TMI Blog2017 (8) TMI 416X X X X Extracts X X X X X X X X Extracts X X X X ..... er business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment’. The connotations of ‘profits indirectly attributable to permanent establishment’ will extend to these two categories. These categories clearly incorporate a force of attraction rule. The basic philosophy underlying the force of attraction rule is that when an enterprise sets up a permanent establishment in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can properly tax all profits that the enterprise derives from that country whether the transactions are routed and performed through the PE or not. The provisions of Article 7(1) of India China DTAA, include same results as sought to be achieved by article 7(1)(c) of UN MC. As to the scope of this provision, one may find guidance from the UN MC Commentary in this regard. The connotations of ‘profits indirectly attributable to permanent establishment’ do indeed extend to incorporation of the force of attraction rule being embedded in article 7(1). In addition to taxability of income in respect of services ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 234 B - Decided in favour of assessee. - ITA No. 224/Del/2015, ITA No. 225/Del/2015, ITA No. 226/Del/2015, ITA No. 227/Del/2015, ITA No. 3552/Del/2015, ITA No. 58/Del/2017 And ITA No. 59/Del/2017 - - - Dated:- 14-7-2017 - SH. R. K. PANDA, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER For The Appellant : Sh. Deepak Chopra, Ms. Manasvini Bajpai, Sh. Ankul Goel, Advs. For The Respondent : Sh. Anuj Arora, CIT, DR ORDER PER BEENA A. PILLAI, J.M : 1. The present appeals have been filed by assessee for relevant assessment years, against final assessment orders passed by Ld. AO, pursuant to directions of DRP, the details of which are as under: S . No . Asst . Year Date of DRP directions Date of Impugned order by Ld . AO Passed U / s . 1. 2007-08 28/11/14 04/12/14 147/148/143 (3) 2. 2008-09 28/11/14 04/12/14 147/148/143 (3) 3. 2009-10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existence of a PE. 2.1 That the AO has erred in holding that onshore revenue from erection, commissioning, testing and supervision of erection/commissioning/testing of BTG equipment was not eligible for taxation under section 44BBB of the Act. 2.2 That the AO has erred in facts and law in not appreciating that the Appellant has rendered onshore services in connection with turnkey power projects awarded to the Indian customers and as such under the provision, the appellant was not required to undertake the turnkey project itself. 2.3 That without prejudice, the AO has erred in determining profits from onshore services at an arbitrary net profit rate of 25% without considering the segmental profit rate of 1.69% in global financials of the appellant. 2.4 That without prejudice, the AO has erred in taxing revenue from onshore services at an arbitrary net profit rate of 25% as against the global profitability of 8.29%. Re : Taxability of Offshore supply 3. That on the facts and circumstances of the case, the AO grossly erred in bringing to tax revenues arising from off-shore supplies to tax in India. 3.1 That the AO grossly erred in law in treating the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y conducted in India results in constitution of fixed place PE and part of the profits should be attributed to such operations when such activities are nonrevenue bearing. 3.11 That without prejudice the AO also erred in assuming the total profitability from offshore supplies at 8.29 % of the gross amount and not considering the segmental profit rate of 1.69% while attributing 25% of such profits to tax in India. 4. That the AO grossly erred in law in levying interest under section 234B and 234C of the Act. 5. That the AO also erred in initiating penalty proceedings under section 27(1)(c) of the Act for alleged concealment/furnishing inaccurate particulars of income in relation to offshore supplies revenues. 3. Brief Facts for the year under consideration are as under: Assessee filed its return of income for the year under consideration on 28.09.2011 declaring a total income of onshore revenue from supervisory services amounting to ₹ 7,35,30,835/-under section 44 BBB of Act. During the course of assessment proceedings assessee filed revised computation declaring total income of ₹ 7,72,74,388/-. Return was processed under section 143(1) of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee submitted that the sale of equipments have been effectuated with the buyers independently from outside India on principal to principal basis. Assessee placed heavy reliance upon the decision of Hon ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Co. Ltd. reported in 288 ITR 408, CIT vs. Hyundai Heavy Industries Co. Ltd., reported in (2007) 291 ITR 482 and decision of Delhi Tribunal in the case of LG Cable Ltd vs. DIT reported in 113 ITD 113. Apart from these decisions, assessee relied upon various other decisions which are as under: DITvs. Ericsson AM. (Delhi High Court) (343 ITR 370) DIT vs. Nokia Networks OY [ITA No. 512/ 2007;1138/ 2006; 503/ 2007; 505/2007- Delhi High Court] JSC Technoprow Export vs. DIT [A.A.R. No. 827 of 2009] Commissioner of Income tax vs. R.D. Agganval and Co. [(1965) 56ITR 20 (SC)] Mewar Textile Mills ltd (91 ITR 542) (SC) Income Tax Officer v. Shri Ram Bearings Lid, [(1997) 224 ITR 724 (SC)] ACIT vs. Andhra Pradesh Power Generation Corpn. Ltd. [2QQ9- TIOE-346-1TAT-HYD] Xelo Pty Limited vs. DDIT [(A.A.R.) ITA Nos. 4107, 4108, 4380, 4381/Mmn/2002] Deepak Cables (India) Limited [AAR No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. Assessee placed reliance upon the decision of Hon ble Supreme Court in the case of CIT vs. Hyundai Heavy Industries Co. Ltd. (supra), wherein Hon ble Court held that, revenues from installation and commissioning are taxable on deemed income basis under section 44 BB (which is in pari materia to the deeming provisions of section 44 BBB and applies in case of foreign companies engaged in the business of civil construction etc in certain turnkey power projects) of the Act. 10. Ld. AO thereafter analyzed the contracts in order to ascertain true nature of income received from different contracts. After considering the submissions advanced by assessee, Ld.AO observed as under: the assessee entered into contractual agreement for supply of boiler, turbine and generator equipment to various companies (project owners) setting up power plants in India; there are offshore supply and onshore services; from the perusal of scope of activities it is seen that assessee is carrying out all the drawings, design and engineering along with supervising the commissioning and erection of BTG equipments; from the scope of activities, it is clear that these are of the nature of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found that assessee was engaged in the activities of drawing and designs, manufacturing, supply of equipment, marketing and related activities like training owner personnel and supervision of erection, instillation and commissioning. Ld. AO observed that drawings, design and manufacturing of equipment was done outside India but marketing and related activities and supervision of erection and commissioning was carried out in India. Ld.AO thus concluded that the supervisory PE of assessee in India, was directly involved in supervision and supply of BTG equipments, needed to set up a fully functional power plant. He thus passed draft order computing profits at 8.1%, on the basis of global profit and loss A/c and attribution of such profit to Indian operations towards the role of supervisory PE, at 25%. 14. Against the draft assessment order, assessee filed objections before DRP, who upheld the attribution at 25% to the PE in India, in respect of offshore supply of BTG equipments. 15. Aggrieved by directions of DRP, assessee preferred appeal before this Tribunal. 16. In the meantime, Ld.DIT International Taxation-II, New Delhi, issued notice under section 263 dated 11.04.2014 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order in accordance with law. We also observe that if the lessee is not satisfied with the order of assessing officer and filed objections before the DRP, tended DRP will pass a speaking order is considering the assessee s objection in accordance with law. 20. Against this order of this Tribunal assessee preferred an appeal before Hon ble High Court. Hon ble High Court by order dated 23.02.2015 in CM No. 1861/2014 and 2293/2015 in ITA No. 688/2014 remanded the matter to DRP, for adjudication with directions as under: 6. This court notices at the outset that in the present case, whilst framing the initial draft assessment order on 28/03/13, the assessing officer deemed it expedient to confine the scrutiny to a certain subject matter. Finally the assessment order was made after taking into account the order of the DRP which was naturally determined in turn by the reference in the draft assessment order. Thereafter, the DRP issued notices under section 263 and made his final order on 29/08/2014. Even at this stage, the DRP did not deem it expedient to enlarge the scope of the scrutiny for a Y 2010-11. The DRP s determination in the circumstances, concerning the A.Y: 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipts are taxable in India, the Ld.AO has erred in law and facts that the 2 separate contracts entered with project owners for supply and supervision are composite contracts II. that the supply which constitutes 99.75% of the total value of 2 contracts taken together is incidental to the supervision services which constitutes less than 0.25% of the total contract value III. without prejudice to our arguments that 2 contracts are separate if the contract is treated as composite contracts then supervision services are incidental to offshore supply and are not taxable in India 2. That the Ld. AO erred in law and facts in holding that the assessee has a fixed place in India 3. That the Ld. AO erred in holding that the PE was involved in carrying out marketing activities when the PE was involved only in supervising the directions of contracts 4. That the Ld. AO erred in facts in holding that the assessee is involved in the operation of the power project 5. Without prejudice the Ld.AO has erred in alleging that the total profits from offshore supply was 8.29% of gross revenue of offshore supply and not considering the segmental profits of 1.69% and in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red according to the specific requirement of respective project owner. For this intensive site survey, geological survey and soil testing etc., is needed to be done and these operations required presence of assessee s expertise in India for a sufficient duration of time and since assessee is executing several contracts in India these activities in fact become a regular feature throughout the year; It is observed that supply contracts also have a clause for training of personnel of project owner by assessee and assessee is responsible for offloading and transportation of equipment from port of arrival in India to place of installation. Assessee was contractually responsible for repairs and warranty obligations under supply contracts and for these purpose for which assessee needs to have someplace in India from or through which these activities could be carried out; The panel agreed with the submissions of assessee that even if the contract is a composite contract, profit can be attributed to only those operations which are carried out in India through PE. Though actual manufacturing of equipment has occurred outside India, several operations which are necessary f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was further observed that assessee did not furnish any information with regard to place and period of stay of expats. As negotiations of new contract happened in India, the protracted negotiation, signing of contracts, site surveys, erection, commissioning, periodical reviews and consultation with owners, presence of employees of assessee was required. DRP thus concluded that assessee knew about such necessity for deputing employees and that even where no project office was available, the hotel were such employees stayed, will constitute a permanent establishment of business in India. It further held that the equipments manufactured by assessee were highly customised according to specific requirement. Assessee was also responsible for offloading and transportation of equipment from port of arrival in India to place of installation and repairs and warranty obligation under supply contract. As per DTAA, business income is taxable in India only by virtue of existence of PE and as PE exists in present case DRP held that income from supply contract were taxable in India. 