DDIT, NEW DELHI vs. M/S. MITSUI & CO. LTD., NEW DELHI

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 a) Contract for Erection, Testing and Commissioning of Equipment and Materials in respect of Electro Mechanical Equipment (Lot 6.1) of Purulia Pumped Storage Project. b) Contract for supply of equipment and materials in respect of Electro Mechanical Equipment (Lot 6.1) of Purulia Pumped Storage Project.

6. In the notes attached to the statement of assessable income, the assessee stated that taxable income from execution of the above projects has been computed @ 10% of the gross receipts u/s 44BBB of the Income-tax Act, 1961. The AO asked the assessee to furnish the details of offshore supplies made during the year under Teesta and Purulia projects in response to which the assessee furnished the following details:- Amount (in JPY) Teesta Project 1,853,557,282 Purulia Project 4,464,413,098

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 of the DTAA entered into between India and Japan. He also asked the assessee to explain as to why the revenues from third contract i.e., ‘Provision of onshore services’ should not be treated as ‘Fees for technical services’ in terms of section 9(1)(viii) of the provisions of the relevant DTAA and taxed in accordance with the provisions of section 44D read with section 115 of the IT Act.

7.1 The assessee made a detailed submission explaining as to why such offshore supplies should not be attributed to the project office in India. However, the AO was not satisfied with the arguments advanced by the assessee and held that on reading of section 44BBB, 10% of the amount paid or payable whether in or outside India to the assessee or any person on his behalf on account such civil construction, erection, testing or commissioning shall be deemed to be the income chargeable to tax under the head ‘Profit and gains from business or profession.’ Accordingly, the income received for offshore supplies in respect of Teesta and Purulia projects are chargeable to tax @ 10%. He further held that everything directly or indirectly relating to the said business should be considered under the ambit of section 44BBB of the Act. He accordingly concluded that income for the purpose of this section should also include offshore receipts for the supply of equipment. He noted that the assessee is engaged in offshore supplies as well as onshore supplies in respect of Teesta and Purulia projects. It is also engaged in the installation and commissioning of such equipments supplied. The submission of the assessee that offshore supplies are made by the HO i.e., Mitsui & Co. Ltd., to ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 NHPC and WBSEB directly and that the project offices has no role to play in the offshore supplies and, therefore, no profits from such offshore supplies can be attributed to the project office in India in respect of these two projects was rejected by the AO. He examined the various clauses of the contract and came to the conclusion that the assessee is receiving consideration from their employers i.e., NHPC and WBSEB for the execution of the projects. A part of such consideration is in foreign currency and the balance is in INR. Therefore, according to the AO, the assessee has a business connection in India u/s 9(1)(i) of the Act. The AO further examined the existence of a PE in India within the meaning of Article 5 of the Indo-Japan DTAA. According to the AO, the assessee has not denied that it does not have any PE in India. The project office of the assessee in India, according to the AO constitutes a PE in India under Article 5(2) r.w. Article 5(1) of the DTAA. Further, the assessee has also a PE in India under Article 5(3) of the DTAA as it is engaged in installation project which has exceeded the duration of six months. He rejected various explanations given by the assessee and observed that in the immediately preceding assessment year, identical issue was involved where it has been held that LO’s of the assessee in India constitutes fixed PE under Article 5(1), 5(2)(c) of the DTAA and Dependent Agency Permanent Establishment (DAPE) under Article 5(7) of the DTAA as the LO excises the authority to conclude contracts and secure orders in India wholly for the assessee. It was further held in the said assessment year, as an alternative stand that Mitsui &

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 Co. India Pvt. Ltd. (MIPL) also constitutes DAPE of the assessee under Article 5(7) of the DTAA. However, the A.O. adopted the figure extracted from sales of LO to arrive at the taxable income under this head for the A.Y. 2005-06.

8. Since the facts of both these assessment years i.e. A.Y 2005-06 and the present assessment year are same, the AO held that the LOs of the assessee in India constitute fixed PE in India under Articles 5(1), 5(2)(c) of the DTAA and DAPE under article 5(7) of the DTAA as has been held in A.Y 2005-06. Further, alternatively MIPL also constitutes DAPE of the assessee as has been held in A.Y 2005-06. Further, alternatively MIPL also constitutes DAPE of the assessee as has been held in A.Y. 2005-06. For the purposes of arriving at the profits attributable to Indian Operations, combined figures of LOs and MIPL were adopted.

9. The assessee was asked to furnish the details of the sales made through the LOs in India. The assessee furnished the details and also took the plea that the offshore supplies in respect of the Teesta & Purulia projects have also been included in such sales through LOs in India. The AO asked the assessee vide letter dated 26.12.2008, to substantiate its claim. However, the assessee could not provide any documentary evidence so as to prove that the offshore supplies in respect of Teesta & Purulia Projects are already included in the turnover of the LO. Therefore, the AO held that no benefit can be given to the assessee on this ground.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

LOs MIPL TOTAL Total Trading T.O. in India (JPY) 9,957,295,519 47,918,415,401 57,875,710,920 Gross Profit @ 5.486% 546,257,232 2,628,804,269 3,175,061,501 Converted into INR @ 0.3786 206,812,988 995,265,296 1,202,078,284 Taxable Profits attributable to Indian Operation @ 50% 103,406,494 497,632,648 601,039,142 Less: Expenses incurred at Indian Offices 148,437,821 148,437,821 Less Commission paid to MIPL 260,217,178 260,217,178 NET ADJUSTABLE INCOME (45,031,327) 237,415,470 192,384,143 Les: deduction u/s 44C @5% 9,619,207 TOTAL INCOME FROM P.E. (INR) 182,764,936 With the above remarks income of the assessee is computed as under:

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

11. The AO accordingly determined the total income of the assessee at Rs.44,91,00,663/-.

12. In appeal, the ld.CIT(A) held that the provisions of section 44BBB of the IT Act cannot be applied for subjecting to tax the income from offshore supplies in respect of Teesta and Purulia projects. According to him, offshore receipts in the present case cannot be subjected to tax merely on the ground that the assessee has chosen to be assessed on presumptive basis. According to him, the question whether such receipts will be taxable in India will have to be considered independently on their own merits. He accordingly deleted the addition of Rs.23,91,98,358/- made by the AO being profit @ 10% of the offshore supplies. The relevant observations of the CIT(A) at para 3.6 onwards reads as under:- “Determination 3.6 I have carefully considered the written submission made on behalf of the appellant, the findings of the Assessing Officer in the assessment order and the facts on record. As can be seen from the memorandum of the Finance Bill, 1989 the legislative intent behind the introduction of section 44BB was simplification in the matter of determination of the income accruing or arising in India to a foreign company which often involved complications. As held by the Hon’ble ITAT, Delhi Bench in case of Saipem S.P.A.vs DCIT(supra), the provision of Section 44BB were intended only to replace the system of computation of income earlier envisaged by the application of the provision of Sections 28 to 41 and Sections 43 and 43 A of the Act. It was not to replace the provision of Section 5 of the Act, which would remain intact and was not to be superceded by the provision of section 44BB. The provisions of section 44BBB are para- materia with the provision of section 44BB. The order of the Tribunal, therefore, applies also to Sections 44BBB. The non-obstante clause with which Section 44BBB starts only supercedes Sections 28 to 44AA. 3.7 In this context reference may also be made to the judgment of the Supreme Court in CIT vs. Hyundai Heavy Industries Company Ltd. 291 ITR 482 (SC). This was a case which related to Section 44BB of the Act, where an 9

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 agreement was entered into by ONGC with M/s Hyundai Heavy Industries Co. Ltd., a non-resident foreign company incorporated in South Korea. The contract was divisible into two types of operations, one being fabrication in Korea and other of installation in India. The main question was whether profits accruing to the assessee from activities performed outside India were chargeable to tax in India. After a detailed discussion the Apex Court held that the profits that accrued to the Korean Enterprise for the Korean operations was not taxable in India. Another question was with regard to the quantum of profits embedded in the Indian operations. On this issue, the Apex Court observed as under “13 The assessee appeared before the Department and submitted that its income from Indian operations be computed under section 44BB or under Instruction No. 1767 issued by the Central Board of Direct Taxes. Under the said instruction, in cases where the sales take place outside, as in this case, only 10 per cent of the gross receipts in respect of the activities of installation, commissioning etc. performed in India will be taxable. In view of the stand taken by the assessee, we are of the view that the Commissioner of Income-tax (Appeals) was right in computing the taxable profits at 10 per cent of the gross receipts in respect of the activities of installation, commissioning etc. performed in India....

held to be non-taxable (as per para 15 (a)} and income only from operations attributable to Indian Permanent establishment has been held to be taxable in India @ 10% on presumptive basis {as per para 15(b)}. Thus, the offshore receipts in the present case cannot be subjected to tax merely on the ground that the appellant has chosen to be assessed on presumptive basis. The question whether such receipts will be taxable in India will have to be considered independently on their own merits which is the subject matter of separate arguments which follow hereinafter. It is, therefore held that the AO was not justified in holding that Section 44BBB requires that the offshore receipts have necessarily to be taxed in India. As a result, Ground of appeal No. 1 & 1.1 are allowed granting relief of Rs.23,91,98,358/-.”

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 that the agreement imposed on the assessee, the obligation to handover the equipment functionally completed was in the nature of trade warranty and no undue importance could be given to such provision in the agreement. The scope of work of offshore and onshore contracts were separate. On a proper analysis of the salient features of the contract, as explained in the written submissions, none of the reasons contained in para 6 of the assessment order in respect of the NHPC contracts contradict the proposition that income from offshore supply was not taxable in India. The reasoning given in clause (vii) of para 6 also does not advance the case of the AO, so long as particular material was supplied outside India and the delivery thereof has been taken outside India. The Purulia Project also has similar facts and for the similar reasons the taxability of the offshore supply also is not liable to be taxable in respect of this contract. 4.5 The appellant has also placed reliance upon the judgment in CIT vs. Hyundai Heavy Industries Company Ltd.(supra). The facts of that case are identical and for the reasons given by the Hon’ble Supreme Court the relevant portion of which had been quoted in para 14.1 of the submissions of the appellant, the offshore supplies in the present case are not liable to tax in India. 4.6 The AO has relied upon the judgment in the case of Ansaldo Energia SPA vs ITAT(2009) 310 ITR 237 (Mad): 222 CTR (Mad)55.The said judgment has been distinguished by the Hon’ble Delhi High Court in the case of LG Cables (supra), the relevant portion of which have been extracted by the appellant in its reply in paras 15 & 15.1. Needless to mention that Ansaldo’s case is not applicable to the facts situation in the present case also as has been held in the case of LG Cables (supra). 4.7 The AO has applied the rule of force of attraction by referring to Paragraph 6 of the Protocol of DTAA between India and Japan. The rule of force of attraction was held not to be applicable by the Apex Court in the cases of CIT vs. Ishikawajma Harima Heavy Industries Ltd. (supra) and Hyundai Heavy Industries Company Ltd. (supra). The rule of force of attraction has also not been upheld in the case of Asia Satellite by the Delhi High Court which has also been quoted by the appellant in para 12.3. For the cumulative reasons it is held that rule of force of attraction does not apply in the present case because of the non-involvement of Permanent Establishment in the transaction of offshore supplies. 4.8. Thus for all these reasons and as the appellant has repelled the contentions advanced by the Assessing Officer with cogent material and evidence, it is held that no income is liable to tax in respect of the offshore supplies and Ground of appeal No.1.2 is allowed. The addition of Rs.23,91,98,358/- is deleted for the aforesaid reasons also.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

Since the A.O. has relied entirely on the order passed by the CIT(A) for the assessment years 2000-01 and 2001-02 , which stands reversed by the ITAT, respectfully following the orders of the Hon’ble ITAT for the assessment year 2001-02, as well as for the assessment year 2002-03, for the reasons as discussed in the aforesaid orders of the ITAT, it is held that L.O. does not constitute a P.E. and it has no income liable to tax in India. As a result, Grounds of Appeal No. 3 to 6 are allowed'.” Accordingly, it is held that the Liaison Office (LO) does not constitute a “Permanent Establishment” and there was no income liable to tax in India. As a result, Ground of Appeal No. 2 is allowed.

