IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SHRI R. S. SYAL, ACCOUNTANT MEMBER AND SHRI I. C. SUDHIR, JUDICIAL MEMBER

Transcription

1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SHRI R. S. SYAL, ACCOUNTANT MEMBER AND SHRI I. C. SUDHIR, JUDICIAL MEMBER (ASSESSMENT YEAR ) POSCO Engineering & Construction Company Limited, 6 th Floor, Park Centra Building, Tower-B, Sector 30, NH-8, Gurgaon, Haryana (APPELLANT) PAN No. AAECP2664A Vs Addl. Director of Income Tax, Range-3, International Taxation, Civic Centre, New Delhi (RESPONDENT) Assessee by: Revenue by: Date of Hearing Date of Pronouncement PER R. S. SYAL, AM: Shri Pawan Kumar, Shri Vishal Anand, Shri Nitin Vaid & Shri Arzoo Batta Shri Sanjeev Sharma, Shri Yogesh Kumar Verma & Shri Vivek Kumar ORDER This appeal by the assessee is directed against the order passed by the Assessing Officer u/s 144C(1) r.w.s. 143(3) of the Income Tax Act, 1961 (hereinafter also called `the Act ) on in relation to the assessment year The first two grounds are general which were neither specifically argued nor require any adjudication. The ld. AR

2 2 submitted that there were basically two issues in the present appeal viz., A. Income from contract with Steel Authority of India Ltd.; B. Transfer Pricing Adjustment. 3. The factual scenario is that the assessee originally filed two returns separately for its Project office and Liaison office with different Permanent Account Numbers. Such returns were revised for a number of times. The assessee admitted that it was earlier under a bona fide belief that separate returns were required to be filed in respect of Liaison office and Project office. The assessee gave its nod to common assessment in respect of both the segments. A draft assessment order u/s 144C(1) was passed on The assessee filed its objection before the Dispute Resolution Panel (DRP). Upon the receipt of Directions from the DRP, the Assessing Officer passed the final confirmatory order which is impugned in the present appeal. A. INCOME FROM CONTRACT WITH STEEL AUTHORITY 4.1. We are first espousing the issue of income from contract with Steel Authority of India Ltd. The facts apropos this issue are that the assessee is a non-resident company incorporated in and also Tax resident of Korea. It is mainly engaged in Engineering and construction for Iron, energy and public works etc. It entered into a

3 3 Contract Agreement dated read with the Amendment agreement dated , as a Consortium consisting of the assessee (as its leader) and another partner, Nagarjuna Construction Company (NCC) on one hand and Steel Authority of India (hereinafter called `the SAIL ) on the other, for setting up a Blast Furnace Complex at IISCO Burnpur, West Bengal. The assessee claimed deduction for some expenses incurred on this project without offering any revenue. The assessee stated during the course of assessment proceedings that it received 5% mobilization advance from SAIL as under : - Sl Particulars As at No Offshore supply of Equipments EURO 38,00, Fee for Technical Services Design & Engineering EURO 1,50, Foreign Supervision Charges EURO 2,22,000 (Onshore services) 4. Onshore supply of Equipments INR 15,03,47, The above amounts were not offered for taxation on the premise that these were simply in the nature of advance and contained no element of income. It was submitted that the liability to tax would arise in subsequent years on the actual supply of onshore equipments and rendering of onshore services (Foreign Supervision Charges). In so far as the amount towards offshore

4 4 supply of equipments and Design & engineering was concerned, it was claimed that no income was chargeable to tax in any year as these activities were completed outside India without any involvement of its Indian office. A detailed explanation was separately filed before the AO submitting reasons for its conclusions in respect of the above four components of the receipts. As regards the non-taxability of income from offshore supply in India, the assessee submitted that SAIL remitted Euro 38,00,033 as mobilization advance towards offshore supply of equipments portion, for which the title of goods was transferred from the origin of supply of goods, that is, high sea. Not only that, the amount was also received outside India. Apart from that, import duty on such goods was directly paid by SAIL to Customs Authorities and marine freight as well as inland freight for movement of such equipments from foreign ports to the site of SAIL was also paid by SAIL through NCC. Insurance policy against transit risk was also taken by SAIL through NCC. In the light of the above facts, it was claimed that no income from offshore supply of equipments was at all chargeable to tax in India in any year. As regards the receipt on account of Design & Engineering services, the assessee stated that the said amount was also not chargeable to tax in any year because such designs were also supplied offshore which were part and parcel of the offshore supply of equipments. The assessee accepted before the A.O that

