M/S. VOITH PAPER GMBH,NEW DELHI vs. DDIT, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘D’, NEW DELHI

BEFORE SHRI O.P. KANT, ACCOUNTANT MEMBER AND SHRI K.N. CHARY, JUDICIAL MEMBER

ITA No.1077/Del/2014 Assessment Year: 2010-11

M/s. Voith Paper GmbH, Vs. DDIT, C/o-Mohinder Puri & Co., Circle-2(2), CAs, 1A-1D, Vandhna, 11, New Delhi Tolstoy Marg, New Delhi PAN :AADCV3751B (Appellant) (Respondent)

Appellant by Shri Ajay Vohra, Sr. Adv. Shri Akshay Uppal, CA Respondent by Shri G.K. Dhall, CIT(DR) (Intl. Taxation)

Date of hearing 28.11.2019 Date of pronouncement 21.02.2020

ORDER PERO.P. KANT, AM:

The assessee has preferred this appeal against the final assessment order dated 02/01/2-14, passed by the Deputy Director of Income Tax, Circle-2(2), International Taxation, New Delhi (in short ‘the Ld. Assessing Officer’), in pursuant to the direction dated 27/12/2013 of Ld. Dispute Resolution Panel(DRP). The grounds raised in the appeal are reproduced as under:

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3.(a) That the learned A.O. and DRP have erred in law and on facts in holding that an income of Rs.16,14,04,346/- in relation to contract for supply of equipment, is deemed to accrue or arise in India under section 9(1 )(i) of the Indian Income-tax Act (‘The Act’) and consequently is taxable in India in terms of section 5(2) of the Act.

(b) That the learned A.O./DRP has erred on facts and in law in holding that sale of equipment was concluded in India based on incorrect interpretation of terms and conditions of contract in respect of supply of equipment.

(c) That the learned A.O./ DRP has misdirected themselves in holding the supply and service contracts in the nature of composite contract and also that the activities have been dissected for the purpose of tax avoidance.

(d) That the learned AO/DRP has erroneously held that the relevant two contracts were in the nature of non-divisible 'works contract' and erroneously relied on the decision of Hindustan Shipyard (2000) 119 STC 533; (2000) 6 SCC 579, not applicable on facts and in law.

(e) That the learned A.O./DRP has made erroneous observations, assumptions of facts, in coming to the conclusion that the business activities carried out by the service (deemed) PE of the Appellant in India contributed to the earning of profits earned by the Appellant from offshore supply of equipments without appreciating that all the equipments were manufactured and supplied from outside India and the service PE had no role to play in the same.

(f) That the learned A.O. / DRP has grossly erred in law and on facts that consideration for sale of plant and equipment was liable to tax in India on incorrect appreciation of the provisions of supply contract, wrong interpretation of the provisions of the Act and DTAA between India and Austria.

(g) That the learned A.O. and DRP have misdirected themselves on wrong assumptions of facts and in law in not accepting the claim

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that supply of equipment represented consideration of the nature of ‘Business Profits' not liable to tax in India, as per the provisions of DTAA between India and Austria read with the Act.

(h) That the learned AO and DRP have grossly erred in holding that the assessee had a project office/branch office in India which constituted a PE.

(i) That the learned AO and DRP have grossly erred in stating that alleged PE was involved in marketing activity in India without any basis.

(j) That the decisions as relied upon by the learned AO are distinguishable, not applicable, on facts of the assessee.

(k) That the learned A.O./DRP has erred in not following the decisions of Hon’ble Supreme Court of India and Jurisdictional High Court in the following cases where, on similar facts, it has been held that consideration for supply of plant and equipment, from outside India, was not liable to tax in India.

(i) Commissioner of Income Tax and Another Vs. Hyundai Heavy Industries Company Limited (291 ITR 482 SC);

(ii) Ishikawajima - Harima Heavy Industries Ltd. - Vs. Director of Income Tax, Mumbai (228 ITR 408 SC).

(iii) Director of Income Tax, New Delhi Vs. LG Cables Ltd.[2011] 197 Taxman 51 (Delhi)

(l) That the learned A.O. / DRP has wrongly and without any basis erred in holding that the assessee has a business connection and ‘Fixed Place of business’ in India where from business of the assessee was wholly or partly carried on.

(m) That the learned A.O./ DRP has erred in holding that the assessee had a fixed place P.E by erroneously linking it ThyssenKrupp companies belonging to a different group.

(n) That without prejudice, the learned A.O./ DRP has erred in applying FAR analysis and benchmarking of un-comparable companies in computing profit attributable in India in relation to supply of equipment at Rs. 16,14,04,346 and failed to appreciate that Global Income Statement- or Appellant was also submitted. That attribution of profits, as made, on such benchmarking by the learned AO, without providing details to the assessee, is totally unjustified and illegal and also fail to consider the result of the global accounts of the assessee.

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(o) Without prejudice, the learned A.O./ DRP has erroneously held that on facts, profit attributable in respect of supplies is 35% of the profit accruing from off shore supplies. The said attribution is arbitrary, highly excessive and has no rationale whatsoever, and is against the principles of attribution as laid down under the provisions of Income-tax Act, DTAA between India and Austria and various decisions of Hon’ble High Court, Supreme Court of India. Reliance made on the decision of Hon’ble Delhi High Court in the case of Rolls Royce is unjustified as the same is not applicable on the facts of the assesse.

(p) Without prejudice, the computation of revenue regarding the offshore supply of equipment has been erroneously made as the rate of exchange for conversion into rupees of income expressed in foreign currency has been taken arbitrarily and not as per rule 115 of the Income Tax Rules.

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resident Indian (NRI). In the return of income filed, the assessee declared its address as C/o Mohinder Puri & Co. 1A-D Vandana Building 11, Tolstoy Marg, New Delhi. 2.2 The assessee had entered into two contracts on 19/06/2008 with the ‘Century Pulp and Paper Company’ (CPPC), a division of M/s. Century Textile Industries Ltd, for equipment supply and service for commissioning of “620 TPD” multilayer packaging coated board plant. The supply included for engineering, designing, manufacturing, drawing and supplying of machinery for 620 TPD multilayer packaging coated board plant and service included for supervision of erection, start-up, training, commissioning and performance test of said machinery. 2.3 During the scrutiny assessment proceedings for the year under consideration, the assessee provided details of both the contracts of equipment “supply” and “service” contracts. The summary of the contract price of equipment “supply” and “service” contract, reproduced by the Assessing Officer in the impugned order is extracted as under:

Summary of supply contract price invoiced on the customer S. No. Year Offshore Supply Drawing & of Equipment Deigning Euro Euro 1. AY 2010-11 (FY 2009-10) 67,481,776 Nil 2. AY 2011-12 (FY 2010-11) 1,017,024 Nil Total 68,498,600 Nil

Summary of service contract price received from the customer. S.No. Year Payment Received (Net Payment Received of Taxes) (Grossed up @10%) Euro INR Euro INR

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AY 2010-11 (FY 59,400 3,631,260 4,034,734 1 66,000 2009-10) AY 2011-12 (FY 1,889,400 114,953,535 2,099,033 127,726,150 2 2010-11) 3 AY 2012-13 (FY 1,496,400 96,042,812 1,662,667 106,714,236 2011-12) Total 3,445,200 214,627,608 3,828,000 238,475,120

2.4 The assessee has supplied the machinery parts in financial year 2009-10 (relevant to assessment year under consideration) and subsequent financial year. During the year under consideration, the assessee raised invoices for supply of components of machinery from 14th Sep., 2009 to 9th December, 2009 and shipped the containers through sea. The personnel of the assessee company visited from 14/12/2009 to 31/03/2010 for supervision of the erection, start up, training, commissioning and performance test of the TPD plant. 2.5 It was contended by the assessee that income in respect of “off-shore supply” of equipment was not taxable as per the provisions of the Income-tax Act, 1961 (in short ‘the Act’) as well as under Double Tax Avoidance Agreement (DTAA) between India and Austria. The assessee submitted that it had no fixed place of business in India as per Article 5(2) of the DTAA between India and Austria as far as offshore supply of machinery was concerned. 2.6 Regarding the service contact, it was submitted that during the year under consideration, the assessee was engaged in undertaking supervision of erection in relation to machines supplied by the assessee from outside India, which is an activity incidental to the plant and for execution outside activities, for which the assessee deputed its personal from time to time. Such

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service activities in relation to the machine, were continued for a period exceeding six months and thus by virtue of provision of Articles 5(2)(i) of the DTAA between India and Austria, only in respect of said service activity, the assessee had a deemed Permanent Establishment (PE) in India. 2.7 The assessee declared income in respect of supervision activity for taxation on the receipt basis following completed contact method (CCM). Under CCM, the amount received from the customer and the costs incurred in respect of supervision activity during the year was carried over to the next financial year(s) till the project activity was completed. In the financial year in which the installation activity was completed, all the amounts invoiced on the customer are brought forward as income to the profit and loss account and similarly all the costs and expenses brought forward from earlier year(s) are transferred to profit and loss account for the purpose of determining the net profit and net tax payable by the assessee. 2.8 During assessment proceedings, the learned Assessing Officer examined the contracts agreements and found that both contracts of supply and service constituted as composite contract. According to the learned Assessing Officer (AO), in view of business connection, the part of the income from offshore supply of machinery was deemed to accrue or arise in India and hence taxable under section 9(1) of the Act. The AO was of the view that said part of income from offshore supply of machinery, was also taxable in India in terms of the DTAA between India and Austria. The AO issued show cause notice to the assessee that it had a Permanent Establishment (PE) in India, in the form of project

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office and as per article 7(1) of the DTAA between India and Austria, the profits of the enterprise attributable to the PE in India would be taxable in India. The AO computed the supply of machinery during the year at Rs. 472,97,97,680/-and in the show cause, he proposed that in offshore supplies segment, the role of PE was akin to distribution function i.e. the PE has first purchased the equipment /platform from the head office (HO) and then sold to Indian customer. According to the AO, the transaction of such purchase by and transfer of equipment to the ‘PE’ was international transaction, which was not reported by the assessee for transfer pricing adjustment. The AO carried out benchmarking of distribution function of the ‘PE’ and based on set of comparables, computed average margin for ‘distribution services’ at 9.75 percentile. Accordingly, he proposed profit mark- up at average margin of 9.75 % on supply of Rs. 472,97,97,680/- which amounted to Rs. 46,11,55,273/-. 2.9 The assessee objected for considering the taxability of profit from supply of machineries made from outside India, as according to the assessee sale of Machinery was made outside India and the payment was also received outside India and thus no part of offshore supply was taxable in India. In support of the claim, the assessee relied on various judicial pronouncements. 2.10 After considering submission of the assessee, the AO made factual observation about the activities of the assessee in para 8 of the assessment order, which is extracted as under for ready reference:

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2.11 According to the AO, supply cannot be termed as contract for sale of equipment because machineries though manufactured in Austria but were required for manufacturing and commission of TPD Plant in India. The AO relied on the decision of Honble Supreme Court in the case of Hindustan Shipyard (2000) 119 STC 533 and concluded that the contract of supply and service in relation to commission of TPD plant is a composite contract. The finding of the Assessing officer in relation to ‘composite contract’ are reproduced as under:

“11. I have examined facts of this case along with the ration decidendi above referred to judgment of Hon’ble Supreme Court and have noted that dictum of law for second category of contract (ii) as discussed above is squarely applicable to the identical facts of the case under consideration. In this case assessee had entered into a contract with CPPC to design, build, manufacture, supply, installation, testing and commission of machinery for TPD Plant. The supply of machines was necessary and incidental to design, manufacture, installation, testing and commission of above facility i.e. machinery for TPD Plant in India. It is not case of assessee that

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the contract was signed for supply of machines only and some technical work was required to be done as incidental to machines only and some technical work was required to be done as incidental to sale of equipments. Even though the assessee during the assessment proceedings, mentioned that the supply of machinery for TPD Plant and the installation and commissioning services are separate and independent of each other, a careful perusal of this document reveal that as per the terms and conditions of the contract the effective mandate given to the assessee is in the nature of composite contract . The purpose and intention of CPPC was to install a fully functional machinery for TPD Plant in working condition at the Airport and the assessee company was given this responsibility. Therefore, Respectfully following the above principle as laid down by Hon’ble apex court, I am of considered view that the impugned contract is nothing but a consolidated contract was for design, build, manufacture, supply, installation, testing and commissioning, of machinery for TPD Plant i.e. work contract and the contract cannot be subdivided as contract for sale of equipments and contract for technical services as was wrongly been argued on behalf of assessee. 11.1 In this case designing, manufacturing, commissioning and calibration of above referred to machinery for TPD Plant was complete responsibility of assessee company which was only one contractor to implement the contract and it had furnished performance guarantee and guarantee for timely completion of the project of building and commissioning these machinery for TPD Plant. It is not case where separate contract were signed by different parties to execute a project. Hon’ble Supreme Court in case of Ishikawajima-harima Heavy Industries Ltd. Vs. DIT, Mumbai (supra) examining the contract for sale and services has held as under:

“We do not think that these observations furnish a universal test that whenever there is a contract to ‘fix’ certain articles made by a manufacturer the contract must be deemed one for sale and not of service. The test in each case is whether the object of the party sought to be taxed is that the chattel as chattel passes to the other party and the service rendered in connection with the installation are under a separate contract or are incidental to the execution of the contract of sale.”

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the same cannot be held and divided as contract for sale of equipments.

2.12 Thereafter, the Assessing Officer went on to hold that income from the composite contract was taxable under section 9(1) the Indian Income-tax Act as the income deemed to accrued or arise in India through or from the business connection in India. In view of the decision of the Hon’ble Supreme Court in the case of CIT Vs RD Agarwal & Co. (1965) 56 ITR 20 (SC), and decision of the Hon’ble Andhra Pradesh High court in the case of GVK Industries Ltd. Vs ITO (1997) 228 ITR 564 (AP), he summarized the essential of “business connection” as under:

(i) a real and intimate relation must exist between the trading or other business activities by a non-resident carried on outside India and the activities within India;

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(ii) the relation contributes directly or indirectly to the earning of income by the non-resident in his business; a course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident outside India and the activity in India, would furnish a strong indication of business connection.

2.13 In view of the facts and circumstances of the case, the AO concluded the taxability under Indian Income-tax Act as under:

“17. In the light of above stated dictum of law I have examined the facts of the case and have noted that in this case, assessee had business connection in India in the year under consideration for earning income from supply of TPD Plant and supervisory services. In this case the business of assessee was to design, build, manufacture, supply and supervision of installation, testing and commissioning of “machinery for TPD Plant” for Indian customer (CPPC). The assessee had carried out the business activities in India through its deemed PE in India and these activities had contributed in earning of the profit by assessee both on account of supervisory services and supplies of equipment needed for TPD Plant. These facts have proved beyond doubts that there was a real and intimate relationship on continuous basis between the business activities carried on in India and business of the assessee who is a non-resident and this relationship had resulted in accrual of income to the assessee both on providing supervisory services and supplies of design, drawing and equipment to Indian customer. It is proved from above discussion that all the three essential features of the business connection mentioned above are present in this case. Therefore, the income accruing or arising to the assessee by way of profit from design, manufacture, supply of machines, supervision of installation, testing and commissioning of machinery for TPD Plant to Indian customer shall be deemed to accrue or arrive in India u/s 9(1 )(i) of the Act and consequently same is taxable in India under domestic law in term of section 5(2) of the Act.”

2.14 The AO also held existence of the PE in India and taxability under the DTAA between India and Austria. The DTAA has defined the PE as a fixed place of business through which the business of an enterprise is wholly or partly carries out. The existence of deemed PE in respect of supervision activities has not

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been disputed by the assessee in view of employees of the assessee were stationed at the CPPC TPD plant in the year under consideration for supervising the erection and commissioning of the TPD plant. The AO is of the view that the address mentioned in the return of income was at the disposal of the assessee for a very long duration and it was involved in marketing and pre contract negotiations done by the assessee, and thus, PE of the assessee existed from beginning of the supply contract. The relevant finding of the AO is reproduced as under: “18.2 Further, in the Tax audit report furnished in Form 3 CB and form 3CD under rule 6G(1)(b) of the Income Tax Rules , 1962 of the assessee (related to the Permanent Establishment in India for the contract with Ford India Pvt. Ltd, the address of the PE is mentioned as “Mohinder Puri& Co 1A-D, Vandhna Building 11, Tolstoy Marg New Delhi- 110001. In the return of Income filed by assessee also the same address is mentioned as the address of the assessee. Also, the undersigned is also the assessing officer of other group companies of the assessee (M/s ThyssenKrupp Elevator Australia Pty. Limited and M/S ThyssenKrupp Airport System SA ) Both these companies have Branch Office / Project Office at the same address as given by assessee. Therefore there can be no dispute on the fact that this address is a place of business and this place of business is at the disposal of the assessee. Next let us examine whether any business activity is carried out from or through this place of business. In the form 3CD mentioned above in column no 9 (b) it is mentioned that the books of accounts of the PE are maintained in the computer system. In form 3CD and 3CB supra the address of the assessee is at supra. Therefore there is no reason to presume that the computer system mentioned supra is not installed at the address of the assessee. Maintenance of books of accounts is a core business activity which is carried out from the above mentioned place of business. The returns of the assessee are being filed in India since last many years and in all the returns the address of assessee remains the same. Therefore it is implied that this place of business is at the disposal of assessee for sufficiently Iona duration to be called as “Permanent Establishment”. Therefore the assessee’s submission that the PE came into existence after the supply under the impugned contract is completed, is not correct. In fact the PE was very much involved in the "marketing and pre-contract negotiations done by assessee.

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18.3 It is evident from above referred to facts that assessee had carried out business of design, manufacture, supply and supervision of installation, testing and commissioning of machinery for TPD Plant from the PE of assessee in India. The supplies of machinery for TPD Plant were a part of a composite contract. Accordingly, a part of the profit earned by assessee on supply was attributable to fix place of PE of assessee in India.”

2.15 The AO also rejected the contention of assessee that Machinery for TPD plant were delivered outside India and thus no profit from offshore supply could be attributed to the PE of the assessee, observing as under:

“18.4 The claim of assessee that machinery for TPD Plants were delivered outside India in Austria, accordingly no profit from offshore supply could be attributed to the PE of assessee in India. I have carefully examined the term and condition of agreement and have noted that the claim of assessee is factually incorrect. As per the terms and conditions of the agreement assessee has to deliver machinery for TPD Plant in running condition after completing supervision of the installation commissioning and testing. In such a condition assessee’s contention that equipments are sold to CPPC in high seas cannot be anything but a tax avoidance scheme. When assessee is required to have possession of the goods at the work site for supervision of installation, the passing of possession in high seas to CPPC and again taking it back at the site is highly illogical. No purpose other than tax evasion can be served from this transaction. Further there is no documentary evidence also of the receipt of these goods by the assessee or its agent at the work site. Even as per Section 19 (1) of sales of goods act the title of goods passes when the contracting parties intend it to pass. In this case, when the intention of one of the contracting parties (CPPC) is to receive the goods in working condition, the mere documents stating that the title has passed overseas have no value as the nature of goods in this case is such which cannot be imagined to be in working condition high seas. Both these facts are contradicting each other therefore only one of them can be fact. Since the other clauses of the impugned contract are in operation, the title over the goods cannot pass overseas.”

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2.16 The AO also examined the claim of the assessee that title of the machinery supplied passed outside India in the light of Sale of Goods Act, 1930 (in short ‘the SGA’). The AO referred to section 19(1) of the SGA, which provides that in a contract for sale of goods, the property is transferred to the buyer at such time as the parties to the contract intend it to be transferred. The section 19(2) of the SGA provides as intention of the parties has to ascertain from terms of contract, the conduct of parties, the circumstances of the case. The AO after examining the circumstances provided in section 19(2) of SGA, held that the parties intended to pass title of the equipment in India only. The observations of the AO are reproduced as under: “Section 19(1) of the Sale of Goods Act provides in a contract for the sale of goods, the property is transferred to a buyer at such time as the parties to the contract intend it to be transferred. However section 19(2) of the Act provides that for the purpose of ascertaining the intention of the parties, regard shall be had to: a. the terms of the contract; b. the conduct of the parties; and c. the circumstances of the case b. The contract has to be read as a whole to ascertain the intention of the parties.

c. The definition of these terms clearly indicates that the entire risk is borne by the supplier and carriage and insurance charges paid till their delivery at airport/ seaport in India. The repeated reference by the Assessee to Incoterms 2000 does not alter the situation because the expression by its very definition in the agreement means the obligation to bear the carriage and insurance charges upto airport/ seaport in India. It would be illogical to read that the parties particularly Century Pulp and Paper Company in India, can agree to the delivery at any airport/ seaport outside India. 19.2 In view of all the above referred clauses, if the agreement is read as a whole, the intent of the parties is clear that the title to the

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equipment passes in India at the site where the deliveries are made or in a worst scenario at the airports/seaports in India.

19.3 Under normal circumstances, the risk and title would go together. In the present case, the terms of the agreement read as whole and the conduct of the parties go to indicate that the documents submitted by assessee during the course of assessment like bill of lading, invoices, import documents etc do not demonstrate the true intent of the parties. This condition of the supply cannot be met it The goods are delivered on High seas The “full satisfaction” can be reached only in India after the provisional acceptance. One cannot pick up one part of supply obligation and contend that the title has passed with the discharge of that obligation. Incoterms 2000 only refer to the terms of the agreement generally acceptable between the contracting parties with regard to obligation to bear the cost of transportation, insurance till the point of delivery. Thus, if the agreement is viewed as a whole, it demonstrates that the supplier has the obligation to deliver the goods at the relevant site in India and the documents showing that the title passes in High seas does not reflect the actual mode and delivery of the supply nor the true intent of the parties. Section 19(2) of Sales of Goods Act provides for the factors to determine the intent of the parties and if despite the declaration to the contrary under the section 19(1), if it is found as a matter of fact that the deliveries had been made in India it would be open to Revenue to assert that title to the goods had passed in India.”