15. The ld.CIT(A) also held that no income is liable to be attributed in India even if Mitsui & Com Pvt. Ltd. (MIPL) constituted a Dependent Agency Permanent Establishment (DAPE) in India and, accordingly, deleted the addition of rs.18,27,64,936/- made by the AO by observing as under:- 6.1 I have carefully considered the findings of the Assessing Officer and the written submissions made on behalf of the Appellant. I find that the identical issue in the appellant’s own case was decided by the undersigned in favour of the appellant vide dated 24.2.2011 in Appeal No. 86/2010-11 for assessment year 2005-06. As the facts and circumstances of the case are pari materia with the case of the appellant in assessment year 2005-06, for the reasons as discussed in the aforesaid order of the undersigned, it is held that MIPL does not constitute a “Permanent Establishment” and there was no income liable to tax in India. In this context, it may be apt to reproduce the findings of the undersigned in Para 5.4 and 5.5 of the appellate order for assessment year 2005-06 referred to above:- “5.4 I have carefully considered the written submission made on behalf of the appellant, the findings of the Assessing Officer in the assessment order and the facts on record. The Assessing Officer has placed reliance on the order of the IT AT, Bombay Bench in DDIT vs. Set Satellite (Singapore) Pte Ltd. (2007) 106 ITD 175( Mumbai): (2007) 108 TTJ (Mumbai)445 which has been set aside by the Hon’ble Bombay High Court by their judgment dated 22nd August, 2008 reported in 307 ITR 205 (Bombay):218 CTR (Bom) 452: 173 Taxman 475:11 DTR 313(Bom). The matter is directly covered by that judgment in which the Bombay High Court has followed the judgment of DIT, International Taxation, Vs Morgan Stanley & Co. (2007) 292 ITR 416 (SC). The AO has no doubt taken note of the judgment of the DIT, International Taxation vs Morgan Stanley & Co. (supra), but he has referred to that 14

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 judgment to state that the attribution of profits would depend upon the functional and factual analysis in each case. 5.5 In this regard it has been clarified on behalf of the appellant that in the present case the Transfer Pricing Officer has specifically stated in his order that transfer pricing documentation, which contains the functional and economic analysis of comparables and of the assessee, has been examined and placed on record and in view of the functional and economic analysis of the assessee and of the comparables no adverse inference was drawn. The AO has also endorsed that after examination of company’s transfer pricing documentation and the functional and economic analysis contained therein, the transfer pricing adopted by the company in respect of international transaction (which was accepted by TPO ) was being followed by him. Both these orders u/s 92 CA(3) and 143(3) of the Act were passed subsequent to the assessment order passed by the AO(the subject-matter of the present appeal). Both the orders fortify the contention of the appellant that the functional and factual analysis has been undertaken in the present case. Accordingly, the test as laid down by the Hon’ble Supreme Court in Morgan Stanley’s case has been followed in positive manner in the present case. Hence, it is held that no income is liable to be attributable in India even if M/s Mitsui & Co. India (P) Ltd.) is taken as Dependent Agency PE in India. Ground of appeal No. 6 is, therefore, allowed. ” 6.2 My attention was also drawn to the report in Form No. 3CEB in terms of section 92E of the Act read with Rule 10E of the Income Tax Rules, 1962 annexed to the return of income by M/s Mitsui & Co. India (P) Ltd.(MIPL), according to which it was reported by the Chartered Accountant that all the transactions between Mitsui Japan and Mitsui India are on arm’s length basis. This shows that functional and factual analysis was undertaken and the test laid down by the Hon’ble Supreme Court in DIT, International Taxation, Vs Morgan Stanley & Co. (2007) 292 ITR 416 (SC) has been followed. There being no more income that can be attributed to the operations of Mitsui Japan in India, the order on this ground for the preceding year applies to this year also. Accordingly, it is held that no income is liable to be attributable to tax in India even if MIPL is taken as Dependent Agency PE in India. As a result, the Grounds of appeal No. 3 and 3.1 are allowed and the addition of Rs. 18,27,64,936/- as income attributable to the PE is deleted. In view of findings made above Grounds of appeal No. 3.2 to 3.5 have become infructuous and do not require any adjudication.”

16. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal by raising the following grounds of appeal:-

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 “ 1. On the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the provisions of section 44BBB of the IT Act, 1961 cannot be applied for subjecting to tax the income from off-shore supplies in respect of Teesta Purulia Projects and has therefore erred in deleting the addition of Rs. 23,91,98,358/-made by the AO.

2. On the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the income form offshore supplies in respect of Teesta and Purulia Projects were not liable to taxed under the provisions of Article 7 read with paragraph 6 of the protocol to the DTAA between India and Japan.

3. On the facts of the and in law, the Ld. CIT(A has erred in holding that The Liaison Office of the assessee does not constitute PE.

4. On the facts of the case and in law, the Ld. CIT(A) erred in holding that no income is liable to be attributed in India even if Mitsui & Co. India Pvt. Ltd. (MIPL) constituted a Dependent Agency Permanent Establishment (DAPE) of the assessee in India and has therefore erred in deleting the addition of Rs. 18,27,64,936/-. The appellant craves to add, amend, modify or alter any grounds of appeal at the time or before the hearing of appeal”

17. The ld. DR strongly objected to the order of the CIT(A) in granting relief to the assessee. He submitted that upto A.Y. 2005-06 the Tribunal has decided the issue in favour of the assessee. However, the facts for the present A.Y. 2006-07 and onwards are different from the facts of the case upto 2005-06. He submitted that the finding of the AO that project offices/projects undertaken by the assessee constitute PE under Article 5(1), 5(2)(c), 5(3) and 5(4) of the DTAA was not challenged before the CIT(A) or ITAT during A.Y. 2005-06 and, therefore, has attained finality. Further, there is no dispute regarding the AO’s finding in para 5.9 at page 19 of the order for A.Y. 2006-07 i.e., the project office constitutes a PE under Article 5(2) r.w. Article 5(1) and the assessee also has a PE under Article 16

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 5(3) of the DTAA. These findings of the AO have not been challenged by the assessee before the CIT(A) and, hence, has attained finality. He submitted that the receipts from Teesta and Purulia projects are eligible for presumptive taxation u/s 44BBB of the Act. The assessee had offered to tax u/s 44BBB receipts from Teesta project in the form of “onshore services” and receipts from “equipment supply” during A.Y. 2005-06 which was accepted by the AO during A.Y. 2005-06. Further, there is also no dispute regarding the finding and decision of the AO that the agreements between the assessee and WBSEB and NHPC are in the nature of composite agreements/one agreement for the purpose of executing the Purulia and Teesta Projects qua section 44BBB. He submitted that there is no dispute to the fact that the income from the consideration received from the contract with WBSEB for Purulia project and contract with NHPC for Teesta project have been offered to tax by the assessee and accepted by the Revenue u/s 44BBB. There is also no dispute to the fact that the provisions of section 44BBB are pari materia with the provisions of section 44BB. Further, the said conclusions of the CIT(A) are no longer res integra in view of the decision of the Hon’ble Supreme Court in the case of Sedco Forex International Inc., 2017-TII-38-SC-INTL. He submitted that since, in the present case, it is not in dispute that the contracts are composite contracts and parts of the receipts from these contracts are offered to tax by the assessee itself u/s 44BB of the Act, therefore, the amount paid or payable to the assessee whether in or out of India irrespective of whether towards “offshore

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 supply” or towards “onshore services” become income u/s 5 and 9 of the Act by fiction created u/s u/s 44BBB of the Act.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

The AO in the assessment order has brought out and highlighted various features present in the three contracts with NHPC that establishes the contracts to be the part of one indivisible composite contract. A few of such important indicators are - � The project was implemented by NHPC under 5 International competitive biddings by splitting the project works into contract packages from Lot-2 to Lot-6, [p.167 of PB 06-07] Assessee was awarded contract in respect of Lot-6 [ref. p. 14,17,18,21,25 &27 of PB 06-07] towards Electrical Mechanical works which consists of design, manufacture, supply, erection, testing, commissioning of 3x170 MW generating units, [p.167 of PB 06-07] ■ The situs of the work is in India and objective of composite nature of work is to provide the 'facilities' in deliverable and acceptable state to the employers in India. ■ Subject Matter of Contract - "...Contractor's obligations cover the provision of all 'Plant & Equipment' and the performance of all 'Installation Services' required for the design, the manufacture (including procurement, quality assurance, installation, pre-commissioning and delivery) of the Plant & Equipment and the installation, completion, commissioning and performance testing of the facilities...," [cl.7.1 of GCC, p.105] Thus, the obligation of assessee did not end with supply of Plant and Equipment, rather it continued and ended only on receipt of 'takeover certificate' issued by project owner, after erection, testing and commissioning of the equipment supplied by it and upon successful performance guarantee tests of the 'Facilities' being conducted at the project site.[Contractor's Responsibilities - cl.9 of GCC ,p.l07] ■ "Facilities" means the Plant & Equipment to be supplied and installed, as well as the Installation Services including design, fabrication, manufacture, supply, transportation, erection, testing and commissioning to be carried out by the Contractor under the Contract, [cl.1.1 of GCC, p.98] � "Plant & Equipment" means permanent plant, equipment, machinery, apparatus, articles and things of all kinds to be provided and incorporated in the Facilities by the Contractor under Contract (including spare parts to be supplied by the contractor under GCC Sub-Clause 7.3 hereof), but does not include Contractor's equipment, [cl.1.1 of GCC, p.99] ■ "Installation Services" means all those services ancillary to the supply of Plant & Equipments for the Facilities, to be provided by the Contractor under the Contract e.g. transportation and provision of marine or other similar insurance, inspection, expediting Site preparation works (including the provision and use of Contractor's equipment and the supply of all construction materials required), installation, testing, pre-commissioning, commissioning,

