TMI Blog2015 (6) TMI 609X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 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 did not have any office or place of business in India 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 LG Cables Ltd., [2010 (12) TMI 948 - Delhi High Court ] after considering the provisions of Sales of Goods Act held that such acceptance tests are merely in the nature of warranty 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 le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmally, 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 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 statistical purposes. - I.T.A. No.431/Kol/2014, I.T.A. No.432/Kol/2014, I.T.A. No.283/Kol/2015 - - - Dated:- 16-6-2015 - Shri Mahavir Singh and Shri B.P. Jain, JJ. For The Appellant : Shri J.P. Khaitan, Sr. Advocate For The Respondent : Shri Vijay Kumar, Sr. CIT(DSD) ORDER Per Shri Mahavir Singh, JM: These three appeals by assessee are arising out of orders of Deputy Director of Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tworks 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 responsibility of the entire work is on the appellant the transfer of title to the customer on high seas of the equipment and entering into separate contracts would not make any difference without appreciating the fact that only in overall interest of the project and to facilitate co-ordination the appellant was given the overall responsibility and hence such responsibility would not have made any difference as far as sale of equipment outside India is concerned. 2(f) 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 1,85,60,360/-. The AO framed draft proposed assessment order u/s 143(3) r.w.s 144C of the Act proposing to assess the income from sale of equipment as taxable in 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 equipment. Aggrieved, assessee carried the matter to DRP. DRP issued direction u/s 144C(5) r.w.s. 144C(8) of the Act and directed the AO as under:- This panel has carefully considered the submissions of the assessee and also gone through the order of the Assessing Officer. The crux of the issue is whether sale of goods taken place in India or outside India? Whether testing activities connected with the supply of equipment is really linked to the very acceptance of the goods or it is merely in the nature of warranty? It is essentia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o commencement of cold tests to the Purchase/Engineers for comments and finalisation. 16.4 The completion of cold tests for all plant and equipment and items covered under the Contract collectively for the plant/unit as a whole and thereby ascertaining proper erection/installation of all plant and equipment and functioning of the system as well as its readiness for start up and load tests shall mean the completion of Integrated Cold Test of the plant. Clause 17.7 On the satisfactory completion of the performance test and on signing of the completion protocol between the purchaser and the contractor, 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 release the contractor from his liabilities and responsibilities in respect of the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) (AR) and in Roxar Maximum Resevoir 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 offshore supply of equipment not capable of being taxed in India. Regarding the assessee s contention that the AO did not consider the Delhi High Court judgment in DIT Vs. Ericsson A.B., New Delhi (343 ITR 470) (Del High Court) and, DIT vs. Nokia networks Oy (253 CTR 417) (Del High Court), the question before the Hon'ble High Court was when the title in the goods is passed outside India, there would not be any taxability in India, even in a composite contract. But the question here is whether 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.2 Electrics 1.2.1 1.2.3 etc. 1.3 Instrumentation Automation 1.4 Utilities 1.5 Water system 2.0 Foundation bolts, special bolts and special embedments as required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 there has been Sale of Equipment by the Company for various projects in the year under consideration. Revenue noted that as per the contracts for sale of equipment, the conclusion of sale is subject to various accepted tests and others, and also envisages that certain percentage of the payment will be payable upon the successful completion of those tests. Clauses exist in the contracts regarding the company liable for payment of liquidated damages in the event of performance guarantee parameters 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 of equipment were broadly undertaken in the following manner: (i) Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in India. The provisions of INCOTERMS 2000 for the term FOB shall be applied. 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 Contractors within twenty three months (23) months from the Contract Effective Date . SCHEDULE 4 TERMS OF PAYMENT 4.1.1 5% of Contract price for imported Equipment and items along with related designs and drawings for imported equipment will be payable by telegraphic transfer, within three (3) months from Contract Effectiveness Date . 4.1.3 75% of the Price of each and every part shipment for Equipment will be payable as per Billing cum Schedule approved by the Purchaser as per Schedule-5 of this Agreement and against presentation of following dispatch documents proving that the goods are delivere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anship 18.1 If the completed plant or any portion thereof after the performance test, be found defective due to the reasons solely attributable to the Contractor or fails to fulfill the performance guarantee parameters as per clause 3.4 of Schedule 3 of the Contract, the Purchaser shall be at liberty to inform the Contractor accordingly and give the Contractor notice as reasonably practical, setting forth particulars of such defect or failure. The Contractor shall, with all speed and at his own expense, make 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 the purchaser all direct resulting cost for such repairs / or replacement, subject to a limit of 35% of the Contract price. In view of the above, Shri Khaitan argued that the relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 carried out any operation in India in relation to sale of equipment. According to Sh. Khaitanthe facts mentioned in above paragraphs including the clauses for TKPO project agreement clearly demonstrate that all the activities relating to designing, fabrication and manufacturing took placed outside India and 75% of the payment 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 submitted to the customer 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly so much of them as is attributable to that permanent establishment. 