2.17 The AO further referred to section 21 of the SGA, which provides that where there is a contract for sale of specified goods and seller is bound to do something to the goods for the purpose of putting them in a deliverable state, the property does not pass until such thing is done and the buyer has notice thereof. The AO observed that in the instant case, the assessee provided goods in deliverable state in India. The relevant finding of the AO is reproduced as under:

“19.4 Section 21 of the Sales of Goods Act provides that where there is contract for sale of specific goods and seller is bound to do something to goods for the purpose of putting them in a deliverable state the property does not pass until such thing is done and the buyer has notice thereof. In the present case, the sale is not of

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standard goods but of components of passenger boarding bridges, unless these components are assembled, installed, commissioned” and tested, these supplies would be worthless. These components and equipments reached the deliverable state only when their installation is completed and performance established through the provisional or final testing. The assessee has definite obligation to achieve this milestone and unless this is done the property cannot pass. Unlike other kinds of overseas supplies where the supplier has no other obligation beyond the point of shipment, in the present case, the obligation of the supplier extends to the geographical limits of India where he has to put the supply into a deliverable state. In the equipments being discussed in the present case, the various components are integral part of the wholesome technology and these cannot be viewed independently.”

2.18 The AO also referred to section 41(1) and 41(2) of SGA , which provides that where goods are delivered to the buyer , which he has not previously examined , he is not deemed to have accepted them unless and until he has had a reasonable opportunities of examining them for the purpose of ascertaining whether they are in conformity with the contract. The AO finally observed in para 20 of the assessment order as title of the machinery supplied passed in India. The relevant para is reproduced as under:

“20. A reading of the aforesaid sections of the Sale of Goods Act will show 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 done and the buyer has notice thereof. This clearly shows that operationalization and full and guaranteed working condition in accordance with technical specifications are the requirements for the contracted goods to be put into a deliverable state and the Property does not pass until such thing is done ie working condition as per technical ‘specifications and the buyer has notice thereof though the provisional acceptance .est. As per terms and conditions of above referred agreements and the discussion in the para above it is amply clear that assessee was responsible for procurement, transport, receiving., uploading and safe keeping of all

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the equipment required in the completion of work which include the supply of 620 TPD Plant from Austria. In term and condition of the agreement, the offshore supplies become the property of the employer only when the same was delivered at site even thereafter the contractor i.e. assessee continued to bear the risk in respect of such item as the same in its custody till installation, commissioning and testing.”

2.19 The AO, then proceeded to hold that sale of equipment was concluded in India and the PE in India played role in marketing and thus part of profit of supply of machinery of TPD plant is directly attributable to the PE of the assessee in India. The relevant part of the finding of the AO is reproduced as under: “21. All these analysis makes it clear that the sale of equipments is concluded in India.PE of assessee in India was directly involved in design, build, manufacturing and supervision of commissioning of machinery for TPD Plant facility and supply of machinery for TPD Plant was needed to make this machinery for TPD Plant functional. These facts clearly suggest that there was extremely close connection between the assessee and PE in India i.e. PE and assessee company were same and one. It is a proven fact that supply of equipment were incidental and essential to design, build, manufacture, commission machinery for TPD Plant and is part of one and composite agreement. The assessee had earned supervision fee and income from supplies only from its business activities carried on through PE in India. All the transaction including supply of equipment offshore had taken place with the involvement of the PE of assessee in India. The above referred to factual matrix of this case that substantial part of the business activities of assessee of manufacturing and commissioning of machinery for TPD Plant were carried out in taxable territory of India and supply of machinery for TPD Plant was incidental to work contract and for this reason a part of profit on supply is directly attributable to the PE of assessee in India.

21.1 It is not case of a project where supervision services were required to fix up a plant and machinery i.e. technical services were incidental to sale of plant and machinery. In the case of assessee a contract was signed between assessee and CPPC to design, built, manufacture and supervision of erection and commissioning of machinery for TPD Plant in India and supply of machinery for TPD Plant were incidental to work contract and were essential requirement and were part of these machinery for TPD Plant. In other words supply of equipment was incidental to main business

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activity of assessee company providing technical services for design, build, manufacture and supervision of installation, testing and commission of ‘machinery for TPD Plant. For all these reasons, it is amply clear that there was sufficient territorial nexus between supplies and PE of assessee company in Inrjia It is also important to consider the fact that the contract with CPPC was negotiated and signed in India.

21.2 In this case supplies of equipment were made only to build and commission machinery for TPD Plant in India through PE of assessee and these supplies were incidental to rendering technical services for manufacturing and supervision of erection and commissioning of machinery for TPD Plant. Accordingly, it cannot be pleaded that sale of machinery for TPD Plant was not directly connected with PE. It is also proved from the facts as recorded above that in this case that all the business activities of manufacturing and supervision of erection and commissioning of machinery for TPD Plant’ as well as incidental supplies were carried on in India (delivery at site) and a part profit on supply was attributable to the PE in India.

21.3 In view of the discussions contained above, it is held that profit earned by assessee from supply of equipments is directly attributable to the PE of assessee in India. The equipment machinery for TPD Plant needed for supervision for erection ad commissioning of these facilities were manufactured by assessee in Austria but were utilized for creation of machinery for TPD Plant in India. Therefore a part of by assessee on offshore sale/supply was directly attributable to PE in India.”

2.20 The AO computed the profit attributable to the PE in the light of the ratio of the decision of the Hon’ble Delhi High Court in the case of Rolls Royce Plc 339 ITR 147c(Delhi) at 35% of the profit from operation of supply of Machinery. The relevant part of the order is reproduced as under: “21. As discussed supra that out of the above activities drawing, designs and manufacturing of equipment is done outside India but marketing and related activities and Supervision of errection and commissioning is done in India. As discussed supra, PE is played role in marketing and related activities and supervision.

21.1 Taking guidance from Rolls Royce 35% of the profit accruing from the offshore supplies to the Indian Operations for the role played by the PE can be attributed. Profit from offshore supplies can be computed based on the assessee’s global profitability after

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making certain adjustments for depreciation and provisions etc. Another method can be to estimate a percentage of gross amounts received as offshore supply. For this, the profit margins of some comparable companies doing similar activity can be adopted as a guidance and profits attributable can be worked out. 21.2 The assessee has submitted Global consolidated annual account which cannot be relied upon as it consolidates all the subsidiary companies accounts also. In absence of standalone annual account a profit of 9.75% (Profit margin estimated as per Para 7 above) is assumed as profit earned by the company and 35% of such profits are attributed to PE.

With these remarks, the total income of the assessee is computed as under: Income as per return of income filed on 28.03.2012 - NIL Income from offshore supply Calculation of income from offshore supply

Particulars FY 2009-10

Gross offshore supply revenues (INR) = exchange Rs. 472,97,97,680 rate @ 70.09

Profit on the basis of 9.75% Rs. 46,11,55,274 Attribution in India (%) 35% Total Taxable Income Rs. 16,14,04,346

2.21 The AO passed the draft assessment order dated 30/03/2013 under section 143(3) read with section 144C(1) of the Act and attributed income from offshore supply to tax in India as computed above. 2.22 The objections filed by the assessee against the draft assessment order before the Ld. DRP, did not find any favour and rejected by the learned DRP in its direction dated 27/12/2013. 2.23 Pursuant to the direction of the learned DRP, the Assessing Officer passed impugned final assessment order dated

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02/01/2014, confirming all the additions made in the draft assessment order. Aggrieved with the addition made in final assessment order, the assessee is before the Tribunal raising the grounds as reproduced above. 3. The ground Nos. 1 and 2 of the appeal are general in nature and therefore we are not required to adjudicate upon specifically. 3.1 In ground Nos. 3 [from 3(a) to 3(m)], the issue of income arising on supply of machinery held by the lower authorities as income accrued in the hands of the assessee as per provisions of the Income-tax Act as well as under the provisions of DTAA between the India and Austria, have been raised. 3.2 Before us, the Ld. counsel of the assessee filed a paper-book containing pages 1 to 216 and made submissions in support of the grounds raised. The learned counsel also filed written submission. The Ld. DR on the other hand supported the order of the lower authorities and contended that the assessee is liable for tax both under the Act as well as under the DTAA between India and Austria in respect of composite works contract of supply as well as service. The learned DR also filed written submissions. The learned counsel filed his rejoinder to the submissions of the learned DR. 3.3 We have heard rival submission of both the parties and perused the relevant material on record including the order of the lower authorities and the paper book filed by the assessee. 3.4 In this case, the assessee has entered into two contracts with ‘CPPC’, a division of M/s Century Textile and Industries Ltd: (a) Equipment Supply Contract dated 19/06/2008 -for engineering, designing, manufacturing, drawing and

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supplying of machinery for “620 TPD multilayer packaging coated board plant”. (b) Service contract dated 19/06/2008- for supervision of erection, start-up, training, commissioning and performance test of said machinery. Both the above contracts have been signed in India on same date.

3.5 In the facts of the case, the contention of the assessee is that the supply of equipment is from outside India, which is only a offshore supply and no income corresponding to the same accrued or arisen in India in terms of Act. The assessee has refuted contention of the Income-tax authorities that contract of supply and contract of the service both constitute a composite contact for setting up of the TPD plant. The assessee has also contested that there was no fixed placed PE as far as supply contract is concerned and therefore no provisions of the DTAA are applicable for income from supply of the contract is concerned. 3.6 The various issues have been raised in the above grounds. The first issue is whether the two contracts constitute a composite contract as held by the Assessing Officer or whether the machinery supply contract was only offshore supply, independent of contract of supervision of erection of the machinery.

Composite contract 4. Regarding the finding of the Assessing Officerthat the contract is a composite contract for setting up a plant and the

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transaction has been segregated into two separate contracts for purchase and service for tax avoidance only and offshore supplies are integral part of supervision and final commissioning and installation of TPD plant, the Ld. counsel of the assessee contended that same are erroneous finding. The learned AO has held that the supply of machinery was necessary and incidental to design, manufacture, installation, testing and commissioning of the TPD plant in India and the impugned contract is nothing but a consolidated contract for design, build, manufacture, supply, installation, testing and commissioning of machinery of the TPD plant, i.e., work contract and the contact cannot be subdivided as contract for sale of equipment and contract for technical services. The AO placed his reliance on the decision in the case of CIT Vs Mitsui Engg. & Ship Building (2003) 259 ITR 248 (Delhi) and Hindustan Shipyard Ltd. (2000) 119 STC 533 (SC). The Ld. counsel of the assessee relied on the decision in the case of DIT Vs Ishikawajma – Harima Heavy Industries Ltd., 288 ITR 408 (SC) and submitted that obligation of the assessee for the contracts of supply of equipment and supervision are distinct and separate, which were executed by the assessee with separate prices and thus, it cannot be said that both contracts are a composite contract. 4.1 Regarding the finding of the Assessing Officer that situs of work is in India and objective of composite nature of the work is to provide the goods in deliverable state to CPPC, the Ld. counsel submitted that as far as situs of supply is concerned it was not in India but for installation it is within India.

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4.2 The Ld. DR, on the other hand, submitted that the claim of the assessee that the supply & service contracts are separate, independent and severable contracts cannot be accepted on account of the following observations –

Provisions in the Contracts –[Pages are referred w.r.t. assessee’s Paper Book for 2010-11] - Intention of the purchaser–“Whereas the Purchaser desires to Install a 620 TPD Multilayer Packaging Coated Board Plant…...”[PB for 2010-11, p.157&186]and the assessee is committed to the success of the ‘project’. [15, p.179] - The term ‘plant’ as used in the contract has a very wide ambit that includes in its sweep not only the ‘machinery’ provided by supplier (3.1; p.162) but also the machinery otherwise procured by the purchaser (3.2; p.163)] to be erected on site. [p.160] - The term ‘machinery’ also has a wide connotation that include ‘supports, embedment’ etc. [3.1.2; p.162] - Examination of the nature of goods supplied under supply contract i.e. ‘Press Section’ and ‘Press Rolls’ [p.14, 36]; ‘wire Section’ and ‘Coating Section’ [p.19,36,45]; ‘Dryer Cylinder’[p.24 & 32]; ‘Head Box’ [p.28];‘Mechanical Drive’[p.36,49]; ‘MCS’ [p.36]; ‘DCS’ [p.36];‘MG Dryer’ [p.41]; ‘Parts for Head Box’ [p.45]; ‘Parts for Master Reel’ [p.45];‘Control Cabinets’ [p.45];‘QCS with CD Controls’ [p.45];‘Air Drying System’ [p.49];‘MG Hood’ [p.54];‘Hood& Ventilation System’ [p.58];‘Dewatering System’ [p.58]; ‘Pneumatic System’ [p.58];‘Control Room Equipment’ [p.58]; ‘Fibre Recovery system’ [p.58];‘Dryer Section’ [p.62];‘Hydraulic System’[p.62];‘Lubrication System’ [p.62]; ‘Wet End’ [p.62]; ‘Approach Flow System’[p.62] and ‘Stock Preparation’ [p.62] etc. clearly bring out the fact that these goods are not in a deliverable state as per the terms of the supply contract. These are merely parts/sections of the “Plant” and don’t have any independent functions/usage for the purchaser and

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needs to be assembled to fulfill/satisfy the purpose of the contract. - The above observation that the individual components supplied under the supply contract does not have any independent use for the purchaser is reconfirmed by clause 13.5 of the contract which states that “The date of completion of delivery is the date of delivery of the last consignment to be supplied. [13.5, p.171]. - Another important feature that establishes the inter- linkage between the Supply & Service contract is the provision for “Monthly Progress Report” [Art-17 of Supply Contract, p.180 & Art-16 of Service Contract, p.201]. If the contention of the assessee is to be accepted, there is no need for a “Monthly Progress Report” in respect of supplies that are independent of the service obligations. - Perhaps, the most significant indicator of the inter- linkage and interdependency between the supply contract and service contract is the presence and primacy of the “Performance Warrantee Clause” [Art-4 of Supply Contract, p. 163] which is one of the service/supervisory obligations of the assessee under the Service Contract. [Art-2 of Service Contract, p.191]This is the umbilical link between the supply and service contract. A separate Art-4 in the supply contract is exclusively devoted to this which provides that “The supplier shall warrantee the performance of the PLANT..and [even] the machinery/accessories to be provided by the purchaser [have to] fulfill[s] the preconditions defined by the supplier.” [p.163] Towards this end, the supply contract pre supposes a number of “Test Runs” [Art-4.2, p.163]. Although “Performance Warrantee” and other tests are relevant and part of the service parameters, nevertheless, it finds prominent mention throughout the entire supply agreement. The primacy of this Article/exercise can be gauged from the fact that the final acceptance of the goods supplied hinges upon the success of the performance warrantee test. Thus, as per Art-6 “The machinery will not be deemed to have been formally finally acceptedby

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the purchaser until performance guarantees have been achieved..... After fulfillment of the performance guarantee, the purchaser will issue to the supplier a final acceptance certificate.” [6.1, 6.2 & 6.3; p.166] Similarly, insufficient fulfillment of the performance guarantee parameters will liable the supplier for liquidated damages. [Art-15.2, p.173]If this is not sufficient, as per Art-7.3 of the General Terms of Contract “If the supplier should commit a breach of non-fulfillment of the minimum performance guarantees........then the purchaser shall have the right to terminate the contract.” [p.177] - The service contract, on the other hand specifically provides in the scope of services provision for “personnel services for supervision of erection, start-up, training, commissioning and PERFORMANCE TEST(s)”. [p.186, 191] Even though as per Art-6.1(a) of the Specific Terms & Conditions of Contract provides that [and the assessee argues that] the purchaser shall carry out the erection, commissioning, startup and performance test(s) under the supervision of the supplier [p.193], Art. 7.1 provides that “Supplier shall be responsible for ensuring correctness of erection of all machineries supplied by the supplier” [p.194] and in case of “non-fulfillment of the minimum performance guarantee, the purchaser shall have the right to terminate the [service] contract.” [Art- 6.2 of General Terms & Conditions to Service Contract, p.198] - In other words, the “Performance Warrantee Clause” under both the Supply & Service Contract act as a cross-fall breach clause where the non-fulfillment of this clause may lead to the termination of both the Supply as well as the Service Contract. The ‘machinery’, ‘plant’ and ‘project’ shall not be complete unless and until the same clears ‘performance warranty test’ and in the event of non-fulfillment of the minimum performance guarantee. [7.3, p.177] the supply contract can be terminated and the price already paid by the purchaser has to be refunded against return of machinery already delivered. [7.5,

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p.178] Similarly, the Service contract can also be terminated for the non-fulfillment of the minimum performance guarantee. [6.2; p.198] In fact, the terms and conditions governing the Service contract are so identical to that of Supply contract that cl. 6.4 of the Service contract also provides for the refund of prices paid by the purchaser and return of machinery received by it in the event of termination of Service Contract. [6.4; p.198] Accounting Practice by the assessee - It is not that the provisions of both the Supply & Service contracts establish their compositeness and inter-linkage. In practice too, the assessee itself treats both the Supply & Service Contracts as an indivisible composite contract. The assessee follows “Cash System of Accounting” for the recognition of its revenue. As per the terms of the Service Contract “remuneration”/ “supervision charges” are payable on a fixed rate per man-day basis. [cl.3; p.191]. The cost for services under the contract to be charged on the basis of actual services rendered using the daily rates. [3.9; p.193].As per cl.4 of the service agreement dealing with the terms of payment, “Payments out of the Letter of Credit shall be made against the following documents: (a) Supplier’s monthly invoice (b) Copy of monthly time sheet issued by the supplier and countersigned by the purchaser.” [cl.4.2; p.193] However, even though there is no provision of advance payment of “remuneration”/supervision fee payable under the Service contract the assessee itself, accounts for the supervision fee received under Service contract as “advance received” “Work in Progress”[p.95 to 97]under completion of contract method although it follows a “Cash” system of accounting. In the notes to the accounts for A.Y. 2012-13, the assessee states “3. The service contract dated June 19 2008 was completed on March 19, 2012 and PE in India ceased to exist after the said date. The completion certificate has also been received from CPP. Accordingly, the income earlier treated as Advance from Customer have now been offered to tax and cost earlier treated as WIP

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has been transferred to P&L. 4(b) In relation to the agreement dt. June 19, 2008, companies personnel visited customer’s site and as per the number of days visited and duration of the contract, PE came into existence in terms of provisions of DTAA between India and Germany. Completed contract method has been followed by VPS in regard to this project. The contract was executed and completion certificate was obtained in the current FY 2011-12 and all the payments were also received during the relevant year., thus, profit/loss of the said project has been recognized in the FY 2011-12.” [p.269, PB 2011-12]

Another fact that lends credence to the fact that the contracts are intimately connected composite contracts is that not only receipts from supervisory services are offered on “project completion” basis, various expenses related to the “Project” are also claimed against these receipts. Thus, during A.Y. 2010-11 expenses towards “Technical Planning Execution outside India” and in 2011-12 expenses towards “Technical Planning Cost”, “Sub-contractor’s Cost”, “Erection Charges outside India” etc. were claimed against the supervision fee. In other words, while on the one hand the assessee claims that the contract for supply and the contract for services are two independent contracts not linked to each other, on the other, the assessee itself treats both these contracts are linked and recognizes/offers the income from service contract after the “receipt of Completion Certificate”. In the rejoinder, the learned counsel of the assessee submitted that the inference drawn by the learned CIT(DR) that because the appellant was bound by performance warranty clause and CPPC was entitle to termination the contract in the event of non-fulfillment of the same, the equipment supply and service contract were a composite contract and income from offshore works is ipso facto taxable in India, was incorrect inasmuch as the Revenue has failed to appreciate that the offshore works have been undertaken outside India in terms of section 9 of the Act. He submitted that once it is

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established that the title to the goods has been transferred to the buyer outside India, then, even in case of composite contracts, income from offshore supply activity has to be segregated from the onshore activities undertaken in India and the taxability there of determined independently.

Findings: 5. On considerations of the features of both the contracts highlighted by the Ld. DR, we are of the view that both contracts cannot be seen independently. On perusal of various clause of the agreement, it is amply clear that dominant purpose or intention of the buyer from very beginning is installation of Multilayer Packaging Coated Board Plant under supervision of the assessee. As the assessee was also specialized in manufacturing of equipment required for setting up of TDD Plant, the assessee was involved in supply of the same. The Plant in itself is not a set of machinery only but the contractor was required to construct a facility of manufacturing the products of the buyer. The various machineries supplied like ‘Press section’, ‘Press rolls’, ‘Wire section’ ,‘Coating section’, ‘Dryer section’ etc. are kind of components of the Plant to be constructed or erected under the supervision of the assessee. These goods in itself are components of plants, which has been delivered by the assessee. The intention of the parties was to provide to the buyer a plant in deliverable state which is also clear from the other terms of contract like date of completion of delivery as last date of delivery of last consignment, provision of monthly progress report both in supply and service contract, performance warrantee clause. The final

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acceptance of the supply of goods was dependent on the success of performance warrantee test. The service contract has a provision of termination clause in case of failure of performance and return of machinery supplied under supply contract and refund of money. All these terms make it clear that both the supply and service contract are intrinsically linked and not severable. It was not possible for the buyer to assemble or erect the plant from any other contractor without the supervision of the assessee and therefore, the buyer made its intention of getting the goods in a deliverable state of plant. The artificial division of composite contract into supply and service may be on paper but the conduct of the parties and terms and condition of the contract manifest that in substance it was a composite contract. The accounting practice followed for recognizing of revenue from service on completion of the project also support the intention of the parties to treat the erection of the plant as composite project. 5.1 All the above terms and conditions of the contract cited by the Ld. DR, when read together clearly bring out the real nature and essence of both the contracts as part of one composite and turnkey works contract. 5.2 The learned Assessing Officer has relied on the decision of the Hon’ble Supreme Court in the case of Hindustan Shipyard (supra) as under: “10. In Hindustan Shipyard (2000) 119STC533 (SC); (2000) 6 SCC 579, the question which arose for consideration was whether a contract constituted a sale or works contract. Laying down the tests therefore, having regard to the terms and conditions contained therein, it was opined that a contract of sale of goods was separate from a contained therein, it was opined that a contract of sale of goods was separate from a contract for works and labour. In regard

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to the categories of contract, it was stated (page 592 of {2003} 6SCC and page 546 of {2000} 119 STC):

“(i) the contract may be for work to be done for remuneration and for supply of materials used in the execution of the work for a price;

(ii) it may be a contract for work in which the use of the materials is accessory or incidental to the execution of the work; and

(iii) it may be a contract for supply of goods where some work is required to be done as incidental to the sale. ”

10.1. Whereas the first contract was held to be a composite contract, the second was held to be a contract for work and labour not involving the sale of goods; and the third was held to be a contract of sale where the goods were sold as chattels and the work done was merely incidental thereto.”

