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Shanghai Electric Group Co. Ltd. Versus DCIT Circle-3, (1) (2) International Taxation, New Delhi

2017 (8) TMI 416 - ITAT DELHI

Income arising from onshore services - Permanent Establishment - global profit accruing from the offshore supplies to PE in India - Composite contract - Attribution of profit - purposes of supply of BTG equipments as well as supervision of erection/installation, commissioning and performance testing at the project site in India - Held that:- 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 .....

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nd 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 estab .....

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mentary 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 rendered by the PE in India, any income in respect of the services rendered to an Indian project, which is similar to the services rendered by the permanent establishment, is also to be taxed in India in the hands of the assessee, i .....

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g 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 .....

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rom the offshore supplies to PE in India - Decided against assessee. - Levy of Interest u/s 234B - Held that:- The undisputed fact in the present case remained that the tax on entire income received by assessee was required to be deducted, at appropriate rates by the respective payers under section 195. Had the payer made the deduction of tax at the appropriate rate, the net tax payable by the assessee would have been Nil. Thus, there was no liability to pay advance tax by the assessee. High .....

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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 04/12/14 147/1 .....

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ants in India. Ld. Counsel submitted that, assessee filed its return of income for onshore services rendered in India for assessment year 2010-11 wherein it had offered to tax the remuneration arising from supervisory services under the provisions of section 44 BBB of the Act. He submitted that no portions of income arising from offshore supplies were offered to tax since the sale of BTG equipments was concluded outside India. He submitted that no portion of profit arising from offshore sales wa .....

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) under section 143(3) read with section 144C of the Income Tax Act, 1961 ( the Act ) is bad in law, void ab-initio and in contravention of the settled position of law. 1.1 That the AO erred in completing assessment at a total income of ₹ 81,82,49,730 as against the returned income of ₹ 77,274,388. Re: Taxability of onshore service 2. That the AO erred in taxing income arising from onshore services under the head business profits solely on the premise that the Appellant had accepted .....

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o 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 circums .....

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ipment in India. 3.3 That the AO grossly erred in law in assuming that the supply of off shore equipment was necessary and incidental to design, manufacture and erection in India without bringing any evidence on record that any designing or manufacturing had taken place in India. 3.4 That the AO misconstrued and misapplied the judgment of the jurisdictional High Court in the case of CIT Vs. Mitsui Engineering and Ship Building (259 ITR 248) which disapproved the revenues stand to segregate a por .....

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siness of design, manufacture, supply, supervision of equipment from a fixed place of business in India without bringing any evidence on record in support of such conclusions. 3.7 That the AO also erred in concluding that all transactions including supply of equipment had taken place with the involvement of the PE in India and for this reason profits arising on off shore supplies were attributable to the PE in India. 3.8 That the AO has erred in assessing that the Appellant has undertaken site s .....

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t and site survey 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 secti .....

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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, and notice under section 143(2) and 142(1) along with detailed questionnaire, was issued and served upon the assessee. In response to these notices, representatives of assessee appeared before Ld. AO from time to time and case was discussed. 4. Ld.AO observed that during year under consideration assessee .....

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of the Act. Ld. AO accordingly issued show cause vide order sheet entry dated 11.12.2012, wherein assessee was asked to submit the basis for claiming income from offshore supplies as not taxable in India. Before Ld. AO assessee submitted that: • no portion of income from supply of equipments is received directly or indirectly by it in India; • no portion of income accrues or rises to it in India; and • no portion of income could be deemed to accrue or arise in India, 6. It was su .....

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rough wire transfers/letter of credit outside India. Assessee thus, submitted that, no portion of consideration of offshore supply can be received or could be deemed to have been received in India. Assessee submitted that transfer of title in BTG equipments supplied by assessee, takes place in favor of buyers outside India, and hence the same substantiates the fact that income from offshore supply, cannot be said to accrue or arise in India. In this regard assessee placed reliance upon the provi .....

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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) &bu .....

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tion [Application No. 1 of 2011 in AAR No. 1008 of 2010] • IS Cable Ltd. IAAR No. 858-861 of 2009] • Joint Stock Company Foreign Economic Association Technoproui Export [AAR No. 827 of 2009] • Technip Italy SPA vs. Addl C1T [ITA No, 434 (Del.) 2010]. 7. Assessee placed reliance upon the double taxation avoidance agreement (DT AA) between India and China to submit that income from offshore supply is not liable to be taxed as per the provisions of India China DTAA. It was submitted .....

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Accordingly it was submitted that as per Article 5 (2) (j) of India China tax treaty, assessee had supervisory PE in India, which has already been offered to tax u/s.44BBB of the Act. 8. Subsequently assessing officer issued notice to assessee to show cause as to why income from supervisory services should not be taxed as fee for technical services(FTS), in response to which assessee submitted vide letter dated 19.03.2013, that assessee was engaged in rendering services in connection with const .....

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he following business in connection with a turnkey power project; 9. Civil construction, Erection of plant or machinery, testing of plant or machinery, and commissioning of plant or machinery. 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 .....

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es (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 composite contract activity and activities have been dissected just for the purpose of tax avoidance; • .....

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e has rendered technical services for its performance and setup of a power plant in working condition. It was also observed that the responsibility of the assessee is discharged only on issue of take over certificate by the project owner upon successful completion of all the performance guarantee tests to be conducted at the project site. Ld.AO observed that assessee was liable to pay liquidated damages in case of any shortfall in performance, after retests. Ld. AO held that it was not a simple .....

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ipbuilding Co Ltd reported in 259 ITR 248 wherein the contention was that the finding that the contract for designing, engineering, manufacturing, shop testing and backing up to F.O.B. port of embarkation could not be split up since the entire contract was to be read together and was for one complete transaction. It was in such set of facts and circumstances that Hon ble Court held that, it was not possible to apportion the consideration for design on one part and the other activities on the oth .....

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ation 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 los .....

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o why the assessment order may not be treated as erroneous in so far as judicial to the interest of revenue on following issues: A. Taxability of receipts on account of supervisory services under section 44 BBB of the act; and B. Existence of Permanent Establishment. 17. Ld. DIT(IT)-II, held that assessee is not entitled to be taxed under section 44 BBB for onshore services and further held that income from supervisory PE in respect of onshore service revenue via assessee is taxable in India as .....

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business of civil construction or in certain turnkey power projects. Thus, assessee is taking contradictory stand while offering income in respect of supervisory service agreement and in respect of equipment supply agreement. Moreover the contention of Ld. DR that all the agreements relating to equipment supply and supervisory contract were not furnished before the assessing officer has not been denied by Ld. counsel. He offered to furnish those agreements before us but when certain crucial agr .....

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e assessee to produce all the agreements in respect of equipment supply as well as supervision of erection of those equipments. We also direct the assessee to produce all these documents and any other document, evidence or explanation which may be relevant for determination of taxable income of the assessee. Thereafter, the assessing officer is directed to pass the order in accordance with law. We also observe that if the lessee is not satisfied with the order of assessing officer and filed obje .....

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er 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 determ .....

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in respect of A Y 2010- 11. In these circumstances, we are of the opinion that the restricted remand to the AO was not justified. At the same time, this court is not persuaded to the submissions of revenue that the assessee considered the entirety of circumstances for the other years in its order dated 28/11/14 which lead to the final assessment order dated 04/12/2014, which is in turn is a subject matter of the assessee s appeal before the ITAT, the latter course is the most appropriate one. T .....

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ppropriate. It would be in the fitness of things that the matter is remitted to the DRP rather than AO which would consider the matter referred to it (on 28/03/2013) and after hearing the submissions of the parties deal with them with proper reasoned order, but in accordance with law. The DRP shall endeavour to complete its proceedings and make final order within 8 weeks from today. It goes without saying that AO shall (on receipt of DRP s order) passed the final assessment in accordance with la .....

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t 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 taxa .....

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% of gross revenue of offshore supply and not considering the segmental profits of 1.69% and in attributing 25% thereof to India even though no part of the activity relating to offshore supply was carried in India 6. That on the facts and circumstances of the case and in law, Ld. AEO has erred in proposing to initiate penalty proceedings under section 271 (1) (c) of the Act against the assessee, which is bad in law All the above grounds of objections are without prejudice to each other. The asse .....

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utedly the assessee has a long presence in India where it is doing activities relating to erection, testing and commissioning of equipment supplied by it; • that the obligation of assessee did not end with supply of BTG equipments, rather it continued and ended only on receipt of takeover certificate issued by project owner, after erection, testing and commissioning of the equipment supplied by it and upon successful performance guarantee tests being conducted at the project site. • Th .....

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mentioned in article 5 (1)/(2); • That assessee has executed many contracts in India which were pending for many years. Negotiations for new contracts happened in India, and for these purpose employees of assessee, have come to India on various occasions. It observed that assessee has not furnished many information regarding place where do they stay and period of their stay etc; • That the equipments supplied is highly customised and manufactured according to the specific requirement .....

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ible 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 .....

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ion of assessee does not end after supply of BTG equipments, rather these continue and end only after erection, testing and commissioning of equipment supplied by it, and until the performance guarantee tests were performed successfully at all project site and project owners issues that takeover certificate to assessee as a proof of final acceptance of BTG. It was thus concluded that it was a composite contract • The assessee has a long presence in India where it is doing activities relatin .....

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vs R.D Agarwal & Co., reported in (1965) 56 ITR 20 for existence of business connection in India are fulfilled. Therefore, contracts become taxable in India under the domestic law, as there existed a business connection in India. • It has been held that it was established in India prior to start of supply of equipment in India and existence of a fixed place PE is not a pre-rquisite for bringing business profit to tax in India any kind of PE as mentioned in Article 5 of the DTAA would be .....

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as to be brought to tax in India. • 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 .....

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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 order, against which, assessee is in appeal before us. 23. Before dealing with the arguments advanced by both the sides we shall briefly state the factual position as recorded by authorities below in each of the assessment years under consideration. Assessment year 2007-0 .....