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 operations, maintenance, the provision of operations and maintenance manuals, training etc.[cl.1.1 of GCC, p.99]” ■ Presence of Cross-fall Breach Clause in respect of all the above 3 contracts, [cl.3 of Notification of award by NHPC, p.49; Cl.5.2 of Special Conditions of Contract, p.55;]As per the Notification of Award, the contractor "...shall also be fully responsible for the works to be executed under the second contract and first contract and it is expressly understood and agreed by you that any breach under the second contract and/or first contract shall automatically be deemed as a breach of this third contract and vice versa and any such breach gives us a right to terminate the first/second contracts and recover damages there under as well terminate this contract and recover damages under the this third contract as well and vice versa, "[p.49 of PB 06-07 & AO, p.28]The presence of 'Cross-Fall Breach' clause in the notification of the award when read alongside the scope of work envisaged under Lot-6 and the subject matter of the contract as discussed above clearly reflects the intention of the employer that the contracts are envisaged as an indivisible composite contract. This was further reiterated when the Supplementary Conditions of Contract [SCC] provides that "The award of three/two contracts shall not in any way dilute the responsibility of the Contractor.... And a breach in one contract shall automatically be construed as a breach of the other contract." [cl.5.2, p.55 of PB 06-07] ■ The other salient characteristic features of assessee's contract with NHPC are summarized in the following table: Details Reference A. Designing of Plant & Equipment Contractor shall execute the basic and detailed design and p.119 & p.107 GCC 20.1 engineering work in compliance with the provisions of the & 9.1 contract 20.3 Approval of technical documents & designs by EIC p.119 28.4 Defect Liability p.139 15.1 Intellectual Property will be with contractor p.113 15% AO,25 [2.5%+5%+2.5%+5%] After submission/furnishing of design & drawings; reports & data on tests and proof of procurement of major raw materials Manufacturing of plant and equipment as per approved specifications clearly proves the involvement of the PO in such manufacturing process B. Supply, Ownership & Risks GCC p.141 Ownership of plant and equipment shall be transferred to the 31.1 employer upon loading on to the mode of transport and upon endorsement of dispatch documents in favor of the employer 31.5 Notwithstanding the transfer of ownership of the plant & p.141 eauipment, the responsibility for care and custody thereof r.w.32 together with the risk of loss and damage thereto shall remain with the contractor 20

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

32 Contractor shall make good at its own cost anv loss or damage p.141-142 the facilities 31.4 Ownership of anv plant and equipment in excess of the p.141 requirements shall revert to the contractor C. Procurement, Transport & Custom Clearance GCC- p.121 Contractor shall manufacture or procure and transport all the 21.1 plant & equipment to the site. GCC- p.122 Contractor shall at its own risk and expense transport all the 21.3 plant & equipment to the site as per mode of transport of its choice 21.3.2 Contractor shall arrange sea shipment p.122 21.3.4 p.124 Contractor shall obtain all approvals for transportation of olant & equipment to the site. It will indemnify and hold harmless the employer from and against any damages to roads & bridges etc. caused by the transport of such equipment to the site. 21.4 Contractor shall, at its own expense, handle all imported plant p.123 & equipment at the point(s) of import and shall handle any formalities for custom clearance. D. Insurance [PB for 2006-07][AO, p.26] GCC-34 Contractor shall at its expense take out and maintain p.144-146 insurance fin case employer takes any insurance, it will deduct the cost from the contract price] App-3 Consolidated Insurance coverage for all 3 contracts p.36 E. Watch& Safe keep GCC22. Contractor shall provide and maintain at its own expense all p.127 7 lighting, fencing and watching for the protection of the F. Payment Schedule 10% Interest free advance which will be reduced in proportion to AO, 25 the value of the plant & equipment delivered to the site as evidenced by delivery documents 15% [2.5%+5%+2.5%+5%] AO,25 After submission/furnishing of design & drawings; reports & 65% Delivery at the site AO, 25 5% Completion Certificate AO, 26 5% Operational Acceptance Certificate AO, 26 G. Interpretation & Other provisions GCC7.1 Contractor's obligations cover the provision of all plant & p.105-106; equipment, performance of all installation services required for AO, p.29 the design, manufacture of the plant & equipment etc. Award-3 "We have also notified you.... for award of other contracts on p.49 you... for complete Lot-6 Electrical & Mechanical works of Teesta HE Project, Stage-V as per specification No, NH/Cont (E&M)/Lot- 6/Teesta-V"

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

"You shall also be fully responsible for the works to be p.49, AO, executed under the second contract and first contract and it is p.28 expressly understood and agreed by you that any breach under the second contract and/or first contract shall automatically be deemed as a breach of this third contract and vice versa and any such breach gives us a right to terminate the first/second contracts and recover damages there under as well terminate this contract and recover damages under the this third App-3 Consolidated Insurance coverage for all 3 contracts p.36 Supp, 5.2 p.55 The award of three/two contracts shall not in any way dilute the responsibility of the Contractor.... And a breach in one contract shall automatically be construed as a breach of the other contract.

Supp. 5.4 In case the option is not exercised by the contractor.... Both p.55 contracts shall contain the aforesaid cross-fall breach clause H. PO/PE Installation PE AO, App-4 Time Schedule 1.11.01 to 31.05.06 p.38 17.2 Appointment of Contractor's representative to represent and p.115 act for the contractor 20.1 & Contractor shall execute the basic and detailed design and p.119 & 9.1 engineering work in compliance with the provisions of the p.107 20.3 Approval of technical documents by EIC p.119 28.4 Defect Liability p.139 15.1 Intellectual Property will be with contractor p.113 17.2.4 & Presence of Construction Manager for the duration from p.116 & 22.1.2 commencement of installation facilities till operational p.124 18.1 Presence of Contractor's Organization p.117 22.2 Presence of Contractor's Equipments p.125 App-5 Subcontractors p.39 ■ As evident from the above, not only all three contracts are umbilically linked by a 'cross-fall breach' clause, contractor's obligations cover the provision of all plant & equipment, performance of all installation services required for the design, manufacture of the plant & equipment etc. [General Conditions of Contract (GCC) cl. 7.1,p.105-106; AO, p.29]

■ Similarly, although much emphasis has been placed by Ld. CIT (A) on Cl.31.1 of the GCC as per which "ownership of plant and equipment shall be transferred to the employer upon loading on to the mode of transport and upon endorsement of dispatch documents in favor of the employed' [p.141 of the PB of 06-07], the said provision is neither absolute nor end all. In fact, it allows itself to be subjected to numerous restrictions imposed by other provisions. Thus – - "Notwithstanding the transfer of ownership of the plant & equipment, the responsibility for care and custody thereof together with the risk of loss and damage thereto shall remain with the contractor." [GCC, cl.31.5, p.141] 22

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

- Contractor shall make good at its own cost any loss or damage to the facilities. [GCC, cl.32, p.141-142] - Ownership of any plant and equipment in excess of the requirements shall revert to the contractor. [GCC, cl.31.4, p.141] ■ The fact that the risk and ownership of the assessee over the plant and machinery gets transferred/does not get extinguished the moment the goods pass the shipping rail is evidenced by the following provisions - - Contractor shall manufacture or procure and transport all the Plant & Equipment... to the site. [cl.21.1 of GCC, p.121] - The Contractor shall at its own risk and expense transport all the Plant & Equipment... to the site by the mode of transport that the Contractor judges most suitable... [cl.21.3.1 of GCC, p.122] - The Contractor shall arrange sea shipment of all Plant & Equipment and Mandatory Spares.... through a shipping and forwarding agent of Contractor's choice..[ cl.21.3.2 of GCC, p.122] - The Contractor shall be responsible for....transportation of Plant & equipment to the site. The Contractor shall indemnify and hold harmless the employer from and against any claim of damage.... caused by the transport of the Plant & Equipment to the site. [cl.21.3.4 of GCC, p.123] - The Contractor shall, at its own expense, handle all imported Plant & Equipment at the point(s) of import..[cl.21.4 of GCC, p.123] - The Contractor shall provide and maintain at its own expense all lighting, fencing and watching...for the proper execution and the protection of the Facilities, [cl.22.7 of GCC, P-127] - Contractor shall at its expense take out and maintain insurance [cl.34 of GCC, p.144- 146] & Consolidated Insurance coverage for all 3 contracts[App-3, p. 36] ■ Another factor that points to the fact that the title & risk over the goods remain with the assessee (at least) till the goods reach the site is the payment schedule for the offshore supplies. Thus, Interest free advance (10%) will be reduced in proportion to the value of the plant & equipment delivered to the site as evidenced by delivery documents. [AO, p.25] Similarly, major part of the value of offshore supplies (65%) shall be payableon delivery of the goods at the site. [AO, p.25] Thus, the entire contract is negotiated and executed not on the basis of delivery of supplies outside India, but on the context of delivery at the site. It is very clear that the supplier/assessee continues to have control over the equipments while in transit and there is no actual custody of the equipments by the buyer from the supplier outside India. From the clauses referred herein above the supplier is solely responsible for delivery of the equipments to the territory of India each time they are loaded on the ship. � It is observed that the assessee is providing with functional guarantee towards performance and security. [AO, p.27] Had the intention of the parties was to consider the supply independently without having any connection with that of services rendered by assessee in India, assessee would not have agreed for providing an 23

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 unconditional performance and security guarantee towards the supply of equipment also. This implies that the supply is in extremely linked/connected to the services rendered by assessee in terms of direction of the project. As per cl.21.4 of the GCC, Contractor shall, at its own ■ expense, handle all imported plant & equipment at the point(s) of import and shall handle any formalities for custom clearance, [p.123 of PB 06-07] If the sale of equipment has taken place outside India as claimed by the assessee, then how that assessee is is paying custom duty in India and delivering the same to its project site? To sum up, in the light of the above, the purpose for which the tender was invited by NHPC is not in doubt. It was not for supply of offshore equipments independent of the installation and commissioning. Nor was it for independent installation and commissioning, divorced from the design and supply of the equipments necessary. The presence of features like 'cross- breach clause' as well as 'consolidated insurance coverage for all the three contracts' etc. clearly proves that such a contract has necessarily to be read as a whole and is not capable of being split up. Furthermore, the assessee itself claims that the receipt from the contract is eligible for taxation u/s 44BBB of the Act. If, the offshore supply component is divorced from the contract, as claimed by the assessee, the receipts from services cannot be taxed u/s 44BBB of the Act. On reading the contract in the context of the tender floated and the purpose sought to be achieved, the contract involved herein is a composite contract and it cannot be dissected into parts. Thus, looking at and reading the contract as a whole, the Ld. CIT (A) erred in accepting the claim of the assessee that a part of the transaction should be treated as a contract for offshore supply that is not liable to be taxed in India. Thus, for the purpose of taxation, the contract must be taken as one, for installation and commissioning of a project in India. In support of its afore stated claims, in addition to the decisions relied upon by AO, revenue relies upon the following decisions: � In support of its claim on the indivisibility of the contracts and claim on 'composite contract' revenue likes to rely upon the following decisions - Mitsui Engg and Ship Building Co Ltd [2003-TII-23-HC-DEL-INTL] - Shanghai Electric Group Company Ltd [017-TII-119-ITAT-DEL- INTL] � In support of its claim on the importance and implications of 'cross-fall breach' clause in the contracts, revenue likes to rely upon the following decisions – - The Indure Ltd and another [2010-TIOL-79-SC-CT] - M/s Larsen and Toubro Ltd [2015-TIOL-3055-HC-AP-CT] Dongfang electric corporation [2012-TII-66-ITAT-KOL-INTL] - Decision of Hon'ble West Bengal AAR for GST in Order No. 04/WBAAR/2018-19 dated 11/05/2018 in the case of EMC Ltd. 24

