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Dy. Commissioner of Income Tax, (I.T) –4 (2) (1) , Mumbai Versus M/s. Safegate International A.B. C/o Deloitte Haskins & Sells Tower–3

2017 (11) TMI 709 - ITAT MUMBAI

Taxability of income - accrual of income in India - Direction of the DRP to exclude the income received from off–shore supplies of equipments from taxation - Held that:- Material brought on record clearly reveal that the P.E. has no role to play as far as it relates to off–shore supply of equipments and materials which is evident from the fact that not only the goods were supplied from Sweden and other countries on CIF/CIP basis but payments have been made directly to the assessee outside India .....

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ore, the off–shore supply of equipments having been effected from outside the territory of India and the sale having been completed outside territory of India, the ratio laid down by the Hon'ble Supreme Court in Ishikawajma-Harima Heavy Industries Ltd. (2007 (1) TMI 91 - SUPREME COURT ) squarely applies to the facts of the present case. Thus the income received from off–shore supply of equipments in case of a divisible contract is not taxable in India - Decided against revenue - ITA no.1599/Mum. .....

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2. The grounds raised by the Revenue pertain to the common issue relating to the direction of the DRP to exclude the income received from off-shore supplies of equipments amounting to ₹ 1,76,92,876 from taxation. 3. Brief facts relating to the issue are, the assessee a tax resident of Sweden is engaged in providing the Airport Industry with effective solutions which the airport authorities use for safer operations, control and handling of aircrafts on the ground, airborne, aircrafts close .....

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rt Pvt. Ltd. (MIAL). The scope of work as per the sub-contract agreement with L&T are Part-A - supply of Airfield, Ground Lighting Equipment; Part-B - Overview the design, installation, testing, commissioning and integration of the supplied items with experienced staff; and Part-C - development, design, supply, installation, testing and commissioning a control and monitoring system. For the impugned assessment year, the assessee filed its return of income on 29th September 2011, declaring to .....

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g Officer, the assessee submitted that off-shore supplies are not taxable in India as title to the goods passed outside the territory of India. The Assessing Officer, however, did not find merit in the submissions of the assessee. The Assessing Officer after examining the contracts entered in to by the assessee was of the view that they are composite contracts and the assessee is not only responsible for supply of equipment, but also for the proper marking, packing, loading, transportation, cust .....

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p;T. Thus, it was held by the Assessing Officer, not only the contract is a composite one under the sole responsibility of the assessee, but, the assessee is also responsible for training, provision of skilled manpower as well. The Assessing Officer observed, merely because consideration for off-shore supply operation is mentioned separately, would not make the contract divisible one since the assessee is required to take care of everything. Thus, ultimately, the Assessing Officer held that the .....

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ts clearly spell out the on-shore and off-shore portion of works / services. On going through both the contracts entered into by the assessee the Panel found that the payment to be made in respect of off-shore and on-shore operation has also been quantified separately in terms of Indian rupee as well as in Euros. They found that as far as on-shore activities attributable to Permanent Establishment (P.E.) is concerned, the assessee has worked out profit on such income and offered it to tax. The D .....

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ssessing Officer has only concentrated on the claim of non-chargeability of the off-shore supply and has sought to bring it to tax. On the contrary, the DRP observed, clause 1.1.3 of the sub-contract with L&T clearly spells out that the off-shore supplies were on carriage, insurance and freight (CIF) basis. Similarly, the contract with DIAL lays down that off-shore supply of imported plant and equipment was to be on cost of insurance paid (CIP) basis. The DRP referring to the definition of t .....

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on, etc., carried to port of export, unloading of truck at Port of export, loading of vessel on port of export, sea / air carriage to port of import and insurance. The DRP found that in case of CIF, the payment for unloading at Port of import and loading on truck at Port of import are the responsibility of the buyer. In the case of CIP, they could be the responsibility of the buyer or seller. The DRP observed, as per the definition of CIP, delivery on CIP basis would mean passage of title of goo .....

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Hon'ble Supreme Court in DIT v/s Ishikawajma-Harima Heavy Industries Ltd. [2007] 158 Taxman 259 (SC). After exhaustively referring to the observations made by the Hon'ble Supreme Court in the aforesaid decision, the DRP ultimately concluded, since supply and service obligation as also off-shore and on-shore obligation having been distinctly and separately provided in the contract, it cannot be said that the contracts are indivisible. Therefore, only such income which is attributable to t .....

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P.E., it automatically rules out the attribution of activities such as supply which came out before formation of P.E. Accordingly, the DRP directed the Assessing Officer to complete the assessment by excluding the amount received from off-shore supplies. 5. The learned Departmental Representative taking us through the observations of the Assessing Officer in the assessment order submitted that the Assessing Officer after making a thorough analysis of the terms of contracts entered into by the a .....

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for independent supply of material. At no place, the contract mentions that the assessee would bifurcate the contract in to off-shore supplies to be paid in Euro and on-shore service to be paid in Indian rupee. Rather, the price schedule has three portions with price attribution to them which form the base for final quotation. For that the contract cannot be split into two segments. He submitted, as per the terms of contract the assessee was to be given possession of site from the design stage. .....