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nerator (BTG) equipments to various companies (project owners) setting up of a plants in India. During the assessment proceedings for assessment year 2010-11, F EEC was engaged in exclusion of contracts with the following: Rosa Power Supply Co. Ltd., Reliance Infrastructure Ltd (formerly known as Reliance Energy Ltd) EMCO Energy Ltd, Jindal Steel & Power Ltd, JSW Ltd & JSW Energy Ltd. SEC has also provided supervisory services for erections/commissioning of such equipments at project own .....

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fits has been attributed to permanent establishment (PE) in India. Also, during the course of assessment proceedings for a Y 2010-11, vide letter dated 13/03/13, the assessee has filed details of offshore supplies for a Y 2007-08 amounting to USD4, 36,79, 200.30 and onshore services for a Y 2007-08 amounting to USD 26,88,000/- and taxability of both needs examination. Also profit attributable to PE has not been offered for taxation. Besides, as per record available assessee has not filed return .....

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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. R .....

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he Act. In respect of the supply of BTG equipments, assessee had contended that since these are offshore supplies, the income earned 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. 28. Against the draft assessment order passed for these assessment years assessee filed its objection before the DRP. 29. Ld. DRP base .....

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fits out of supervisory receipts at 25%. Pursuant to these directions Ld. AO passed the impugned assessment order for assessment years 2007- 08, 2008-09 and 2009-10. Aggrieved by the impugned assessment order is assessee is in appeal before us now. Assessment year 2011-12 30. During the reassessment proceedings Ld. AO observed that assessee had entered into following contracts for this assessment year, the details of which are as under: S. No. Asst. Yr Details of Parties with whom Contracts were .....

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ded 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 .....

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e records that from assessment year 2008-09, 2009-10 and 2011-12 Ld. AO reopened the assessment based on the findings of his predecessor in assessment year 2010-11. Assessment year 2012-13 & 2013-14 36. 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.Yr Details of Parties with whom Contracts were executed 1. 2012-13 & 2013-14 1. Butibori Project 2. Ros .....

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e 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. Against draft assessment order, for these assessment years assessee filed objection before DRP. 39. DRP based on its observations made in assessment year 2010- 11, issued enhancement notice to show cause as to why, supervisory receipts should not be taxed, consideri .....

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ears 2012-13 & 2013-14. 40. Aggrieved by the impugned assessment orders, assessee is in appeal before us for all the above assessment years. 41. Ld. Counsel at the outset submitted that, all the grounds raised in the years under consideration before us are similar and identical based 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 rece .....

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n 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 terms of Explanation 1 r.w section 9 .....

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rom offshore supplies could be attributed to such PE in India? 43. In our considered opinion on answering the above issues the entire controversy involved in these appeals could be resolved. Ld. Counsel submitted as under: 44. From the submissions filed in the paper book, Ld. Counsel referred to certain agreements, for examining scope of work and terms and conditions of contracts, entered into by Assessee. Reference in this regard was made to the chart titled as Details of scope of erection, com .....

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r Yamuna Contract and Kinda Contract as illustrated by Ld. Counsel is as under below: Yamuna Contract (at serial No. 1 of the Chart submitted by the Assessee) (at page 335 of the Paper book part II for assessment year 2007-08) 45. It has been submitted that this contract was between Reliance Energy Ltd. (Purchaser), Shanghai Electric (Group) Corporation and Shanghai Electric Group Co. Ltd., and the contract is for equipment and mandatory spares supply and service contract. It was submitted that .....

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ries (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 .....

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en JSW Energy (Vijainagar) Ltd. (Owner) and Shanghai Electric Corporation. Owner intends to build a 2 X 300 MW Power project and requires supply of Boilers, Steam Turbine Generators set and Auxiliaries (BTG) for the project. It has been submitted that Owner has appointed TATA Consultancy Engineers Ltd. as project engineer. 51. In the second chart submitted by Assessee gives details of scope of work, price, service contracts, in terms, warranty, and transportation have been separately provided. 5 .....

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pon the decision of Hon ble Supreme Court in the case of Ishikawajima Harima (supra), to distinguish the decision relied upon by Ld. CIT. DR delivered by Hon ble Supreme Court in the case of Hindustan Shipyard (supra). Hon ble Supreme Court in Hindustan Shipyard(supra) categorised contracts as works contracts where it is a contract for work in which the use of materials is accessory or incidental to execution of the work. Ld. Counsel submitted that this is not the situation in the assessee s cas .....

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e submitted that Hon ble Court also held that, where different parts are clearly identifiable, it cannot be held that the, profits arising from off shore supplies were liable to be taxed in India. Thus, whether the contracts were composite or not are of no consequence. 54. Ld. Counsel placed reliance on the decision of jurisdictional High Court in the case of LG Cable Vs. DIT reported in 197 Taxman 100. Ld. Counsel in the written submission dealt with this decision as under: The nature and scope .....

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nder 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 .....

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me wholly accrued or arose in Korea. It was also claimed that the entire contract was carried out in Korea and was subject to income tax in Korea. The transfer of title along with the attendant risks had entirely passed on to PGCIL The findings of the CIT(A) in the case of LG Cables are submitted to be as under- The assessee impugned the above assessment in appeal before the CIT (A), rehydrating its submission that the transfer of title in the equipment supplied by it had taken place in favour o .....

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ill the end. (2) Notwithstanding the award of work under two separate agreements, in case of default or breach under one contract the same shall automatically be deemed to be a default or breach under both the contracts', This means that if there is a default in any part of one contract by the appellant, both the contracts are liable to be cancelled. (3) Notwithstanding the award of work under two separate agreements, it was agreed by the appellant that the equipment/material supplied by it .....

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e. 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 interrelatio .....

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in India. He, therefore, held that the decision of the AAR in the case of Ishikawajima Harima Heavy Industries Co. Ltd., In re (supra) was applicable to the facts of the case. Applying art. 7 of the DTAA, the CIT(A) held that the income from the offshore sale of goods could be deemed to be accrued to Assessee in India and was taxable in India in terms of s. 9(1)(i) of the Act. The computation of income of the Assessee at ₹ 1,05,48,950 made by the AO as well as the levy of interest under ss .....

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re appears to be no justification to intermingle the two. The consideration for the offshore supply of equipment, it is repeated at the risk of repetition, accrued when the goods were sold. The performance of duties as envisaged in the second contract, viz., the erection contract, by no stretch of imagination can be conceived to postpone the transfer of property under para 31.2 of the agreement, which property passed on to the buyer simultaneously with the loading on to the mode of transport to .....

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ith the payment of the entire price of the equipment to the seller. Even otherwise a substantial amount in this case was paid to the seller outside India and the Tribunal observed that for the unpaid price the purchaser could have resorted to the provisions of s. 46 of the Sale of Goods Act, which read as under: (1) Subject to the provisions of this act and of any law for the time being in force, notwithstanding that the property in the goods may have passed to the buyer, the unpaid seller of go .....

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ppage 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 obligati .....

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pudiation or right of disposal of equipment with the buyer or with the seller. The property in equipment having been passed on handing over the equipment to the ship with the delivery of documents to the bank under irrevocable letter of credit, the terms referred to above could not affect the passing of the property. Thus when goods were transferred outside India, the taxable income accrued outside India. It being not attributable to any operation carried out in India, no portion of the same was .....

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is not by reason only of such breach of warranty entitled to reject the goods, but he may- (a) Set up against the seller the breach of warranty in diminution or extinction of the price; or (b) Sue the seller for damages for breach of warranty. (2) The fact that a buyer has set up a breach of warranty in diminution or extinction of the price does not prevent him from suing for the same breach of warranty if he has suffered further damage. 32. The aforesaid position was accepted in the case of Kw .....

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tract. 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 t .....

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ropriation. 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 are of little help and are only illustrative of the principles which are applicable for determining when the goods are unconditionally appropriated to the contract. In the case of transactions of sale of goods between the buyer and seller living in two different countries, the contract may envisage, the .....

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ms of the contract the seller may insist on the buyer to provide for in a bank doing business in the place of the seller's domicile.... 35. In the final analysis we have no hesitation in holding hat viewed from any angle, the fact situation in the instant case is almost identical to that in the' case of Ishikawajma (supra) and the law as enunciated by the Supreme Court in the said case will squarely apply to the facts of the present case. If at all there is a difference, the facts in the .....

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As in the said case the considerations for offshore contract and onshore contract are separate and distinct from each other, in as much as the consideration in the case of offshore supply contract was received outside India through the mechanism of a letter of credit in foreign exchange while the consideration for onshore contract was received, for the most in Indian rupees with a nominal amount in foreign currency, the latter being for training charges. The title to the equipment supplied from .....

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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 .....

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try. It is one of the leading companies in the field of power project construction and export of electric power and is further engaged in the business of construction and commissioning of power project. In response to the tender floated by the National Thermal Power Corporation (NTPC), the applicant successfully bid the tender and three separate following contracts are entered into with the NTPC : (1) Offshore supply contract- Contract No. CS-9558-102-2-FCCOA- 4520 dt. 25th March, 2005. ('Of .....

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only with the offshore supply contract No. 4520 and therefore, it is unnecessary to delve into other contracts. The value of the offshore supply contract is US$ 391,121,452 (Rs. 17,084,185,023) to be paid in foreign currency in execution of offshore supply contract. According to the applicant, the transaction of offshore plant and equipment etc. was completed outside India and that the property in goods passed to NTPC outside India and no portion of income from the offshore supply accrues or ari .....

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only such part of the income, as is attributable to the operations carried out in India can be taxed in India. (2) 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 con .....

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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 lading was issued. Two days later, the amount equivalent to 70 per cent of the value was transferred to the applicant's account on the same day. This modus operandi is in accordance with para 2.4.4 of the LOA. The .....

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of India. The events match with the nomenclature offshore supply contract' and the express stipulation that the transfer of title to equipment and materials shall pass on to Power Grid at FOB Port of shipment with the negotiation of shipping documents. It is worthy of note that the applicant has not reserved the right of disposal during transit or otherwise. The fact that the applicant is not relieved of the responsibility for loss or damage to the goods until the final take over and accepta .....