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 � In support of its claim on the applicability of provisions of INCOTERMS 2000 & Sales of Goods Act revenue likes to rely upon the following decisions - M/s Larsen and Toubro Ltd [2015-TIOL-3055-HC-AP-CT] - Shanghai Electric Group Company Ltd [2017-TII-119-ITAT-DEL- INTL] - Baker Hughes Asia Pacific Ltd [2014-TII-104-ITAT-DEL-INTL] Involvement of PE – Analysis of the contracts between the assessee and WSEB and NHPC also clearly reveals the close involvement of the PO not only in the installation, supervision and commissioning of the projects, but also in the offshore supply of plant & machinery. Cl. 17.2 of the contract with NHPC [p.115 of PB for 06- 07] provides for the Appointment of Contractor's representative to represent and act for the contractor. Similarly, Cl.17.2.4 & 22.1.2 provides for the Presence of Construction Manager for the duration from commencement of installation facilities till operational acceptance [p.116 & 124 of PB for 06-07] while Cl. 18.1 provides for the presence of Contractor's Organization, [p.117 of PB for 06- 07] What is more important in this context is that the role of contract's representative in liaising, seeking and obtaining approval of the Engineer in Chief in respect of technical designs on the basis of which plant and machineries are manufactured. The role of the PO is not limited to the above premanufacture/fabrication processes alone. Once the plant & machinery is manufactured/fabricated as per the approved design & specifications, the PO also takes care of all the processes involving the custom clearance, insurance, transport of the offshore supplies to the site and for the watch and safe keep of the offshore supplies for installation and commissioning.The entire process as envisaged under the contract can be visualized as per the enclosed flow chart. It has already been stated earlier that the assessee has a PE in the form of Project Office, which has also been accepted by the assessee. Ld. CIT(A), therefore has erred in ignoring the above functions of the PE and allowing relief to the assessee only on the basis of existence and role of MIPL as a DAPE and the TP analysis of the transactions between the assessee and MIPL and completely ignoring ant adjudicating on the issue of attribution of profit to the other forms of PEs as held by the and accepted by the assessee. It may not be out of context that during A.Y. the CIT(A) has also confirmed the action of the AO holding MIPL as DAPE.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 (iv) Dongfang Electric Corporation, 2012-TII-66-ITAT-KOL-INTL; 19.1 He accordingly submitted that the order of the ld.CIT(A) be reversed and that of the AO be restored.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 20.1 So far as the argument of the ld. AO/DR that the facts of the present case are distinguishable from that of the LG Cables Ltd. (supra) on the ground that in the present case not all part of the transactions have been carried outside India, he submitted that the same is not correct as both the AO as well as the DR have misunderstood the facts of the present case. He submitted that the whole basis for making addition by the AO is the inference made by him that both the contracts for on shore as well as offshore supplies are just an eyewash and in fact this is composite contract He submitted that the Hon’ble Supreme Court in the case of Ishikawajima Harmia Heavy Industries Co. Ltd. vs. DIT (2007) 288 ITR 408, has held that even if the contracts are composite, the offshore supplies having no relation with India cannot be eligible to tax here. He drew the attention of the Bench to the relevant observations of the Hon’ble Supreme Court at para 99 of the order which reads as under:-

“99. We, therefore, hold as under : Re : Offshore Supply : (1) That only such part of the income, as is attributable to the operations carried out in India can be taxed in India. (2) Since all parts of the transaction in question, i.e. the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India. (3) The principle of apportionment, wherein the territorial jurisdiction of a particular state determines its capacity to tax an event, has to be followed. (4) The fact that the contract was signed in India is of no material consequence, since all activities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

(5) There exists a distinction between a business connection and a permanent establishment. As the permanent establishment cannot be said to be involved in the transaction, the aforementioned provision will have no application. The permanent establishment cannot be equated to a business connection, since the former is for the purpose of assessment of income of a non-resident under a Double Taxation Avoidance Agreement, and the latter is for the application of Section 9 of the Income Tax Act. (6) Clause (a) of Explanation 1 to S. 9(1)(i) states that only such part of the income as is attributable to the operations carried out in India, are taxable in India. (7) The existence of a permanent establishment would not constitute sufficient 'business connection', and the permanent establishment would be the taxable entity. The fiscal jurisdiction of a country would not extend to the taxing entire income attributable to the permanent establishment. (8) There exists a difference between the existence of a business connection and the income accruing or arising out of such business connection. (9) Paragraph 6 of the Protocol to the DTAA is not applicable, because, for the profits to be 'attributable directly or indirectly', the permanent establishment must be involved in the activity giving rise to the profits.”

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 paid/payable on account of provision of services and facilities in connection with, or supply of plant and machinery on hire used or to be used in the prospecting for, or extraction or production of mineral oils in India. Thus, there is specific coverage of the services provided which has to be taken into consideration while computing presumptive income under4his section. As against this in section 44 BBB which is applicable in respect of business of civil construction, the applicability is of the amount paid or payable on account of civil construction, erection, testing or commissioning only. Hence, the amount of offshore supply is not covered in this section 44 BBB applicable to the assessee. There is no dispute that third contract entered into by the assessee with NHPC is regarding civil construction, erection, testing or commissioning and on which the assessee has paid taxes under this section. This section is not applicable in respect of offshore supplies. It is important to point out that the Ld. DR in its submission has Highlighted in bold a para of the Sedco Forex judgment. This para itself which has been put in bold of page 2 in fact supports the case of the assessee. It is stated ‘thus, whereas clause (a) mentions the amount, which is paid or payable, clause (b) deal with the amount, which are received or deemed to be received in India. ’ Thus, Supreme Court clearly held that the amount which is covered in clause (a) only will be within the purview of section 44 BB and not all the payment. It may be relevant to quote para 42 of this judgment which reads as under:

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

“42) It is, however, pertinent to point out that Section 44BB(2) makes certain receipts as “deemed income" for the purposes of taxation in the said provision. Therefore, aid of thisprovision is to be necessarily taken to determine whether a particular amount will be “income” within the meaning of Section 5 of the Act. Likewise, Section 44BB(2) also acts as guide to determine whether a particular income is attributed as income occurred in India. Section 44BB of the Act provides for special provision for computing profits andgains. However, that would not mean that if the income is to be computed under this provision, we have to give a go-by to Sections 5 and 9 of the Act. To this extent, remarks of the High Court may not be correct. ” The bold para of the above judgment makes it clear that it is only certain receipts mentioned in sub section (2) of section 44 BB which have to be taken into account for applying section 44 BB. In the present case there is no dispute that the receipts mentioned in section 44 BBB has been taken into account and tax paid by the assessee thereon. The Revenue wants to go beyond and include even those receipts which are not covered by section 44 BB. D Offshore supply qua PE In this para the Ld. DR has raised the contention that there are composite contracts and hence, AO was justified in taxing offshore supplies. The Ld. DR thereafter on page 4 to page 9 has referred to various clauses of the agreement to make out a case that there is one composite contract which has been splitted into three parts and there is a cross fall breach clause. In this regard, it is submitted that exactly the similar issue was raised in the case of LG Cables Ltd. In this case, LG Cables 30

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

Ltd., has entered into a contract with Powergrid Corporation of India Ltd. and has entered into 2 contracts. One was for offshore supply and services and the second was for onshore services. It may be relevant to point out that this contract was entered into on 26.02.2001 and PGCIL was under Ministry of Power as is the case of the assessee where NHPC is under Ministry of Power and this contract was entered into on 06.12.2001. The terms of the contracts are identical as these contracts are drafted and vetted by the Law Ministry, Government of India. A detailed comparative chart demonstrating how the terms are identical is annexed. It is further submitted that the contentions raised by the Ld. DR were also raised in the case of the LG Cables as is evident from the table made out by the High Court comparing the two contracts entered into by LG Cables with PGCIL. On going through the second column, it may be noted that in this contract also the contractor was overall responsible to ensure the execution of all the two contracts achieve successful completion. There was a cross fall breach clause in that contract. In para 11 of the judgment the court has taken note of the argument of the counsel that property in equipment passed to the buyer only in India and this property did not pass till equipment was erected and Yielded satisfactory performance in India. Further, in para 18, the court has categorically held that none of the stipulations of the onshore contract could postpone the transfer of property supplied under the offshore contract. E Para 1 Page 10 The Ld. DR has tried to make a distinction that in the case of LG Cables there were two contracts whereas in assessee’s case 31

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 there are three contracts. It has been stated that in the absence of no offshore services, services relating to offshore supply are provided from India. This argument is without appreciating the meaning of ‘offshore services’. Offshore itself means services provided outside India. Thus, there cannot be any allegation that offshore services have been provided from India. In fact in the present case, onshore services is being provided under third contract on which taxes has been paid and there is no dispute. It may be relevant to point out that in the LG. Cables Ltd. the Hon’ble High Court has referred and! relied upon the judgment of Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. 288 ITR 408 (SC) and in para 20, there were 5 contracts involving (i) offshore supply, (ii) offshore services (iii) onshore supply, (iv) onshore services (v) construction and erection. It may be noted that the nomenclatureis not significance. In one contract, there can be offshore supply and offshore services and still the same may be named as offshore supply as is the case of the assessee. It may be relevant to quote para 19 of the LG Cable judgment where the Hon’ble High Court has also quoted the Supreme Court judgment of Ishikawajima- Harima Heavy Industries Ltd. which reads as under: “19. The contention of the learned counsel for the Revenue during the course of arguments that offshore supplies are not taxable only in the case of sale of goods simpliciter, and that the contract is a turnkey contract split/divided into offshore and onshore supplies at the instance of the respondent- assessee, in our considered opinion, is not sustainable in view of the authoritative pronouncement of the Supreme Court in the case of Ishikawajma-

