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Income Tax Appellate Tribunal, DELHI ‘D’ BENCH,
Before: SHRI N.K. BILLAIYA, & SHRI ANUBHAV SHARMA
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-
This appeal by the assessee is preferred against the order dated 18.07.2022 framed u/s 143(3) r.w.s 144C(13) of the Income-tax Act,
1961 [hereinafter referred to as 'The Act'] pertaining to Assessment
Year 2019-20.
Though the assessee has raised as many as 7 grounds of appeal,
but the sum and substance of the grievance of the assessee relates to
the taxability of offshore supply of equipment under the Act and
taxability of offshore supply of equipment under the India-Singapore
Double Taxation Avoidance Agreement [DTAA].
Briefly stated, the facts of the case are that the assessee
company is incorporated under the laws of Singapore and is a tax
resident of Singapore, within the meaning of Article 4 of the DTAA
between India and Singapore. The assessee is a part of UK based
business conglomerate - Smiths Group and is engaged in the business of
manufacturing and trading of security equipment manufacturing and
trading of security equipment.
The assessee filed its return of income on 30.11.2020 declaring
total income of Rs. 3,50,02,980/- at special rates and a loss of Rs.
1,11,62,442/- and claimed exempt income of Rs. 1,04,55,60,800/- on
account of supply of offshore equipments.
During the year under consideration, the assessee declared the
following receipts in its return of income:
S. No Payer Nature of Amount (in INR) Maintenance 22,01,272/- Cochin International receipts 1. (17,83,601/- Airport Ltd. pertained to Cochin International Airport) Smiths Detection Systems Royalty/Fee for 2. 35,00,313/- Technical Pvt Ltd (SDS) Services 3. Airport Authority of India 97,80,42,736/- Offshore supply of (AAI) equipment 4. Chandigarh International 6,75,18,064/- Offshore supply of Airport Ltd. (CIAL) equipment 5. 62,94,461/- Interest on Fixed Canara Bank Deposits (FDs)
During the course of scrutiny assessment proceedings, the
assessee itself submitted that it has a Permanent Establishment [PE] in
existence in India with respect to contract with CIAL and accordingly,
the Assessing Officer was of the opinion that once a PE has been
established for foreign entity, there is no need to establish the PE
again.
The Assessing Officer was further of the view that the taxation of
business income of the non-resident is ascertained as per source rules
under the domestic provisions r.w. relevant Article of the DTAA.
Referring to various financial statements furnished by the
assessee for the relevant period, the Assessing Officer noticed that the
assessee company also carries out similar business in other countries.
Therefore, the operating margin shown by the assessee company itself
from similar businesses across the world could be taken as the profit
similar to the Arms length profit margin.
Applying the said ratio, the Assessing Officer computed the total
profit to be attributed at Rs. 10,73,79,094/-.
Proceeding further, the Assessing Officer noticed that as per
Form 26AS, the assessee has received interest income of Rs.
71,51,535/- from Canara Bank. However, interest of Rs. 62,94,461/-
has been declared by the assessee. The Assessing Officer, accordingly,
made addition of Rs. 8,57,074/- and concluded the assessment
proceedings.
Objections raised before the DRP were of no avail.
Before us, the ld. counsel for the assessee vehemently stated
that the assessee’s branch office has no role to play in the execution of
contracts pertaining to AAI and CIAL. It is the say of the ld. counsel
that the role of branch office was limited to maintenance of CIAL.
The ld. counsel for the assessee further stated that the assessee
does not have a PE in India in relation to off shore supply of
equipment. The ld. counsel for the assessee pointed out that the
transaction involved in the present case is one, akin to export of goods
from outside of India where the contract for supply of goods was
entered outside of India and the sale was also affected outside of India
and title to the property in the equipment passed outside of India.
Strong reliance was placed on the decision of the Hon'ble
Supreme Court in the case of Ishikawajima Harima Heavy Industries
Limited 288 ITR 408 and Hyundai Heavy Industries Co. Ltd 291 ITR 482.
Per contra, the ld. DR strongly supported the findings of the
Assessing Officer/DRP. Referring to the remand report submitted by
the Assessing Officer, the ld. DR pointed out that via communication
letter written by the assessee company to the CIAL dated 22.08.2018
and communication addressed to the AAI, the assessee on its own
accord, divided the scope of work awarded to it into two components –
comprising of supply of equipments and the other being installation,
testing, commissioning and comprehensive annual maintenance.
The ld. DR vehemently stated that the assessee has assigned the
aspect related to supply of equipment to itself and the other
component of work i.e, installation, testing, commissioning, AMC has
been assigned to the subsidiary of the assessee in India i.e. Smith
Detection Systems Pvt Ltd.
The ld. DR further stated that suo moto bifurcation by the
assessee will not change the colour of transaction and the attribution
of profit by the Assessing Officer /DRP cannot be faulted with.
We have given thoughtful consideration to the orders of the
authorities below and have duly considered the judicial decisions
relied upon by the ld. counsel for the assessee and relevant
documentary evidences brought on record in light of Rule 18(6) of the
ITAT Rules.
The core issue which needs to be addressed at the outset is to
what extent the Force of Attraction Rule apply in the case of off shore
supply/sales of goods/merchandise.
The Hon'ble Supreme Court in the case of Hyundai Heavy
Industries Co. [supra] had the occasion to address such issue. The
relevant observations of the Hon'ble Supreme Court read as under:
“The attraction rule implies that when an enterprise (GE) sets up a PE in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can tax all profits that the GE derives from the sources country-whether though PE or not. It is the act of setting out a PE which triggers the taxability of transactions in the source State. Therefore, unless the PE is set up, the question of taxability does not arise-Whether the transactions are direct or they are through the PE. In the case of a Turnkey Project, the PE is set up at the installation stage while the entire Turnkey Project, including the sale of equipment, is finalized before the installation stage. The setting up of PE, in such a case, is a stage subsequent to the conclusion of the contract. It is as a result of the sale of equipment that the installation PE comes into existence. However, this is not an absolute rule. In the present case, there was no allegation made by the Department that the
PE came into existence even before the sale took place outside India. Similarly, in the present case, there was no allegation made by the Department. that the price at which ONGC was billed/invoiced by the assessee for supply of fabricated platforms included any element for services rendered by the PE. In the present case, we are concerned with assessment years 1987-88 and 1988-89. Therefore, we are not inclined to remit the matter to the adjudicating authority. We reiterate, in the circumstances, not all the profits of the assessee company from its business connection in India (PE) would be taxable in India, but only so much of profits having economic nexus with PE in India would be taxable in India. To this extent, we find no infirmity in the impugned judgment of the Tribunal. Accordingly, we are of the view that the Tribunal was right in holding that profits attributable to the Korean Operations was not taxable in view of Article 7 of CADT.”
In light of the aforementioned findings of the Hon'ble Supreme
Court [supra], we find that the facts of the case in hand are also
identical to the facts of the case considered by the Hon'ble Supreme
Court.
Similarly, in so far as turnkey project or composite contract
having different severable parts are concerned, the Hon'ble Supreme
Court addressed the issue in the case of Ishikawajima Harima Heavy
Industries Limited [supra]. The relevant findings of the Hon'ble
Supreme Court read as under:
“68. In cases such as this, where different severable parts of the composite contract is performed in different places, the principle of apportionment can be applied, to determine which fiscal jurisdiction can tax that particular part of the transaction. This principle helps determine, where the territorial jurisdiction of a particular state lies, to determine its capacity to tax an event. Applying it to composite transactions which have some operations in one territory and some in others, is essential to determine the taxability of various operations.
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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.
(5) There exists a distinction between a business connection and a permanent establishment. As the permanent establishment cannot be said to be involved in the transaction, the aforementioned provision will have no application. The permanent establishment cannot be equated to a business connection, since the former is for the purpose of assessment of income of a non-resident under a Double Taxation Avoidance Agreement, and the latter is for the application of Section 9 of the Income Tax Act.
(6) Clause (a) of Explanation 1 to S. 9(1)(i) states that only such part of the income as is attributable to the operations carried out in India, are taxable in India.
(7) The existence of a permanent establishment would not constitute sufficient 'business connection', and the permanent establishment would be the taxable entity. The fiscal jurisdiction of a country would not extend to the taxing entire income attributable to the permanent establishment.
(8) There exists a difference between the existence of a business connection and the income accruing or arising out of such business connection.
(9) Paragraph 6 of the Protocol to the DTAA is not applicable, because, for the profits to be 'attributable directly or indirectly', the permanent establishment must be involved in the activity giving rise to the profits.”
Facts of the above decisions of the Hon'ble Supreme Court
[supra] squarely apply to the facts of the case in hand also. Turnkey
project was split into two parts – as per break-up given at pages 339,
340 and 341 of the Paper Book and payments have also been made by
AAI and CIAL separately for off shore supply and installation and
commissioning. Therefore, the allegation of ht ld. DR that the
assessee suo moto bifurcated the contract does not hold any water as
other parties also concurred at the beginning itself and therefore,
made separate payments.
Considering the facts of the case in totality in light of two above
decisions of the Hon'ble Supreme Court [supra] discussed elsewhere,
we do not find any justification in attribution of profit on off shore sale
of equipment and direct the Assessing Officer to delete the impugned
addition. This grievance alongwith with all its sub grounds is allowed.
The next grievance relates to the addition of interest on fixed
deposits amounting to Rs. 8,57,074/-.
The ld. counsel for the assessee vehemently stated that the
assessee misplaced the fixed deposits and being capital assets, have
written off the same. Therefore there is no question of earning any
interest income.
We are of the considered view that this contention of the ld.
counsel for the assessee is not only illogical, but also unacceptable.
The Canara Bank in Form No. 26AS has acknowledged the Fixed
Deposits with it and has credited interest by deducting tax at source.
Even if the Fixed Deposits are misplaced, the assessee can approach
the Canara Bank and ask for duplicate Fixed Deposits. We do not find
any error or infirmity in the addition made by the Assessing Officer and
the same is upheld.
In the result, the appeal of the assessee in ITA No.
2258/DEL/2022 is partly allowed.
The order is pronounced in the open court on 22.02.2023.
Sd/- Sd/- [ANUBHAV SHARMA] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 22 February, 2023.
VL/ Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR
Asst. Registrar, ITAT, New Delhi