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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI V. DURGA RAO, HON’BLE & SHRI MANJUNATHA. G, HON’BLE
PER MANJUNATHA. G, ACCOUNTANT MEMBER:
These three appeals filed by the assessee are directed against separate, but identical order passed by the learned Commissioner of Income Tax (Appeals)-16, Chennai, dated 22.02.2016 and pertains to assessment years 2009-10 to 2011-12. Since, facts are identical and issues are common, for the sake of convenience, these appeals are heard together and are being disposed off, by this consolidated order.
:-2-: 1556 to 1558/Chny/2016 2. The assessee has more or less raised common grounds of appeal for all assessment years. Therefore, for the sake of brevity, grounds of appeal filed for assessment year 2009-10 are reproduced as under: “1. Against taxability of supply of equipment (i) The Commissioner of Income-tax (Appeals) - 16 [CIT(A)] has failed to appreciate the fact that since the supply of equipment takes place outside India and the property in the equipment passes to the customer outside India, no income accrues or arises in India in the hands of the appellant both under the Income-tax Act, 1961 as well as Article 7 read with the Protocol of the DTAA between India and Germany. (ii) The CIT(A) erred in confirming the profit attribution from supply of equipment, on an ad-hoc basis, without taking into consideration the actual financial result of the operation of the contract.
2. Non adjudication of the Grounds of appeal by CIT(A) The CIT(A) has erred in not adjudicating the Ground No. 4 and Ground No. 5 of Form 35 placed before him.
3. Against attribution of Profits Based On Budgeted Revenues and Expenses of the Appellant, Instead Of Actual Performance of the Business The CIT(A) erred in computing the attributable profits by applying the revenues and expenses of the appellant as per budgets as against the actual performance of the business, ignoring the principle that tax can only be levied on actual income and not on a notional basis. Consequently, the AO has determined an amount of Rs. 6,12,87,462/- as Income attributable to Indian PE.
4. Indian PE is a legal fiction to tax the profits in India under the DTAA (i) Transfer Pricing Officer's (TPO) erred in assuming that the contract entered into by Durr Germany is sub- contracted to the Indian PE or that the Indian PE has agreed to perform services in India on behalf of Durr Germany.
:-3-: 1556 to 1558/Chny/2016 (ii) TPO also erred in ignoring the fact that Durr Germany and its PE in India are in fact one and the same entity and therefore incapable of doing business with itself. Therefore, as such, there is no international transaction as defined in section 92B of the Act. (iii) TPO has erred in assuming that the transaction under consideration is one which gave rise to a value chain i.e. where a contract was initially entered into by Durr Germany and was thereafter sub-contracted, on a commercial basis, to its Indian PE. Since, no value chain comes into existence in the above transaction, the attribution of the revenue to the Indian PE has to be based on the Comparable Uncontrolled Price (CUP) method and neither the Cost Plus Method (CPM) nor Transaction Net Margin Method (TNMM) shall be appropriate in the given case. (iv) Without prejudice to the above, it is submitted that the comparable used by the TPO are not applicable to the activities of the appellant's PE in India namely supervision of the installation and commissioning of the highly specialized facility i.e. a Paint shop. In fact the TPO failed to appreciate that there are no entities in India which provide identical services.
5. Duplication of Income The CIT(A) has erred in confirming the attribution of supply and services contracts value to the PE in India, ignoring the fact that the Services Contract Revenue has been subjected to tax. Consequently the CIT(A) has. erred in confirming the duplication of income of Rs.89,90,006/- under the head supervisory services which is already offered to tax by applying a notional percentage of profit on the total contract revenue.
6. Request for leave to add, alter, amend and/or supplement the grounds of appeal The appellant craves leaves to add, alter, amend and/ or supplement any ground or grounds, if necessary, at the time of hearing of the appeal.”