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

Harima Heavy Industries Ltd. vs. Director of IT (2007) 207 CTR (SC) 361 : (2007) 288 ITR 408 (SC) wherein it has been held that offshore supplies are not taxable even in the case of a turnkey contract as long as the title passes outside the country and payments are made in foreign exchange. The Supreme Court in this regard observed as follows: 'The fact that it has been fashioned as a turnkey contract by itself may not be of much significance. The project is a turnkey project. The contract may also be a turnkey contract, but the same by itself would not mean that even for the purpose of taxability the entire contract must be considered to be an integrated one so as to make the appellant to pay tax in India. The taxable events in execution of a contract may arise at several stages in several years. The liability of the parties may also arise at several stages. Obligations under the contract are distinct ones. Supply obligation is distinct and separate from service obligation. Price for each of the component of the contract is separate. Similarly offshore supply and offshore services have separately been dealt with. Prices in each of the segments are also different." F Para 1.1 Terms of The Ld. DR here has tried to make a payment Page 10 distinction in the terms of payment. It may be relevant to point out that in the case of LG Cables 10% was advance, 75% was progressive payment and 15% was the final payment on completion and operational acceptance. In the case of the assessee, 10%o is advance payment, 15% is also advance payment on the progress of the equipment drawings in the home country, 65% payment is on delivery and balance 10%) on completion and operational acceptance. The Ld. DR probably is not able to 33

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 appreciate the terms of payment stated in item 2, 3, 4 and 5. These are payments to be made in advance on the basis of the progress of the Turbine and Generator drawings which are to be supplied from home country. Similarly, the Ld. DR has not been able to appreciate price variation clause which is given in appendix 2 to the contract at page 8. On going through the same it may be noted that this is an annexure of first contract and is price adjustment formula for supply of plant and equipment under this contract i.e. offshore supply. The contractor having quoted the price on the basis of the price of material and labour on the date of the tender, a clause has been inserted to make further payment in terms of this formula. It may be important to point out that all these payments are to be made in foreign currency. The issue which is important is that these payments are linked to shipment of the supplies and hence, there is no difference in I the terms of payment. G. Method of payment The Ld. DR has tried to make a distinction page 11 that method of payment is different than LG Cables. It is submitted that method of payment is the same. The only difference is that there the payment was to be made within 30 days of submission of invoice and in the present case it is within 60 days of the submission of invoice. In LG Cables also, there was a provision for pro-rata payment which means pro-rata shipment meaning thereby all equipments not to be shipped at one go. Similarly in the present case, there is a provision of pro-rata payment and sub- 34

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 packages means that part shipment can be made and payment will be received on pro- rata basis. In LG Cables, payment was through irrevocable letter of credit. In assessee’s case also all payment through irrevocable letter of credit as per clause 3.0 at page 7 of the agreement. H. Transfer of Ownership It has been stated that the term of transfer para 31.1 page 11 of ownership in the case of the assessee are different than LG Cables. This is factually incorrect, in fact clause no. 31.1 in LG Cables also matches with the clause no 31.1 of assessee’s agreement at page 116. The Ld. DR has tried to point out the difference by referring to the words ‘upon endorsement of dispatch documents in favour of the employer’. The same condition was there in the LG Cables as can be seen from the High Court judgment in para 17 where the High Court has observed “The equipment was delivered to the shipping company named in the bill of lading and the bill of lading and other documents were handed over to the nominated bank. Accordingly, with the delivery of the bill of lading to the bank, the property in the goods stood transferred to PGCIL. The cargo insurance policy was obtained by the respondent- assessee and it named the PGCIL as.co-insurer. Clause 31.2 of the contract unequivocally clarified that the respondent-assessee and the PGCIL intended to transfer the title/property in the goods as soon as the goods were loaded on to the ship at the port of shipment and the shipping documents were handed over to the nominated bank where the letter of credit was opened. The sale was complete and unequivocal. There is no condition in the contract which empowers the respondent to keep control of the goods and/or to 35

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 repossess the same. With the completion of this sale the income accrued outside India.” Clause 31.2 of assessee’s contract at page 116 matches exactly with the above clause 31.2 referred by the High Court in above para. As regards clause 31.4 referred by the Ld. DR firstly it is stated that it is identical to LG Cables as can be seen from the numbering. Moreover, this clause needs to be read in full and in the context in which it has been stated. It is important to point out that clause 31.4 is part of the General Conditions of Contract (GCC) which Is common to all three contracts and thus, the application of any clause will be with reference to that particular contract to which it has implication and not to other contract. Accordingly, the first line of this clause 31.4 is meant for onshore supply i.e. supplies from within India under Second contract and not under First contract i.e. Offshore supply. This becomes more clear when we read last line of this clause reads page 116 of the contract “provided quantity of any plant or equipment specifically stipulated in the contract shall be the property of the employer whether or not incorporated in the facilities.” The first contract is for offshore supplies and quantity of plant and equipment has been specifically specified in schedule 1 at page 36 to page 38 of the contract. Thus, offshore supplies cannot be returned. As regards clause 31.5 regarding the risk of loss and damage, the Ld. DR has not appreciated the full contract and the meaning of this clause. This clause has limited meaning of a responsibility which as a bailee the assessee has to take care of plant and equipment while carrying out erection. This does not mean that ownership is that of the assessee. As ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 against this, there are various clauses which provide that in case of any loss the same will be to the account of the employer NHPC and not the assessee as can be seen from para 32.2 at page 117, 38.1, 38.2 at page 124 of the Contract. I Page 11 Usha Beltron The Ld. DR has placed reliance on this Ltd. Vs. State of Punjab judgment. In fact this judgment supports the case of the assessee as can be seen from the extract quoted by Ld. DR on page 12 which reads as under: “These terms clearly indicate that the property in the goods remain at the risk of the appellant till delivery was completed. It shows that delivery would be completed only after the takeover certificate was issued. As per section 19 of the Sale of Goods Act, 1930, the property in the goods passes when the parties intend to pass. In this case, the contract provides that property in the goods does not pass till after delivery and successful testing and issuance of takeover certificate. Thus, High Court was right in concluding that the property in the goods had not passed at the time the goods entered the Municipal Limits.” On going through the above, it is important to note that in this judgment the Court was trying to infer transfer of ownership in the absence of any clause in the agreement. The Court has noted that “as per section 19 of the Sale of Goods Act, 1930, the property in the goods passes when the parties intend to pass.” Thus, it is the agreement between the parties which will determine when the ownership will pass. In the present case, clause 31.1 and 31.2 clearly shows that the property in goods will pass when it is loaded on to the mode of transport in the country of origin. Thus, there is no vagueness and this clause will 37

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 clearly be applicable. On this clause, same view has been taken in the case of LG Cables in para 18 which reads as under: “18. Furthermore, as noticed above, the scope of work under the onshore contract was under a separate agreement and for separate consideration. There is, therefore, in our opinion no justification to mix the consideration for the offshore and onshore contracts. None of the stipulations of the onshore contract could conceivably postpone the transfer of property of the equipments supplied under the offshore contract, which, in accordance with the agreement, had been unconditionally appropriated at the time of delivery, at the port of shipment. When the equipment was transferred outside India, necessarily the taxable income also accrued outside India, and hence no portion of such income was taxable in India J AP High Court in the This judgment instead of supporting the case of L&T Ltd. case of the Revenue supports the case of the assessee. On page 13 of the DR submission in para 155, the Court has taken note that “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 section 19 of the Sale of Goods Act, it is primarily the intention of the parties when the title to the goods is to pass.” Thus, it is the intention in the agreement and the present case is clearly stipulated in clause 31.1 and 31.2. K. Delhi ITAT in the case The Ld. DR placed reliance on Delhi IT of Shanghai Electric AT in the case of Shanghai Electric Group Group Company Ltd. Company Ltd. It is important to mention here that there was a single composite contract. The Hon’ble ITAT at para 179 observed as under:

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

“179. It is further pertinent to note that in the agreements entered into by assessee with various project owners, payment in the contract schedule are not related with sale of equipments. But payments are linked with the different stages like signing of contract, raising of invoice, submission of invoice for advance payments, submission of advance bank guarantee, submission of performance bank guarantee, design, drawing, successful commissioning of power plant. In all, the payments are related to entire work entrusted upon assessee includes, supervisory services that assessee has to render in India. It has been consistently observed in all contracts that, major milestone in payment schedule does not mention about supply/sale of BTG equipments, but recognizes incidents like signing of contracts, raising invoice, submitting of performance Bank Guarantee by assessee to the project owner, Submitting of Advance Bank Guarantee by assessee to the project owner, engineering/architectural works, supply of equipments, testing of equipments and commissioning of the plant followed by issuance performance guarantee test certificates. This shows the nature of contract being one and indivisible, as no separate value for supply/sale of equipments has been recognized as a milestone. ” In the case relied upon by the Ld. DR, the IT AT observed that in respect of the contracts entered into by Shanghai Electric Group Company Ltd all the payments were related to entire work entrusted upon the company which included, supervisory services that the company has to render in India. The Hon’ble ITAT in the Shanghai

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 Electric case has observed that there were no identifiable payments exclusively made for supply of equipments and none of the agreements were executed exclusively for the sale BTG equipments. However, in the assessee’s case as evident from appendix 1 of first contract at page no.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 “2.11 The following comparative chart of the contract in the case of LG Cable Ltd., and in assessee’s case demonstrate that the clauses in both these agreement are similar. S.No. Contract No. Date of Purpose of Contract Article wise Contract description 1. NH/Cont. 06.12.2001 CIT/CIP Supply of all Article-1 (Description (E&M)/LOT- offshore equipments and of contract 6/Teesta- materials including documents) V/579/2001/1 Mandatory Spares for Article-2 (Contract (First Contract) Lot-6 Electrical & Price and Terms of Mechanical works of Payment) Teesta HE Project Article-3 (Effective date for determining time for completion of the contract) Article-4 (Contract is between Mitsui and NHPC and not with the government of India) Article-5 (List of Appendices which shall form integral part of the agreement) 2. NH/Cont. 06.12.2001 Ex-works Supply of all Article-1 (Description (E&M)/LOT- equipments and materials of contract 6/Teesta- of Indian Origin for Lot- documents) V/580/2001/II 6 Electrical & Article-2 (Contract (Second Contract) Mechanical works of Price and Terms of Teesta HE Project Payment) Article-3 (Effective date for determining time for completion of the contract) Article-4 (Contract is between Mitsui and NHPC and not with the Government of India) Article-5 (List of Appendices which shall form integral part of the agreement) 3. NH/Cont. 06.12.2001 Providing onshore Article-1 (Description (E&M)/LOT- services in respect of of contract 6/Teesta- equipments supplied documents) V/581/2001/III under Article-2 (Contract 41

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

Price and Terms of payment)

23. Referring to the various clauses of the contract, he submitted that the clauses are identical to that of the case decided by the Hon’ble Delhi High Court in the case of LG Cables and, therefore, the issue stands squarely covered by the decision of the Hon’ble Jurisdictional High Court in favour of the assessee. So far as the decision relied on by the ld.CIT, DR in the case of Sedco Forex International Inc. (supra), is concerned, he submitted that the same case was decided on the issue of section 44BB and not on section 44BBB. As per section 44BB(1), a sum equal to 10% of the amount specified in sub-section (2) is deemed to be profit and gains of such business. In sub-section (2), it has been stated that such sum shall include amount paid/payable on account of provision of services and facilities in connection with or supply of plant and machinery on hire or to be used in the prospecting for or extraction of or production of mineral oils in India. Thus, in section 44BB, there is specific coverage of the services provided which has to be taken into consideration while computing presumptive income under this section. As against this, in section 44BBB which is applicable in respect of business of civil construction, the applicability is on the amount paid or payable on account of civil construction, erection, testing or commissioning only. Thus, the amount of both the offshore supply is not covered in provisions of section 44BBB. He submitted that in the case of the assessee, the third contract entered into by the assessee with ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 NHPC is regarding civil construction, erection, testing or commissioning and on which the assessee has paid taxes under this section. The provisions of section 44BBB are not applicable in respect of offshore supplies. He submitted that, in fact, the decision relied on by the ld.CIT, DR in the case of Sedco Forex International Inc. supports the case of the assessee wherein at para 47 of the order, it has been stated: “Thus, where clause (a) mentions the amount which is paid or payable, clause (b) deal with the amount which are received or deemed to be received in India.