5.3 The AO has held that supply of machinery was incidental to the erection and commission of the plant. The relevant paragraph is reproduced as under: “11. I have examined facts of this case along with the ration decidendi above referred to judgment of Hon’ble Supreme Court and have noted that dictum of law for second category of contract (ii) as discussed above is squarely applicable to the identical facts of the case under consideration. In this case assessee had entered into a contract with CPPC to design, build, manufacture, supply, installation, testing and commission of machinery for TPD Plant. The supply of machines was necessary and incidental to design, manufacture, installation, testing and commission of above facility i.e. machinery for TPD Plant in India. It is not case of assessee that the contract was signed for supply of machines only and some technical work was required to be done as incidental to machines only and some technical work was required to be done as incidental to sale of equipments. Even though the assessee during the assessment proceedings, mentioned that the supply of machinery for TPD Plant and the installation and commissioning services are separate and independent of each other, a careful perusal of this document reveal that as per the terms and conditions of the contract the effective mandate given to the assessee is in the nature of composite contract . The purpose and intention of CPPC was to install a fully functional machinery for TPD Plant in working condition at the Airport and the assessee company was given this responsibility. Therefore, Respectfully following the above principle as laid down by Hon’ble apex court, I am of

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considered view that the impugned contract is nothing but a consolidated contract was for design, build, manufacture, supply, installation, testing and commissioning, of machinery for TPD Plant i.e. work contract and the contract cannot be subdivided as contract for sale of equipments and contract for technical services as was wrongly been argued on behalf of assessee.”

5.4 Further, what constitute a contract as composite contract, the Hon’ble Delhi High court in the case of CIT Vs. Mitsui Engineering and Ship Building Co. Ltd. (2003) 259 ITR 248 (Delhi) has observed as under:

“1. The question which has been raised in this appeal under Section 260A of the Income-tax Act, 1961 (hereinafter referred to as the "Act"), is the interpretation of "royalty" as envisaged under Explanation 2 appended to Section 9(1) of the Act. By reason of this Explanation which provides that the income specified therein shall be deemed to accrue or arise in India specifies six items which would come within the scope thereof. The Commissioner of Income- tax (Appeals) as also the Income-tax Appellate Tribunal have arrived at a finding of fact that by reason of the agreement entered into by and between the assessed and the transferee, no royalty could become chargeable. Mr. Khanna, learned counsel for the appellant, has in support of this appeal, however, submitted that design is one of the components which has been transferred together with engineering, manufacturing, shop testing, packing up to f. o. b. port of embarkation for a consideration of Rs. 4,74,000 and thus the same could come within the purview of one or the other clauses contained in Explanation 2 to Section 9(1). Having considered the submissions made at the Bar, we are of the opinion that it is not possible to apportion the consideration for design on the one part and engineering, manufacturing, shop testing, packing up to f. o. b. port of embarkation. In that view of the matter, in our opinion, the transfer of design, if any, vis-a-vis other would not come within the purview of the said Explanation. This aspect of the matter is covered by a Division Bench judgment of the Madras High Court in the case of CIT v. Neyveli Lignite Corporation Ltd. [2000] 243 ITR 459, 463, where it was held as under :

"In a contract for the design, manufacture, supply, erection and commissioning of machinery which does not involve license of the patent concerning the machinery, or copyright of its design, mere supply of drawings before the manufacture is commenced to ensure that the buyer's requirements are fully taken care of and the supply

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of diagram and other details to enable the buyer to operate the machines, and also to assure the buyer, that the machines will perform to the specification required by the buyer, such supply is only incidental to the performance of the total contract which includes design, manufacture and supply of the machinery.

The price paid by the assessed to the supplier is a total contract price which covers all the stages involved in the supply of machinery from the stage of design to the stage of commissioning. The design supplied is not to enable the assessed to commence the manufacture of the machinery itself with the aid of such design. The limited purpose of the design and drawings is only to secure the consent of the assessed for the manner in which the machine is to be designed and manufactured, as it was meant to meet the special design requirements of the buyer.

The contract between the assessed and the manufacturer does not anywhere refer to any specific patent owned by the supplier which the buyer is permitted to exploit. All that the contract provides is an indemnity to the buyer, to protect the buyer against any action by a third party claiming patent, trade mark or other rights in the equipment supplied.

None of the sub-clauses in Explanation 2 under Section 9(1)(vi) would, in the circumstances of this case, be capable of being regarded as covering the design and engineering carried out by the supplier of the machinery abroad. There is no transfer or license of any patent, invention, model or design. The design referred to in the contract is only the design of the equipment required to be manufactured by the supplier abroad and supplied to the purchaser. The information concerning the working of the machine is only incidental to the supply as the machinery was tailor-made for the buyers. Unless the buyer knows the way in which the machinery has been put together, the machinery cannot be maintained in the best possible way and repaired when occasion arises. No license of any patent is involved. Sub-clause (vi) and also (vii) of Section 9(1) would have no application as the design was only preliminary to the manufacture and integrally connected therewith. The other three sub-clauses also in the circumstances of the case are not attracted."

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5.5 The Hon’ble AP High Court in the case of L&T Ltd. [supra] quoted the observations of Hon’ble SC in the case of State of Karnataka v. Bangalore Soft Drinks P. Ltd. (2000) 117 STC 413 (SC), where the Hon’ble SC held that “In turn-key projects, more particularly of the kind involved in this batch of Writ Petitions, the same person has been entrusted with the responsibility of procuring material, and of erection and installation of equipment. While in-built safeguards are provided in all the contracts to ensure quality of the material, and effective performance of the erection contract, the supply contracts, in substance, do not absolve the petitioners-contractors of their obligations of erection and installation of equipment after the goods are sold by them to the owner. The petitioners-contractors' obligations, under both the supply and erection contracts, cease only after the turn-key project becomes operational, and after final payment is made both for supply of material and for erection and installation of equipment.” 5.6 Similarly, the Hon’ble Andhra Pradesh High Court again quoted Hon’ble SC in the case of Indure Ltd. v. CTO (2010) [2010-TIOL-79-SC-CT] and observed that “32. …The goods supplied to the owner, under the supply contracts, are tailor made goods, and cannot be bought off the shelf. Such goods cannot, ordinarily, be sold to another except for its use in turnkey projects of a similar nature. The petitioners have been entrusted with the work mainly for their expertise in erection and installation of plants in the execution of turn-key projects. As they were entrusted with the work of erection and installation, the petitioners contractors have also been entrusted with the task of procuring material therefor. The functions relating to the supply of material, and

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rendering services of erection and installation, are integrally connected and are interdependent. …..while the form of the contracts indicate that they are two separate contracts, in substance they are one single indivisible works contract for supply of material and for erection and installation of equipment.” 5.7 In the instant case also, the machinery components have been imported in India to commission a custom-made plant for the buyer and those imported goods may not be used for any other customer. The assessee has been entrusted the work of commissioning of the TPD plant in view of the expertise in this field. Thus, the ratio of the above decision squarely applied over the facts of the instant case. 5.8 The ratio of the decision in the case of DIT vs Ishikawajma- Harima heavy industries Ltd (supra) is not applicable over the facts of the instant case as supply obligation and service obligation are interlinked and complement to each other . In the case of Ishikawajma-Harima heavy industries Ltd (supra), the party who supplied the goods and erected the plant were different entities but in the instant case the party who supplied the goods and supervised the erection are one and same party. Further, it was not possible for the buyer to erect the plant without the supervision of the assessee. In the case the first shipment of goods was dispatched from the Austria from 14thsep. 2009 and last shipment in the year under consideration was shipped on 9th December, 2009. The shipment of the goods have been supplied in the subsequent year also. The personals of the assessee company arrived in India on 14/12/2009 and remained till commissioning of plant. As machineries have been dispatched by

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sea, its arrival in India takes a period of 20 days to 30 days. Thus, the arrival of the goods and arrival of the personal of the assessee coincide and run concurrently. 5.9 The Tribunal in the case of Shanghai Electric Group Co. Ltd. vs. DCIT in ITA No. 224 to 227/Del/2015 and Others has held that for two contracts to be composite one, dominant nature of an agreement should be seen. The Tribunal referred to the decision of the Hon’ble Supreme Court in the case of Bharat Sanchar Nigam Ltd. Vs. Union of India (2006) 3 STT 245 45. The relevant paragraph of the order of the Tribunal is reproduced as under:

“215. Hon'ble Supreme Court's observation in the case of Bharat Sanchar Nigam Ltd. v. Union of India [2006] 3 STT 245 are relevant Shanghai Electric Groups Co. Ltd. Vs. DCIT ITA No. 224 to 227/Del/2015 ITA no. 3552/Del/2015 ITA No. 58 & 59/Del/2017 to understand the "dominant nature of an agreement". The relevant portions of the same has been extracted herewith:

"The reason why these services do not involve a sale for the purposes of Entry 54 of List - II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366 (29-A) continues to be: Did the parties have in mind or intend separate rights arising out of the sale of goods? If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is "the substance of the contract'. We will, for the want of a better phrase, call this the dominant nature test."

(Emphasis Supplied)”

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5.10 The Tribunal also considered the decision of the Authority for Advance Ruling in the case of Raxar Maximum Reservoir Performance WLL (supra) as under:

“217. We draw our support from the decision of Authority of Advance Ruling in case of Roxar Maximum Reservoir Performance Shanghai Electric Groups Co. Ltd. Vs. DCIT ITA No. 224 to 227/Del/2015 ITA no. 3552/Del/2015 ITA No. 58 & 59/Del/2017 WLL (supra), had relied upon the judgment in Ishikawajma Harima, and held that:--

"A contract has to be read as a whole. The purpose for which the contract is entered into by the parties is to be ascertained from the terms of the contract. In the case on hand, ONGC clearly called for a contract for "services for supply, installation and commissioning of 36 manometer gauges". The purpose of the contract is the installation of the gauges at site to enable ONGC to carry out its operations. I have quoted earlier the relevant portion of the contract. On a reading of the same, there cannot be any doubt that that the contract in question was for erection and commissioning of 36 manometer gauges for the use of ONGC. The contract is clearly not one for sale of equipment. Nor is it one for mere erection of the equipment. It is a composite contract for supply and erection at sites within the territory of India. What is paid for by ONGC is for the supply and erection done in India. The payment is received by the applicant for the performance of the contract as a whole in India. It is, therefore, clear that the income to the applicant accrued in India."

5.11 In view of the above, we hold that the Supply & Service contracts represent a single, composite turnkey work contract.

Income deemed to accrue or arise in India as per Section 9(1)(i) of the Act:

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India is deemed to accruing or arising in India. The relevant part of the sectionis reproduced as under:

“9. (1) The following incomes shall be deemed to accrue or arise in India :— (i) 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 situate in India.”

6.1 The assessee has objected the business connection on the ground that Sale of the property has been made from outside India and thus offshore supply is not taxable in India as per section 9(1)(i) of the Act. 6.2 Now we take up the contention of the assessee that supply of machinery was only offshore supply and not liable for tax in India in terms of section 9(1)(i) of the Act in view of no business connection in India. 6.3 The Ld. counsel of the assessee in relation to the issue submitted three factual aspects of the contract. Firstly, he submitted that the title of goods in dispute was transferred by the assessee to the purchaser outside India. He referred to article 7.1 of the appendix-A (specific terms and conditions of the contract) to the offshore supply contract, available on page 166 of the paper book. According to the Ld. counsel, the said appendix specifies that the ownership and risk of equipment supplied under the laws of supply contract would be transferred in favour of the buyer outside India at the port of shipment after the machinery is put on board of the ship on CIF Incoterms 2000

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basis. For ready reference, clause 7.1 of the offshore supply contract, referred by him is reproduced below:

“7. Transfer of Ownership and Risk 7.1 Notwithstanding anything contained elsewhere in the contract it is agreed that the property and risk of the Machinery will stand transferred to the PURCHASER form the SUPPLIER outside India at the Port of Shipment after the Machinery is put on board of the ship on CIF Incoterms 2000 basis.” (emphasis supplied)”

6.4 Secondly, he referred to article 12 of appendix –A ( specific terms and conditions of the contract ) to the offshore supply contract , available on page 170 -171 of the paper book and submitted that it specifies that assessee shall arrange the transit insurance on its own cost and that the shipping documents are to be prepared in the name of CPPC. The relevant extract of the above terms of the offshore supply contract is reproduced below: “12. Shipment and Insurance …… 12.2 The Documents should be prepared in the name of CENTURY PULP AND PAPER (Prop.: Century Textiles & Industries Ltd.) 12.4 The SUPPLIER shall arrange the Transit Insurance at his cost from the SUPPLIERS’S warehouse to the PURCHASERS’S warehouse at site at Lalkua, (Distt. Nainital), Uttarakhand, India”

6.5 Thirdly, he referred to article 8 (eight) and 9 (nine) of appendix-A (specific terms and conditions of the contract) to the offshore supply contract, available on page 166-168 of the paper book and submitted that it specifies contract price amounting to EURO 68,498,800, which was payable in foreign currency. The relevant extract of article 8 of the offshore supply contract reproduced as under:

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“8. Price 8.1 Price for the supply as per Scope of Supply as per Article 3 shall be Euro 68,498,800/- composed as follows: a) Machinery and equipments Euro6,17,22,800 b) Spares Euro67,76,000 Total Euro6,84,98,800 9. Terms and mode of Payment …………………………………. 9.6The payment stated under Article 9.1.2 shall be made through an irrevocable Letter of Credit to be opened by the PURCHASER in favour of the SUPPLIER within 30 (thirty) days after signing of the CONTRACT, which shall be valid until 1 (one) month beyond the contractual FOB delivery time. The Letter of Credit shall allow for partial shipments. In general, Transshipment will not be allowed but based on specific request, discrepancy in Letter of Credit may be accepted by us. The Letter of Credit shall be payable in the country of the SUPPLIER and confirmed by a International Bank and the confirmation charges will be borne by the PURCHASER. ”

6.6 With regard to the contention that sale of equipment effected outside India and thus no income accrues or arise in India on supply of goods, the Ld. counsel relied on the decision of Hon’ble Supreme Court in the case of Pushalal Mansinghka (P) Ltd Vs CIT 66 ITR 159 (SC)and the decision of the Hon’ble Supreme Court in the case of Mahabir Commercial Co. Ltd. Vs CIT 186 ITR 417 (SC).The Ld Counsel emphasized that sale of goods had taken place outside India due to the reasons that (i) The intention of the parties that transfer of title shall take place outside India is clear from the article 7.1 of the appendix to the offshore supply contract, which has clearly mentioned that ownership of the equipment shall be transferred to CPP at the port of shipment. (ii) Bill of Lading (BOL) names CPP as the notifying party of goods (iii) the commercial invoice has been drawn by the Voith (the assessee) on CPP( Buyer)

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6.7 The learned counsel of the assessee referred to the Sale of Goods Act, 1930 (in short ‘the SGA’) and submitted that property in goods was transferred the moment the assessee dispatched the goods for transmission to the CPPC. He submitted that it was always the intention of the parties that the property in equipment shall be vested in the CPPC at the port of shipment. The Ld. counsel referred to the decision of the Hon’ble Delhi High Court in the case of DIT Vs Erriction AB 343 ITR 470 wherein it is held that if the equipment was manufactured outside India and even the sale took place outside India, then the fact that equipment was subject to acceptance test in India, did not alter the legal position that title of the equipment passed outside India. The Ld. Counsel also relied on the decision of the Hon’ble Supreme Court in the case of DIT vs Ishikawajma-Harima Heavy Industries Ltd 288 ITR 408 (SC) to support his contention that sale in the case of the assessee has been concluded outside India. The assessee drawn comparison with the above case as under: Particulars Ishikawajima’s Appellant’s case case Title transferred in favour of Buyer outside Yes Yes India at the port of shipment of equipments& materials Consideration for offshore supplies Yes Yes receivables in foreign currency Buyer named as insured/co-insured Yes Yes

6.8 The Ld. counsel submitted that the ratio of the above decision applies over the fact of the instant case because in view of the provisions of the sales of goods Act, 1930 (SG Act) , the property in equipment supplied by Voith ( i.e. the assessee) to CPPC was transferred in favour of CPPC, when the equipment

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was unconditionally appropriated to the contract or in other words when the equipment was dispatched for transmission to CPPC. The Ld. counsel submitted that in view of the facts of the case, the equipment was sold by the Voith outside India and the entire activities essential for transfer of the title of the equipment took place outside India and therefore property in equipment shall be vested in CPPC at the port of shipment. He further submitted that bill of lading (BOL) constituted a document of title of the equipment and the same was drawn to shown CPPC as the consignee which further substantiated property in equipment had been intended to be transferred to CPP at the point of dispatch of equipment. He also referred to section 1 of Indian Bills of Lading Act, 1856, according to which consignee of goods named in the bill of leading to have vested all rights of suit and subject to the same liabilities in respect of such goods, if the contract contained in the bill of leading has been made with himself. 6.9 Further, the Ld. counsel elaborated that no income deemed to accrue arise in India because no income accrued or arisen to the assessee whether directly or indirectly, through or from any business connection in India as it specified in section 9 of the Act, due to following reasons: - the sales were independently made by the assessee to CPP on principal to principal basis. - the sales are concluded outside India. - in connection with the contract in question, no business operations were carried out by the assessee in India. 6.10 The learned counsel accordingly submitted that in view of no business connection in India, no part of income can be said to

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be deemed to accrue arise in India. In support of his contention he relied on the decisions of the (i) Hon’ble Delhi High Court in the case of DIT Vs Ericson AB 343 ITR 470. Wherein it is held that the fact that supply contract was signed in India or the equipment were subject to acceptance test by the Indian customer was not relevant and income from supply of equipment was held to be not taxable in India if no business connection existed within the meaning of section 9(1)(i) of the act. (ii) The tribunal Delhi benches in the case of Nokia Networks OY (ITA No. 1963 & 1964/Del/2001) wherein, inter alia it was held that mere provision of marketing activities does not lead to creation of a business connection.

6.11 The Ld. counsel submitted that issue in dispute of offshore supply of goods not liable to tax in India, is covered in favour of the assessee in view of the ratio of the following decisions: (i) DIT Vs Ishikawajma-Harima Heavy Industries Ltd 288 ITR 408 (SC) (ii) CIT and Anr Vs Hyundai Heavy Industries Co.Ltd (2007) 291 ITR 482 (SC) (iii) DIT Vs LG Cable Ltd (2011)237 CTR 438 (Delhi) (iv) Hyosung Corporation (AAR No. 773 of 2008) further affirmed by the Hon’ble Delhi High Court [WP(C) No. 2765/2010 and CM No. 5515/2010]

6.12 On the other hand, the Ld DR submitted that an identical issue involving the transfer of title to the property and risk was before the ITAT in the case of Baker Hughes Asia Pacific Ltd. [2014-TII-104-ITAT-DEL-INTL] where the ITAT had an occasion

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to consider a gamut of decisions including the decisions of Hon’ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. [Supra], DIT Vs. L.G. Cables Ltd.(SC) [2011-TII-02-HC-DEL-INTL], CIT Vs. Hyundai Heavy Industries(SC) [2007-TII-02-SC-INTL], DIT Vs. M/s Nokia Networks OY [2012-TII-49-HC-DEL-INTL] and Skoda Export v. Addl. CIT [2003-TII-34-HC-AP-INTL].The ITAT after considering the above decisions of Hon’ble Supreme Court & that of Hon’ble Delhi & AP High Courts as well as that by the Special Bench ,approved by Hon’ble Delhi High Court in the case of Motorola Inc. Vs. DCIT [2005-TII-10-ITAT-DEL-SB-INTL] held as under – “155. In our opinion, this argument cannot be accepted because CIF as understood in INCO terms, no where contemplates passing of title simultaneously with passing of risk. CIF Chennai Airport implies that up to Chennai Airport, the supply is to be arranged by seller. Seller has topay cost, insurance, freight and risk during the carriage of goods. However, loss or damage to the goods and risk is to be borne by the purchaser. This does not imply that ownership has also passed to purchaser. It is not correct to say that risk and title pass simultaneously. There can be agreement for passing of risk before passing of title per se. As per sec. 19 of the Sale of Goods Act, it is primarily the intention of the parties when the title to the goods is to pass. The true test is when the buyer gets the right to dispose off the goods i.e. when the buyer acquires the control over the goods....... Therefore, the intention is to be gathered from the deed itself.”

6.13 He submitted that In the light of the above, the ITAT after examining the terms of the contract concluded that–

“161. Thus, all the terms are summarized as under: (i) The agreement was signed in India. (ii) The delivery of documents was to be in India.

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(iii) Supply was at CIF Chennai Port. (iv) The payment was to be made within 30 days of receipt of goods in India. (v) The risk though passed at the port of shipment but that was also subject to packing of goods as per the terms of agreement. (vi) The passing of title was as per the terms of deed. (vii) The deed does not specify that the title passed outside India and therefore, the intention is to be gathered from the entire terms of agreement as discussed above.

6.14 The Ld. DR further submitted that The contention of Revenue is also supported by Hon’ble AP High Court’s decision in the case of L&T Ltd. [2015-TIOL-3055-HC-AP-CT which has followed the decision of Hon’ble Supreme Court in the case of Usha Belltron Ltd. v. State of Punjab (2005) 7 SCC 58.