3. The brief facts of the case are that, the appellant is a wholly owned subsidiary of Durr Aktiengesselscaft, Stuttgart. The Durr group is one of the largest leading group in the area of automobiles. The group plans and builds complete paint :-4-: 1556 to 1558/Chny/2016 shops and final assembly facilities. The appellant operating in India through its subsidiary M/s. Durr India private Limited. The appellant operates two divisions viz., (i) paint and assembly division and (ii) measuring and process system division. The paint and assembly division offers production and paint finishing technology mainly for automotive body shells. The Measuring and process systems division produce machines and systems that are used in engine and drive construction as well as final assembly. The appellant has entered into various contracts with Indian clients like Mahindra Automotive (Cab), Mahindra Automotives (Passengers), Ford India Pvt Ltd., Volkswagen India Pvt Ltd and Tata Motors Ltd. The contract between the appellant and the company deals with supply and delivery of the equipment and supervision, installation, erection and commissioning activity. The appellant company does not involve in any installation activity. The installation, erection and commissioning of the projects has been handled by the wholly owned subsidiary of the Germany company M/s. Durr Systems India Pvt Ltd. Based on the terms and agreement and nature of contract between the appellant and their clients, the Assessing Officer observed that the contract was split into three parts at the instance of Durr :-5-: 1556 to 1558/Chny/2016 Germany and three purchase orders were issued. Contract-1 deals with off-shore supply, contract-2 provides for payment of supervision charges and contract-3 deals with installation of commissioning of the project. Income arising out of the contract-2 has been offered to tax by Durr Germany in India. The income from installation and commissioning was offered to tax by M/s. Durr India (P) Ltd. The Assessing Officer, based on these facts came to the conclusion that all the activities right from engineering stage to commissioning stage were inextricably and originally linked and therefore, the turnkey contract was a single composite contract between the assessee and the clients in India. The ld. Assessing Officer, considering mark-up of all the three activities, has proposed addition towards income attributable to Indian PE from said contracts and taxed in the hands of the assessee for all three years. The assessee carried the matter in appeal before the first appellate authority and raised various contentions. The ld. CIT(A), for the reasons stated in their appellate order dated 22.02.2016, dismissed objections raised by the assessee and held that such contracts constitutes PE in India and also computation of profit attributable to Indian PE. Aggrieved by the ld. CIT(A) order, the assessee is in appeal before us.
:-6-: 1556 to 1558/Chny/2016 4. The Ld. Counsel for the assessee, Shri. Vikram Vijayaraghavan, Advocate, at the time of hearing submitted that the main issue involved in these three appeals filed by the assessee is determination of PE and profit attribution and said issue is covered against the assessee by the decision of ITAT, Chennai Benches in assessee’s own case for assessment years 2013-14 & 2014-15. Although, the issue is decided against the assessee by the Tribunal, but fact remains that the Tribunal has not considered certain vital aspects of Article 5(4)(f) of the India-Germany DTAA, where the definition of PE excludes storage. He further submitted that, the ITAT had also not considered Protocol 1(a) to Article 7 which is UNIQUE to India-Germany DTAA unlike other DTAA’s and it clearly applies stating off-shore supplies shall not be added to PE. Further, the onus is on the revenue to prove otherwise and not on basis of presumptions and allegations. Since, there is no PE, there can be no tax avoidance of PE i.e., no application of protocol 1(c). The Ld. Counsel for the assessee, further submitted that the Hon’ble Supreme Court in the case of DIT(IT) vs Samsung Heavy Industries Co. Ltd., [2020] 117 Taxmann.com 870 (SC), has stated the law on what constitutes a PE under Article 5, and as per observations of :-7-: ITA. Nos: 1556 to 1558/Chny/2016 Hon’ble Supreme Court, no PE in India in absence of core activities by project office. The Tribunal has not considered the decision of Hon’ble Supreme Court in the above case while deciding the issue for earlier assessment years. However, the ITAT merely went on a nomenclature without substantiating how the activity of storage results in a profit so as to constitute a storage PE. The Ld. Counsel for the assessee, further submitted that the revenue has attributed profits to Indian PE based on budgeted revenue and expenses instead of actual performance of the business, ignoring the principle that tax can only be levied on actual income and not on a notional basis. Further, there is duplication of income, which is evident from the fact that the service contract revenue has been subjected to tax in India. However, the Assessing Officer has attributed profit in relation to supervisory service value to the PE in India and for avoidance of duplication of income the matter may be set aside to the file of the Assessing Officer/TPO.