23.1 He submitted that the Hon’ble Supreme Court in the above decision cited (supra) has held that the amount which is covered in clause (a) only will be within the purview of section 44BB and not all the payments. Para 42 of the judgment makes it clear that it is only certain receipts mentioned in sub-section (2) of section 44BB which have been taken into account for applying section 44BB. He submitted that since, in the instant case, there is no dispute that the receipts mentioned in section 44BBB has been taken into account and tax paid by the assessee thereon, therefore, the AO has gone wrong in including even those receipts which are not covered u/s 44BBB. He submitted that in the case of LG Cables Ltd., there were two contracts whereas in the case of the assessee, there were three contracts. Further, offshore services means services provided outside India. He submitted that there cannot be any allegation that offshore services have been provided from India. In fact, in the present case, onshore services is being

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 provided under a third contract in which taxes have been paid by the assessee for which there is no dispute.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 a provision for pro rata payment which means pro rata shipment meaning thereby all equipments not to be shipped at one go. Similarly, in the present case, there is a provision for pro rata payment and sub-packages means that part shipment can be made and payment will be received on pro-rata basis. In the case of LG Cables, the payment was through irrevocable letter of credit whereas in the case of the assessee also the payments are through irrevocable letter of credit as per clause 3.0 at page 7 of the agreement.

24.1 He submitted that there is no difference in the transfer of ownership to the title and risk. The term of transfer of ownership in the case of the assessee is not different from that of LG Cables Ltd. Referring to various clauses of the agreement vis-à-vis the clauses of the agreement of LG Cables Ltd., he submitted that both are same, therefore, in view of the decision of the Hon’ble Jurisdictional High Court, the matter being covered in favour of the assessee, the order of the ld.CIT(A) be upheld and ground of appeal No.1 and 2 of the appeal filed by the Revenue should be dismissed.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 of the tribunal in assessee’s own case for A.Y. 2005-06. He accordingly submitted that the grounds raised by the Revenue should be dismissed.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 supplies is chargeable to tax independent of section 44BB of the Act. For the above proposition, the AO referred to the various clauses of the Agreement entered into by the assessee and, on this basis, reached to a conclusion that the income from offshore supplies shall be chargeable to tax in India. He further held that everything directly or indirectly relating to the said business should be considered under the ambit of section 44BBB. He, accordingly, concluded that income for the purpose of this section should also include offshore receipts for the supply of equipments.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 tax paid by the assessee thereon. Therefore, it is wrong on the part of the Revenue to include even these receipts which are not covered by section 44BBB.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 performance in India. In para 18, the Hon’ble High Court has categorically held that none of the stipulations of the on shore contract could postpone the transfer of property supplied under the offshore contract.

32. As regards the terms of payment in the case of LG Cables Ltd., 10% was advance payment, 75% was progressive payment and 15% was the final payment on completion of operational acceptance. As against this, we find in the case of the assessee, 10% is advance payment, 15% is also advance payment on the progress of the equipment drawings in the home country, 65% payment is on delivery and the balance 10% on completion of operational acceptance. We, therefore, do not find any material difference between the two contracts. As regards the basis of price variation,/adjustment in respect of supplies made, this clause in our opinion does not change the nature of the contract. Further, on going through the annexure

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 to the contract, it is evident that there is price adjustment formula for supply of plant and equipment under this contract that is offshore supply. The contractor having quoted the price on the basis of the price of material and labour on the date of the tender, a clause has been inserted to make further payment in terms of this formula. Further, all these payments were to be made in foreign currency. The issue which is important is that these payments are linked to shipment of the supplies from the country of origin i.e., Japan.

33. We further find the method of payment is also similar. The only difference is that in the case of LG Cables Ltd., the payment was to be made within 30 days of submission of invoice whereas in the present case it is within 60 days of submission of invoice. Further, in the case of LG Cables, there was a provision for pro-rata payment whereas in the present case also there is a provision of pro-rata payment. In the case of LG Cables, the payment was through irrecoverable letter of credit whereas in the case of the assessee also all payments are through irrecoverable letter of credit as per clause 3.0 at page 7 of the agreement.

34. We further find there is no difference in the transfer of ownership to title and risk. The term of transfer of ownership in the case of the assessee is not different than LG Cables. We find Clause 31.1 in LG Cables also matches with the clause 31.1 of the assessee’s agreement at page 116. The condition upon endorsement of dispatch documents in favour of the employer in the case of the assessee was also ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 in the case of LG Cables which has been quoted by the Hon’ble High Court in para 17 which reads as under:- “17. That the offshore supply of equipment related to the supply of specified goods discharged from Korea for which the PGCIL had opened an irrevocable letter of credit in the name of the respondent-assessee with a bank in South Korea. The consignor of the equipment supplied from Korea to Haldia Port was the respondent while the importer was the PGCIL. The equipment was delivered to the shipping company named in the bill of lading and the bill of lading and other documents were handed over to the nominated bank. Accordingly, with the delivery of the bill of lading to the bank, the property in the goods stood transferred to PGCIL. The cargo insurance policy was obtained by the respondent-assessee and it named the PGCIL as co- insurer. Clause 31.2 of the contract unequivocally clarified that the respondent-assessee and the PGCIL intended to transfer the title/property in the goods as soon as the goods were loaded on to the ship at the port of shipment and the shipping documents were handed over to the nominated bank where the letter of credit was opened. The sale was complete and unequivocal. There is no condition in the contract which empowers the respondent to keep control of the goods and/or to repossess the same. With the completion of this sale the income accrued outside India. There was neither any material to show that accrual of such income was attributable to any operations carried out in India nor any material to show that the PE of the respondent-assessee had any role to play in the offshore supply of the equipments.”

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 of plant and equipment has been specified in schedule 1 at page 36 to page 38 of the contract. Thus, offshore supplies cannot be returned.

36. Clause 31.5 regarding the risk of loss and damage has a limited meaning of a responsibility which is bailee. The assessee has to take care of plant and equipment while carrying out erection. This does not mean that ownership is that of the assessee. As against this, there are various clauses which provide that in case of any loss, the same will be to the account of the employer and not the assessee which can be seen from para 92.2 at page 117, 38.1 and 38.2 at page 124 of the contract.

37. So far as the reliance on the decision in the case of Usha Beltron Ltd. v. State of Punjab (2205) 7 SCC 58 on the issue of transfer of title of the goods is concerned, the same, in our opinion, is misplaced. A perusal of the following observation of the decision makes it very clear that the said decision is not applicable to the facts of the present case.:-

“These terms clearly indicate that the property in the goods remain at the risk of the appellant till delivery was completed. It shows that delivery would be completed only after the takeover certificate was issued. /As per section 19 of the Sale of Goods Act, 1930, the property in the goods passes when the parties intend to pass. In this case, the contract provides that property in the goods does not pass till after delivery and successful testing and issuance of takeover certificate. Thus, High Court was right in concluding that the property in the goods had not passed at the time the goods entered the Municipal Limits.”

38. The issue before the court in this case was to infer transfer of ownership in the absence of any clause in the agreement. The court noted that as per section 19 54

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 of the Sale of Goods Act, 1930, the property in the goods passes when the parties intend to pass. Thus, it is the agreement between the parties which will determine when the ownership will pass.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 agreement for passing of risk before passing of title per se. as per section 19 of the Sale of Goods Act, it is primarily the intention of the parties when the title to the goods is to pass.” Thus, this judgment also endorses the settled law that ownership shall pass as per the intention of the parties. Thus, it is the intention of the agreement and in the present case in clause 31.1 and 31.2 of the agreement, it is clearly stipulated that ownership passes upon loading on to the mode of transport from the country of origin i.e., Japan. Therefore, there cannot be any dispute about the transfer of ownership having taken place in Japan.

indivisible, as no separate value for supply/sale of equipments has been recognized as a milestone.”

36. With regard to the setting up of a PE also, the PE of the respondent in the instant case, as in the case of Ishikawajma (supra), had no role to play in the execution of the offshore supply contract and as a matter of fact was set up for the sole purpose of enabling the performance of the onshore services contract.

37. The contract, however, in the instant case as in the case of Ishikawajma (supra) would be said to have been successfully performed only after the satisfactory commissioning and erection of the plant and equipments. Since the PE was not at all involved in the transaction of the offshore supply of equipment, the existence of the PE [which as held in Ishikawajma (supra) is for the purpose of assessment of income of a nonresident under the DTAA], would be irrelevant in the instant case. Clause (a) of Expln. 1 to s. 9(1 )(i) would not be attracted at all which provides that in the case of a business where all operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. In the instant case there was no operation qua the agreement for supply of equipment, which was carried but in India, and therefore, no income could be deemed to have accrued or arisen in India whether directly or indirectly or through any business connection in India.”

