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2015 (6) TMI 609 - ITAT KOLKATA

2015 (6) TMI 609 - ITAT KOLKATA - TMI - Taxability of supply of equipment in India - India-Germany Double Taxation Avoidance Agreement (DTAA) - Held that:- The designing, procurement of material, fabrication and manufacturing of equipment was undertaken outside India. From the facts of the case it is clear that the Company is not involved in the manufacturing of equipment and such equipment were sourced from third party vendors based outside India. From the agreements and documents it is clear t .....

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to the customer. Such payments are made through irrevocable letter of credit. From the documents and evidences it is very much clear that the buyers were the Indian customers who were independent and unrelated parties and purchased the equipment from the assessee on their own account. From the agreements it can be gathered that the contracts for the sale of equipment were concluded on a ‘principal to principal’ basis. Under the contracts, customers’ inspection of the equipment was to be taken p .....

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anty provisions. Even there is no PE for sale of equipment in view of the decision of Hon'ble Supreme Court in the case of Hyundai Heavy Industries, [2007 (5) TMI 196 - SUPREME Court] and in addition to this, there is no concept called sale PE under DTAA. In light of the facts and legal position, we hold that the profit arising to the assessee from sale of equipment is not taxable in India. - Decided in favour of assessee.

Assessing the income from supervisory services - what profit p .....

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the Indian PE. In assessment, AO had enhanced this allocation to 27.50% which works out to ₹ 2,84,66,810/-. The DRP also confirmed the action of the AO for the reason that on identical facts and circumstances, the ITSC attributed profits @ 27.50% in the assessee’s own case for AYs 2008-09 and 2009-10 respectively. For the AYs 2008-09 & 2009-10 before the ITSC and now for AY 2010-11 before the AO, the assessee admitted to have PE in India to which the impugned supervisory services were effe .....

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from supply of designs and drawings in India - AO/DRP erred in holding that the income earned by the appellant from sale of designs and drawings is taxable as Royalty under Article 12(3) of the DTAA read with the provisions of Section 9(1)(vi) of the Act and is not in the nature of sale of product - Held that:- Retaining intellectual property in designs and drawings is similar in the nature to the retaining of patented rights in any goods/machinery. Restriction on the intellectual property in d .....

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than use of a copyright and is, therefore, in the nature of business income. - Decided in favour of assessee.

Disallowance of credit for TDS - Held that:- The claim of the assessee is that the original TDS certificates were submitted before the AO during the course of assessment proceedings in support of its claim of TDS. But the AO has not allowed the claim in full. We direct the AO to verify the TDS certificates and allow the claim actually.- Decided in favour of assessee for statis .....

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t ) in appeal ITA No. 431/Kol/2014 for Assessment Year 2010-11& ITA No. 283/Kol/2015 for A.Y. 2010-12 in the case of Outotec GmbH dated 29.01.14 & 28.01.14 respectively and in ITA No. 432/Kol/2014 for AY 2010-11 in Outotec (Canada) Ltd. dated 23.02.2015. In all these cases, Deputy Director of Income Tax, International Taxation-2(1), Kolkata has followed the directions of Dispute Resolution Panel ( DRP in short) Kolkata u/s 144C(5) r.w.s 144C(8) of the Act. 2. As the facts and circumstanc .....

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he income earned by the appellant from sale of equipment to the Indian customers accrues or arises in India and thus taxable in India under the provisions of the Act read with the provisions of India-Germany Double Taxation Avoidance Agreement (DTAA). 2(b) On the facts and in the circumstances of the case and in law Ld. AO/DRP has erred in holding that title of the equipment sold by appellant has passed on to the Indian customers in India and while reaching to this conclusion has further erred i .....

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) On the facts and in the circumstances of the case and in law, Ld. AO erred in rejecting the reliance placed by the appellant on the decisions of DIT Vs. Ericsson A.B [343 ITR 470], DIT Vs. LG Cable Ltd.[237 CTR 438] and Director of Income Tax vs. Ms. Nokia Networks Oy [253 CTR 417] merely on the contention that such decisions are sub-judice before the Hon'ble Apex Court. 2(e) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that since the overall re .....

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mstances of the case and in law, Ld. AO/DRP erred in holding that the contracts entered into by the appellant are composite contracts, for erection of plant purely based on surmise and conjecture without appreciating that the contracts are for supply of equipment. 2(g) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in not appreciating the fact that no Permanent Establishment (PE) of the appellant is created in India under Article 5 of the DTAA for offshore sale of .....

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of the projects and hence for the projects for which there is no supervisory PE, the question of attribution on account of sale of equipment does not arise. 2(i) v, Ld. AO/DRP erred in holding that since the Acceptance Tests were carried out at customers site in India the supervisory PE has a role to play in offshore sale of equipment without appreciating the fact that all the operation relating to design, fabrication and manufacture of the equipment were undertaken outside India and hence ther .....

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5 of the DTAA. 2(l) On the facts and in the circumstances of the case and in law, Ld.AO/DRP erred in holding that the judgment of Ishikawajma-Harima Heavy Industries Ltd. Vs. DIT 288 ITR 408 and other judicial precedents relied upon by the appellant were based on their own facts without appreciating that such decisions are squarely applicable in the appellant s case. 4. Brief facts leading to the above issue, as noted in the order of DRP dated 23.12.13 and assessment order are that the assessee .....

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India. According to AO, the assessee supplied equipment to seven Indian companies during the year under consideration relating to Steel Industry. The assessee raised invoices for sale of equipment amounting to Euro 79,776,994 equivalent ₹ 475,71,02,152/- applying TT buying rate as on 31-03-2010. The assessee filed copies of contract for sale of equipment and AO after considering the submissions and documents proposed that a profit percentage @ 10% be chargeable to tax from sale of equipmen .....

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of warranty? It is essential to look into the terms of the contract to arrive at a conclusion on this crucial question. During the year under consideration the assessee has earned from sale of equipment from TATA Steel Ltd., JSW Steel Ltd. Steel Authority of India Ltd., Bhushan Steel Ltd., Vedanta Aluminium Ltd. This panel has gone through the agreements and found that the supplies of the equipment on standalone basis are not the objective of the agreements. The agreements indicated that it is .....

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ctor s aforesaid responsibility shall be construed as included in the contract price. All items of equipment, whether specifically mentioned or not in the Technical Specification but which are usual and/or necessary for completion of work under the contract and are necessary for proper, efficient, sale and stable construction, operation and maintenance of the work and/or for the fulfillment of the performance guarantees, shall be supplied or provided or executed by the contractor without any add .....

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ment, rotation and vibration, checking of all electrical interlocks, checking of insulation, checking of cabling interconnection, input/output connection check, calibration of instruments, pressure testing of pipelines, idle and no-load tests. 16.3 A details program of cold tests including formats of check-sheets shall be prepared by the contractor and submitted at least three (3) months prior to commencement of cold tests to the Purchase/Engineers for comments and finalisation. 16.4 The complet .....

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tor, the purchaser will promptly issue a Provisional Acceptance Certificate for the plant, provided that the contractor undertakes to promptly rectify defects, if any, which do not influence commercial operating but which are nevertheless present in the plant and which are indicated in writing by the Purchaser to the Contractor and the Contractor has fulfilled his obligations regarding his submission of designs and drawings including As Built Drawings . Such certificate, however, shall in no way .....

