TMI Blog2024 (4) TMI 985X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee has to deliver the project of the Security Paper Mill and hand over to the contractee at deliverable stage as a complete package. The contract between the assessee and the contractee is not for purchase of plant and equipments simpliciter, but a complete paper mill to be installed and commissioned at deliverable stage. That being the factual position emerging on record, assessee s contention that the income received from supply of plants and equipments is not chargeable to tax in India, as the supplies were made from outside India, in our view, is not acceptable. Not only the assessee has entered into a single contract providing for purchase, installation, commissioning, performance-run of a single unit of 6000 MTs Security Paper Mill, but the assessee is required to ensure proper functioning of the paper mill after commissioning through start-up and test-run. Thus, these facts clearly indicate that the contract is a composite indivisible contract of setting up the paper mill in India. That being the case, it cannot be said that the receipts from offshore supplies of plant and equipments etc. are not taxable in India. On a careful scrutiny of assessment order and first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that assessee s contention regarding existence or otherwise of PE in terms of paragraph 7, 1(a) and (b) of Protocol to India-Germany DTAA has not at all been considered by learned first appellate authority. Since, various claims and contentions of the assessee have not been considered by the departmental authorities, while attributing part of the receipts from offshore supplies as income of the PE, we are inclined to restore the issue to the AO for de novo adjudication after providing reasonable opportunity of being heard to the assessee. Grounds are allowed for statistical purposes. - Shri G.S. Pannu, Vice-President And Shri Saktijit Dey, Vice-President For the Assessee : Sh. Rajan Bhatia, Adv. Sh. Ankit Nanda And Sh. Anuj Mathur, CA For the Revenue : Sh. Sanjay Kumar, Sr. DR And Sh. Vivek Vardhan, Sr. DR ORDER Captioned appeal by the assessee arises out of order dated 04.03.2019 of learned Commissioner of Income-tax (Appeals)-43, New Delhi pertaining to assessment year 2015-16. 2. The core issues arising for consideration are in relation to taxability of income earned from offshore supplies and attribution of profit to the permanent establishment (PE) in India. 3. Briefly, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es in relation to offshore supply was carried out in India. In this context, the assessee submitted that the design of plants and machineries, manufacturing and sale has taken place outside the territory of India. Thus, it was submitted by the assessee that the income from offshore supply is not chargeable to tax in India. It was further submitted by the assessee that all activities in relation to negotiation etc. were concluded prior to entering of the contracts. Therefore, there is no marketing activity, as the incidence of PE arose only at a much later stage. After examining the submissions of the assessee, particularly, in respect of the contract entered with the Security Paper Mill at Hoshangabad, the Assessing Officer observed that the assessee had entered the contract not only for supply of equipment but also setting up the entire plant. He observed that as per the terms of the contract, the assessee was not only required to supply the equipments from outside India, but was also required to provide onshore services. He observed that as per the scope of activities, the assessee has to carry out design, supply, erection, commissioning and performance run of 6000 MTs, as per an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of Rule 10 of the Rules and estimated profit @ 10% on the income received from offshore supply of plant and equipment and other related activities and attributed 25% thereof as profit of the PE. In this process, he made addition of an amount of Rs. 16,72,21,075/-. Against the assessment order so passed, the assessee preferred an appeal before learned Commissioner (Appeals). While deciding the appeal, learned Commissioner (Appeals), more or less, agreed with the decision of the Assessing Officer. However, he reduced the profit on offshore supply estimated at 10% to 5%. 5. Before us, learned counsel appearing for the assessee submitted that in the year under consideration, the assessee has undertaken the work of supply of plant and machinery in respect of four projects in India, viz., Security Paper Mill Project, Hoshangabad (SPMCIL Project), J.K. Paper Ltd. project, Rayagada, Bank Note Paper Mill India Pvt. Ltd. Project, Mysore and Tamil Nadu Newsprint and Papers Ltd. project, Tamil Nadu. He submitted, as per the general and specific terms of the contract, the contract price for supply of plants, equipments and spares and contract price of onshore services are divisible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt making bare allegations, the Assessing Officer has not brought any evidence on record to substantiate his claim that the assessee was involved in marketing activities. Thus, he submitted, the assessee cannot be called upon to prove the negative. 7. He submitted, though, the Assessing Officer has alleged existence of business connection of the assessee in India, however, factually, it is not so. He submitted, the sale of plants, equipments and spares etc. were made by the assessee to the customers in India on principal to principal basis. He submitted, not only all the activities relating to such sales were carried out outside India, but the sale was concluded outside India. Thus, he submitted, in absence of any business operation in India, it cannot be said that the assessee had a business connection under section 9(1)(i) of the Act. 8. Further, he submitted, the allegation of the Assessing Officer that the assessee has a fixed place PE in India is without any basis. He submitted, though, the Assessing Officer had alleged that the assessee admitted of having a project office in India for carrying out onshore activities, however, in reality, there is no such admission by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from technical services, if derived from the resident State in connection with a PE situated in other contracting State, it shall not be attributable to the PE. He submitted, though, the Article 7 of the protocol was specifically brought to the notice of the Assessing Officer, however, he failed to appreciate it correctly. He submitted, the decisions rendered in case of Sanghai Electric Group Co. Ltd. vs. DCIT, 84 taxmann.com 44, DDIT vs. Mitsui Co. Ltd. (2020), 118 taxmann.com 379 and Ansaldo Energia SPA (2009), 178 Taxman 57 (Madras HC), though, relied upon by the Assessing Officer, however, they are not applicable to assessee s case. Thus, he submitted, the profit attributed to the PE is improper. 