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could be special stipulation between the parties in this behalf. As rightly pointed out by the learned counsel for the applicant, the applicant, by taking care of goods at the site in India till installation, assumed the capacity of a bailee. As regards the stipulation that the supplier shall continue to be responsible for the quality and performance of the goods until the final take over on testing of the equipment, it cannot be construed to be a condition which postpones the transfer of title .....

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lation 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 featur .....

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The copies of bill of entry are also filed by the applicant. These go to show that the consignee/importer is NTPC. The commercial invoice has also been filed. It shows that the invoice was raised a few days after shipment and all the material documents including sight draft, bill of lading, freight paid memo, insurance certificate were enclosed. The terms of contract and the above documents go to show that the transaction of offshore plant and equipment was completed in the high seas and the pro .....

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med to have been received in India and therefore not liable to tax. Further no income accrues or arises in India to the applicant attracting income-tax. 58. Ld. Counsel placed reliance upon decision of Hon'ble Delhi High Court in the case of DIT Vs. Ericsson AB (343 ITR 470) and submitted that observations made by Hon ble High Court have bearing on the issue at hand. He submitted that Hon ble Court held as under: The place of negotiation. the place of signing of agreement. or formal acceptan .....

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though it is not found to be so in the present case) supply has to be segregated from the installation and only then would question of apportionment arise having regard to the express language of S. 9(1)0). which makes the income taxable in India to 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 o .....

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act. 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 such test found out that the system did not conform to the contr .....

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inative of this factor . 60. He submitted that in Nokia (supra) Hon'ble Delhi High Court observed as under:- Thus the places of negotiation. the place of signing of agreement or formal acceptance thereof or overall responsibility of the Assessee are irrelevant circumstances. Since the transaction relates to the sale of goods. the relevant factor and determinative factor would be as to where the property in the goods passes. In the present case, the finding is that property passed on the high .....

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ndia. 61. He submitted that, from well settled legal position, submissions advanced by Revenue to raise issues of place of signing of contract, place of negotiation, acceptance tests etc. have no legs to stand on. It is apparent that no profits arising from off shore supplies could be brought to tax in India in the present case. 62. On the issue of whether any portion of the profits from off shore supplies was taxable in India in terms of Section 9 read with Explanation 1 of the Act, Ld. Counsel .....

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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 rec .....

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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 situate in India... 65. Ld. Counsel submitted that, income does not accrues or arises in the hands of assessee through or from any business connection in India. It has been submitted that, while passing draft order, Ld. AO did not anywhere hold that there existed a business connection of Assessee in India. He submitted that after holding that the contracts .....

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but not admitting that there did exist a business connection of Assessee in India, the principle of attribution would immediately become applicable as envisaged in Explanation 1 and 3 to section 9(1) of the Act. 67. It was submitted that, what is of seminal importance and crux of the issue involved herein is that, the entire endeavour of the Revenue is to bring portion of the profits arising from the offshore supplies to tax in India. Ld counsel submitted that what is critical to keep in mind is .....

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The buyer pays for the insurance and transportation of the goods from the port of destination to his factory. The passing of risk occurs when the goods pass the ship s rail at the port of shipment. 69. Ld. Counsel tried to establish that title and risk in goods passed on outside India. It has been submitted that this position has not been disputed by the Revenue. He submitted that authorities below are of the opinion that since these are composite contracts the liability of the Assessee does not .....

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s 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 In .....

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operations carried out in India would be taxable. Thus, if it is accepted that the Assessee has received only the consideration for the equipment manufactured and delivered overseas, it would be difficult to uphold the view that any part of Assessee s income is chargeable to tax under the Act as no portion of the said income could be attributed to operations in India. 44. There is little material on record to hold that Nortel India habitually exercises any authority on behalf of the Assessee or .....

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hat the question whether any benefit under the Double Taxation Avoidance Treaty is required to be examined. 47. As noticed earlier, there seems to be no dispute that the title to the equipment passed in favour of Reliance overseas. However, the AO, CIT (A) and ITAT did not consider the same to be relevant as according to them, the equipment continued to be in the possession of the Nortel Group' till its final acceptance by Reliance. In our view, even if it is accepted that the equipment supp .....

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lar. 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 .....

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Counsel submitted as mandated in several judgments of the jurisdictional High Court as well as the Apex Court once there does not arise any taxability of Assessee under provisions of the Act itself, there is no requirement for us to examine the provisions of the DTAA. The Assessee also relied on the following judgments in support of this contention- Ishikawajima-Harima Heavy Industries Ltd. Vs. DIT [2007] 288 1TR 408 (SC)(Pg. 1593/ Para 89) DIT Vs. Nokia Networks OY [2013] 358 ITR 259 (DEL)(Para .....

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e provisions of the Act. The second part is whether the income received in respect of the specified items of work is taxable under the DTAA. Double Taxation Avoidance Agreements do not contain any charging provisions by virtue of which income tax is levied. Income tax is charged by virtue of Section 4 read with Section 5 of the Act. It is only in the event that an assessee is liable to pay tax under the Income Tax Act (de hors any Double Taxation Avoidance Asreements) that the question of examin .....

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ome is not exigible to tax under the Act, it would not be necessary to consider whether the DTAA is applicable. 73. Thus, Ld. counsel concluded by submitting that in absence of taxability under the provisions of the Act, no portion of the profits arising from off shore supplies could be brought to tax in India in the present case. On the contrary, Ld CIT DR submitted as under: 74. During the course of hearing Ld. CIT (DR) submitted that he would raise three contentions sequentially which are as .....

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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 implemente .....

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of; • Hon ble Supreme Court in the case of Hindustan Shipyard Ltd. Vs. State of Andhra Pradesh (2000) 6 SCC 579; • Madras High Court in the case of Ansaldo Energia SPA 178 Taxmann 57; Ruling of the Authority for Advance Ruling in case of Roxar Maximum Reservoir Performance WLL 207 Taxmann Page 293/349 ITR 189. 77. Ld. CIT DR submitted that the goods have been actually delivered to the project owners within the territories of India as per the port of destination agreed upon between the .....

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Establishment 78. He filed a detailed written submission of his arguments which is placed on record. While submitting arguments to prove the existence of PE Ld. CIT.DR submitted that there is an overlap in respect of period in which supplies were made, and supervision surveys commenced. In the written submission filed by him he had submitted that it was undisputed that assessee had a supervisory PE in India, ever since January, 2007. Ld. CIT.DR emphasized that, keeping in view Article 5(1) read .....

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to buttress his arguments. Attribution of profit: 79. Under this head 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 ar .....

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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 relied upon by Ld. CIT.DR in the case of Ansaldo Energia (supra) has also been discussed by Hon ble Delhi High Court LG Cable (2011) 237 CTR 138 and it was distinguished. He submitted that similar plea was taken by Revenue before the Authority for Ad .....

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to distinguish the judgment in Ishikawajima - Harima Heavy Industries Ltd. (Supra) and held that there was nothing in law which prevented the parties from entering into a contract for sale of material for a specified consideration although they were meant to be utilized in the fabrication and installation of complete plant or unit. 82. Ld. Counsel referring to the decision Vodafone International Holdings reported 341 ITR 1, relied by Ld.CIT DR submitted that for the purpose of income the look at .....

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here is no such allegation in the present case and revenue received in respect of supervision activity were in excess of 77 crores. He submitted that, none of the averments made out by Ld.CIT DR have any bearing on this matter. 83. Ld. Counsel then referred to the decision of the Hon'ble Supreme Court in Hindustan Shipyard Ltd. Vs. State of Andhra Pradesh (2000) 6 SCC 579, which has been relied by Ld. CIT DR. It is submitted by Ld. Counsel that the assessing officer had also referred to this .....

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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 .....

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nciple 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. He thus submitted that the assumptions and presumptions of the revenue regarding place of negotiation, signing of contract, completion of acceptance test are of no consequence. Ld. Counsel drew our attention on the decision of this Tribunal in the case of DCIT Vs. Roxon OY (2007) 106 ITD 489. It was submitted that this decision has been rendered .....

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ce Agreements. He submitted that in a recent judgment of the Delhi High Court in the case of Nortel Networks India International Inc. (2016) 386 ITR 353 on the facts of that case, Hon ble High Court held that profits arising from offshore supplies cannot be brought to tax in India given the specific mandate of Explanation 1, which is the attribution rule. 85. On the issue of existence of permanent establishment, Ld. Counsel submitted as under: Ld. Counsel submitted that, as regards Ld. CIT.DR .....

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ll has to apply the test of attribution, as far as the offshore supplies is concerned. Ld. Counsel submitted that the fundamental principle which has been enunciated by the Court repeatedly is that whether provisions of domestic law are 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 .....

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siness 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. Counsel submitted that Ld. CIT DR relied on para 25 of the said decisio .....

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f a mine, and oil or gas well, a quarry or any other place of extraction of natural resources and were not even examined by the Court in the context of subclause (j) which relates to building site or construction, installation or assembly project or supervisory activities in connection therewith. He submitted that second line of paragraph 25 clearly shows this and hence the proposition that Ld.CIT.DR extracted out of this paragraph does not exist. 87. Ld. Counsel submitted that the contention pu .....

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n indicated would have to also meet the requirements of Article 5 (1) and as such in order to establish PE in India in terms of Article 5 (2) the condition of Article 5(1) i.e. Fixed Place PE must also be satisfied. He submitted that in Para 84 of the judgment while recording the contentions of the revenue, the court took note of the contention put forth by revenue, that once conditions laid out in Article 5 (2) was satisfied, nothing further was required to hold the existence of a PE. As regard .....

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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 Wester .....

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o existence . 89. Article 5(2), however, consists of two heterogeneous categories of permanent establishments. The first category consists of illustrations of what would constitute a PE, even under the basic rule, and the second category consists of, what can be termed as, extensions of the basic rule and deemed permanent establishments. While clauses (a) to (i) of article 5(2), in our humble understanding, form part of the former category, i.e., illustrative of the basic rule, clauses (j) and ( .....