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ble ad save as otherwise expressly provided herein shall be governed by the provisions of the said Act. From the above the total contract value is Euro 24,130,550 for the entire contract which included cost of equipment and designs and drawings. From the above it is clear that the scope of Contract is not confined merely to dispatch of equipment on FOB basis overseas but linked to free and trouble fee operation of the such equipment in the plant. Further acceptance of equipment is linked to the .....

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ore than 100 crores. When the equipment becomes the integral part of the plant and till such state is the obligation of the assessee to ensure smooth commissioning of the plant, the contract cannot be viewed in isolation and in parts. From the contacts it is noticed that the main purpose of the supply of equipment is to erect plant and such intention is not to be missed. The Hon'ble AAR in the case of Alstom Transport SA [2012] 208 Taxman 223 (AAR) held as under: • A contract for the in .....

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esevoir Performance WLL (AAR No. 977 of 2010) (AR)] • The AAR relied on the decision of the Supreme Court in the case of Vodafone International Holdings BV [2012] 341 ITR 1 (SC) wherein the Apex Court observed that it is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look at the transaction as a whole and not to adopt a dissecting approach; • Accordingly, the contract could not be split up to treat a part of it as confined to .....

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er the title is actually passed outside India. Since we have already held that acceptance of performance deliveries including testing and commissioning is linked to the supply of equipment, the title in the property has passed in India only. As such the reliance on these case laws is misplaced. When the contract is for the erection and commissioning of the plant, in fact the equipment may not remain as a property and the whole contract becomes a project for Plant Erection. It is the assessee thu .....

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d this may be the reason, the liquidated damages are confined to 35% of the contract value. The absence of return of goods clause is apparently cannot be incorporated since the equipments part and parcel of the plant and cannot be goods in real sense. Enclosure-1 to the FOB contract is as under: FOB (Contd.) 260 Enclosure - 1 Break-up of price for design, manufacture and supply of imported plant, machinery and equipment with auxiliaries and initial fills, commissioning spares on F.O.B. basis for .....

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eptance 5.0 Initial fill required for start-up and commissioning till Provisional Acceptance 6.0 Any other item not specifically mentioned above but considered by the Contractor 7.0 Designs and drawings for imported equipment/items Total … … Euro 24,130,550 Thus the equipment is part of whole plant which consists of various designs, electrical and automated systems. Though the contract is split into parts, the completeness of the contract is achieved only after the successful testi .....

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owed the directions of DRP and assessed the estimated profit @ 10% of sale of equipment. Aggrieved, assessee-company filed appeal before Tribunal. 5. Before us, Ld. counsel for the assessee Shri J.P. Khaitan, Senior Advocate argued on behalf of the assessee-company and for Revenue Shri Vijay Kumar, CITDR argued. Ld. counsel for the assesses stated facts that the AO and DRP, noted in respective orders that assessee Company does have a PE in terms of Article 5(2)(i) of the India-Germany DTAA and t .....

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not being met. Therefore, the same has concluded in India and as the existence of a PE has already been admitted by assessee, then as to why attribution of profits from sale of Equipment should not be made. Ld. Counsel explained the factual and legal position with regard to sale of equipment before addressing the specific query with regard to acceptance tests and the attribution of profits from sale of equipment to the PE raised by revenue. According to Ld. Counsel the contracts relating to sale .....

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ndia. (iii) Consideration/payment for sale of equipment was received outside India in foreign currency. (iv) Majority of the payment (80% - 85% including 10% advance) for each and every part of shipment becomes payable upon delivery of equipment on FOB foreign port of shipment once shipping and other documents are send to the customer. Such payments are made through irrevocable letter of credit. (v) The buyers were the Indian customers who were independent and unrelated parties and purchased the .....

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ed from the facts that operations relating to designing, fabrication and manufacturing of equipment, and sale of equipment took place outside the territory of India. He referred to relevant clauses of contract for sale of equipment for Tata Steel Kalinganagar Project (In short TSKP), which are reproduced as below: Clauses relating to scope of work - Tata KPO project Schedule 1 Article 1.1. SCOPE Of WORK FOR DESIGN, MANUFACTURE AND SUPPLY OF IMPORTED EQUIPMENT 1.1.1 Designs, procurement of materi .....

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. 1.1.2 Supply of all equipment foundation bolts including bolts of special design and those made of alloy/special steels and imported special embedment s that may be required for the Equipment on F.O.B. Basis Clauses related to transfer of title/property in equipment outside India Schedule 3 1.1 Delivery of imported Equipment and Commissioning Spares The FOB Delivery of all imported Equipment as listed in break-of Price given in Enclosure-I of this Agreement, will be completed by the Contractor .....

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this Agreement and against presentation of following dispatch documents proving that the goods are delivered FOB port of shipment: 4.2 Mode of payment 4.2.2 Payments as per clause 4.1.3 and 4.14 are payable at sight against presentation of the stipulated documents out of an irrevocable letter of credit allowing partial payment to be opened by a first class bank in India in favour of the contractor within sixty (6) days from the date of signing the agreement. 15. REPLACEMENT OF UNSERVICABLE MATE .....

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urchaser repair or replace such parts and be entitled to payment from purchaser of the corresponding mutually agreed reasonable costs and time incurred by Contractor to do so. Clauses relating to customer s inspection 12.2 Inspection at Contractor s and / or at His Sub-Contractor s Premises The purchaser and/or his authorised representative may have the right of inspecting and testing the Contract work or any part thereof including all Plant and Equipment, its components, sub[-assemblies and ass .....

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hall also carry out other tests as may be required to be carried out by the Contractor under the Contract… 12.11 Despatch Clearance Certificate Within 5 days of successful completion of inspection and/or tests at the Contractor s or sub-contractor s works, the purchaser/his authorised representative shall automatically issue a Despatch clearance certificate (DCC) approving thereby the concerned Plant and Equipment for shipment/dispatch. 18. Defective Plant, Materials and Workmanship 18.1 .....

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e it comply with the requirement of the Contract. Should he fail to do so within a reasonable time, the Purchaser may repair and / or replace, at the cost of the Contractor, the whole or any portion of the plant, as the case may be, which is defective or fails to fulfill the requirements of the Contact. Such repair / and or replacement shall be carried out by the Purchaser, where reasonably possible to the same Technical specification. The Contractor s liability under this clause shall be to pay .....

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the sample bills of landing which clearly demonstrate that the title in equipment was transferred to the customers outside India, and this document is enclosed as Annexure-II. 6. In view of these facts, Shri Khaitan referred to the provisions of Section 5(2) of the Act, which deals with the scope of total income of any previous year of a nonresident on which income-tax is chargeable under section 4 of the Act. According to him, section 5(2) of the Act provides that the total income of the non-r .....

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rom the sale of equipment can be said to accrue or arise or deemed to accrue or arise in India. In order to explain the same, it would be important to take a note of relevant extracts of section 9(1)(i) that are reproduced below: 9(1) The following incomes shall be deemed to accrue or arise in India: (i) 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 .....