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of negotiation, the place of signing of agreement or formal acceptance thereof or other responsibility of the assessee were irrelevant consideration for determining taxability of offshore supply of equipment. The relevant extract of the decision is reproduced as under: “44. The aforesaid analysis will bring forth the legal position that the place of negotiation, the place of signing of agreement, or formal acceptance thereof or overall responsibility of the assessee are irrelevant circumstances. Since the transaction relates to the sale of goods, the relevant factor and determinative factor would be as to where the property in the goods passes. In the present case, the finding is that property passed on the high seas. Concededly, in the present case, the goods were manufactured outside India and even the sale has taken place outside India. Once that fact is established, even in those cases where it is one composite contract (though it is not found to be so in the present case) supply has to be segregated from the installation and the only then would question of apportionment arise having regard to the expressed language of Section 9 (1) (i) of the Act, which makes the income taxable in India to the extent it arises in India.”

7.1 In the instant case also, the contract agreements have been signed in India, which in view of the above decisions are not relevant consideration for determining the taxability of offshore supply by the assessee. 7.2 In the case of Ishikawajma-Harima Heavy Industries Ltd. (supra), wherein the contractor retained care, custody and control of the equipment and had to exercise due care thereof until (a) provisional acceptance of the work (b) termination of the contract, although the title to the equipment was to passed outside India. The Hon’ble Court held that since all the activity in connection with the offshore supply were performed outside India, income from also supply was not liable to tax in India. In the case of the DIT Vs Ericson AB (supra) the Hon’ble Court after analyzing the

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clauses of the agreements held that conditions such as formal acceptance of the equipment or overall responsibility of the assessee for completion of the project are irrelevant for determining taxability of offshore supply of the equipment. The Hon’ble court held that for no taxability of offshore supply in India, the property and risk in the equipment must be passed outside India. The Hon’ble Andhra Pradesh High Court in the case of Addl. CIT vs. Skoda Exports (supra) held that for determining taxability in offshore supply one has to apply the test of predominance and decide where the sale took place. In the case of Hyosung Corp Vs DIT 314 ITR 343, the Authority for Advance Ruling held that responsibility of the supplier for quality and performance of the equipment should not be construed as a condition which postpone the transfer of the title in goods till that time. The Hon’ble Delhi High Court in the case of DIT Vs LG Cable Ltd., 237 CTR 438 held that buyer’s right to examine and repudiate the goods in law does not indicate the property in goods has not passed. 7.3 The contention of the assessee is that sale of goods has taken place outside India in view of the intention of parties as reflected in various clauses of agreement particularly article 7.1 of the Appendix -A, Bill of lading in the name of the purchaser and commercial invoice in the name of the purchaser. In all the decision, common thread is that title in property and risk to buyer is passed at a time when parties to contract intend it to transfer. 7.4 According to section 19(1) of the Sale of Goods Act, 1930 (SG Act) the property is transferred to the buyer at such time as the

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parties to the contract intended to be transferred. Further the section 19(2) specifies that for the purpose of ascertaining the intention of the parties, regard shall be given to the terms of contract, conduct of the parties and circumstances of the case. Further, section 19(3) of the SG Act specifies that unless a different intention appears, rules contained in section 20 to 24 rules for ascertaining the intention of the parties as to the time at which the property and goods is to passed to the buyer. The relevant section of the Sale of Goods Act, 1930 are reproduced for ready reference: “Section 2. Definitions:—

‘(4) ' ‘document of title to goods’ includes bill of lading, dock warrant, warehouse keeper’s certificate, wharfingers’ certificate, railway receipt, [multimodal transport document], warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof of the possession or control of goods or authorizing or purporting to authorize, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented’.

‘(6) future goods ’ means goods to be manufactured or produced or acquired by the seller after making of the contract of sale ’.

Section 18: Goods must be ascertained:—

‘Where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained’.

Section 19: Property passes when intended to pass:—

(1) Where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to contract intend it to be transferred.

(2) For the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case.

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(3) Unless a different intention appears, the rules contained in Sections 20 to 24 are rules for ascertaining the intention of the parties as to the time at which the property in goods is to pass to the buyer. ” Section 23: Sale of unascertained goods and appropriation:— ‘(1) Where there is a contract for the sale of unascertained or future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the goods thereupon passes to the buyer. Such assent may be expressed or implied, and may be given either before or after the appropriation is made.

(2) Delivery to carrier-Where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee (whether named by the buyer or not) for the purpose of transmission to the buyer, and does not reserve the right of disposal, he is deemed to have unconditionally appropriated the goods to the contract. ’

Section 26: Risk prima facie passes with property:— ‘Unless otherwise agreed, the goods remain at the seller’s risk until the property therein is transferred to the buyer, but when the property therein is transferred to the buyer, the goods are at the buyer’s risk whether delivery has been made or not……..”

7.5 We find that though in the instant case, the Article 7.1 (supra) specifies that the ownership and risk of the equipment supplied under the offshore supply contract would be transferred in favour of the buyer outside India at the port of shipment. But when we examine the intention of the parties from various clauses of the agreements, we find that in both the agreements, the intention of the buyer was to install the TPD plant in connection with expansion project, and which is clear from opening paragraphs of the agreement on first page of both the agreements, available on page 157 and 186 of the paper book, which reads as under:

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“Supply contract

“Whereas the PURCHASER desires to install a 620 TPD MULTILAYER PACKAGING COATED BOARD PLANT in connection with PURCHASER’S Expansion Project.

And

WHEREAS the SUPLIER is capable and desirous of designing, engineering, manufacturing and supplying imported MACHINERY for the 620 TPD MULTILAYER PACKAGING COATED BOARD PLANT as set-forth in this CONTRACT.”

Service contract

Whereas the PURCHASER desires to install 620 TPD MULTILAYER PACKAGING COATED BOARD PLANT in connection with PURCHASER’S Expansion project.

And

Whereas the SUPPLIER is desirous of providing services for supervision of erection, start-up, training, commissioning and performance test(s) of the 620 TPD MULTILAYER PACKAGING COATED BOARD PLANT.”

7.6 The clause 3.2 of the agreement, which is available on page 163 of the paper book, also refers that as far as purchaser’s scope of supply was concerned, it was “the PLANT”. 7.7 Under the supply agreement, the supplier has warranted the performance of the Plant. The terms of guaranteed performance, available on page 163 of the paper book, reads as under: “4.2 DEMONSTRATION OF GUARANTEED PERFORMANCE:

4.2.1 For purpose of demonstration of warranted performance, the Plant shall be subject to test run(s), which shall be arranged and carried out within 6 (six) months after commissioning of the plant.

4.2.2 The performance warrantees shall be deemed to have been fulfilled if in the test run(s) the warranted performance parameters as per Annexure-IH have been achieved.

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4.2.3 If the first test run(s) as per Article 4.2.1 are unsuccessful within a period of six months after commissioning for reasons for which the SUPPLIER is responsible, the test run(s) shall be repeated within another period of 3 (three) months after SUPPLIER’S necessary rectifications, replacements and/or additions to be carried out in a reasonable time. The repetition of such tests run(s) shall be carried out with the same procedure as mentioned In this article. Expenses for SUPPLIER'S personnel for the second test run(s) shall be borne by SUPPLIER.

4.2.4 If the second test run(s) during the second period of 3 (three) months are also unsuccessful due to SUPPLIER’S fault, both parties will mutually decide which further steps shall be made in order to solve the problems related to the performance warrantee(s).

4.2.5 In case there is some disruption in the course of the first Warrantee test run(s) in provision of items under Article 4.2.6 hereinafter by PURCHASER for reason beyond their control, PURCHASER shall be given a maximum of (6) six weeks time from the date of receipt of the above mentioned notice for warrantee tests to fully comply with the requirement of Article 4.2.6 hereinafter, In this case, the second or third Guarantee test run(s) will be held on a mutually agreeable date, the expenses for the SUPPLIER’S personnel shall be borne by the PURCHASER.

4.2.6 The above performance warrantees are subject to the conditions and pre-requisites mentioned in Annexure-III

4.2.7 If these test run(s) cannot be successfully completed latest by 18 (eighteen) months after last major delivery for reasons for which the SUPPLIER is not responsible, the performance warrantees shall be deemed to have been fulfilled at such date.

7.8 The warranty was provided by the suppler w.r.t. the date of commissioning. The relevant clause available on page 164 of the paper book reads as under: “5.2 The warranty period of MACHINERY supplied by SUPPLIER shall be 12 (twelve) months from the date of commissioning but not more than 21 (twenty-one) months from the date of delivery at port of Shipment of last consignment of MACHINERY excepting minor items or spares, which do not effect the erection and commission schedule of the plant During the warranty period if any part of the MACHINERY requires repair and/or replacement, the warranty period for the newly repaired part and/or the replacement shall also be 12 (twelve) months from the date on which they are put into

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operation, but not more than 21 (twenty-one) months after the date of delivery at site of each part, in case the operation of the MACHINERY is stopped for a period of, or over 14 (fourteen) days caused by the repair or replacement due to SUPPLIER’S responsibility, then the warranty period for the MACHINERY shall be prolonged according to the stoppage correspondingly.

5.3 During the warranty period, if any defect of MACHINERY is found due to SUPPLIER’S responsibility (except for normal wear and tear) the PURCHASER shall inform the SUPPLIER in detail specifying the nature of the defect by fax/e-mail immediately. The PURCHASER’S notice shall still be valid within 30 (thirty) days after the expiration of the warranty period If the defect occurred within the warranty period. SUPPLIER shall within 15 (fifteen) days of receiving the PURCHASER’S notice inform .the PURCHASER whether it will be sending its personnel over to the plant side or request the PURCHASER to entrust the appropriate Indian Authority to investigate the cause of the defect. Should the defect be attributable to SUPPLIER'S responsibility, the SUPPLIER shall depute its personnel to remove the defect or replace the faulty parts at Its option. The PURCHASER shall render It3 assistance to the extent possible free of charge during the course of the repairs or replacement. In case of slight defect, the PURCHASER with SUPPLIER'S authorization and instruction may adjust the same. The relevant material cost shall be to the SUPPLIER'S account and the relevant labour cost In India shall be to the PURCHASER'S account Materials required to meet the performance guarantees and contractual obligations during warranty period - If attributable to the SUPPLIER, shall be arranged by the SUPPLIER free of cost, all freight and duty paid.”

7.9 The final acceptance of the machinery was subjected to the final acceptance test only. The relevant clause of the agreement available on page 166 reads as under: “FINAL ACCEPTANCE

6.1 During the performance guarantee test as stipulated in this CONTRACT, the 620 TPD MULTILAYER PACKAGING COATED BOARD PLANT will be operated by and under the supervision of PURCHASER according to the operating instructions issued by SUPPLIER. The MACHINERY will not be deemed to have been formally finallyaccepted by the PURCHASER until performance guarantees are achieved, the liquidated damages have been paid or waived, or the performance guarantees have been deemed fulfilled as set out below.

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6.2 After fulfillment of the performance guarantees as per Annexure-III or if the performance guarantees are deemed to be fulfilled as stipulated in Article 4.2.7 the PURCHASER win issue to The SUPPLIER a final acceptance certificate.

6.3In case tee MULTILAYER PACKAGING COATED BOARD PLANT has not achieved the required performance parameters but come to level of minimum acceptable level as per Annexure III and the relevant liquidated damages have been paid by the SUPPLIER or if the PURCHASER has decided to waive off such liquidated damages, then the MULTILAVER PACKAGING COATED BOARD PLANT will be deemed to be finally accepted by the PURCHASER. "

7.10 The Annexure-B of the supply agreement contains termination clause. In the event of termination, supplier was bound to return the price already paid against the machinery. The relevant clause is reproduced as under: “7.5 In the event of termination according to Article 7.2 for reasons attributable to the SUPPLIER the exclusive consequence for both PARTIES shall be the SUPPLIER'S waiver for payment of the unexecuted part of the CONTRACT and the PURCHASER’S waiver for delivery of the unexecuted part of the CONTRACT. In the event of termination according to Article 7.3 for reasons attributable to the SUPPLIER the exclusive consequence for both PARTIES shall be the re-exchange of the executed parts of the CONTRACT, i.e. repayment of the price already paid by the PURCHASER against returning of MACHINERY already delivered.”

7.11 The said repayment for return of machinery was also provided in the service contract, which read as under:

“6.4 in the event of termination according to Article 6.2 for reasons attributable to the SUPPLIER the exclusive consequence for both PARTIES shall be the re-exchange of the executed parts of the CONTRACT, i.e. repayment of the price already paid by the PURCHASER against returning of MACHINERY already delivered.

7.12 If due to termination of service contract, if the contract of supplying of machinery also gets effected ,that shows that both

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the contract are interconnected and composite. 7.13 The Ld. counsel of the assessee has relied on the decision of the Hon’ble Supreme Court in the case of Mahabir Commercial Co. Ltd (supra), wherein it is held as under: "As per the provisions of section 5 of the Act, the total income of a nonresident includes income which is received or deemed to be received in India or which accrues or arises, or is deemed to accrue or arise to the nonresident in India. Arguably, a sale undertaken by a non-resident to a resident outside India should not be subject to tax in India. However, the Act does not define what constitutes sale made outside India or in India. Therefore, guidance could be sought from judicial pronouncements. The Supreme Court has held that whether a sale has been made in India or outside India would depend upon the facts of the case. For instance, the apex court has held that in case the bill of lading accompanying the goods is in the name of the of the Indian buyer, then the transaction is complete in the sellers' count", and the delivery of goods, and the sale, is deemed to have taken place outside India. However, if the seller retains control over the goods by taking the bill of lading in his own name, the delivery and sale could be said to have taken place in India. ” "...sale of goods on a CIF basis does not necessarily imply that sale As concluded in India”.

7.13 Thus, we find that the Hon’ble Supreme Court has held that sale has been made in India or outside India would depend upon the facts of the case, though instance of bill of lading has been given as one of criteria of deciding sale inside or outside India. 7.14 In the instant case, the learned counsel claimed that the equipment to be supplied by the assessee to CPPC falls under the definition of ‘Future Goods’ as defined in section 23 of the Sale of Goods Act, 1930, since the equipment is to be appropriated by the assessee after entering into the contract of sale. The ld counsel agree that as per the provisions of section 23(1) of the SG Act, property in future goods is transferred to the buyer when the goods are ascertained and when the good being in a deliverable

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state are unconditionally appropriated to the contract by the seller with the ascent of the buyer. But, we find that AO has made analysis of the provisions of the Sale of Goods Act and referred to various sections to hold that title of goods passed in India. For ready reference, the findings of the AO are reproduced as under: “Section 19(1) of the Sale of Goods Act provides in a contract for the sale of goods, the property is transferred to a buyer at such time as the parties to the contract intend it to be transferred. However section 19(2) of the Act provides that for the purpose of ascertaining the intention of the parties, regard shall be had to:

a. the terms of the contract; b. the conduct of the parties; and c. the circumstances of the case

b. The contract has to be read as a whole to ascertain the intention of the parties.

c. The definition of these terms clearly indicates that the entire risk is borne by the supplier and carriage and insurance charges paid till their delivery at airport/ seaport in India. The repeated reference by the Assessee to Incoterms 2000 does not alter the situation because the expression by its very definition in the agreement means the obligation to bear the carriage and insurance charges upto airport/ seaport in India. It would be illogical to read that the parties particularly Century Pulp and Paper Company in India, can agree to the delivery at any airport/ seaport outside India.

19.2 In view of all the above referred clauses, if the agreement is read as a whole, the intent of the parties is clear that the title to the equipment passes in India at the site where the deliveries are made or in a worst scenario at the airports/seaports in India.

19.3 Under normal circumstances, the risk and title would go together. In the present case, the terms of the agreement read as whole and the conduct of the parties go to indicate that the documents submitted by assessee during the course of assessment like bill of lading, invoices, import documents etc. do not demonstrate the true intent of the parties. This condition of the supply cannot be met it The goods are delivered on High seas The “full satisfaction” can be reached only in India after the provisional acceptance. One cannot pick up one part of supply obligation and

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contend that the title has passed with the discharge of that obligation. Incoterms 2000 only refer to the terms of the agreement generally acceptable between the contracting parties with regard to obligation to bear the cost of transportation, insurance till the point of delivery. Thus, if the agreement is viewed as a whole, it demonstrates that the supplier has the obligation to deliver the goods at the relevant site in India and the documents showing that the title passes in High seas does not reflect the actual mode and delivery of the supply nor the true intent of the parties. Section 19(2) of Sales of Goods Act provides for the factors to determine the intent of the parties and if despite the declaration to the contrary under the section 19(1), if it is found as a matter of fact that the deliveries had been made in India it would be open to Revenue to assert that title to the goods had passed in India.

19.4 Section 21 of the Sales of Goods Act provides that where there is contract for sale of specific goods and seller is bound to do something to goods for the purpose of putting them in a deliverable state the property does not pass until such thing is done and the buyer has notice thereof. In the present case, the sale is not of standard goods but of components of passenger boarding bridges, unless these components are assembled, installed, commissioned and tested, these supplies would be worthless. These components and equipments reached the deliverable state only when their installation is completed and performance established through the provisional or final testing. The assessee has definite obligation to achieve this milestone and unless this is done the property cannot pass. Unlike other kinds of overseas supplies where the supplier has no other obligation beyond the point of shipment, in the present case, the obligation of the supplier extends to the geographical limits of India where he has to put the supply into a deliverable state. In the equipments being discussed in the present case, the various components are integral part of the wholesome technology and these cannot be viewed independently.

19.5 In view of the above, there is no room for any doubt that the title to the goods Jn&s passed in India despite the declaration in various documents, to the contrary.

Ref is invited to the Sale of Goods Act, section 19(2) and Section 20- 24. Section 21: Specific goods to be put into a deliverable state - 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 done and the buyer has notice thereof.

Further regarding Acceptance of goods by buyer - Contract of Sale is completed not by mere delivery of goods but by acceptance of goods

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by buyer. ‘Acceptance’ does not mean mere receipt of goods. It means checking the goods to ascertain whether they are as per contract. - Where goods are delivered to the buyer which he has not previously examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract. [Section 41(1)]

19.6 Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract. [Section 41(2)]

19.7 It is necessary to decide whether property in goods has been transferred to buyer to determine rights and liabilities of buyer and seller. Generally, risk accompanies property in goods i.e. when property in goods passes, risk also passes.

19.8 It is seen that title of all Equipment sold was to pass from suppliers in high seas before arrival in India but the risk of loss shall pass only upon provisional acceptance by buyer. However, when we examine the terms of the contract, the conduct of the parties and the circumstances of the case. [Section 19(2)] it is seen that this is a Composite contract of design, manufacture, supply, installation, testing and commissioning of 620 TPD Plant. Therefore the intention of the contracting parties can never be pass the title in high seas.

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such item as the same I in its custody till installation, commissioning and testing.”

7.15 On perusal of the list of machinery mentioned in the clause 3.1 of the agreement as compared to the Machineries imported through various invoices, we find that in the agreement various section of the plant have been mentioned as machinery. For ready reference, the various machinery mentioned in clause 3.1 of the agreement, as available on page 162 of the paper book is reproduced as under: “3.1 SCOPE OF SUPPLY: 3.1.1 SUPPLIER shall supply to PURCHASER the MACHINERY briefly described as below and more fully described in the ANNEXURE I, - Head Boxes and Forming Section - Press Section - Drying Section - Surface Sizing and On-line Coating Stations - Air Drying System - Hard and Soft Nip Calendaring - Pope Reel - Machine Control System - Automation and Controls - Auxiliaries and Accessories - Spares 3.1.2 The SUPPLIER’S Scope of Supply shall be as specified In Annexure I, MACHINERY shall be complete within the delivery limits of SUPPLIER’S scope of supply in order to achieve the performance guarantees subject to the conditions as per Annexure III in every respect with all mountings, fittings, fixtures and standard accessories normally provided with such MACHINERY and / or needed for completion and safe operation of the MACHINERY including supports, embedment etc, as required by the applicable codes, though" they may not have been specially detailed in the respective specifications unless included in the list of exclusion. All similar standard components/parts of similar standard equipment provided shall be interchangeable with one another to the extent applicable.

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3.1.3 The SUPPLIER shall provide drawing and other data including operation and maintenance manuals as specified in Annexure- I & IV.”

7.16 The items mentioned in various invoices raised by the assessee on CPPC are available from pages 14 to 66 of the paper book. According to the Invoices, various components of these machineries have been imported. The sections of the plants as mentioned in the supply agreement have been assembled in India. For example; the invoice No 401400 dated 09/12/2009 available on page 14 of paper book contains various parts of press section in 30 boxes, machine rolls in 5 boxes. The Invoice No. 401399 dated 02/12/2009 available on page 19 of the paper- book contains various parts of section along with spares packed in 133 wooden boxes. The invoice no. 401391 dated 19/11/2009 available on page 24 of the paper book contains parts of dryer cylinder packed in 24 boxes. Other invoices also contains components of Head box, dyer cylinder, wire section, press section, mechanical devices, MCS with Power supply, MG-dryer, parts of master Reel, coating section, control cabinets, strips for dewatering system, air drying system, MG-hood, hood and ventilation system, hydraulic system, lubrication system, approach flow system etc. It is evident that items which have been imported through different invoices are not the machineries, which have been mentioned in the supply agreement but these are various components packed in wooden boxes, which have been brought into shape of different section of the plant as listed in agreement, only after assembling at the site of the buyer. After perusal of these invoices, it clear that the goods supplied by the

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assessee through various invoices are not in deliverable state.

7.17 The learned counsel of the assessee has relied on the decision of the Hon’ble Delhi High Court in the case of DIT Vs. Ericson AB (supra) to support that acceptance test by the Indian Customer was not relevant to hold that the sale effected outside India. The Tribunal in the case of Shanghai Electric Group Co. Ltd. has summarized the facts of the DIT Vs. Erriction AB, (2017)- TII-119-ITAT-DEL-INTL under:

“In the case of DIT vs. Ericson AB (supra), facts before Hon'ble Delhi High Court were as under:

(i) The profits from the supply of equipment were not chargeable to tax in India because the property and risk in goods passed to the buyer outside India. The assessee had not performed installation service in India. The fact that the contracts were signed in India could not by itself create a tax liability. The nomenclature of a "turnkey project" or "works contract" was not relevant. The fact that the assessee took "overall responsibility" was also not material. Though supply of equipment was subject to the "acceptance test"

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performed in India, this was not material because the contract made it clear that the "acceptance test" was not a material event for passing of the title and risk in the equipment supplied. If the system did not conform to the specifications, the only consequence was that the assessee had to cure the defect. The position might have been different if the buyer had the right to reject the equipment on the failure of the acceptance test carried out in India. Consequently, the assessee did not have a "business connection" in India. The question whether the assessee had a "Permanent Establishment" was not required to be gone into.