5 5 it has a Supervisory P.E in India as per Article 5(3) of the Double Taxation Avoidance Agreement between India and Korea (hereinafter called `the DTAA ). The assessee claimed that its Permanent Establishment (PE) had no role in making such offshore supplies and Design & engineering services. The assessee agreed that Foreign Supervision Charges were in the nature of onshore services and hence exigible to tax. Similarly, it was also conceded that onshore supply of equipments was also liable for taxation in India. However, these two items were claimed to be not chargeable to tax during the year because neither any onshore services were rendered nor any onshore supply of equipments was made during the relevant financial year. Amount 5% of the Contract price towards Foreign Supervision Charges and onshore supply of equipments was claimed to be in the nature of advance The Assessing Officer held that the assessee had a Fixed place P.E/Supervisory P.E/Services P.E in terms of Article 5 of the DTAA and was also having business connection in India in terms of Sec. 9(1)(i) of the Act. Thereafter, he proceeded to vet various clauses of the Contract Agreement. After entertaining objections from the assessee, the Assessing Officer came to initially hold that it was a case of composite contract with SAIL and the bifurcation of consideration into various segments. as done by the assessee,

6 6 was not appropriate. He held that 5% of mobilization charges received during the year in respect of onshore supply of equipments amounting to Rs. 15,03,47,944/- were liable to be included in the total income for the year. He further held that 5% of mobilization charges received during the year in respect of Foreign Supervision Charges amounting to Rs. 1,37,77,320/- (equivalent of Euro 2,22,000) were also liable to be included in the total income. It was still further held that 5% of mobilization charges received during the year in respect of Offshore supply of equipment at Euro 38,00,033 was to be considered for the determination of business income of the assessee as per Article 7 of the DTAA and also Sec. 9(1)(i) of the Act. He however, restricted the income to 90% of such amount as attributable to Permanent Establishment in India and the profit margin of 30.65% was applied thereon. As regards 5% of mobilization charges received during the year in respect of Design & Engineering, the AO initially held it to be Royalty within the meaning of Sec. 9(1)(vi) of the Act (as per para 8 of the order) and then also as Fees for Technical Services within the meaning of Sec. 9(1)(vii) of the Act (as per para 9 of the assessment order). However, while computing the total income, he included 90% of this amount as attributable to the P.E. By applying profit margin of 30.65%, he clubbed this amount along with that of offshore supply and made

7 7 total addition on these two counts at Rs. 6,76,37,014/-. That is how the AO computed total income of the assessee as under: - Sl Particulars Amount (Rs) Amount (Rs) No. 1. Loss as per revised (-) Rs. return dated ,04, Additions on account of 2,15,27,090 adjustment made by TPO 3. Additions on account of 15,03,47,944 5% receipt against 1 st Milestone (onshore activities) 4. Additions on account of 1,37,77,320 Foreign Supervision Charges 5. Additions on account of 6,76,37,014 25,32,89, offshore Design & Engineering and Offshore supply Total Income 24,48,85, The assessee is aggrieved against such computation of total income on account of offshore supply, onshore supply, onshore services and Design & Engineering services We have heard the rival submissions and perused the relevant material on record. The first question which requires to be decided and which has been strenuously argued by the ld. DR is whether it is a case of composite contract? We note that the

8 8 Assessing Officer proceeded with the presumption in the earlier part of the assessment order that it is a case of a composite contract with total consideration as one unit. He, therefore, initially held that the entire Contract agreement was to be considered as composite contract without any further bifurcation into offshore and onshore supply of equipments as well as services. However, while computing the total income on the penultimate page of the assessment order, he bifurcated the income in respect of three broad categories, viz., onshore activities, Foreign Supervision Charges (that is, onshore services) and offshore supply clubbed with offshore Design & Engineering There is no dispute that the assessee entered into one Contract Agreement with SAIL, a copy of which is available on pages 1008 to 1193 of the paper book. The preamble of the Contract Agreement indicates that it has been entered into for setting up a Blast Furnace Complex. Article 2 of the Contract Agreement has been captioned as Contract Prices and Terms of Payment. The Contract price has been mentioned as the aggregate of Euro 8,34,58,671 and Indian rupees 1088,67,81,000. Para 2.1 of Article 2 talks of : `Contract Price (Reference GCC clause 11 & Appendix 1). Appendix 1 is on pages 1021 to1040 pages of the paper book. Page 1021 is `Price Schedule which spells out Contract Price break-up with various Tables. Table 1B is