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at income shall accrue or arise or deemed to accrue or arise in India if the same is earned through any business connection in India. However, Explanation 1(a) to section 9(1)(i) of the Act provides that where some operations are carried out in India then income only to that extent resulting from such operations can be taxed in India. In other words, if no operation is carried out in India, then no profit can be taxed in India. Thus, the point that merit consideration is whether the assessee has .....

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mer and such payment has to be made through irrevocable letter of credit. It is needless to mention that no buyer would make the substantial payment for equipment of which the property has not been transferred to him. The irrevocable letter of credit further makes it clear that even if the ship does not sail or deliver the goods to the destination, the assessee receives payment out of L/C, guaranteed by the bank, upon FOB delivery. Therefore, it is clearly evident that the sale of equipment took .....

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provisions of the Act, therefore, the assessee is not required to examine the taxability under the provisions of the DTAA as mentioned by the Hon'ble Supreme Court in the judgment of Ishikawajma-Harima Heavy Industries Ltd. vs DIT (2007) 288 ITR 408 (SC) on page no. 444 of report wherein it has been held that The entire transaction having been completed on the high seas, the profits on sale did not arise in India, as has been contended by the appellant. Thus, having been excluded from the sc .....

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rofits earned by a German resident is taxable in India only if that German resident carries on business in India through a permanent Establishment ( PE ) in India in terms of Article 5 of the DTAA. 1. The relevant provisions of Article 7(1) of the DTAA, is reproduced below: ARTICLE 7 - Business profits -1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishme .....

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refore, the assessee wishes to submit that no PE has been constituted in India with respect to sale of equipment and hence no profits from sale of equipment can be taxed in India. Further, for the projects for which supervisory PE has been constituted in India, it is submitted to designing, fabrication and manufacturing of equipment was done outside India and sale has also taken place outside India and hence profits arising from sale of equipment is not taxable under the provisions of DTAA. 3. L .....

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had happened during the said period. During the year under consideration, the assessee has raised the invoices for remaining payments which mainly pertains to acceptance test etc., and do not relate to supply. The details of the same are mentioned below: (Amount in Euros) S.No. Name of project Value of invoices raised for sale of equipment 1 Tata SP4 333,838 2 Vedanta Paste Plant 395,000 3 Vedanta Paste Plant (expansion) 633,472 The assessee contended that to the best of the knowledge of the as .....

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ration, the supervisory PE exists only for SAIL IISCO project. Hence it was reiterated that, since all the work relating to designing, fabrication and manufacturing of equipment was done outside India and sale has also taken place outside India, there cannot be any question of role of supervisory PE in the off shore supplies for the said project and hence revenue from sale of equipment for IISCO project is not attributable to the said supervisory PE. 4. Apart from Article 7, Protocol [Item (a)] .....

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activities of the permanent establishment as such. If machinery or equipment is delivered from the head office or another permanent establishment of the enterprise (situated outside that contracting state) or a third person (situated outside that contracting state) in connection with those activities or independently there from there shall not be attributed to the profits of the building site or construction, assembly or installation project the value of such deliveries . (Emphasis Supplied) Thu .....

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designs & engineering documents constituted outright sale, not connected with assessee s PE in India and hence not taxable in India. The assessee also placed reliance upon various judicial pronouncements, namely, Scientific Engineering House (P) Ltd. v. CIT 157 ITR 86 (SC) and Modern Treads (India) LTD. v. DCIT 69 ITD 115 (ITAT Jaipur). The AO gave a finding that the payment for supply of drawings, designs & engineering documents constituted royalty under Explanation 2 to section 9(1)(vi .....

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l clause is present in all the contracts with other Indian customers to whom, the assessee supplied the impugned drawings, designs and engineering documents. It makes it evident that in reality, it is not pertaining to any sale of goods but mere granting of a license to use the intellectual property embedded in such drawings, designs & engineering documents. Moreover, the judgment of the Hon'ble Supreme Court in the case of Scientific Engineering House (P) Ltd. cannot help the case of th .....

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n short ITSC) in its order dated 30.12.2011 in assessee s own case gave elaborate findings that the payment for supply of drawings, designs & engineering documents constituted royalty under Explanation 2 to section 9(1)(vi). The decision of ITSC on this issue still holds the field in the absence of any contrary decision by any higher judicial forum in the assessee s case. Since there have been no change on facts and circumstances even in the assessment year under consideration, there is no r .....

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, commercial or scientific experience. The term industrial, commercial or scientific experience alludes to the concept of knowhow (vide paragraph 11 of the OECD Commentary on Article 12). As commonly understood, know-how is the accumulated fund of knowledge acquired by years of observation, research, experimentation and experience. It grows in the shape of a formula, drawings, patterns, blue prints, specifications and so on. The material form it takes, not only facilitates preservation, collatio .....

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able to the production of goods or services. Modern machinery is the product of technology. The concept of transfer of technology is complex phenomenon involving rights, obligations privileges and commitments of the parties concerned. The transaction permits access and control to advance means of production. In the present case what was transferred in the form of drawings designs, engineering information, documents, etc., covered the usage of industrial, commercial or scientific experience to en .....

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is defined both in the Income Tax Act and in the Tax Treaties as meaning royalty . For the purpose, technical know-how means knowledge concerning industrial, commercial or scientific experience. It is the unrivaled technical information whether capable of being patented or not, that is necessary for the industrial production of a product or process, directly and under some condition, inasmuch as it is derived from experience [vide (1999) 105 Taxman 240 (AAR): Advance Ruling P. No. 30 of 1999] 9. .....

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ndustrielle), know-how is undivulged technical information that is necessary for the industrial reproduction of a product or process, directly and under some conditions, inasmuch as it is derived from experience, know-how represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the process of technique. (ii) In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge an .....

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th the AO and DRP have correctly applied the law to the facts of the present case. The secrecy & confidentiality clause in the agreement under which the supply of drawings, designs, etc., was made cannot justify the assessee s claim of it being an outright sale of goods. By the transfer of drawings, designs, engineering information, etc. the recipient was enabled to ensure the operation and maintenance of the plant set up and the manufacturing process of the plant. The recipient was enabled .....

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the Indian company to the non-resident company for imparting of any information concerning the working of or the use of patent, invention, model, design, secret formula or process or trademark or similar property or if it was paid for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill, the amount would fall within the meaning of royalty , as defined in Explanation 2 of section 9(12). This is a question of fact to be determined o .....

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. We have heard rival submissions and gone through facts and circumstances of the case. We find from the facts of the case that the designing, procurement of material, fabrication and manufacturing of equipment was undertaken outside India. From the facts of the case it is clear that the Company is not involved in the manufacturing of equipment and such equipment were sourced from third party vendors based outside India. From the agreements and documents it is clear that the equipment was direct .....

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nts are made through irrevocable letter of credit. From the documents and evidences it is very much clear that the buyers were the Indian customers who were independent and unrelated parties and purchased the equipment from the assessee on their own account. From the agreements it can be gathered that the contracts for the sale of equipment were concluded on a principal to principal basis. Under the contracts, customers inspection of the equipment was to be taken place outside India and assessee .....