The ld. Sr. Standing Counsel, Shri. Karthick Ranganathan, appeared for the department submitted that the issue is squarely covered in favour of the revenue by the :-8-: 1556 to 1558/Chny/2016 decision of ITAT, Chennai Benches in assessee’s own case for assessment years 2013-14 & 2014-15 in IT(TP)A No. 92/Chny/2018 and IT(TP)A No. 15/Chny/2021, where the Tribunal held that the contract between appellant and its clients in India is a composite contract/turnkey contract and thus, supply contract constitute PE in India, because of business and project office. He further submitted that, the Assessing Officer has rightly computed profit attribution on the basis of evidence filed by the assessee and the same has been appraised and confirmed by the Tribunal. Therefore, there is no reason to set aside the issue of computation of profit attribution once again to the file of the Assessing Officer/TPO.
We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The sole issue involved in these three appeals filed by the assessee for assessment years 2009-10 to 2011-12 is treating project office of the appellant as PE in India, in respect of supply contract and computation of profit attribution to Indian PE. We find that this issue is squarely covered in favour of the revenue by the decision of ITAT, Chennai Benches in assessee’s own case for assessment years 2013-14 :-9-: 1556 to 1558/Chny/2016 & 2014-15 in IT(TP)A No. 92/Chny/2018 and IT(TP)A No. 15/Chny/2021, where the Tribunal held that contracts entered into by the appellant with Indian clients is single composite contract and income arising there from was to be assessed in the hands of the assessee, because the project office of the appellant constitute a PE in India. The relevant findings of the Tribunal are as under: 2. The issue, on merits, was adjudicated by the Bench in revenue’s favor as under: - 7.4 Now on the issue whether the income on account of supply of paint shop material/ equipment on account of the composite contract is taxable in India in the hands of the PE, the Ld AR submitted the same plea taken before the AO/DRP and on the grounds above. Per contra, the Ld Standing Counsel relied on the orders of the lower authorities, his counter, supra. It is clear from the elaborate facts viz in case of Ford contract, examination of RFQ, proposal by Durr Germany in response to RFQ, Letter of Intent, Proposal given to Ford by Durr Germany, Purchase Order, Organisational Chart, Project progress/Final report, transfer of risk on supply and acceptance, statement from paint shop Manager, Ford India etc, it was proved beyond doubt that the contract was a single composite contract and that at the RFQ stage what was envisaged was a single composite, turnkey contract. It is Durr Germany by its proposal insisted that the contract should be split into supply and supervisory. Thus, the assessee company has not entered into two different contracts naturally. It is at the instance of Durr Germany, Ford India has split the contract and issued three purchase orders. Since the risks and responsibilities of the entire contract vest with Durr Germany, on successful execution of the entire project (being a turnkey project), only, the liability ceases to exist. The situs has to be determined on the basis of the site where the plant is to be erected. From the Project Master Schedule prepared for the project and :-10-: 1556 to 1558/Chny/2016 on the related facts, it is seen that the assessee was maintaining a Storage area on site since 10.08.2012. Subsequent to that from 11.09.2012, the shipment of goods by import order has commenced and has continued till 02.04.2013. After all the goods have been received at site, the installation was to commence only on 02/05/2013 to be completed on 17.01.2014. Till such time, the imported goods have been stored in the storage area on site. Hence, the imported material was always in the custody of assessee and the passing of Risk on Equipment to customer is to happen only on 17.01.2014 post which the warranty for the equipment supplied starts from 31.03.2014, post installation of all the equipments at site. There are two stages of passing of risk associated with this project viz., passing of risk over equipment and passing of risk over completed project to the customer, which would happen only post commissioning or when the pilot production start and pre-acceptance of the customers. Therefore, the assessee had a PE in India in respect of offshore supplies by virtue of presence of Site Office/Storage Area at the Ford Site in India for a period more than the threshold. It is therefore clear that the income to