TMI Blog2020 (2) TMI 1053X X X X Extracts X X X X X X X X Extracts X X X X ..... cruing or arising out of such business connection. The Apex Court has further held that para 6 of the protocol to the DTAA is not applicable because for the profits to be attributable directly or indirectly, the PE must be involved in the activity giving rise to the profits. In view of the above discussion, we are of the considered opinion that the ld.CIT(A) is correct in holding that the income from offshore supplies is not liable to tax in India both u/s 44BBB as well as under the provisions of Article 7 r.w. para 6 of DTAA between India and Japan. Accordingly, grounds No.1 and 2 raised by the Revenue are dismissed. Liaison offices - liaison offices do not constitute PE liable to tax in India. Since the facts and the issue involved are same in in assessee s own case in the immediately preceding assessment year 2005-06 we hold that the Liaison offices of the assessee do not constitute PE liable to tax in India. No income is liable to be attributed in India even if Mitsui Co. Ltd., constituted a DAPE [ Dependent Agent Permanent Establishment ] of the assessee in India Determination of income from Teesta and Purulia projects on cash basis instead of mercantile ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om needle to airplane engines. It has established a Liaison Office in New Delhi and undertakes several projects in connection with big industrial installations and power projects. It filed its return of income on 13th December, 2006 declaring total income at ₹ 2,71,37,369/-. During the course of assessment proceedings, the AO noted that the assessee has received consideration for executing two projects, namely, Teesta Purulia Projects. The assessee has entered into contracts with National Hydroelectric Power Corporation Ltd. (NHPC) for carrying out Electrical Mechanical Works of Teesta H.E. Project [3 X170 MW (Stage-V) (Sikkim, India)]. These agreements are - a) First Contract - For CIF/CIP Supply of all offshore equipments and materials including Mandatory Spares for Lot-6 Electrical Mechanical works of Teesta FIE Project (Stage-V). b) Second Contract - For Ex-works supply of all equipments and materials of Indian origin for Lot-6 Electrical Mechanical works of Teesta HE Project (Stage-V). c) Third Contract - For providing all onshore services in respect of all equipments supplied under First Second Contract and other services for Lot-6 Electrical Mech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount paid or payable whether in or outside India to the assessee or any person on his behalf on account such civil construction, erection, testing or commissioning shall be deemed to be the income chargeable to tax under the head Profit and gains from business or profession. Accordingly, the income received for offshore supplies in respect of Teesta and Purulia projects are chargeable to tax @ 10%. He further held that everything directly or indirectly relating to the said business should be considered under the ambit of section 44BBB of the Act. He accordingly concluded that income for the purpose of this section should also include offshore receipts for the supply of equipment. He noted that the assessee is engaged in offshore supplies as well as onshore supplies in respect of Teesta and Purulia projects. It is also engaged in the installation and commissioning of such equipments supplied. The submission of the assessee that offshore supplies are made by the HO i.e., Mitsui Co. Ltd., to NHPC and WBSEB directly and that the project offices has no role to play in the offshore supplies and, therefore, no profits from such offshore supplies can be attributed to the project of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he details of the sales made through the LOs in India. The assessee furnished the details and also took the plea that the offshore supplies in respect of the Teesta Purulia projects have also been included in such sales through LOs in India. The AO asked the assessee vide letter dated 26.12.2008, to substantiate its claim. However, the assessee could not provide any documentary evidence so as to prove that the offshore supplies in respect of Teesta Purulia Projects are already included in the turnover of the LO. Therefore, the AO held that no benefit can be given to the assessee on this ground. 10. The AO noted that in the consolidated accounts the assessee has shown profit rate of 5.486%. Also, during the year, as per the assessee, total sales in India related to LOs, P.O.s and MIPL are JPY 64,193,681,300. Out of which, turn over of JPY 546,257,232 and JPY 6,317,970,380 belong to the LOs and the P.O.s, as above. This according to the AO leaves remaining turnover of JPY 47,918,415,401 which is attributed to MIPL. Based on these numbers, the AO computed the profits attributable to the P.E. as under: LOs MIPL T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10% of the offshore supplies. The relevant observations of the CIT(A) at para 3.6 onwards reads as under:- Determination 3.6 I have carefully considered the written submission made on behalf of the appellant, the findings of the Assessing Officer in the assessment order and the facts on record. As can be seen from the memorandum of the Finance Bill, 1989 the legislative intent behind the introduction of section 44BB was simplification in the matter of determination of the income accruing or arising in India to a foreign company which often involved complications. As held by the Hon ble ITAT, Delhi Bench in case of Saipem S.P.A.vs DCIT(supra), the provision of Section 44BB were intended only to replace the system of computation of income earlier envisaged by the application of the provision of Sections 28 to 41 and Sections 43 and 43 A of the Act. It was not to replace the provision of Section 5 of the Act, which would remain intact and was not to be superceded by the provision of section 44BB. The provisions of section 44BBB are para- materia with the provision of section 44BB. The order of the Tribunal, therefore, applies also to Sections 44BBB. The non-obstante clause wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ike Section 44BBB, was also the provision for computation of income on presumptive basis. The ratio which emerges from this judgement is that Section 44BB cannot be interpreted to mean that once the income is computed on the presumptive basis, as envisaged under this section, all the receipts, even though they may not be taxable in India, would be included for computing income on presumptive basis. This is clear from the finding given in paras 15(a) and 15(b) above. The income from operations outside India has been held to be non-taxable (as per para 15 (a)} and income only from operations attributable to Indian Permanent establishment has been held to be taxable in India @ 10% on presumptive basis {as per para 15(b)}. Thus, the offshore receipts in the present case cannot be subjected to tax merely on the ground that the appellant has chosen to be assessed on presumptive