9 9 `Summary of Prices, which is available on page 1023 of the paper book. This Table contains the break-up of the aforementioned Contract price of Euro 8,34,58,671 and Indian rupees 1088,67,81,000. First item in this Table is the price of Design & Engineering (Imp.) at Sr. No. 1, for which consideration of Euro 30,18,000 has been given. Item at Sr. no. 3 of Table 1B is consideration for `Supply of Plant (Imp) for which consideration has been given as Euro Serial no. 5 of Table 1B is `Supply of Refectory (Imp) with consideration of Euro At serial no. 7 of Table 1B is `Supply of Commissioning Spares (Imp) whose consideration is Euro In the like manner, item at serial no. 12 of Table 1B is `Foreign Supervision Charges, whose consideration is Euro The above description of the detail of the price for various components shows that albeit a composite price has been given as per Article 2 of the Contract Agreement as Contract Price, but it is a sum total of the clearly demarcated prices for onshore supplies and services and offshore supplies and Designs. In our considered opinion, the Assessing Officer was initially not correct in holding that the contract was a composite one devoid of any bifurcation towards onshore and offshore supplies and services, which stand was subsequently altered to the correct position. We, therefore, hold that it is wide off the mark to categorize the present contract agreement as a

10 10 composite one since all its major four components are distinctly identifiable with separate consideration for each In this connection, it is of paramount importance to consider the judgment of the Hon ble Supreme Court in the case of Ishikawajma -Harima Heavy Industries Ltd. vs. Director of IT (2007) 288 ITR 408 (SC), which has been heavily relied on behalf of the assessee. In that case, the assessee was a resident of Japan. It was to develop, design, engineer and procure equipments and material supplies, etc. to erect and construct storage tanks of 5 MMTPA capacity. The project was to be completed in 41 months. The contract involved (i) offshore supply; (ii) offshore services; (iii) onshore supply; (iv) onshore services; and (v) construction and erection. The price was payable for offshore supply and offshore services in US Dollars and for onshore supply and onshore services and construction and erection partly in US Dollars and partly in Indian Rupees. It filed an application before the Authority for Advance Rulings for determination of its tax liability with reference to "offshore supply and offshore services". No issue was raised as regards the liability to pay income-tax on onshore supply, onshore services and its activity relating to construction and erection. It was contended before the Authority that the contract was a divisible one and hence there was no liability to pay tax on offshore supply and offshore services. The

11 11 Authority, after considering the provisions of section 5 r/w s. 9 as well as DTAA, opined that the assessee was liable to pay taxes. In further appeal, the Hon ble Court held that the contract was a composite arrangement. It noted that price was given separately for each of these segments. It was also noticed that the onshore supply, onshore services and construction did contain element of income and hence tax was payable in India, which proposition was not disputed by the assessee as well. However, as regards the taxation of income from offshore supply and offshore services, even though it was a composite contract, the Hon ble Supreme Court held that income from such offshore supply of equipments and the offshore services did not fall within the purview of s. 9(1)(vii) since the entire services were rendered outside India and the PE of the assessee had no role to play in the transaction Coming back to the facts of the instant case, we find that here also a composite contract was entered into between the assessee together with NCC and SAIL. There is a separate mention of consideration for supply of equipments and for rendition of services. Simply because the supply of equipment and the rendition of services is to one party and for a common purpose, we are unable to find any logic in treating the entire amount as one composite payment attributable commonly both to the supply of equipment and rendering of services, more so when there is a

12 12 specific identifiable amount relatable to these segments. There is no qualitative difference between two situations, viz., first, when one contract is made for two or more works specifying the consideration for each work separately; and second, when two or more contracts are made for each such work. Be that as it may, it is observed that the AO has ultimately completed the assessment by separately including the above referred four components in the total income of the assessee. It shows that he impliedly accepted the break-up of the contract price into four broad divisions as correct Apart from the assessee s contention that the amount received during the year was in the nature of advance and not income, both the sides have extensively argued on the taxability or otherwise of such amounts as has also been adjudicated by the Assessing Officer in favor of the Revenue. As such, it has become imperative to consider and decide the principles for determining the taxability, if any, of such four components of income included by the AO in the total income of the assessee, as under :- I. Income from offshore supply of equipments II. Income from onshore supply of equipments. III. Income from onshore services. IV. Income from Design & Engineering services