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bove discussions, clearly shows article 5(2) of India- UK tax treaty is a mixture of what is usually contained in article 5(2) and article 5(3) in all major model conventions i.e., UN Model Convention, OECD Model Convention an US Model Convention. The clauses consisting in article 5(2) of India-UK tax treaty are, therefore, not homogeneous and these clauses do not belong to the same genus. One cannot therefore proceed on the basis, as has been urged by the learned senior counsel for the Assessee .....

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f examples, each of which can be regarded, prima facie, constituting a permanent establishment , and that as these examples are to be seen against the background of general definition given in paragraph 1, it is assumed that the Contracting States interpret the items listed, 'a place of management', 'a branch', 'an office' etc., in such a way that such places constitute permanent establishment only if they meet the requirement of paragraph 1 . Even by the OECD Model Conve .....

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lf 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 involve .....

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l Convention Commentary, and, for this reason, we are unable to approve learned counsel's argument that article 5(2) of India- UK tax treaty only provides examples of situations covered by article 5 (1), (emphasis supplied) 88. Ld. Counsel controverted the contention of Ld. CIT. DR regarding continuous existence of PE ever since January 2007 owing to the overlapping of the time periods of the supplies and supervision services and the argument that the supervision was a core revenue generatin .....

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re was an existing Supervisory PE ever since January 2007, still no profits arising from the offshore supplies could be brought to tax in India. 89. Ld. Counsel very strongly emphasized that the question of going into the DTAA would arise, only if taxability of the Assessee has been established under the provisions of Section 9(1) of the Income Tax Act. He submitted that whole question of whether there was a PE or not, and whether profits arising from the offshore supplies could be brought to ta .....

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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 b .....

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td.(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 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 Assesse .....

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. DR are nothing but an effort to reinvent the wheel, which has been functioning normally ever since the decision of the Hon'ble Supreme Court in the case of Ishikawajima - Harima Heavy Industries Ltd. (supra.) 92. On the issue attribution of profits Ld. Counsel submits as under: Ld. Counsel referred to the written submission filed by Ld. CIT DR, wherein reliance has been placed on the POSCO Engineering & Construction Co. Ltd. (supra) judgment. Ld. CIT DR had referred to Butibori Project .....

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Ld.Counsel submitted that Ld. CIT DR has compared Apples with Oranges, without explaining the scope of work in POSCO Engineering & Construction Co. Ltd. (supra). Ld. Counsel submitted that facts in POSCO Engineering & Construction Co. Ltd. (supra) are that POSCO Engineering, Nagarjuna Construction Company and Steel Authority of India, formed a consortium for setting up of a Blast Furnace Complex in West Bengal. He submitted that this Tribunal therein dealt with the question raised by Dep .....

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nace 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 identifi .....

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ed to examine, whether income from offshore supply of equipment could be brought to tax in India. There the DR took a plea that, if sale consideration included compensation towards rendering of some services in connection with installation and commissioning of equipment of India, then to that extent income should be brought to tax in India. In Para 4.7.2, this Tribunal also noted the position of revenue that transfer of title outside India was not relevant and it was the performance guarantee wh .....

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n the facts of that case in offshore supply contract, that the Assessee therein was to provide training, instillation, testing, commissioning of such equipment in India which showed that the Assessee was required to put the equipment in a deliverable state in India. He submitted that the Tribunal noted in this paragraph the contention of the revenue that since so many activities were to be done in India in connection with the training, installation and commissioning of the equipment, the propert .....

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ecisive question to be answered was whether the title in the goods passed in India or offshore. Ld. Counsel submitted that revenue's arguments were rejected 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 r .....

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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 providing supervision services in respect of these activities, the actual erection, commissioning, performance, guarantee and PG testing was done by .....

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y Ld. CIT.DR on training of the owner's personnel by Assessee vis- avis the operation of BTG equipment. This submission by Ld. CIT. DR was in support of his overall contention that, if original price of the equipment included certain activities to be carried out in India then the same should be brought to tax in India. Ld. Counsel submitted that the entire endeavor of Ld. CIT.DR is to confuse the facts, with the ultimate objective of seeking a remand. It was submitted by Ld. CIT.DR that a ba .....

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ting of performance testing, training of owner's personnel. 98. Ld. Counsel submitted that from the contract it can be seen that the component of training is already included in the services portion, for which separate value has been indicated. Thus, the entire case of the revenue that training was built into the price of the equipment falls flat into its case. 99. Ld. Counsel referred Kinda Phase IV contract, which is on Page 1280 in Vol.-II of Paper book for Assessment Year 2012-13 and 201 .....

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;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 pro .....

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training has been conducted in China and in all cases where training was to be provided in India it has been included in the onshore services portion and has already been offered to tax. 101. Ld. Counsel Submitted that, to be fair to the Department, there are certain contracts namely (i) the Hisar Contract at Page 980 in Vol.-II of the Paper book relating to the Assessment Year 2010-11, where the scope of work has been given on Page 989 Clause I. He submitted that a closer perusal of scope of wo .....

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enerally to be provided for training the personnel to be able to operate the equipment. Ld. Counsel submitted that the question which arises is, whether this can be the training having its own existence or whether such activity has to be treated as merely incidental to the supply of equipment. Ld. Counsel submitted that this peculiar aspect was considered by the Hyderabad Bench of the Tribunal in the case of Pirelli Cavi E Sisteni vs. ACIT (2014) 151 1TD 19. In para 13 (C) of its judgment, the T .....

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chnical services. In pares 94 and 95, Hon ble Court was of the opinion that in every contract for manufacture and installation there are certain services which are inextricable linked with such manufacture, installation and supply and cannot be separately evaluated for treating them as fee for technical services. While doing so, Hon 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 argu .....

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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 .....

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es in India. Since the information was not available, the Tribunal found it fit to restore the matter to the A.O. to make such determination. 105. Ld. Counsel referred to the facts of Butibori Project, and submitted that Article 10 on Page 117 covers the Acceptance Procedures. Article 10.1.1 deals with the contractor performing Shop Tests at the place of manufacture. Article 10.2 deals with mechanical completion. Ld. Counsel submitted that the Ld. CIT DR tried to emphasise the point that since t .....

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o be attributed. Ld. Counsel submitted that close reading of Clause 10.2 on Page 117 which refers to Mechanical Completion reveals that the contractor i.e. assessee was only required to assist the purchaser in mechanical completion activities of the BTG Package. Clause 10.3.1 on Page 118 provides that the contractor shall assist the purchaser in preparing (i) mechanical completion check lists for the BTG Package and (ii) a plan of pre-commissioning tests for the systematic checking. Clause 10.3. .....

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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. .....

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DR has fairly admitted that all revenues pertaining to PG testing have been offered to tax. Ld. Counsel submitted that there is no substance in the argument of the DR that certain tests have been carried out in India which do not form part of the onshore services contract. 107. Ld. Counsel then addressed the next issue raised by Ld. CIT. DR while placing reliance on the POSCO (supra) judgment is on the clause relating to liquidated damages. Ld. Counsel submitted that having referred to Article 9 .....

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consumption. To some up Ld. Counsel submitted that liquidated damages could be levied by the owner in the event the Assessee delayed the delivery of the equipment and secondly if the equipment did not perform in terms of specifications given by the owner. Ld. Counsel submitted that assessee fails to understand that if it was required to suffer liquidated damages, it would actually be a cost in his hands and not a revenue generating activity. Also, in every business transaction relating to suppl .....

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e for warranties and latent defect. 108. Ld. Counsel submitted that these are again contingent events, i.e. it may or may not happen. The very fact that there is an uncertainty attached to it, the same cannot be a basis for bringing any profits to tax in India on account of offshore supplies. 109. Ld. Counsel submitted that all these issues do not have any bearing on the matter since what is to be considered transfer of title in goods which has taken place outside India and thus no taxable event .....

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sion 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, erectio .....

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ms of the scope of work. Assessee was required to supply only BTG equipment and the drawing and designs and the scope of work covered the designing and engineering part only as incidental to the supply of equipment. He submitted that Ld. CIT DR relied on Butibori Project where the scope of work has been given on Page 2 and the intention of the parties has been expressed in so many terms and where the contractor has expressed its willingness and the purchaser desires that the contractor shall pro .....

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ght to tax in India. This argument was rejected by the Tribunal. To support the above contentions Ld. Counsel drew our attention Rosa 1 Contract where at Page 1269 in para 6.9, manufacturing drawings have been defined. The Clause specifically provides for the contractor to provide to the employer or the engineer in-charge over the project, the manufacturing drawings, designs, calculations and practices etc. This clearly evidences that the drawing and designing was only related to BTG equipment a .....

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The term technical specifications has been defined on Page 94 and means the general specifications, technical 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/ .....

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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, similar issue has been considered and it has been held as under: It is submitted that the work relating to design and engineering is inextricably linked with the manufacture ana1 fabrication of the mat .....

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considered at an appropriate stage. However, if it is accepted that the services provided by Linde relating to design and engineering are inextricably linked with the manufacture and fabrication of the material and equipment to be supplied overseas and form an integral part of the said supplies, then the services rendered by Linde would not be amenable to tax under Section 9(1)(vii) of the Act. Consideration for such services would not be considered as Fees for Technical Services for the purpose .....

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ll as written, submissions, rejoinder, a summary of which have been reproduced hereinabove. Ld. Counsel as per his submissions on the last date of hearing, submitted on 15.05.2017, detailed submission incorporating the oral arguments advanced by Ld. Counsel himself, oral arguments advanced by Ld. CIT. DR in the light of written submissions, and the rejoinder of Ld. Counsel. It was agreed by Ld. CIT.DR that, on receipt of the same, by him or his office, in the event any further submission needs t .....

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he 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, instal .....