2. He stated that the assessee did not have any office or place of business in India for the year under consideration. Further, it has already been explained in the preceding paragraphs, that all the activities relating to manufacturing and sale of equipment took place outside India. Therefore, 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. Ld Counsel stated that the above position has also been accepted by the Settlement Commission for Financial years 2007-08 and 2008-09, whereby after examining the facts of the case of the assessee it was held by the Commission that sale of equipment is not taxable in India both under the provisions of the Act and DTAA. Further, the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... situated only the profits resulting from the 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) Thus the profits, if any, of the offshore supply of equipment will not be attributable to the PE even if the equipment is delivered in connection with the activities of the said PE. 8. On the other hand, Ld. CIT, DR Shri Vijay Kumar only relied on the orders of DRP and that of the AO. According to him, the assessee provided drawings, designs engineering documents relating to steel industry to Indian customers for the operation and maintenance of the plant and claimed that supply of drawings, designs engineering documents constituted outright sale, not connected with assessee s PE in India and hence not taxable in India. The assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same issue. He explained that under the contact, the assessee had actually granted a license to use i.e. right to use know-how and engineering information to enable the Indian customers not only to design, engineer, erect and set up the plant but also to commission, operate, test and maintain the plant and to manufacture the product in the plant. Certainly the payment in question covered consideration for information concerning industrial, 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, collation and reference, but also makes it perceptible and visible and easily capable of being transmitted to others. Though physical records of know-how such drawings, designs, engineering and manufacturing data is imparted to another person, know-how is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and experience which remains unrevealed to the public. (iii) In the know-how contract the grantor is not required to play any part himself in the application of the formula and does not guarantee the results thereof . (iv) The provision of know-how must be distinguished from the provision of services, in which one of the parties undertakes to use customary skills of his calling to execute work himself for the other party . Viewed from the above perspective and development of law on the subject, both 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 info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide India in foreign currency and 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. 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 did not have any office or place of business in India. We have gone through judgments relied upon by assessee, wherein it has been decided that the income from offshore sale of equipment is not taxable in India. The case law of Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd.(supra), wherein dealing with the case of a Japanese Company, one of the similar issues that was whether the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 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 separate enterprise having its own profits and distinct from GE. Applying the above test to the facts of the present case, we find that profits earned by the Korean GE on supplies of fabricated platforms cannot be made attributable to its Indian PE as the installation PE came into existence only after the transaction stood materialized. The installation PE came into existence only on conclusion of the transaction giving rise to the supplies of the fabricated platforms. The Installation PE emerged 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 independent of the GE. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly of equipment was attributable to India, the Hon'ble Delhi Court a page 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 was a turnkey contract with four separate component activities turnkey contract with four separate component activities, viz., offshore supply, offshore services, onshore supply and onshore services awarded by Petronet LNG to a consortium of companies led by the Japanese company Ishikawajma-Harsima. In the instant case there are two separate contracts i.e., offshore supply and the onshore services contract awarded by the PGCIL to the respondent-assessee. As in the said case the considerations for offshore contract and onshore contract are separate and distinct from each other, inasmuch as the consideration in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Joint Stock Company Foreign Economic Association Technopromexport , In re. (2010) 322 ITR 409(AAR) discussed the issue that the assessee, a Russian Company, entered into three contracts, namely, (i) offshore supply contract; (ii) onshore supply contract; and (iii) onshore services contract, with NTPC. An issue similar to assessee s case arose for consideration before Authority for Advance Ruling ( AAR ) that whether the consideration from offshore supply of all plant and machinery 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, the title and property passed outside India (on high seas) and the payment was received outside India and therefore the applicant is not liable to pay income-tax in India. In view of our discussion, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 from outside India and sent its employees for erection, commissioning and training purposes. In this case, while dealing with the taxability of equipment supplied from outside India, it was held that the direct sale of equipment by the Finnish entity from outside India to the Indian customers is not taxable in India. The Mumbai Bench of this Tribunal, at page no 291 of the report, held as under: As per art 7(2) profits attributable to a PE are the profits which it might be expected to make 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 ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne the acceptance tests referred by assessee to contend that the sale has taken place in India are the integrated cold tests, performance tests etc conducted at the customer site in India. Before advancing the argument as to how such tests by any stretch of imagination cannot be construed to mean 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 17.7 On the satisfactory completion of the performance test and on signing of the Completion protocol between the purchaser and the Contractor, the Purchaser will promptly issue a Provisional Acceptance Certificate for the plant .. Schedule 4 Terms of Payment 4.1.5 5% of Contract Price for the imported Equipment along with related designs and drawings will be payable on satisfactory completion of Integrated Cold Test 4.