the assessee accrued in India and the source of income is in India and therefore taxable in India. From the statement recorded from General Manager Sales & Service Durr India Private Limited, the process mentioned in Ford Contract is common for all the contracts executed by Durr Germany in India. Further, the facts recorded by the DRP in the following portion of its order stand undisputed:- “ the assessee is intricately connected to the client activities in India from supply of equipment till certification of successful installation and commissioning as per the agreement. Even though the installation activities are undertaken by the Indian subsidiary, the presence and continued supervision of assessee is well established. It is the responsibility of assessee to give final proof of performance. Hence the PE is clearly constituted as brought out by the AO in the DAO and these facts are further fortified by the evidence gathered during remand report. The remand report submitted by the AO details the evidence gathered and the same is captured in :-11-: 1556 to 1558/Chny/2016 earlier paras. Various documents, agreements, invoices obtained and enclosed to the remand report confirms these facts. As per the Ground 1(a), it is claimed by the assessee that it has not participated in the execution of the installation and commissioning of the plant and hence there can be no question of attributing any portion of income to the assessee. However as per the documents obtained during survey it is seen that the assessee was directly involved in the installation and commissioning in India and the technical personnel on the rolls of the assessee were stationed in the client premises in India to oversee the operations. Hence the contentions of the assessee are found to be wrong and accordingly they are rejected. Accordingly, the assessee’s contentions are proved to be false. Accordingly, the objection raised by the assessee is rejected.” 7.5 Therefore, it is clear that all the activities of the assessee from engineering stage to supply erection, installation, commissioning and completion are all inextricably and organically linked and hence, the turnkey contract is a single composite contract between Ford India and Durr Systems GmbH (assessee). Further, it is clear that the assessee has not placed any material before us to dislodge the findings recorded by the DRP. Further, we find that the facts and circumstances of this case are identical with the facts of the case relied on by the Ld Counsel in Ansaldo Energia SPA v ITAT, Chennai in TC No 1303 of 35 ITA No.3109/Chny/2017 2007 dt 12.01.2009 , reported in (2009) 178 Taxman 57 (Madras) of which , the relevant portions of the decision of the Jurisdictional High Court is extracted as under : 36. The Tribunal’s factual findings also are in favour of the revenue as regards the contract being a composite one, ASPL being a mere facade, existence of close relationship between the foreign person and the Indian operations. 37.…………………………………………………………………………it had secured the due performance of the whole contract by insisting that the assessee should guarantee its performance even if the contract was split up into four contracts, NLC did not stand to lose since the value of the contract was fixed :-12-: 1556 to 1558/Chny/2016 even from the beginning. It must be remembered that it was open only for a single bidder. It was only for the convenience of and at the instance of the assessee that it was divided into four. Therefore, the question as to whether NLC would have agreed to such a course of action is really not relevant. NLC did not suffer in any way by splitting up and NLC was bound to pay the entire payment regardless of whether it was equally distributed among all the four contracts or whether the price was loaded on to Contract or 11.
For the reasons given above, we confirm the findings that, (a) the foreign company and the activities rendered by it under contract No. I and the other three contracts are inextricably linked and it was a composite contract, (b) all responsibility from the beginning to the end rested on the assessee. (c) there is an intimate, real and continuous relationship with the subsidiary company, and (d) that the price of the other contract was loaded on to Contract No. I. In these circumstances, we do not think that the first question arises for consideration. Therefore, we do not find merit in the submissions of the Ld AR and hence the corresponding grounds fail. The bench thus held that all the three contacts were single composite contract and income arising therefrom was to be assessed in the hands of the assessee.”