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supply of equipment and materials to an Indian Company was liable to be taxed in India under the provisions of the Act or the India-Japan Tax Treaty. That was a case wherein break-up of contract price for each of the segments i.e. for supply, services and construction and erection were separately given in the Agreement. In that connection, the Hon'ble Supreme Court held, on pages no 430 and 444 of the report, as under: … It is not in dispute the title in the equipment supplied was to .....

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ation treaty would not arise… (p. 444) In another case cited by assessee i.e. Hon'ble Supreme Court in the case of CIT and Anr V Hyundai Heavy Industries Co. Ltd. (2007) 291 ITR 482(SC)in which the assessee, a non-resident foreign company incorporated in South Korea had entered into an agreement with ONGC for designing, fabricating, hook-up and commissioning of South Bassein Field Central Complex Facilities in Bombay High. The contract was in two parts, one was for fabrication of the .....

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se of one Contracting State may not be taxed by the other Contracting State unless the enterprise caries on its business in the Other Contracting State through its PE. The said para (1) further lays down hat only so much of the profits attributable to the PE s taxable. Para (1) of Article 7 further lays down that the attributable profit can be determined by the apportionment of the total profits of the assessee to its various part OR on the basis of an assumption that the PE is a distinct and se .....

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only after the contract with ONGC stood concluded. It emerged only after the fabricated platform was delivered in Korea to the Agents of ONGC. Therefore, the profits on such supplies of fabricated platforms cannot be said to be attributable to the PE. There is one more reason for coming to the aforestated conclusion. In terms of para (1) of Article 7, the profits to be taxed in the source country were not the real profits but hypothetical profits which the PE would have earned if it was wholly i .....

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such taxability can also arise in the present case assessee there was no allegation made by the Department that the price at which billing was done for the supplies included any element for services rendered by the PE. In the light of our above discussion, we are of the view that the profits that accrued to the Korean GE for the Korean operations were not taxable in India. 11. Dealing with the case of taxability of equipment in the case of non- resident company, in the above judgment the Hon .....

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tests were mentioned in the contract. Similar observation were also made by the Delhi High Court in the recent case of DIT Vs. M/s Nokia Network OY (2012) 253 CTR 417 (Del.) and DIT Vs. LG Cable Ltd. (2011) 237 CTR 438 (Del.). In the case of LG Cable Ltd. (Supra), a Korean company entered into two contracts with Power Grid Corporation of India Limited ( PGCIL ) in connection with the supply and installation of Fibre Optic Cables in India. One contract was for onshore execution, installation and .....

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no. 462 and 463 of the report, held as under:- In the final analysis we have no hesitation in holding that viewed from any angle, the fact situation in the instant case is almost identical to that in the case of Ishikawajma (supra) and the law as enunciated by the Supreme Court in the said case will squarely apply to the facts of the present case. If at all there is a difference, the facts in the present case stand on a better footing than in Ishikawajma (supra). In Ishikawajma (supra) there wa .....

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offshore contract and onshore contract are separate and distinct from each other, inasmuch as the consideration in the case of offshore supply contract was received outside India through the mechanism of a letter of credit in foreign exchange while the consideration for onshore contract was receive, for the most in Indian rupees with a nominal amount in foreign currency, the latter being for training charges. The title to the equipment supplied from outside India was transferred in favour of PGC .....

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nts to take back the title. 36. With regard to the setting up of PE also, the PE of the respondent in the instant case, as in the case of Ishikawajma (supra), had no role to play in the execution of the offshore supply contract and as a matter of act was set up for the sole purpose of enabling the performance of the onshore services contract. The contract, however, in the instant case as in the case of Ishikawajma (supra) would be said to have been successfully performed only after the satisfact .....

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he 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. In the instant case there was no operation qua the agreement for supply of equipment, which was carried but in India, and therefore, no income could be deemed to have accrued or arisen in India whether directly or indirectly or through any business connection in India. 12. The Authority for Advance Ruling (AAR i .....

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achinery can be taxed in India under the provisions of the Act and India-Russia Tax Treaty. The AAR while deciding the case in favour of the assessee, at page no. 420 of the report held as under: In view of our above analysis, perusal of documents and case laws, we find that no portion of consideration is received by the applicant in India. Further, no income accrues or arises in India to the applicant as all the transactions took place outside India. The materials were shipped outside India, th .....

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orpn. In re (AAR) (2009) 314 ITR 343 dealing with the issue similar to the one which is involved in the case of assessee i.e. as to whether the offshore supply of equipment, materials etc., were liable to tax under the provisions of the Act and India-Korea Tax Treaty, the AAR, on page no. 359 of the report, held as under: Thus, viewed from any angle, the title to ad property in the goods shipped by the applicant at the foreign port stood transferred at the port of shipment or while the goods wer .....

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ct cannot be upheld… In a recent case, the ITAT Delhi Bench-I had an occasion to consider the same issue in relation to the contract between Power Grid and another Korean Company. The learned Members of the Tribunal, after a thorough discussion held that in view of the decision of the Supreme Court in Ishikawajima, the receipts from offshore supply contract cannot be taxed under the Income-tax Act and that a percentage of income cannot be subjected to tax by reason of the fact that certai .....

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view as the Tribunal has taken on this aspect. 13. Further, the coordinate bench of this Tribunal in the case of DCIT Vs. Roxon Oy (2007) 291 ITR (AT) 275 (Mum.) discussed that this case relates to a Finland entity, having a PE in India. The Finnish entity was awarded a turnkey contract by Nava Seva Port Trust (NSPT) to design, manufacture, deliver, erect, test and commission, certain bulk-handing facility. As per the terms of the contact, the taxpayer entity supplied the required equipment fro .....

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if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE . Thus, the profits of the PE are to be calculated as if the PE is hypothetically independent of the enterprise of which it is a PE. The profits to be taxed in the source country are thus not the real profits made by the enterprise but hypothetical profits which the PE would have earned if it was whol .....

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l sale to and the hypothetical sale by the PE being at the same price, there cannot be any profits on account of the transaction. No such taxability can, therefore, arise in the case before us because the sales are directly billed to the Indian customer and also because there is no suggestion that the prices at which billing is done includes any element for services rendered by the PE… In view of the above facts and circumstances of the case, it is clear that no portion of receipts from s .....

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en the ITSC has accepted these facts for Financial Years 2007-08 and 2008-09 and has held that income from sale of equipment in the case of assessee is not liable to tax in India. One pertinent facts is required to be discussed here that as to why attribution of profits from sale of equipment should not be made, since the assessee has admitted a supervisory PE in India under Article 5(2)(i) of the DTAA and the conclusion of sale is subject to various acceptance tests and the contracts also envis .....

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ean that the sale has taken place in India, the assessee placed the clauses relating to such acceptance tests for TKPO project, which reads as under:- Clauses relating to acceptance tests Schedule 6 … … 16.0 COLD TESTS, INTEGRATED COLD TEST AND START UP … … … 16.5 The Purchaser shall promptly issue the Integrated Cold Test Certificate upon successful completion of Integrated Cold Tests. 17. PROVISIONAL ACCEPTANCE … … … … … 17. .....

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1.6 5% of Contract Price for the imported Equipment along with related designs and drawings will be payable after the issue of Provisional Acceptance Certificate… 4.1.6 The last 5% of the Contract Price for the imported Equipment along with related designs and drawings will be payable after the issue of Final Acceptance certificate. 3.4 Limited Damages for Non-fulfillment of the Performance Guarantee parameters. The total liquidated damages (LD) for non-fulfillment of the Performance Guar .....

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t of shipment becomes due to the assessee from the customer and merely 15% of contract price is receivable by the assessee upon completion of the above mentioned tests as evident from clauses of Schedule 4. Further, in case these tests were not successful Tata Steel becomes entitled to claim liquidated damages from their assessee upto 35% of contract price. Accordingly, this 15% payment is merely a deferred payment and the acceptance tests clauses mentioned under the contract are merely in the n .....

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any transfer of property in goods by one person to the another for cash or deferred payment or for any other valuable consideration and includes …. ….. Similarly, the above clauses relating to liquidated damages (clause 3.4 of Schedule 3) clearly indicates that when the performance tests do not provide the desired output, the assessee is liable to pay liquidated damages. This is also a normal commercial arrangement agreed in common parlance in the industrial world. This cannot be c .....

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no. 460 of the report, has held as under:- 29. Thus, the mere fact that 15% of the payment was to be retained by the PHCIL to be period 30 days after operational acceptance on erection and completion of the system cannot be construed to mean that the title in goods did not pass to the buyer in the contrary of origin. 30. Then again, in our considered opinion, undue importance cannot be attached to the fact that the agreement imposed in the assessee company the obligation to handover the equipmen .....

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cts or is compelled to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not by reason only of such breach of warranty entitled to reject the goods, but he may - (a) Set up against the seller the breach of warranty in diminution of extinction of the price; or (b) Sue the seller for damages for breach of warranty. 15. Reliance is also placed on the decision of special bench in the case of Motorola Income. vs DCIT (Del ITAT Special Bench) [(95 ITD 269) .....

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en in the case of Addl. CIT vs. Skoda Export Praha (172 ITR 358) (Andhra Pradesh High Court), the High Court that a mere provision in the agreement that assessee was to satisfy himself about the quality and standard of the machinery supplied in India would not mean that the sale has not taken place outside India. The relevant observation of the High Court on page 362 of the report is reproduced below:- There was a good amount of controversy as to whether the sale of machinery is an isolated and .....

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entered into between them. This is also the view expressed by a Bench of this Court in Bharat Heavy Plate and Vessels Ltd. vs Additional, Commissioner of Income-tax (1979) 119 ITR 986. The same view is expressed in the subsequent decision in Skoda Export vs. Additional, Commissioner of Income-tax (1983) 143 ITR 452 (AP) as well. We may also mention that learned standing counsel for the Department challenged the finding of the Tribunal that the sale of machinery was completed outside India. Accor .....

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urther makes it clear that the insurance risk during the course of the journey was that of the assessee and it paid for the same : even the freight charges from the European port to the place of destination were paid by the assessee. Thus, judged from any angle, the sale of machinery, which are goods within the meaning of the Sale of Goods Act, was completely outside India. A mere provision in the agreement that the assessee is entitled to satisfy itself about the quality and standard of the mac .....

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f the offshore equipment was payable on successful completion of erection, testing and commissioning, it was held that the off-shore sale of equipment is not taxable in India. In this regard, the AAR in the case of Hyosung Corpn., In re (supra), on page no 359 of the report, has held as under: Thus, viewed from any angle, the title to and property in the goods shipped by the applicant at the foreign port stood transferred at the port of shipment or while the goods were on high-seas. The event of .....

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From the above observations of Delhi High Court, Tribunal and AAR, it is clear that the acceptance tests are merely in the nature of warranty provisions. Further, the observation of Delhi High Court also clarify that breach of warranty could result in payment of damages and does not by itself mean the property/title in the goods did not pass to buyer outside India. Accordingly, the clause of acceptance tests and liquidated damages are nothing but merely in the nature of warranty provision and i .....

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e in India and hence no attribution can be made to the supervisory PE on this account, the assessee argued that in case of supervisory PE only the income arising on account of supervisory activities can be taxed in India since the PE has been constituted merely on account of rendition of supervisory services under Article 5(2)(i) of the DTAA which provides that The term permanent establishment: includes especially, - (i) a building site or construction, installation or assembly project or superv .....

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tuted in India for any of the projects and hence there cannot be any question of attribution of profits to PE for sale of equipment. This position has also been accepted by the ITSC in the order passed for Financial Years 2007-08 and 2008-09. The relevant observation of the ITSC is reproduced below: …With regard to the attribution of profits from sale of equipment to the supervisory PE, we find force in the contention of the applicant and are of the view that since the said PE has been co .....

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ch the PE would have earned if it was wholly independent of the GE. Therefore, even if we assume that the supplies were necessary for the purposes of installation (activity of the PE in India) and even if we assume that the supplies were an integral part, still no part of profits on such supplies can be attributed to the independent PE unless it is established by the Department that the supplies were not at arm s length price. No such taxability can arise in the present case as the sales were di .....

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he supervisory PE does not all. The fact that the PE under the DTAA has to be determined separately for each of the project is clearly evident from the wording of Article 5(2)(i) of the DTAA which reads as under:- The term permanent establishment includes especially, - (i) a building site ors construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities continue for a period exceeding six months. The word such project, pr .....

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s referred to by the learned counsel for the assessee. The perusal of such treaties shows that whenever the contracting parties intended that different sites should be taken together, they had expressly provided so. For example, in the Indo-Denmark Treaty, Article 5(2)(k) provides as under: Article 5: Permanent Establishment:- 1. …. … .. 2. The term permanent establishment includes especially: a) to j)… … k) a building site or construction, installation or assembly pr .....

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ated 29.11.96 while the other treaties mentioned above (except Canada) were in existence period to 29.11.96. Hence it is clear beyond doubt that India was aware of such provisions while drafting Indo-German treaty. Therefore, it appears to us that contracting parties deliberately deviated from such provisions by not including the words together with other such sited, projects or activities. Accordingly, it cannot be said that other sites can also be taken together for determining the scope of PE .....

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ce of business existing there as well (Hoge Road, Rol no. 16305, BNB 197/71 : DTC German/Netherlands) . 26. In this connection, it would also be useful to refer to para 31.4 at page 115 of the book Principles of International Taxation which is reproduced as under: 31.4 The time set applies to each individual site or project. No account should be taken of the time spent by the contractor concerned on other sites that are totally unconnected with the tested site. On the other hand, a site should b .....

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mitumo Corporation which were to be executed independently at different sites in the factory of MarutiUdyog Ltd., Since there was no effective connection between such contracts, it was held that minimum period of 130 days was to be separately for each contract and could not be aggregated. 28. In view of the above discussion, it is held that in computing the minimum period of 6 months, various sites cannot be considered together particularly when different contracts had no effective interconnecti .....

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work relating to manufacturing, designing, fabrication etc. of equipment is done outside India and sold to the assessee directly on export sale basis. The contract provides for delivery of equipment on FOB Foreign Port of Shipment majority of payments i.e. 80-85% for each and every part of shipment becomes payable upon delivery of equipment on FOB foreign Port of Shipment the above payments are through irrevocable letter of credit which makes it clear that even if the ship does not sail or deliv .....