13 13 I. INCOME FROM OFFSHORE SUPPLY OF EQUIPMENT The case of the assessee is that the receipt of Euro 38,00,033 during the year related to the offshore supply of equipments and hence the profit element contained in such an amount could not be charged to tax. Per contra, the ld. strongly refuted this argument by submitting that there was no offshore supply and the title to such goods passed in India and hence the entire amount has been rightly charged to tax. In the alternative and without prejudice to his main argument, it was put forth by the ld. DR that the said sale consideration includes compensation towards rendering some services in connection with installation and commissioning of equipments in India and to that extent, the income be charged to tax in India We will examine and evaluate these contentions, one by one, under the following sub-heads:- 1. Where title to the goods passed? 2. Whether sale price includes any consideration for services rendered or to be rendered in India? 3. Taxability of price for offshore supply of equipment and compensation for services rendered in India 4. Attribution of income to services rendered in India. 1. Where title to the goods passed?

14 1.a. 14 The assessee stated before the AO that that the invoices for offshore supply were issued directly by POSCO-E&C Korea in the name of SAIL and the title of goods was transferred by virtue of transfer of risk to SAIL from the origin of supply of goods, that is, high sea. The payment against such offshore supply was remitted to the assessee abroad directly by SAIL in foreign currency and no amount on this count was received in India. It was also stated that import duty against offshore supply was paid by SAIL in India. The marine freight as well as Inland freight for movement of offshore equipments supply from foreign ports to the site of SAIL was also paid by SAIL through NCC. The insurance policy against the transit risk of said offshore equipment supply was taken by SAIL through NCC. The position as enumerated above has not been controverted by the Assessing Officer. Further, when the assessee challenged the addition proposed by the A.O on this issue before the Dispute Resolution Panel (DRP), it was reiterated that the title of goods passed outside India. The DRP accepted this argument vide para of its Direction u/s 144C(5). However, it was observed that even though the title of goods passed outside India, but it was the performance guarantee which was important and decisive of the taxability of income. That is how the assessee s contention came to be rejected by the DRP.

15 1.b. 15 In the oppugnation, the ld. DR forcefully argued that the permanent establishment of the assessee played an active role in the supply of offshore equipment. On a specific query to indicate the precise role of the PE in the offshore supply of equipments, the ld. DR failed to substantiate his point of view. He kept on harping on the general submissions that the construction of plant, which also includes offshore acquisition of equipment, could not have become possible without the role of the PE and it was for the PE to decide as to when the equipment was to be acquired from abroad. In our considered opinion, these submissions are totally irrelevant in so far as the question of passing of title of goods is concerned. 1.c. The ld. DR then invited our attention towards various clauses of the Contract agreement to demonstrate that it was the responsibility of the assessee to provide training, testing and commissioning of such equipments in India, which showed that the assessee was required to put the equipment in a deliverable state in India. Referring to section 19 of the Sale of Goods Act, 1930, it was stated that property in the goods passes only when the parties intend it to pass. He further invited our attention towards section 21 of the Sale of Goods Act which provides that : `Where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them into a deliverable state, the property does not pass until such thing is

16 16 done and the buyer has notice thereof. Accentuating on these provisions of the Sale of Goods Act, it was argued that since so many activities were to be done in India in connection with the training, installation and commissioning of the equipments alleged to be sold offshore, the property in the equipment will pass in India only on completing such activities in India. He summed up his arguments by stating that the property in goods passed in India on doing of such activities and putting them into a deliverable state in India. 1.d. Having heard both the sides and perused the relevant material on record, we find that there is material on record to indicate, which we will advert to in detail infra, that apart from imparting training to employees of SAIL in India, the assessee was obliged to carry out certain activities associated with the installation and commissioning of such equipment in India. The question is whether carrying on of such activities in India is decisive of the question that the title to goods passed in India? Though the contention of the ld. DR looks attractive at first flush, but loses its shine when the provisions of the Sales of Goods Act are considered in entirety. It is noticed that the contention similar to the one now raised by the ld. DR before us, was earlier also attempted before the Special Bench tribunal in Motorola Inc. VS. DCIT (2005) 95 ITD 269 (Del)(SB). It can be seen from para 231

