments, has not been properly gone into by the departmental authorities. Thus, without properly analysing the role of PE in offshore activities, 25% of the receipts arising out of offshore supplies cannot be attributed to PE, as it is purely on adhoc basis. AO has attributed profit rate of 10% to the receipts/income of the PE, which has been reduced to 5% by Commissioner (Appeals) - In our view, the estimation of profit is purely on adhoc basis without any rationale. When the assessee has furnished evidence to show that the global profit rate in the paper division is at 3%, there is no justification for adopting the rate at 10% or 5%. The reasoning of departmental authorities in adopting the estimated profit rate is based on conjectures and surmises. If learned Commissioner (Appeals) was of the view that the activities and obligations of different contracts for different supplies would be different, he should have examined each of the contracts and accordingly decided the profit rate. The departmental authorities have examined only one of the contracts. Whereas, they have not gone through the terms of other contracts. We cannot accept the estimation of profit at 5% by Commissioner (Appeals). It is further to be noted that assessee’s contention regarding existence or otherwise of PE in terms of paragraph 7, 1(a) and (b) of Protocol to India-Germany DTAA has not at all been considered by learned first appellate authority. Since, various claims and contentions of the assessee have not been considered by the departmental authorities, while attributing part of the receipts from offshore supplies as income of the PE, we are inclined to restore the issue to the AO for de novo adjudication after providing reasonable opportunity of being heard to the assessee. Grounds are allowed for statistical purposes.
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