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ds reach site. To emphasise the fact that the P.E. was also involved in the off-shore supply of goods / equipments, the learned Departmental Representative relied upon OECD guidelines and comments by Klaus Vogel. In this context, he also relied upon the decision of the Hon ble Madras High Court in Ansaldo Energia Spa v/s ITAT & Ors, [2009] 310 ITR 237 (Mad.). The learned Departmental Representative submitted, the terms of the contract would reveal that the assessee was responsible for receip .....

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ntract does not reflect any scientific basis of segmentation in Part-A, B and C based on estimate. In the light of nature of contract, price is not severable. He submitted, documentation with respect to supply of equipment to be submitted at the plant site on CIF basis. Risk of material has to be borne by the assessee from the date of notice to proceed till 21 days after completion of contract. This according to the learned Departmental Representative, indicates that the title of goods did not p .....

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d to supply and service operations. He submitted, DRP has completely erred in holding that supply on CIF / CIP basis would mean delivery of goods outside India. He submitted, it is also equally wrong to conclude that the off-shore and on-shore terms are clearly spelt in the contract. He submitted, on the contrary, off-shore manufacturing is intricately linked with on-shore design / feed back / approval of contractor / employer. There are also links with other systems to be factored during design .....

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the Learned Departmental Representative also relied upon the following decisions:- i) Authority For Advance Rulings (I.T) v/s Metro Asia Pacific Pte Ltd., In re, [2016] 73 traxmann.com 17 (AAR); ii) DIT v/s Nokia Networks OY, [2012] 25 taxmann.com 225 (Del.) 6. Learned Authorised Representative strongly supporting the findings of the DRP submitted, the off-shore supplies having been made from outside the territory of India and the title having passed outside India, the amount received by the ass .....

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ontract agreement has been segregated to three parties as provided under Appendix-1 of the sub-contract agreement. He submitted, Part-A relates only to supply of materials. He submitted, Part-B of the scope of work relates to design, installation, testing, commissioning and integration of the supplied items whether to be installed by the assessee or others. Part-C provides for developing design, supply, installation and commissioning of control and monitoring system and upgrade as required. He s .....

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itory of India is on CIP basis, hence, the title over such goods passes once it is loaded and dispatched in the country of origin. Learned Authorised Representative drawing our attention to the total project value as provided in the contract submitted, for each part of the contract, there is a separate price schedule. He submitted, for Part-A, which is for supply of materials the price is provided in Euros. Whereas, for Part-B which relates to design, development, installation, testing, commissi .....

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and on-shore work separately. He submitted, as far as income from on-shore activities are concerned, the assessee has offered it to tax while excluding the amount received from off-shore activities as it is not chargeable to tax in India. He submitted, the supplies on CIF and CIP basis in terms of the contract clearly demonstrate that the title over the goods had passed in the port of loading and sale was concluded outside India. He submitted, the off-shore supplies of goods had no connection w .....

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horised Representative relied upon the following decisions:- i) DIT(IT) v/s Siemens Aktiengesellschaft, ITA no.1033 of 2011 (Bom.), dated 20.11.2012; ii) DIT(IT) v/s Toyo Engineering Corporation, ITA no.663 of 2011, dated 23.01.2013; iii) DIT v/s Nokia Networks OY, 358 ITR 259 (Del.); iv) Linde AG, Linde Engineering Division v/s DDIT, 365 ITR 1 (Del.); v) DIT(IT) v/s Xelo Pty Ltd., 203 taxman 475 (Bom.); and vi) ILJIN Electric Co. Ltd. v/s DCIT, ITA no.1023 and 5642/ Mum./2015, dated 14.10.2016. .....

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is stated before us that the scope of work as per the contracts are more or less similar. It is evident, the scope of work under both the contracts comprised of supply of equipments from outside India and installation and commission services at the work site in India. As far as supply of equipment from outside India is concerned, it has been treated by the assessee as off-shore portion of the contract and has no territorial nexus with India, hence, not taxable. Undisputedly, the income arising .....

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P.E. in India has taken active part in designing, monitoring of the work relating to plant / equipment to be supplied. Therefore, the income arising from such supply having territorial nexus with India is taxable in India. As discussed elsewhere in the order, in the course of hearing, the learned Authorised Representative has taken us through the contract executed by the assessee with L&T Ltd. with regard to the airfield ground lighting works of Mumbai International Airport. On a reading of .....

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commissioning as well as supply of equipment. It is, however, evident from the contract, payment for the supply of equipment are to be made in Euros whereas payment for design, installation, commission, etc., has to be made in Indian rupees. It is also to be noted that as per the terms of contract off-shore supply of equipment are to be made on CIF and CIP basis. Thus, on a reading of the contract with L&T it becomes clear that, though, it is a composite contract, however, it is divisible in .....

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asis which has happened in the case of contract with DIAL. There is no dispute that the off-shore supplies in case of both the contracts are either on CIF or on CIP basis and payments have been made in Euros, that too, outside India. Moreover, the invoice raised for supply of equipment, sample copies of which have been placed in paper book, clearly indicate that the supply of equipment has been made in the name of either DIAL or L&T Ltd. The invoices also indicate that the payments were to b .....

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t relates to off-shore supply of equipments and materials which is evident from the fact that not only the goods were supplied from Sweden and other countries on CIF/CIP basis but payments have been made directly to the assessee outside India in foreign currency and in the bank account of the assessee in Sweden. Therefore, the P.E. has no connection with the off-shore supply of goods. Therefore, only because the contracts entered into by the assessee are single composite contracts it cannot be s .....

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