7.18 However, the facts of the assessee before us is not the same as in the case of DIT vs. Ericson AB (supra).In the case of Ericson (supra), the assessee, a non-resident company, supplied the equipments to the operators, while the other two companies (EFC and ECL) were in the business of installations of equipments and granting marketing support to the assessee. All the entities were assessed in respect of the income that accrued to them and it was not the case that only one assessment had to made treating the transaction as one works contract. As against the above facts in the case of Ericson (supra), in the case of the assessee, the assessee alone is responsible for supply of equipments and supervision of installation of equipment. In the case of Ericson (supra), it is held that overall agreement does not result in income accruing in India and execution of the overall agreement was prompted by purely commercial considerations. As opposed to the case of Ericson (supra), there was no need for execution of the overall agreement in the case of the assessee, because in the case of the assessee both the process of supply and supervision of installation are interconnected as evident from followings:  Supply and installation are the responsibilities of one party i.e. assessee;

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 Description of goods supplied as per invoice [p. 13 to 66 of Paper Book for A Y. 2010-11 and p.143 to 146 of Paper Book for A Y 2011-12] revel that they are only parts of the machinery which need to be assembled, erected and installed. This is consistent with Cl. 13.1 & 13.5 of the Supply Contract which state that Machineries to be delivered in part shipments and the date of completion of delivery is the date of delivery of the last consignment”;  The supply and installation process overlap with each other. The supply of such machine parts continued through both the relevant assessment years alongside installation services. Thus, whereas it is claimed by the assessee that installation services commenced from 14-12-2009 with the arrival of Mr. A.C.Schwab on 14.12.2009 and continued till A.Y. 2012-13, the supply of machine parts continued till at least 6.5.2010 [p.143 of Paper Book for 2011-12. In fact, the value of supplies during A.Y.2011-12 was Rs. 6,30,75,828. In other words, since as per cl. 13.5 of the supply contract, “the date of completion of delivery is the date of delivery of the last consignment" it can be concluded that the delivery of supply was not completed during A.Y. 2010-11 i.e the year in which installation activities commenced.  Moreover, the assessee itself has shown the revenue from installation activities are dependent upon and intrinsically connected with the supply of machinery by offering the income from installation on 'project completion' basis i.e. after the final "delivery of the last consignment" of the machinery although, as per the Service Contract, there was no such obligation on part of the assessee. As per Cl.3 of the Service Agreement, the remuneration was payable at a fixed rate on a per person per man- day basis. The assessee raised its monthly invoices on the above basis and was accordingly remunerated by the client. Yet, the assessee shown such receipts as 'advances' and not recognized as revenue. This is another fact which distinguishes the case of the assessee from that of, Ishikawajima Harima and Ericsson.

7.19 We find that the Hon’ble high Court in the cases of Erriction (supra) held that acceptance test" was not a material event for passing of the title and risk in the equipment supplied and if the system did not conform to the specifications, the only consequence was that the assessee had to cure the defect. But there is a caveat attached to the finding that the position might have been different if the buyer had the right to reject the equipment on the failure of the acceptance test carried out in India. In the instant case, the said clause of repayment on return

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of machinery on failure of acceptance test is available and reproduced above by us .Thus , the decision of the Hon’ble High court in the case of DIT Vs Erriction in a way support the contention of the Revenue. 7.20 In the instant case, the transit insurance of goods has been arranged by the assessee at its own cost from the ware house of supplier to the warehouse of the purchaser, which means the risk in case of damage of goods during transit remained with the supplier. In such a scenario, the article 7.1 that ownership and risk would be transferred to the purchaser, remained only on paper and not acted upon. 7.21 In the instant case the parts of the machineries have been manufactured outside India but they have not been brought in deliverable state in India as per supply agreement and thus sale cannot be said as effected outside India. In the case of Ericson AB (supra) the contract of erection was executed by subsidiary company and thus the Hon’ble court held that both the entity perform their own independent obligation, receive appropriate separate remuneration and are technically not dependent on each other. But in the instant case, both the contract of supply and supervision of installation or commissioning of plant has been executed/supervised by the one party, i.e., the assessee. 7.22 The learned counsel has referred to the decision of Nokia Networks OY (supra), where in the Tribunal has held that mere provisioning of marketing activities does not lead to creation of a business connection. The relevant extract is reproduces as under: “53 ...... Theprovisions ofsection 9(l)(i) of the Act clearly provide that income accruing or arising, whether directly or indirectly, through or

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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 taxable in India if they come within the meaning of income deemed to accrue or arise in India as explained in Section 9 of the Act. Thus, where any income accrues or arises to a non-resident through or from any “business connection ” in India where all the operations are not carried out in India only such income will be chargeable to tax in India as can be attributed to the operations carried out in India. In light of these provisions and facts of the case, we will analyse the rival contentions of the parties and the judicial proposition highlighted before us in this regard.”

7.23 In the instant case, the assessee has not provided the details of marketing activities or negotiation of the contract to the Assessing Officer despite repeated requests and thus, the decision relied upon is any way not assistance to the assessee. 7.24 The Hon’ble Andhra Pradesh High Court in the case of L & T Ltd. (supra) has relied upon the decision of the Hon’ble Supreme Court in the case of Usha Beltron Ltd. (supra) wherein various provisions of the sale of goods Act, 1930 have been analyzed and held that wherever the supply contracts contain and inspection or a certification clause , the title in the goods does not pass till the inspection and certification are successful and the buyer /owner has indicated his approval. The relevant parts of Hon’ble High Court as applicable to the present case are reproduced hereunder: “6. After extracting Sections 3(b) and 5(2) of the CST Act, the assessing authority held that these provisions refer to a 'sale' which is effected by transfer of documents of title while the goods are under movement from one State to another (Section 3(b))State of Gujarat v. Chem-Dyes Corporation(1991) 83 STC 488 (Gujarat High Court) (DB), the Gujarat High Court had held that during the period, i.e at the time of endorsement of documents of title to the goods, what was inexistence was an 'agreement to sell', and Section 3(b) did not apply. 45. For a sale to fall under Section 3(b), the sale must be effected by

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the transfer of documents of title to the goods. The transfer of documents, contemplated by Section 3(b), is a transfer which, in law, amounts to delivery of the goods. Transfer of documents either by endorsement or delivery completes the transfer of title but, in the absence of an indication to that effect in the statute, the place where the documents are transferred is not necessarily the place of the sale. (S.R. Sarkar106). Transfer of documents of title may be effected by handing them over. An endorsement to that effect on the documents is one mode of proving the fact. (The Dy. Commissioner of Commercial Tax, Madurai Division, Madurai v. A.R.S. ThirumeninathaNadar Firm, Tuticorin (1968) 21 STC 184) (Madras HC) (DB)). 94. ...in addition to post-despatch inspection, the supply contracts (as opposed to the erection contracts) also contemplate a certification after erection; by virtue of the said clause, the owner certifies as to the successful operation of the facility; the said certification is given after the owner inspects the facility, and finds that all the units and components, which have been supplied, are working; the scope of certification extends not only to the civil work, but also to the goods supplied under the supply contract; in all the contracts, the supplier becomes entitled to full payment only upon receipt of such certification; the payment is linked to successful inspection and certification; if the contract has an inspection or a certification clause, title does not pass till the inspection and certification are successful, and the buyer / owner has indicated his approval; the Supreme Court, in Usha Belltron Ltd. v. State of Punjab (2005) 7 SCC 58, held that title passes only upon certification; and the petitioners contention that the taking over certificate was merely for ensuring proper quality of goods supplied, and does not relate to passing of property in the goods, is not tenable. 96. In UshaBeltron Ltd., the petitioner contended that the property in the goods had passed to the Government of India before it entered the Municipal limits; this was a contract for sale of specific goods in a deliverable state; the property in the goods passed to the buyer when the contract was made; and it was immaterial as to what was the time of delivery of the goods. Clause 5.5, of the bid document therein, provided for the issue a taking over certificate when the performance tests had been successfully carried out; and, while issuance of such a certificate would certify receipt of goods in a safe and sound condition, it would not discharge the supplier of their warranty obligations. Clause 6.1 of the bid document stipulated that delivery of the goods shall be made by the supplier in accordance with the terms of the contract; and the goods were to remain at the risk of the supplier until delivery was completed. The Supreme Court held that clause 5.5 and 6.1 of the bid document clearly indicated that the property in the goods remained at the risk of the appellant till delivery was completed; it showed that delivery would be completed only after the take-over certificate was issued; as per

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Section 19 of the Sale of Goods Act, the property in the goods passes when the parties intended it to pass; in this case the contract provided that property in the goods does not pass till after delivery, and after successful testing and issuance of the take-over certificate; and the High Court was right in concluding that the property in the goods had not passed at the time the goods entered the municipal limits. 98. Section 23 of the 1930 Act stipulates that title, in a sale of future goods, passes only when the goods are in a deliverable state, they are unconditionally appropriated to the contract, and there is assent of the buyer. If the contract has a post-delivery inspection or a certification clause, the unconditional appropriation, ordinarily, takes place, and the assent of the buyer is also given, only upon inspection and certification. Under Section 24 of the 1930 Act title passes upon approval which, in the subject contracts, is only after inspection. The post-delivery inspection clauses in the subject contracts would fall within the ambit of the phrase "on approval" in Section 24 as delivery of the goods is taken only after inspection. The "taking over" certificate also shows that the buyer indicates his approval only after certification. The inspection and certification clauses in the contract would fall within the ambit of the phrase "other similar terms" in Section 24. The presence of an inspection and certification clause in the supply contract defers passing of title till the owner has expressed its assent. Such assent is given only after inspection and certification. 99. Section 26 stipulates that risk, prima-facie, passes with the property and, thereunder, unless otherwise agreed, the goods remain at the sellers risk until the property therein is transferred to the buyer, but when the property therein is transferred to the buyer, the goods are at the buyer's risk whether delivery has been made or not. Section 26 is not attracted where the contract provides otherwise. While the question, as to when title to the goods is transferred from the seller to the buyer, must be determined from the conditions stipulated in the subject contracts, if the parties have agreed that the responsibility for risk of loss and damage to the goods would be that of the supplier till erection of the plant is completed, it is evident that transfer of title to the goods was intended to pass only on erection, and not prior thereto. 100. Section 41(2) of the 1930 Act stipulates that, unless otherwise agreed, when the seller tenders delivery of the goods to the buyer he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract. Section 42 relates to acceptance and, thereunder, the buyer is deemed to have accepted the goods when he intimates to the seller that he has accepted them, or when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller. The post-delivery inspection clauses, in the supply contracts, are in

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conformity with Section 41(2), and the certification clauses therein accord with the requirement of Section 42 of the 1930 Act.”

7.25 The Ld. counsel of the assessee tried to distinguish the decisions of Hon’ble Supreme Court in the case of Usha Belltron Ltd. [supra] and that of Hon’ble AP High Court in the case of L&T Ltd. [supra] on the ground that the said decisions were delivered in the context of Octroi and hence not applicable to the present case. However, the above contentions of the learned counsel are not acceptable since in both the above cases as in the case of the assessee, the issue involved is identical i.e. place where the title and risk to the property passed for the purpose of tax liability. The only superficial difference if any] being that while in the case of Usha Belltron the boundary between the taxing jurisdictions was the “municipal limit”, inthe case of L&T Ltd involved the boundary between “two states” while the present case involves the boundary between “two countries”. 7.26 The Revenue also places reliance on the decision of the ITAT, Delhi in the case of Shangahai Electronics Group Company Ltd. [2017-TII-119-ITAT-DEL-INTL] where the ITAT held the income from overseas supply to be taxable in India. 7.27 In view of the discussion, we are of the view that the assessee has supplied parts of goods by way of invoices raised,which have further been assembled in India to bring them in deliverable state as agreed in the supply agreement between the assessee and buyer , and thus property in goods have been passed in India and thus part of the consideration of supply agreement for offshore supply is taxable in India. We note that no information has been provided by the assessee in respect of the

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activity carried out in India subsequent to award of the tender to the assessee for collection of drawing of the factories of the buyer and other input information in relation to erection of plant and customized manufacturing of the parts of various section of the plant.

(b) Business connection in India

8.2 The ratio decidenci emanating from the aforesaid decision is that the following conditions should exist to constitute ‘Business Connection’ in India: • A real and intimate relation must exist between the trading activities carried on outside India by a non-resident and the activities in India;

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• The relation contributes directly and indirectly to the earnings of income by the non-resident in his business; • There should be an element of continuity between the business of the non-resident and the activity in India. To put it apparently, stray or isolated transaction is not normally regarded as a business connection. 8.3 The learned counsel of the assessee has submitted that in support all the aforesaid conditions are conspicuous by their absence in the case of the assessee and therefore, no ‘Business Connection’ of the appellant could be deemed to exist in India. In support of the same, he invited our attentions to the following submissions: • The sales were independently made by the appellant to CPP on principal to principal basis; • The sales were concluded outside India; • In connection with the Contract in question, no business operations were carried out by the appellant in India. 8.4 In view of the learned counsel of the assessee, income flowing from the Contract in question is not liable to tax in India since the appellant does not have any Business Connection in India, and thus no part of the income can be said to be deemed to accrue or arise in India.

8.5 In CIT v. R.D. Aggarwal & Co. (1965) 56 ITR 20, Hon'ble Supreme Court had considered the scope of the expression "business connection", and it was observed as follows (pp. 24 & 28):

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"The expression 'business' is defined in the Act as any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, but the Act contains no definition of the expression 'business connection' and its precise connotation is vague and indefinite. The expression 'business connection' undoubtedly means something more than 'business'. A business connection in section 42 involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non- resident and the activity in the taxable territories: a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms: it may include carrying on a part of the main business or activity incidental to the main business of the non-resident through an agent, or it may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In each case, the question whether there is a business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case.

A relation to be a 'business connection' must be real and intimate, and through or from which income must accrue or arise whether directly or indirectly to the non-resident. But it must in all cases be remembered that by section 42 income, profit or gain which accrues or arises to a non resident outside the taxable territories is sought to be brought within the net of the income-tax law, and not income, profit or gain which accrues or arises or is deemed to accrue or arise within the taxable territories. Income received or deemed to be received, or accruing or arising or deemed to be accruing or arising within the taxable territories in the previous year is taxable by section 4(1)(a) and (c) of the Act, whether the person earning is a resident or non-resident. If the agent of a non-resident receives that income or is entitled to receive that income, it may be taxed in the hands of the agent by the machinery provision enacted in section 40(2). Income not taxable under section 4 of the Act of a non-resident becomes taxable under section 42(1) if there subsists a connection between the activity in the taxable territories and the business of the non-resident, and if through or from that connection income directly or indirectly arises..................

The expression 'business connection' postulates a real and intimate relation between trading activity carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the non- resident in his trading activity".

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8.6 In CIT v. Hindustan Shipyard Ltd. [1977] 109 ITR 158 (AP) a Division Bench of this court had construed the word "business connection". The facts in this case were that;- The non- resident company supplied diesel engines with accessories. The terms of the sale were that 90% of the value must be paid against original set of documents, to be submitted duly to the State Bank of India within fifteen days and the balance within six months. The net price included 5% commission payable to the non- resident company at Bombay. The property was to pass to the purchaser on delivery on board. The engine was agreed to be erected by the staff of the purchaser under the supervision of the erector and a supervising engineer was placed at the disposal of the purchaser by the non- resident company.

8.7 It was held that; "business connection" can be said to be established when "the thread of mutual interest runs through the fabric of the trading activities carried on outside and inside the taxable territory and there must be real and intimate connection between the two. The commonness of interest may be by way of management control or financial control or by way of sharing profits".

8.8 Having regard to the facts of the said case, the Hon'ble Court held that there was no business connection between the assessee and non-resident company, as the services rendered by non- resident company were connected with the effective fulfillment of the contract of sale and were merely incidental to the contract.

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“The ratio decidendi emanating from the aforesaid decisions is that the following conditions should exist to constitute ‘Business Connection’ in India: • A real and intimate relation must exist between the trading activities carried on outside India by a non-resident and the activities in India; • The relation contributes directly and indirectly to the earnings of income by the nonresident in his business; • There should be an element of continuity between the business of the non-resident and the activity in India. To put it apparently, stray or isolated transaction is not normally regarded as a business connection.”

8.9 We note that the general provision bringing income from any business connection in India within the scope of section 9 (1) (i), has been explained by way of Explanation 1 (a) of the Act that, in the case of a business of which all the operations are not carried out in India, the income of business deemed under this clause to accrue or arise in India. It shall be only such part of income as is reasonably attributable to the operations carried out in India. A careful reading of section 9, together with the Explanations thereto, makes it clear that the statutory test for determining the place of accrual of income is not the place where these services are rendered but where those services are utilized".

8.10 Since, in the instant case, the part of the operations of the supply agreement have been carried out in India and sale of goods is in continuation of the process of erection of the plant , the conditions of the business connection exits. We have observed an element of continuity between the business of the assessee from supply to successful supervision of the commission of Plant.

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It is not the case of isolated sale of the off the self goods or stray transaction, in view of the fact that the assessee has rendered supervision of erection/commission of TPD Plant. Thus, the assess is doing business activities in India which are not isolated instances but represent real and intimate relationship between activities of assessee done outside India and those done inside India. The business operation being done in India by the assessee are revenue generating as these operations are required to earn the contract and to meet the contractual obligations. Therefore, all parameters of business connection as prescribed by above judicial authorities are satisfied in the case of the assessee.Accordingly, the income is deemed to accrue or arise in India in terms of section 9(1)(i) of the Act from the offshore supply of goods.

Existence of PE in India 9. The Article-5(1) of the DTAA between India and Austria has defined the Permanent Establishment means a fixed place of through which the business of an enterprise is wholly or partly carried on. The article 5(2) further include following places as permanent establishment: “ARTICLE 5 : Permanent Establishment - 1. …………………… 2. The term “permanent establishment” includes especially:— (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g) a sales outlet; (h) a warehouse in relation to a person providing storage facilities for others;

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(i) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (for the same or connected project, site or activities) continue for a period of more than six months.”

9.1 The Article 7(1) of the DTAA has further prescribed that Profit of enterprise in Austria shall be taxable in India if the Austrian Enterprise carries on business in India through PE situated in India and so much of the profit of the enterprise would be taxable that is attributable to the PE . 9.2 The assessee has admitted existence of service PE in India as far as supervisory activity under service agreement in view of the fact that employees of the assessee were stationed at the CPPC TPD Plant in the year under consideration to supervise the erection and commissioning of the plant. 9.3 The Assessing Officer found that in Tax Audit report furnished in Form No. 3CB and 3CD related to PE in India for the contract with M/s Ford India Pvt. Ltd., the address of the PE was mentioned as “Mohinder Puri& Co. Vanadana Building, Tolstoy Marg, New Delhi. He further observed that in the return of income filed by the assessee same address has been mentioned as the address of the assessee. The Assessing Officer also observed that in case of the other group companies of the assessee (M/sThyssenKrupp elevator Austria Pvt. Ltd. and M/s ThyssenKrupp Airport System SA), the branch/project office has been shown at the same address. According to the Assessing Officer this place was at the disposal of the assessee. In view of the Assessing Officer books of accounts being maintained on computers systems were located at thar place and return of

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income have been filed for the last many years. The Assessing Officer rejected the contention of the assessee that PE came into existence after the supply under the impugned contract completed. According to him the place of the business was at the disposal of the assessee for sufficiently long duration and in fact PE was very much involved in the marketing and pre-contract negotiation done by the assessee. In view of the above observations, the learnedAssessing Officer concluded that the assessee had carried out business, supply and supervision of installation, testing and commissioning of machinery for TPD plant from the PE of the assessee in India. 9.4 The Ld. counsel of the assessee before the Assessing Officer submitted that the activities relating to design and manufacturing were carried out outside India and the Indian PE of the assessee had no role whatsoever in design, build and manufacturing of the machinery, which is evident from the fact that the assessee company has no office or manufacturing facilities in India. The learned Assessing Officer rejected the contention of the assessee, observing as under: “18.4The claim of assessee that machinery for TPD Plants were delivered outside India in Austria, accordingly no profit from offshore supply could be attributed to the PE of assessee in India. I have carefully examined the term and condition of agreement and have noted that the claim of assessee is factually incorrect. As per the terms and conditions of the agreement assessee has to deliver machinery for TPD Plant in running condition after completing supervision of the installation commissioning and testing. In such a condition assessee’s contention that equipments are sold to CPPC in high seas cannot be anything but a tax avoidance scheme. When assessee is required to have possession of the goods at the work site for supervision of installation, the passing of possession in high seas to CPPC and again taking it back at the site is highly illogical. No purpose other than tax evasion can be served from this transaction. Further there is no documentary evidence also of the receipt of these

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goods by the assessee or its agent at the work site. Even as per Section 19 (1) of sales of goods act the title of goods passes when the contracting parties intend it to pass. In this case, when the intention of one of the contracting parties (CPPC) is to receive the goods in working condition, the mere documents stating that the title has passed overseas have no value as the nature of goods in this case is such which cannot be imagined to be in working condition high seas. Both these facts are contradicting each other therefore only one of them can be fact. Since the other clauses of the impugned contract are in operation, the title Over the goods cannot pass overseas.”

9.5 The Ld. counsel submitted that the supervisory PE came into existence under the DTAA, since the period of stay of employees carrying out supervision activities exceeded the threshold period of six months. It was deemed PE in India and it does not have any permanent office or commonplace as presumed by the Assessing Officer. According to the Ld. counsel, the activities relating to offshore supply were completed by the assessee company much before the deemed PE came into existence. According to him, the Assessing Officer grossly erred in stating that that transaction including offshore supply of equipment was done with the involvement of the Indian PE. 9.6 As regard the address of the ‘Mohinder Puri & Co.’ chartered accountants, the learned Counsel submitted that said address was for communication purpose since the said firm was engaged by the assessee for providing professional services related to accounting and taxation and said firm had no role in the business of the assessee company. The learned Counsel also submitted that the claim of the Assessing Officer that return of income was being filed in India by the assessee for last many years was factually incorrect and the assessee had filed return of income for the first time for the subject assessment year 2010-11.