basis. The question whether such receipts will be taxable in India will have to be considered independently on their own merits which is the subject matter of separate arguments which follow hereinafter. It is, therefore held that the AO was not justified in holding that Section 44BBB requires that the offshore re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd no undue importance could be given to such provision in the agreement. The scope of work of offshore and onshore contracts were separate. On a proper analysis of the salient features of the contract, as explained in the written submissions, none of the reasons contained in para 6 of the assessment order in respect of the NHPC contracts contradict the proposition that income from offshore supply was not taxable in India. The reasoning given in clause (vii) of para 6 also does not advance the case of the AO, so long as particular material was supplied outside India and the delivery thereof has been taken outside India. The Purulia Project also has similar facts and for the similar reasons the taxability of the offshore supply also is not liable to be taxable in respect of this contract. 4.5 The appellant has also placed reliance upon the judgment in CIT vs. Hyundai Heavy Industries Company Ltd.(supra). The facts of that case are identical and for the reasons given by the Hon ble Supreme Court the relevant portion of which had been quoted in para 14.1 of the submissions of the appellant, the offshore supplies in the present case are not liable to tax in India. 4.6 The AO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 003-04 respectively and also vide orders dated 09-11-2010 and 12-11- 2010 for the assessment years 1998-99 and 1999-2000 respectively. In assessment year 2005-06 also the issue has been decided in favour of the appellant vide order dated 24.2.2011 in Appeal No. 86/2010-11. As the facts and circumstances of the case are pari materia with the case of the appellant in assessment years 1998-99, 1999-2000, 2003-04 ,2004-05 and 2005-06, for the reasons as discussed in the aforesaid orders of the undersigned, it is held that the Liaison Office does not constitute a Permanent Establishment and there was no income liable to tax in India. In this context, it may be apposite to reproduce the findings of the undersigned in Para 4.4 of the appellate order for assessment year 2003-04 referred to above :- 4.4 I have carefully considered the submissions made on behalf of the appellant and have also looked into the records. Perusal of the assessment order passed by the Assessing Officer shows that it has been completed following the combined order passed by the CIT(A) for the assessment years 2000-01and 2001-02 on 18-2-2005. The order of the CIT(A) has been set aside by the Hon ble Tribunal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Para 5.4 and 5.5 of the appellate order for assessment year 2005-06 referred to above:- 5.4 I have carefully considered the written submission made on behalf of the appellant, the findings of the Assessing Officer in the assessment order and the facts on record. The Assessing Officer has placed reliance on the order of the IT AT, Bombay Bench in DDIT vs. Set Satellite (Singapore) Pte Ltd. (2007) 106 ITD 175( Mumbai): (2007) 108 TTJ (Mumbai)445 which has been set aside by the Hon ble Bombay High Court by their judgment dated 22nd August, 2008 reported in 307 ITR 205 (Bombay):218 CTR (Bom) 452: 173 Taxman 475:11 DTR 313(Bom). The matter is directly covered by that judgment in which the Bombay High Court has followed the judgment of DIT, International Taxation, Vs Morgan Stanley Co. (2007) 292 ITR 416 (SC). The AO has no doubt taken note of the judgment of the DIT, International Taxation vs Morgan Stanley Co. (supra), but he has referred to that judgment to state that the attribution of profits would depend upon the functional and factual analysis in each case. 5.5 In this regard it has been clarified on behalf of the appellant that in the present case the Transfer Pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome infructuous and do not require any adjudication. 16. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal by raising the following grounds of appeal:- 1. On the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the provisions of section 44BBB of the IT Act, 1961 cannot be applied for subjecting to tax the income from off-shore supplies in respect of Teesta Purulia Projects and has therefore erred in deleting the addition of ₹ 23,91,98,358/-made by the AO. 2. On the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the income form offshore supplies in respect of Teesta and Purulia Projects were not liable to taxed under the provisions of Article 7 read with paragraph 6 of the protocol to the DTAA between India and Japan. 3. On the facts of the and in law, the Ld. CIT(A has erred in holding that The Liaison Office of the assessee does not constitute PE. 4. On the facts of the case and in law, the Ld. CIT(A) erred in holding that no income is liable to be attributed in India even if Mitsui Co. India Pvt. Ltd. (MIPL) constituted a Dependent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -38-SC-INTL. He submitted that since, in the present case, it is not in dispute that the contracts are composite contracts and parts of the receipts from these contracts are offered to tax by the assessee itself u/s 44BB of the Act, therefore, the amount paid or payable to the assessee whether in or out of India irrespective of whether towards offshore supply or towards onshore services become income u/s 5 and 9 of the Act by fiction created u/s u/s 44BBB of the Act. 18. Without prejudice to the above, he submitted that the offshore supplies are also taxable qua PE under Article 5(1), 5(2)(c), 5(3) and 5(4) of the DTAA. Referring to the various clauses of the contracts between the assessee and WBSEB and NHPC, he submitted that clearly it not only establishes their unitary and composite nature, but also the active involvement of the PE in the form of project office in the execution of such contracts. Since both the agreements between the Mitsui Co. and WBSEB are identical, the ld. DR drew the attention of the Bench to the details with respect to NHPC contract which, according to him, will be applicable equally to WBSEB contract. The ld. DR drew the attention of the Bench to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owner, after erection, testing and commissioning of the equipment supplied by it and upon successful performance guarantee tests of the 'Facilities' being conducted at the project site.[Contractor's Responsibilities - cl.9 of GCC ,p.l07] Facilities means the Plant Equipment to be supplied and installed, as well as the Installation Services including design, fabrication, manufacture, supply, transportation, erection, testing and commissioning to be carried out by the Contractor under the Contract, [cl.1.1 of GCC, p.98] Plant Equipment means permanent plant, equipment, machinery, apparatus, articles and things of all kinds to be provided and incorporated in the Facilities by the Contractor under Contract (including spare parts to be supplied by the contractor under GCC Sub-Clause 7.3 hereof), but does not include Contractor's equipment, [cl.1.1 of GCC, p.99] Installation Services means all those services ancillary to the supply of Plant Equipments for the Facilities, to be provided by the Contractor under the Contract e.g. transportation and provision of marine or other similar insurance, inspection, expediting Site preparation works (including t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual Property will be with contractor p.113 15% [2.5%+5%+2.5%+5%] After submission/furnishing of design drawings; reports data on tests and proof of procurement of major raw materials AO,25 Manufacturing of plant and equipment as per approved specifications clearly proves the involvement of the PO in such manufacturing process B. Supply, Ownership Risks GCC 31.1 Ownership of plant and equipment shall be transferred to the employer upon loading on to the mode of transport and upon endorsement of dispatch documents in favor of the employer p.141 31.5 r.w.32 Notwithstanding the transfer of ownership of the plant eauipment, the responsibility for care and custody thereof together with the risk of loss and damage thereto shall remain with the contractor p.141 32 Contractor shall make good at its own cost anv loss or damage 142 the facilities p.141- 31.4 Ownership of anv p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ificate AO, 26 G. Interpretation Other provisions GCC7.1 Contractor's obligations cover the provision of all plant equipment, performance of all installation services required for the design, manufacture of the plant equipment etc. p.105-106; AO, p.29 Award-3 We have also notified you.... for award of other contracts on you... for complete Lot-6 Electrical Mechanical works of Teesta HE Project, Stage-V as per specification No, NH/Cont (E M)/Lot- 6/Teesta-V p.49 You shall also be fully responsible for the works to be executed under the second contract and first contract and it is expressly understood and agreed by you that any breach under the second contract and/or first contract shall automatically be deemed as a breach of this third contract and vice versa and any such breach gives us a right to terminate the first/second contracts and recover damages there under as well terminate this contract and recover damages under the this third p.49, AO, p.28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. CIT (A) on Cl.31.1 of the GCC as per which ownership of plant and equipment shall be transferred to the employer upon loading on to the mode of transport and upon endorsement of dispatch documents in favor of the employed' [p.141 of the PB of 06-07], the said provision is neither absolute nor end all. In fact, it allows itself to be subjected to numerous restrictions imposed by other provisions. Thus - Notwithstanding the transfer of ownership of the plant equipment, the responsibility for care and custody thereof together with the risk of loss and damage thereto shall remain with the contractor. [GCC, cl.31.5, p.141] - Contractor shall make good at its own cost any loss or damage to the facilities. [GCC, cl.32, p.141-142] - Ownership of any plant and equipment in excess of the requirements shall revert to the contractor. [GCC, cl.31.4, p.141] The fact that the risk and ownership of the assessee over the plant and machinery gets transferred/does not get extinguished the moment the goods pass the shipping rail is evidenced by the following provisions - - Contractor shall manufacture or procure and transport all the Plant Equipment... to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the project. As per cl.21.4 of the GCC, Contractor shall, at its own expense, handle all imported plant equipment at the point(s) of import and shall handle any formalities for custom clearance, [p.123 of PB 06-07] If the sale of equipment has taken place outside India as claimed by the assessee, then how that assessee is is paying custom duty in India and delivering the same to its project site? To sum up, in the light of the above, the purpose for which the tender was invited by NHPC is not in doubt. It was not for supply of offshore equipments independent of the installation and commissioning. Nor was it for independent installation and commissioning, divorced from the design and supply of the equipments necessary. The presence of features like 'crossbreach clause' as well as 'consolidated i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involvement of the PO not only in the installation, supervision and commissioning of the projects, but also in the offshore supply of plant machinery. Cl. 17.2 of the contract with NHPC [p.115 of PB for 06- 07] provides for the Appointment of Contractor's representative to represent and act for the contractor. Similarly, Cl.17.2.4 22.1.2 provides for the Presence of Construction Manager for the duration from commencement of installation facilities till operational acceptance [p.116 124 of PB for 06-07] while Cl. 18.1 provides for the presence of Contractor's Organization, [p.117 of PB for 06- 07] What is more important in this context is that the role of contract's representative in liaising, seeking and obtaining approval of the Engineer in Chief in respect of technical designs on the basis of which plant and machineries are manufactured. The role of the PO is not limited to the above premanufacture/fabrication processes alone. Once the plant machinery is manufactured/fabricated as per the approved design specifications, the PO also takes care of all the processes involving the custom clearance, insurance, transport of the offshore supplies to the site and fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, this being a covered matter in favour of the assessee, the ground raised by the Revenue should be dismissed. 20.1 So far as the argument of the ld. AO/DR that the facts of the present case are distinguishable from that of the LG Cables Ltd. (supra) on the ground that in the present case not all part of the transactions have been carried outside India, he submitted that the same is not correct as both the AO as well as the DR have misunderstood the facts of the present case. He submitted that the whole basis for making addition by the AO is the inference made by him that both the contracts for on shore as well as offshore supplies are just an eyewash and in fact this is composite contract He submitted that the Hon ble Supreme Court in the case of Ishikawajima Harmia Heavy Industries Co. Ltd. vs. DIT (2007) 288 ITR 408, has held that even if the contracts are composite, the offshore supplies having no relation with India cannot be eligible to tax here. He drew the attention of the Bench to the relevant observations of the Hon ble Supreme Court at para 99 of the order which reads as under:- 99. We, therefore, hold as under : Re : Offshore Supply : (1) That only such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g liaison office as PE and ground no. 4 regarding Dependent Agent PE are covered in favour of the assessee. C. Offshore Supply qua section 44 BBB The reliance placed by the Ld. DR on the judgment of Sedco Forex International Inc. is misplaced. This judgment was on the issue of section 44 BB which is regarding the business of exploration of mineral oils. As per section 44 BB (1) a sum equals to 10% of the amount specified in sub section (2) is deemed to be profit and gains of such business. In sub section (2) it has been stated that such sum shall include amount paid/payable on account of provision of services and facilities in connection with, or supply of plant and machinery on hire used or to be used in the prospecting for, or extraction or production of mineral oils in India. Thus, there is specific coverage of the services provided which has to be taken into consideration while computing presumptive income under4his section. As against this in section 44 BBB which is applicable in respect of business of civil construction, the applicability is of the amount paid or payable on account of civil construction, erectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te contracts and hence, AO was justified in taxing offshore supplies. The Ld. DR thereafter on page 4 to page 9 has referred to various clauses of the agreement to make out a case that there is one composite contract which has been splitted into three parts and there is a cross fall breach clause. In this regard, it is submitted that exactly the similar issue was raised in the case of LG Cables Ltd. In this case, LG Cables Ltd., has entered into a contract with Powergrid Corporation of India Ltd. and has entered into 2 contracts. One was for offshore supply and services and the second was for onshore services. It may be relevant to point out that this contract was entered into on 26.02.2001 and PGCIL was under Ministry of Power as is the case of the assessee where NHPC is under Ministry of Power and this contract was entered into on 06.12.2001. The terms of the contracts are identical as these contracts are drafted and vetted by the Law Ministry, Government of India. A detailed comparative chart demonstrating how the terms are identical is annexed. It is further submitted that the contentions raised by the Ld. DR were also raised in the case of the LG Cables as is evident fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts that offshore supplies are not taxable only in the case of sale of goods simpliciter, and that the contract is a turnkey contract split/divided into offshore and onshore supplies at the instance of the respondent- assessee, in our considered opinion, is not sustainable in view of the authoritative pronouncement of the Supreme Court in the case of Ishikawajma- Harima Heavy Industries Ltd. vs. Director of IT (2007) 207 CTR (SC) 361 : (2007) 288 ITR 408 (SC) wherein it has been held that offshore supplies are not taxable even in the case of a turnkey contract as long as the title passes outside the country and payments are made in foreign exchange. The Supreme Court in this regard observed as follows: 'The fact that it has been fashioned as a turnkey contract by itself may not be of much significance. The project is a turnkey project. The contract may also be a turnkey contract, but the same by itself would not mean that even for the purpose of taxability the entire contract must be considered to be an integrated one so as to make the appellant to pay tax in India. The taxable events in execution of a contract may arise at several stages in several years. The liability of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a provision for pro-rata payment which means pro-rata shipment meaning thereby all equipments not to be shipped at one go. Similarly in the present case, there is a provision of pro-rata payment and sub- packages means that part shipment can be made and payment will be received on prorata basis. In LG Cables, payment was through irrevocable letter of credit. In assessee s case also all payment through irrevocable letter of credit as per clause 3.0 at page 7 of the agreement. H. Transfer of Ownership para 31.1 page 11 It has been stated that the term of transfer of ownership in the case of the assessee are different than LG Cables. This is factually incorrect, in fact clause no. 31.1 in LG Cables also matches with the clause no 31.1 of assessee s agreement at page 116. The Ld. DR has tried to point out the difference by referring to the words upon endorsement of dispatch documents in favour of the employer . The same condition was there in the LG Cables as can be seen from the High Court judgment in para 17 where the High Court has observed The equipment was delivered to the shipping company named in the bill of lad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has to take care of plant and equipment while carrying out erection. This does not mean that ownership is that of the assessee. As against this, there are various clauses which provide that in case of any loss the same will be to the account of the employer NHPC and not the assessee as can be seen from para 32.2 at page 117, 38.1, 38.2 at page 124 of the Contract. I Page 11 Usha Beltron Ltd. Vs. State of Punjab The Ld. DR has placed reliance on this judgment. In fact this judgment supports the case of the assessee as can be seen from the extract quoted by Ld. DR on page 12 which reads as under: These terms clearly indicate that the property in the goods remain at the risk of the appellant till delivery was completed. It shows that delivery would be completed only after the takeover certificate was issued. As per section 19 of the Sale of Goods Act, 1930, the property in the goods passes when the parties intend to pass. In this case, the contract provides that property in the goods does not pass till after delivery and successful testing and issuance of takeover certificate. Thus, High Court was right in concludin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Shanghai Electric Group Company Ltd. It is important to mention here that there was a single composite contract. The Hon ble ITAT at para 179 observed as under: 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. But payments are linked with the different stages like signing of contract, raising of invoice, submission of invoice for advance payments, submission of advance bank guarantee, submission of performance bank guarantee, design, drawing, successful commissioning of power plant. In all, the payments are related to entire work entrusted upon assessee includes, supervisory services that assessee has to render in India. It has been consistently observed in all contracts that, major milestone in payment 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, test ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both these agreement are similar. S.No. Contract No. Date of Contract Purpose of Contract Article wise description 1. NH/Cont. (E M)/LOT- 6/Teesta- V/579/2001/1 (First Contract) 06.12.2001 CIT/CIP Supply of all offshore equipments and materials including Mandatory Spares for Lot-6 Electrical Mechanical works of Teesta HE Project Article-1 (Description of contract documents) Article-2 (Contract Price and Terms of Payment) Article-3 (Effective date for determining time for completion of the contract) Article-4 (Contract is between Mitsui and NHPC and not with the government of India) Article-5 (List of Appendices which shall form integral part of the agreement) 2. NH/Cont. (E M)/LOT- 6/Teesta- V/580/2001/II (Second Contract) 06.12.2001 Ex-works Supply of all equipments and materials of Indian Origin for Lot- 6 Electrical Mechanical works of Teesta HE Project ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with NHPC is regarding civil construction, erection, testing or commissioning and on which the assessee has paid taxes under this section. The provisions of section 44BBB are not applicable in respect of offshore supplies. He submitted that, in fact, the decision relied on by the ld.CIT, DR in the case of Sedco Forex International Inc. supports the case of the assessee wherein at para 47 of the order, it has been stated: Thus, where clause (a) mentions the amount which is paid or payable, clause (b) deal with the amount which are received or deemed to be received in India. 23.1 He submitted that the Hon ble Supreme Court in the above decision cited (supra) has held that the amount which is covered in clause (a) only will be within the purview of section 44BB and not all the payments. Para 42 of the judgment makes it clear that it is only certain receipts mentioned in sub-section (2) of section 44BB which have been taken into account for applying section 44BB. He submitted that since, in the instant case, there is no dispute that the receipts mentioned in section 44BBB has been taken into account and tax paid by the assessee thereon, therefore, the AO has gone wrong in including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh irrevocable letter of credit whereas in the case of the assessee also the payments are through irrevocable letter of credit as per clause 3.0 at page 7 of the agreement. 24.1 He submitted that there is no difference in the transfer of ownership to the title and risk. The term of transfer of ownership in the case of the assessee is not different from that of LG Cables Ltd. Referring to various clauses of the agreement vis- -vis the clauses of the agreement of LG Cables Ltd., he submitted that both are same, therefore, in view of the decision of the Hon ble Jurisdictional High Court, the matter being covered in favour of the assessee, the order of the ld.CIT(A) be upheld and ground of appeal No.1 and 2 of the appeal filed by the Revenue should be dismissed. 25. So far as the ground of appeal No.3 by Revenue is concerned, he submitted that the issue stands squarely covered in favour of the assessee by the decision of the Tribunal in assessee s own case for A.Y. 2005-06 in ITA No.2335/Del/2011, order dated 14th September, 2017. So far as ground of appeal No.4 is concerned, he submitted that the same is also covered in favour of the assessee by the decision of the tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived outside India for offshore supplies. He also held that as per clause 31.1 of the contract, the title of the properties in the goods was transferred outside India as soon as the goods were loaded in the ship and the shipping documents were handed over to the nominated bank. Thus, the sale was completed outside India. According to him, the PE had not played any part in the offshore supplies of the equipments. He accordingly held that the income in respect of offshore supplies accrued outside India. While holding so, the ld.CIT(A) relied on the decision of the Hon ble Delhi High Court in the case of LG Cables Ltd. (supra). 28. We do not find any infirmity in the order of the CIT(A) on this issue. We have already reproduced his findings in the preceding paragraphs. So far as the decision relied on by the ld. DR in the case of Sedco Forex International Inc. (supra) is concerned, we are of the considered opinion that the said case is distinguishable and not applicable to the facts of the present case. The issue in the case of Sedco Forex International Inc. (supra) was regarding the applicability of the provisions of section 44BB whereas in the instant case the issue is u/s 44BB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all amounts pertaining to the aforesaid activity which are received on account of provisions of services and facilities in connection with the said facility are treated as profits and gains of the business. This clause clarifies that the amount so paid shall be taxable whether these are received in India or outside India; Clause (b) deals with amount received or deemed to be received in India in connection with such services and facilities as stipulated therein. Thus, whereas clause (a) mentions the amount which is paid or payable, clause (b) deals with the amounts which are received or deemed to be received in India. In respect of amount paid or payable under clause (a) of sub-section (2), it is immaterial whether these are paid in India or outside India. On the other hand, amount received or deemed to be received have to be in India. 29. Thus, the Hon ble Apex court has held that the amount which is covered in clause (a) only will be within the purview of section 44BB and not all the payments. In para 42 of the above judgment, it becomes clear that it is only certain receipts mentioned in sub-section (2) of section 44BB which have to be taken into account for applying section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be any allegation that offshore services have been provided from India. We find in the present case on shore services are being provided under a third contract on which tax has been paid by the assessee for which there is no dispute. 32. As regards the terms of payment in the case of LG Cables Ltd., 10% was advance payment, 75% was progressive payment and 15% was the final payment on completion of operational acceptance. As against this, we find in the case of the assessee, 10% is advance payment, 15% is also advance payment on the progress of the equipment drawings in the home country, 65% payment is on delivery and the balance 10% on completion of operational acceptance. We, therefore, do not find any material difference between the two contracts. As regards the basis of price variation,/adjustment in respect of supplies made, this clause in our opinion does not change the nature of the contract. Further, on going through the annexure to the contract, it is evident that there is price adjustment formula for supply of plant and equipment under this contract that is offshore supply. The contractor having quoted the price on the basis of the price of material and labour on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the port of shipment and the shipping documents were handed over to the nominated bank where the letter of credit was opened. The sale was complete and unequivocal. There is no condition in the contract which empowers the respondent to keep control of the goods and/or to repossess the same. With the completion of this sale the income accrued outside India. There was neither any material to show that accrual of such income was attributable to any operations carried out in India nor any material to show that the PE of the respondent-assessee had any role to play in the offshore supply of the equipments. 35. Further, we find clause 31.4 in assessee s case is also identical to LG Cables which can be seen from the numbering. Moreover, in our opinion, this clause needs to be understood in the context in which it has been stated. Further, clause 31.4 is part of the general conditions of contract which is common to all three contracts and, thus, the application of any clause will be with reference to that particular contract to which it has implication and not to other contract. Accordingly, the first line of this clause 31.4 in our opinion is meant for onshore supply i.e., supplies fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. We find the Hon ble Delhi High Court on this very issue at para 18 of the order has observed as under:- 18. Furthermore, as noticed above, the scope of work under the onshore contract was under a separate agreement and for separate consideration. There is, therefore, in our opinion no justification to mix the consideration for the offshore and onshore contracts. None of the stipulations of the onshore contract could conceivably postpone the transfer of property of the equipments supplied under the offshore contract, which, in accordance with the agreement, had been unconditionally appropriated at the time of delivery, at the port of shipment. When the equipment was transferred outside India, necessarily the taxable income also accrued outside India, and hence no portion of such income was taxable in India. 40. So far as the decision of the Hon ble Andhra Pradesh High Court in the case of L T Ltd. (supra), relied on by the ld. DR is concerned, it has been noted that risk, prima facie, passes with the property unless otherwise agreed. Thus, it is the agreement between the parties which determines the passing of the title, therefore, the said decision, in our opinion, is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s exactly the case of the assessee here though under different law that income in respect of goods supplied from outside Indie i.e., offshore supplies is not taxable in India. 43. So far as the decision of the Delhi Bench of the tribunal in the case of Shanghai Electric Group Company Ltd., is concerned, the same in our opinion is also not applicable to the facts of the instant case. In para 179 of the said order, the Tribunal has observed as under:- 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. But payments are linked with the different stages like signing of contract, raising of invoice, submission of invoice for advance payments, submission of advance bank guarantee, submission of performance bank guarantee, design, drawing, successful commissioning of power plant. In all, the payments are related to entire work entrusted upon assessee includes, supervisory services that assessee has to render in India. It has been consistently observed in all contracts that, major milestone in payment schedule does not mention about supply/sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra) there was a turnkey contract with four separate component activities, viz., offshore supply, offshore services, onshore supply and onshore services awarded by Petronet LNG to a consortium of companies led by the Japanese company Ishikawajma-Harima. In the instant case there are two separate contracts i.e., offshore supply and the onshore services contract awarded by the PGCIL to the respondent-assessee. 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 outside India was transferred in favour of PGCIL outside India. In the case of Ishikawajma (supra), it was transferred on the high seas but in the instant case, it was transferred in the country of origin itself as soon as the goods were loaded upon the mode of transfer to be used to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business connection. The Apex Court has further held that para 6 of the protocol to the DTAA is not applicable because for the profits to be attributable directly or indirectly, the PE must be involved in the activity giving rise to the profits. 46. In view of the above discussion, we are of the considered opinion that the ld.CIT(A) is correct in holding that the income from offshore supplies is not liable to tax in India both u/s 44BBB as well as under the provisions of Article 7 r.w. para 6 of DTAA between India and Japan. Accordingly, grounds No.1 and 2 raised by the Revenue are dismissed. 47. So far as ground of appeal No.3 is concerned, we find identical issue had come up before the Tribunal in assessee s own case in the immediately preceding assessment year 2005-06. We find the Tribunal, vide ITA No.2335/Del/2011, order dated 14th September, 2017 at para 3.9 of the order has observed as under:- 3.9 We have heard the rival submissions and perused the order passed by the authorities below. We find that the first ground in the present appeal filed by the Revenue is whether the Liaison offices of the assessee in India constitutes its PE in India. We have carefully consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a even if MIPL is considered to be Dependent Agent PE in India. On this issue the learned CITDR though stated that though in view of the TPO order under Section 92CA (3) holding the transactions between the assessee and the MIPL at arm s length, addition may not be sustainable, yet argued that MIPL be considered as Dependent Agent PE in India in terms of Article 5(7) of DTAA between India and Japan. It was contended by the learned CIT-DR on the basis of the allegation levied by the Assessing Officer in the assessment order that MIPL habitually secures order for the assessee in India and MIPL is economically dependent on the assessee as major revenue of MIPL is from the assessee company. Accordingly, it has to be examined whether MIPL can be considered to be a Dependent Agent of the assessee company. In this regard it may be relevant to refer to Article 5(7) of DTAA between India and Japan, which reads as under 7. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 8 applies-is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pear to be correct. As per the agreement which has been quoted by the Assessing Officer in the assessment order, MIPL is supposed to put best effort to collect information with regard to Instant Noodle project etc. to make the best effort to find the best candidate, to attend/take care of the visitor from Japan, to make the best effort to analyze the feasibility report. None of these clauses can be interpreted to mean that MIPL is securing orders. On the basis of this clause the Assessing Officer was wrong in assuming that MIPL is securing orders. The Assessing Officer has not brought any other material to substantiate his allegation that may demonstrate that MIPL has secured orders for the assessee. It is to be noted that this clause (c) uses the word habitually secures orders . Thus, there has to be procurement of orders habitually. As against this the assessee s contention has been that MIPL is only providing support services and it is not securing order on behalf of assessee company. It may be relevant to further mention that the expression has shall mean a legal existence. Whereas habitually secures orders shall mean a systematic conduct on the part of the agent. Thus it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to obey his principal s instructions and be regarded as being Dependent Agent. This contention of the learned CIT-DR again ignores the basic requirement i.e. fulfilling one of the three conditions. It is also important to note that the DTAA provide for treating a person as Dependent Agent. The DTAA has to be strictly interpreted. The DTAA having prescribed the conditions, no further conditions can be read. What learned CIT-DR is canvassing will mean adding new condition in the DTAA. Further, it may be relevant to note that as per Para 9 of this Article 5 in DTAA, it has been specifically provided that if a company in the contracting state is controlled by a company in the other contracting state that itself shall not itself constitute either of company a permanent establishment of the other. Thus, the fact that MIPL is controlled by the assessee company shall not mean that MIPL is a PE of the assessee company. 4.4 Our view gets supported by the judgement of Hon ble Delhi High Court in the case of Director of Income Tax And Others Versus M/s E Funds IT Solution And Others 364 ITR 256 Delhi f where the Hon ble court has held as under 31. Paragraphs 4 and 5 of Article 5 relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot include agents who have power to conclude contracts. Paragraph 38.1 of the OECD Commentary has been quoted above (see paragraph 15). The commentary elucidates and gives illustrations and tests. 33. Earlier U.N. commentary had deviated in some respect from the OECD commentary and had observed that an agent who was wholly or almost wholly engaged by one principal shall be considered to be a dependent agent. This initial position stated in UN commentary has, however, not been accept in subsequent commentaries. The essential criteria being arms length relationship though engagement with one or a group might serve as an indicator of absence of independence of an agent. 34. Subsidiary by itself cannot be considered to be a dependent agent PE of the Principal, otherwise it would negate the overriding effect of paragraph 6 to Article 5, a provision which precedes and seeks to give recognition to separate legal entity principle associated with juristic incorporated enterprises. However, a subsidiary may become dependent or an independent PE agent provided the tests as specified in paragraphs 4 and 5 are satisfied. A dependent agent is deemed to be PE of the principal establis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he foreign establishment / agency. The contracts were entered into in America and were concluded there. Only implementation of those contracts to the extent of back office operations were carried out in India. This legal position is relevant in the present case. 37. In TVM Ltd. vs. Commissioner of Income Tax (1999) 237 ITR 230, Authority of Advance Ruling has interpreted the two expression has and habitually exercises in the case of dependent agent. It has been observed that the expression has may have reference to the legal existence of such authority on terms of the contract between the Principal and the Agent, the expression habitually exercises has certainly reference to systematic course of conduct on the part of the agent. Reference to OECD Commentary and Klaus Vogel was made and it has been observed . Para. 4 uses two expressions : has and habitually exercises an authority to conclude contracts on behalf of the enterprise in question. While the expression has may have reference to the legal existence of such authority on the terms of the contract between the principal and agent, the expression habitually exercises has certainly reference to a sy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der passed by the TPO which was available to him by that time. 5.2 It is a fact on record that the TPO has carried out functional and economic analysis of the activities performed by MIPL towards the assessee company. No adverse inference has been drawn in respect of the same. All these facts were before the TPO. It is not the case of the Assessing Officer that something beyond has been done. The case of the Assessing Officer is with regard to the functions which were subject matter before the TPO. This issue is also covered by the judgment of the Hon ble Supreme Court in the case of DIT International Taxation Vs. Morgan Stanley and Co. 292 ITR 416 (SC), where the Hon ble court has approved the ruling delivered by the authority for advance holding that once a Transfer Pricing analysis is undertaken, there is no further need to attribute profit to a PE. The relevant part of the judgment reads as under:- The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Under article 7(2) not all profits of MSCo would be taxable in India but only those which have economic nexus with P.E. in India. A foreign enterprise is liable to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same documents and facts on which Transfer Pricing analysis has been carried out, the income is being attributed to the assessee by adopting a different method of computation. 5.4 Our above view is supported by the judgment of the Hon ble jurisdictional Delhi High Court in the case of Director of Income Tax Vs. BBC Worldwide Ltd. in ITA No. 1341 of 2010, 703 and 705 of 2011 dated 30th September 2011, where the Hon ble Court has held as under 5. After considering the respect arguments, we are of the opinion that no substantial question of law arises in the instant cases as we do not find any justification in interfering with the impugned order of the Tribunal. Following pertinent aspects which emboldened stand out and stare at the face of the Department and shut its case completely (i) The provisions of transfer pricing was introduced for Finance Act, 2002 from the Assessment Year 2002-03 and therefore, in respect of two appeal for the Assessment Years 2000-01 and 2001- 02, no such FAR Analysis was even required. (ii) For the Assessment Year 2002-03, FAR Analysis was prepared and submitted by the assessee's agent BWIPL. BWIPL had submitted that it had receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence was made to TPO, which again passed the orders dated 07.3.2006, once again opining that no adverse inference could be drawn in respect of ALP. Following portion of the said order is worthwhile to quote:- A reference under Section 92CA was received in the case of BWIPL from its assessing