TMI Blog2015 (6) TMI 765X X X X Extracts X X X X X X X X Extracts X X X X ..... and “outside India” - Whether in absence of any allegation that the supply of spares was not made at arm's length price or that the price for the goods included any element of service rendered by the Chennai PE in India, there is nothing left for attribution to the PE? - Held that:- Tribunal for the assessment year 2007-08 on the issue in the case of assessee itself held that the contracts are divisible. The receipts pertaining to designing, fabrication and supply of material, the activities carried out outside India is not taxable in India. Respectfully following this decision on identical issue in the assessment year under consideration we decide the issue raised relating to MUT pipeline project, MSP platform project, of ONGC and GMR (operation and maintenance contract) projects in favour of the assessee with this finding that the outside receipts pertaining to designing, fabrication and supply of material, activities carried out outside India is not taxable in India. So far as taxability of receipts pertaining to HMI (sub station) of Hyundai Heavy Industries Ltd. is concerned the matter is set aside to the file of the AO to examine the issue in relation to these project in vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e consideration denominated in U.S. dollars and received by the appellant outside India for supply of spares and tool-kits etc. from Korea on FOB basis, as per the terms of the O M Contract with GMR, is attributable to the Chennai PE of the appellant. 4. Without prejudice the Ground No. 3, Ld. A.O./DRP erred in attributing the entire gross Revenue of ₹ 5,16,57,291 pertaining to supply of spares from outside India for the GMR project to the Chennai PE. 5. Illegally determining the profit of the PE from operations inside India contrary to the show-cause notice dated 20.3.2013 wherein (as in the case other FTWW projects) the appellant was asked to explain as to why such profit should not be estimated at 25 percent of the gross Revenue from the GMR project. 6. In arbitrarily determining the profit from operations Inside India at ₹ 11.23 crores as against gross Revenue of ₹ 15.80 crore. 7. Holding that the Mumbai Office constitutes a fixed place PE under Article 5(1) of the DTAA for the purpose of taxing royalties received from its 100% subsidiary Hyundai Construction Equipment India (Pvt.) Ltd. (HCEIPL), Pune. 8. In taxing the appellant s income by wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon. 6. We find that the above ground Nos. 3 to 9 involve following two issues: i) As to whether Mumbai Liaison Office is fixed placed PE under Article 5 of DTAA with Korea for the purpose of taxing royalties received from HCEIPL and interest earned on delayed payment of royalty as business income? (Ground Nos. 7 to 9). ii) As to whether the Assessing Officer is justified in attributing income from supply of spares FOB, Ulsan, Korea as per contract with GMR Power Ltd. ? (Ground Nos. 3 to 6). 7. Issue No.1: The Assessing Officer has dealt with the issue at page Nos. 1 to 3, 6, 10 to 12 of the assessment order. The learned DRP has dealt with the issue at page No. 8 of the order. 8. The relevant facts are that the assessee is engaged in the business of offshore construction and power project. During the year under consideration, the assessee received revenues from the following projects: Sl. No. Name of Project Name of the Company Scope of work Revenue for the year 2008-09 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L (100% subsidiary of HHI) pays royalty @ 2% on sales of construction equipment manufactured by it under Technology Agreement dated 20.3.2008 (Pg. 122/Vol.-I) (Summary of Pgs. 68- 72/AM). DRP is not correct in following its own order that Mumbai LO is fixed PE, which is contrary to past history of the case jurisdictional High Court in BKI Ham (347 ITR 570 Uttra.) However, even assuming the LO is fixed place PE, it has no reole as the receipt of royalty is for direct transfer of technology to HCEIPL (para 6 of DRP at pg. 44/AM). Interest is on delay in payment of royaly by HCEIPL and therefore taxable @ 15 percent under Art. 12 of DTAA, being interest on Debt claim. According to AO, it is business receipt therefore taxable @ 40%. ii) Tata Nissan Installation Projects lasted for period beyond 9 months prescribed in Art. 5(3) of DTAA. The assessee offered it for tax as FTS tax @ 10% of gross receipt. The AO taxes it as business income u/s 44DA read with Art. 7 of DTAA by estimating profit @ 25% of gross receipt. Issue academic. Tax effect same. iii) No project this year has nexus with Mumbai L.O. The AO has mere cut and paste Assessment orders for earlier years, relating t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d place PE as the supervisor is deputed not for the business of the Korean Company but that of HCEIPL, an Indian company. Supervision in connection with a construction/installation PE would constitute PE only if such supervisory activities continue for more than nine months. There is no allegation to this effect either by the Learned CIT(DR) or the Assessing Officer/Learned CIT(Appeals). Hence, the interest on delayed payment of royalty by HCEIPL cannot be taxed as business income under sec. 44DA @ 40%, but @ 15% as per Article 12 of the DTAA with Korea. 