TMI Blog2017 (8) TMI 737X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee to segregate the contract into three contracts was clear from the beginning. It negotiated with SCCL who ultimately agreed to execute three separate contracts with specific scope of work for each of the contracts and different time frames. Thus, the intention of the parties to have three different contracts is proved. In such circumstances, the findings of the authorities below, that all the three contracts are part of a single and composite contract are not sustainable. The question No.1 is accordingly answered in favour of the assessee. The consequential finding that in a composite contract, if there is a PE for one of the contracts, then the PE is there for all the contracts is also not sustainable. According to the revenue, the project office set up on 21.04.2008 is the PE even for the contracts I and II. This is not acceptable. Article 5(2) of the DTAA between India and Germany defines Permanent Establishment and clause (i) thereof includes a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities continue for a period exceeding six months. In the case before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GmbH-India Project Office. 3. Brief facts of the case before us are as under: 4. The assessee company is a non resident company incorporated in Germany. Is business consists inter alia of manufacturing of mining equipments and operating mines and it has implemented a number of projects in which both the equipment and operational support was provided. The Singareni Colleries Company limited, (hereinafter referred to as SCCL), an Indian Company, decided to introduce Continuous Miner Technology (CMT) for extraction of developed pillar GDK-11A Incline in the Ramagundam area of Andhra Pradesh for increased production and mining safety. Accordingly, on 14.11.2005, SCCL floated a single tender along with tender notices in Vol. I II for introduction of CMT with 5 years maintenance contract in SCCL Mines. The assessee applied for the bid as a single bidder on 29.03.2006 and 3.04.2006 by submitting a single bid document in two parts i.e. cover (A) for Technical Bid and cover (B) for Commercial Bid which also contains Price Bid as cover (C). SCCL, in its tender documents, had specified the scope of work to include design, supply, installation, commissioning and operation maintenan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire project and the assessee submitted the offer in two volumes, i.e., one for technical bid and the other for commercial bid as a total service provider for accomplishment of contract in accordance with all the provisions of bid documents, which was accepted by SCCL. The technical personnel of the assessee have visited India not once but several times, to negotiate the terms and conditions of the contract and to integrate the subsequent level of activities for successful completion of the project. Thus, AO was of the opinion that the whole project was one single composite, continuous and inseparable project which has been fragmented into separate activity module. The AO also observed that the assessee, while providing all the technical details in its technical bid document in cover A for the implementation of full scope of supply works of SCCL, has stipulated that (i) The contract No.1, should come into force immediately upon signing the contract, (ii) The Contract No.2 and 3 should come into force upon receipt of the DGMS Mining method Approval. Thus, though all the three contracts are inter-linked and are indivisible, the assessee has stipulated the conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses incurred also, AO attributed 40% of the total expenses to Indian activities. The AO observed that from the contract III, the assessee has shown a loss of ₹ 3,69,82,963/- as per the P L Account and after verification accepted the same observing that some of the some of the manpower expenses pertains to a period prior to commencement of the installation and operation maintenance activities as per contract III. He accordingly computed the taxable income of the year and proposed the draft assessment order. Aggrieved, assessee preferred its objections before the DRP. DRP also confirmed the view of the AO but, apportioned 35% of the contract II receipts towards Indian Operations and enhanced the allowable expenses to 50%. The AO, accordingly passed the final assessment order. Against the final assessment order, the assessee is in appeal before us by raising the following grounds of appeal: 1. On the facts and circumstances of the case and in law, the learned AO has erred in assessing the total business income of the Appellant at ₹ 20,403,492 as against total business loss of ₹ 36,982,963 computed by the Appellant; 2. On the facts and in the circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia and therefore will be attributable to the PE for taxation in India. Without prejudice, on the facts and in the circumstances of the case and in law, the Ld. AO has failed to appreciate the fact Project Office in India has no role with supply of equipment and accordingly, income from offshore supply of equipment cannot be taxed in India. 11. On the facts and circumstances of the case, the Ld. AO has erred in stating that Appellant has not cooperated during the assessment proceedings and has compelled the Ld. AO to call for the information under section 133(6) of the Act. The Ld. AO has not appreciated the facts that details requested from the Project Office is not available at that time and therefore Project Office took time to collate the relevant information from the head office. 