22. Based on the observations and directions of DRP, Ld. AO passed impugned assessment or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escapement of income, chargeable to tax. In view of the above, the Assessing Officer (AO) has reasons to believe that income chargeable to tax in excess of One lakh rupees has escaped assessment within the meaning of section 147/148 of the I.T. Act, 1961. 25. Similar reasons were recorded with the statistics for the assessment years 2008-09 and 2009-10. Against these reasons recorded assessee filed objections towards the initiation of reopening of proceedings which were disposed of after due consideration by Ld. AO. 26. During the reassessment proceedings Ld. AO observed that assessee had entered into following contracts for the respective assessment years the details of which are as under: S. No. Asst. Year Details of Parties with whom Contracts were executed 1. 2007-08 1. Reliance Energy Ltd. 2. JSW Energy Ltd. 2. 2008-09 1. Reliance Energy Ltd. 2. JSW Energy Ltd. 3. JSW Steel Ltd. 4. Rosa Power Supply Company Ltd. 5. JSW Energy (Ratnagiri) Ltd. 6. Jindal Steel and Power Ltd. 3. 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er been observed that assessee has offered supervisory service fee received under section 44 BBB of the Act. In respect of the supply of BTG equipments, assessee had contended that since these are offshore supplies hence were not taxable in India. Ld. AO, based on the findings and observations of his predecessor for assessment year 2010-11 attributed 25% of profit based on global profitability statement accruing from offshore supply to PE in India. 32. Against the draft assessment order passed for these assessment years assessee filed its objection before the DRP. 33. As the assessee could not furnish original site records maintained during erection commissioning and testing of BTG equipment and not maintaining specific books of accounts in India it therefore upheld addition made by Ld. AO, applying 25% of the net profit rate for taxing the onshore service revenues and not computing the supervision fees under section 44 BBB of the Act. Pursuant to these directions, Ld. AO passed the impugned assessment order for assessment years 2011-12. 34. Aggrieved by the impugned assessment order is assessee is in appeal before us now. 35. Thus it is observed from the records that f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed on same facts. He submitted that Ground Nos. 1 and 1.1, are general in nature, which do not require adjudication, Ground No. 2 raised in all the assessment years under consideration, regarding taxability of received from onshore services under section 44BBB of the Act is not pressed. Accordingly we do not intend to adjudicate this ground. Ground No. 3 relates to taxing of offshore supply in India, Ground No. 4 is on levy of interest under section 234B and C of the Act; and Ground No. 5 is an initiation of penalty proceedings under section 271(1)(c ) of the Act, is premature at this stage. 42. The main issue that needs to be addressed is in respect of taxability of offshore supply in India. Ld.Counsel in written submission dated 04.05.2017 has formulated following issues for our consideration: 1. Whether the contracts for offshore supplies and provisions of onshore services were composite contracts? 2. Whether the title in goods is passed outside India or in India upon completion of the testing, commissioning of the BTG equipment and upon issue of completion certificate? 3. Whether there existed a business connection of the appellant in India? 4. Whether in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract between the Owner and Purchaser. 46. It has been submitted that, the Contractor has submitted an offer for supply of Boilers, Turbines, Generators and Auxiliaries (referred to as the BTG Package) for the facility/plant. 47. Ld. Counsel submitted that the scope of work is described in Article 4.2 at page 338 that divides scope of work between the parties in two parts (a) the first part (of Shanghai Corporation) which shall cover the supply of all equipment and materials including associated accessories and mandatory spares related to BTG package of CFR Kandla Port basis. Ld. Counsel submitted that Clause 5 of the contract provides the break-up of the price where the off shore supplies and services are separately provided for (On shore services to be provided by. a related party). 49. Ld. Counsel then referred to next project being Kinda Contract in the list. Ld. Counsel submitted as under: Kinda Contract - For supply of Boilers and Steam Turbine Generators (at serial No. 2 of the Chart submitted by the Assessee) (agreement at page 920 of the Paper book part 11 for assessment year 2010-11) 50. Ld. Counsel submitted that this contract is between JSW Energy (V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 97 Taxman 100. Ld. Counsel in the written submission dealt with this decision as under: The nature and scope of work in that case was as under- Briefly the factual matrix giving rise to the present appeal is as follows. The respondent LG Cable Ltd. ( LGCL ) is a company incorporated under the laws of South Korea having its registered office at ASEM Tower (19-20F), 159 Samsung Dong, Gangnamgu, Seol 135-090 Korea. LGCL was awarded two contracts on 26th Feb., 2001 by the Power Grid Corporation of India Ltd. ( PGCIL ). The first was for onshore execution of the Fibre Optic Cabling System Package Project under the System Co-ordination and Control Project for the Eastern Region involving onshore services. including erection/installation. testing and communicating. etc., of the fibre of the cabling system. The second contract was (or offshore supply of equipment and offshore services. During the financial year 2001-02, LGCL had set up a project office in India after obtaining requisite approval from the RBI. The services under the onshore contract were rendered by LGCL through its project office in India for which separate books of account were maintained by the Assessee. The income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e equipment supply contract shall give satisfactory performance. The same responsibility has been cast on the appellant in art. 6 of the offshore supply of equipment also. ( 4) Notwithstanding the award of contract under two separate agreements, the contractor (appellant) shall achieve successful completion of the project under both contracts and successful taking over the project by PGCIL. 6. The CIT(A) held that it was clear from the foregoing that the two contracts were not independent of each other as claimed by the Assessee, that there was interrelation and inter-dependence between the two agreements and that one could not exist without the other. Thus, the CIT(A) concluded that though there were two agreements, in fact, it was a composite contract for supply of equipment as well as execution, erection and installation of equipment in India. He further observed that a colourable device had been adopted by the Assessee to conceal its real tax liability. The supply of offshore equipment was inextricably linked with the operations to be carried in India. He, therefore, held that the decision of the AAR in the case of Ishikawajima Harima Heavy Industries Co. Ltd., I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as such has by implication of law- ( a) A lien on the goods for the price while he is in possession of them; ( b) In case of the insolvency of the buyer, right of stopping the goods in transit after he has parted with the possession of them; ( e) A right of resale as limited by this Act. ( 2) Where the property in goods has not passed to the buyer, the unpaid seller has, in addition to his other remedies, a right of withholding delivery similar to and coextensive with his rights of lien and stoppage in transit where the property has passed to the buyer. 29. Thus, the mere fact that 15 per cent of the payment was to be retained by the PGCIL to be paid 30 days after operational acceptance on erection and completion of the system cannot be construed to mean that the title in the goods did not pass to the buyer in the country of origin. 30. Then again, in our considered opinion, undue importance cannot be attached to the fact that the agreement imposed on the Assessee-company the obligation to hand over the equipment functionally completed. This obligation has been rightly construed by the Tribunal to be in the nature of a trade warranty and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract. The buyer's assent to the passing of the property in the said circumstances is implied and that when the seller dispatches the goods and delivers them to the common carrier for purposes of transit to the buyer, the common carrier not only receives the goods as agent of the buyer but also assents to the appropriation made by the seller. Where however the intention is clearly indicated and the carrier assents it is immaterial by what document the consignment is effected In cases where the seller bears the freight for the transmission of the goods free of cost to the buyer, the property in the goods passes to the buyer as soon as they are sent to the carrier, though there may be a provision that they are to be paid for by the buyer on behalf of the seller after the arrival of the goods. But where however the seller exercises a right of disposal or where he agrees to deliver the goods at their destination, the carrier is the seller's agent and the delivery is not a final appropriation. The intention of the parties is therefore one of the important elements in determining the situs where the property passes to the buyer in pursuance of the contract. The decided cases a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a (supra), it was transferred on the high seas but in the instant case, it was transferred in the country of origin itself as soon as the goods were loaded upon the mode of transfer to be used to convey the plant and machinery, i.e., the shipping vessel, even prior to the goods reaching the high seas. Once the title was transferred in the aforesaid manner, there was no provision either in the agreement or in law providing a recourse to the respondents to take back the title. 55. Ld. Counsel submitted that the issue of composite contracts has been analysed threadbare by Hon ble Supreme Court, as well as the jurisdictional High Court and as such what the revenue is now contending is reinventing the wheel. He submitted that the legal position is well settled. He pointed out that the above position has consistently been followed even by the Authority for Advance Rulings (AAR). 