17 17 of the special bench order that the ld. DR therein also pressed into service the applicability of sections 19 and 21 of the Sale of Goods Act to canvass view that the title of goods passed in India. Such contention met with the fate of dismissal. The special bench, after considering sections 26 and 40 of the aforesaid Act, noticed that : `S. 40 further says that it is open to the parties to agree that even where the property in the goods has passed, the seller may undertake the risk of deterioration in the goods necessarily incident to the course of transit. This is what the parties in the present case have undertaken in the sense that though the title to the GSM equipment passed in USA, the risk continued to remain with the assessee (seller) and the risk passed to the cellular operator only on delivery in India. Therefore, the result is that merely because the risk passed in India, it cannot be said that the sale took place in India. Therefore, no income can be said to have arisen in India. Thus, the contention of the ld. DR that since risk passed in India and hence the title of the goods should also be considered as passing in India, is not tenable. We further find that the facts and circumstances of the instant case are mutatis mutandis similar to those as were prevailing in the case of Ishikawajma Harima (supra). As, both the Hon ble Supreme Court and the Special bench of the tribunal have held that title to goods shall be considered to have passed outside India when delivery was made on high sea and the payment was also received outside India, we

18 cannot deviate from the settled position. 18 In our case too, the authorities below have not controverted this argument of the assessee that the delivery of goods was made outside India and also the payment was received outside India. We, therefore, hold that the title of goods in respect of said offshore supply of equipments was transferred outside India. 2. Whether sale price includes any consideration for services rendered or to be rendered in India? 2.a. Having held that supply of such equipments was offshore, now we espouse the next argument of the ld. DR that the sale price also includes some consideration for services rendered or to be rendered in India. The ld. DR vehemently argued that certain costs for doing of some activities in India in relation to offshore supply of equipments were not specifically charged and hence were inbuilt in the price so charged. This was contradicted by the ld. AR by stating that consideration for the supply of equipments and refractory was exclusively towards the price of goods and no part of it was towards rendering of any services in India. It was shown that there was a distinct charge of `Foreign Supervision charges in the Summary of prices at Euro , which the assessee also considered as chargeable to tax in India. This amount was claimed to be towards rendering of all services in India in connection with the supply of offshore equipments.

19 2.b. 19 We find from Table 1B, whose copy is available on page 1023 of the Paper book, which is an integral part of the Contract agreement and has been captioned as `Summary of Prices that there is a charge for supply of offshore equipment and also there is a separate charge towards `Foreign supervision charges to the tune of Euro The description of such foreign supervision charges has been given in Table 13B, a copy of which is available on page 1036 of the paper book. When we turn to such Table, the description of `Foreign 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

20 20 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 Maintenance in similar operating plants, etc. Under the next column of Price for training in India, it has been mentioned as Included. 2.d. When we consider Table 1B (Summary of prices) in juxtaposition to Table no. 13B (Foreign supervision charges) on one hand and Table no. 14B (Training charges) on the other, the following three points emerge. First is that the training is exclusively in India. It can be seen from Table 14B that after the Description column, the next column is `Estimated Man days for Employer s Personnel for Training in India. Then the next column is `Price for Training in India. From these columns, it is proved beyond any shadow of doubt that the training was to be given in India. Second point is that charges for `Foreign supervision charges are certainly distinct from `Training charges in their connotation as well as ambit. Whereas the former are towards Foreign supervision charges in India during Erection, Start up, Commissioning and Performance Guarantee tests, the later are towards providing training to Employer s Technical personnel in Plant Operation and Maintenance in similar operating plants, etc.

21 21 These two things are distinct from each other also becomes obvious from the Working Consortium Agreement dated which divides the works/activities between the assessee and NCC. As per this chart, which has been reproduced on page 15 of the assessment order, there is broader heading of `Services under which two separate categories, viz., `Supervision of erection and Training have been mentioned. When we proceed to the next column of this Table, it emerges that both these services are the responsibility of the assessee alone and NCC is not liable to render such services. Thus it is clear that `training is distinct from `foreign supervision. Third point, which assumes great significance, is that whereas there is a separate charge for the `Foreign supervision charges, the consideration for the `Training charges is `Not quoted and the same is `Included, obviously in the price of equipment. The reason for our conclusion that the training charges are included in the `Price of the equipment is that the only other charge as per the Summary of Price for the onshore services is `Foreign supervision charges. 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 On having a glance at the detail of `training charges on