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 assessment year 2005-06. We find the Tribunal, vide order dated 14th September, 2017 at para 3.9 of the order has observed as under:- “3.9 We have heard the rival submissions and perused the order passed by the authorities below. We find that the first ground in the present appeal filed by the Revenue is whether the Liaison offices of the assessee in India constitutes its PE in India. We have carefully considered the facts and submissions, we find that in ITA. No.4645/Del/2005, in assessee’s own case the tribunal had considered the issue and held as under:- “We have considered the facts of the case and submissions made before us. In paragraph 24 of the order of assessment year 2001-02 the Hon’ble tribunal came to the conclusion that the income tax authorities erred in holding that the liason office had income liable to tax in India. The action of the lower authorities is not justified both on account of the subsisting order of Special Bench of The Tribunal in the case of the assessee for assessment years 1980-81 and 1981-81, as also the aforesaid discussion. In view thereof, it was also held, that the dispute regarding computation of income becomes of academic importance only and, therefore, the same need not be decided. Thus, the appeal of the assessee was allowed. Respectfully following that order, the appeal of the assessee for this year is allowed.” 3.10 The learned CIT-DR has fairly conceded that this issue is covered in favour of the assessee by the decision of the ITAT in earlier years whereby it has been held that liaison offices do not constitute PE liable to tax in India. Since the facts and the issue involved are same in the year under consideration, respectfully following the above judgments we hold that the Liaison offices of the assessee do not constitute PE liable to tax in India. Accordingly ground No. 1 is dismissed.”

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

No.4 is concerned, we find an identical issue had come up before the Tribunal in assessee’s own case in the immediately preceding assessment year. We find the Tribunal, after considering the totality of the facts of the case, has held that no income is liable to be attributed in India even if Mitsui & Co. Ltd., constituted a DAPE in India. The relevant observation of the Tribunal from para 4 of the order reads as under:- “4. The second ground is regarding finding of the learned CIT (Appeals) holding that no income is liable to be attributed in India even if MIPL is considered to be Dependent Agent PE in India. On this issue the learned CIT- DR though stated that though in view of the TPO order under Section 92CA (3) holding the transactions between the assessee and the MIPL at arm’s length, addition may not be sustainable, yet argued that MIPL be considered as Dependent Agent PE in India in terms of Article 5(7) of DTAA between India and Japan. It was contended by the learned CIT-DR on the basis of the allegation levied by the Assessing Officer in the assessment order that MIPL habitually secures order for the assessee in India and MIPL is economically dependent on the assessee as major revenue of MIPL is from the assessee company. Accordingly, it has to be examined whether MIPL can be considered to be a Dependent Agent of the assessee company. In this regard it may be relevant to refer to Article 5(7) of DTAA between India and Japan, which reads as under “

7. Notwithstanding the provisions of paragraphs 1 and 2, where a person—other than an agent of an independent status to whom paragraph 8 applies-is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State, if: (a) he has and habitually exercises in that Contracting State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 6 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph; (b) he has no such authority, but habitually maintains in the first- mentioned Contracting State a stock of goods or merchandise from ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned Contracting State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control as that enterprise.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 may be relevant to further mention that the expression ‘has’ shall mean a legal existence. Whereas ‘habitually secures orders’ shall mean a systematic conduct on the part of the agent. Thus it is not only a legal right to secure order but also it is to be found, as a matter of fact that agent has habitually secured order. 4.2 Further, in this case the TP study of MIPL was subject matter of examination by the TPO. The FAR (Function performed, Assets deployed and Risk assumed) analysis has been accepted by the TPO. These agreement on the basis of which Assessing Officer has levied the allegation were also before the TPO. Thus, there cannot be any allegation that MIPL has performed any function beyond what has been stated. Functional and economic analysis of the transactions entered into having been examined nothing further can be imputed. The services of MIPL to assessee company were support services similar to the activities of a Liaison offices. This fact gets also supported from the finding recorded by the Assessing Officer himself in the assessment order on page 26 whereby it has been stated by the Assessing Officer that MIPL is functioning in the same manner as the LOs of the assessee are functioning in India. It has already been held that LOs do not constitutes PE in India. Thus, the functioning of MIPL though a subsidiary and a company incorporated in India but its activities vis-a-vis assessee company were akin to liaison office. It does not have authority to conclude contract, it was not maintaining any stocks of goods and merchandise nor it was securing order for the assessee company. In view of the above facts we reject the contention of the learned CIT-DR that MIPL habitually secures order for the assessee company. And accordingly, none of the condition prescribed in Article 5(7) are fulfilled. 4.3 The second contention of the learned DR was that MIPL is economically dependent on assessee company as major revenue of MIPL is from assessee company. We are of the view that this per se cannot be ground to hold that MIPL is a Dependent Agent. For invoking this clause, first one of the three conditions needs to be fulfilled. As we have held hereinabove that MIPL does not get covered as PE under Article 5(7), it cannot be considered to be a Dependent Agent. The learned DR also made a reference to Conventions on Double Taxation by Klaus Vogel to support its contention that where a person works only for one principle such person is economically dependent on the principal. In these circumstances the agent though not legally but will be bound to obey his principal’s instructions and be regarded as being Dependent Agent. This contention of the learned CIT-DR again ignores the basic requirement i.e. fulfilling one of the three conditions. It is also important to note that the DTAA provide for treating a person as Dependent Agent. The DTAA has to be strictly interpreted. The DTAA having prescribed the conditions, no further conditions can be read. What learned CIT-DR is canvassing will mean adding new condition in the DTAA. Further, it may be relevant to note that as per Para 9 of this Article 5 in DTAA, it has been ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 specifically provided that if a company in the contracting state is controlled by a company in the other contracting state that itself shall not itself constitute either of company a permanent establishment of the other. Thus, the fact that MIPL is controlled by the assessee company shall not mean that MIPL is a PE of the assessee company. 4.4 Our view gets supported by the judgement of Hon’ble Delhi High Court in the case of Director of Income Tax And Others Versus M/s E Funds IT Solution And Others 364 ITR 256 Delhi f where the Hon’ble court has held as under “31. Paragraphs 4 and 5 of Article 5 relate to creation of agency PE in the second contracting country. Agency replaces fixed place with personal connection. Arvid K. Skaar in his work “Permanent Establishment” has opined that primacy of “location test” of the basic rule is consistent with the conceptual structure of the PE clause itself. An agency will constitute a PE only when a PE cannot be found according to those conditions in the basic rule which are altered or replaced by the agency clause. OECD and UN Model Treaties recognize agency PE. The principle being, that a foreign enterprise may choose to perform business activities itself or through a third person in the other States. An agent is a representative who acts on behalf of another with third persons. International taxation laws recognize and accept two distinct types of agency PE, dependent and independent. Every agent by very nature of principle of agency is to follow principaV’s instructions. But this principle is not squarely applicable to DTAAs, as third parties may not be strictly an agent under the domestic law. Further, the aforesaid dependency cannot be the distinguishing factor which determines whether the agency is dependent or an independent agency for the purpose of Article 5 paragraphs 4 and 5 respectively. A dependent agency is one which is bound to follow instructions and is personally dependent on the enterprise he represents. Such dependency must not be isolated or once in a while transaction but should be of comprehensive nature.

35. Transactions between a foreign enterprise and an independent agent, do not result in establishment of a permanent

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 establishment under paragraph 5 to Article 5 if the independent agent is acting in ordinary course of their business. The expression “ordinary course of their business” has reference to activity of the agent tested by reference to normal customs in the case in issue. It has reference to normal practice in the line of business in question. However as per paragraph 5 of Article 5, an agent is not considered to be an independent agent if his activities are wholly or mostly wholly on behalf of foreign enterprise and the transactions between the two are not made under arm”s length conditions. The twin conditions have to be satisfied to deny an agent character of an independent agent. In case the transactions between an agent and the foreign principal are under arm”s length conditions the second stipulation in paragraph 5 of Article 5 would not be satisfied, even if the said agent is devoted wholly or almost wholly to the foreign enterprise.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 the terms of the contract. If such a situation is found to exist, then perhaps it could be said that TVI constitutes a permanent establishment for TVM despite the clauses of the contract relied upon.”

5. The ground 2 raised in Revenue appeal is regarding attribution of the income if MIPL is taken as Dependent Agent PE. Though, this ground becomes academic in nature in view of our finding holding that MIPL is not Dependent Agent PE of the assessee company but since this issue forms part of the ground No. 2 in Revenue’s appeal the same is being decided on merit as well. 5.1 The Assessing Officer has made the addition holding that MIPL is a Dependent Agent PE and has computed 50 per cent of the profit in respect of the turnover in India. The learned CIT (Appeals) has deleted the addition holding that Transfer Pricing Officer has specifically stated in his order that Transfer Pricing documentation which contains the functional and economic analysis of comparable and of the assessee, has been examined. The learned CIT-DR was fair enough to point out that the Assessing Officer made the addition since at the time of passing of the assessment order he was not having benefit of the order passed under Section 92CA(3) by the TPO in the case of MIPL and the learned CIT (Appeals) has deleted the addition after taking into consideration the order passed by the TPO which was available to him by that time. 5.2 It is a fact on record that the TPO has carried out functional and economic analysis of the activities performed by MIPL towards the assessee company. No adverse inference has been drawn in respect of the same. All these facts were before the TPO. It is not the case of the Assessing Officer that something beyond has been done. The case of the Assessing Officer is with regard to the functions which were subject matter before the TPO. This issue is also covered by the judgment of the Hon’ble Supreme Court in the case of DIT International Taxation Vs. Morgan Stanley and Co. 292 ITR 416 (SC),

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 where the Hon’ble court has approved the ruling delivered by the authority for advance holding that once a Transfer Pricing analysis is undertaken, there is no further need to attribute profit to a PE. The relevant part of the judgment reads as under:- “ The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Under article 7(2) not all profits of MSCo would be taxable in India but only those which have economic nexus with P.E. in India. A foreign enterprise is liable to be taxed in India on so much of its business profit as is attributable to the P.E. in India. The quantum of taxable income is to be determined in accordance with the provisions of the Income-tax Act. All provisions of the Income-tax Act are applicable, including provisions relating to depreciation, investment losses, deductible expenses, carry-forward and set-off losses etc. However, deviations are made by the DTAA in cases of royalty, interest etc. Such deviations are also made under the Income-tax Act (for example: sections 44BB, 44BBA etc.). Under the impugned ruling delivered by the AAR, remuneration to MSAS was justified by a transfer pricing analysis and, therefore, no further income could be attributed to the P.E. (MSAS). In other words, the said ruling equates an arm's length analysis (ALA) with attribution of profits. It holds that once a transfer pricing analysis is undertaken; there is no further need to attribute profits to a P.E. The impugned ruling is correct in principle in so far as an associated enterprise, that also constitutes a P.E., has been remunerated on an arm's length basis taking into account all the risk-taking functions of the enterprise. In such cases nothing further would be left to be attributed to the P.E. The situation would be different if transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to the P.E. for those functions/risks that have not been considered. Therefore, in each case the data placed by the taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attribution of profits and that would depend on the functional and factual analysis to be undertaken in each case. Lastly, it may be added that taxing corp orates on the basis of the concept of economic nexus is an important feature of attributable profits (profits attributable to the P.E.). ” As regard the observations of the Hon’ble Supreme Court that the situation will be different if the Transfer Pricing analysis does not adequately reflect the functions performed and the risk assumed by the enterprise. In the present case as discussed hereinabove the Transfer Pricing analysis adequately reflect the functions performed and the risk assumed. In fact it is on the basis of the same documents and facts on which Transfer Pricing analysis has been carried out, the income