56. Ld. Counsel relied on a decision delivered by AAR in the case of JSC Foreign Economic Association (322 ITR 409) (AAR). He submitted that In this case the AAR considered the issue on more or less identical circumstances and facts. To highlight the contentions of AAR certain relevant sections of the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Since all parts of the transaction in question, i.e. the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India. ( 3) The principle of apportionment, wherein the territorial jurisdiction of a particular State determines its capacity to tax an event, has to be followed ( 4) The fact that the contract was signed in India is of no material consequence, since ail activities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country. This Authority had an occasion to deal with such type of case in Hyosung Corporations case (supra) and the relevant passage is extracted below: 10.1 The above events would indicate that the title to goods stood transferred to Power Grid outside the territory of India. The title passed on to Power Grid well before the goods reached the Indian Port or the territorial waters of India. The bill of lading contains the name of Power Grid as the consignee. The documents were presented to the applicant's banker for negotiation soon after the goods were shipped FOB and bill of la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved: 10.7 It may be noticed that the clauses in the contract considered by the Supreme Court also contained an obligation on the part of the contractor to retain custody and control of equipment and to take due care of equipment and to take due care thereof until provisional acceptance of the work. Moreover, installation of equipment was also to be carried out by the contractor. In spite of these features, the Supreme Court came to the conclusion that the offshore supply of goods which took place outside India does not give rise to any taxable income in India under the provisions of the Act. The applicant's case even stands on a better footing inasmuch there is a separate and exclusive contract with the applicant for the supply of goods offshore. 6. The facts of the present case and the salient features of contract are almost the same and the said ruling which followed the decision of Supreme Court in Ishikawajma's case (supra) fully supports the applicant's case. In this case, the bill of lading filed by the applicant shows that the port of loading is Ilyichevsk, in Ukraine and the port of discharge at Haldia in India. The description of cargo is als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the extent it arises in India. Merely because the activities, namely, the supply activity and the installation activity are to be carried out by two separate companies who are part of the same group cannot result in the transaction being treated as one composite transaction This is more so when both the entities perform their own independent obligations, receive appropriate separate remuneration and, as found by the Tribunal, are not financially or technically dependent on each other. Further, all of them are assessed in respect of the income that has accrued to them and even the Revenue has, in the course of its arguments, accepted that it is not their case that only one assessment has to be made treating the transaction as one works contract. 59. Ld. Counsel submitted that on the issue of whether transfer in favour of purchaser happens only after the acceptance test is complete has been dealt by Hon'ble Delhi High Court in the case of DIT vs. Nokia Networks OY(358 ITR 259) as under- The terms of contract make it clear that acceptance test is not a material event for passing of the title and risk in the equipment supplied It is because of the reason that even if su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act defining the scope of total income. Section 5(2) of the Act provides as under- ( 2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- ( a) is received or is deemed to be received in India in such year by or on behalf of such person; or ( b) accrues or arises or is deemed to accrue or arise to him in India during such year. 64. Ld. Counsel submitted that, provisions of sub-section 2(a) of section 5 are not applicable on the facts of the case, since title of goods has been transferred outside India on CFR basis INCOTERMS 2000. The payments also have been received by Assessee outside India. He then referred to the provisions of sub-section 2(b) of section 5, which deals with the accrual of income or deemed accrual of income to such non-resident Assessee in India. Ld. Counsel referred to Section 9 of the Act which deals with Income deemed to accrue or arise in India . He submitted that provisions of section 9(1) of the Act provides for all income accruing or arising, whether directly or indirectly, through or from any business connection i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that authorities below are of the opinion that since these are composite contracts the liability of the Assessee does not end here and continues till the actual handing over after completion of PG testing. It has been submitted that this argument of Revenue has been discarded by Hon ble Supreme Court as well as the jurisdictional High Court, and it has been held that this is not a determinative test. Ld. Counsel then went to the submit the play between the provisions of section 9 read with Explanation 1 and 3 of the Act which has been dealt with in decision of Hon ble Delhi High Court in the case of Nortel Networks India International Inc. Vs. DIT (386 1TR 353). 70. It was submitted that this was a case where this revenue sought to tax the profits arising from off shore supplies in India by alleging that there existed a business connection in terms of section 9 of the Act. He submitted that this issue was considered and answered by the Court as under:- 43. It is apparent from the plain reading of Section 9(1) of the Act that all income which accrues or arises through or from any business connection in India would be deemed to accrue or arise in India. In CIT v. R.D. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ajima-Harima Heavy Industries (supra) was also similar. There too, the equipments were supplied overseas and the contractor continued to retain control of equipment and material till the provisional acceptance of the work or the termination of the contract. 71. Ld. Counsel submitted that mere existence of a business connection is not enough to trigger taxability in India and that to apply the principle of apportionment as envisaged in Explanation 1 and 3 to section 9(1) of the Act, there must be some activity carried out in India relating to the off shore supplies. Ld. Counsel submitted that no evidence has been brought on record to show that some portion of activities relating to off shore supplies were carried out in India. It has been submitted that on this ground alone no profit arising from off shore supplies could be brought to tax in India. Ld. Counsel submitted when taxability is not established under the provisions of the Income Tax Act, there cannot be any recourse to the provisions of DTAA to Impose Tax on assessee. 72. Ld. Counsel submitted as mandated in several judgments of the jurisdictional High Court as well as the Apex Court once there does not arise any t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. On composite nature of contract entered into by assessee; 2. Existence of PE in India; 3. Attribution to income to such PE. On composite nature of contracts. 75. The first contention of Ld. CIT (DR) was that, contracts entered into by assessee with the Project owners were composite contracts. In support of this contention, he referred to Rosa -I Contract. Referring to terms of the contract, Ld. CIT DR submitted that the contract were for Engineering, Procurement and Construction (EPC). The Ld. CIT (DR) alleged that there were post bid negotiations to arrive at such an elaborate contract and for such negotiations the presence of Sr. Personnel of assessee would have been required in India. It was also submitted that scope of work awarded to assessee was the BTG Package which required assessee to deliver a functional unit Ld. CIT DR submitted that since erection commissioning of BTG package was done under the supervision of assessee, it is evident that the package was implemented in India. It was also submitted that since assessee contractually was required to meet, entire performance guarantee tests and to get the acceptance certificate from the owner, the work wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead Ld. CIT DR submitted the bottom line case by placing reliance on the decision of Hon ble Delhi High Court in the case of POSCO Engineering and Constructions Company Ltd. Vs. ADIT reported in 2014 Taxmnn.com 500 (Delhi Tri). 80. He submitted that the price of equipment included compensation for certain activities which were carried out at site. He submitted that the contracts entered into by assessee with the project owners are indivisible in nature and that the responsibility of the assessee does not end with mere supply of BTG equipment but is extended to provide supervisory services in India for erection of power plant, income received by assessee from offshore supply is deemed to have been received in India and therefore the same is attributable to the supervisory PE in India. Rejoinder by Ld. Counsel: 81. In rejoinder to the submissions by Ld. CIT DR, Ld. Counsel submitted that as regard the question of whether the contracts were of a composite nature or not, looses significance in view of the judgment of the Hon ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. Vs. DIT [(2007) 288 ITR 408. Ld. Counsel submitted that the decision rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork in which the use of material is accessory or incidental to the execution of the work. Ld. Counsel submitted that assessee's case is that it is essentially a contract for supply of goods where some work is required to be done as incidental to the sale. He further submitted that the decision of Hindustan Shipyard Ltd. (supra) has been considered by Hon'ble Supreme Court in the case of Ishikawajima - Harima Heavy Industries Ltd. (supra) wherein, Hon'ble Supreme Court observed that, it is only for the purposes of taxation that the terms of contract are required to be construed. He submitted that the Court therein observed that a turn-key contract may involve supply of materials used in execution of contract for price as also for use of the materials by works and labor but same may have no relation with the taxability. Eventually, the Hon'ble Supreme Court applied the test of territorial nexus and the principle of attribution to conclude that no portion of the profits arising from the offshore supply could be brought to tax in India. 84. Ld. Counsel submitted that even if it is assumed that the contracts entered into by Assessee were composite contracts, what real ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re applied or DTAA, still one has to satisfy the attribution rule and it is only the profit arising from such activities carried out in India that can be brought to tax in India. He submitted that in the entire submission made by the Ld. CIT DR, not a word has been said as to how any activity pertaining to the offshore supplies was carried out in India. Ld.Counsel, submitted that the argument of an overlapping period lacks substance and has no bearing on the matter. 86. Ld. Counsel then adverted to the argument of Ld. CIT.DR, regarding the inter play between Article 5 (2) and Article 5 (1) of the DTAA i.e. to say that if any instance of Permanent Establishment as contained in Article 5 (2) is prevalent, then automatically it constitutes a fixed place of business within the meaning of Article 5 (1) of the DTAA and hence profits arising from offshore supplies should be brought to tax in India. It is submitted by Ld. Counsel that reading and understanding of Department, qua the provisions of Article 5 are totally incorrect. He submitted that the decision relied upon by the DR of the Delhi High Court in the case of Efunds IT Solution (supra), does not lay down this principle. Ld. Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticle 5(2) cannot be read on a standalone basis. Ld. Counsel referred to the observations made by this Hon ble Tribunal in Linkletters LLP (supra) as under:- 88. The face s admitted omitted where the Article 5(1) of the India UK tax treaty refers to the requirements of, what is often termed as, basic rule PE. This refers to a fixed place of business through which business of the enterprise is wholly or partly carried out. Elaborating upon the scope of this provision, a co-ordinate Bench of this Tribunal, in the case of Airline RotablesLtd. UK v. Joint Director of Income-tax 40 DTR 226 and after analysis of earlier decisions of this Tribunal in the cases of Western Union Financial Services Inc. v.Asstt. DIT [2007] 104ITD 34 (Delhi) and Motorola Inc. v. Dy. CIT[2005] 95 ITD 2691 (Delhi) (SB), has observed that, There are three criterions embedded in this definition - physical criterion i.e., existence of physical location, subjective criterion, i.e., right to use that place, functionality criterion, i.e., carrying out of business though that place. It is only when these three conditions are satisfied, a PE under the basic rule can be said to have come into existence . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent establishment only if they meet the requirement of paragraph 1 . Even by the OECD Model Convention Commentaries, however, this theory is not extended to the items in second category i.e., (i) and (k }. So far as paragraph 3 of the OECD Model Conventions dealing with these items are concerned, OCED Model Convention Commentary states as follows :- This paragraph provides expressly that a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months. Any of those items which does not meet this condition does not of itself constitute a permanent establishment, even if there is within it an installation, for instance an office or a workshop within the meaning of paragraph 2, associated with the construction activity. Where, however, such an office or workshop is used for a number of construction projects and the activities performed therein go beyond those mentioned in paragraph, it will be considered a permanent establishment if the conditions of the article are otherwise met even if one of the projects involved lasts for more than 12 months. [Emphasis supplied] 91. It is thus clear that, even as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of Section 9 read with Explanation 1, and while following the settled principle of law in terms of the judgment of the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. Vs. DIT (supra), held that under Section 9 of the Act itself, taxability was not established and hence there was no occasion to even refer to the provision of DTAA. He submitted that this position was earlier enumerated by Hon ble Delhi High Court in the case of DIT Vs. Nokia Networks [(2013) 358 ITR 259] wherein Hon ble Court held that in the absence of any activities relating to the offshore supplies being carried out in India, no portion of such profits could be taxed in India under Section 9 of the Act. 90. Ld. Counsel controverted revenue's submission that title in the equipment did not pass to the owner till the final acceptance of the BTG Package was not completed. He submitted that stand of the revenue has already been dealt with by the jurisdictional High Court in the case of DIT vs. L.G. Cable Ltd.(supra), wherein in paragraph 29 30 the Hon'ble High Court has held as under: 29. Thus, the mere fact that 15% of the payment was to be retained by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract. Ld. Counsel submitted that in the facts of that case there were four contracts being, offshore supplies of equipment, onshore supply of equipment, onshore services and design and engineering services He submitted that the Tribunal therein noted that, one contract had been entered into by the Assessee with Steel Authority of India wherein the preamble of contract indicated that it had been entered into for setting up a Blast Furnace Complex. Thereafter, the Tribunal noted that each activity has been demarcated, and prices has been indicated in the contract and then came to the conclusion that the Assessing Officer was not correct in holding that it was a composite contract devoid of any bifurcation towards onshore offshore supplies and services. 93. Ld. Counsel submitted that emerging principle from the decision of POSCO Engineering Construction Co. Ltd. (supra) was that, if the components are distinctly identifiable even in a single contract it cannot be considered as composite contract. This finding of the Tribunal was rendered by following the Supreme Court judgment in the case of Ishikawajima Harima Heavy Indutries (supra). This Tribunal in POSCO (supra) on these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by Tribunal by following the Special Bench decision in the case of Motorola Inc v. DCIT [2005] 95 ITD 269 as well as that of the Supreme Court in Ishikawajima (supra) judgment. 95. The next question decided by Tribunal in POSCO was whether the sale price included any consideration for services rendered or to be rendered in India. While referring to the summary of prices in Para 4.7.2 (2.b), the Tribunal found that the schedule of summary of prices included Foreign supervision charges which were Supervision charges in India during Erection, Start up, Commissioning and Performance Guarantee Tests. It was in this context that the Tribunal came to the conclusion in Para (2.d) that certain revenues had to be attributed on account of the alleged activities carried out in India which were built into the overall price of the equipment. 96. Coming to the facts of the present case, Ld. Counsel submitted that there are separate contracts for Onshore services (barring Rosa), where it is clearly provided that assessee shall be providing supervision services in respect of Erection, Commissioning, Performance Guarantee testing etc. He submitted that there are instances, where apart from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich includes USD 150000 towards training of the owner's personnel as provided in Clause 40. Clause 40 of the agreement is at Page 1327 of the Paper book which provides that the supplier, i.e the Assessee shall provide training in English to the owner's personnel for 10 months in People Republic of China. Thus, the argument of the DR that training was carried out in India is unsubstantiated and at best only a wild and general averment which the Department usually makes, as noted by the Tribunal in POSCO(supra) judgment in para 4.7.2 (l.b). This averment is further substantiated by the Kinda Supplement contract which is at Page No. 1073 of Paper book Vol.-Ill for Assessment Year 2010-1,1 where again Clause 40 of the Agreement on Page 1119 provides the training has to be carried out in China. Similar Clause is found in the Ratnagiri Contract at Page 117 of Paper book Vol.-III for Assessment Year 2010-11 where again Clause 40 on Page 1182, it is provided that training has to be provided in China. 100. Ld. Counsel submitted that in view of the above, it has been established beyond doubt that the allegations made by Ld. CIT. DR are baseless and correct picture is, that where t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ble Court referred to the decision of AAR in the case of Rotem Company, 279 ITR 165. 103. Ld. Counsel thus concluded the rebuttal in respect of Ld. CIT.DR's argument relating to training services, by trying to establish that, where training services were included in the offshore supply portion, they were carried out in China and where the training was to be done in India it formed part of the onshore services portion of the contracts for which revenue has already brought to tax. He also submitted that, be that as it may, in view of the settled principles of law, such training activities were inextricably linked to the supply portion and were incidental, not being revenue generating activity separately. 104. He submitted that Ld. CIT. DR referred to Botiburi Project where mechanical completion testing has been discussed and has tried to emphasise the point that the supervision of erection and commissioning by Assessee would not include these tests. Ld. Counsel referred to the discussion in POSCO's (supra) Judgment in para 4.7.2 (2.d), in the context of examination of taxability of training charges. The Court has given an example and come to the conclusion that where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntinuous operation for 14 days. Ld. Counsel submitted that it is clear that all that the contractor was doing was assisting the purchaser in carrying out these tests and this activity form part of the overall supervision activity and that there is no substance in the argument of Ld. CIT DR that the assessee was carrying out any activity in India for which the price was built in the overall price of offshore supplies. 106. He submitted that certain Clause in Butibori Project emphasises that there are certain tests which were being carried out in India, for which Ld. CIT.DR submitted that price was built into the offshore supplies. Ld. Counsel referred to Clause 10 on Page 529 which refers to site Tests. He submitted that bare perusal of Clause 10.01 states that on completion of installation and commissioning of equipment, the following checks shall be carried out with the maximum available load........... This in itself is evident of the fact that these activities are post the installation and commissioning and are forming part of the PG testing which Ld. CIT. DR has fairly admitted that all revenues pertaining to PG testing have been offered to tax. Ld. Counsel submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. Whether the Assessee may have to incur subsequent costs on repair, warranties etc. do not have any bearing on the said taxable event i.e. offshore supplies. Be that as it may, these product warranties etc. are normal trade warranties which are attached to all equipment whether it is for industrial use or personal use. Ld. Counsel placed reliance on the decision of the Delhi High Court in the case of L.G. Cable Ltd. (supra). 110. Ld. Counsel submitted that as far as the decision of the Tribunal in POSCO's case is concerned the Tribunal failed to considered the decision of the jurisdictional High Court in the case of LG Cable, and as such to that extent, the observation of the Tribunal and the conclusions are per incurium, and cannot be relied upon. He submitted that it would also be relevant to refer to Para 9 of the submission filed on 13.04.2017 by Ld,CIT. DR, where in his understanding, even the liability of bearing insurance during the construction, erection, warranty and latent defects periods shall be a revenue generating activity requiring attribution. He thus submitted that for the reasons stated above, this also has no bearing on the transfer of title of eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical documents and specifications and design criteria setting out a description and specification for the works. 112. Ld. Counsel further to illustrate this he referred to JSW Contract on Page 1082, where the term drawings has been explained in Clause 3.11 which provides that the drawings shall mean auxiliary and instrumental supply under the contract and includes any drawings furnished and/or provided by the owner or the engineer as a basis for proposal and forming part of specification. He submitted that similarly, in Butibori Project the term drawings have been discussed. Here also it is prescribed that the drawings refers to the drawing furnished by the purchaser to the contractor and engineering data and drawings submitted by the contractor during the progress of the work. Ld. Counsel submitted that all these would establish beyond doubt that the designing and engineering was not a separate activity, but was incidental to the supply of equipment and was not a separate revenue generating activity, unlike the facts in POSCO's case. 113. Ld. Counsel relied on the decision of the Hon'ble Delhi High Court in the case of Linde AG Vs. DDIT (supra), wherein in para 94, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beyond 30.05.2017. We have not received any further submissions from Ld. CIT.DR, as on 30.05.2017. Hon ble Delhi High Court was pleased to grant extension vide order dated 18.05.2017, to pass order in these appeal by 30.06.2017, We proceed to decide the issues on the basis of materials placed on record as well as the noting made by us while the matter was being heard in the court. 116. Detailed submissions advanced by both the sides have been reproduced hereinabove however; in a nutshell the same is summarized as under: Ld. Counsel emphasised as under: Two transactions and its considerations have been bifurcated contractually into supplies effected and services rendered. It has been submitted that the supply of equipments have been dealt with separately and services rendered for supervision, installation/commissioning of the project has been dealt with separately in the agreement. Ld. Counsel further submitted that for the purposes of supervision being the service agreement in all the contracts, the revenue received by assessee has been offered to tax. However as the supply of equipments have taken place out of India on CIF/F.O.B. INOTERMS 2000, the same cannot be held to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TG equipment by assessee and payments received by assessee for supply could be attributed to the supervisory PE under deeming provision of section 9 of the Act. Bearing in mind all the prepositions advanced by both the sides stated above, we will examine the facts of the present case vis a-vis the agreements entered into between assessee and project owners as per the directions of Hon ble High Court. 