22 22 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 consideration for the same and if it is not there, then such costs are to be considered as in-built in the price of equipment. Ordinarily, when any product is sold with warranty, the price charged by the seller always includes compensation for the repairs cost to be incurred during the warranty period. In contrast to that, if there is no warranty clause and similar product is sold by another seller, the sale price is bound to be at a lower level vis-a-vis the seller who sells its products with warranty. This leads us to the irresistible conclusion that when the assessee has undertaken to bear training costs at its own and there is no separate compensation for that, which is `Included, then such compensation is included in the sale price charged for offshore supply of equipments. In such a case, the sale

23 23 price so charged is required to be split towards the price of goods simplicitor and compensation for training and other charges which the seller has undertaken to bear. 2.e. Apart from training charges, there are also other costs incurred by the assessee in connection with supply of such offshore equipments. `General Conditions of Contract which is part of the Contract Agreement contains Clause no. 30 which has been referred to as Defect Liability clause on page 1145 of the Paper Book. First para of clause clause 30.2 states that the defect liability period shall be twelve (12) months from the date of commissioning mentioned in the commissioning certificate. Second para of this clause reads as under : If during the Defect Liability Period any defect is found in the design, engineering, materials and workmanship of the plant and equipment the contractor shall promptly in consultation with and agreement with the employer and at its cost, repair, replace or otherwise, make good such defect sales any damage to the facilities caused by such defect. 2.f. Again, Clause No.23 of the General Conditions of Contract on page 1135 of the Paper book has been named as `Test and Inspection. Para 1 of this clause reads as under : - The contractor shall at its own expense carry out at the place of manufacture and/or on the site of such

24 2.g. 24 tests and/or inspections of the plant and equipment and in part of the facilities as are specified in the contract. There are certain other clauses also which show that the assessee has 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 price, then these have to be considered as part and parcel of the sale price, which would require its splitting up to determine the amount

25 25 attributable to such testing charges etc. in India. As such details are not readily available, we are of the considered opinion that it would be in the fitness of things if the impugned order on this issue is set aside and the matter is restored to the file of the Assessing Officer. He will examine as to whether the costs for tests and inspection, liquidated damages and defect liability along with any such other costs are specifically charged distinct from the sale consideration of offshore supply of equipment. If on such an analysis, he comes to the conclusion that there is no separate charge in respect of all or any of these items, then, a portion of sale price of offshore supply of equipment needs to be attributed to such activities performed in India. 2.i. It is, therefore, 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. In so far as training charges are concerned, these are surely included in the sale price, but the question of consideration for other factors, such as tests and inspection, liquidated damages and defect liability, requires examination at the end of the Assessing Officer. 3. Taxability of price for offshore supply of equipment and compensation for services rendered in India

26 3.a. 26 The ld. AR stuck to his stand that no part of the price of offshore supply included any consideration for services rendered in India and hence income on account of such offshore supply of equipments was not chargeable to tax in the hands of the nonresident assessee. Without prejudice to his main arguments for the taxability of the entire consideration for the offshore supply of equipments in India, the ld. Departmental Representative also vehemently contended that the income arising out of such offshore supplies is partly attributable to activities carried out in India and hence a part of such profits should be charged to tax. We have held above that the price shown towards offshore supply of equipments has two components, viz., one is the price for offshore supply of equipment simplicitor (Point 1 above); and second is the consideration for some services rendered in India (Point 2 above). 3.b. Now comes the question of taxability of price for offshore supply of equipment simplicitor and compensation for services rendered in India. The assessee is a non-resident. Sec. 4 of the Act, which is a charging section, provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of this Act in respect of the total income of the previous year of every person. Sec. 5(2) of the Act deals with the scope of

27 27 total income of non-residents and provides that subject to the provisions of the Act, the total income of non-resident includes income from whatever sources which is received or is deemed to be received in India or accrues or arises or is deemed to accrue or arise in India during such year. Clause (a) of this sub-section talks of the income which is received or is deemed to be received in India. It is not the case of the Revenue that the income from offshore supply was received by the assessee in India. The expression income deemed to be received in India has been defined under s. 7 of the Act, which refers to the annual accretion in the previous year to the balance at the credit of an employee participating in a recognized provident fund, etc. It is apparent that the nature of amount under consideration is quite distinct from the items specified in this section. Then cl. (b) of section 5(2) talks of income which accrues or arises or is deemed to accrue or arise in India. There can be no dispute as regards the scope of income which accrues or arises in India. Sec. 9 of the Act enlists certain incomes which are `deemed to accrue or arise in India. Income from supply of offshore equipments cannot be in the nature of Salaries, `Dividend, `Interest, `Royalty or `Fees for technical services, which items of income have been specifically dealt with in cls. (ii) to (vii) of s. 9(1).

