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TMI Blog2021 (10) TMI 272X X X X Extracts X X X X X X X X Extracts X X X X ..... sel that the conclusion of the AO that the same form part of the revenue earned from offshore supply is incorrect and against the settled principle of law. Further, this being the initial year of contract for the project, no such occasion had arisen and, therefore, in absence of any material with the AO, he was not justified in making the addition. We find, the Kolkata Bench of the Tribunal in the case of Outotec GmbH [ 2015 (6) TMI 609 - ITAT KOLKATA] has held that clauses like liquidated damages, performance guarantee and defect liability are part of normal commercial arrangements generally agreed in common trade parlance and cannot form the basis for attributing revenue earned from offshore supply of equipment to India. We hold that no portion of revenue earned from the sale of equipment can be taxed in India by virtue of commercial clauses like performance guarantee, defect liability and liquidated damages. We, therefore, set aside the order of the AO and direct him to delete the addition. Grounds of appeal No. 4 and 5 are accordingly allowed. Revenue received for design and engineering services - AO held that design and engineering are chargeable to tax u/s. 9(1)(v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee in India. The tax payer filed objections before the DRP and after receipt of directions from the DRP, the final assessment order was passed by the AO on 27th September, 2013 determining the total income at ₹ 24,48,85,181/-. The income of the tax payer was assessed as under:- 4. The tax payer filed appeal before the Tribunal and the Tribunal, vide order dated 26th February, 2014 in ITA No. 5787/Del/2013 set aside certain issues to be decided afresh by the AO. The Tribunal has deleted the other additions except the set aside issues for which the Revenue is in appeal before the Hon'ble High Court and we are not concerned with the same. 5. Similarly, for A.Y. 2009-10, after receipt of the directions from the DRP, the final assessment order was passed by the AO on 21.01.2014 by determining the income of the assessee as under:- 6. The assessee filed appeal before the Tribunal and the Tribunal, vide order dated 2nd April, 2014 in ITA No. 1140/Del/2014, set aside certain issues to be decided afresh by the AO. While doing so, the Tribunal followed its earlier order for A.Y. 2008-09. 7. So far as assessment year 2008-09 is concerned, the Tribunal, whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gn supervision charges' is found as : Foreign supervision charges in India during Erection, Start up, Commissioning and Performance Guarantee tests. Getting a separate charge for foreign supervision charges for the setting up of plant makes it clear that such supervision charges are not part and parcel of the price of equipment as referred to in columns 3, 5 and 7 of Table 1B. It implies that there was distinct charge for foreign supervision charges which has been construed by the assessee itself as onshore services chargeable to tax in the relevant year. To this extent, it is manifested that foreign supervision charges do not form part of sale consideration of the equipment supplied offshore. 2.c. However, we find from Summary of Prices on Table 1B, as was rightly pointed out by the ld. DR, that Training charges have been separately set out at Sr. No. 13 and under the Price column, it has been mentioned as Not Quoted'. Then there is reference of Table 14B to give the portrayal of Training' on page 1037 of the paper book. Under the Description column it has been mentioned as : Providing training to Employer's Technical personnel in Plant Operation and Main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;. When we consider the detail of such charges on page 1036 of the paper book, it transpires that there is no ad hoc consideration. In fact, it has been calculated by estimating 7400 man days for rendering such foreign supervision and there is a specific rate per man day, culminating into the calculation of total charge on this account at Euro 4440000. On having a glance at the detail of 'training charges' on page 1037, it comes out that against the column 'Estimated Man days for Employer's Personnel for Training in India', it has been mentioned as Included'. Similarly against the next column of 'Price for Training in India', again it has been mentioned as Included'. Once the foreign supervision is found to have been exclusively charged and our attention has not been drawn towards any material to indicate that the charge for training was embedded in any other component of price charged, the natural corollary which follows is that the Training charges are Included' in the sale price of equipments. It is simple and plain that if a seller has to incur training expenses or repair cost during the warranty period, then either there is a specific c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s undertaken to bear expenses in connection with the supply of goods. 