14. Considering the above submission, we find that since beginning the Revenue s contention has been that the assessee s Mumbai office is a fixed placed Permanent Establishment (PE) within the meaning of Article 5(1) and 5(2) of the Treaty. The assessee on the other hand has always maintained a position that wherever the projects duration exceeds a period of nine months stipulated in Article 5(3) of the Treaty, it has an installation PE, else it does not have any PE in India. The DRP has noted that the assessee had relied upon the principles of generalia specialibusnon derogant and accordingly has taken a stand that Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder, the ITAT has decided the ground following its earlier order for the assessment year 2007-08. The ITAT has reproduced para No. 32 of its order for the assessment year 2007-08 and following the same, has held that the receipts pertaining to designing, fabrication and supply of material, the activities carried out outside India is not taxable in India. In view of this finding, the ITAT has held that the other issues raised in the grounds N. 7 to 10 have become infructuous. In nutshell, we find that the issue as to whether Mumbai Liaison Office is fixed place PE in relation to contract with ONGC under Article 5 of the Treaty with Korea has not been disputed by the assessee in the assessment year 2007-08 before the ITAT and the same has been followed in the assessment year 2008-09 in the order of the ITAT in this regard. 16. In view of the above discussion, we find that the authorities below has simply followed its orders for earlier assessment years on the issue of treating the Mumbai Liasioning Office as PE. However, to decide the issue as to whether Mumbai Liaisoning is PE for the purpose of HCEIPL as well for the purpose of taxing royalties received from HCEIPL and interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 84,805 NIL 100% of gross receipt of ₹ 5,16,57,291 5,57,44,993 16,38,42,098 Tax deducted 7,10,410 826/Vol.V 4,591,785 114/Vol.1(197 order) 821- 825/Vol-V 4,591,785 - 18. The assessee admitted that during the year, it had Permanent Establishment (PE) in India in relation to GMR contract. MUT contract was with ONGC and GMR Project was with Vasai Power Corporation Ltd. Besides, the assessee had also entered into contract with SCEIPL, TATA Motors Ltd. and Nissan during the year. The assessee has shown income from fee for technical services under sec. 115A from contracts with SECIPL, TATA Motors and Nissan Motors. Under the GMR Project, the assessee was required to provide services relating to design, engineering, procurement, fabrication, construction, manufacture, transport, demonstration, testing, commissioning and startup of the units and facilities in respect of a 200 Mg. capacity diesel engine based power generating facilities consisting of four units of 50 Mg. near basing bridge, Chennai. 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the imported goods pass to GMR on delivery at site. Thus no operation is carried out by the PE in India in respect of imported goods used in the project (Ref. Expl. 1 to Sec. 9(1)(i) read ITAT order for 2007-08 at Pg. 614/Vol.-IV) 21. We find that the issue No. 2 consists of the following sub-issues: a) Whether the Ld. AO has estimated the income from GMR Power (both for supply of spares from outside India and from operations and maintenances services provided by the Chennai in India) arbitrarily and in utter disregard of the showcause notice as per order-sheet entry dated 20.3.2013 and the assessee's reply dated 22-25/3/2013? b) Whether the Ld. AO is justified in ignoring Tribunal's order for earlier years holding that no income for supply of spares from outside India was taxable? c) Whether in absence of any allegation that the supply of spares was not made at arm's length price or that the price for the goods included any element of service rendered by the Chennai PE in India, there is nothing left for attribution to the PE? d) Whether the income of Chennai PE from GMR project should not be assessed u/s 44DA read with Sec. 115A in the same manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2013 and allowed 30% of th ecost of material booked. This resulted in taxing more than 70% of the gross receipts the GMR for operation inside India. This unilateral act of the Assessing Officer is in gross violation of principle of natural justice. Further, the Ld. AO has given no reason as to why FTS income from MGR PE should be taxed differently than income by way of projects executed for Tata Motor, Nissan Motors HCEIPL. The Ld. AO has taxed FTS from those projects u/s 44DA by estimating business income of the PE at 25%, thus taxing it as effective rate of 10% of gross receipt. 22.6 Tax treatment by the Ld. AO is arbitrary and capricious and therefore may be deleted. 22.7 The contract envisages that various parts and components of the Power Plant would have a limited economic life as detailed in the Schedule 5 of the Contract (pl. ref. Cl. 7.3 Schedule 5). It is measured in terms of number of operating hours. 22.8 The assessee has to submit the Annual Plan forecasting the requirement of spares, tools and material to be procured and supplied domestically and abroad for every forthcoming financial year. On approval of the Annual Plan by GMR the forecast the year' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 42-44/AM. iii) Contract with GMR Vasai Power - Annexure B of Paper Book iv) Written 'Note' on this issue. v) For all the elements of services in India, the income of Chennai PE offered to tax. 23. The Learned CIT(DR) made the following submissions: May it please the Hon ble Bench: The Revenue is in receipt of the revised (concise) grounds of appeal dated 21.10.2014 filed by the assessee. The Revenue does not have any objection for dropping some of the original grounds of appeal by the assessee. GMR Project alleged outside India Revenue: 1. This concern ground Nos. 3 and 4 of the assessee. During the year assessee has provided operation and maintenance services in respect of 200 MW power generation plant of GMR Vasai Power Corporation Ltd. (GMR). During the year assessee has shown receipt of IN R 15,37,21,278 and offered the same to tax. However, it has also invoiced an amount of USDF 1,125,889 (INR 5,16,57,291) to GMR by raising an invoice of USD 94,372 each month for 11 months and USD 87,796 for the month of April 2008. This amount of USD 1,125,889 has not been offered to tax for the reason that supply of spares is made from outside India on FOB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l kits etc. from Korea on FOB basis is not taxable and not attributable to PE. It's claim that amount received is on account of offshore sales or activities carried outside India is the version of the assessee and not supported by the agreement with GMR. The assessee has not made any sales to GMR. It imported the spares, if any, on its own account for the purpose of executing the agreement. It has the obligation to provide spares and consumables under the agreement. These spares and consumables are used by the assessee in operation and maintenance of power plant. The assessee uses the spares and tool kits during the course of its business of operation and maintenance of the project. The agreement does not provide that spares are to be sold to GMR. In respect of transaction of spares there are no two parties. Article 6.3 of the agreement obliges the assessee to maintain books and records. The assessee is being a fixed amount per month on account of spares and toll kits in USD irrespective of actual purchases and use of spares and tool kits in the maintenance. Pages 250 and 251 of the PB show that assessee is incurring expenses on clearing and forwarding. It is paying customs dut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d whole amount. 11. The assessee received monthly fixed amounts from GMR for procuring spares and tool kits for power plant. The spares have been imported and used in the maintenance of power plant. The purchase/import of spares/tools is inextricably and essentially linked to the power plant operation and maintenance and there is no doubt that these activities are carried out in India and through the PE. Any income earned on account of operations carried out in India (irrespective of place of title transfer) is an income deemed to accrue or arise in India (Explanation to section 9(1)(i) of the Act). Similarly, the profits attributable to PE are taxable in India. Taxation of deemed income under section 9(1) (i) is not dependent on the transfer of title, if any, but on the business connection and extent of operations in lndia 12. Place of transfer of title (though not proved by the assessee that it was outside of India)l does not affect the taxability of transactions under the Income Tax Act and the DTAA. Transfer of title may be relevant for the purpose of deciding the place of accrual of income but not for the purposes of income deemed to accrue or arise in India. The income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled copy of ledger accounts; however, supporting documents were not produced by the assessee. 24. The Learned AR rejoined with the following contentions: Vide written Reply dt.29.10.2014, the Ld CIT (DR) has made certain contentions, which are met point-wise in this rejoinder:- 1) GMR Project: i) DR s Contention That sales of spares to GMR is FOB Korea is not supported by the agreement with GMR. Rejoinder: This contention is factually incorrect. Please refer clause 10.2 10.4 of the Agreement read with Schedules 4, 5 5A of the GMR Agreement. Most of parts like Piston Rings Fuel Pump Stuffing Box etc. used in the GMR Power Plant have limited economic life and have to be periodically replaced in each of the four 200 megawatt Power plants. At the beginning of every financial year annual procurement plan is approved by GMR and 12 equated monthly invoices are raised both for material procured locally and abroad. At the end of the year, necessary adjustment entries are passed by GMR adjusting the closing unused inventory towards next year's annual plan for imports. Schedule 4 bifurcates imported portion and Local rupee portion . Schedule 5 gives t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... infructuous. These grounds are accordingly disposed of. iv) CIT (DR):- Both in terms of the provisions of the treaty or Explanation to section 9 (1) (i) profits are attributable to India. It is not dependent on the transfer of title. Hence, 100% of sale of spares from outside India is taxable in India. Rejoinder: The Ld. DR s contention is self contradictory. It is settled law that only that much of profit of the GE is attributable to the PE, which represents the element of service by the PE in India included in the price charged by GE for supply of of spares parts sold from outside India. The Chennai PE charges GMR for all its activities in India. Since there is no allegation that the sale price of material exported from Korea is not at arm s length price or that it includes any element of service by the PE in India, no further profit can be attributed to the PE. This has been so decided by the Apex Court in our own case in 291 ITR 482. There is another reason as to why the addition made by AO is not justifiable. The order sheet entry dated 20.3.2013, reads as under:- GMR Project you are requested to show-cause why profit may not be estimated @ 25% on G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Party B shall bear the expenses of the air-tickets and local transportation for the Party A's engineer and shall pay to the Party A Four Hundred US Dollars (US$400.00) per calendar man-day (including traveling days) which the Party A's engineer is required or requested by the Party B to stay beyond the 180 man-days supervision period. It is obvious that it is optional for the HCEIPL to obtain supervising