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9.7 On the contrary, on the issue of existence of Fixed Place PE, the Ld. DR first submitted that requisite details were not provided before the lower authorities. The submissions of the Ld DR in this regard are reproduced as under:

i. No details regarding pre-contract activities and the personnel involved in such activities were furnished despite repeated requests by AO. The AO vide letter dt. 22/2/13 asked the assessee to explain “pre-contract details” i.e. how you are chosen for the referred work with reference to the tender modalities.” In response, the assessee vide its reply dt. 13/3/13 [p.83 of Paper Book] stated that “Regarding pre-contract details, we are awaiting the same from the assessee. As and when the documents are received, we shall submit the same with your goodself.” The assessee again vide its letter dt. reply dt. 19/3/13 sought time on the ground that “In respect of pre-contract documents, we would like to inform you that the assessee is in the process of collecting the same. However, these are old records, the assessee may take some more time to organize the relevant documents and information. Therefore, we request your goodself to give some more time to the assessee for submitting these details/documents.” The assessee, once more vide its reply dt. 25/3/13 [p.91 of PB] contended that “Regarding the information of the expatriates of the assessee who visited India in respect of the contract with Century Pulp & Paper Mills Ltd., we would like to inform your goodself that due to Easter holidays in Austria, the non- resident assessee has not been able to provide the relevant information, as desired by you. However, we expect to receive such information during this week and we hope to file the information with your goodself by the end of this week.”It is not the contention of the assessee that no personnel had came to India or involved in the pre-contract and negotiation activities. It accepts that its employees were present in India for pre-contract activities and contract negotiations, but it did not produce these details. No such details were also filed before the Ld. DRP and the final assessment order was passed on 2/1/14 as per DRP directions dt. 27/12/13.

On the contention of the Ld. AR that no PE exist for supply contract he submitted that assessee consistently claims that it has no fixed place PE under Art-5(1) in India and the Supervisory PE/Service PE came into existence only after the arrival of Mr. Andreas Christian Schwab, Site Representative on 14/12/2009. The entire attempt by the assessee is to establish that the Supervisory PE being coming into existence after the supplies are made, has no role in the supply of equipments and hence the revenue from supplies cannot be held

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as connected to it. Despite several opportunities, the assessee preferred not to provide the details of its pre-contract activities in India. Moreover, no other evidences in the form of copies of their passport etc. were filed in support of the claim that Andreas Christian Schwab, Site Representative & Hubert Grossman, Supervisor stayed in India only between 14/12/09 & 31/3/10. As has already been discussed in Part-B of this submission above, it is not the contention of the assessee that no personnel had came to India or involved in the pre-contract and negotiation activities. It accepts that its employees were present in India for pre-contract activities and contract negotiations, but it did not produce the details regarding their stay and the functions they carried out in India. On the face of it, it can’t be accepted that Century entered into a high value contract with the assessee without any tender, bidding, negotiations etc. It is not the claim of the assessee that there is a LO to take care of part of such activities.

The assessee in its return of income as well as in its TDS returns/certificates given its address as – 1A-D, Vandhana Building, 11 Tolstoy Marg, New Delhi It may be noted that this address is different from the site office at Lalkua, Nainital, UP [p.94] which constitutes the Supervisory PE. It cannot be said that the above address at New Delhi is not a geographically fixed place. Since, as per the Tax Audit Report, [p.34, PB 2011-12] it has been certified that the books of accounts of the assessee are being maintained at this premises, it can’t be said that the premises are not at the disposal of the assessee. It may not be out of context to state that Hon’ble Delhi High Court in the case of Galileo International Inc. & Travelport [19SOT 257] have upheld fixed place PE on the basis of existence of computer terminals. Accordingly, maintenance of books of accounts at a fixed geographical location satisfies the disposal, location and business tests for the existence of a Fixed Place PE. The temporal aspect of the PE or permanency test is also satisfied as the AO in para-18.2 in page 24 of his order has given a finding that “The returns of the assessee are being filed in India since last many years and in all the returns the address of the assessee remains the same.” Furthermore, Form No. 27A in support of deduction & deposit of TDS [p.13 & 14 of the submissions of Revenue] shows Mr. C.S. Mathur as the person responsible for deduction and deposit of TDS. Since the said function i.e. deduction and deposit of TDS can only be carried on by an employee of the assessee payee, it can be concluded that Mr. Mathur is the employee of the assessee who has been operating from the above fixed place of business. Accordingly, the claim of the assessee that the only

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employees it have in India are Mr. Andreas Christian Schwab & Hubert Grossman is factually incorrect. Both these employees may be the only expat employees present in India, however, on the facts of the case, they are not the ONLY employees present in India. Thus, the premises at 1A-D, Vandhana Building, 11 Tolstoy Marg, New Delhi constitutes a Fixed Place PE of the assessee from which it carries on its business. Furthermore, in the face of non- compliance by the assessee and in the absence of any material to the contrary, the AO is justified in treating the same as the fixed place of business of the assessee from which all activities for the supply of equipments taking place.

9.8 In the rejoinder, the Learned Counsel submitted that pre- contract activities are not relevant to constitute fixed place PE. The submission of the learned Counsel reproduced as under: “Re: Constitution of fixed place PE on account of non- availability of details of pre-contract activities and employee visits Para B (iv) and C.1, Panes 1-2 of the Ld. CIT(DR) ’s submission]

The Ld. CIT(DR) has alleged that the appellant failed to furnish the details of pre-contract activities despite the same being specifically called for by the assessing officer and that no evidences have been furnished in support of the appellant’s claim that the employees, i.e. Mr. Andreas Christian Schwab and Mr. Hubert Grossman stayed in India from 14.12.2009 and 31.03.2009 for undertaking supervisory activities. It has been alleged that the subject contract for supply of equipment, being a high value contract, could not have been carried out without any tenders, bidding, negotiations, etc.

Further, the Ld. CIT(DR) has reiterated the allegation of the assessing officer that since the appellant has been maintaining its books of account and filing its income tax return in India for the past many years, with the address stated as “1A-D, Vandhana Building, 11 Tolstoy Marg, New Delhi”, the aforementioned address constitutes fixed place of business from where activities of supply of equipment took place.

Re: Pre-contract activities not relevant to constitute fixed place PE As regards the allegation of the Ld. CIT(DR) with respect to non- furnishing of pre-contract activities before the lower authorities, it is respectfully submitted as under:

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The appellant, being a company resident in Austria, is entitled to the treaty benefits under the Double Taxation Avoidance Agreement between Austria and India (“the Treaty”). Article 7 of the Treaty dealing with taxation of “business profits”, reads 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 profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

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rights, or by way of commission or other charges, for specific services performed or for management, or, except in the case of a banking enterprise by way of interest on moneys lent to the head office of the enterprise or any of its other offices.

In terms of paragraph 1 of Article 7 of the Treaty, business profits arising to a French enterprise shall be taxable in India, only if the Austrian enterprise has a PE in India. In other words, in the absence of a PE in India, no part of the business profits arising to French enterprise is taxable in India.

Article 5 of the Treaty defines PE as under:

“ARTICLE 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially:— (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) amine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g) a sales outlet; (h) a warehouse in relation to a person providing storage facilities for others; (i) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (for the same or connected project, site

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or activities) continue for a period of more thansix months.

(a) the use off facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance ofa stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; (f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e). provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.”

Paragraph 1 of Article 5 of the Treaty, which defines the term PE to mean a “fixed place of business through which the business of an enterprise is wholly or partly carried on”, is similarly worded as paragraph 1 of Article 5 of the OECD Model Convention.

The OECD Commentary on Article 5 of the OECD Model Convention, states that the following conditions should exist in order to constitute “fixed place of business” for the purpose of paragraph 1 of that Article: • the existence of a “place of business”, i.e., a facility such as premises or, in certain instances, machinery or equipment.

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• this place of business must be “fixed”, i.e., it must be established at a distinct place with a certain degree of permanence. • the carrying on of the business of the enterprise through this fixed place of business. This usually means that persons who, in one way or another, are dependent on the enterprise(personnel) conduct the business of the enterprise in the State in which the fixed place is situated.

It is further submitted that the DTAAs characterize a fixed place of business as PE only if the enterprise undertakes a business activity through the place of business. This is referred to as the ‘business activity’ test. The ‘core business’ of the foreign enterprise should be conducted through the place of business. Thus, there should be a nexus between the place of business and carrying on of business.

In order that the foreign enterprise resident of a Contracting State can be said to have a fixed place PE in the other Contracting State, it is essential to demonstrate that the foreign enterprise has a fixed place available at its disposal in the other Contracting State, which is used for purposes of undertaking core business activities of that foreign enterprise in that other contracting State.

In this regard, reference is made to the decision of the Supreme Court in the case of Formula One World Championship Ltd. vs. CIT: 394 ITR 80 (SC) wherein the Court after referring to the OECD Model Tax Convention, Commentaries by Professor Philip Baker and Professor Klaus Vogel, international tax jurisprudence observed that in terms of Article 5(1) of the India- UK Tax Treaty, a fixed place PE is constituted in India, if twin conditions are satisfied viz, (i) existence of a fixed place of business at the disposal of the foreign enterprise in India; (ii) through which the business of the foreign enterprise is wholly or partly carried on. In other words, the fixed place of business should be at the disposal of the foreign enterprise through which its business is carried on in India. Conversely, PE of the foreign company will not be constituted in India where the foreign enterprise is provided access to its customer's premises in order to perform services under the contract with such customer and not for undertaking other business activities of the foreign company in India. Relevant extracts of the decision are as under:

“32……………..Some of the instances given by Vogel in this behalf, of relative standards ofcontrol, are as under:

By contrast, in the case of a self-employed engineer who had free access to his customer's premises to perform the services required by his contract, the Canadian

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Federal Court of Appeal ruled that the engineer had no control because he had access only during the customer’s regular office hours and was not entitled to carry on business of his own on the premises.

It may also be pointed out that the Delhi High Court in the case of CIT vs. eFunds IT Solution and Ors.: 364 ITR 256 while deciding the issue as to whether outsourcing of services to an Indian affiliate results in a PE in India for the foreign company under the provisions of the India-US Tax Treaty held that for the purposes of existence of fixed place PE under Article 5, there must be a fixed place of business at the disposal of the enterprise through which the core business activities of such enterprise are carried out in India. Relevant extracts of the decision are as under:

“56………..The fact that business has been transferred or sub- contracted or assigned to e-Fund India is not relevant and material, unless we are determining applicability of paragraph 3 to paragraph 5 and the question is whether the Indian company is performing core or auxiliary and preliminary activities. The fact, the report refers to and give details of or number of employees of e-Fund India which are part of the e- Fund group is not relevant. Neither income earned by e-Fund India nor activities in India by the Indian subsidiary by itself, relevant in determining whether or not PE exists under paragraphs 1, 2, 4 and 5 of Article 5. Thus and therefore, the fact that 40% of the employees of the entire group were in India i.e. were employees of e-Fund India, will not make the said company agency subsidiary PE or fixed place PE of the

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assessee. Neither provision of any software, intangible data etc. whether free of cost or otherwise, make e-Fund India an agency or fixed place PE of the two foreign assessees. Whether or not and on what basis e-Fund India was reimbursed expenses of xerox, courier charges etc. will not make e-Fund India as PE of the assessee under Articles 5(1), 5(4) or 5(5). Conditions and stipulates under Articles 5(1), 5(4) or 5(5) will create a PE and not the said facts as highlighted in the impugned orders. Therefore, we will now examine the facts found and refer to Articles 5(4) and 5(5) of DTAA.”

The aforesaid decision has been upheld by the Supreme Court and is reported in 399 ITR 34.

To reiterate, fixed place PE would be constituted if the foreign enterprise has a fixed place available at its disposal in the other contracting state, through which core business activities of such enterprise are carried out. This proposition is reinforced by virtue of the exception carved out in Article 5(4) of the Treaty to exclude the use of facilities solely for the purpose of collecting information for the enterprise or for other activities which have a preparatory or auxiliary character.

The provisions of Article 5(4) of the Treaty are designed to prevent an enterprise of one Contracting State from being taxed in the other Contracting State, if it uses facilities solely for the purpose of collecting information for the enterprise or carries on in that other State, activities of a purely preparatory or auxiliary character. It is recognized that the services performed by such a place of business are so remote from the actual realization of profits, that it is difficult to allocate any profit to the fixed place of business.

The facilities and activities enumerated in the list of exceptions to PE concept do not constitute PE, even if all the requirements for constituting fixed place PE as provided in Article 5(1) areotherwise satisfied. The list refers to activities of a preparatory or auxiliary character, such activities being exempted from PE taxation.

This Authority for Advance Rulings, in the case of UAE Exchange Centre: 268 ITR 9,further affirmed by Delhi High Court in 313 ITR 94 (Del.)] held as follows:

"... the word “auxiliary” in common English means helping, assisting or supporting the main activity. We have, therefore, to ascertain whether the activities carried on in the liaison offices in India, are only supportive of the main business or form one of the main functions of the business.”

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Further, reference is made to the decision of the Hon’ble Delhi High Court in the case of National Petroleum Construction v. DIT: 383 ITR 648 (Delhi) wherein the Court held that a building site or an assembly project could be construed as a fixed place of business only when an enterprise commences its activity at the project site. An activity which may be related or incidental to the project but which is not carried out at the site in the source country would clearly not be construed as PE as it would not comply with the essential conditions as stated in paragraph1 of Article 5 of the DTAA. Relevant extracts of the decision are reproduced below:

“33. In terms of clause (h) of paragraph 2 of Article 5 of the DTAA, "a building site or construction or assembly project or supervisory activities in connection therewith "would also constitute a PE of an enterprise subject to that site, project or activity continuing for a period of at least nine months. Clearly, the purpose of the said clause is also to include a building site or a construction or an assembly project as a PE by itself. On a plain reading, a PE constituted by a building site or a construction or an assembly project, would commence on the commencement of activities relating to the project or site. The said clause is also to be read harmoniously with paragraph 1 of Article 5 of the DTAA which necessarily entails a fixed place of business from which the business of an enterprise is carried on. Thus, a building site or an assembly project could be construed as a fixed place of business only when an enterprise commences its activity at the project site. An activity which may be related or incidental to the project but which is not carried out at the site in the source country would clearly not be construed as a PE as it would not comply with the essential conditions as stated in paragraph 1 of Article 5 of the DT.AA It is necessary to understand that a building site or a construction assembly project doe s not necessarily require an attendant office; the site or the attendant office in respect of the site/project itself would constitute a fixed place of business once an Assessee commences its work at site. Thus, for clause (h) of paragraph 2 of Article 5 to be applicable, it is essential that the work at site or the project commences - it is not relevant whether the work relates to planning or actual execution of construction works or assembly activities…………….”

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Territory on 19.11.2006 and such activities relating to the installation, testing and commissioning of the platforms continued till 27.04.2007. Thus, the Assessee's activity at site would indisputably commence on 19.11.2006 and continue till 20.04.2007, that is, for a period of less than nine months. ”

Reference is further made to the decision of the Delhi Tribunal in the case of Bellsea Ltd vs. ADIT: 98 taxmann.com 489 (Del. ITAT) wherein the assessee was engaged in the business of dredging and pipeline related services to oil and gas installations. During the year, assessee was awarded contract for laying of gas pipelines at Krishna Godavari Basin. The scope of work, inter-alia, required the assessee to undertake pre-engineering and pre-construction surveys, seabed preparation etc. The assessee had the single point responsibility towards project management. The ITAT held that preparatory work for tendering purpose before entering into contract could not be included for determining whether PE existed in India or not. Relevant extracts of the decision are reproduced below:

“10. From the material placed on record, we find that prior to the entering of the contract, one of the employees of the assessee company. Mr Harry Beliaars had visited India sometime in September, 2007 for the purpose of collecting data and information necessary for tendering purpose and to bid for the contract. Before entering into contract with AMC such preparatory work like pre-survey engineering, investigation of site, etc.. for tendering purpose without actually entering into the contract and installation of project cannot be held that the activity qua the installation project has started. Here one important fact to establish the threshold period prior to effective date provided in the contract, has neither been brought by the Revenue nor is borne out from the records, that the assessee has installed any kind of project office or developed a site before entering into the contract with the AMC for carrying out any preparatory work. Auxiliary and preparatory activity. purely for tendering purpose before entering of the contract and without carrying out any activity of economic substance or active work qua that project cannot be construed as carrying out any activity of installation or construction. Clause (g) of Article 5(2) ostensibly refers to activity based PE, because the main emphasis is on "where such site project or activity continues for a period of more than 12 months." The duration of 12 months per se is activity specific qua the site, construction, assembly or installation project. If the contract would not have been awarded, then any kind of preparatory work for tendering of contract cannot be reckoned for carrying out any activity as stipulated in this clause. Hence, in this case all such preparatory work for

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tendering purpose before entering into contract cannot be counted while calculating the threshold period. Situation would be different if after the contract/work has been awarded/assigned and then if any kind of active work of preparatory or auxiliary nature is carried out, it could be counted for determining the time period.

Reference is further made to the decision of the Special Bench of the Tribunal in the case of Motorola vs. DCIT: 95 ITD 269 (Del.) wherein the Tribunal held that the basic operations to be carried out before the business actually starts such as market survey, industry analysis, economy evaluation, furnishing of product information, ensuring distributorship and their warranty obligation, ensuring technical presentations to potential users, development of market opportunities, providing services and support information, procurement of raw materials and accounting and finance services etc. are activities of preparatory or auxiliary character before the commencement of actual business in India. Such activities cannot be considered as activities in the course of the carrying on of the business by a foreign company in India and the same are anterior thereto. Relevant extracts of the decision are reproduced below:

“223. The alternative argument of the learned counsel for the assessee was that even if we were to hold that there is a fixed place PE within the meaning of Article 5.1, the maintenance of such a fixed place of business was only for "other activities which have a preparatory or auxiliary character, for the enterprise" within the meaning of Article 5.3(e) of the DTAA and, therefore, under the negative deeming provisions thereof the office of MINL cannot be deemed to be a fixed place of assessee’s business. Article 5.3 says that "notwithstanding the preceding provisions of this Article, the term ‘permanent establishment ’ shall be deemed not to include " the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise. The contention of the assessee is that the activities carried on by MINL for Motorola are of preparatory or auxiliary character. Reliance is placed on clauses (1) to (5) of Article 1.1 of the Services Agreement entered into on 1-4-1996 between the assessee and MINL. The nature of the obligations of MINL have been elaborated in these clauses as under:

"Article 1 Duties of MINL 1.1 MINL undertakes the obligation to perform the following services (the "Services")in India to MINC and its affiliated companies (hereinafter referred to jointly as

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"Motorola"):

(1)Engage in market survey, industry analysis, economy evaluation, development of business opportunity, investment, joint venture and technology co-operation and interface with potential business partners and with local Government agencies on industrial policy and regulations. (2)Provide product information and training to distributors and OEMs, assist distributors, to provide potential equipment users with technical and price information, ensure that distributors meet warranty obligations, and maintain technical standards consistent with the high quality, reliability and state of art technology of Motorola equipment, assist distributors to make technical presentations to potential users, act as an interface between Motorola and endusers in dealing with issues of technical performance of equipment, selection of equipment or price of equipment. (3)Develop market opportunities for Motorola products and services by introducing Motorola products and services and by providing product and service information to potential customers and partners in liaison and support of Motorola and provide warranty and after sales services in connection with the products sold. (4)Engage in sourcing and procurement activity on behalf of Motorola for raw materials or components to be incorporated or used in conjunction with products manufactured on a worldwide basis. (5)Corporate Finance and Accounting Services. "

On the basis of above clauses in the Services Agreement, it is contended that the activities of MINC are only preparatory or auxiliary in character and, therefore, the office of MINI in India cannot be deemed to be a fixed place PE of the assessee.

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activities of preparatory or auxiliary character before the commencement of actual business of Motorola in India. These activities cannot be considered as activities in the course of the carrying on of the business by Motorola in India. but they are anterior thereto…………”

Accordingly, pre-contract activities such as pre-engineering survey for the purpose of bidding/tendering are necessary for submitting the bid. At that stage, the bidder is not even certain that the bid would be accepted and the contract would be awarded in its favour. Further such activities do not per se generate any profits particularly since no consideration is paid by the project owner for such activities to the applicant. Accordingly, such activities would at best amount to preparatory or auxiliary activities and the same cannot give rise to PE of the appellant in India, even if the contract is awarded in its favour since costs for such activities are to be borne by the appellant without any reimbursement and hence, such surveys do not tantamount to any revenue generating activity.”

9.9 On the issue whether, premises of chartered accountants can be construed as fixed place PE, the learned Counsel in his rejoinder submitted as under: “Re: Premises of Chartered Accountant cannot be construed as fixed place PE.

In this regard, it is respectfully submitted that the aforesaid observation of the assessing officer as well as of the Ld. CIT(DR) that since the appellant has been filing its return of income for the past many years from the aforementioned address (premises of Chartered Accountant), the same would constitute fixed place PE, is grossly incorrect inasmuch as the year under consideration i.e., assessment year 2010-11 was the first year for which return of income was filed by the appellant. As regards the address mentioned in the return of income and Form 27A filed by the appellant, it is respectfully submitted that the same belongs to M/s. Mohinder Puri & Co., Chartered Accountants (“MPCO”) who were engaged by the appellant for preparing the books of accounts and for undertaking tax compliances in respect of onshore activities (supervisory activities) undertaken by the appellant in India. The address of the Chartered Accountant was mentioned in the return of income and Form 27A merely for administrative convenience and to communicate with Indian tax authorities and the Chartered Accountant firm has no role in the business of the appellant company. It is respectfully reiterated that the all activities involved

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in supply of equipment viz. designing, manufacturing etc. were carried out outside India and the same were not carried out in India in any manner, much less from the premises of MPCO.