2.h. The above discussed clauses indicate that the assessee undertook to incur some expenses towards test and inspection at site that is in India; conduct repair during defect liability period again in India etc. These expenses are to be borne by the assessee. Though the mention of words 'at its own expense' for test and inspection in Clause 23.1 and the words 'at its cost' for defect liability prima facie indicate that compensation for such liability is included in the sale price of the offshore supply of equipment, but it cannot be so concluded outrightly. The possibility of compensation for such things being included in Foreign supervision charges cannot be ruled out without verification. In fact, our attention has not been drawn towards the further break-up of total Man days under 'Foreign supervision charges' for reaching a positive conclusion as to whether or not the compensation for such charges is included therein. With this truncated information, we cannot reach a sure conclusion. It is palpable that if the charges for such things are not included in any other component of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. This makes it clear that the price for such services is liable to be considered for taxation as per Sec. 9(1)(i) of the Act and also Article 7(1) of the DTAA. 4.e. Reverting to the issue of apportionment of profit to the services rendered in India, we find that such attribution cannot be done in an arbitrary manner. It is a question of fact which varies from case to case. In a given case, the nature of services to be rendered may be quite cost or labour intensive, while in another case, it may not be so. There cannot be any straitjacket sacrosanct formula for such attribution. As we have restored a part of this issue to the file of the AO as per point 2 above for determining as to whether the testing charges in India and repair charges during the defect liability period etc. were included in sale price of goods, it would be appropriate if the AO after such determination gives value to such services if these are included in the sale price of offshore supply of equipments. As regards training expenses, we have already held that compensation for such training in India is part and parcel of the sale price of offshore supply of equipments. The value to such training is dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ineering sold by the Assessee to SAIL have been designed largely on the basis of standard technologies available with it. b) Consideration received by the assessee was for the sale of a product which is indispensable part of offshore supply, hence not taxable. c) Primarily the work relating to the sale of designs and engineering was done outside the territory of India and the sale was also affected outside India. d) Even if the consideration for off-shore designs is treated as for services, then too both under the Act as well as under Double Taxation Avoidance Treaty (DTAA), there would be nil taxation in. India. e) This is because these services are in no way connected or attributable to the PE in India. 13. However, the AO was not satisfied with the arguments advanced by the assessee. So far as the training charges is concerned, he held that training has been provided in India and the consideration for the same is included in the revenue received by the assessee for offshore supply of equipment. As regards liquidated damages and defect liability is concerned, the AO attributed 2% of the consideration for offshore supply as the price for liquidated damages ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being incidental to the supplies made by the assessee from outside India, cannot have separate taxability. 5. On the facts and in the circumstances of the case and in law, the Ld. AO/DRP has erred in holding that cost for Defect liability liquidated damages charges is to be included in the income of the assessee despite of fact that these incidental obligations are in the nature of trade warranties. 5.1 While doing so the Ld. AO/DRP has grossly ignored the fact that the same are contingent in nature and can arise only on the happening of certain specific instances mentioned in the contract and none of such event has taken place in the subject year. 5.2 That the Ld. AO/DRP has grossly ignored the certificate issued by SAIL, wherein it has certified that defect liability and liquidated damages are in the nature of trade warranties and none of the said activities have taken place in the subject year. 5.3 That the Ld. AO has grossly erred in attributing the cost for defect liability and liquidated damages @ 2% of the offshore supplies which is arbitrary, unreasonable and has no basis. Further, Ld. AO has grossly erred in determining the net profit @ 50% which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be admitted and necessary relief be granted to the assessee. 17. The ld. DR, on the other hand, opposed the additional grounds. 18. After hearing both the sides, we find that the additional ground raised by the assessee are purely legal in nature. Therefore, relying on the decisions of the Hon'ble Supreme Court in the case of NTPC Ltd. vs. CIT, 229 ITR 383 and the decision in the case of Jute Corporation of India cited (supra), we admit the additional grounds raised by the assessee for adjudication. 