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ed to the interpretation of contracts as carried out by the Ld. Counsel. According to Ld. CIT.DR, assessee has conducted its business operations from supervisory/fixed PE in India and thus has established business connection within the meaning of Explanation 2 and 3 to clause (i) of sub section 1 of section 9 of Income tax Act. Ld. CIT.DR contended that Permanent Establishment stood established, as per article 5 of Indo-China tax treaty. • Ld. CIT.DR submitted that the agreements entered in .....

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ly was the responsibility of assessee. • Ld. CIT.DR submitted that, goods having been sold offshore hence not taxable in India, cannot be accepted, as these goods has finally arrived at the project site in India and has been utilised for the purposes of setting up of power project by assessee itself. • Ld. CIT.DR submitted that there is no dispute regarding Service PE existing in India, for the relevant transaction. And therefore income has deemed to have arisen in India through this b .....

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se transactions are made or replaced directly with overseas head office of the enterprise rather than with the permanent establishment. 117. Our entire exercise revolves around the issue, whether there existed a Business connection of assesee in India, and if so whether the supply of BTG 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 .....

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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 since December 2004, which .....

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10-11;and 2. Services Contract placed at pages 1894 to 1918 in the paper book part III for A.Y.2010-11. Both these agreements have been executed between the parties on 20/06/06. 121. It has been submitted by the Ld. Counsel that assessee has received payments separately for supply of BTG equipments as well as for services rendered under the service contract. It has been argued that since the BTG equipments has been supplied outside the territories of India and the payments received lease under a .....

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yse the clauses agreed upon by both the parties in both the contracts entered into by assessee with JSW Energy Ltd. First, we shall take up the contract for Supply of Boilers and Steam Turbine Generator Set and Auxiliaries . 124. Clause 1 of the contract reads the scope of contract in a nutshell. It has been agreed upon between parties in sub clause 1.1 that the scope of supply of BTG equipments and auxiliaries would be as per Annexure-2 of the contract. Reading of Clause 1.2, suggests that alon .....

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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 .....

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rd in respect of the equipments. 129. Contract Price has been considered in Clause 12.2 which reads as under: 12.2 The contract price includes all costs necessary for the supply of equipment and compliance with performance guarantee and warranties. The contract price includes any and all direct indirect and ancillary charges course and expenses of whatsoever nature, suppliers tax (whether direct, indirect or ancillary) incurred by or imposed on the supplier in any supplying the equipment, all pr .....

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ight in respect of the equipment 12.5 the contract price excludes any duties and taxes in India and withholding taxes. 14.2 Transportation the supplier shall be responsible for packing, loading, transporting, unloading at the port of destination all equipment, without limitation the supplier shall be responsible for loading and shipping equipment and or other material. It is also acknowledged by the supplier that the responsibility set out in this clause are included in the contract prices. In r .....

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such equipment and/or materials and for their compliance with the specifications until takeover in terms of the performance warranties. 130. On a joint reading of clause 14.5.1 and 14.5.2 it is very clear that the supplier/assessee continues to have control over the equipments while in transit and there is 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 t .....

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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 shall .....

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tioned as the Supplier shall submit it within two weeks. Schedule IV is placed at page 972 Schedule IV -payment schedule 1. Contract price and terms of payment 1.1. As full and composite compensation for the suppliers performance of the work and obligations under this contract, the owner shall be to the supplier a fixed lump sum referred to as the contract price including ocean right up to the port of destination in India as per clause 12 of general conditions of contract. The contract price for .....

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of advance bank guarantee equivalent to 9% of the total contract price as per schedule I 1.2.2. 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 1.2.3. 60% of the contract price amounting to USD113,040,000 per individual pa .....

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ract 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 suppli .....

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erve that in clause 1.3 of the payment schedule being mode of payment it is only the payment towards advance and the milestone payment mentioned in sub clause 1.2.2 in the schedule that shall be paid through telegraphic transfers/Swift. And it has been agreed that all other payments under the contract shall be made through irrevocable letter of credit payable at site as per schedule V (format of letter of credit and exited page 974 -978). 134. Clause 47 of the agreement at page 956 deals with Tr .....

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the owner which shall be valid until the expiry of warranty period of each unit under the contract. 135. Clause 53 (performance security) the intention of the parties appears to be very clear that the supplier is responsible for the performance of the equipment supplied by it to the owner and that the supplier shall be responsible for the care of equipment, materials and supplies as per CFR INCOTERMS 2000. Service Contract 136. Between the same parties placed at page 1894 executed on 28.06.2006 .....

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project. Deployment schedule for supervisory staff shall be mutually discussed and agreed between JSWEL and SEC • BG test for boiler, turbine and generator shall be carried out by SEC. Any special tools, tackles and instrument shall be arranged by SEC. Providing support services to the SEC s supervisory staff 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 .....

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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. Kinda Suppl .....

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placed at page 1073 of paper book III, filed for assessment year 2010-11. A Plain and cumulative reading of terms and conditions of these contract entered into between assessee with owner for all the above referred contracts clearly shows that it was one and the same transaction. One cannot be read in isolation with the other. The supply of equipments was same contract. In fact supply was part and parcel of the main contract and the same cannot be severed and treated differently. The service Co .....

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sist all the work to be performed as detailed in division of work document between assessee and reliance which has been enclosed as Annexure A. 143. Clause 4.1 it has been agreed by the contract/assessee that the contract is awarded to them on single source responsibility basis and the contract/assessee is bound to perform total contract in its entirety. 144. Clause 4.2 it has been agreed that the contract shall be performed in 2 parts; the 1st part shall be where the contract shall supply all t .....

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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 .....

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shipment the destination airport shall be New Delhi. Further the term contract price , equipment contract price has been defined in the contract at page 1023 as: Contract price shall mean the lump sum price quoted by the contract in its offer with addition and deletion as may be a creed and incorporated in the contract agreement for the scope of works shall be treated as the contract price. Equipment contract price shall mean the CFR value of the imported equipment and the material and delivery .....

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rt basis. The contract shall pay all taxes and duties in the country of origin of goods. The purchaser shall bear the cost of customs duty and CVD in India (if applicable), Madurai and transit insurance and transportation from Indian port to site. Laguna 147. This contract has been entered into between assessee and reliance energy Ltd, dated 27.02.2008, on similar and identical terms. This agreement has been placed at page 1552 of paper book- IV filed for assessment year 2010-11. 148. From the a .....

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assessment year 2010-11. This contract is entered into between assessee along with Utility Energytech and Engineers Pvt.Ltd., (UEEPL), (being consortium members) and collectively called as contractor with the owner/Employer, being Rosa power supply company. The recital in which the understanding between the parties performing work are as under: AND WHEREAS SEC had submitted its offer and employer after examining the offer shortlisted SEC for award of EPC and after subsequent discussions and nego .....

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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 .....

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into 4 parts and this contract shall accordingly operate as a combination of following contracts; the 1st part (hereinafter called the 1st contract) which shall cover supply of all equipment and materials for 2 sets of boilers, turbines and generators including associated accessories and mandatory spares, sourced outside India on CFR Indian port ( Kandla) basis. The 2nd part (hereinafter called the 2nd contract) which shall cover supervision of rejection, supervision of commissioning and perform .....

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and 4th contract shall hereinafter also be referred to as the balance EPC works . The scope of work applicable for S EC is more specifically set forth in Annexure A attached hereto and the terminal points for SEC is more specifically set forth in Annexure-B attached hereto and other documents as per Annexure see attached hereto ………….. 3.2. SEC shall be fully responsible for the BTG package; and UEEPL shall be fully responsible for the entire scope of work constituted .....

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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 .....

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ly with the terms and conditions of the contract, then such consortium member shall be solely responsible for and bear the cost of dismantling, replacement, modification or despair as may be required and shall coordinate on an individual basis with the employer in respect of such remedy will work. 3.5 is expressly understood and agreed under this contract that, liability of S EC shall be basic on and limited to the section prize of the BTG package only and not the entire value of the contract. S .....

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ontractor agrees that it shall perform or cause to be performed the entire scope of work of the contract for fixed and lump sum consideration of USD 208, 500, 000 (US dollar 208 million and five hundred thousand only) would and INR 11, 267, 700, 000 (Indian Rs.Eleven billion 267 million and Seven hundred thousand only) inclusive of all applicable Indian taxes and duties ( contract price ) payable by employer to the contractor. The above contract price would be divided among following contracts a .....

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ding tax, service tax and other applicable taxes). ……….. Appendix I has not been placed in the paper book for our reference. Appendix II is the terms of the payment schedule according to which payment in respect of the contract started as on the date when the following events occurred: 1.2 terms of payment on supply of equipment and mandatory spares: 1.2.1 5% of 1st contract price shall be paid as 1st initial advance (interest-free) on fulfillment of the following by the con .....

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ate 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 .....

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e is providing with unconditional bank guarantee towards performance and security. Had the intention of the parties was to consider the supply independently without having any connection with that of services rendered by assessee in India, assessee would not have agreed for providing an unconditional performance and security guarantee towards the supply of equipment also. This implies that the supply is in extremely linked/connected to the services rendered by assessee in terms of direction of t .....

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ced and completed schedules, tender and such further documents as may be expressly incorporated therein. Contract agreement means a document recording the terms of the contract between the employer and the contractor. Contract price means are some stated in the contract agreement as payable to the contractor for the execution of the works as may be adjusted from time to time pursuant to the contract. Contract s Risk means the risk defined in sub clause 37.3 Final Certificate of Payment means a c .....

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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 sh .....

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here the plant is to be erected; and c. making necessary can connections to the plant. 6.6 Operation and Maintenance Manual The contractor shall supply operation and maintenance manuals together with drawings of the works as built. These shall be in such detail as well enable the employer to operate, maintain, adjust and repair all parts of the works and shall be in such form as stated in the contract. 28.7 Consequence of Failure to Pass Test on Completion If a section fails to pass the tests on .....

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ause 45 be entitled to recover all sums paid in respect of the works, together with the cost of dismantling the sets, clearing the site and returning the plant to the contractor, otherwise disposing off in accordance with the contractor s instructions; or c. issue at taking over certificate if the employer so vicious notwithstanding the works are not complete or the sections/works do not meet even the minimum acceptable standards in which case the contract or shall pay such sums as are due under .....