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or single contract with separate scope of supply and services as well as separate consideration. The findings of DRP and that of the AO that the contracts are single contract split into separate parts is not correct. Even if the contract is considered to be integrated one, then also the taxability of each of the component has to be determined separately based on the decision of Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd., supra. Further, the reliance placed .....

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f warranty provisions for the reason that only 15% of the payment is receivable by the assessee on completion of various tests. In case these tests are unsuccessful Tata Steel or the party concerned can claim liquidated damages not exceeding 35% of the contract price. Accordingly, the clause of acceptance tests is merely in the nature of warranty provisions. Even the reliance placed by AO on various clauses of Sales of Goods Act is misplaced. Since the Hon'ble Delhi High Court in the case of .....

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in India. This issue of assessee s appeal is allowed. 20. The next issue in this appeal of the assessee is against the order of DRP and that of the AO in assessing the income from supervisory services. For this, assessee has raised following grounds: Income from Supervisory Services 3(a) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in ignoring the net profit rate of 17.93% on gross revenue based on the average margin of comparable companies as considered by the .....

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by its customers for supervising the detailed engineering, installation and commissioning activity undertaken independently by the customer/third party vendors appointed by the customers. The assessee before ITSC during FY 2007-08 and 2008-09 admitted that it has supervisory PE in India for supervisory services rendered on standalone basis. The assessee for the purpose of computation of profit for the assessment year under consideration computed the average profit margin earned by the comparabl .....

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nhanced the same to 27.5% for the relevant years. However, for those previous assessment years the assessee did not have the details relating to the net profit earned by comparable India companies. During the current year, based on the profitability of the comparable Indian companies a net profit percentage of 17.93% was arrived at and considered by the assessee. However, the AO has completely disregarded such comparable companies and has merely applied the net profit percentage of 27.5% as adju .....

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ided this issue of taxability of income earned from supervisory services in India by the assessee and adopted the profit margins at 27.5% of profit attribution by relying on the decision of the ITSC for FY 2007-08 and 2008-09 by observing as under: The AO has relied on the order of the ITSC for the FY 2007-08 and 2008-09 wherein a profit percentage of 27.5% of gross revenue was determined supervisory services. The AO has concluded that the facts for the current year were similar to the aforesaid .....

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dealing with the taxability for sale of equipment. Thus reference by the AO of proceedings before ITSC is not relevant and is contradictory to his own stand. Such decision of ITSC was accepted merely to buy peace and to avoid protracted litigation with the Income Tax Department for those years and a letter to this effect was also filed with the AO. The assessee s main contention is to examine the profit rate independently on the basis of comparable margins of Indian companies which it had furnis .....

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sorted to invoke the Rule 10 of the IT Rules. However, whether this power of the AO is absolute? Merely because no books of account are maintained, whether the opinion of the AO s reliance on ITSC is order is final? From the order, this panel has found that the AO maintained that there is no change in the facts in the present year as that of from the FY 2007-08 and 2008-09, and hence the assessee s own submission before the ITSC is considered to arrive at the profit rate of 27.5% We find no infi .....

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ly technical in nature. These services are specific to the high end metal industry where plant works with crores of rupees have been executed. Thus comparing these highly skilled specific services with normal supervisory services is not correct. Before us also the assessee could not demonstrate the functional similarity of services of the comparable companies so as to consider the comparability and accept the profit margin. In view of the above we upheld the profit margin adopted by the AO and r .....

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ble companies. The assessee contended that the comparable companies relied on by the assessee are involved in the business of engineering and technical services and such comparable companies have been rightly relied upon by assessee in order to arrive at the net profit margin of 17.93% on gross revenue earned from supervisory services. It was contended that the final order of the ITSC for FY 2007- 08 and 2008-09, the margins of comparable companies was not a basis before the ITSC and hence, the .....

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ross revenue from supervisory services amounting to ₹ 10,35,15,673/- out of which ₹ 1,85,60,360/-, being 17.93% of the gross revenue, was allocated to the Indian PE. In assessment, AO had enhanced this allocation to 27.50% which works out to ₹ 2,84,66,810/-. The DRP also confirmed the action of the AO for the reason that on identical facts and circumstances, the ITSC attributed profits @ 27.50% in the assessee s own case for AYs 2008-09 and 2009-10 respectively. For the AYs 200 .....

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th and for the very same reason, the action of the AO in attributing profits @ 27.50% was rightly confirmed by DRP. We also hold so. This issue of assessee s appeal is dismissed. 25. The next issue in this appeal of assessee is against the order of DRP and that of the AO in taxing income earned from supply of designs and drawings in India. For this, assessee has raised following grounds: 4(a) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that the incom .....

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e past years ignoring that the conclusion of ITSC is not as per the provision of the law and the appellant has accepted the decision of Hon'ble ITSC merely to buy peace. 4(c) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that the sale of designs and drawings by the appellant as granting of license allowing the Indian customer to use it without appreciating the fact that the customers use these designs and drawings for internal purpose of setting up .....

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s for the operation and maintenance of the plant. During the year under consideration, the assessee raised invoices to the tune of ₹ 79,42,01,177/-. The DRP and the AO holds the income earned from supply of drawings and designs as taxable in India. The DRP for taxing the income earned from supply of drawing and designing observed as under: The AO in his draft assessment order after giving due consideration to the arguments of the assessee opined that the consideration received by the asses .....

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ing to the conclusion that the income constitute royalty. 3. The judgment of Hon'ble Supreme Court on Scientific Engineering [157 ITR 86] relied upon by the assessee deals with the capitalization of assets in the books of purchaser and has no applicability in the case of the assessee. Other judgments relied upon by the assessee are based on their own facts and are not applicable in assessee s case. The assessee contended before this panel that consideration received for sale of designs and d .....

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ot taxable under the provisions of the Act and DTAA. Sample copies of airway bills were also submitted to the AO to demonstrate that sale has taken place outside India. 2. Reliance is placed on the judicial precedents of Supreme Court in the case of Scientific Engineering House P. Ltd. vs. CIT (157 ITR 86) and Jaipur Tribunal in the case of Modern Threads (India) Ltd. vs CIT (69 ITD 115). Relevant part of the decision of Hon'ble Jaipur ITAT is reproduced herein below: Having regard to the fa .....

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the said payments in India treating the same as royalty… 3. Retaining intellectual property in designs and drawings is similar in nature to the retaining of patented rights in any goods / machinery. Restriction on the intellectual property in designs and drawings sold by the assessee for the purpose of setting up a plant in India does not change the character of the transaction from the sale of the product to the use of license/know-how. 4. The mere fact that the word license has been us .....

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Wimco Limited vs. Meena Match Industries (AIR 1983 Delhi 537) are not relevant in the instant case since this is the case where designs and drawings have been sold to the Indian customers for the internal purpose of setting up plants and not for commercial exploitation. We have carefully considered the arguments put forth by the assessee before us. Similar contentions have been made before the Hon'ble ITSC. The Hon'ble ITSC after an elaborate discussion held as under in its order dated .....

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d and is retained by the applicants. The designs and drawings provided by the applicants to the Indian clients constitute an item in which the intellectual property is embedded. No proprietary rights in the designs and drawings have been transferred. In our considered opinion, the clients have only been given the right to use the underlying technical knowledge, process and information which are exclusively in the position of the applicants and so the receipt by the applicant companies for such a .....