19. The d. counsel for the assessee submitted that the AO was supposed to pass the draft assessment order. However, at para 11 of the order dated 26th December, 2016, the AO has given a direction for issue of demand notice, show cause notice for penalty and challan. This shows that this is the final order. He submitted that as per the provisions of section 144C(1) of the Act, the AO must forward a draft of the proposed order of assessment to the eligible assessee if he proposes to make on or after the first day of October, 2009 any variation which is prejudicial to the interests of such assessee. Therefore, as per the provisions of the Act, where the AO proposes to vary t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the sale price of offshore supply of equipment also includes some consideration towards training activities and it directed the AO to verify the date of actual rendition of training and determine the value of training as per man day rate. He submitted that the Assessee in the remand proceedings before the AO had submitted that the training would be provided to SAIL staff post installation and commissioning for the purpose of operation and maintenance of the plant. Since, no training had been provided in the years under consideration, the question of attributing an amount towards training in the year under consideration, does not arise at all. Referring to the certificate issued by SAIL (copy placed at Page 78 of the Convenience Compilation), he submitted that it has been certified that no training has been conducted in India and that the consideration for training services is included in the amount being received by the company for foreign supervision services. 23. He submitted that the AO ignored the above submissions as well as the certificate and proceeded to attribute ₹ 2,23,41,600 (AY 2008-09) and ₹ 2,40,12,000 (AY 2009-10) towards training services. The ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Page 246 of the Convenience Compilation) he submitted that the said clause clearly quantify the same as 0.5% of contract value per week of delay with a cap of 5%. The said damages are penal in nature and exist only to protect the interest of the buyer. These damages have to be paid by the assessee in case of delay i.e. a contingent event. The said liquidated damages under no circumstance can be concluded to be a part of the consideration. Hence, the AO's conclusion that the same forms part of the revenue earned from offshore supply is incorrect and against the settled principles of contract law. 27. He submitted that the clauses pertaining to defect liability also provide that in case the product is defective the same will have to be replaced or repaired (Clause 30.1 and 30.2 at Page 242 of the convenience compilation). The same are again contingent in nature and can arise only on the happening of certain specific events as mentioned in clause 30 of the General Conditions to the Contract ('GCC'). He submitted that since, the years under consideration were the first years of the project, none of the above-mentioned events had occurred to trigger such liability. Referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancials of the assessee but the AO failed to follow the said direction of the DRP as well. He accordingly submitted that the AO should be directed to follow the aforesaid directions of the Ld. DRP and compute profit rate in line with the global profit rate of the assessee during the calendar year 2007 and 2008 i.e. 9.7% and 5.3% respectively. 31. The ld. DR, on the other hand, heavily relied on the order of the AO. He submitted that in this case the Tribunal had set aside the matter to the file of the AO on specific points with a clear-cut finding that the services included in sale consideration for offshore sale are chargeable to tax as fee for technical services. The Tribunal has held that the sale price of offshore supply of equipment also includes some consideration for services rendered or to be rendered by the assessee in India. Accordingly, the Tribunal upheld the attribution of sale consideration of offshore supply to the extent of the services included in the sale price. The assessee has filed appeal before Hon'ble High Court against the set aside decision of the Tribunal which is pending for decision. Referring to the grounds of appeal filed by the assessee, he su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entions that the taxpayer will be providing 1200 man days of training to the staff of SAIL and for the training services, no separate charge has been made. He accordingly submitted that the AO was justified in computing the training cost of 1200 man days at the rate of 600 Euros per man day. 34. So far as liquidated damages are concerned, he submitted that the certificate submitted by the assessee that no such event of incurring defect liability took place in the concerned period cannot be accepted in absence of filing of any evidence where such services for defect resolution have been separately charged during the entire contract. He submitted that the contract does mean liability on the assessee in case of defect liability and liquidated damages may have taken place in the entire contract period. However, this fact is indeterminate at the time of bid and therefore, the commercial bid is bound to load such liability cost on estimation basis in the sale consideration. Therefore, once the assessee has not charged any defect liability or liquidated damages, the only conclusion that is coming out of the decision of the Tribunal is that the defect liability and liquidated damages ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Construction Company Limited, South Korea (hereinafter referred to as POSCO ) and M/s. Nagarjuna Construction Company Limited (hereinafter referred to as NCC ), POSCO is under an obligation to provide training to SAIL staff in India [Refer clause 7.8, page 73]. It is further certified that no training has been conducted till date in India and as and when training shall be imparted to SAIL staff POSCO shall not be entitled to any separate consideration [Refer Pricing Schedule - Table 14B. page 27] because hours to be spent by POSCO in imparting training in India had been considered to be a part of consideration