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al commercial arrangement agreed in common parlance in the industrial world. This cannot be construed to mean all the contracts should be clubbed together or that the title in equipment did not pass outside India. Reliance in this regard is placed on LG Cable Ltd. (supra). Under identical circumstances, Hon ble Delhi High Court in LG Cable Ltd. (supra) held that income from offshore supply of equipment cannot be taxed in India despite the fact that such clauses existed in the agreement entered for such sale of equipment. In the connection of tests, Hon'ble Delhi High Court, at page 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 equipment functionally completed. The obligation has rightly been construed by the Tribunal to be in the nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement 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. According to him, the sale was completed only in India, inasmuch as the assessee was entitled to inspect and satisfy itself about the quality and standard of the machinery supplied. We do not see any substance in this contention. The various clauses in the agreement referred to above make it clear that the sale of machinery was F.O.B. European port, and the time of fulfillment of delivery was prescribed as the date of the bills of lading. The payment was also to be made outside India. The agreement further 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and the same cannot be construed to mean that any portion from the sale of equipment can be taxed in India. The fact that the acceptance test would not have any impact on the transfer of title has also been agreed and accepted by the ITSC in the order passed for Financial Years 2007-08 and 2008-09. 17. Further, the alternative plea of the assessee that the acceptance tests would not have any impact on conclusion of sale 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 supervisory activities in connection therewith, where such site, project or activities continue for a period exceeding six months. . The entire value of the invoices raised by the assessee on the rendition of supervisory services during the year under consideration (for which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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, project or activities mentioned under Article 5(2)(i) of India-Germany DTAA clearly indicates that the supervisory PE has to be examined separately for each of the project. The above legal position has also been confirmed by the Mumbai. This position has also been affirmed by the Mumbai Tribunal in the case of M/s Krupp Udhe GmbH vs Addl. CIT (28 SOT 254), which is also based on India-Germany DTAA. In this regard, the Mumbai Tribunal has held as under:- 24. We have gone through the various treaties 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra) wherein it has been held that could be different PE s with reference to different unconnected contracts even though each contracts may be entered into by the same parties. In that case, MarutiUdyog Limited awarded various supervisory contracts on Sumitumo 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 interconnection with each other. In the present case, the assessee had entered into various contracts with various parties in respect of various independent projects located at different places. Hence, the lower authorities were not justified in considering the various sites together while computing the minimum period of six months prescribed in Article 5(2)(i) of the DTAA. 19. In view of the above facts and legal position, we are of the view that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 LG Cables Ltd., supra after considering the provisions of Sales of Goods Act held that such acceptance tests are merely in the nature of warranty 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, supra 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. 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 appellant for computing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and gone through facts and circumstances of the case. We find that DRP has decided 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 two years and thus considered it reasonable to apply a profit percentage of 27.5% on the income earned by the assessee from providing supervisory services. The assessee contended that the profit percentage of 17.93% is based on the margins earned by the similar Indian comparable companies. The AO cannot simply reject the same without showing any basis. The attribution before the ITSC cannot be considered as binding for the subsequent years and this fact has also been stated by the Ld. AO while dealing with the taxability for sale of equipment. Thus reference by the AO of proceedings before ITSC is not relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eject the objection of the assessee on the issue of profit margin on supervisory services. 23. Before us the assessee contended that it has computed the profit percentage at 17.93% based on margins earned by similar Indian comparable companies. The DRP as well as AO in its orders has mentioned that profit margins of some Indian companies, per se, will not justify the profit margins admitted by assessee as the assessee failed to demonstrate the functional similarity of the services of the comparable 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 ITSC did not had an occasion to analyse the same. It was contended that the decision of ITSC was accepted to buy peace and to avoid protracted litigation with the revenue. We find that even now be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w 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 their plants and not for commercial exploitation. 4(d) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that merely because the intellectual property in designs and drawings has not been transferred to the customer the nature of transaction will change from sale of goods to use of license. 26. Brief facts relating to this issue are that the assessee provided drawings, designs engineering documents relating to steel industry in India to the customers 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply of technical know-how and basic process engineering documentation for setting of the plant in India for manufacturing of PTA is the business profit in the hands of Italian company and the Italian company having no permanent in India the same is taxable in Italy and not in India. The Revenue authorities are, therefore, not justified in taxing 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 used in the agreement would not make any difference in the taxability of the income. 