118. Before taking up the issues in hand, it is imperative to set out important portions of all contracts for 2 reasons; (a) the issue can be considered only on the basis of intention of parties to the contracts the terms and conditions agreed upon on the basis of submissions advance. (b) Coating one portion of the clause from here and there on selective basis would not be the appropriate way to consider the issue involved. 119. It is matter of record that during the assessment years under consideration, assessee entered into 14 contracts, for purposes of supply of BTG equipments as well as supervision of erection/installation, commissioning and performance testing at the project site in India as the case may be. Assessee through their personnel have been present in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply the equipment and make the equipment operable and capable of performing as specified in the specifications or as otherwise necessary in order to comply with the requirements of this contract, then the same shall be considered as a part of the scope of supply. 125. Clause 1.3 requires a supplier to perform all its obligations and responsibilities under the supply contract at its own risk, cost and expenses. And that the supplier would also ensure functioning of equipments for intended purpose as per the contract. 126. Clause 3.25 defines Port of Destination which means Chennai, for consignment coming by sea and is Bangalore for consignment by air. 127. Clause 3.27 defines project site which means the actual site where the project is to be set up. 128. Clause 10.4.1 that any royalties and fees for patents covering materials, articles, characters, devices, equipment or processes used in the equipment shall be deemed to have been included in the contract price. It has also been agreed that the supplier shall indemnify the owner against any infringement of any patents involved in and in case of an award of damages the supplier shall pay all sums as may be req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no actual custody of the equipments by the buyer from the supplier outside India. From the clauses referred herein above the supplier is solely responsible for delivery of the equipments to the territory of India each time they are loaded on the ship. It is also agreed between the parties that the entire cost incurred by assessee on behalf of the owners. The assessing officer has done what has been agreed between the parties. As per clause 26 the contract is completed only when the warranty period expires or the supplier has issued a certificate for commercial use of the equipment after the completion of performance guarantee test. 131. Clause 38.1 refers to Mode of Payment which is as under: 38.1 Mode of Payment the payment 75% of the contract price amounting to USD 141, 300, 000 shall be made through irrevocable automatic revolving letter of credit. The value of the revolving letter of credit shall be for 25% of such value which amounts to USD 35,325,000. The letter of credit shall be opened by the owner and accepted by the supplier within 3 months from the effective date. The format of letter of credit shall be as per schedule-V. The letter of credit issuing bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the equipment supplied in case the documents are received in advance at the shipment is delayed then the payment for the same shall be made along with the delivery of equipment; 1.2.5. 10% of contract price each unit as shown in the breakup of contract price (scheduleVI) shall be paid on issuance of taking over certificate or deemed takeover date of each unit. 1.3. Mode of payment: 1.3.1. The payment towards advance and milestone payments had been made through telegraphic transfer/Swift. All other payment under this contract shall be paid through an irrecoverable letter of credit (L/C) payable at site as per schedule V. The L/C shall be established through a band acceptable to the supplier. 1.3.2. The revolving L/C shall be received by the supplier within 3 months from the effective date of the contract. 1.3.3. L/C may be confirmed at the option of the supplier. All cost charges connected with the L/C shall be borne by the owner except following to the account of the supplier: confirmation charges, if any negotiating charges due to the bank of the supplier extension charges if due to reasons only attributable to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taff example construction of site offices, temporarily stores, transport to work site for SEC S personnel, insurance cover, watch and ward for security and safety of the materials under SEC s custody etc as required. Maintaining proper documentation of all the site activities pertaining to SEC as specified by JSWEL. 137. Clause 8 of this agreement reads as under: 8. Transportation, receiving, Handling and Storage 8.1. SEC shall provide all necessary information to JS WEL for JSWEL s property handling, storing, utilising and disposing of any project materials considered has added under the governmental or local law, regulation, statute or ordinance in effect at the job sites. 8.2. SEC shall provide supervision services to JSW in unloading, inspection, storage and preservation of materials and equipment in the scope of supply of SEC. Necessary storage handling reservation manual shall be provided by SEC. 138. This clause makes it further clear that assessee is involved even in unloading, inspection of sites for the purposes of erection of project in India. This further establishes control of assessee over the equipments supplied by it under the supply contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of contract shall automatically constitute to be deemed breach. In respect of delivery of goods the terms that have been agreed between the parties have been narrated in the scope of work under Ocean transportation at page 991 which reads as under: 8. Ocean transportation 145. The contractor shall be responsible for the transport of the plant and equipment from their place of origin to the port of destination in accordance with CFR INCOTERMS 2000. 146. The contractor shall check the capacity and availability of the loading facility which will be utilized in connection with the transport operation. The shipment of all the consignment relating to equipment and materials will be arranged by the contract of. Supplier will also ensure that the consignments are shipped by vessel of the following classification but not limited to .. The contractor shall arrange shipment of all imported materials and equipment from the port of export to Kandla, Gujarat Indian port. However in case of any emergency, the materials and equipment can be shipped to Mumbai Port subject to prior approval of taint from purchaser. In case of air shipment the destination airpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... WHEREAS SEC had submitted its offer and employer after examining the offer shortlisted SEC for award of EPC and after subsequent discussions and negotiations agreed to award the EPC to the consortium of SEC and UEEPL on terms and conditions contained in this contract for engineering, procurement and construction activities for the project and the documents referred to therein, which have been mutually accepted by both the parties and reduced into writing being these presents. Article 2: Contract Documents 2.1 the following documents together with the respective attachments and appendices (hereinafter referred to as contract documents ) shall together constitute this contract between the employer and the contract and the term contract in all such documents shall be construed accordingly. A. The contract and the append assessed to are: Appendix I (a) (b) breakdown of the contract price and mandatory spares Appendix II terms of payment and letter of credit B. Division of work (Annexure-A) and terminal point Annexure-B), other documents (Annexure C) and delivery schedule and liquidated damages (Annexure D) between SEC and Rosa for BTG package ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for its own scope of work and responsibility and liability as defined in Annexure A to D for SEC and Annexure A to G for UEEPL under this contract and it satisfactory performance in accordance with the specifications and parameters under the contract. 3.4 Each consortium member shall be responsible for the execution of its scope of work in accordance with the provisions of the contract. In executing its scope of work each consortium member on an individual basis shall owe a duty to the employer to ensure that all the plant, material and equipment used by 8 and the design (to the extent necessary) thereof is fit for the purpose of for which it is required and that all the work undertaken by such concerted member is executed in a good and work man like manner by appropriately scaled, qualified and experienced personnel. If any part of the works performed by a consortium member within its scope of work, (including drawings and information prepared by the said consortium member) shall be or become defective and required to be dispatched it, displaced, modified or repaired in any way in order to comply with the terms and conditions of the contract, then such consortium membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree) on fulfillment of the following by the contract: signing of the contract submission of invoice for the 1st initial advance of 5% of the 1st contract price submission of an unconditional bank guarantee equal into 5% of the 1st contract price as per the Annexure towards advance payment bond submission of an unconditional bank guarantee equivalent to 15% of the 1st contract price as per Annexure towards performance security The above referred terms read with the other terms of payment does not indicate any separate reference to offshore supply and onshore services provided by assessee. In respect of the contract price and terms of payment for 2nd contract which has been produced at page 1241 of the paper book reads as under: 2. contract price and terms of payment for 2nd contract 2.1 as full and complete compensation for the contract s performance of work and obligations under this contract, the employer shall pay the contract of fixed lump sum fee for services rendered to as the 2nd contract price as per Appendix I. 2.2 Terms of payment signing of the contract submission of invoice for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e work. Provisional takeover means the takeover of a section of the works pursuant to sub clause 28.5 and provisionally taken over shall have the corresponding meaning. Risk Transfer Date means the date as determined in sub clause 38.2 where the risk or loss of or damage to the work passes from the contractor to the employer in accordance with sub clause 39.1 Site means a place or places provided or made available by the employer where work is to be done by the contract or to which plant is to be delivered, together with so much of the area surrounding the same as the contract shall with the consent of the employer use in connection with the works otherwise than merely for the purpose of access. 6.5 Erection Information The contractor shall provide with the times stated in the contract or in the program drawings showing how the plant is to be affixed and any other information required for: a. preparation by the contract of suitable foundations or other means of support; and b. providing suitable access on the site for the plant and any necessary equipment to the place where the plant is to be erected; and c. making necessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work or a section thereof is the earliest of either: a. the date of issue of taking over certificate or b. with respect to the relevant section only the date of provisional takeover or c. the date when the engineer is deemed to have sure the taking over certificate or the works are deemed to have been taken over in accordance with clause 29 or d. the date of expiry of the notice of termination when the contract is terminated by the employer or the contractor are in accordance with these conditions. Rosa II 151. This contract has been executed between assessee and Rosa Parks supply company limited for setting up of 2 x 300 MW thermal power plants at Utterpradesh, being Rosa II. The said agreement has been entered into between the parties on 23.03.2008 on similar terms and conditions as has been reproduced hereinabove. Yamuna 152. This project is entered into by assessee with Reliance energy Ltd on identical terms of payments and scope of work. 153. Thus on perusal of the contracts being Rosa I and Rosa II, it is blatantly clear that there is only one contract to be executed by assessee for the entire erection, commissioning and su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tract. Appendix 10, Division of Work is placed at page 35-48 of Part -2 of paper book filed for assessment year 2012-13 and 2013-14. It has been agreed between the parties that the effective date of the contract shall be the date on which the following events occur: the contractor (assessee) and the purchaser (reliance infra project UK) has signed the contract; the contractor has submitted the performance guarantee being 5% of the contract price; contractor has submitted advance payment guarantee being 5% of the contract price; and an advance payment of 5% of the contract price has been received by the contract. 157. It is observed that assessee has received lump-sum payment of US $ 111,000,000 as full consideration from the purchaser for equipment supply price on CFR Indian port basis. A detailed breakup of price for this project has been listed at appendix 1 placed at page 8-10 of paper book. On perusal of the same it is observed that payments for the purposes of services rendered being supervision service for injection, a direction for turbine and generator, services for performance guarantee tests, commissioning, training has been aggregated at USD4,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom their place of origin to the port of destination in accordance with CFR Inco terms 2000. 166. The contractor has to provide various guarantees like advance bank guarantees, and performance guarantee to the owner in terms of the quality of the equipments provided. 167. Ld. Counsel vehemently argued that considerations have been bifurcated into supplies and service contract rendered separately. However on perusal of the agreement nowhere it suggests that the contract bifurcation is available. There is no mention of 2 transactions. The fact is that the contract ascribes the entire scope of work and it is incorrect to pick up one particular clause to show that it represents an independent scope of work. 168. On perusal of all contracts, commonly it has been observed that in the payment schedule the payments are received at various stages. For example in KINDA Project, (relevant clauses which have been reproduced herein above), it is observed that 15% of the total payments received by assessee in the supply of equipment contract is on completion of performance guarantee tests. It is also observed that assessee with some of the project owners has separately received payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ler (Exporter) and a buyer (Importer) within the framework of international contracts of trade concerning loading, transport, type of transport, insurances and delivery. Its first function is about a distribution of transport charges. The second role of the Incoterms 2000 is to define the place of transfer and the transport risks involved in order to justify the ownership for support and damage of goods by shipments sent by the seller (exporter) or the buyer (importer) in an event of execution of transport. Incoterms, safeguard the following issues in the Foreign Trade contract or International Trade Contract: a) To determine the critical point of the transfer of the risks of the seller to the buyer in the process forwarding of the goods (risks of loss, deterioration, robbery of the goods) allow the person who supports these risks to make arrangements in particular in term of insurance. b) To specify is going to subscribe the contract of carriage that is to say the seller or the buyer. c) To distribute between the seller and the buyer the logistic and administrative expenses at the various stages of the process. d) To define who is responsible for packaging, marking, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill of lading at page 2035, bill of entry for home consumption at page 2036 pertaining to invoice dated 19/08/09 at page 2037, Delivery trems- CFR Visakhapatnam, INCOTERMS 2000 175. In all the above referred invoices, the shipper/suppliers/beneficiary carries the name of assessee, on the certificate of origin exporter is the assessee, consignee is - made out of order of industrial development bank of India Ltd. in the case of document relating to invoice dated 02.11.2009 and 19.09.2010 and in case of the certificate of origin issued against invoice dated 19.08.2009, shows the consignee to be Jindal steel and power Ltd. 176. Bill of lading shows the fright to be prepaid, shipper being the assessee and consignee has been referred to as- made out of order of industrial development bank of India Ltd. in all the 3 cases referred herein above; similar is the noting recorded in bill of entry placed at the respective pages. 177. On analysis of the above documents it appears that assessee was responsible for payment of the entire customs duty in respect of the goods shipped from China to the respective port of discharge mentioned in the bill of lading and the bill of entry whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract on CFR basis is USD 188,400,000 (One hundred and Eighty Eight million Four hundred thousand only). The breakup of total contract price shall be as per schedule VI. 2.2. Terms of payment on supply of equipment and mandatory spare 2.2.1. 9% of the contract price amounting to USD16,956,000 shall be paid as advance payment (interest-free) on fulfillment of the following by the supplier: signing of the contract submission of invoice for advance payments submission of advance bank guarantee equivalent to 9% of the total contract price as per schedule I 2.2.2. 16% of the contract price amounting to USD30,144,000 shall be paid towards milestone payment as follows: USD 5,400,000 in January 2007 USD 5,400,000 in February 2007 USD 5,400,000 in March 2007 USD 5,400,000 in April 2007 USD 5,400,000 in November 2007 USD 3,144,000 in December 2007 2.2.3. 60% of the contract price amounting to USD113,040,000 per individual package as shown in the building breakup (schedule VI) shall be paid on dispatch, against satisfactory evidence of shipment. 2.2.4. 5% of the contract p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wner. 182. This leads to a major question, whether on the basis of facts and circumstances in the present case, sale and supply of BTG equipment to the buyer could be considered to have been completed outside India. Section 19 of Sale of Goods Act, makes it clear that property in good passes when the parties intended to pass. It was submitted by Ld. Counsel in rejoinder to Ld.DR s submission as under; It is a settled principle of law that in a supply contract the revenue arises only once the supplies has been made and does not arise at any preceding or subsequent stage. 183. That being the circumstances, in each and every contract entered into by assessee with project owners, why would terms in payment schedule start with assessee providing Performance Bank Guarantee, assessee providing an Advance Bank Guarantee (the performer of which has been attached as an Annexure/Appendix to each and every contract) and then the Owner issuing a percentage of contract price as advance, without there being an identifiable payment exclusively made for supply of equipments. Transfer of Tile Transfer of title in respect of Equipment and materials supplied by the sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause there is an existence of supervision PE in India. On perusal of the decision of special bench in Motorola Inc. (supra), it is observed that the Tribunal after perusing the contract entered into between the parties therein, was of the opinion that the intention of the parties, insofar as the title in the goods were concerned, passed on to the buyer outside India was very clear. Similar was the observation of this Tribunal in POSCO(supra), as assessee therein entered into three different contract and the sale of equipment and transfer of title on the buyer was explicit and the payment for sale of equipment could be identifiable and the entire payment of value of goods supplied was received outside India. 186. Coming to the facts of the present case, the moment assessee/seller agreed to give a performance Bank Guarantee, clause relating to failure to pass Test on completion makes assessee liable for successful functioning of the BTG equipment in India upon installation on site. None of the contracts specifies clear intention of parties to transfer the title and the goods outside India. In fact the seller/ Assessee was having complete control over the goods inclusive of Risk w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 3 STT 245 are relevant to understand the dominant nature of an agreement . The relevant portions of the same has been extracted herewith: The reason why these services do not involve a sale for the purposes of Entry 54 of List - II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366 (29-A) continues to be: Did the parties have in mind or intend separate rights arising out of the sale of goods? If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is the substance of the contract'. We will, for the want of a better phrase, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The issue now that arises is, whether the sale price includes any consideration for services rendered or to be rendered in India. The Ld. CIT DR submitted that certain costs for carrying on with certain activities in India in respect of erection of the power plant is inbuilt in the contract price. 220. On perusal of various agreements entered into between the parties before us with assessee, we observe that assessee has trained personnel regarding the functioning/handling/maintenance of BTG equipments which is an admitted position. By and large it is observed that assessee has not been separately compensated for providing training have expressly agreed that cost of training would be included in the total contract price. In our considered opinion, it does not help the assessee in any case, as training given to owners personal is finally consumed in India. Whether the payment is paid separately or not, and whether it has been given in India and or in China, does not change the situs of consumption of such services rendered by assessee. This leads to the conclusion that the training cost is included in the sale price charged for the supply of BTG equipments. Further certain clauses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnkey project and the question whether the title to the goods supplied passes offshore or within India is secondary to the execution of the contract ? 223. Analysing the present facts of the case in the light of the above referred tests, it is in conformity with the observations that has been upheld by Hon ble Supreme Court in the case of Ishikawajima Harima (supra) which when applied to the facts of the present case would be the same, as under: Each component of the contract was directly related to the performance of the integrated contract as, violation and/or breach on the part of the parties thereto would affect the entire contract; the contract itself providing for milestone dates the breach of any of the terms thereof would result in the breach of the entire contract and not just a particular ob ligation; does the turnkey project contemplated a permanent establishment admittedly in India and in that view of the matter explanation appended to section 9 (1) (i) of the act is directly applicable; the appellant has business connection in India and in that view of the matter the casual connection between offshore supply and onshore services being interlin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... successfully put to function without any defect. It is for that reason that assessee gives Performance Bank Guarantee and Advance Bank Guarantee to Owners of the project, much before any payment is made to assessee. If that not be the case, then there would have been no question of retaining effective control by assessee over the equipments till it reached the project sites, and further while erection/installation activities are carried on irrespective of whether the erection/installation activities are carried on by assessee or by any other party under the supervision of assessee. Assessee would not have been responsible for bearing such high risk, and protecting owner by providing the performance guarantee etc., till completion of the entire work of erection under the contract. Judicial Precedents relied on by Ld.Counsel 227. Ld. Counsel heavily relied on the decisions in the case of Ishikawajma - Harima Heavy Industries Ltd. (supra), LG Cable (supra) Nokia Networks OY (supra), Ericson EB(supra), Lind AG(supra), Nortel Networks(supra) as regards the facts relating to transfer of title, the contract, responsibilities of supplier, and role of PE. a. In the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which issues were decided. The Hon'ble Court had also noticed in CIT v. Mitsui Engg. Ship. Building Co. [2003] 259 ITR 248/[2002] 123 Taxman 182, it was held that it was not possible to apportion the consideration design on one part and the other activities on the other part as the prices paid to the assessee was not the total price which covered all the stages involved in the supply of machinery. The Hon'ble Court noted that the case of Ishikawajma Harima was clearly distinguishable from the facts of Mitsui since the payments for offshore and onshore supply of goods and services was in itself clearly demarcated and cannot be held to be a complete contract that had to be read as a whole and not in parts. b. In the case of LG Cables(supra) there were two separate contracts, one for offshore supply and other for onshore services. Hon ble Court observed that as per the agreements between the parties therein, the property in the goods would pass on to the buyer as and when the seller loads the equipment onto the mode of transport for transportation from the country of origin. It was further observed that the PE had no role to play in the execution of offshore supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f create a tax liability. The nomenclature of a turnkey project or works contract was not relevant. The fact that the assessee took overall responsibility was also not material. Though the supply of equipment was subject to the acceptance test performed in India, this was not material because the contract made it clear that the acceptance test was not a material event for passing of the title and risk in the equipment supplied. If the system did not conform to the specifications, the only consequence was that the assessee had to cure the defect. The position might have been different if the buyer had the right to reject the equipment on the failure of the acceptance test carried out in India. Consequently, the assessee did not have a business connection in India. The question whether the assessee had a Permanent Establishment was not required to be gone into. However the facts of the assessee before us is not the same as in the case of DIT vs. Ericson AB (supra). Per Contra 230. The assessee before us has executed contracts for erection, commissioning and successful performance of the project to be set up at various sites in India. It is for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 236. This Hon ble High Court after examining the agreement between the Consortium and the Project Owner ( Contract ), the Memorandum of Understanding between Linde and Samsung ( MoU ) as well as internal agreement between Linde and Samsung ( Internal Agreement ). Under the Contract, Linde performed the following functions: a) Design and engineering of equipment for manufacture outside India, and b) supply of equipment and related materials outside India. 237. While Hon ble High Court made key observations on the taxability of payments made to Linde, the matter was remanded back to the AAR for determination of whether Linde has a permanent establishment ( PE ) in India or not. The relevant extract are as under: 82. The facts obtaining in the present case are quite similar to the facts as in the case of Ishikawajma-Harima Heavy Industries Ltd.(supra). It is indisputable that as far as obligations of Linde and Samsung are concerned, the Contract is an indivisible one. However, for the purposes of tax, the Contract does specify the amounts that are payable with respect to the various activities carried on by Linde /Samsung. Income may accrue or arise at various s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject matter of taxation was not the Contract between the parties but the income that the petitioner derived from the Contract. Thus, the situs of the object of the Contract would not be as relevant as determining the situs where the income of Linde had accrued or arisen. By virtue of Section 4 of the Act, income tax is charged in respect of the total income of a person. By virtue of Section 5 of the Act, the scope of total income of a non-resident is limited to income which is received or deemed to be received in India and income which accrues or is deemed to accrue or arise in India. It, therefore, follows that the object of inquiry would have to be to determine whether any income of Linde accrued or arose in India or whether any income could be deemed to accrue or arise in India. The fact that the contractual obligations of Linde were not limited to merely supplying equipment, but were for due performance of the entire Contract, would not necessarily imply that the entire income which was relatable to the Contract could be deemed to accrue or arise in India. 85. The principle of apportionment of income on the basis of territorial nexus is now well accepted. Explanation 1(a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the transaction also implied transfer of control and assets of the Indian subsidiary of the overseas company, whose share had been sold and purchased. The Supreme Court observed that the last sub-clause of Section 9(1)(i) of the Act referred to income arising from transfer of capital asset in India . The Court further explained that Section 9(1) of the Act created a legal fiction which had a limited scope and could not be expanded. Accordingly, transfer of capital asset situated outside India could not be taxed by virtue of Section 9(1)(i) of the Act. The expression look through had been used by the Supreme Court in this context. The relevant extract of the judgment is as under:- 90. We have to give effect to the language of the section when it is unambiguous and admits of no doubt regarding its interpretation, particularly when a legal fiction is embedded in that section. A legal fiction has a limited scope. A legal fiction cannot be expanded by giving purposive interpretation particularly if the result of such interpretation is to transform the concept of chargeability which is also there in Section 9(1)(i), particularly when one reads Section 9(1)(i) with Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... volves around the situs of the income accruing or arising from the contract. To our minds, the Authority has read the principles applied by the Supreme Court in Vodafone International Holdings B.V'S. case (supra) completely out of context. Income from Offshore Supplies 89. In the present case, the Contract involves supply of equipment, materials and spares by Linde. The contract specifically provides that the ownership of the material to be supplied by Linde would be transferred to OPAL upon FOB shipment. Article 7 of the Contract is quoted below:- 7.1.1 Ownership of materials shall be transferred to the Company upon FOB shipment for imported supply and FOT for local supply subject to Contractor takes full responsibility for any damage / loss during the course of transportation until acceptance of works. 7.1.2 Deleted 7.1.3 Ownership of the construction Equipment used by the Contractor and its subcontractors in connection with the Works shall remain with the Contractor and its subcontractors. 90. FOB is an abbreviation of Free on Board and clearly indicates that the ownership of the material to be supplied by Linde would transfer to OPAL, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases is that in a contract for manufacture, installation, sale or supply of goods the element of services will always be present. Where services are inextricably linked with manufacture, installation, sale or supply, they cannot be evaluated for the purpose of FTS; it is only where services are separable and independent that the FTS will be assessable. 95. It is clarified that in order to fall outside the scope of Section 9(1)(vii) of the Act, the link between the supply of equipment and services must be so strong and interlinked that the services in question are not capable of being considered as services on a standalone basis and are therefore subsumed as a part of the supplies. Given the fact that its Linde s case that the consideration for the supplies are separately specified, this aspect would require a closer scrutiny and determination of facts, which we do not propose to do in the present proceedings. 96. It is clarified that in the event, it is found that the offshore services rendered by Linde are not inextricably linked to the manufacture and fabrication of equipment overseas so as to form an integral part of the supply of the said equipment, the income ari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n subsidiary of 'Nortel Canada'. Nortel Canada also had an indirect subsidiary in India, namely, 'Nortel India'. Nortel Canada also had a Liaison Office in India called 'Nortel LO'. 240. Nortel India negotiated and entered into three contracts with 'Reliance', namely, Optical Equipment Contract ('the Equipment Contract'), Optical Services Contract ('the Services Contract') and the Software Contract ('the Software Contract'). On the same date, Nortel India entered into an agreement assigning all rights and obligations to sell, supply and deliver equipment under the Equipment Contract to the assessee. Reliance and Nortel Canada were also parties to the assignment contract and in terms thereof, Nortel Canada guaranteed the performance of the Equipment Contract by the assessee (Assignee). In terms of the assignment contract, Reliance placed purchase orders directly on the assessee and also made all payments for the equipments supplied directly to the assessee. 241. The equipments supplied to Reliance were manufactured by Nortel Canada. The same was invoiced by the assessee directly to Reliance and consideration for the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed into with Reliance were negotiated by Nortel India and neither Nortel LO nor assessee were involved in negotiations with Reliance. There is also no material on record which would indicate that Nortel LO or the assessee had participated in any negotiation with Reliance. The facts on record indicate that Nortel India had negotiated the contracts with Reliance, and Nortel Canada had executed a deed of guarantee (referred to as a 'Parent Guarantee') guaranteeing the performance of all the three contracts. 247. It was under these circumstances that Hon ble High Court came to the conclusion that assessee did not have a permanent establishment in India and therefore no part of supply could have been attributed to earning of income in India. Per Contra 248. The common facts in all above decisions as compared to the facts in the present case are: In these cases there were separate contracts for offshore supply and onshore services or such distinction was specific with supply obligation being distinct from service obligation. There is no such distinction in the present case. In these cases price for each component was separately specified. However, cost value ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes that all income accruing or arising whether directly or indirectly through or from any business connection in India or through or from any property in India or through or from any asset or source of income in India or through the transfer of a capital asset situated in India shall be deemed to accrue or arise in India. 252. The relevant provisions of the I.T. Act having a bearing on the question are extracted hereunder: Section 9(1)(i): ( 1) The following incomes shall be deemed to accrue or arise in India- ( i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through or from any money lent at interest and brought into India in cash or in kind or through the transfer of a capital asset situate in India. 253. It is seen that the expression business connection occurs in s. 9(1)(i) of the act. The expression business connection is not defined in the I.T. Act, though the word business is defined. The expression business connection has been considered in several cases. In CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... occasion to consider the expression business connection in Anglo-French Textile Company Ltd. v. CIT (No. 2) [1953] 23 ITR 101 (SC) and it was observed as follows : An isolated transaction between a non-resident and a resident in British India without any course of dealings such as might fairly be described as a business connection does not attract the application of section 42, but when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realises the profits, such relationship does constitute a business connection. 256. In CIT v. R.D. Aggarwal Co. (1965) 56 ITR 20, Hon ble Supreme Court had considered the scope of the expression business connection , and it was observed as follows (pp. 24 28): The expression 'business' is defined in the Act as any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, but the Act contains no definition of the expression 'business connection' and its precise connotation is vague and indefinite. The expression 'business connection' undou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion 'business connection' postulates a real and intimate relation between trading activity carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity . 257. In CIT v. Hindustan Shipyard Ltd. [1977] 109 ITR 158 (AP) a Division Bench of this court had construed the word business connection . The facts in this case were that;- The non-resident company supplied diesel engines with accessories. The terms of the sale were that 90% of the value must be paid against original set of documents, to be submitted duly to the State Bank of India within fifteen days and the balance within six months. The net price included 5% commission payable to the non-resident company at Bombay. The property was to pass to the purchaser on delivery on board. The engine was agreed to be erected by the staff of the purchaser under the supervision of the erector and a supervising engineer was placed at the disposal of the purchaser by the nonresident company. It was held that; business connection can be said to be established when the thread of mutual in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shanghai China come to India to provide technical support services to PE in India. All these activities go on to establish that the appellant has business connection in India within the meaning of section 9(1)(i) of the Act. The assessee is doing business activities in India which are not isolated instances rather these represent real and intimate relationship between activities of assessee done outside India and these done inside India. The business operations being done in India by the appellant are revenue generating as these operations are required to earn the contract and to meet with contractual obligations. Therefore, all the parameters of business connection as prescribed by various judicial authorities as mentioned supra are satisfied. Even the assessee has not taken any contention before AO during assessment stage that it does not have business connection in India. EXISTANCE OF SUPERVISORY PE IN INDIA 262. Ld. Counsel relied upon decision of this Tribunal in the case of Linklaters LLP (supra) in rejoinder, to submit that provisions of Article 5 (2) where specific instances of PE had been indicated, would have to also meet the requirements of Article 5 (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PE. ARTICLE 5 : Permanent establishment ( 1) For the purposes of this Agreement, the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. ( 2) The term permanent establishment includes especially : ( a) a place of management; ( b) a branch; ( c) an office; ( d) a factory; ( e) a workshop; ( f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; ( g) a warehouse, in relation to a person providing storage facilities for others; ( h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; ( i) an installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than 183 days; ( j) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 183 days; ( k) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within any twelve-month period. 263. On a combined reading of Article 3 (a) (b) of UN MC and Article 5 (2) of India or China DTAA, provides expressly that a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months. Any of those items which does not meet this condition does not by itself constitute a permanent establishment, even if there is within it an installation, for instance an office or a workshop within the meaning of paragraph 2, associated with the construction activity. Where, however, such an office or workshop is used for a number of construction projects and the activities performed therein go beyond those mentioned in paragraph, it will be considered a permanent establishment if the conditions of the article are otherwise met even if one of the projects involved, lasts for more than 12 months. 264. Thus on the question of existence of PE, to the facts of the present case, the contentions of Ld. Counsel cannot be accepted for the following reasons: Para 2 of Article 5 of DTAA provides the circumstances under which permanent establishment arises in a Contracting State. Para 2 provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein, there shall in each Contracting State be attributed to that permanent establishment 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 permanent establishment. 3. Insofar as the tax law of a Contracting State provides with respect to a specific business activity that the profits to be attributed to a permanent establishment are to be determined on the basis of a deemed profit, nothing in paragraph 2 shall preclude that Contracting State from applying those provisions of its law, provided that the result is in accordance with the principles contained in this Article. 4. In determining the profits of a permanent establishment, there shall be allowed as deduction expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Contracting State in which the permanent establishment is situated or elsewhere in accordance with the provisions of tax law of that Contracting S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) as well as Article 7 of DTAA. If a particular income is not attributable to the operations carried out in India thereby not having any territorial nexes with India, then a non-resident cannot be charged to tax for that income. Per contra, if a particular income is attributable to the operations carried out in India and has territorial nexes with India, then there can be no escape from charge of such income to tax. 267. In the present case before us assessee having entered into a Composite contract which is relatable to the operations carried out in India and partly to outside India a proportionate part of income which is so relatable to the operations carried out in India has to be charged to tax. 268. The extension of taxability of profits of PE by including profits directly or indirectly attributable, is akin to the provisions of Article 7(1)(b ) and 7(1)(c) of the UN MC which provides that in addition to the profits attributable to the permanent establishment the taxability of PE profits will also extend to (b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the provisions of Article 7(1)(b ) and 7(1)(c) of the UN MC, which provide that in addition to the profits attributable to the permanent establishment the taxability of PE profits will also extend to (b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment . The connotations of profits indirectly attributable to permanent establishment will extend to these two categories. These categories clearly incorporate a force of attraction rule. The basic philosophy underlying the force of attraction rule is that when an enterprise sets up a permanent establishment in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can properly tax all profits that the enterprise derives from that country whether the transactions are routed and performed through the PE or not. In effect, profits relating to services rendered by assessee, whether rendered in India or outside India, in respect of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 44,97,99,756.00 Gross offshore supply revenues (EURO) (A) 2,50,86,420.00 Exchange rate @ 50.53 on 31.03,2009 (B) 50.53 Exchange rate @ 66.70 on 31.03.2009 (B) 66.70 Gross offshore supply revenues (INR) (A*B) ₹ 24,40,16,45,884.68 Profit on the basis of Global profit and loss account (5.53%) ₹ 1,34,94,11,017.42 Attribution in India (%) 25% Taxable Income ₹ 33,73,52,754.36 ITA no. 3552/Del/2015 ( A.Y.2010-11) Income as per revised computation filed on 11.12.2012 (u/s 44BBB of the Act) - ₹ 7,72,74,388/- Income from offshore supply -Rs. 625,063,759.71/- Particulars FY 2009-10 Gross offshore supply revenues (USD)(A) 520,649,916.69 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /Del/2017 ( AY 2013-14) Particulars FY 2012-13 Gross offshore supply revenues (USD) (A) 11,74,67,337.00 Gross offshore supply revenues (EURO) (B) 55,52,259.00 Exchange rate of USD on 31.03.2013 (Al) @ 53.98 Exchange rate of Euro on 31.03.2013 (Bl) @ 68.69 Gross offshore supply revenues (Rs) (AxAl + BxBl) in aggregate ₹ 6,72,22,71,551 Profit on the basis of Global profit and loss account (8.57%) ₹ 57,60,98,671.94 Attribution in India (%) 25% Taxable Income (X) ₹ 14,40,24,667.98 271. Assessee in ground 6.9 of appeals for assessment years under consideration, has contended that segmental profit rate submitted to be applied, instead of global profit rate. However, Ld.Counsel has not submitted any justification to adopt the segmental profits. He has also not demonstrated any illegality in the computation adop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, can take action against the payer under the provisions of section 201 of the Income- tax act and compute the amount accordingly. No doubt, if the person (payer) who had to make payments to the non-resident had defaulted in deducting the tax at source from such payments, the non-resident is not absolved from payment of taxes thereupon. However, in such a case, the non-resident is liable to pay tax and the question of payment of advance tax would not arise. This would be clear from the reading of section 191 of the Act along with section 209 (1) (d) of the Act. For this reason, it would not be permissible for the revenue to charge any interest under section 234 B of the Act. 273. Respectfully following the above decision of Hon'ble Jurisdictional High Court in the case of Jacabs Civil Incorporated/Mitsubishi Corpn. (Supra) the interest charged u/s 234 B in present facts of the case stands deleted. Hon ble Delhi High Court has considered the issue in case of DIT vs.G E Energy Parts Inc reported in (2015) 56 Taxmann.com 190. Hon ble High Court has followed the view in case of Jacobs Civil Incorporated/Mitsubishi Corpn. (Supra). Ld.AO is directed to recompute inco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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