The aforesaid premises of MPCO can, by no stretch of imagination, be construed as a fixed place of business of the appellant in terms of Article 5(1) of the India-Austria Double Taxation Avoidance Agreement (‘the Treaty’) which defines the term permanent establishment (PE) to mean a “fixed place of business through which the business of an enterprise is wholly or partly carried on.”

As explained earlier, a fixed place of business/PE is constituted only if the enterprise undertakes a business activity through the place of business. This is referred to as the ‘business activity’ test. The ‘core business’ of the foreign enterprise should be conducted through the place of business. [Formula One World Championship Ltd. Vs. CIT (supra) and CIT Vs. eFunds IT Solutions and Ors. (supra)]

Further, reference is made to the decision of the Kolkata ITAT in the case of Van Oord Atlanta B.V. vs. ADIT: 112 TTJ 229 (Kol) wherein the ITAT inter-alia held that maintenance of books of accounts or bank account is irrelevant for determining whether a non-resident has a fixed place of business PE in India. Relevant extracts of the decision reproduced below:

In the instant case, it is trite that the address of the Chartered Accountant was mentioned in the return of income and Form 27A merely for administrative convenience and to communicate with Indian tax authorities and the said Chartered Accountant firm did not play any role in any business activity of the appellant company. Furthermore, the appellant states with full emphasis at its command that the premises of the Chartered Accountant were never at the disposal of the employees of the appellant through which the

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business of the appellant was carried on in India. Even otherwise, it is respectfully submitted that maintenance of books of accounts and filing the income tax return is a preparatory and auxiliary activity and cannot, in our respectful submission, constitute PE of the appellant in India.

Be that as it may, as per terms of Equipment Supply contract, i.e., Article 7.1 and the import documents such as bill of lading, etc., it is abundantly clear that the ownership in the goods passed outside India. It is further submitted that the activities relating to design and manufacturing were carried out outside India and the supervisory PE of the appellant, which came into existence on account of number of days for which appellant’s employees stayed in India, had no role whatsoever in the design, fabrication and manufacture of the equipment, which is substantiated by the fact that the applicant has no office or manufacturing facilities in India. No evidence has been submitted by the Ld. CIT(DR) in support of this unsubstantiated, bald allegation which is based wholly on conjectures and surmises. Further, it needs to be appreciated that since the activities relating to offshore supply were completed by the appellant much before the supervisory PE came into existence, the Ld. CIT(DR) has grossly erred in stating that all the transactions including offshore supply of equipment were undertaken in India.

In this regard, reference is made to the decision of the Supreme Court in the case of CIT vs. Hyundai Heavy Industries Co. Ltd: 291 ITR 482 CSC) wherein the assessee foreign company had entered into an agreement with Oil and Natural Gas Company for designing, fabrication, hook-up and commissioning of South Bassein Field Central Complex Facilities in Bombay High. The Supreme Court observed that the act of setting up of PE triggers the taxability of transactions in the Source State; unless the PE is set up, the question of taxability does not arise; in 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; since setting up of PE is a stage subsequent to the supply of equipment from outside India, income in respect of such supply could not be attributed to tax in the hands of the PE in India.

Relevant extracts of the decision are reproduced below:

“11. On reading Article 7 of the CADT, it is clear that the said Article is based on OECD Model Convention. Para (1) of Article 7 states the general rule that business profits of an enterprise of one Contracting State may not be taxed by the other Contracting State unless the enterprise carries on its business in the Other Contracting State through its PE. The said para (1) further lays down that only so much of the profits

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attributable to the PE is taxable. Para (1) of Article 7 further lays down that the attributable profit can be determined by the apportionment of the total profits of the assessee to its various parts or on the basis of an assumption that the PE is a distinct and separate enterprise having its own profits and distinct from GE. Applying the above test to the facts of the present case, we find that profits earned by the Korean GE on supplies of fabricated platforms cannot be made attributable to its Indian PE as the installation PE came into existence only after the transaction stood materialized. The installation PE came into existence only on conclusion of the transaction giving rise to the supplies of the fabricated platforms. The Installation PE emerged only after the contract with ONGC stood concluded. It emergedonly after the fabricated platform was delivered in Korea to the Agents of ONGC. Therefore, the profits on such supplies of fabricated platforms cannot be said to be attributable to the PE. There is one more reason for coming to the aforestated conclusion. In terms ofpara (I) of Article 7, the profits to be taxed in the source country were not the real profits but hypothetical profits which the PE would have earned if it was wholly independent of the GE. Therefore, even if we assume that the supplies were necessary for the purposes of installation (activity of the PE in India) and even if we assume that the supplies were an integral part, still no part of profits on such supplies can be attributed to the independent PE unless it is established by the Department that the supplies were not at arm's length price. No such taxability can arise in the present case as the sales were directly billed to the Indian Customer (ONGC). 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 element for services rendered by the PE. In the light of our above discussion, we are of the view that the profits that accrued to the Korean GE for the Korean operations were not taxable in India. 12. There is one more aspect to be discussed. 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 through PE or not. It is the act of setting out a PE which trissers 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

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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” Reference is further made to the decision of Authority for Advance Rulings in the case of LS Cable Ltd, In re [2011] 337 ITR 35 (AAR) wherein it was held that existence of PE for the purpose of carrying out the contract for onshore supplies and services etc. had no role to play in offshore supplies; even if the PE was involved in carrying on some incidental activities such as clearance from the port and transportation, it could not be said that the PE was in connection with the offshore supplies. The said decision of the AAR has been affirmed by the Delhi High Court in 243 Taxman 427.

9.10 We have heard rival submission of the parties on the issue in dispute. We have considered the contention of the learned Counsel that pre-Contact activities such as re-engineering survey for the purpose of the bidding/tendering cannot give rise to PE being activities in the nature of preparatory or of jewellery activities. We have also gone through the Decision of the Hon’ble Delhi High Court in the case of GE Energy Parts (2019-TII-01-HC- DEL-INTL) cited by the Ld DR. In the said decision the Hon’ble court has appreciated contribution of the presale activities i.e. process of marketing the product, understanding need of client, giving them options about available technology, address queries etc. by an assessee. The relevant finding of the Hon’ble High Court is reproduced as under:

“57. This court is of the opinion that the process of sales and marketing of GE's product through its various group companies, in several segments of the economy (gas and energy, railways, power, etc.) was not simple. As noticed by the tribunal, entering into contract with stakeholders (mainly service providers in these segments) involved a complex matrix of technical specifications, commercial terms, financial terms and other policies of GE. To address these, GE had stationed several employees and officials:

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high ranking, and in middle level. At one end of the spectrum of their activities was information gathering and analysis- which helped develop business and commercial opportunities. At the other end was intensive negotiations with respect to change of technical parameters of specific goods and products, which had to be made to suit the customers. Standard "off the shelf" goods - or even standard terms of contract, were inapplicable. In this setting, a potential seller of equipment - like GE, had to create intricate and nuanced platforms to address the needs of customers identified by it, in the first instance. After the first step, of gathering information, GE had to commence the process of marketing its product, understanding the needs of Indian clients, giving them options about available technology, address queries and concerns with respect to technical viability and cost efficacy of the products concerned and- wherever necessary indicate how and to what extent it could adapt its known products, or design parameters, to suit Indian conditions as well as Indian local regulations. This process was time consuming and involved a series of consultations between the client, its technical and financial experts and also its headquarters. Oftentimes the headquarters too had to be consulted on technical matters. After this consultative process ended and the terms of supply were agreed to, the final affirmative to the offer, to be made by the Indian customer, would be indicated by GE's headquarters."

9.11 In instant case, we find that the buyer has not ordered off the shelf machinery, which could be used by the buyer just by plugging of power cords. In this case, the buyer has desired to install a “620 TPD multilayer packaging quoted board plant”. The buyer has awarded the contract to the assessee in view of the expertise of the assessee in commissioning of such plant. In addition to the expertise in commissioning of the plant, the assessee is also manufacture of all those components of the machinery, which after assembling at site result into a plant which becomes useful for the buyer. Merely supplying components of machinery may not be of any use for the buyer until all those parts are assembled and commissioned in the form of a plant for manufacturing of the product of the buyer. For the purpose of commissioning of the plant, even after award of tender

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to the assessee, for making customized machines for the buyer certain data, information or layout plans of premises of the buyer etc. may be required and then to make designs of the plant. It is unbelievable that after awarding the contract i.e. 19/06/2008 to the assessee ,none has visited site of the buyer prior to dispatch of the goods to the buyer. In the case, the assessee has not provided any detail of either pre-engineering survey/pre-contract activities or any post engineering survey/post contract activities, therefore, we are not commenting on the decisions relied upon by the assessee. 9.12 We do agree with the observation of the Assessing Officer that there was close proximity or connection between the PE and the assessee. The Learned Assessing Officer is correct in observing that substantial part of the business activity of the assessee of manufacturing and commissioning of TPD plant was carried out in taxable territory of the India and supply of parts of machinery for plant was incidental to service contract and for this reason a part of the profit is directly attributable to the PE in India. In the facts of the case the supervision services are not incidental to sale of the plant and machinery and it is otherwise that for commissioning of the plant, assessee has brought component of the machinery to India under supply agreement. It is not the case that the assessee is a pure trader or seller of the part of the machineries to be utilized for commissioning of the TPD plant, but the assessee is having domain expertise of commissioning of such plants. 9.13 The Existence of service PE has not be denied by the assessee. In the case of the assessee, the employees of the

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assessee were in India at the time of entry of the part of the machinery on the Indian soil. Those employees were instrumental in supervising the entire activity of inspection of part of the machinery imported into India and assembling of those machinery to bring into the deliverable state mentioned in the supply agreement. The service PE has also played the role in completing the supply agreement between the assessee and the buyer. The part of the equipment or the machinery needed for erection or commissioning of the TPD plant though has been manufactured in Austria but same have been utilized for creation of TPD plant in India. The part of the operations of supply agreement have definitely been carried out in India by the permanent establishment of the assessee and for which part of the profit from the supply agreement also need to be taxed in India in terms of the treaty between India and the Austria as the assessee relied on the treaty provisions for considering taxation of the supply agreement.

Attribution of profit to permanent establishment 10. In view of the Assessing Officer, the PE has played role in marketing and related activities and supervision of erection and commissioning, thus, he following the decision of the Hon’ble Delhi High Court in the case of Rolls Royace PLC Vs DIT 339 ITR 146 (Delhi) assigned 35% of the profit accruing from the offshore supplies to the Indian operations. The Assessing Officer rejected the global consolidated annual account as according to the him which included subsidiary companies accounts also. In absence of a standalone annual accounts, the Assessing Officer adopted

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profit margin of the company at 9.75 % as was proposed by him in the show cause notice, and 35% of such profit was attributed to the PE. The working of the profit attributed to offshore supply, computed by the Assessing Officer is extracted as under:

` Particulars FY 2009-10 Gross offshore supply revenues (INR) Rs.472,97,97,680/- =exchange rate @70.09 Profit on the bais of 9.75% Rs.46,11,55,274/- Attribution in India (%) 35% Total Taxable Income Rs.16,14,04,346/-

10.1 Before us, the Learned Counsel of the assessee submitted that as per global accounts there was a net loss of 7.96% whereas the Assessing Officer has arbitrarily applied FAR analysis and benchmarking companies while computing the profit attributable. He further submitted that no basis has been given by the Assessing Officer to allocate profit of the company assigned to the Indian PE and the percentage of 35% adopted by the Assessing Officer is arbitrary without any rational. He submitted that in the case of Rolls Royce Plc (supra), sale of goods was through the liaison officer i.e. RRIL and it was remunerated for it. He submitted that RRIL carried out marketing activities in India on behalf of the Rolls-Royce PLC. According to the Ld. Counsel, however, in the instant case, two separate contracts have been awarded to the assessee company by the CPPC and there was no PE at the time of signing of the contract. According to him the deemed ‘PE’ came into existence by virtue of rendition of the supervision services and therefore attribution of 35% of the profit

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from supply of the equipment based on the decision in the Rolls- Royce PIC(supra) was not justified as the company did not carry out any licensing or marketing activities in relation to supply of the equipment India. 10.2 Alternatively, in support of the ground no. 3(o), the learned Counsel submitted that only 10% of the global profit is applied to India sales could be best attributed as profit to the alleged PE. The relevant submissions in support of ground are reproduced as under:

“Re: Grounds of Appeal No. 11 and 12: Attribution of profits

Without prejudice to the aforesaid, only a small part of the global profits of the appellant company could, if at all, be attributed to the PE of the appellant in India and can be brought to tax in India as substantial and substantive part of the appellant’s activities are carried outside India.

The principle of attribution has been upheld by the Hon’ble Supreme Court of India in the case of CIT vs. Ahmedbhai Umarbhai& Co.: 18 ITR 472. The Court observed that where a person is carrying on manufacture and sale, the profits received relate firstly to his business as manufacturer and secondly, to his trading operations. Profit or loss has to be apportioned in a business-like manner and according to well established principles of accountancy. In such cases, the Court held that it will be doing no violence to the meaning of the words ‘accrue or arise’ if the profits attributable to the manufacturing business are said to arise or accrue at the place where the manufacture is being done and the profits which arise by reason of sale are said to arise at the place where the sales are made.

The aforesaid view was reiterated by the Hon’ble Supreme Court in the case of The Anglo-French Textile Co Ltd. v. CIT: 25 ITR 27. It was observed in the aforesaid case that though profits may not be realized until the manufactured article is sold, profits are not wholly made by the act of sale and do not necessarily accrue at the place of sale. It was further observed that to the extent profits are attributable to the manufacturing operations, profits accrue at the place where the business operations are carried on. The question whether a particular part of income, profit or gain arose or accrued

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within the taxable territories or without the taxable territories would have to be decided having regard to the general principles as to where the income, profit or gain could be said to arose or accrue, the Court held.

In the aforesaid case, the assessee company incorporated in the United Kingdom and having its registered office in London manufactured yarn and cloth in their mill at Pondicherry. The assessee had appointed a company in Madras at their agents. The manufactured goods were sold mostly in British India and partly outside British India. All the contracts in respect of the sales in British India were entered into in British India and deliveries were made and payments were received in British India. In regard to sales outside British India also, payments in respect of such sales were received in Madras through the agents.

The assessee had shown the total world income for the year ended 30.12.1941 at Rs.10,23,807. Profit at 10 per cent on British Indian sales which aggregated to Rs.57,07,431 was shown at Rs.5,70,743 and after deduction of the proportionate expenses relating to sales in British India and sundry charges was put down at the net figure of Rs.4,58,026 which was shown as the British Indian income. It was, thus contended that the income arising in British India in the year of account did not exceed its income arising without British India and that therefore the assessee was non-resident in British India. This calculation of profits, at the rate of 10 per cent on British Indian sales did not make any allocation between manufacturing profits and merchanting profits and all the profits arising out of British Indian sales were shown in one lump sum.

It was held on the aforesaid facts, that the income received in British India could not be said to wholly arise in British India and that there should be allocation of income between the various business operations of the assessee demarcating the income arising in the taxable territories inthe particular year from the income arising without the taxable territories in that year.

The Madras High Court in the ease of Annamalais Timber Trust and Co. Vs CIT: 41 ITR 781, held that the apportionment of profits under the above provisions should not be arbitrary but on a rational basis. Where the only operation within the taxable territory was the negotiation and conclusion of the contract, there was no justification for apportioning 50% of the profits to the operation carried out within the taxable territory. The Court held that there was justification only for apportioning 10% of the assessee’s share of the profits to the trading operations carried out in the taxable territory.

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The decision of the Calcutta High Court in the case of CIT Vs Bertrams Scotts Ltd.: 31 Taxman 444, where the Court upheld the order of the Tribunal is directly to the point under consideration. In that case the Tribunal had noted that a large number of services were to be performed outside India as compared to the comparatively fewer services rendered in India. The Court upheld the estimated 10% of the net profits as income accruing or arising in India.

Your Honour’s kind attention in this regard is further invited to decision of the Special Bench of the Tribunal in the case of Motorola Inc. vs. DCIT: [2005] 95 ITD 269 (Delhi)(SB), wherein the Tribunal elaborated the manner in which the profit attributable to the PE, are to be computed.

In that case, the assessee engaged in the business of telecom equipment supply and erection, was held to have a PE in India, through which the activities relating to telecom network planning, negotiations relating to sale of equipment and signing of supply and installation contracts with Indian customers, were carried out in India. The issue before the Special Bench was, as to what was the income attributable to the PE of the assessee in India. The Special Bench found that the assessee made global net profit of 10.8%. The aforesaid percentage was applied to the sales made to the Indian customer, and the resultant figure was held to be net profit arising in respect of the Indian sale. Having regard to the activities of the PE in India, 20% of the net profit in respect of the Indian sale w'as held to be income attributable to the PE in India.

Reliance is further placed on the recent decision of the Uttarakhand High Court in the case of Samsung Heavy Industries Co. Ltd. vs. DIT: 265 CTR 109 in judgment dated 27.12.2013. The observation of the Court on the issue of attribution of income reads as”

“4. In paragraph 1 of Article 7 of the said Agreement, it has been provided that 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. It, therefore, recognizes two tax identities of an enterprise. The said paragraph makes it clear that the profits of the enterprise may be taxed in the other State only so much of the same which is attributable to that permanent establishment.

“Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the

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other Contracting State through a permanent establishment situated therein, there shall 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. ”

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Project Office of the assessee opened at Mumbai can be, or cannot be said to be a permanent establishment within themeaning of the said Agreement is of no consequence. In terms of the said Agreement, as it appears to us. if an enterprise does not have a tax identity in India in the form of a permanent establishment, it has no oblisation to either submit any tax return with, or payany tax to India. The question still remains, whether it was right on the part of the Taxing Authority to assess income-tax liability of the assessee as was assessed in the instant case. In other words, can it be said that the Agreement permitted the Indian Taxing Authority to arbitrarily fix a part of the revenue to the permanent establishment of the assessee in India? As aforesaid, assessee held out that a part of the revenue was received by it for doing certain work in India. It did not contend that even those works were done by or through its Project Office at Mumbai. On the other hand, there is not even a finding that 25 per cent of the gross revenue of the assessee was attributable to the business carried out by the Project Office of the assessee. One has to read Article 5 of the Agreement in order to understand what a permanent establishment is, in terms whereof “permanent establishment” means a fixed place of business through which business of an enterprise is wholly or partly carried on. In the instant case, according to the revenue, the Project Office of the assessee in Mumbai is the “permanent establishment ” of the assessee in India through which it carried on business during the relevant assessment year and 25 per cent of the gross receipt is attributable to the said business. Neither the Assessing Officer, nor the Tribunal has made any effort to bring on record any evidence to justify the same.

Reliance in this regard is placed on the decision of the Delhi Bench of the Tribunal in the recent case of Convergys Customer

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Management Group Inc. vs. ADIT: ITA Nos.1443/Del/2012 & 5243/Del/2011. In that case, the assessee was an American company engaged in providing IT enabled customer management services. The assessee had established a subsidiary in India which provided back office/call centre services to the assessee to services its customers in India. The Tribunal held that the Indian company constituted PE of the assessee in India since the assessee exercised substantial control and influence in the functional matters as is evident from the frequent and extensive visits of assessee’s employees to India, secondment of assessee’s employees to the key position in the Indian company and considering that the Indian company did not bear any substantial risk in relation to the functions carried out by in India. The Hon’ble Tribunal while explaining the approach of computing profits attributable to such permanent establishment, held as under:

“11.17. In view of the above facts, circumstances, case law, CBDT circulars and various articles of India-USA DTAA, following conclusions are arrived at: A. xxx xxx xxx F. In our considered opinion. the correct approach to arrive at the profits attributable to the PE should be as under: Step 1: Compute Global operating Income percentage of the customer care business as per annual report/1 OK of the company. Step 2: This percentage should be applied to the end-customer revenue with regard to contracts/projects where services were procured from CIS. The amount arrived at is the Operating Income from Indian operations. Step 3: The operating income from India operations is to be reduced by the profit before tax of CIS. This residual is now attributable between US and India Step 4: The profit attributable to the PE should be estimated on residual profits as determined under Step 3 above. The attribution of India profit shall be worked out as under, mentioned after the table:

11.18. In the computation based on the above approach for the assessment year 2006-07, the profits attributable to India comes as under:

Particulars Amount (in USD) Total Revenue of CMG as per the Annual 1,663,600,000 Report (A) Operating Income of CMG as per the Annual 175,500,000 Report

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(B)

Operating Income as a percentage of 10.55% revenue earned (C = B/A) End-customer revenue from Indian 138,900,000 operations (D) Operating Income from Indian operations (E 14,653,950 = C * D) Operating Income of CIS (Profit before tax of 13,800,000 CIS) (F) Profit retained by CMG in the US (G = E - F) 853,950 Placitum ‘X’

11.19. As per this working, the worldwide profit earned by CMG for A.Y. 2006-07 comes to USD 853950. This by and large tallies with the submission of the assessee dated 26- 12-2010 to the assessing officer in which it has been submitted that the approximate operating profits of CMG in USD come to 0.8 million. Now the important question that arises is as to how much of the profits shall be attributable to CMG’s Indian PE over and above the profits declared by its subsidiary CIS.

11.20. Apropos TPO’s estimation, we are of the view that the same is not justified as it involves a very unrealistic method of counting the worldwide number of employees and dividing it with CMG’s global revenue without considering the relevant aspects. Thefiner and material aspects about the status, capacity of the employees are over looked and result become very vague and distorted. Therefore, the method adopted by assessing officer cannot be relied on as most appropriate method.

11.21. Apropos CIT(A)’s estimate about attribution, though he accepted the proposition that there cannot be notional addition to India revenue, however, CIT(A) ’s method also does not become a rational inasmuch as the various expenditures incurred by CMG i.e. research & development, depreciation, amortization etc. have not been considered and 50% of selling, general and administrative expenses have been ignored along with other expenses incurred by CMG outside India for earning the revenue from end customers. In our considered view, this approach is also not viable and appropriate.

11.22. As the methods for calculating the attribution profit as adopted by TPO and CIT(A) are not reliable. Ld. Counsel has further demonstrated that if both the methods are harmoniously applied,

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this leads to a situation where no further attribution to the assessee’s income can be made. Thus a harmonious intermixed rationalization of TPO and CIT(A) method results into no further attribution of profits to Indian PE.