for Foreign Supervision Services paid or payable by SAIL to POSCO. This certificate has been issued on a specific request of POSCO for its income-tax proceedings in India. And this certificate does not bind SAIL commercially or legally. Sd/- (P.V.S.U. Mahesh) AGM (Finance) SAIL-ISP, Burnpur. I, P.V.S.U. Mahesh son of Late P.L. Narasimham solemnly affirm that this certificate is based on the factual terms of the contract and the actual activities undertaken and is not intended to provide any comment on the tax implication which may arise on acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iquidated damages under no circumstances can be concluded to be a part of consideration. We, therefore, find merit in the argument of the ld. Counsel that the conclusion of the AO that the same form part of the revenue earned from offshore supply is incorrect and against the settled principle of law. Further, this being the initial year of contract for the project, no such occasion had arisen and, therefore, in absence of any material with the AO, he was not justified in making the addition. 39. We further find, SAIL has issued a certificate copy of which is placed at page 80 of the paper book wherein they have certified that no liability has arisen in the said years. The relevant extract of the certificate reads as under:- I P.V.S.U. Mahesh son of Late P.L. Narasimham aged 46 years, in the capacity of Assistant General Manager (Finance), IISCO Steel Plant, Steel Authority of India Limited (hereinafter referred to as SAIL ), do hereby certify that as per the contract agreement dated October 16, 2007 between SAIL and consortium comprising of M/s. POSCO Engineering Construction Company Limited, South Korea (hereinafter referred to as POSCO ) and M/s. Nagarjuna Constructio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le in the goods did not pass to buyer outside India. Accordingly, the clause of acceptance tests and liquidated damages are nothing but merely in the nature of warranty provision and its remedial measures. Hence, undue importance cannot be given to such clauses and the same cannot be construed to mean that any portion from the sale of equipment can be taxed in India. 41. In view of the above, we hold that no portion of revenue earned from the sale of equipment can be taxed in India by virtue of commercial clauses like performance guarantee, defect liability and liquidated damages. We, therefore, set aside the order of the AO and direct him to delete the addition. Grounds of appeal No. 4 and 5 are accordingly allowed. 42. So far as the revenue received for design and engineering services is concerned, the AO held that design and engineering are chargeable to tax u/s. 9(1)(vii) of the Act as well as Article 13 of the India-Korea DTAA. It is the submission of the ld. Counsel for the assessee that the consideration for design and engineering is not taxable in India since such designs and drawings are treated as inseparable part of offshore supplies. We do not find any merit in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stainable. 42.1. Further, at para 7.7, the Tribunal has held as under:- 7.7. A bare perusal of this Explanation defining the term fees for technical services' makes it clear that it refers to rendering of any of technical services apart from managerial or consultancy. It also includes the provision of services of technical or other personnel. As the nature of afore-discussed drawings and designs customized to the assessee's requirements are result of the rendering of technical services, we are of the considered opinion that the consideration for the same qualifies to be categorized as 'Fees for technical services'. The Hon'ble jurisdictional High Court in Rio Tinto Technical Services (supra) vide para 22 of this judgment in the context of remuneration for such services has held that the Tribunal has not specifically examined Explanation 2 to Sec. 9(1)(vii) which defines fees for technical services. 43. We find, the Tribunal has given the finding which are specific and unequivocal regarding the taxability of design and engineering services. Since the issue is settled at the level of ITAT and which was not set aside to the file of the AO for any enq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly no income could be said to have accrued to the assessee in India. 4.2 That the Ld. AO has erred in disregarding the facts and the circumstances of the case that, the training activities, being incidental to the supplies made by the assessee from outside India, cannot have separate taxability. The Ld. AO/DRP has grossly ignored the facts the certificate issued by SAIL, wherein it has certified that no training is to be conducted in India under the terms of the contract 4.3 That the Ld. AO has grossly erred in taxing the training charges on gross basis without allowing any expenditure i.e. without verifying the profit margin on such transaction 5 On the facts and in the circumstances of the case and in law, the Ld. AO/DRP has erred in holding that cost for Defect liability liquidated damages charges is to be included in the income of the assessee despite of fact that these incidental obligations are in the nature of trade warranties. 5.1 While doing so the Ld. AO/DRP has grossly ignored the fact that the same are contingent in nature and can arise only on the happening of certain specific instances mentioned in the contract and none of such event has t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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