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2016 (9) TMI 16 - ITAT DELHI

2016 (9) TMI 16 - ITAT DELHI - TMI - Income attributed to the offshore supply - Existence of PE in India - Held that:- Section 9(1)(i) of the Act provides that income shall be deemed to accrue or arise in India if such income has accrued or arisen through or from a business connection in India. Further, Explanation 1 to section 9(1)(i) of the Act provides that where a business, of which all the operations are not carried out in India, the income of the business deemed to accrue or arise in India .....

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igible to claim benefit under the treaty. As per Article 7(1) of the India US DTAA, the business income of a US entity can be taxed in India only if it had PE in India. The AO held that assessee had PE in India for installation and commissioning and supply which also included the indigenous supply and presence of its personnel/ entities for providing training to ONGC personnel. These observations are primarily with reference to the contract being treated as a composite contract and does not refe .....

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alleged PE. - Further, if we consider the AOs view that there was installation PE, then too as per Article 5(2)(j)&(k), there should have been presence for more than 120 days then only installation PE could be considered. The AO has not commented on this aspect. Therefore, the entire findings of AO on the issue relating to PE are without any basis. Therefore, considered from all perspectives no income can be attributed to the offshore supply. - Stay no. 206/Del/2016, ITA no. 1607/Del/20 .....

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u/s 143(3)/148/144C(13), pursuant to DRP directions u/s 144C(5) of the Income Tax Act, 1961, relating to AY 2008-09. All these matters were heard together and are being disposed of by this composite order for the sake of convenience. 2. Brief facts of the case are that the assessee company, a tax resident of USA, was engaged in the business of manufacture and sale of equipments, used in the seismic industry. The products included cable based/ cable less and radio controlled seismic data acquisi .....

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ee). 2.2. Under this contract, the assessee had made supplies to ONGC of equipment, material, general stores and services, as specified in Annexure 1 of the contract, which had been specifically mentioned in the contract. 2.3. As per the contract, certain indigenous items were also to be supplied in respect of each unit supplied by the assessee. These items were procured and supplied from India to ONGC at its various locations. The contract also included installations and commissioning of equipm .....

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filed for AY 2009-10, which came under scrutiny, assessee had offered revenues earned on account of installation and inspection amounting to US $ 88613 under the provisions of section 44BB and DPR of 10% and had offered training component given to ONGC engineers in India at US $ 146058 as per provisions of article 12 of DTAA at 15% gross. Thus, in AY 2009-10, the assessee had not offered to tax the supply of goods from the outside India under the claim that income had not accrued/ arisen or deem .....

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rd to the reasons recorded, analyzed the contract and concluded that it was a composite contract given on trunkey basis and the off shore supply of the equipment was nothing but essential material required for execution of the project, which was shown to have been supplied by the assessee to the ONGC to bring the same to India for use by the assessee itself for the purposes of execution of the subject contract. He computed the income @ 25% as under: Total receipts as worked out above USD 6,05,10 .....

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the order passed by the Ld. Assessing Officer ("AO") is bad in law and void ab-initio. 3. That on the facts and in the circumstances of the case and in law, the Ld. AO has failed to carry out the assessment proceedings under section 147 of the Act in accordance with the provisions of the Income tax law read with judicial precedents. Reason being: (a) There was an unreasonable delay of more than 13 months in rejecting the objections filed by the Appellant against the reasons provided f .....

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Ld. DRP has erred in treating the contract with Oil and Natural Gas Corporation ("ONGC") for supplies, installation and training as a composite contract and holding that the Appellant has a Permanent Establishment ("PE") in India, ignoring the fact that - (a) The Appellant has entered into a pure supply contract with installation and other services incidental to such supply. (b) Even if it is assumed that it is not a pure supply contract, it should be considered as a divisib .....

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out prejudice to above, even assuming (though not conceded) that the Appellant has a PE in India, the Ld. AO/Ld. DRP has failed to bring any material on record which could substantiate that the income from contract with ONGC is attributable to the alleged PE. 4. That on the facts and in the circumstances of the case and in law, the Ld. AO/ Ld. DRP has erred in taxing the offshore supplies in India. 5. That on the facts and in the circumstances of the case and in law, the Ld. AO/ Ld. DRP has erre .....

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non-taxability of various income streams. 9. That the Ld. AO I Ld. DRP has erred on facts and in law in estimating the income attributable to alleged PE in India at the rate of 15%, instead of determining the income attributable to the alleged PE under Section 92 of the Act (read with Sections 92A to 92F of the Act and Rules 10A to 10E of the Rules). 10. That the Ld. AO/ Ld. DRP has failed to provide any rationale for attributing income at the rate of 15% of gross receipts 11. That the Ld. AO h .....

