TMI Blog2008 (12) TMI 758X X X X Extracts X X X X X X X X Extracts X X X X ..... dia and also had business connection in India. 2. The assessee company, a State Government Undertaking, is in the business of generation of power. It entered into an agreement with National Machinery and Equipment Import and Export Corporation, China (CMEC) for the design, manufacture, supply, erection and Commissioning of six units of hydro electric generators of 39MW each on a turnkey contract basis on fixed price for the Jurala Hydro Electric project in Mahbubnagar District. In this connection, the assessee approached the Income tax Department through two letters bearing Nos. 51/2006 and 50/2006, both dt.16-2-2006, for certain permission under section 195 of the Income tax Act, 1961 (the Act). In the letter No. 51, it was stated that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yees were required to be at the site for at least 30 months and that CMEC had taken two warehouses on hire from the assessee company. Residential colony was also found to be constructed for CMEC employees. On these facts, he held that CMEC had PE in India. Based on all these facts, he held that income attributable to the composite contract is subject to tax in India as business income. Taking a cue from the provisions of sec. 44BBB, he determined the income at 10% of the gross value of the contract i.e. US$ 66,89,841. On this the tax was directed to be deducted @ 40% plus surcharge plus education cess before remittance. 4. The CIT (A) considered the submissions of the assessee in detail. He agreed with the primary finding of the TDS auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to deduct tax only from the second part of the contract and not from the supply contract. In this connection, he also referred to clause 9.5.2 of the supply agreement as per which the contractor, i.e. the non-resident company was liable to pay tax in respect of the contract irrespective of the mode of contracting. The learned Departmental Representative also laid emphasis on the finding of the CIT (A) to the effect that it was a composite contract and in spite of this finding, it was not justifiable to hold that the assessee was not liable to deduct tax from the income arising from the supply contract. 6. The main contention of the learned counsel was that it was an FOB contract and the title to the goods had passed outside Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of tax at source. The CIT (A) has agreed with the Assessing Officer to the extent that it is a composite agreement but having two identifiable segments. Firstly, let us consider the implication of it being a composite agreement in the light of the Board's instruction No. 1829 dt.21-9-1989. This Instruction was considered by the Special Bench of the Tribunal in the case of Motorola Inc. v. DCIT reported in 95 ITD 269. In that case there were three separate agreements viz., the supply agreement, the installation agreement and business promotion agreement. In that case also, the contention of the assessee was that so far as sale of the equipment is concerned, it was affected outside India as it was an FOB contract and that the title to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contracts should not be clubbed together unless they are undertaken by the same foreign company. In the case of Motorola, (supra), the different contracts were with different parties and hence there was a strong reason not to club the contracts. On the other hand, in the present case, the supply contract and the erection contract is with the same party. Therefore, if they are clubbed, there is nothing wrong in it. The CIT (A) in fact has held it to be a composite contract with which we also agree. However, at the same time, one cannot be oblivious to the factum of there being two identifiable segments of the overall turnkey project and the Assessing officer cannot sit down to rewrite the agreements between the parties. If the parties have c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er should read something which is not only not there, but is not also intended by the parties. If on commissioning the plant, it is found that the equipment is defective, it would not imply that the assessee is not the owner of the goods. The assessee may have various remedies to redress the grievance under the terms of contract. in fact, the Assessing Officer himself accepts that the foreign company has no title over the goods in India to bring into existence the generators or where not even a single part of it is manufactured in India, no income can accrue to the supplier under the contract. Thus, though it is a composite contract, no income arises to the supplier from the supply segment of the contract. Income arises to it only from the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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