services of an engineer of the assessee company. In this connection, please refer to Pg.116/ PB-1, wherein the assessee had furnished the Details of Expatriates deputed on India FTS Projects . It is clear from that statement that no engineer was deputed to India for HCEIPL Project. Further, the summary of invoices raised during the year together with copy of relevant invoices submitted to the AO clearly shows that both the receipts are on account of technology fee and no invoice was raised on account of supervision. (pgs. 186 195of PB/1) Further, there is no concept of supervision PE in Korean DTAA. Even if a supervisor is deputed, no PE in India is formed. There is no fixed place PE as the supervisor is deputed not for the business of the Korean company, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion) of Hyundai Motors India Ltd. has continued from the assessment year 2006-07. In the assessment year 2007-08, the Tribunal has dealt with the issue relating to MUT pipeline project, MSP platform project, of ONGC, and GMR (operation and maintenance contract) projects which are also under consideration in the assessment year in question. After discussing the issue in detail the Tribunal has summarized the reasons for not concurring with the AO that contracts are indivisible and the receipts pertains to preengineering services, designing, fabrication, procurement have element of income attributable to PE of the assessee in India vide para No. 32 of the order as under :- 32. Apart from the above discussion, we summarize the reasons for not concurring with the Assessing Officer that contracts are indivisible and the receipts pertain to pre-engineering services, designing, fabrication, procurement have element of income attributable to PE of the assessee in India : a) the ONGC has floated international tender. The assessee has won the tender by giving lowest bid. Prior to filing sealed bid, it is illegal for the bidder to negotiate the bid. Even the department has not levelle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee remained that even assuming that supplies were necessary for the purpose of activities of the permanent establishment (PE) in India and even if further assuming that the supplies were an integral part, no part of profit on account of off shore activities can be attributed to the PE as undisputedly, all the designated work, designing, fabrication and supply were carried out outside India much before the date of arrival of structure in India. In ground No. 9 of the appeal the assessee has questioned finding of the authorities below that Mumbai office constitutes a fixed place PE under article 5(1) of the DTAA. In ground No. 9.1 the action of the authorities below have been questioned whereby they have applied Article 5(1) to the facts of the case as against the specific provisions of Article 5(3) which as per the assessee is applicable to its case. In ground 9.2 the finding of the authorities below that PE stood constituted from the date of the notification of the award and not from the date when the installation activities commenced has been questioned. In ground No.10 the action of the authorities below in not following the principles of consistency also by Article 7(5) of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n record. If the Assessing Officer after verification finds that the facts of this year on the issues raised in ground Nos. 3 to 6 are similar to the facts of the earlier years on the issues then he is directed to decide the issues following the decision of the ITAT in this regard for the assessment years 2007-08 and 2008-09 and of the Hon'ble Supreme Court in the case of assessee reported in 291 ITR 482. The ground Nos. 3 to 6 involving the issue No.2 are thus allowed for statistical purposes. Ground Nos. 10 11: 26. It is regarding deduction of service tax. The assessee need to explain that no expenses in relation to service tax are debited in the profit and loss account. At page No. 644 of P.B-IV, assessee has filed information on service tax. The matter is thus set aside to the file of the Assessing Officer to decide the issue afresh after giving opportunity to the assessee to explain that no expenses in relation to service tax are debited in the profit and loss account. The ground Nos. 10 11 are accordingly allowed for statitstical purposes. Additional Ground: 27. Interest under section 234B of the Act 27.1 The learned AR contended that the issue is cover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the payee has role in such a lower or no deduction of tax. In the present case, assessee has full role in lower deduction of tax, as it had obtained order section 197 of the Act at lower rate and provided to GMR. In such a case, the payer GMR was not at fault and no order under section 201(1) can be passed in that case as they deducted tax as per order under section 197 of the Act. As the tax was not paid correctly and there was a shortfall in payment of tax, therefore, the interest under section 234B is payable by the assessee. 27.4 Considering the above submissions, we find that the an identical issue has been decided in favour of the assessee by the Delhi Bench of the ITAT in the case of assessee itself for the assessment year 2007-08 (supra). We thus, set aside the matter to the file of the A.O. to decide the issue afresh in view of the decision of the ITAT on the issue for the assessment year 2007-08 which is based on the decision of Hon ble jurisdictional Uttrakhand High Court in the case of CIT vs. Sedco Forex International Drilling Co. Ltd.- 264 ITR 320 (Uttrakhand), after affording opportunity of being heard to the assessee. The additional ground is accordingly all ..... 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