28 3.c. 28 Then comes cl. (i) of section 9(1), which mandates that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India or through or from any asset or source of income in India or through the transfer of a capital asset situated in India shall be deemed to accrue or arise in India. The Hon ble Supreme Court in CIT vs. R.D. Aggarwal & Co. (1965) 56 ITR 20 (SC) has held that mere sale does not result into business connection attracting the deeming provisions of s. 9(1)(i). It is trite law that income accrues at the place where the title to goods passes to the buyers on the payment of price. The Hon ble Supreme Court in Seth Pushalal Mansinghka (P) Ltd. vs. CIT (1967) 66 ITR 159 (SC) has held that income accrues at the place where the title to goods passes to the buyers on the payment of price to the bankers of the assessee. In so far as the price for offshore supply of equipment simplicitor (Point 1 above) is concerned, profit from the same cannot be charged to tax as the assessee is a non-resident and there is absence of territorial nexus of such income with India. Respectfully following the verdict of the Hon ble Supreme Court in above cases and also Ishikawajma Harima (supra), we hold that since the title of such goods passed outside India and the payment was also received by the assessee outside India, no income can be said to have either accrued or deemed to have accrued in India.

29 3.d. 29 At this juncture, it is relevant to mention that the general provision bringing income from any business connection in India within the sweep of section 9(1)(i) further explains by way of Explanation 1 (a) that : `in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. The crux of the above provision, in so far as it is relevant for our purpose, is that a non-resident is liable to tax if he earns business income from the operations carried out in India. 3.e. As both the sides have extensively argued on the position of the assessee qua the `Business profits under the DTAA, it would be apposite to appreciate such position as well. Article 5 discusses about the existence of a Permanent Establishment (PE). Then Article 7 of the DTAA deals with the Business profits. It would be in order to note down the prescription of paras 1 and 2 of Article 7 of the DTAA as under : - ARTICLE 7 Business profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the

30 3.f. 30 profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through permanent establishment situated therein, there shall be in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment... The ld. AR has candidly admitted the assessee of having a PE in India as per Article 5 of the DTAA during the year in question. Art. 7(1) of the DTAA states that the profits can be taxed in India only to such extent which are attributable to the PE in the other contracting State. To put it simply, the business profits of a resident of Korea can be taxed in India to the extent which are attributable to its PE in India. In other words, if there is no PE then the business profits of the non-resident cannot be taxed in India. Even if there is a PE, but no part of the business profits is attributable to such PE, then also there does not arise a question of taxability as per Art. 7. But if PE plays some role in the earning of

31 31 the income by the non-resident, then such proportionate amount of profit is chargeable to tax as business profit. 3.g. It can be seen that the position under the DTAA is almost analogous to the position as stipulated by Explanation (1)(a) to section 9(1)(i). Crux of both the provisions is that only that part of the business income of the non-resident can be charged to tax in India, which is attributable to operations carried out in India due to business operations as per section 9(1) of the Act or is attributable to the PE as per Article 7 of the DTAA. Thus it is vivid that the principle of apportionment of income with reference to the territorial nexus is not only explicit but also forms an integral part of both section 9(1) of the Act read with Explanation (1)(a) as well as Article 7 of the DTAA. If a particular income is not attributable to the operations carried out in India and thus has no territorial nexus with India, then a non-resident cannot be charged to tax for that income. Per contra, if a particular income is attributable to the operations carried out in India and thus has territorial nexus with India, then there can be no escape from charge of such income to tax. In case of a composite income, which is partly relatable to the operations carried out in India and partly to outside India, a proportionate part of income which is so relatable to the operations carried out in India, has to be charged to tax. This position has been accepted by the Hon ble Summit Court

32 32 in Ishikawajma Harima (supra) when it summed up its conclusion on offshore supply in para 73 of the judgment, the relevant part of which is as under : We, therefore, hold as under : Re : Offshore supply : (1) That only such part of the income, as is attributable to the operations carried out in India can be taxed in India. (2) Since all parts of the transaction in question, i.e. the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India. (3) The principle of apportionment, wherein the territorial jurisdiction of a particular State determines its capacity to tax an event, has to be followed. (4) The fact that the contract was signed in India is of no material consequence, since all activities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country.. 3.h. After holding that no income was chargeable to tax because no part of the consideration was towards the services to be rendered in India, the Hon ble Supreme Court in CIT & Anr. VS. Hyundai Heavy Industries Co. Ltd. (2007) 291 ITR 482 (SC) has further held that : `No such taxability can also arise in the present case as there was no allegation made by the Department that the price at which billing was done for the supplies included any