12. Without prejudice, assuming but not accepting that income from offshore supply is effectively connected with business connection in India, erred in alleging that the total profits from offshore supply was 50% of gross revenue of offshore supply and in attributing 35% thereof to India, even though no part of the activity relating to offshore supply was carried out by Appellant' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) is taxable in India, it is taxable as business income of the assessee and since there was no permanent establishment (P.E) in India during the relevant period, the income cannot be brought to tax either under the Income Tax Act or the India Germany DTAA. Further, she also drew our attention to Article 5(d) of the DTAA to submit that a P.E is constituted only if the employees of the assessee were in India for a minimum of six months but since even SCCL letter clearly mentions only 37 days, there was no P.E in India. She also drew our attention to the fact that under article 29 of the DTAA, the equipment supplied by the Head Office is outside the scope of business income of the Assessee. 11. The learned Counsel for the assessee also submitted that as per the terms of the contract (ii), the tax burden if any, arises on this contract, it is to be borne by SCCL. Therefore, according to her, there was no incentive for the assessee to avoid tax by splitting the alleged composite contract into three different contracts. In support of all the above contentions, the learned Counsel for the assessee placed reliance upon the following case laws: (a) Ishikawajima-Harima Heavy Industries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld guilty of suppression of material facts and adverse inference should be drawn against it. ( ii) That the contract was composite and non-separable as the responsibility of the bidder included conducting of scientific site investigations, obtaining DGMS approvals, supplying continuous mines and other equipment, operation and maintenance of the equipment for a period of five years with a guarantee for an average production of 1350 tonnes per day and 0.40 million tonnes per year. Thus, though the contract apparently contained separate activities, but it was to be single contract with a single deliverance, i.e. Annual Guaranteed Production . As this overarching scheme of the contract was not abrogated by the parties, it continued to be the essence of the contract. The commitment of Annual Guaranteed Production presupposes combined commitment of supply of equipment, installation and commissioning, operation and maintenance because neither of them, by itself, could guarantee annual production and therefore the contract is a composite one. Even though, the contract is split into three, the success or failure of each contract was to be judged on the touchstone of the single outc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term supply took place partly in India. Even the term supply included the stage up to installation and commissioning of the plant. Therefore, the paper arrangement showing delivery off-shore did not amount to real delivery and there was never a real transaction for sale of the goods. 14. In support of the above contentions, the learned DR relied upon the following decisions: (a) Ansaldo Energia SPA Vc Income Tax Appellate Tribunal(2009) 310 ITR 237 (b) Linde AG, Linde Engineering Division (AAR No.962 of 2010) dated 20.03.2012. (c) Vodafone International Holdings BV Netherlands vs. VOI (345 ITR 1 (S.C) (d) Dongfang Electric Corporation vs. Dy. Director of Income Tax, (International Taxation) (2012) 147 TTJ 579 (Kolkata). 15. Having regard to the rival contentions and the material on record, the following questions emerge for adjudication: (i) Whether all the three contracts are interlinked interdependent and indivisible and therefore whether they are to be considered as a single and a composite contract? (ii) Whether there was a PE of the assessee in India before establishment of project office in India and if so, since when? (iii) What is the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the tender starts from page 269 of the paper book and at page 279 is clause No.23 specifying the bidder responsibility as per which the relevant responsibilities are as under: 1) Shall conduct scientific site investigations, prepare study reports, obtain DGMS approval for the mining method/ technology and shall quote for these. 2) Shall supply continuous Miner, shuttle cars, Multi Roof Bolter, Mobile feeder breaker J complete electrical equipment as one package and shall quote for these in detail for each individual item. The bidder shall quote for 2 Nos. of shuttle cars/Coal Haulers with 15 Tonne pay/load capacity or 3 Nos. of shuttle cars with 10.0 Tonne pay load capacity. (To quote for both options). 3) Shall operate and maintain the equipment with required spares and consumables for a period of 5 (five) years and to quote separately for spares and services on per tonne basis, year-wise. Note: The contract for supply, operation maintenance of the equipment will come into force after the DGMS approvals for the scientific site investigations mining method/technology are obtained. 4) a) Shall guaranty for an average production of 1350 Tonne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tracts is detailed in Cover A Technical Volume of this Bid. All contracts are signed simultaneously, however: Contract NO.1 above comes into force immediately upon signing the contract. Contracts NO.2 and No.3 come into force upon receipt of the DGMS Mining Method Approval . 