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from the commencement date until the risk transfer date applicable thereto under sub clause 38.2 The Contractor shall also be responsible for the care of any part of the works upon which any outstanding work is being performed by the contractor pursuant to clause 30 until completion of such outstanding work. Risk Transfer Date The risk transfer date in relation to the 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 re .....

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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, .....

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ract is an artificial bifurcations which is flawed. The assessee is responsible for selection and supply of materials, shipping to the site and installation and all works, commissioning and placing the plant into service. Butiburi Project: 154. This contract has been entered into by assessee with Vidarbha industries power Ltd being the owners of this project to be set up at Butiboori, Nagpur, Maharashtra. 155. The owner has appointed Reliance Infra Projects (UK) Ltd., a company incorporated unde .....

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ntract. 156. In this Triparte agreement assessee has agreed its willingness to provide the purchaser the BTG equipments and to provide supply of and services for boilers turbines and generators including associated accessories and auxiliaries and commissioning spares, maintenance tools and tackles and consumables of one unit of 300 MW capacity. The contract being the assessee shall also provide covering design, engineering, manufacturing, procurement, supply, transportation to designated Indian .....

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ssessment 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 .....

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nerator, services for performance guarantee tests, commissioning, training has been aggregated at USD4,000,000. The payment schedule for the purposes of equipment supply price has been placed as Appendix 5 at page 14-17 of paper book. It is very interesting to note that though there is a segregation of prise for supply of equipment and services rendered for erection; supervision etc 5% of the final payment of supply of equipment, would be paid on issuance of the final completion certificate by t .....

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r balance BTG prep package, supervision of testing and of commissioning, conducting of performance testing, training of owners/purchasers personnel, achievement of provisional raking over and final completion of BTG package. 161. On perusal of Article 2 at page 96- 99, it is discernible that the training of owners/ Purchaser s Personnel for operation and maintenance of the equipment is upon assessee and the entire cost of working conditions of its supervisors is upon assessee itself. Article 4 p .....

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approximate weight and volume of the shipment, the name, flag and the owner of the vessel of the shipment is by sea or the description of the aircraft of the shipment is by air. 164. Further the clause reveals that the contractor would be paid under the letter of credit only after the packing list and invoices are received by the owner. 165. Under the clause ocean transportation in article 22.12, it is the responsibility of the contractor for the transport of equipments from their place of orig .....

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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 o .....

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of the case before us, do not hesitate to hold that, activities rendered by assessee are inextricably linked with each other, and all the responsibility from supply till successful commissioning of projects, rested on assessee. We observe a continuous activity is being carried on by the assessee from supply of equipments till the setting up of the power projects. It is also observed in the payment clause agreed upon between the parties under contract for supply of equipments, that the prise of s .....

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costs and responsibilities between the seller and the buyer and reflect state-of-the-art transportation practices. 170. Incoterms deal with the questions related to the delivery of the products from the seller (exporter) to the buyer (importer). This includes the carriage of products, export and import clearance responsibilities, who pays for what, and who has risk for the condition of the products at different locations within the transport process. Incoterms are always linked to a physical lo .....

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fines the responsibilities and the obligations of a seller (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 (expor .....

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act 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, operations of handling, loading and unloading of the goods or the potting and the discharge of the containers as well as the operations of inspection. e) To fix respective obligations for the achievement of the formalities of exportation and /or importation, .....

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hat the seller (exporter) delivers when the goods pass the ship's rail in the port of shipment. The seller (exporter) must pay the costs and freight necessary to bring the goods to the named port of destination and the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller (exporter) to the buyer (importer). 173. Under such circumstances, it is imperative to examine in each contract what has .....

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e India prior to the shipment date. 174. In the paper book filed for assessment year 2010-11, assessee has placed copies of; • certificate of origin at page 2026, bill of lading at page 2027, bill of entry for home consumption at page 2028 pertaining to invoice dated 02/11/09 at page 2039, Delivery terms CFR Chennai Seaport/Bangalore airport India; • certificate of origin at page 2030, bill of lading at page 2031, bill of entry for home consumption at page 2032 pertaining to invoice da .....

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rder 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 .....

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g the shipping house. However the customs duty has been borne by assessee, which is clear from the document. 178. If the sale of equipment has taken place on high sea outside India as submitted by Ld. Counsel, then how is that assessee is paying custom duty in India and delivering the same to its project site ? 179. It is further pertinent to note that in the agreements entered into by assessee with various project owners, payment in the contract schedule are not related with sale of equipments. .....

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ent schedule does not mention about supply/sale of BTG equipments, but recognizes incidents like signing of contracts, raising invoice, submitting of performance Bank Guarantee by assessee to the project owner, Submitting of Advance Bank Guarantee by assessee to the project owner, engineering/architectural works, supply of equipments, testing of equipments and commissioning of the power plant followed by issuance of performance guarantee test certificates. This shows the nature of contract being .....

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fig lump sum referred to as the contract price including ocean right up to the port of destination in India as per clause 12 of general conditions of contract. The contract price for this contract 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 .....

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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 price per individual package as shown in the breakup of contract price (schedule VI) shall be paid on receipt of related documentation for the erection of the equipment .....

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r 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. 2.3.2. The revolving L/C shall be received by the supplier within 3 months from the effective date of the contract. 2.3.3. 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 cha .....

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lly into supply of equipment and rendering of supervisory services, and that the transaction of supplies has been completed upon the consignment leaving the port of origin. He placed reliance upon Butibori Contract, Ratnagiri Contract Kinda Phase IV contract to substantiate his argument. But on reading of the Payment schedule, we do not agree with this argument advanced by Ld.Counsel. Reason being that, there is no specific demarcation of value of equipments supplied by the supplier/assessee. Th .....

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ended 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 .....

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he contract. The supplier shall continue to be responsible for the risk to, quality and performance, of such equipment and/or materials and for their complaint with the contract specifications until Take-over, in terms of the Performance warranties. The above referred clause is common to all 14 arguments. Warora Agreement This agreement is placed at page 1737 of paper book part IV for A. Y. 2010-11. Between assessee and EMCO Article 2.10 - Packing and Transportation Article 4 - Contract Price &a .....

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shall not mean acceptance and consequent takeover of Equipment. The supplier shall continue to be responsible for the risk to quality and performance of such equipment and/or materials and for their compliance with specification until take over in terms of performance guarantee. Similar is the understanding between Assessee and owner under Chandrapur Project and Jindal 2 Project placed at page 1343 of paperbook part- IV for A. Y. 2011-12 and Page 1873 paperbook part IV for A. Y. 2010-11. 184. O .....

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payments have also been received by the seller outside India, such income received would be offshore supply and could not be deemed to have accrued or arisen in India merely because 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 co .....

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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 while in transit as well as once Equipments reaches the respective site. All agreements required assessee to bring the BTG equip .....

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o the buyer only on the goods reaching the port of India. Thus title in the goods did not get transferred to the buyer outside India. All the contracts placed in the paper book specifies a schedule, which clearly emphasise, 60% as advance of the total contract price which includes income received by assessee towards supervision services rendered in India. There are no clear payments made to assessee in terms of value of goods. 187. On the basis of above discussions, we do not agree with the cont .....

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s under the supervision of assessee. And as assessee was also specialized in manufacturing of equipments required for setting up of Power plant, assessee was involved in supply of the same. It is clear from the plain reading of agreements that the parties had agreed to construct Power plants of certain capacity. None of the agreements are executed exclusively for sale of BTG equipments. Further it is observed that under one project assessee has entered into two agreements; one for supply and ano .....

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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 f .....

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216. Coming to the facts of the present assessee, the substance of all contracts very clearly indicates to be composite in form, as there is no division in the contract in respect of supply and services, as advocated by Ld. Counsel, and payments are not separately linked with services and supply, but is to be made on the basis of stages of completion of the contract irrespective of the equipments brought at the project site. 217. We draw our support from the decision of Authority of Advance Ruli .....

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able ONGC to carry out its operations. I have quoted earlier the relevant portion of the contract. On a reading of the same, there cannot be any doubt that that the contract in question was for erection and commissioning of 36 manometer gauges for the use of ONGC. The contract is clearly not one for sale of equipment. Nor is it one for mere erection of the equipment. It is a composite contract for supply and erection at sites within the territory of India. What is paid for by ONGC is for the sup .....

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td. v. Union of India (supra), and the ratio of substance over form that has been considered by the authority of advance ruling in the case of Roxar Maximum Reservoir Performance WLL (supra) we do not have any hesitation in holding that the transfer of title to the equipments has taken place in India. 219. 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 wi .....

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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 cl .....

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ule III 966 to 971 of paper book, the same has been reproduced herein above while discussing the terms of agreement). The training of Personnel admittedly has taken place in and outside India. Ld Counsel placed reliance upon following decision to advocate that providing training does not have its own existence and such activity has to be treated as merely incidental to the supply of equipment; • Decision of Hon ble Delhi High Court in the case of Lind AG vs. DDIT(supra); • Decision of .....

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locations and supply of equipments are incidental to the erection and instillation activity. The major milestone mentioned in the payment schedule does not mention about supply/sale of BTG equipments, but it recognizes architectural works, providing of designs, testing of equipments, furnishing of complete operating manuals, installation and commissioning and obtaining of take over certificate. 222. Hon ble Supreme Court in the case of Ishikawajima Harima heavy industries Ltd versus DCIT (supra .....

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ndia 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 .....

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hat view of the matter the casual connection between offshore supply and onshore services being interlinked with the entire project is explicit; • by reason of DTAA, the parties thereto can always locate the jurisdiction to tax the entire income attributable set to such permanent establishment to the country in which it is established; • supply of goods whether offshore or onshore as well as rendering of services whether offshore or onshore are attributable to the turnkey project and t .....

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ection 19 of Sales of Goods Act which reads as under: Section 19 (1) Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. (2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. (3) Unless a different intention appears, the rules containe .....