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II/3(2735)/2005-06/ZA23LO6004 dated 3.1.2007 is contained. He also filed copy of order passed u/s 195(2) dated 26.2.2007 in course of hearing wherein ONGC was, inter alia, directed to deduct TDS after applying DPR 2% on gross value of the supply of material inside India. However, ONGC was also directed to deduct TDS after applying DPR 105% on the installation and commissioning of 15% (including necessary chart) on 3rd party inspection charges, training charges inside India under the DTAA. Furthe .....

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d offered revenue from training and installation but no income was offered for off shore supply and services. Assessment was completed u/s 143(3). In this assessment it was held that assessee was having a PE in India and supply was liable to tax on the ground that it was a composite contract. 4.2. Thereafter, matter travelled before ld. DRP, which held that the supplies took place in FY 2007-08 and not in FY 2008-09 and, therefore, the additions were to be made in AY 2008-09. Accordingly, notice .....

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However, in course of haring, he did not press this ground. 7. We have considered the submissions of both the parties and have perused the record of the case. In our opinion, the order passed u/s 195 only prima facie determines the income chargeable for the purposes of TDS. This cannot be equated with assessment proceedings u/s 143(3). It is only in case where AO has formed an opinion while framing assessment u/s 143(3) that reassessment proceedings cannot be initiated on mere change of opinion. .....

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o supply the following equipments: S. No. Description of goods Price (in USD) 1 4 units of complete 3D data acquisition analog 2000 channels system along with all necessary modules 10,483,172.92 2 2 units of complete 3D data acquisition analog 3000 channels system along with all necessary modules 6,959,453.98 3 1 unit of complete 3D data acquisition analog 4000 channels system along with all necessary modules 4,328,930.47 4 2 units of complete 3D data acquisition digital 2000 acquisition points .....

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mpany also required to provide off shore and on shore training installation and third party inspection. Details of consideration for such services against each of the items mentioned in the above details were as under: S. No. Off-shore Training Installation On-shore Training Inspection Service Tax Total 1 100,000 2,000 42,856 24,000 4,000 172,856 2 50,000 1,000 21,429 12,000 1,000 85,429 3 25,000 500 10,714 6,000 250 42,464 4 50,000 1,000 21,429 12,000 1,000 85,429 5 50,000 1,000 21,429 12,000 1 .....

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On-shore 589,010.00 Total (A) 60,411,426.80 Services - Training (Off-shore) 350,000 - Training (On-shore) 150,000 - Installation 7,000 - Inspection 84,000 Total (B) 591,000 Service tax © 8,500 Total consideration (A+B+C) 61,010,926.80 8.3. Ld. counsel referred to page 69 of PB to demonstrate that the contract was labeled as supply/ purchase order. 8.4. Ld. counsel further referred to page 71 of the PB wherein the delivery/ completion period is given, which reads as under: Delivery/ Completi .....

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(ER) ii. Installation, Commissioning and Acceptance: Within 30 days for all the systems pertaining to each ultimate consignee from the date of receipt of intimation by respective ultimate consignee. The intimation will be sent by Head, Geophysical Services of concerned work center after receipt of all the items of telemetry systems belonging to that site to the supplier (i.e, M/s Input/ Output Inc., USA). b. Trainings: i. At Supplier's premises. USA: Supplier will impart training to 14 Geop .....

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training will be completed during installation and commissioning of the systems at the concerned site. 8.5. He further referred to page 72 of the PB, wherein terms of delivery are contained, which are reproduced hereunder: For imported items to airfreight : FCA, Dubai Airport. UAE For imported items to be sea-freighted: FOB, Dubai Seaport For indigenous items to be supplied from India: FOR destination BarodaiJorhatlChenoailKolkata1Dehradun (depending upon the destination) ONGC reserves the right .....

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al through irrevocable Letter of Credit, valid for a period of 210 days for shipment and additional IJ days fur negotiation of documents. The payment shall be made against proof of dispatch and production of other relevant documents as mentioned at clause 17 of this purchase order. Part payment will be allowed for the value of the units mentioned for each consignee/user provided the complete items meant for each consignee/user are shipped/air-freighted. The supplier @ would present the documents .....

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ory completion of installation, commissioning, acceptance and training as per provisions of supply order. The payment will be made against presentation of following documents by supplier through their bank to State Bank of India, Tel Bhavan Branch, Dehradun-248 003 (India) : a) Invoice as per supply order, in triplicate, drawn in the name of Oil & Natural Gas Corporation Ltd. and duly manually signed by the supplier or his authorised representative b) Quality control certificate issued joint .....

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ons/cable charges and confirmations of Letter of Credit charges, if required, will be borne by the supplier. All Indian Bank Charges will, however be borne by ONGC. 14.4 The corporate &, personnel tax liability (imposed on his employees and the employees of his sub-contractor, vendors, bank-up consultants etc. on account of their association with or for performance of the work in India) against this order will be borne by Supplier. This is not a tax protected contract and ONGC will simply re .....

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oper training. The installation and trainings were, thus, part of supply of equipment. He submitted that it is mere a case of delivery by one person followed by visit of technicians who installed the machine and trained the persons who would be operating. 8.10. Ld. counsel further pointed out that contract clearly specifies prices of equipment, installation and training both within and outside India, which is evident from Annexure 1 to the contract. Ld. counsel further referred to page 248 of th .....

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all a case of composite contract but a pure supply contract or in the alternative a divisible contract, because payment of consideration for various activities was not dependent on the completion of other activities or whole contract. Ld. counsel pointed out that AO did not deal with the arguments of the assessee company on this count. 9. Ld. CIT(DR) relied on the order of AO, passed in pursuance to the directions of ld. DRP and submitted that contract is to be looked as it is. 10. We have consi .....

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tely contemplated in the contract itself. Further, from the assessment order it is evident that AO had aggregated the income from various streams and had not adopted any specific value of the contract. 10.1. Having held that it was a divisible contract with multiple scope of work, we have to find out where the title in goods passed. If title in goods passed off shore, then no income can be attributed from this part of the contract in India. At page 82 of PB wherein the Annexure 1 to the supply o .....

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amed by the buyer at the named place of point and FOB implies that the seller fulfills his obligation to deliver when the goods have passed over the ship s rail at the named port of shipment. This means that the buyer is to bear all costs and risks of loss of or damage to the goods from that point. 10.2. Under both the circumstances, viz. through air or through sea, the title in goods passed off shore and, therefore, no part of the consideration could be attributed to the supplies in India. Thes .....

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operations are not carried out in India, the income of the business deemed 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. 10.4. Admittedly no portion of the offshore supplies involved any activities in India as all the activities in relation to the earning of income from offshore supplies took place outside India. Now even assuming that on account of contract being signed in India, a business connection had .....

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vations are primarily with reference to the contract being treated as a composite contract and does not refer to which PE as per Article 5 of the India-US treaty was there. Admittedly the assessee had no fixed place of business in India and its employees only gave training for proper execution of the project. Further, assessee company did not take the services of any person in India except for supply of indigenous parts and, therefore, there was no dependent agent PE in India also. The AO has no .....

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erspectives no income can be attributed to the offshore supply. In the result ground nos. 3 & 4 are allowed. 11. Now coming to ground no. 5, ld. counsel pointed out that as far as onshore supply of equipment was concerned, it was sub-contracted to third party namely HGS (India) Sales and Services Private Limited ( HGS India ). Ld. counsel pointed out that HGS India supplied goods directly to ONGC amounting to USD 589,010. The same amount of invoices was raised by HGS India to the assessee co .....

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ctual value availed. In support of his contention, ld. counsel referred to page 96 of the PB, wherein total order value is contained, wherein in respect of indigenous items FOR destination value has been mentioned at USD 589010. Ld. counsel also referred to page 291 of PB, wherein details of invoices raised on ONGC are contained. 12. Ld. DR relied on the order of AO and submitted that AO has not examined the assessee s claim of no profit being involved in the transaction. 13. We have considered .....

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. Ld. counsel has referred to various invoices on this count, but since this aspect has not at all been examined by AO, therefore, it would be in the interest of justice that this matter is restored back to the file of AO for examining the assessee s contention and if it is found that no profit was earned out of this activity, then no income can be attributed to this aspect. In the result ground no. 5 is allowed for statistical purposes. 14. Ground no. 6: Regarding taxing of consideration for in .....

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can independently carry out installation and inspection in future without recourse to the assessee company. We find that both these aspects were not examined by AO and, therefore, it will be in the interest of justice that for proper verification of facts on this count, the matter is restored back to the file of AO. We order accordingly. Ground no. 6 is allowed for statistical purposes. 15. Ground no. 7: At the time of hearing ld. counsel submitted that this ground is not pressed as it is. He, h .....

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ponent of receipt under the contract. Ld. counsel pointed out that this aspect is covered under ground no. 8 raised by assessee. He submitted that on this service tax no income was earned by assessee as this was a reverse charge and is to be excluded. 17. Having heard both the parties, we find that this issue has not been independently examined by lower revenue authorities as the entire issue was considered in the back drop of finding that it was a composite contract. Therefore, we restore this .....

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