19. At page 421 of the paper book is the specimen copy of the price bid submitted by the assessee in cover-C and in accordance with this bid, the assessee has divided the whole contract into three different contracts and has also apportioned the payment accordingly. Further, from the Errata issued by SCCL which is placed at Page 362 to 376 of the paper book, we find that as per the original tender document, the contract for supply portion and maintenance of the equipment will come into force after DGMS approval for the scientific site investigation/mining method/technology is obtained but as per the amended document, there can be 3 separate contracts for (i) scientific site investigation (ii) supply of equipment and (iii) maintenance of spares and services and it has also been specified that these 3 contracts shall be signed only with single agency i.e. that the successful bidder who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon fulfilling all the following: ( a) Signing of the contract by all the parties; ( b) Receipt of all DGMS approvals under clause 3.1, 3.2, 3.3 of General Conditions. ( c) Sanction from Govt. of India and RBI ( d) Letter of indicative support for the Contract from a first class Indian Bank/Financial Institution as per Annexure IV. 34.2 In the event the contract does not come into force within nine (9) months from the date of signing of the Contract, either party may withdraw from the contract without any obligation there under . 21. Further, clause 3 of section-I of the contract-II, RC-223 provides that for the introduction of the Continuous Miner mining system in GDK-11A Mines of SCCL, DGMS approval for the mining method would be obtained by the SCCL and scientific investigation (scientific site investigation and obtaining DGMS approval) to be carried out for securing DGMS approval would be part of a separate contract to be awarded by SCCL and that the results of scientific investigations will be the basis of design of mining method (emphasis supplied by us) and also submission of application for DGMS approval for the mining method and also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the time schedule mentioned in the contract. All costs of packaging, internal transportation, fees of forwarding agents, warehousing charges, port charges, dock and harbor dues and all other expenses as may be incurred for the purpose and up to the point of delivery of the goods on board the nominated ship shall be paid by the DBT and the DBT shall be liable for all expenses, including dead and extra freight, demurrage of vessels etc, arising from delay in shipment due to lack of shipping opportunities, or delay in providing documents, which are for any cause attributable to the DBT and it is also agreed that the risk of the goods shall remain with DBT until delivery has been effected free on board (FOB). 26. Clause 11 of the contract provides that SCCL shall take insurance cover for equipment on a full replacement cost basis from FOB, port of shipment, till the time the equipment is successfully commissioned underground at the Mine Site on the basis of shipping advice given by DBT as per Clause 10 of the agreement. It is further provided that SCCL shall take insurance cover in USD with DBT as the beneficiary for Spares on a full replacement cost basis from FOB, port of shi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each of the constituent of consortium was specified. The role of the assessee therein was to develop, design, engineer and procure equipment, material and supplies, to erect and construct storage tanks of 5 MMTPA capacity, with potential expansion to 10 MMTPA capacity at the specified temperatures. Thus, the activities of the assesse involved both off-shore supply, offshore services and on shore supply and services. The contention of the revenue before the Hon ble Supreme Court was that the contract being a composite and integrated one, the assessee was liable to tax on the offshore supply and services also. The Hon ble Supreme Court has held that A contract must be construed keeping in view the intention of the parties. Even in the case before us, though SCCL had issued a single tender document for whole of the project, the intention of the assessee to segregate the contract into three contracts was clear from the beginning. It negotiated with SCCL who ultimately agreed to execute three separate contracts with specific scope of work for each of the contracts and different time frames. Thus, the intention of the parties to have three different contracts is proved. In such circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject report during contract I), manufacture and delivery of the equipment including the payment was made outside India. Therefore, even if there was a PE for contract II, it cannot be said that the PE of the assesse had any role to play in any of the above activities. The AO and DRP had relied upon some case law to hold that the income contract No. II is taxable in India. In the case of Ansaldo Energia SPA (cited supra) there is a specific finding by the department that the price of Contract No.1 was loaded to take in a portion of the contract price for contract No. II to IV and while discount was offered for contract Nos. II to IV, with regard to Contract No. I no discount was offered. Further, there is also a finding that the assessee therein, a foreign company, had set up a subsidiary company in India, namely ASPL, which was alter ego of the assesse and that ASPL was its PE in India as the site office was jointly occupied by assesse and ASPL. Therefore, this case is distinguishable from the facts of the case before us. In the case of Samsung Heavy Industries Co. Ltd, the issue before the tribunal was whether the project office set up by the assesse therein is a fixed place of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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