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s has to be treated as royalty in terms of Section 9(1)(vi) Explanation 2 because under the agreement the applicant companies had granted license to the Indian companies to use the technical know-how for setting up the plants. It is also important to realize that the know-how was to remain exclusive property of the applicant companies and the Indian companies had to maintain secrecy of the know-how which could not be disclosed to other parties, and it could be re-used by them only after further .....

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on which TDS has been deducted are on account of technical services. We further observe that the technical know-how provided by the applicants is so highly specialized that the clients have to heavily depend on the applicant s skill and expertise for setting up the plant and make it fully operational. Thus we have reason to believe that technical services in fact have also been provided to the Indian companies by the applicants, and the fees paid for the same are included in the consideration r .....

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s are fees for technical services. Further, as per the IT Act, as well as he respective DTAA; both kind of receipts are taxable @ 10%. The issue upheld by the ITSC is clear and this panel has no reason to differ on the issue of sale of design and drawings. Accordingly, this Panel is of the opinion that the drawing and designs are clearly right to use but not in the nature of sale of goods as contended by the assessee. Though the assessee submits that the decision of the ITSC is accepted to buy p .....

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of the assessee was limited to designs and drawings being in the nature of basic engineering for which work was done primarily outside the territory of India. Basic engineering includes sale of designs and drawings to the customers that pertain to the location of plant, layout drawings, placement of various equipment, types of equipment to be installed, process description, manufacturing of indigenous equipment in India etc. that are needed as per specifications by the customers to erect the pl .....

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by the assessee in its own country i.e. the entire work has been undertaken / performed outside India. The designs and drawings sold by the assessee were used by the Indian customers for internal business purpose of setting up of their plants and not for any commercial exploitation. Sale of designs and drawings has also effected outside India. Copies of the sample airway bills evidencing that the delivery of designs and drawings for various projects has taken place outside India is enclosed in a .....

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Tata Pellet Project Schedule I Article 1.1 SCOPE OF WORK FOR SUPPLY OF IMPORTED DESIGDNS AND DRAWINGS In consideration of the payments to be made by the purchaser, the Contractor shall be responsible for supply on FOB basis of following imported designs and drawings as detailed in the Technical Specification. In the event of air transportation at the sole direction of the purchaser, FOB port of shipment shall be considered as FCA airport of dispatch. 1.1.1 Supply of imported designs and drawing .....

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hnical Specifications Engineering work shall be completed by the Contractor within Thirteen (13) months from the Contract Effectiveness Date in accordance with the agreed schedule In light of the above facts, it was explained by Ld. Counsel for the assessee that the basic engineering packages sold by the assessee company to the Indian customers have been designed largely on the basis of standard technologies available with it. The consideration received by the assessee was therefore for the sale .....

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ng that 10% of the sales revenue attributable to the Indian PE would be income assessable to tax in India. When the contract is for the erection and commissioning of the plant, the equipment may not remain as a property and the whole contract becomes a project for plant erection. It is the assessee whoop agreed to erect the plant and for the sake of convenience the terms of supply of equipment, designs, supervision, etc., were specified. Given the fact that the assessee had a PE in existence to .....

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act is achieved only after the successful testing of the plant. The works done by the assessee may include supply of material, equipment, drawings documents, guaranteeing the work. The responsibility of the assessee did not stop with the supply of the equipment and when the contract is for the work, the supply component need not be viewed separately. As can be seen from the above, it was not a case of sale of equipment simplicitor, but it involves a host of services employed at the site level to .....

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services was actually embedded in the price set for the supply of equipment itself. In other words, a portion of profit having its situs in India at the plant site level always stood loaded in the supply of equipment which is now sought to be labeled as offshore supply not amenable to taxation in India. Therefore, the payment for the offshore supply needed to be segregated amongst the sale simplicitor and a host of other services performed at the plant site level till completion of the whole wo .....

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e. The facts mentioned above, clauses of contract and the sample copies of airway bill clearly indicate that the entire work relating to designs and drawings was done outside the territory of India; sale was affected outside India and the consideration was also received outside India in foreign currency. In view thereof and the detailed legal submission mentioned above with regard to income from sale of equipment, it is submitted that the business income earned by the assessee from the sale of d .....

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me Court held in the affirmative case on page no 97 of the report as under: Obviously, the purpose of rendering such documentation service by supplying these documents to the assessee was to enable it to undertake its trading activity of manufacturing the odolites and microscopes and there can be no doubt that these documents had a vital function to perform in the manufacture of these instruments; in fact it is with the aid of these complete and up-to-date sets of documents that the assessee was .....

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therefore, clearly of the view that the capital asset acquired by the assessee, namely, the technical know-how in the shape of drawings, designs, charts, plans, processing date and other literate falls within the definition of plant and is, therefore, a depreciable asset . (Emphasis supplied) Since the assessee supplied the designs and drawings for setting up plants in India, in light of the above judgment, such designs and drawings partake the character of a product and accordingly, it is clear .....

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l know-how for designing, construction and operation of the plant. The agreement, inter alia, provided for lump sum technical know-how fee of USD 250 lakhs and USD 50 laks for supply of basic process engineering documentation. The issue was whether the payment for the supply of technical know-how and basic process engineering documentation for designing, construction and operation of the plant could be taxed as Royalty or not? ITAT on page no. 157 of the report held as under: Having regard to th .....

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ing the said payments in India treating the same as royalty …. (Emphasis supplied) 32. The revenue authorities has asked assessee to explain as to why the revenue sale of design and drawing made by the Company in the FY 2009-10 should be considered as non-taxable, where, as per the various contracts in respect of the above mentioned services, the ultimate ownership of the designs and drawings are never passed to the buyer, and only license to use the same is granted. In this way, the true .....

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ransfer its patent or intellectual property to the buyer of the car but that does not change the nature of the transaction from sale of a product to use of a patent/intellectual property. Similarly, restriction on the intellectual property in designs and drawings sold by the assessee for the purpose of setting up a plant in India does not change the character of the transaction from the sale of the product to the use of license/know-how and the mere fact that the word license has been use in the .....

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ntions by Klaus Vogel. The relevant extract is reproduced below: ….In a partial transfer of rights the consideration is likely to represent a royalty only in very limited circumstances. One such case is where the transferor is the author of the software (or has acquired from the author his rights of distribution and reproduction) and he has placed pat of his rights at the disposal of a third party to enable the latter to develop or exploit the software itself commercially for example by d .....

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convention of OECD 2010 on the Article 12 i.e. Royalties and Fee for Technical Services. The relevant paras are outlined below: 131. Payments made for the acquisition of partial rights in the copyright (without the transfer or fully alienating the copyright rights) will represent a royalty where the consideration is for granting of rights to use the program in a manner that would without licence, constitute an infringement of copyright. Examples of such arrangements include licences to reproduc .....

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granted limited rights to reproduce the program. This would be the common situation in transactions for the acquisition of a program copy. The rights transferred in these cases are specific to the nature of computer programs. They allow the user to copy the program, for example on to the user s computer hard drive or for archival purposes. In this context, it is important to note that the protection afforded in relation to computer programs under copyright law may differ from country to country .....