In so far as, computation of profit attribution to Indian PE and elimination of duplication income in respect of service contract, the Tribunal after considering relevant facts held that the assessee has failed to provide basic information and other details to prove that computation of profit attribution was erroneous. However, accepting the plea of the Ld. Counsel for :-13-: 1556 to 1558/Chny/2016 the assessee has set aside the issue of computation of profit attribution, and elimination of duplication of income in respect of service contract revenue, to the file of the Ld. Assessing Officer/TPO. The relevant findings of the Tribunal are as under: 3. However, considering the plea of Ld. AR with respect to correct computations, the issue of computation of income was restored to the file of Ld. AO / TPO with following directions: - 8. On the issue of mistakes in the computation, the Ld AR submitted that supplies are added to the total income by applying an ad-hoc markup rate. On the transactions with Ford India, the Ld AR submitted that down payment invoices considered as supplies as per the RR, a basic error which leads to same payment being counted twice resulting in double taxation. The AO also erred in determining taxable income of the PE on a ‘Cash Basis” whereas the Appellant has determined Taxable Income on a Mercantile Basis, in contravention of S. 145 of the Act. Additions to supplies made on information obtained under 133(6) from customers which is on payment basis. Per contra, the Ld Standing Counsel submitted that the assessee has not quantified the double additions, if any. If the assessee’s claim is proved, suitable remedial action can be taken. 9. We have considered the rival submissions. Though, the assessee has not furnished the details in respect of the above submissions, in the interests of justice, we deem it fit to remit this issue back to the AO/TPO for a fresh examination. The assessee shall place all materials in its support before the AO/TPO and comply to the requirements of the AO/TPO in accordance with law. The AO/TPO is free to conduct appropriate enquiry as deemed fit. However, he shall after affording effective opportunity to the assessee, would pass appropriate order in accordance with law. The assessee’s above grounds are treated as allowed to the above extent. It could be thus seen that the assessee could not furnish any details with respect to computations but nevertheless, the :-14-: 1556 to 1558/Chny/2016 matter was restored by the bench back to lower authorities for limited purpose of computation of income. Set-aside proceedings 4.1 Pursuant to the aforesaid directions, order giving effect has been passed by Ld. AO on 06.02.2020. During proceedings, details were called from assessee seeking information on the income which is taxed twice and the year in which the same was already brought to tax. However, the assessee submitted that it was not maintaining separate books for the permanent establishment (PE) in India and there was no separate ledger accounts pertaining to the Indian Operations in the books of account of the assessee. The list and copies of all the invoices with respect to contracts undertaken in India was provided. The assessee maintained that since the transfer of goods took place outside India, no income on account of such supply of goods accrue or arise or deemed to accrue or arise in India. Accordingly, no income therefrom is liable to tax in India and therefore, no income from supply of equipment have not been disclosed in the return of income. 4.2 The Ld. AO noted that the assessee earned 4,25,44,796.52 Euros from Ford India contract over the years which need to be reconciled year-wise and the assessee was directed to reconcile the same. The assessee, vide reply dated 04.10.2019, inter-alia, admitted that downpayment invoices of Ford India do not form part of the PO and the same were over and above total PO value. This amount was revised to 4,23,12,142 Euros by the assessee which do not include installation and commissioning revenue. The Ld. AO held that it was thus clear that invoices were raised separately for supply, installation and commissioning. No details of profit earned were made available by the assessee and the assessee did not file any reconciliation for the income which was taxed twice along with convincing evidences. 