11. Without prejudice, he submitted, while the Assessing Officer arbitrarily applied the profit rate of 10%, the first appellate authority has reduced it to 5%. However, neither of them has provided any basis for estimation of such profit. He submitted, as per the global profitability statement, the margin earned by global paper division is 2.28% of the sales. Therefore, when the assessee had provided a basis, the departmental authorities were not justified in applying profit rate pure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... start-up, but also supervisory work. Thus, it is proved on record that the assessee had both fixed place PE as well as the installation/supervisory PE in India. 14. As regards the issue of attribution of profit, learned Departmental Representative submitted, since, the assessee has been unable to substantiate any justifiable reason for acceptability of global profit rate, the decision of learned Commissioner (Appeals) in estimating the profit of the PE at 5% is reasonable. 15. We have considered rival submissions in the light of decisions relied upon and perused materials on record. The issue arising for consideration is the taxability of income received from supply of plants, equipments, spares etc. It is the case of the assessee that plants, equipments and spares have been manufactured and supplied from outside India, hence, they are not taxable in India. The assessee has also claimed that it does not have any PE in India. 16. As can be seen from the facts on record, the assessee had four ongoing contracts in India. In so far as the contract with Security Paper Mill (SPMCIL), otherwise known as project Hoshangabad is concerned, in response to a global tender issued by SPMCIL, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the new plant has taken place. The agreement also provides that the contractee shall store all received equipments and parts of the new plant at the site at its risk and expenses. The agreement provides that the contractee shall provide well equipped office with tables and chairs for assessee and its staff in charge of the project on site. The contractee is also required to provide lodging and boarding facilities at Hoshangabad for the personnel of the assessee for the entire period of stay. 19. As per the obligations of the assessee, the equipments and spares to be sold are on FOB European port basis and the seller has to guarantee that the plant and machinery, being supplied, are of state of the art technology. The seller shall also guarantee availability of spares for 15 years and there should not be any major fault in the new plant for at least five years of its installation and commissioning. The seller is also required to provide a certificate that technology, being supplied and the plant being installed, shall not be out of market for at least fifteen years and spares shall be available during that period. Clause-9 of the agreement provides that the seller shall arrange sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh, the agreement stipulates the cost of equipments and the cost of erection, commissioning, training charges etc. under distinct and separate heads, however, the payments are linked to completion of project. The agreement also provides that the seller has to pay liquidity damages at specified rate for its failure to have the new plant commissioned as per the time schedule under the agreement. The agreement also vests right upon the purchaser to terminate the contract in case of any default in carrying out any of the terms, conditions, covenants of the agreement, the supplier is not entitled to payment of any charges on any account or any portion thereof with respect to any part not completed by the supplier in accordance with the terms of agreement. Clause 38 of the contract provides that any dispute arising under the agreement shall be governed and interpreted in accordance of laws of India and subject to exclusive jurisdiction of the competent courts of New Delhi. 21. Thus, a reading of the agreement, as a whole, reveals that the assessee was given one integrated end to end activity of setting up a 6000 MTs capacity per annum state of art CWBN paper making machine compatible wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., Bank Note Paper Mill India Pvt. Ltd., Mysore and Tamil Nadu Newsprint and Papers Ltd., Tamilnadu, to whom the assessee has supplied plant and equipments, have not at all been examined. From the submissions of the assessee, prima facie, it appears that the terms of the contracts in different projects are not identical. In fact, in case of project at Tamil Nadu, the assessee has entered into two separate contracts, one for supply of material and other for onshore services. Therefore, if offshore supplies of plant and material do not have any relation to onshore services, they cannot be brought to tax in India. These facts have not been verified by going into the terms of the contract by the departmental authorities. Even, to what extent the PE of the assessee, if at all there is one in India, is involved in manufacture and supply of plant and equipments, has not been properly gone into by the departmental authorities. Thus, in our view, without properly analysing the role of PE in offshore activities, 25% of the receipts arising out of offshore supplies cannot be attributed to PE, as it is purely on adhoc basis. 23. Furthermore, the Assessing Officer has attributed profit rate of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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