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or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying where they do n more than enable the effective operation of the program by the user, should be disregarded in analysing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as commercial income in accordance with Article 7. 14.2 The method of transferring the computer program to the transferee is not relevant. .....

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stitute royalty since the licensed product could not be commercially exploited by the licensee/customer. This was despite the fact there were clauses regarding the restriction on Intellectual Property. In this regard, the AAR in the captioned case, at page no 113 of the report, held as under: There is also a specific provision in both the agreements that intellectual property rights would always remain with the owner of the product or the licensor. Such restrictions placed on the user of softwar .....

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ng the grant of authority to use the license (on non-exclusive and non-transferable basis), the copyright imbedded in the software remains with the owner intact. 35. The principle of license and copyright was also discussed by the AAR in the case of Dassault Systems K.K. In re. 322 ITR 125(AAR),on page no 144 of the report, held that Passing on a right to use and facilitating the use of a product for which the owner has a copyright is not the same thing as transferring or assigning rights in rel .....

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e, it would not be legally correct to state that the copyright itself has been transferred to any extent. It does not make any difference even if the computer programme passed on to the user is a highly specialized one. The parting of intellectual property rights inherent in and attached to the software product in favour of the licencee/customer is what is contemplated by the definition clause in the Act as well as the Treaty. As observed earlier, those rights are incorporated in Section 14. Mer .....

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shoes of the owner/grantor and he enjoys the copyright to the extent of its grant to the exclusion of others. We may in this context usefully refer to the well-reasoned opinion expressed by OECD in its Commentary on Article 12. Transfers of rights in relation to software occur in many different ways ranging from the alienation of the entire rights in the copyright in a programme to the sale of a product which is subject to restrictions on the use to which it is put….….Therefore, ri .....

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k containing a copy of the programme or directly receives a copy on the hard disc of her computer via a modem connection. It is also of no relevance that there may be restrictions on the use to which the transferee can put the software. 36. From the above submissions read with judicial precedents, it is clear that the restriction on intellectual property would not make any difference since the designs and drawings sold by the assessee were used by the Indian customers for internal purpose of set .....

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er dated March 07, 2012 with the AO and DRP that the assessee has accepted the order of the ITSC on this issue merely to buy peace of mind and to avoid protracted litigation with the revenue. 37. From the above facts and legal position, it is clear that the basic engineering packages sold by the assessee to the Indian customers have been largely designed on the basis of standard technologies available with it. The consideration was, therefore, for the sale of the product, which is embedded in th .....

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e of setting up a plant in India does not change the character of the transaction from the sale of the product to the use of licence/know-how. Normally, designs and drawings sold by foreign customers were used by Indian customers for internal business purposes for setting up of their plants and not for any commercial exploitation. Accordingly, the designs and drawings sold by the assessee tantamounts to the use of copyrighted article rather than use of a copyright and is, therefore, in the natur .....

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mitted before the AO during the course of assessment proceedings in support of its claim of TDS. But the AO has not allowed the claim in full. We direct the AO to verify the TDS certificates and allow the claim actually. 40. The next issue in this appeal of assessee is as regards to levy of interest u/s. 234A and 234B of the Act. This charging of interest u/s. 234A and 234B of the Act is consequential in nature and AO will recompute the same accordingly. 41. Coming to ITA No. 432/K/2014 for AY 2 .....

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idance Agreement (DTAA). 2(b) On the facts and in the circumstances of the case and in law Ld. AO/DRP has erred in holding that title of the equipment sold by appellant has passed on to the Indian customers in India and while reaching to this conclusion has further erred in misinterpreting various clauses of Sales of Goods Act, 1930. 2© On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that the sale of equipment by the appellant were not concluded unt .....

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tor of Income Tax vs. Ms. Nokia Networks Oy [253 CTR 417] merely on the contention that such decisions are sub-judice before the Hon'ble Apex Court. 2(e) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that the contracts entered into by the appellant are composite contracts, for erection of plant purely based on surmise and conjecture and without appreciating that the contracts are for supply of equipment. 2(f) On the facts and in the circumstances o .....

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site or project need to be clubbed together and hence once there is a supervisory PE the role of such PE in other contracts for offshore sale of equipment cannot be ruled out without appreciating the fact that the appellant has not rendered su9pervisory services for the contracts relating to offshore sale of equipment and hence such clause would not apply in the case of the appellant. 2(h) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that since the pe .....

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ies Ld. Vs. DIT 288 ITR 408 and other judicial precedents relied upon by the appellant were based on their own facts without appreciating that such decisions are squarely applicable in the appellant s case. 42. As the facts and circumstances are exactly identical to the facts and circumstances of the case of Outotec GambH for the same assessment year 2010- 11, hence, taking a consistent view and applying the same decision, we allow this issue of assessee s appeal in this case also. 43. The issue .....

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tances of the case and in law, Ld. AO/DRP erred in considering the net profit rate of 227.5% for computing the taxable income from supervisory services in India which is excessive. 44. As the facts and circumstances are exactly identical to the facts and circumstances of the case of Outotec GambH for the same assessment year 2010- 11, hence, taking a consistent view and applying the same decision, we dismiss this issue of assessee s appeal in this case also. 45. The next issue in this appeal of .....

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ding that a part of the income earned by the appellant from sale of equipment to the Indian customers accrues or arises in India and thus taxable in India under the provisions of the Act read with the provisions of India-Germany Double Taxation Avoidance Agreement (DTAA). 2(b) That on the facts and in the circumstances of the case and in law Ld. AO/DRP erred in holding that title of the equipment sold by appellant has passed on to the Indian customers in India and while reaching to this conclusi .....

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al judicial precedents. 2(d) That on the facts and in the circumstances of the case and in law, Ld. AO erred in rejecting the reliance placed by the appellant on the decisions of Hon'ble Delhi High Court in the case of DIT Vs. LG Cable Ltd.[237 CTR 438] and other related judicial precedents merely on the contention that such decisions are sub-judice before the Hon'ble Apex Court. 2(e) That on the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that sinc .....

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and in law, Ld. AO/DRP erred in not appreciating the fact that no Permanent Establishment (PE) of the appellant is created in India under Article 5 of the DTAA for offshore sale of equipment to the Indian customers and accordingly no income from such sale of equipment is taxable in India under the provision of the DTAA. 2(h) That on the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that the appellant has a supervisory PE in erms of Article 5(2)(i) of the DTAA .....

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the circumstances of the case and in law, Ld. AO/DRP erred in holding that once there is supervisory PE for one of the projects the said PE would become applicable for other projects as well without appreciating the fact that the wording of Article 5(2)(i) of the DTAA clearly provides that PE has to be determined separately for each of the projects. 2(k) That on the facts and in the circumstances of the case and in law, Ld. AO /DRP erred in holding that the judgment of Ishikawajma-Harima Heavy I .....

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e issue as regards to taxability of supervisory services income in India, the assessee has raised following grounds: Income from Supervisory Services 4. That on the facts and circumstances of the case and in law, Ld. AO/DRP erred in increasing the net profit rate to 27.5% on the gross revenue from supervisory services against the net profit rate of 16.49% applied by the appellant. 49. As the facts and circumstances are exactly identical to the facts and circumstances of the case of Outotec GambH .....

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