officer. All the above mentioned international transactions have been examined at length in the order under section 92CA(3) dated 09.01.2006. In that order Arm's Length Price of international transaction mentioned above has been revised upward but there is no reciprocal effect in the case of assessee in view of provisions of sub-section 3 of Section 92 of Income Tax Act. Hence no adverse inference is drawn in respect of arm's length price of the above mentioned transaction in the hands of assessee company. (v) We do not find any merit in the plea of the Department that country-wise accounts have not been made by the assessee and therefore, the deemed rate of taxation at 10% of advertisement revenue as per Circular No. 742 dated 02.5.1996 issued by the CBDT, should be applied to tax the revenue of the Permanent Establishment of the assessee. In this regard, we note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This finding is rendered on a complete reading of the agreement. Thereafter Indo-Mauritius DTAA has been referred to and particularly paragraphs 5.4 and 5.5. and the Tribunal concludes that the requirement that the first enterprise in the first mentioned State has and habitually exercised in that State an authority to conclude contracts in the name of the enterprise unless his activities are limited to the purchase of goods or merchandise for the enterprise is a condition which is not satisfied. Therefore, this is not a case of B4U India being an agent with an independent status. This finding is rendered in paragraph 29 and 30 of the order under challenge. We do not find that the Tribunal's order and which also refers to the Hon'ble Supreme Court decision in Morgan Stanley Co. (supra) can raise any substantial questions of law. 11. We are not agreement with Mr. Tejveer Singh when he submits that the Supreme Court judgment in the case of Morgan Stanley Co. will not apply. In that regard he relies upon the conclusion rendered by the Hon'ble Supreme Court. That conclusion is that there being no need for attribution of further profits to the permanent establishmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are of the opinion that the Tribunal's conclusions and which are consistent with the factual materials and the principles of law laid down above are neither perverse nor vitiated by any error of law apparent on the face of the record. 5.6 Further, this issue has again come up before the Hon'ble jurisdictional Delhi High Court in the case of Adobe Systems Incorporated Vs. Assistant Director of Income Tax and Anr. (WP) No. 2384/2013 dated 16th May 2016, where the Hon ble Court has held as under:- 23. In view of the above, even if the subsidiary of a foreign company is considered as its PE, only such income as is attributable in terms of paragraphs 1 and 2 of Article 7 can be brought to tax. In the present case, there is no dispute that Adobe India - which according to the AO is the Assessee's PE - has been independently taxed on income from R D services and such tax has been computed on the basis that its dealings with the Assessee are at arm's length (that is, at ALP). Therefore, even if Adobe India is considered to be the Assessee's PE, the entire income which could be brought in the net of tax in the hands of the Assessee has already been so taxed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in not considering appellant s contention in Ground No.3.1 to the effect that transaction between the appellant and MIPL being at arms length no further profit is attributable in view of Supreme Court judgement in DIT vs. Morgan Stanley Co. Inc., 292 ITR 416(SC) and Mumbai High Court judgement in DIT vs. Set Satellite, 218 CTR 452 and rejecting it merely on the ground that Transfer Pricing Officer vide his order u/s 92CA(2) of the IT Act in case of MIPL has not accepted the transaction between the appellant and MIPL being at arms length, which order was not conclusive but subjudice before the Dispute Resolution Panel(DRP). 4. That on the facts and in law orders of AO / CIT(A) are bad in law and void ab- initio. The appellant prays for leave to add, alter and/or vary the ground(s) of appeal at any time during the pendency of the appeal or at the time of hearing 53. After hearing both the sides, we find the ground of appeal No.1 by the assessee relates to the order of the CIT(A) holding the assessee a Dependent Agent Permanent Establishment. After hearing both the sides, we find the above ground raised by the assessee is identical to ground of appeal No.4 raised by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s aggrieved by the order of the CIT(A) in holding that the profits that can be attributed to the PE of the assessee should be 20% and not 50%. After hearing both the sides, we find the issue stands covered in favour of the assessee by the decision of the Tribunal in assessee s own case for A.Y. 2005-06 where it has been held that the assessee is not a Dependent Agent Permanent Establishment and no income is attributable. We, therefore, dismiss the ground raised by the Revenue on this issue. 60. So far as ground of appeal No.3 by the Revenue is concerned, the same relates to determination of income from Teesta and Purulia projects on cash basis instead of mercantile basis. 61. After hearing both the sides, we find the AO applied section 44BBB in respect of onshore supplies and onshore services in computing the income on the basis of amount accrued. We find the ld.CIT(A) at para 5.3 of the order has discussed the issue and held that as per the provisions of section 44BBB, it is a presumptive module. The relevant observation of the CIT(A) is at para 5.3 of his order. The ld. DR could not controvert the findings given by the ld.CIT(A). In our opinion, the ld.CIT(A) was fully just ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sides, we find these grounds are identical to grounds No.2 and 2.1 in ITA No.4367/Del/2011 filed by the assessee. We have already decided the issue and the grounds raised by the assessee have been allowed. Following similar reasonings, these grounds of the assessee are also allowed. 65. So far as the ground of appeal No.3 raised by the assessee is concerned, after hearing both the sides, we find this ground is identical to ground No.3 in ITA No.4367/Del/2011 filed by the assessee. We have already decided the issue and the ground raised by the assessee has been allowed. Following similar reasonings, this ground of the assessee is also allowed. ITA No.794/Del/2012 (By the Revenue) (for A.Y. 2008-09) 66. The grounds raised by the Revenue are as under:- 1. On the facts and in the circumstances of the case the Ld CIT(A) has erred in holding that the off shore supplies in respect of Teesta and Purilia projects cannot be taxed @10% u/s 44BB of the IT Act. 2. On the facts and in the circumstances of the case the Ld CIT(A) has erred in holding that the profits than can be attributed to the PE of the assessee should be 20% and not 50% as determined by the AO. 3. O ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