5. Although Hon'ble ITSC has held the payment received by Design and Drawings as royalty in its order, the assessee does not agree with such decision of the ITSC. Such decision of ITSC was accepted merely to buy peace and to avoid protracted litigation with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant 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 payment to the applicant companies as per future separate agreements. The case laws relied upon by the Ld. AR do not specifically deal with such set of facts which are peculiar to the applicant s case, and are hence not applicable in the case of the applicants. The applicants case is thus primarily covered by Explanation (2) of Section 9(1)(vi) of the IT Act, which define royalty. 77. We have closely examined the TDS certificate filed before us by the Ld. AR and observe that some of the payments 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the products of the aforesaid technologies that are sold to its Indian customers after being modified, to meet their requirements. The modification activities have been performed 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 assessee s paper book. Consideration/payments for the basic engineering work were received by the assessee outside the territory of India in foreign currency. All the contracts were net of tax contracts and the liability to pay taxes was on the Indian customers. 28. The relevant clauses of contracts for supply of imported designs and drawings for civil and structural work, utilities etc for Tata Steel Pellet project ( Tata Pellet project ) are reproduced below: Clauses relating to scope of work Tata Pellet Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of supply of equipment, designs, supervision, etc., were specified. Given the fact that the assessee had a PE in existence to undertake the project, it should have undertaken a robust transfer pricing methodology while allocating prices to different work segments and the supply for equipment should have been proved by the assessee to be at arm s length, which was evidently not done by the assessee. The DRP in its order at page 18 notes that 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 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 complete the whole plant. Unless these services and other obligations a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation, Hon'ble Supreme 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 able to commence its manufacturing activity and these documents really formed the basis of the business of manufacturing the instruments in question. True, by themselves, these documents did not perform any mechanical operations or processes but that cannot militate against their being a plant since they were in a sense the basis tools of the assessee s trade having a fairly enduring utility, though owing to technological advances, they might or would in course of time become obsolete. We are, 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, proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9(1)(vi) of the Income Tax Act, 1961 and Article 12 of India-Germany DTAA rather than Sale of designs and Drawings as a product. It was explained that the nature of retaining intellectual property in designs and drawings, due to which the ownership has never passed on to the buyer, is similar in nature to the retaining of patented rights in any goods / machinery. For example, if any customer purchases a car, in that case, the company does not transfer 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 agreement would not make any difference. The assessee explained that the design and drawings sold by it were used by the Indian customers for internal business purpose of setting up of their plants and not for any commercial exploitation. Accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. In some countries the act of copying the program onto the hard drive or random access memory of a computer would, without a license, constitute a breach of copyright. However, the copyright laws of many countries automatically grant this right to the owner of the software which incorporates computer program. Regardless of whether this right is granted under the law or under a license agreement with the copyright holder, copying the program onto the computer s hard drive or random access memory 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a copyrighted product cannot be construed as an authority to enjoy any or all the of the enumerated rights ingrained in a copyright. Where the purpose of the licenceors the transaction is only to establish access to the copyrighted product for internal business purpose, 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. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, in our view, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. However, where, for example, the owner of copyright over a literary work grants an exclusive license to make out copies and distribute them wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een 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 the plant set up by the Indian customers and does not constitute royalty and is in the nature of business income. Since the work was done outside India and sale was taken place outside India, such income is not taxable under the provisions of the Act and DTAA. 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 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 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 nature of business income. This issue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions 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 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 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 u9nder 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(g) That on the facts and in the circumstances of the case Ld. AO/DRP erred in holding that for the purpose of supervisory PE under Article 5(2)(k) of the DTAA all site or project need to be clubbed together and hence once there is a supervisory PE the role of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 46. Coming to ITA No. 283/K/2015 for AY 2011-12. The issue as regards to taxability of supply of equipments in India, the assessee has raised following grounds: Taxability of supply of equipment in India 2(a) That on the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding 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 conclusion has further erred in misinterpreting various clauses of Sales of Goods Act, 1930. 2 That on the facts and in the circumstances of the case and in law, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. 47. 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. 48. The 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/ ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