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property in goods are actually passed on to the buyer. Therefore, when property or risk is to pass, is a question that depends on the intention of the contracting parties. If a contract provides for a specific method, place or time of passing of property or risk or both, it has to be concluded accordingly. 226. In the facts of present case, intention of parties is that the property in BTG equipments will pass only when it reached the project site and is successfully put to function without any d .....

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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 Netwo .....

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side India. The permanent establishment was not involved in the transactions. As regards offshore supply it was held that since all parts of the transaction in question, i.e., the transfer of property in goods as well as the payment, was carried outside the Indian soil, the transaction could not have been taxed in India. In this case the Hon'ble Court had reproduced all relevant clauses of the contract to show that clause 14.8 showed separate payment in US dollars and Indian rupees depending .....

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d to the cost and offshore supplies. The insurance was in owner's name. Then the Court concluded obligations under the contract are distinct one. Supply obligation is distinct and separate from service obligation. Price for each of the component of the contract is separate. Similarly, offshore supply and offshore services have separately been dealt with. Prices in each of the segment are also different. The very fact that in the contract, the supply segment and the service segment have been .....

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n offshore and onshore works based on 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 Ishika .....

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ld 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 contract and as a matter of fact was set up for sole purpose of enabling the purpose of the onshore services contract, which was a separate one. c. In the case of Nokia GSM(supra) equipment manufactured in Finland was sold to Indian Telecom Operators from outside Ind .....

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essful commissioning of the project. d) In the case of DIT vs. Ericson AB (supra), facts before Hon ble Delhi High Court were as under: 228. The assessee, a Swedish company, entered into contracts with ten cellular operators for the supply of hardware equipment and software. The contracts were signed in India. The supply of the equipment was on CIF basis and the assessee took responsibility thereof till the goods reached India. The equipment was not to be accepted by the customer till the accept .....

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equipment had been transferred by the assessee offshore, the profits there from were not chargeable to tax. It was also held that the profits from the supply of software was not assessable to tax as royalty . 229. On appeal to the High Court, Hon ble Court dismissed Revenue s appeal by observing as under: (i) The profits from the supply of equipment were not chargeable to tax in India because the property and risk in goods passed to the buyer outside India. The assessee had not performed install .....

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he 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 bef .....

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n India. On these two grounds, this decision relied upon by Ld.Counsel cannot be of any help to assessee, as they are factually different. e) In the case of Lind AG vs.DDIT(supra), facts before Hon ble Delhi High Court were as under: 231. In the instant case Linde AG, Linde Engineering Division, Pullach, Germany ( Linde ) and Samsung Engineering Company Ltd., Seoul, Korea ( Samsung ) formed a consortium to bid for a particular project that was being floated by ONGC Petro Additions Limited ( Proj .....

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the plant located in India. 233. Linde filed an application for an advance ruling pertaining to the taxability of payments made to Linde, before the Authority for Advance Rulings ( AAR ). 234. The AAR passed adverse ruling against Linde stating that the liability of the Consortium for due performance of the contract towards the Project Owner was joint and several. Further, it was held that the contract was an indivisible contract incapable of being divided. On this basis, the AAR held that inco .....

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India under the ITA or under the Double Taxation Avoidance Agreement entered into between India and Germany ( India - Germany DTAA )? 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 f .....

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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 stages and on account of varied activities. In case of a nonresident tax entity any income which accrues or arises from an activity outside India, would not be taxable unless the same falls .....

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sortium was recognized under the Contract, the same would not alter the nature of the Contract in any manner. The Authority concluded that the Contract would have to be considered as one indivisible contract and the income from the same would be taxable in India as the object of Contract was to set up a facility in India. The Authority further held that the MOU entered into between Linde and Samsung could not be understood to be overwriting the Contract or the object of the Contract. With respec .....

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y and designing of the project and equipment should be treated as an offshore transaction. The Authority referred to the decision of the Supreme Court in the case of Vodafone International Holdings B.V. (supra) in support of its view that since in law the liability for performance of the Contract by Linde and Samsung was joint and severable, the Contract must be read as an indivisible one for the purposes of tax. On the above facts Hon ble High Court observed and held as under: 84. In our view, .....

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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 .....

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n India would be deemed to accrue or arise in India. It necessarily follows that in cases where a contract entails only a part of the operations to be carried on in India, the assessee would not be liable for the part of income that arises from operations conducted outside India. In such a case, the income from the venture would have to be appropriately apportioned. The Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. (supra) had considered this aspect and held that merely b .....

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nkey project where the object was to setup a Liquefied Natural Gas (LNG) receiving, storage and degasification facility. Indisputably, insofar as obligations of parties are concerned, this contract was also an indivisible contract. The Supreme Court held that for the purposes of determining the taxability, it was necessary to enquire as to where the income sought to be taxed had accrued or arisen. The impugned ruling is thus clearly contrary to the decision of the Supreme Court in Ishikawajma-Ha .....

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share of an overseas company (capital asset). This capital asset was sold by a non-resident company to another nonresident company. The Revenue contended that the capital gains arising from this transaction was exigible to tax under the Act by virtue of Section 9(1)(i) of the Act 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 .....

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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 5(2)(b) of the Act. What is co .....

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capital assets/property situate in India. To do so, would amount to changing the content and ambit of Section 9(1)(i). 87. In the present case also, Linde has contended that it being a nonresident is not liable to pay tax in India and the sweep of Section 9(1) of the Act cannot be extended to income which has not accrued or arisen in India. 88. The Supreme Court also reiterated the look at principle as was enunciated in W.T. Ramsay Ltd. v. IRC [1981] 1 All ER 865 (HL). That matter related to a c .....

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ch individual transaction in the scheme but could consider the scheme as a whole. The contentions being considered by the Supreme Court in the Vodafone International Holdings B.V.'s case (supra) as well as the House of Lords' in W.T. Ramsay Ltd. (supra) were in respect of schemes which were contended to be for the purposes avoiding tax. The Supreme Court held that the look at principle must be applied to see the transaction as it existed and piercing of the Corporate Veil was not necessa .....

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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 suppl .....

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the moment, the materials were placed for shipment. The petitioner had pointed out that shipping Documents/Bill of Lading also recorded the name of Linde as a Consignor and OPAL as a Consignee. In terms of the Contract, Linde and Samsung were fully responsible for any damage/loss during the transportation of the equipment and material. However, the same would not in any manner contradict the position that the ownership of the material in question was transferred to OPAL overseas. The petitioner .....

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that the work relating to design and engineering is inextricably linked with the manufacture and fabrication of the material and equipment to be supplied overseas and this work was also performed wholly outside India. These submissions have not been evaluated. Question no. (ii) framed for consideration of the Authority invites a ruling on the basis that the offshore services falling within the scope of services by Linde are inextricably linked with the Offshore supply of equipment and material a .....

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vii) of the Act. Consideration for such services would not be considered as Fees for Technical Services for the purposes of Section 9(1)(vii) of the Act. This view has also been expressed by the Authority Rotem Co., In re [2005] 279 ITR 165/148 Taxman 411 (AAR). The relevant extract of the said decision reads as under:- 16. The principle which emerges from the decisions in the aforementioned cases is that in a contract for manufacture, installation, sale or supply of goods the element of service .....

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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 .....

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ospective effect from 01.06.1976, the decision of the Supreme Court in Ishikawajma-Harima Heavy Industries Ltd's. case (supra), in so far as it holds that in order to tax fees for technical services under the Act the services must be rendered in India, is no longer applicable. Therefore, in the event the services in question are not considered as an integral and inextricable part of equipment and material supplied, it would be necessary to examine whether any relief in respect of such income .....

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t at various sites agreed to have been constructed under assessee s supervision in India. There cannot be any decision which would be factually identical to facts of assessee mutatis mutandis, in order to adopt the ratio laid down by various High Courts as well as Hon ble Supreme Court. In fact all decisions of Hon ble High Court relied by Ld. Counsel are based on the specific facts where Hon ble court has laid down propositions after analysing the intention of the parties on the basis of contra .....

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#39;. 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 agr .....

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equipments supplied to Reliance were manufactured by Nortel Canada. The same was invoiced by the assessee directly to Reliance and consideration for the same was also received directly by the assessee. It was asserted by the Assessing Officer that the equipment supplied to Reliance was sourced from Nortel Canada at a much higher price than the price charged to Reliance and this resulted in the assessee suffering a loss during the relevant period. 242. The Assessing Officer was of the view that .....

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India and Nortel LO constituted assessee's PE in India (both Fixed Place PE as well as Dependent Agent PE). 244. The Commissioner (Appeals) upheld the order of Assessing Officer that office of Nortel LO and Nortel India would constitute a fixed PE of the assessee in India as the assessee and Nortel Canada were one and the same entity. The Commissioner (Appeals) further held that keeping in view the facts of the case, 50% of assessee's estimated profits could be attributed to the PE in I .....

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ds to the contrary. Further, the revenue authorities have held that a part of the Equipment Contract assigned to the assessee was, in fact, performed by Nortel India. This too, is stoutly disputed by the assessee. The question whether the assessee has a PE in India is clearly interlinked with the issue whether Nortel India or Nortel LO had performed any of the functions or discharged any of the obligations assumed by the assessee. 246. It is not disputed, on the contrary it has been expressly ad .....

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eing 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 distinc .....

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as in owner's name whereas in this case the insurance was in assessee s name, covering the risk till completion. • In all these cases PE had no role to play in offshore supply as observed by Hon ble High Court whereas in this case, admittedly there exists a superiority PE and assessee was involved. in design, selection and procurements of materials to be used in the facade related work in India, clearance of goods through customs in India and payment of customs duty in India. 249. The a .....

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sful functioning of the projects in India under each and every contract, which is discernable on careful reading of the contracts. Therefore in our considered opinion factually the case of assessee is different from the facts that has been considered by Hon ble High Court in Nortel Networks (supra) and does come for rescue in assessee s case. BUSINESS CONNECTION 250. The next issue that arises is regarding taxability of prise for offshore supply of equipment in India. Assessee being a nonresiden .....