4.3 Accordingly, these details were again sought from the assessee, vide letter dated 05.11.2019. The assessee, vide reply dated 14.11.2019, filed certain details of supplies made to Ford India along with details of income accrued on mercantile basis under supervisory contract etc. The Ld. AO rejected the plea that downpayment invoices as unearthed by the department during survey proceedings were mere documents that facilitate the release of payment. The assessee :-15-: 1556 to 1558/Chny/2016 did not show that these downpayment invoices has been included in income and brought to tax. The assessee did not maintain any books of accounts for Indian operations and therefore, the issue raised regarding method of accounting was beyond the purview of these proceedings. Finally, Ld. AO held that the assessee was not able to show the exact amount which was taxed twice. Though the assessee filed further replies agitating various issues, it could not reconcile the figures along with computation of income that arose under the impugned contract. Consequently, the computations made in order dated 08.11.2017 were retained by Ld. AO. The Ld. DRP confirmed the stand of Ld. AO vide directions dated 05.02.2021 and accordingly, final assessment order was passed on 17.02.2021. Aggrieved, the assessee is in further appeal before us with a grievance that the directions as given by Tribunal has not been followed by lower authorities and the additions have been repeated in the set aside proceedings. Our findings and Adjudication 5. Upon careful perusal of Tribunal’s adjudication as extracted in preceding para 2 & 3, we find that the issue, on merits, has been decided by the Bench against the assessee. It has clearly been held by the bench that all the activities of the assessee from engineering stage to supply erection, installation, commissioning and completion are inextricably linked and hence, the turnkey contract is a single composite contract between Ford India and Durr Systems GmbH (assessee). However, considering the submissions of the assessee that the profit rate was determined by applying adhoc mark-up rate and the down payment invoices were considered as supplies which lead to double taxation and the plea that the income should have been computed on mercantile basis, the bench directed lower authorities to re-determine the computations. However, upon perusal of impugned order, it could be seen that the assessee has miserably failed to provide the basic information as to invoices raised by it under all the three categories despite the averment before the Tribunal that computations were erroneous. The complete reconciliation of invoices raised by it under all the heads vis-à-vis payments received by it and the quantum of income offered by it over various years has neither been tabulated nor been quantified at any stage of proceedings. Instead, the assessee has, merely raked up the issue on merits, which already stood adjudicated by the Tribunal. The assessee also raised a plea of double :-16-: 1556 to 1558/Chny/2016 taxation of income without demonstrating the same. No separate books are being maintained for Indian operations and therefore, the method of accounting would lose relevance in such a case. Per query from the bench, Ld. AR has failed to provide any such information or computations before us. In such an eventuality, lower authorities would be left with no option but to determine the profits as per material available on record, which they have correctly done. During hearing, Ld. AR has pleaded for another opportunity to provide the complete details as well as computations to the lower authorities. Accepting the same, we direct Ld. AO / TPO to provide another opportunity of hearing to the assessee to place before it the complete details of invoices raised by it, in all the heads, under the contract and income offered by it over various years. The computation of income which arose to the assessee under the contract shall also be quantified. The complete onus, in this regard, would be on assessee. We order so. For the said limited purpose only, the issue of computation of income stand restored back to the file of Ld. AO / TPO. The appeal stands partly allowed for statistical purposes.”
In the present year also, the Ld. Counsel for the assessee has failed to provide necessary information to justify his arguments that, there is an error in computation of profit attribution to PE in India and also failed to substantiate his arguments that there is a duplication of income in respect of service contract revenue. Although, the appellant failed to provide basic information, considering the plea of the assessee and also consistent with view taken by the co-ordinate bench in assessee’s own case for assessment years 2013-14 & 2014- 15, we set aside the issue of computation of profit attribution and duplication of income in respect of service contract :-17-: 1556 to 1558/Chny/2016 revenue to the file of the Assessing Officer for the limited purpose of computation of income. The assessee is directed to provide the requisite details to ascertain correct amount of profit attributable to Indian PE.
The Ld. Counsel for the assessee, at the time of hearing submitted that the appellant does not want to press ground no. 2, challenging non-adjudication of certain grounds by the ld. CIT(A) and also ground no. 4 on the issue of PE and thus, ground no. 2 & 4 of assessee’s appeal for assessment years 2009-10 to 2011-12 are dismissed as withdrawn.