11.23. In this backdrop we are reminded of two case laws decided by Hon’ble Supreme Court which have dealt with attribution of the profits to the Indian PEs: (i) Anglo French Textile Company Ltd. vs CIT 23 ITR 101 (SC), in which 10% attribution has been held to be reasonable.

(ii) Hukum Chand Mills Ltd. vs. CIT 103 ITR 548 (SC), in which 15% attribution hasbeen held to be reasonable.

11.24. These cases decided by the Apex Court though are old. but they still hold the field as they have not been tinkered with. In our considered view. the adoption of higher figure of 15% as held by Hon’ble Supreme Court in the Hukum Chand Mills Ltd. (supra). Tor attribution of assessee’s Indian PE operations will meet the ends of justice. Thus, the attribution of Indian PE income should be made at 15% of profit retained by CMG in the US. 11.25. In other words 15% of the placitum X’ (result of G=E-F) in the chart at para11.18,as mentioned above as a reasonable attribution ofprofit of India PE, will meet the ends of justice. Thus, assessing officer will work out the profits attributable to Indian PE on this method for A. Y. 2006-07. ” (emphasis supplied) On a rough and ready basis, in the present case, since the alleged PE is involved in lesser number of activities, only 10% of global profit percentage as applied to India sales could at best be attributed as profit attributable to the alleged PE, as held in the following cases: • Anglo French Textile Company Ltd. Vs. CIT, 23 ITR 101 (SC) • CIT Vs. Bertrams Scotts Ltd., 31 Taxman 444 (Cal. HC)

In the present case, it may be pointed out that since the appellant has incurred as loss at the global/head office level, therefore, no portion of its global receipts can be attributed to tax in India.”

10.3 We have heard submission of the parties on the issue in dispute. We find that assessee has not provided any detail in respect of the marketing or pre-tendering activities or even post tendering activity. In absence of any such details, it was difficult for the Assessing Officer to quantify the role related to marketing

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activity played by the permanent establishment. But as far as assembly of fabrications of the machines the service PE has played a significant role and no part of the profit out of the supply agreement has been assigned by the assessee towards the service PE. In the supply agreement, the assessee has supplied mainly parts or the components of the machines and those machines or sections of the plants have been assembled in India. As we have already concluded that for all practical purposes the property in goods transferred in India and thus PE has played role in supply agreement other than design, build and manufacturing of the components of the machines. Therefore, the significant part of the profit on offshore supply of equipment under supply agreement need to be attributed to PE in India. In the case of the Rolls-Royce PLC (supra), Hon’ble High Court taken into consideration the role 50% toward manufacturing activity and 15 % towards the research and development activity and balance 35% was considered to the marketing activity. The relevant finding of the Hon’ble High Court is reproduced as under:

“In the Rolls Royce case, the assessee was a British company. It supplied certain parts and equipments to Indian customers. Rolls Royce India Limited (‘RRIL’) was 100 per cent subsidiary of assessee set up in India, which rendered liaison services and was remunerated on a cost plus basis. The Assessing Officer, after holding that RRIL was PE of the assessee and there was business connection between the two as the marketing and sale of goods to Indian customers were carried out by the assessee through RRIL, held that profits attributable to PE were liable to tax in India in terms of article 7 of the DTAA between India. The Assessing Officer, accordingly, invoked rule 10 of the Income-tax Rules, 1962 and attributed 100 per cent of profits earned from sale of goods to Indian customer in the assessment years 1997-98 to 2000-01 and 75 per cent of profits in the assessment years 2002-03 and 2003-04. On appeal, the Commissioner (Appeals) upheld the order of the

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Assessing Officer for the assessment years 1997-98 to 2000-01 and held that the offices of the RRIL in India constituted permanent establishment of the assessee in India under article 5 of the DTAA. However, he modified the order of the Assessing Officer to the extent that the profits attributable to the activities carried on in India were deemed to be 75 per cent instead of 100 per cent of the estimated profits as held by the Assessing Officer.

On second appeal, the Tribunal modified the order of the Commissioner (Appeals) to the extent that the profits attributable to the activities carried on in India were estimated at 35 per cent instead of 75 per cent as held by the Commissioner (Appeals). The Tribunal held that out of the total profits on global basis, 50 per cent of the profit was to be attributed to the manufacturing activity, 15 per cent to research and development activities and balance to marketing activities and since marketing activities were carried out in India, to the extent of sales in India proportionate profit was to be attributed to the global profits. The contention of the assessee that net research and development expenses should also be reduced while computing operating profits was rejected by the Tribunal on the ground that no part of research and development activities was carried out in India. Hon’ble Delhi High Court dismissed the assessee’s appeal against the percentage of attribution.

In can be seen from the above case that there was sale of goods through the liason office i.e. RRIL and it was remunerated for it. Further, RRIL carried out marketing activities in India on behalf of Rolls Royce PLC. However, in the instant case, two separate contracts have been awarded to the appellant company by CPP and there was no PE at the time of signing of the contracts. The deemed PE came into existence by virtue of rendition of supervision services. Accordingly, attribution of 35% of the profits from the supply of equipment based on the decision in Rolls Royce PLC (supra) is unjustified as the appellant company did not carry out any liasoning or marketing activities in relation to the supply of equipment in India.”

10.4 In the instant case, in addition to the marketing activities or engineering survey pre or post awarding of contract (for which no information has been filed by the assessee), the service PE has played role in assembling and bringing the equipment to deliverable state as agreed under the supply agreement. In such

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facts and circumstances, in our opinion, the 35% of the profit attributed to the PE is justified. Accordingly, we uphold the same. 11. The ground No. 4 of the appeal relates to interest as under section 234A/234B/234D of the Act. The Learned Counsel of the assessee has submitted as under:

“Re: Ground of appeal no. 13 - No interest chargeable under section 234B of the Act:

At the outset, it is submitted that since the revenues receivable by the appellant are subject to deduction of tax at source, the question of payment of advance tax and subsequent levy of interest under section 234B of the Act does not arise at all, as elaborated hereunder:

As per the provisions of section 234B of the Act, an assessee who is liable to pay advance tax under section 208 will be liable to interest under the said section, if he fails to pay such tax, or the advance tax paid by him falls short of 90 percent of the assessed tax. Accordingly, before levying interest under section 234B, it must be first determined whether the assessee was liable to pay advance tax under the provisions of section 208 of the Act. In terms of section 208 read with section 209(l)(d) of the Act as applicable at the relevant time, advance tax payable has to be computed after reducing from the estimated tax liability, the amount of tax deductible/ collectible at source on income which is included in computing the estimated tax liability. Such balance tax liability is the advance tax payable under section 208 of the Act. It should be noted that the words used in section 209(1 )(d) of the Act are 'tax deductible at source' and not 'tax deducted at source'.

Under section 195 of the Act, tax is deductible at source from payments made to non-residents. The appellant being a non- resident, tax is deductible at source under section 195 of the Act from the payments made to the appellant. Since tax was deductible at source on all the payments made to appellant, no advance tax was payable as per the provisions of section 208 read with section 209(1 )(d) of the Act. In the absence of any liability for payment of advance tax, the provisions of section 234B of the Act for alleged short payment of advance tax cannot apply and the levy of interest hereunder should be deleted.

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Reliance is placed on the recent decision of the Delhi High Court in the case of DIT v. GE Packaged Power Inc.: ITA No. 352-353 of 2014, wherein the High Court held that no interest under section 234B of the Act could be levied on the assessee-payee on the ground of non- payment of advance tax because the obligation was upon the payer to deduct the tax at source before making remittances to the non- resident assessee. The relevant extracts of the decision are reproduced hereunder:

"22. This Court, therefore, holds that Jacabs (supra) applies in such situations; Alcatel Lucent (supra) can be explained as a decision turning upon its facts; its seemingly wide observations, limited to the circumstances of the case. This Court, therefore, holds that the view taken by ITAT was correct; the primary liability of deducting tax for the period concerned, since the law has undergone a change after the Finance Act, 2012) is that of the payer. The payer will be an assessee in default, on failure to discharge the obligation to deduct tax, under Section 201 of the Act.

Further, reliance is placed on the following decisions of the Courts/ Tribunals, wherein it has been held that interest under section 234B of the Act for non-payment of advance tax could not be levied on the non-resident assessee, since such assessee was not liable to pay any advance tax considering that all payments made to the assessee were subject to tax deduction at source even if the payer had not actually deducted tax at source:

• DIT v. Maersk Co. Ltd.: 334 ITR 79 (Uttrakhand HC) • DIT Vs. Jacabs Civil Incorporated: 330 ITR 578 • Sedco Forex International v. DCIT, Delhi (72 ITD 415)/l 86 CTR 144 (Del.) • Asia Satellite Telecommunications Co. Ltd. (238 CTR 233)

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• Rheinbraun Engineering & Wasser GmbH (1915/Bom/96) It may be pointed out that the Finance Act, 2012, w.e.f. 1.4.2012 added proviso below section 209(1) f the Apt-to the following effect: “Provided that for computing liability for advance tax, income- tax calculated under clause (a) or clause (b) or clause (c) shall not, in each case, be reduced by the aforesaid amount of income-tax which would be deductible or collectible at source during the said financial year under any provision of this Act from any income, if the person responsible for deducting tax has paid or credited such income without deduction of tax or it has been received or debited by the person responsible for collecting tax without collection of such tax. ” The said proviso is applicable from assessment year 2013-14 and is, therefore, prospective in operation. The insertion of the proviso cannot be construed to have retrospective effect so to expose a non- resident company to levy of interest under section 234B of the Act for assessment years prior to assessment year 2013-14, where tax was deductible at source on the income payable to the non-resident, if such income is held to be chargeable to tax in India.”

11.1 the Learned DR, on the other hand, submitted that it was the responsibility of the assessee to pay the advance tax on the its income, if tax was not deducted by the deductor, and accordingly, the Assessing Officer is justified in levy of interest under section 234B of the Act . 11.2 We have heard rival submission of the parties on the issue in dispute. The learned Counsel has submitted that proviso below the section 209(1)(d) of the Act is prospective in nature. The learned Counsel has also relied on the decision of the Hon’ble Delhi High Court in the case of DIT Vs GE Packaged Power Inc.(supra). The Hon’ble High Court has observed that in view of the change after the Finance Act, 2012 it was primary liability of the payer to deduct tax and he would be an assessee-in-default, on failure to discharge the obligation to deduct tax under section

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201 of the Act. But the instant case is prior to the amendment or change brought by the Finance Act, 2012. In the case of Alcatel Lucent World Services (ITA No. 326/2012, 329/2012 and 336/2012), the Hon’ble Delhi High Court has reproduced facts of the case as under:

“5. The Assessing Officer however did not accept the assessee's stand and in the assessment order passed on 23.03.2010 attributed 2.5% of the sale proceeds of the hardware as profit attributable to the PE in India, which came to `21,02,58,238/- for the assessment year 2007-08. Similar re-assessments were made in all the years in respect of both the assessees. In the re-assessment order, in addition to the aforesaid income, the Assessing Officer also directed that interest under Sections 234A, 234B and 234C shall be charged. Demand notices were accordingly issued. http://www.itatonline.org ITA Nos.327-330 & 336-340/2012 Page 6 of 33 6. Appeals were taken by the assessee in respect of all the assessment years before the CIT (Appeals). Three grounds were taken in the appeals. The first ground was that the Assessing Officer erred in computing the income of the assessee as was done in the re-assessment orders; the second ground was that on the facts and in the circumstances of the case and in law, the Assessing Officer erred in levying interest under Section 234B "in view of the fact that the entire consideration in the hands of appellant was subject to deduction of tax at source under Section 195 of the Act"; the third ground was against the initiation of penalty proceedings for alleged concealment of income. 7. Before the CIT (Appeals), the assessee did not press the appeals in respect of the first ground, i.e. the ground against the computation of the income attributable to the PE in India. Only ground No.2 which was directed against the levy of interest under Section 234B of the Act was pressed, the contention being that it was the liability of the purchasers of the telecom equipment in India to deduct income tax at the applicable rates from the remittance made to the assessee under Section 195 of the Act, that in view of the language employed in Section 209(1)(d) the assessee was entitled to take credit for the tax which was "deductible" at http://www.itatonline.org ITA Nos.327- 330 & 336-340/2012 Page 7 of 33 source while computing its liability for paying advance tax and if the amount of tax so "deductible" by the payer in India is given credit, there was no amount of advance tax payable by the assessee, and if that is so there was no question of the assessee being liable to pay any interest under Section 234B. Several authorities were cited before the CIT (Appeals) in support of the above contention including the judgment of a Division Bench of this court in Director of Income Tax

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vs. Jacabs Civil Incorporated and Mitsubishi Corporation : (2010) 330 ITR 578. It was submitted before the CIT (Appeals) that in this judgment, this court held that Section 195 places an obligation on the payer to deduct tax at source at the rates in force from the payments made and if the payer has defaulted in deducting the tax, it was open to the Income Tax Department to take action against the payer under Section 201 of the Act, but no action can be taken for recovery of the interest under Section 234B from the non-resident assessee. It was further held in this decision that the non-resident will, no doubt, be liable to pay the income tax on the income assessed upon it, but it cannot be held liable for payment of any advance tax thereon if the tax deductible by the payer in India exceeds the amount of advance tax payable on the estimated income. It was further held that the position would be so even if the income tax http://www.itatonline.org ITA Nos.327-330 & 336- 340/2012 Page 8 of 33 was not in fact deducted from the remittance because Section 209 (1)(d) of the Act permitted the non-resident assessee to take credit, while computing its advance tax liability, for the amount of income tax that was "deductible" from the remittance, though not actually deducted. It was furthermore held in the judgment that once it was found that the liability was that of the payer under Section 201 of the Income Tax Act, which permitted recovery of the tax from the payer by treating him as an assessee in default and also recovery of interest under Section 201 (1A) for the default in not deducting the tax, there can be no liability fastened upon the non-resident assessee to pay interest under Section 234B.”

11.3 In view of the facts of the case, the Hon’ble Court held that the assessee was liable for interests u/s 234B, observing as under:

“….24. The learned counsel for the assessee submitted in the course of his arguments that the assessee and the Indian telecom equipment dealers cannot contract out of the statute and, therefore, even if such an arrangement had been made between them, it cannot be given effect to and the liability of the Indian payer under Section 195(1) has to be strictly enforced. In other words, it was his contention that the Indian payers ought not to have paid any heed, and should have acted strictly in accordance with Sections 195(1), even assuming, but not admitting that there was such a request from the assessee. Taking a practical view of the matter, it is difficult to see how the Indian payers could have resisted the request which, according to our inference, was made by the assessee to them not to deduct tax from the remittances. The Indian payers have to keep in mind the future business prospects and it

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was necessary for them to keep the assessee in good humour so that the business relationship remains profitable for them. They would have been in no position to resist the request. Moreover, since the sales were claimed to have been concluded outside India, again it would be a fair and reasonable inference to be drawn that the Indian dealers would have had an interface with the assessee in USA while concluding the sale contracts and on such an occasion it is normal for the parties to finalize all aspects touching on their relationship including the tax compliances. It should also be remembered that no reason whatsoever has been given by the assessee as to why it did not press its appeals before the CIT (Appeals) on the question of liability to tax on its Indian income. 25. In the light of the view taken by us on the facts of the present case, we do not consider it necessary to discuss the plethora of authorities cited by both the sides. It is, however, necessary to just highlight one aspect of the matter. This was in fact pointed out on behalf of the revenue also. It is open to the assessee to deny its liability to tax in India on whatever grounds it thinks fit and proper. Having denied its tax liability, it seems unfair on the part of the assessee to expect the Indian payers to deduct tax from the remittances. It is also open to the assessee to change its stand at the first appellate stage and submit to the assessment of the income. When it does so, all consequences under the Act follow, including its liability to pay interest under Section 234B since it would not have paid any advance tax. Such liabilities would arise right from the time when the income was earned. Advance tax was introduced as a PAYE Scheme – “pay as you earn”. It is not open to the assessee, after accepting the assessment at the first appellate stage to claim that the Indian payers ought to have deducted the tax irrespective of the fact that the assessee itself claimed the Indian income to be not taxable. We can understand an assessee who admits its tax liability right from the beginning to contend that it was the responsibility of the payers to deduct the tax and if they did not, even then the tax which ought to have been deducted by them should be set off against the assessee's advance tax liabilities. That is the type of case dealt with in the decision of this Court in Jacabs (supra). We were not referred to a single case where on facts similar to the case of the assessee before us, the Court took the view that no interest under Section 234B was chargeable. The case of Mitsubishi Corporation decided along with the case of Jacabs, was on facts similar to the assessee's case. However, as pointed out by us earlier, this Court in Jacabs case proceeded on the assumption that the facts in Mitsubishi Corporation were similar to those in Jacabs. That assumption, as we have earlier demonstrated, with respect, is not borne out by the facts. 26. It further seems to us inequitable that the assessee, who accepted the tax liability after initially denying it, should be permitted to shift the responsibility to the Indian payers for not deducting the tax at source from the remittances, after

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leading them to believe that no tax was deductible. The assessee must take responsibility for its volte face. Once liability to tax is accepted, all consequences follow; they cannot be avoided. After having accepted the liability to tax at the first appellate stage, it is unfair on the part of the assessee to invoke section 201 and point fingers at the Indian payers. The argument advanced by the learned counsel for the assessee that the Indian payers failed to deduct tax at their own risk seems to us to be only an argument of convenience or despair. As we have pointed out earlier, it is difficult to imagine that the Indian telecom equipment dealers of the assessee would have failed to deduct tax at source except on being prompted by the assessee. It may be true that the general rule is that equity has no place in the interpretation of tax laws. But we are of the view that when the facts of a particular case justify it, it is open to the court to invoke the principles of equity even in the interpretation of tax laws. Tax laws and equity need not be sworn enemies at all times. The rule of strict interpretation may be relaxed where mischief can result because of the inconsistent or contradictory stands taken by the assessee or even the revenue. Moreover, interest is, inter alia, compensation for the use of the money. The assessee has had the use of the money, which would otherwise have been paid as advance tax, until it accepted the assessments at the first appellate stage. Where the revenue has been deprived of the use of the monies and thereby put to loss for no fault on its part and where the loss arose as a result of vacillating stands taken by the assessee, it is not expected of the assessee to shift the responsibility to the Indian payers. We are not to be understood as passing a value-judgment on the assessee’s conduct. We are only saying that the assessee should take responsibility for its actions. 27. It is not unusual for the courts to invoke equitable considerations even while interpreting tax laws. In Jodha Mal Kuthiala v. CIT : (1971) 82 ITR 570 (SC), Hegde, J., opined thus: “It is true that equitable considerations are irrelevant in interpreting tax laws. But, those laws, like all other laws, have to be interpreted reasonably and in consonance with justice”. In CIT v. J.H. Gotla : (1985) 156 ITR 323 (SC), it was held by the Supreme Court that though equity and taxation are often strangers, attempts should be made (to ensure) that they do not always remain so and if a construction results in equity rather than injustice, that should be preferred to the literal or strict construction. In Calcutta Jute Manufacturing Co. v. Commercial Tax Officer : (AIR 1997 SC 2920) the Supreme Court held that if there is a provision in a taxing statute to compensate the state by charging interest, that provision need not be strictly construed but may be so construed as to effectuate its purpose. The Court held: “10. The State is empowered by the legislature to raise revenue through the mode prescribed in the Act so the State should not be the sufferer on account of the delay caused by the taxpayer in payment of the tax due. The provision for charging interest would have been introduced

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in order to compensate the State (or the Revenue) for the loss occasioned due to delay in paying the tax (vide Commr. of Income- tax A.P. v. M. Chandra Sekhar : 1985 (1) SCC 283 : (AIR 1985 SC 114) and Central Provinces Manganese Ore Co. Ltd. v. Commr. of Income-tax : 1986 (3) SCC 461 : (AIR 1987 SC 438). When interpreting such a provision in a taxing statute a construction which would preserve the purpose of the provision must be adopted. It is well-settled that in interpreting a taxing statute normally, there is no scope for consideration of principles of equity. It was so said by Rowlatt J. in Cape Brandy Syndicate v. Inland Revenue Commissioners : (1921) 1 KB 64 at page 71: "In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used." The above observation has been quoted with approval by a Bench of three Judges of this Court in Commissioner of Income-tax Madras v. Ajax Products Ltd. : 55 ITR 741: (AIR 1965 SC 1358). In another decision rendered by a Bench of three Judges of this Court in State of Tamil Nadu v. M. K. Kandaswami : 36 STC 191 : (AIR 1975 SC 1871) It has been observed thus: "In interpreting such a provision, a construction which would defeat its purpose and, in effect, obliterate it from the statute book should be eschewed. If more than one construction is possible, that which preserves its workability and efficacy is to be preferred to the one which would render it otiose or sterile." 11. We are, therefore, not adopting a construction which would upset or even impair the purpose in introducing Section 10A in the Act. The return to be filed by the dealer is the full and correct return as referred to in Section 10 and on failure to furnish such a return the liability to pay interest from the prescribed date would arise when assessment is completed.” 28. We think that the present case is one where such considerations should prevail in the interpretation of section 234B; otherwise, it will not merely result in injustice but the purpose of the provision would not have been achieved. In any case, the facts of the present case are different, as we have earlier pointed out, from the facts obtaining in Jacabs (supra) and therefore the said decision cannot be applied.”

11.4 In the instant case also, the assessee has accepted the existence of the PE before the AO and in that circumstances, it cannot take benefit that it was the responsibility of the deductor to deduct tax at source. In view of facts of the case being identical to the facts of the above case, we don’t find any error in the order

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of the Assessing Officer on the issue in dispute. Accordingly, the ground No. 4 of the appeal of the assessee is dismissed. 12. The ground No. 5 relating to initiation of penalty being premature at this stage is dismissed as infructuous. 13. In the result, appeal of the assessee is dismissed. Order is pronounced in the open court on 21st February, 2020.

Sd/- Sd/- (K.N. CHARY) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 21st February, 2020. RK/-(D.T.D.S.) Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi