TMI Blog2011 (6) TMI 153X X X X Extracts X X X X X X X X Extracts X X X X ..... ere executed for the sake of some convenience of both the parties. However, the essential purpose was to set up the ATS at Delhi and Bombay, for which hardware and software was supplied by the assessee, installation was carried out leading to site acceptance test. The training for the personnel of the AAI as well as Indian industry was also to be carried out for preparing them to handle the ATS. Accordingly, we are of the view that the two contracts constitute one contract. Regarding PE in India - In this case, the essence of the contract is to completely renovate the existing ATS, which constitutes the PE of the assessee - It is the case of the assessee that the work of system specification review, PDR and CDR required occasional visits of the personnel of the assessee, but all the work in relation thereto, after initial inspection, was conducted outside India - There is no evidence on record that apart from inspection, the ATS were made freely available to the assessee to be occupied by its personnel for system specification review, PDR or CDR - it also emerges clearly that after clearance of goods in India, the possession was handed over to the assessee and it became responsib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.J. Majumdar, Adv., K. Ganesh Raj, Vikram Yadav, Vinay Mangal, and Geeta Khanna, Chartered Accountants for the Appellant Ashwani Kumar Mahajan, CIT,DR for the Respondent ORDER K.G. Bansal, Accountant Member 1. This appeal emanates from the order of CIT(Appeals)-XXIX, New Delhi, passed on 30.03.2009 in appeal nos. 405/06-07, 216/06-07 and 43/08-09. The corresponding assessment order was framed by the Deputy Director of Income-tax, Circle 2(1), International Taxation, New Delhi ("the AO"), on 27.12.2006, under the provisions of section 147 read with section 143(3) of the Income-tax Act, 1961 ('the Act' for short). The assessee has taken the following grounds in the appeal:- "On the facts and in the circumstances of the case, the ld. Commissioner of Income-tax (Appeals)-XXIX, New Delhi:- Validity of reopening 1. Erred in holding that the reasons as recorded by the ld. Deputy Director or Income-tax, Circle 2(1), International Taxation, New Delhi ("Assessing Officer"), while initiating proceedings under section 147 of the Income-tax Act, 1961 ('Act') constituted sufficient reasons for arriving at a belief that income of the appellant has escaped assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I for repair of equipments and modifications and anomaly resolution of computer software supplied under MATS contracts and for independent supply of equipments etc. for Indian Air Force. 9. Erred that the finding in the rulings of the AAR dated 28.7.2008 was clearly applicable to the facts of the appellant's case for the assessment year under consideration and the estimate of taxation of payments of software as well as hardware has to be carried out as indicated by the AAR. Permanent Establishment in India. 10. Erred in confirming that the appellant had fixed place Permanent Establishment ("PE") in India at the premises of AAI in Delhi and Mumbai, as it had project office in India. 11. Erred in holding that the appellant constitutes an Installation PE as well as service PE in India in terms of Article 5(2)(k) and 5(2)(l) of the India-US DTAA, during the previous year. 12. Erred in holding that the contract for offshore supply of equipment is an integral part of the activities carried out by PE in India and the income from supply of equipment is attributable to the said PE in India. Taxability based on completed contract 13. Erred in holding that the accrual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... short) is one of the divisions of the assessee company. Its main object is to represent the assessee in various countries through its offices. In pursuance of this objective, it has maintained an office ("LO" for short) in India since 1995. For this year, the assessee had not filed the return of income under the provisions of section 139(1) of the Act. However, the AO had reason to believe that income chargeable to tax escaped assessment due to failure on the part of the assessee in filing the return. Therefore, reasons were recorded u/s 147 and notice was issued u/s 148 of the Act. In response to this notice, the assessee filed the return on 31.08.2006, declaring total income of Rs. 45,91,740/-. The assessment proceedings were initiated by issuing notice u/s 143(2) on 31.08.2006. This notice was followed by other notices and questionnaires. On the basis of facts gathered in the course of the proceedings and the representations made by the assessee, the tax payable was determined at Rs.33,98,99,441/- as under:- "Income from supply of hardware The contract price as stated in para 4.1 describes it at accumulative of USD 82.011 million. In the discussion made above, it ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the assessee had earlier moved an application dated 31.1.2007 before the competent authority for settlement of the case under Mutual Agreement Procedure (MAP). However, no consultation took place on this application. In view thereof, it is insisted by the ld. counsel for the assessee that the tax-liability of the assessee may be determined on merits and the appeal may be proceeded with. 5. The assessee has taken objection regarding the validity of making assessment u/s 147. It is mentioned in ground nos. 1 and 2 that the ld. CIT(A) erred in upholding the reasons recorded by the AO u/s 147 and that he had reason to believe that the income escaped assessment. It is further mentioned that he erred in holding that the AO was right in rejecting the objections filed by the assessee to the issuance of notice u/s 148. In this connection, the ld. counsel drew our attention towards the reasons recorded by the AO and placed in the paper book on page nos. 230 and 231, which read as under:- "The assessee is a company incorporated in USA. The assessee has entered into a contract with Airport Authority of India (AAI) on 04.02.2003 entitled "Contract for Software Maintenance Suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return; (c) where an assessment has been made, but:- (i) income chargeable to tax has been underassessed; or (ii) such income has been assessed at too low a rate; or (iii) such income has been made the subject of excessive relief under this Act; or (iv) excessive loss of depreciation allowance or any other allowance under this Act has been computed. In view of the foregoing, I have reasons to believe that income chargeable to tax has escaped assessment for the relevant assessment year within the meaning of Section 147 r.w.s. 148 of the Income-tax Act, 1961." 5.1 It is submitted that the AO referred to Software Maintenance and Support Contract dated 4.2.2003 in respect of MATS- BD system, which was set up by the assessee for the Airport Authority of India ("AAI" for short) in March, 1998, in Delhi and June, 1999, in Bombay. On the basis of this contract, he was of the view that after supplying the system, the assessee was carrying on maintenance operation, more so because the system required anomaly re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 of the impugned order, in which it is mentioned that the requirement of the expression "reason to believe" used in section 147 is that the AO has some material on record on the basis of which a prima facie belief could be arrived at that income had escaped assessment. He does not have to conclusively prove the escapement of income at this stage, as held by the Hon'ble Supreme Court in the case of Raymond Woolen Mills Ltd. (1999) 236 ITR 34. It is argued that even on the basis of Software Maintenance Support Contract dated 4.2.2003, a man of common prudence could have come to the conclusion that the assessee would have earned revenues from the AAI in respect of anomaly resolution, modification and maintenance of the MATS-BD system, as it is the proprietary of the assessee and it is the assessee alone who could render such services. Therefore, it is strongly contended that the reasons recorded by the AO have direct nexus with the escapement of income. 5.3 We have considered the facts of the case and submissions made before us. From the reasons recorded by the AO, it is clear that he was of the view that income arising on account of software maintenance, anomaly resolution and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oks of the company; (b) he granted a large loan to the Managing Director, who was his sister's husband; (c) out of the loan he made a gift of Rs.1,01,101/- to his sister; (d) he made further gifts to his nephews and nieces, and (e) the major portion of his salary and other emoluments, which had not been withdrawn, went to the Managing Director and the members of his family as loans and gifts. On these facts, the AO came to the conclusion that excess claim of salary and perquisites had been made in computation of the income made by the assessee. Therefore, the assessment was reopened u/s 147(a), as it then existed. This provision requires as pre-condition for assuming jurisdiction that -(i) the AO has reason to believe that the income had escaped assessment, and (ii) such escapement is by the reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. The Hon'ble Court held as under:- "We may point out that, in fact, the statements of account of Deo Dutt Sharma with the assessee for the relevant accounting year as also the previous years were with the ITO at the time of original assessment and these state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th effect from April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied: firstly the Assessing Officer must have reason to believe that income, profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a). But under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in sections 148 to 153 referred to as the relevant assessment year): Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year." 5.8 The provision contained in this section is materially different from the provision contained in section 147(a) as it existed prior to the amendment of section 147 by Taxation Laws (Amendment) Act, 1987, coming into force from assessment year 1989-90. This change has been taken note of by the Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P) Ltd. 5.9 Coming to the relevant facts, the assessee had not filed the return of income u/s 139(1). Therefore, the provision contain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts of the case of Ganga Saran and Sons (P) Ltd. (supra) are clearly distinguishable for the reason that the assessee had declared all the facts known till the close of the previous year and he was not bound to disclose subsequent gifts or loans. Moreover, the assessee was a regular assessee and similar facts had been disclosed in the returns over a period of time. In the instant case, the assessment has been made for the first time in this year on the basis of notice issued u/s 148. There is no question of disclosure of information in such a situation. Further, the validity of issuance of notice u/s 148 does not depend upon disclosure of all material facts as it has been held earlier that the only condition to be seen is whether the AO had the "reason to believe". In the case of Rajesh Jhaveri Stock Brokers (P) Ltd., the court distinguished between the provision contained in section 147 as applicable now and the provision contained in the omitted section 147(a). It has been held that so long as ingredients of section 147 are fulfilled, the AO is free to initiate proceedings u/s 147. In that case, the return filed by the assessee had been processed u/s 143(1) before recording ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ately upon the effective date of this contract and shall be completed in stages on or before the dates mentioned in time schedule of completion of work. The assessee shall bear in mind that time is the essence of the contract and time schedule including progress time schedule as provided for in this contract or such extended time schedule, as is mutually agreed, shall be strictly adhered to. It is also mentioned that in case the assessee delays System Site Acceptance Test ("SAT" for short) as specified in terms of this contract beyond 30 days after its specified completion date, the NAA shall be entitled to recover from the assessee or deduct from the payment due to the assessee as liquidated damages an amount equal to 1% of the contract price for each week of delay beyond the aforesaid 30 days specified for completion of the work, up to a maximum of 7.5% of the contract price. It is also mentioned that the assessee agrees to provide the necessary information to operate, maintain and repair the equipment delivered under the contract. The documents furnished by the assessee to the NAA which are in the possession of the assessee prior to the date of this contract, or which are deploy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er proceedings instituted against NAA, the same shall be defended at the cost and expense of the assessee, who shall also satisfy any decree or order of award made against NAA. But it shall be understood that no such equipment, sub-system, work, material or thing has been used by NAA for any purpose or in any manner other than that for which they have been furnished and installed by the assessee. It is also mentioned that the assessee shall implement a plan for transferring software technology for the radar data processing system ('RDPS' for short) and the flight data processing system ('FDPS' for short). The plan shall include a transfer of technology to the NAA staff and to Indian industry. The contractor shall train six NAA system software engineers at its facilities in the United States for a period of six months. These engineers shall participate in a series of software courses covering computer languages, UNIX, and software development methodology. NAA engineers will work directly with the contractor's personnel on the software development and testing. In addition, the training programme includes a three week course of instruction, which is to be given in India. This course i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l risks during the period of contact. It will be his responsibility alone. Any loss or damage to the equipment during clearance, handling, transportation, installation and testing, till such time the total system is taken over by the NAA shall be to the account of the assessee. The transfer of title shall not in any way relieve the contractor of this responsibility during the period of the contract. All costs on account of insurance liabilities will be on contractor's account and will be included in the contract price. 6.6 Article 9 inter-alia deals with the transfer of property, and it is provided that the property in equipments, sub-systems, systems to be applied to the NAA shall pass to it when the same are dispatched for delivery. Thereafter, the assessee shall be in possession of and will have the custody of equipments, sub-systems and systems for the purpose of transportation to site, its installation and site acceptance test. It shall hold the same on behalf of NAA and shall not deal with the same in any manner except for the purpose of this contract. The assessee shall hold the equipments etc. handed over to him by NAA as trustee on behalf of it without having any lien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eafter, he considered the arguments of the ld. counsel and mentioned that the question is one of fact and the cases relied upon by the assessee may not be of any help unless it is fully established that the facts are in pari-materia. He referred to the rulings of Authority for Advance Ruling in respect of subsequent contracts between the assessee and the AAI. It has been mentioned that although these rulings are in respect of subsequent contracts, they throw important light on the nature of work done by the assessee. It has been held that the payments made to the assesseecompany in respect of software and providing services of installation, testing and training are taxable in India both under the Act and the DTAA. These rulings were furnished on 4.3.2003, 26.4.2006 and 20.2.2007. It is clarified by the ld. CIT(A) that the finding of nonexistence of the PE is only in respect of these agreements only. Finally, it has been held that the two agreements constitute one agreement in the nature of a works contract for hading over functioning ATS at Delhi and Bombay to the AAI. The payments received by the assessee are, thus, to be considered for taxation in India on the basis of aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two separate contracts, one dealing with the supplies and the other with installation etc. and training. Separate considerations have been fixed for the two contracts. Therefore, even if it is construed that there is only one turn-key contract, the income will have to be determined in different years on the basis of distinct and separate activities, taking into account the system of accounting followed by the assessee. 6.11 In reply, the ld. DR referred to the decision of Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. (supra), in which there was a composite turn-key project for setting up a liquefied natural gas receiving, storage and regasification facility in Gujarat to be carried out by a consortium. The responsibility of each member of the consortium was fixed and separate consideration was also fixed for each one of them. Coming to the case at hand, it is submitted that under the two contracts, the assessee was to modernize the existing ATS. The assessee was assigned this work and the parameters were mentioned in the tender floated by the AAI. There was an existing ATS which was to be modernized to meet the present requirements of the AAI. U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ptance test. On carrying out this test, the AAI was to take over the ATS and operate them. The contract regarding supply of equipments and software would have been of no consequence without installation and performance of SAT as these processes are complicated, which could be undertaken only by the assessee. Further, the dates of payment mentioned in the supply contract were connected both with carrying out certain work, namely, completion of preliminary design review etc., factory acceptance test completion, installation and site acceptance test. Therefore, it will be difficult to segregate this contract from installation/service contract. It is another matter that two separate contracts were executed for the sake of some convenience of both the parties. However, the essential purpose was to set up the ATS at Delhi and Bombay, for which hardware and software was supplied by the assessee, installation was carried out leading to site acceptance test. The training for the personnel of the AAI as well as Indian industry was also to be carried out for preparing them to handle the ATS. Accordingly, we are of the view that the two contracts constitute one contract. Having come to the afo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a pointer to show that the liability of the appellant thereunder would also be different. The contract indisputably was executed in India. By entering into a contact in India, although parts thereof will have to be carried out outside India would not make the entire income derived by the contractor to be taxable in India. We would, however, deal with this aspect of the matter a little later. The scope of work is contained in clause 2.1 of exhibit A appended to the contract which includes supply of equipment, materials and facilities. The said exhibit spells out different systems to be set in place. It imposes an obligation on the contractor to supply equipment required therefor. It was to arrange for the engineering services in relation thereto. It was also required to render various other services within India. Exhibit D, however, provides for the prices to be paid in respect of offshore supplies and offshore services, onshore supply and onshore services, construction and erection. The payment schedule has also been separately specified in respect of each of the components separately. It is not in dispute that title in the equipment supplied was to stand transferred upon de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted in India which was involved in execution of the contract and its follow-up. In any case, it has been admitted by the assessee that it has an installation PE but this PE had nothing to do with the supply contract. In the context of these facts, it has been held that the assessee has a business connection in India u/s 9(1)(i). Looking to the magnitude of the activities involved even from preparation of tender onwards, the assessee had substantial presence in India. The market and support services were provided by the liaison office of the group company. The installation work continued for more than 120 days. The personnel of the assessee stayed in India for more than 90 days. Therefore, it has been held that the assessee had PE in India under article 5(2) of the DTAA. 7.2 The ld. CIT(A) has dealt with this issue on page nos. 35 to 53 of the impugned order. He referred to the findings of the AO and the provision contained in article 5 of the DTAA. Thereafter, he examined the issue in the light of provision contained in paragraph nos. (1), 2(a), 2(k) and 2(l) of the DTAA. It is mentioned that the assessee was engaged in the activities of supply of equipment and software, insta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee in India. Therefore, it is argued that the short visits of the employees in India for the purposes mentioned above do not lead to inference that the assessee had a PE in India. 7.5 In reply, the ld. DR submitted that the assessee entered into a contract with AAI for modernization of ATS at Delhi and Mumbai. These stations had pre-existing ATS at the airports, which were to be substantially upgraded. For this work, the assessee was required to carry out the works of designing, manufacturing, supplying, installing, testing and commissioning of the equipment. It was also to provide training to the personnel of AAI and private companies for handing the ATS. Thus, the first stage of the work was the designing of the confugration of the upgraded ATS as per requirement of the AAI. After deciding this matter, the requirement of equipment had to be ascertained. This required various reviews mentioned in exhibit A of the supply contract, i.e., conducting technical systems reviews and meeting with the NAA for system specification review, PDR and CDR. The assessee was required to attend a quarterly progress review meeting also for the purpose of presenting project status repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tc. The admitted position is that system specification review was conducted in India and for this purpose, the personnel of the assessee had access to the existing ATS. On examining the existing system and the system to be installed, various design reviews had to be undertaken. It is the case of the assessee that the work of system specification review, PDR and CDR required occasional visits of the personnel of the assessee, but all the work in relation thereto, after initial inspection, was conducted outside India. On the other hand, the case of the ld. DR is that since ATS were available to the assessee, the same constituted the PE under article 5(1) from the day system specification review started. We are of the view that system specification review, PDR and CDR do not require any prolonged stay of the employees of the assessee in India. The system specification review requires data from the AAI regarding the capacity to be installed. The design reviews can be carried out outside India which may require subsequently approval of the AAI. There is no evidence on record that apart from inspection, the ATS were made freely available to the assessee to be occupied by its personnel fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee earned from the supply contract with AAI between supply of equipment and software. It is mentioned that the ld. CIT(A) erred in upholding the finding of the AO that the revenue can be bifurcated in terms of supply of equipment and software in the ratio of 30:70. It is further mentioned that he erred in holding the finding of the AO that 70% of the contract price constituted royalty or fees for included services, representing the right to use copyright of computer software and services, without appreciating that the contract was predominantly for supply of equipment in which the software was embedded. It is also mentioned that he erred in upholding the finding that royalty etc., as aforesaid, was taxable under Article 12 of the DTAA and 50% of the balance amount representing profit from supply of equipment was taxable in India. It is also mentioned that he misunderstood the fact that the assessee (and not the AAI) had obtained ruling in the matter from the Authority for Advance Ruling. It is also mentioned that he erred in supporting his decision from three other rulings of AAR based upon subsequent agreements between the assessee and the AAI. It is also mentioned t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaken for modernization of pre-existing ATS. The dominant intention is to provide services and the supply of equipment is only incidental to such services. The equipment and technology are the proprietary of the assessee for which it holds patents and the AAI has only been provided limited right to use such technology and equipment. Coming to the splitting of the revenue, the AO has relied on the ruling of the AAR in the case of Mitsubishi Corporation, (2005) 279 ITR 165. 8.2 On consideration of the findings of the AO and the submissions of the assessee, it is mentioned that the rulings of the AAR throw important light on the facts of the case and the legal position except in regard to the existence of PE. The finding of the AAR is that since the personnel of the assessee stayed in India for less than 40 days, the PE will not come into existence. This is a finding under Article 5(2)(k) of the DTAA. The Authority also ruled out the existence of PE in respect of supply of hardware. However, the instant contract is for supply of equipment and software as well as for installation thereof. It also provides for support services. The remuneration for patent rights and royalties etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has to be attributed to the PE in consonance with the domestic law. The income accrued to the assessee on completion of both the ATS in Delhi and Mumbai. The acceptance test in Mumbai was performed in May, 1998, in which certain defects were found, which were rectified in June, 1999. Therefore, the activities in respect of the agreements were concluded in financial year 1998-99 and profit therefrom is liable to be taxed in assessment year 1999-00. Such profits are to be taxed under Article 7 of the DTAA in terms of completed project basis. The assessee has not followed any regular system of accounting in respect of Indian operation. In view thereof, the finding of the AO regarding taxation of profit on project completion basis has been upheld. 8.4 Before us, the ld. counsel submitted that in order to decide these grounds it is necessary to refer to the contents of the two contracts. In so far as supply contract is concerned, the terms are similar to the case of Motorolla Inc. vs. Dy. CIT, (2005) 95 ITD 269 (Del) (SB). The title of the contract, namely, modernization of air traffic control system...." Is not conclusive of the fact that it is purely a works contract. A moderniz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia. All activities in respect of manufacturing of equipment, loading it with software and shipping were carried out side India. Therefore, even if the ATS is taken to be the PE of the assessee in India, as held by the ld. CIT(A), no activity can be attributed to the PE till this stage. Therefore, no profit can be attributed to the PE, being the ATS or for that matter any other PE envisaged by the ld. CIT(Appeals). 8.5 Coming to the bifurcation of the consideration towards the supply of equipment and royalty on software, it is submitted that the contract does not contain any stipulation regarding separate prices of the equipment and the software. Therefore, no such allocation can be made. The software was loaded on to the equipment and it formed part and parcel of the equipment. Therefore, the whole of the supply contract was an integrated contract of supply of equipment with software. In such a situation, no price can be allocated to the software. Further, the assessee had not parted with the right in software as AAI is entitled to use the software, copy it, modify it etc. only for the purpose of ATS, i.e., working the equipment. The AAI is not entitled to sell any right in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s until the seller weighs, measures, tests or does some other act with reference to the goods for the purpose of ascertaining the price when he is bound to do so. The case under consideration not only involves the supply of goods and software but also its installation, testing and commissioning. The mere supply of goods is meaningless until the latter activities are also performed. Therefore, the property in goods passes only when all these activities have been completed. These activities were completed in India and not outside India. Further, the supply was made under CIP (As per INCOTERMS) at Delhi and Mumbai airports. According to the contract, the property in equipment etc., passes to the NAA at the time of shipment of the goods. Thereafter, the possession of the goods was given to the assessee again to be held for and on behalf of the NAA. In these circumstances, it is not correct to say that the property in goods passed outside India. The reason is that even after dispatch of goods, risks and responsibilities continued to vest in the assessee. The assessee was under obligation to maintain insurance to protect its interest and the interest of NAA against all risks. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought to tax profits from supply of equipment as accruing in India and the amount received in lieu of software as royalty. 10. We have considered the facts of the case and submissions made before us. The facts are that after examining the tender documents and the state of the existing ATS, the assessee entered into a contract with the AAI for supply, installation, commissioning of the ATS as per the requirements of tender document. The process involved establishing the PDR so as to ascertain the requirement of hardware and software. This was to be discussed with AAI to come to the final requirement of software and hardware designs, i.e., establishing CDR. Once the CDR was agreed upon, the requirement of hardware and software was frozen. The hardware was manufactured outside India. The assessee was also in possession of requisite software being its own property or obtained under license from others. The software was loaded on to the equipment. The whole system was examined by the AAI outside India for its approval. Thereafter, the equipment loaded with software was shipped to India under CIP (INCOTERM). The AAI cleared the goods in India and handed it over to the assessee for in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of equipment and software by themselves were of no consequence to the AAI as it was interested in the functioning ATS of requisite capacity, which the assessee undertook to install. Therefore, the profits accrued on completion of the contract when the functioning ATS was handed over to the AAI. In the alternative, it has been submitted that if profits are to be ascertained on the basis of milestones in execution of the contract, then the consideration in respect of equipment and software will have to be segregated because they are quite distinct assets in nature and their taxability has to be decided on different considerations. We may add here that in the course of hearing, the assessee was asked as to whether segregation as aforesaid has been made by the assessee for its own internal purpose or for the purpose of payment of customs duty or any other purpose. It was submitted that no such exercise was undertaken. The assessee was also not able to produce any order from customs authorities passed at the time of clearance of the equipment and the software at the customs port in India from which we could have an idea whether that authority had segregated the consideration in terms o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of S-SDD, which includes software documentation, software, hardware, installation, testing and training at the total cost of US$ 2348120, out of which US$ 169102 will be towards hardware and US$ 2149018 will be towards the cost of software and a fee of US$ 30000 for installation, testing and training. This contract is also in the nature of a turn-key contract although of a smaller amount. The contract trifurcates the consideration towards hardware, software and installation etc. This shows that in a contract of the kind undertaken by the assessee, if there is a composite consideration, the same can be conveniently segregated in different components. Therefore, on the facts of the case and subsequent contracts of the assessee with the AAI, we do not find any difficulty in coming to a conclusion that the consideration for equipment and software could have been segregated. Since as per arguments made before us, if profits from supply contract are held to be taxable separately, as the supply is a milestone in the whole contract, then the treatment meted out to profits on sale of equipment and consideration received for supply of software will have to be different, as the two assets a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT(Appeals) are not arbitrary or highly excessive. In absence of any evidence filed by the assessee before any of the authorities, we have no reason to interfere with the allocation made by the ld. CIT(Appeals). 12. The second question is-whether, in a turn-key contract, in which the assessee is under obligation to supply the equipment and the software and also install them, the profit should be taxed on completion of each milestone or at the time of handing over the functioning system to the contracting party? We have already furnished the summary of the contract in various sub-paragraphs of paragraph no. 6. The details of payment to be made to the assessee in different countries have also been furnished in paragraph no. 6.4. It has also been mentioned that the payments are to be made on 10 different dates between 30.11.1993 and 30.09.1995, upon completion of a particular activity starting from completion of PDR and ending with performance of site acceptance test. The ATS at Delhi was tested in March, 1998 and the ATS at Mumbai was tested in June, 1998. The previous year for this assessment year comprises the period 1.4.1998 to 31.3.1999. Therefore, the work regarding Mumba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordingly, it was held that since all parts of the transaction in respect of off-shore supply, i.e., the transfer of property in goods as well as the payments, were carried on outside India, the transaction could not have been taxed in India. The only difference pointed out by the ld. DR in the facts is that there were a number of other parties in the consortium who performed different parts of the contract, while in the case at hand the responsibility vests solely in the assessee to carry out all parts of the transaction. According to us, this distinction does not make any difference to the taxability of amounts received as consideration for different identifiable activities for which consideration is payable separately. Since the activities are distinct and consideration for supply of equipment and the software has been separately mentioned, the ratio of the aforesaid decision will be applicable to the facts of this case. In that case, there were two parts in the same contract regarding supply and services, whereas there are two separate contracts in this case regarding supply and services. However, we have already concluded that the two contracts are inextricably linked so as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt-AAI itself has not been provided with the technology for developing the software as such does not really make a difference. The expression used is: "make available technical knowledge, experience or skills". The substance of the transaction, in our view, is rendering of technical and consultancy services which make available to AAI the technical knowledge, experience and skills possessed by Raytheon in the field and the provision of software system is only part of that exercise. The delivery of software and the specification of the cost of software cannot be viewed in isolation. Software is a part of the package of setting up upgraded automation system and as stated earlier, it has no value unless the supplier shares the technical knowledge, informations and experience with the user and suitably equip the personnel of AAI to handle the system by themselves. It needs training and imparting of valuable informations and instructions. Viewed in this background, we are of the view that the payment made towards software can be legitimately brought within the fold of Art. 12(4)(b) of the Tax Treaty, if not Art. 12(3). As regards installation services, there is no dispute about its taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only the copyrighted software, which is an article by itself and not any copyright therein." 13.3 In the course of hearing, the Bench also referred to the decision of "H Bench of Delhi Tribunal in the case of Grace Mac Corporation, Microsoft Corporation and Microsoft Regional Sales Corporation vs. ACIT, (2011) 8 ITR (Trib.) 522. In this case, it has been held that a computer programme is a literary work under Copyright Act, 1957, and if any or all rights (including granting of a license) are transferred for a consideration, the amount received will be in the nature of royalties. It is also mentioned that a programme is in the nature of a process which executes instruction in the given order. Therefore, any consideration received would amount to royalty under the Act and the DTAA. The case of the ld. DR is that the aforesaid decision supports the case of the revenue. The decision deals with the license granted in respect of shrimp wrapped software, which is sold across the counter. The software in this case is highly specialized one and, therefore, the facts of this case stand in a stronger footing. On the other hand, the ld. counsel for the assessee distinguished the case by s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise in the year under consideration. Accordingly, it is held that profits on supply of equipment and software are not taxable in this year. Ground no.6 is decided accordingly. 14.1 We have also held that the PE of the assessee came into existence when the equipment was handed over to it by the AAI after clearance for the purpose of installation. The ATS in Delhi was handed over to the AAI in March, 1998 after conducting site acceptance test. This is prior to the relevant previous year. However, the ATS in Mumbai was handed over in June, 1998. Therefore, the profits in respect of the installation contract and services rendered in this connection in Mumbai are taxable in this year. Ground nos. 13, 14 and 15 are decided accordingly. 14.2 Thus, the matter regarding the computation of profit in respect of installation contract has to be decided de-novo by the AO and ground nos. 16, 17 and 18 are decided accordingly. 14.3 As the matter has been restored to the file of the AO, there is no need at present to decide ground nos. 19 and 20 regarding charging of interest under sections 234B, 234C and 220(2) of the Act. The AO shall decide these matters afresh while computing the i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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