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in India, which has been specifically dealt to it in clause (ii) to (vii) of section 9 (1). Section 9 (1) (i) mandates 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 beari .....

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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 CIT v. Remington Typewriter Co. (Bombay) Ltd., AIR 1931 PC 42, a question arose whether there was a business connection between the assessee-company and the foreign company. The facts were that the assessee purchased the goodwill o .....

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ction existed between the assessee and the non-resident company. 254. A Full Bench of the Rangoon High Court observed in CIT v. Visalakshi Achi [1937] 5 ITR 448 (Rang) [FB] that the expression business connection must denote a connection which produces, by itself, all profits or gains and not a mere state or condition which was favorable to the making of profits. In Bangalore Woollen, Cotton and Silk Mills Co. Ltd. v. CIT [1950] 18 ITR 423 (Mad), Hon ble Madras High Court, construing the word bu .....

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connection arising out of financial relations. The non-resident business and the resident business may be two separate legal entities and they may be closely connected or associated either by reason of some common control or by reason of the nonresident company or firm financing the resident company or firm. The goods of a non-resident company may be sold by a broker or commission agent residing in British India or the person resident may render various services to the nonresident or conduct bu .....

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ct 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  .....

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yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories: a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms: it may include carrying on a part of the main business or activity incidental to the main .....

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and intimate, and through or from which income must accrue or arise whether directly or indirectly to the non-resident. But it must in all cases be remembered that by section 42 income, profit or gain which accrues or arises to a non resident outside the taxable territories is sought to be brought within the net of the income-tax law, and not income, profit or gain which accrues or arises or is deemed to accrue or arise within the taxable territories. Income received or deemed to be received, o .....

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(1) if there subsists a connection between the activity in the taxable territories and the business of the non-resident, and if through or from that connection income directly or indirectly arises.................. The expression '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 .....

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ion 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 interest runs through the fabric of the trading activities carried on outside and inside .....

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tal to the contract. 259. We are of the opinion that the activities referred to in the agreements placed before us satisfy/establishes business connection of assessee in India. There is an element of continuity between the businesses by assessee from supply to successful commissioning of the Plants. It is not a case of a mere stray or isolated transaction, as contended by Ld. Counsel, when assessee has agreed to render technical/supervisory co-operation for construction, erection of power plant .....

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carried out in India. A careful reading of section 9, together with the Explanations thereto, makes it clear that the statutory test for determining the place of accrual of income is not the place where these services are rendered but where those services are utilized . The crux of the above provision insofar as is relevant to the facts of the present case is that assessee is liable to tax, if it earns business income from the operations carried out in India. 261. In a nutshell we observe that: .....

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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 judic .....

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g reliance upon Linklaters LLP (supra) submitted that, in order to establish PE in India in terms of Article 5 (2), conditions of Article 5 (1) must also be satisfied. In the written submission Ld. Counsel has extracted relevant paragraphs that suggest this preposition. To our understanding paragraph 91 referred by Ld. Counsel does not come to rescue assessee and further do not support the arguments advanced by him, which has been reproduced herein below: 91. It is thus clear that, even as per t .....

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ument that article 5(2) of India-UK tax treaty only provides examples of situations covered by article 5 (1). 92. UN Model Convention Commentary, dealing with article 5(3) which is in pari materia with article 5(2)(j) and (k ) of India UK tax treaty, makes the position even more clear. 93. According to this analysis in the UN Model Convention Commentary, article 5(3)(b) of UN Model Convention, which is materially similar to the provisions of article 5(2)(k) of India- UK tax treaty, extends to th .....

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le set out in article 5(1), could not be accepted. 262. Similar is the situation in the facts of the present case where the India -China DTAA, is concerned. Article 5 of India China DTAA discusses about the existence of permanent establishment which is reproduced here under. ARTICLE 5(2) herein are not to be read only as a bunch of illustrations of PE. ARTICLE 5 : Permanent establishment - (1) For the purposes of this Agreement, the term permanent establishment means a fixed place of business th .....

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e 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) the furnishing of services other than technical services as .....

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- is acting in a Contracting State on behalf of an enterprise of the other Contracting State, has and habitually exercises an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 3 which, if exercised through a fixed place .....

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)An office; (d )A factory; (e )A workshop; and (f )A mine, an oil or gas well, a quarry or any other place of extraction of natural resources. (3) The term permanent establishment also encompasses : (a )A building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only if such site, project or activities last more than six months; (b )The furnishing of services, including consultancy services, by an enterprise through employees or other .....

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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 i .....

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1 of Article 4 e.g., duration of construction contract, furnishing of services other than technical services, etc. It is a well accepted principle that specific provisions prevail over the general provisions. Therefore, if the conditions provided in para 2 of Article 5 are satisfied, it will amount to a permanent establishment, irrespective of the fact whether the general provisions of article 5(1) cover such a situation or not. • The permanent establishment under Article 5(2)(j), encompass .....

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erection, intellation and successful commissioning of plants. Thus, splitting of this transaction under supply and services will be wholly artificial and neither will it have a rational basis, nor can it be recognized for the purposes of commutation of profits attributable to the PE. ATTRIBUTION OF PROFITS. Article 7 deals with the business profits, which has been reproduced hereunder: Article 7 -Business Profits 1. The profits of an enterprise of a Contracting State shall be taxable only in tha .....

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dertaken by the permanent establishment or have no relation with the permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, 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 activit .....

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e 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 State. 5. No profits shall be att .....

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icles shall not be affected by the provisions of this Article. 265. Article 7 (1) states that profits can be taxed in India only to such extent that is attributable to the PE in India. In other words if there is no PE then business profits of assessee cannot be taxed in India. On the facts of the present case, the assessee has already admitted of existence of Service PE in India, while submitting for assessment year 2010-11, as per Article 5 of India - China DTAA. The written submissions placed .....

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years has to be construed in the similar manner. 266. It is further observed that the position under DTAA is analogues to the position as expressed in Explanation (1) (a) to section 9 (1) (i) of the Act. The sum and substance of both these provisions under DTAA as well as Indian Income tax Act is that, only that part of business income of assessee can be charged to tax in India which is attributed to the operations carried out in India, due to the business connection as per section 9 (1) of the .....

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ith 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 opera .....

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ment; 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 withi .....

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ions 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 rendered by the PE in India, any income in respect of the services rendered to an Indian project, which is similar to the services rendered by the permanent establishment, is also to be taxed in India in the hands of the assessee, irrespective of the fact whether, such servic .....

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: (i) the services should be relatable to the services rendered by the PE in India; and (ii ) the services should be directly or indirectly attributable to the Indian PE , i.e., rendered to a project or client in India. To the facts of the present case, both these conditions stands satisfied. 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 provide that in addition .....

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ories. 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 rela .....

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ll; Supervision & related activities. Ld.AO computed attributed 25% from offshore supply to be accruing from off shore supplies to PE in India, based on Global profitability statement submitted by assessee, for assessment year under consideration, as under: ITA no. 224/Del/2015 (A.Y. 2008-09) Particulars FY 2006-07(AY 2007-08) Gross offshore supply revenues (USD(A) 4,36,79,200.00 Exchange rate @ 43.77 on 30.03.2007 43.77 Gross offshore supply revenues (INR)(A*B) ₹ 1,91,18,38,584.00 Pro .....

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1,26,903.49 Attribution in India (%) 25% Taxable Income ₹ 15,85,31,725.87 Tax Liability @ 42.23% ₹ 16 69 47 947.84 ITA no. 226/Del/2015 (AY 2009-10) Particulars FY 2008-09 AY 2009-10 Gross offshore supply revenues (USD) (A) 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 .....

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rate @ 50.53 + (B)*exchange rate @ 66.70 30,150,785,284.23 Profit on the basis of Global profit and loss account (@8.29%) 2,500,255,038.86 Attribution in India (%) 25% Taxable Income 625,063,759.71 Tax Liability @ 42.23% 263,964,425.73 ITA no. 227/Del/2015 (AY 2011-12) Particulars FY 2010-11 Gross offshore supply revenues (USD) (A) 25,72,57,618.00 Gross offshore supply revenues (EURO) (A) 3,89,86,186.00 Exchange rate® 44.23 on 31.03,2011 (E) 44.23 Exchange rate @ 62.36 on 31.03.2011 (B) 62.3 .....

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Euro on 31.03.2012 (Bl) @ 67.44 Gross offshore supply revenues (Rs) (AxAl + BxBl) in aggregate ₹ 21,50,35,76,160 Profit on the basis of Global profit and loss account (6%) ₹ 1,29,02,14,569 Attribution in India (%) 25% Taxable Income (X) ₹ 32,25,53,642 ITA no. 59/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 .....

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justification to adopt the segmental profits. He has also not demonstrated any illegality in the computation adopted by Ld.AO. It is observed that Ld.AO has followed the global profitability based upon the ruling of Rolls Roys (supra) and attributed 25% of global profit accruing from the offshore supplies to PE in India Accordingly ground no.6.9 raised by assessee in all the appeals are dismissed. The next issue raised by assessee is in respect of levy of Interest u/s234 B of the Act. 272. The c .....

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payers under section 195. Had the payer made the deduction of tax at the appropriate rate, the net tax payable by the assessee would have been Nil. Thus, there was no liability to pay advance tax by the assessee. High Court of Delhi in the case of Jacabs Civil Incorporated/Mitsubishi Corporation reported in [2011] 330 ITR 578 /[2010] 194 Taxman 495 (Delhi) on identical issue, held as under: This clause categorically uses the expression deductible or collectible at source and it is this clause w .....

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h is payable on such payments made by the payee to the non-resident. Section 201 of the Act lays down the consequences of failure to deduct or pay. These consequences include not only the liability to pay the amount which such a person was required to deduct at source from the payments made to a non resident but also penalties, etc. Once it is found that the liability was that of the payer and the said payer has defaulted in deducting the tax at source, the Department is not remedy-less and, the .....

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