33 33 element for services rendered by the PE. It follows that if a part of some composite income is attributable to the operations carried on in India and other part is not, then such part of income as is so attributable to the operations carried out in India has to be charged to tax. In the case of Ishikawajma Harima (supra), the income from onshore supply and onshore services was suo motu offered for taxation by the assessee and rightly so because it had nexus with India. To sum up, income for which everything is done in India is fully taxable but the principle of apportionment applies to tax that part of the composite income which is relatable to operations carried out in India, leaving aside that part of income which is not so. Applying the above principle, it is palpable that that the second component of the sale price of offshore equipments, which is quid pro quo for services rendered in India (Point 2 above), is chargeable to tax in India. 4. Attribution of income to services rendered in India. 4.a. We have held above that the consideration for services rendered in India is also included in the sale price of offshore equipments. Such part of the sale consideration constitutes remuneration for the operations carried out in India as per the mandate of Sec. 9(1)(i) and the amount attributable to the role of Permanent Establishment in terms of Article 7(1) of the DTAA. To this extent, the amount is chargeable to tax in India.

34 4.b. 34 Now comes the question of determination of such income or the attribution of income from sale price of offshore equipment to services rendered in India. The ld. DR argued that 35% of the total profit from offshore supply should be attributed to such services rendered in India. For this proposition, he drew strength from the judgment of the Hon ble Delhi High Court in Rolls Royce PLC Vs DIT (IT) (2011) 339 ITR 147 (Del) in which it has been held that 35% of the profit should be attributed to activities carried out in India. Sounding a contra note, it was stated on behalf of the assessee that even though some operations were carried out in India, still no part of the sale price of offshore equipments could be attributed to such operations. The ld. AR relied on the judgment of the Hon ble Uttarakhand High Court in the case of Samsung Heavy Industries Ltd. vs. Director of Income-tax (IT), a copy of which has been placed on page 490 onwards of the case law paper book. It was submitted that in this judgment, the Hon ble High Court has held that no profits out of the sale proceeds of supply of offshore equipment could be attributed to the operation carried out in India. 4.c. On a proper analysis of this judgment, we find that the facts of the instant case are quite distinguishable. In that case, the assessee entered into contract with ONGC and received certain amount of money. The Assessing Officer held that 25% of the revenue received allegedly for outside India activities should be

35 35 brought within the taxing network of this country. The Hon ble High Court observed that the assessee was tax resident of Korea. It observed that : There was no finding anywhere that the revenue earned and said to have been on account of out of India activity earned was, in fact, on account of within India activity. It was in view of such finding that the Hon ble High Court came to hold that 25% of gross receipts could not be attributed to the activities carried out in India. In contrast to this judgment, we find that there is sufficient material to indicate that several activities concerned with offshore supply of equipments were to be carried out in India. The ld. DR has invited our attention towards several clauses of the Contract agreement which amply indicate that not only certain training was to be imparted on Indian soil, but also repairs and maintenance of machinery along with test and inspection was also to be done by the assessee in India at its own expense. When there is a clear-cut mention of the assessee being liable to incur certain expenses on Indian soil in connection with the offshore supply of equipment for which there is no separate charge, the consideration for rendering of such services is definitely attributable to the operations carried out in India and, hence, chargeable to tax. 4.d. The further reliance of the ld. AR on the judgment of the Hon ble Supreme Court in the case of Hyudai Heavy Industries (supra) is also not appropriate. This aspect in that

36 36 case has been dealt with in para 11 by noticing that the profits on supply of fabricated platform could not be said to be attributable to the P.E because the installment of P.E emerged only after the contract with ONGC was concluded. The Hon ble Apex Court further held that no part of profits of such supplies could be attributed to the independent P.E unless it was established by the Department that the supplies were not at arm s length price. Further no such taxability was held to be arising : as there was no allegation made by the department that the price at which billing was done for the supplies included any element of services rendered by the P.E. When we turn to the facts of the extant case, it can be easily deduced that the Revenue has proved beyond doubt that the price charged by the assessee for supply of offshore equipment also includes consideration for certain services rendered in 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