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 is being attributed to the assessee by adopting a different method of computation. 5.4 Our above view is supported by the judgment of the Hon’ble jurisdictional Delhi High Court in the case of Director of Income Tax Vs. BBC Worldwide Ltd. in of 2010, 703 and 705 of 2011 dated 30th September 2011, where the Hon’ble Court has held as under “5. After considering the respect arguments, we are of the opinion that no substantial question of law arises in the instant cases as we do not find any justification in interfering with the impugned order of the Tribunal. Following pertinent aspects which emboldened stand out and stare at the face of the Department and shut its case completely (i) The provisions of transfer pricing was introduced for Finance Act, 2002 from the Assessment Year 2002-03 and therefore, in respect of two appeal for the Assessment Years 2000-01 and 2001- 02, no such FAR Analysis was even required. (ii) For the Assessment Year 2002-03, FAR Analysis was prepared and submitted by the assessee's agent BWIPL. BWIPL had submitted that it had received commission @ 15% on the gross sale from the assessee for selling marketing advertisement and sponsorship and as per BWIPL, it was a reasonable commission paid on arm's length basis. Matter was referred to TPO under Section 92CA(3) of the Act, who clearly opined that the aforesaid commission paid to BWIPL was ALP. Once it is treated as ALP at the hands of recipient, we fail to understand how a different view can be taken in the case of assessee who had paid the same commission to its agent. Therefore, we fail to appreciate the contention of the Department that the FAR Analysis by the TPO in the case of BWIPL was not relevant. (iii) Moreover, in the assessee's own case for the Assessment Year 2002-03, transfer pricing reference was made to the TPO under Section 92CA (3) and TPO had opined that no adverse inference/addition could be drawn. Learned counsel for the assessee produced the order dated 31.12.2004 passed by the TPO, in this behalf, inter alia, stated as under :- " A reference under Section 92CA was received in the case of BWIPL from its assessing officer. All the above mentioned international transactions have been examined at length in the order under section 92CA (3) dated 31st March, 2004, subsequently rectified vide order under section 154 dated 30th November, 2004 in the case of BWIPL for the assessment year 2002-03. In that order, no adverse inference

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 was drawn in respect of the arm's length price of all the international transactions as declared by the assessee except the transaction for availing market services. The arm's length price for the international transaction for availing market support services was determined at Rs.10,90,52,410/- instead of an amount of Rs.7,44,30,694/- as declared by the assessee. However, since this adjustment would have the effect of reducing the income chargeable to tax or increase in the loss, as the case may be, in the case of assessee the provisions of section 92 shall not apply in this case i.e. the effect of the adjustment made in the arm's length price of the transaction availing marketing support services by the assessee shall be ignored while computing the income of the assessee. " (iv) Even if the next Assessment Year, i.e., 2003-04, the assessee had submitted the account's report in relation to its international transactions. For this year also, reference was made to TPO, which again passed the orders dated 07.3.2006, once again opining that no adverse inference could be drawn in respect of ALP. Following portion of the said order is worthwhile to quote:- " A reference under Section 92CA was received in the case of BWIPL from its assessing officer. All the above mentioned international transactions have been examined at length in the order under section 92CA(3) dated 09.01.2006. In that order Arm's Length Price of international transaction mentioned above has been revised upward but there is no reciprocal effect in the case of assessee in view of provisions of sub-section 3 of Section 92 of Income Tax Act. Hence no adverse inference is drawn in respect of arm's length price of the above mentioned transaction in the hands of assessee company. " (v) We do not find any merit in the plea of the Department that country-wise accounts have not been made by the assessee and therefore, the deemed rate of taxation at 10% of advertisement revenue as per Circular No. 742 dated 02.5.1996 issued by the CBDT, should be applied to tax the revenue of the Permanent Establishment of the assessee. In this regard, we note that in the course of assessment proceedings, the assessee had prepared its country accounts for India, allocating total revenues and expenses of the assessee to India activity and filed the same before the AO. This fact has been recorded by the Tribunal in its order in Assessment Year 2000-01. In the light of this observation, Circular No. 742 is not applicable in the instant appeal.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 Supreme Court decision in Morgan Stanley & Co. (supra) can raise any substantial questions of law.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

[2008] 307 ITR 265would conclude this aspect. Therefore, we are of the opinion that the Tribunal's conclusions and which are consistent with the factual materials and the principles of law laid down above are neither perverse nor vitiated by any error of law apparent on the face of the record. ” 5.6 Further, this issue has again come up before the Hon'ble jurisdictional Delhi High Court in the case of Adobe Systems Incorporated Vs. Assistant Director of Income Tax and Anr. (WP) No. 2384/2013 dated 16th May 2016, where the Hon’ble Court has held as under:- “ 23. In view of the above, even if the subsidiary of a foreign company is considered as its PE, only such income as is attributable in terms of paragraphs 1 and 2 of Article 7 can be brought to tax. In the present case, there is no dispute that Adobe India - which according to the AO is the Assessee's PE - has been independently taxed on income from R&D services and such tax has been computed on the basis that its dealings with the Assessee are at arm's length (that is, at ALP). Therefore, even if Adobe India is considered to be the Assessee's PE, the entire income which could be brought in the net of tax in the hands of the Assessee has already been so taxed in the hands of Adobe India. There is no material that would even remotely suggest that the Assessee has undertaken any activity in India other than services which have already been subjected to ALP scrutiny/adjustment in the hands of Adobe India. Thus, in our view, even if the AO is correct in its assumption that Adobe India constituted the Assessee's PE in terms of Article 5(1), 5(2)(l) or 5(5) of the Indo-US DTAA, the facts in this case do not provide the Assessing Officer any reason to believe that any part of the Assessee's income had escaped assessment under the Act. ” 5.7 In view of our above analysis and the facts, we hold that the learned CIT (Appeals) was justified in holding that no income is liable to be attributable in India even if MIPL is taken as Dependent Agent PE of the assessee in India. Accordingly, ground No. 2 is dismissed.”

No.5 being general in nature, is dismissed. (by the assessee) (A.Y. 2007-08)

52. The grounds raised by the assessee are as under:- “1. That on the facts and in law the Commissioner of Income Tax (Appeals) erred in upholding that Mitsui India Private Limited (MIPL) constituted Dependent Agent Permanent Establishment (DAPE) of Mitsui & Co. Ltd. Japan as per Article 5(7) of the Double Taxation Avoidance Agreement between India and Japan.

2. That without prejudice to the finding that Mitsui India Pvt. Ltd. Constituted Dependent Agent Permanent Establishment the CIT(A) erred in holding that 20% of the gross trading profit was attributable to the operations and functions carried out in India through MIPL as DAPE. 2.1 That without prejudice, in any view of the matter, on facts the quantum of 20% of the gross trading profit as attributable to the operations and functions of MIPL as DAPE in India is high and excessive.

3. That the CIT(A) erred in not considering appellant’s contention in Ground No.3.1 to the effect that transaction between the appellant and MIPL being at arms length no further profit is attributable in view of Supreme Court judgement in DIT vs. Morgan Stanley & Co. Inc., 292 ITR 416(SC) and Mumbai High Court judgement in DIT vs. Set Satellite, 218 CTR 452 and rejecting it merely on the ground that Transfer Pricing Officer vide his order u/s 92CA(2) of the IT Act in case of MIPL has not accepted the transaction between the appellant and MIPL being at arms length, which order was not conclusive but subjudice before the Dispute Resolution Panel(DRP).

4. That on the facts and in law orders of AO / CIT(A) are bad in law and void ab- initio. The appellant prays for leave to add, alter and/or vary the ground(s) of appeal at any time during the pendency of the appeal or at the time of hearing”

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

(by the Revenue) (A.Y. 2007-08) 56. The grounds raised by the Revenue are as under:-

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 “1. On the facts and in the circumstances of the case the Ld CIT(A) has erred in holding that the off shore supplies in respect of ‘Teesta’ and ‘Purilia’ projects cannot be taxed @10% u/s 44BBB of the IT Act.

2. On the facts and in the circumstances of the case the Ld CIT(A) has erred in holding that the profits than can be attributed to the PE of the assessee should be 20% and not 50% as determined by the AO.

3. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in holding that the assessee’s income from ‘Teesta’ and ‘Purilia’ projects should be taxed on cash basis instead of Mercantile basis.

4. The appellant craves to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal.”

No.1 and 2 in filed by the Revenue for A.Y. 2006-

07. We have already decided the issue and the grounds raised by the Revenue have been dismissed. Following similar reasonings, this ground of the Revenue is dismissed.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 Agent Permanent Establishment and no income is attributable. We, therefore, dismiss the ground raised by the Revenue on this issue.

61. After hearing both the sides, we find the AO applied section 44BBB in respect of onshore supplies and onshore services in computing the income on the basis of amount accrued. We find the ld.CIT(A) at para 5.3 of the order has discussed the issue and held that as per the provisions of section 44BBB, it is a presumptive module. The relevant observation of the CIT(A) is at para 5.3 of his order. The ld. DR could not controvert the findings given by the ld.CIT(A). In our opinion, the ld.CIT(A) was fully justified in holding that while computing the presumptive income books of account are not required to be maintained. Therefore, what is received by the assessee during the year a fixed percentage of such receipt is deemed to be the income. In absence of any distinguishable features brought before us by the ld. DR in the findings given by the ld.CIT(A), we do not find any infirmity in the same. Accordingly, the same is upheld and the ground raised

by the Revenue is dismissed. (by the assessee) (A.Y. 2008-09)

62. The grounds raised by the assessee are as under:-

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012 “1. That on the facts and in law the Commissioner of Income Tax (Appeals) erred in upholding that Mitsui India Private Limited (MIPL) constituted Dependent Agent Permanent Establishment (DAPE) of Mitsui & Co. Ltd. Japan as per Article 5(7) of the Double Taxation Avoidance Agreement between India and Japan.

3. That the CIT(A) erred in not considering appellant’s contention in Ground No.3.1 to the effect that transaction between the appellant and MIPL being at arms length no further profit is attributable in view of Supreme Court judgement in DIT vs. Morgan Stanley & Co. Inc., 292 ITR 416(SC) and Mumbai High Court judgement in DIT vs. Set Satellite, 218 CTR 452.

4. That on the facts and in law orders of AO / CIT(A) are bad in law and void ab- initio. The appellant prays for leave to add, alter and/or vary the ground(s) of appeal at any time during the pendency of the appeal or at the time of hearing”

64. So far as the grounds No.2 and 2.1 raised by the assessee are concerned, after hearing both the sides, we find these grounds are identical to grounds No.2 and 2.1 in filed by the assessee. We have already decided the issue and the grounds raised by the assessee have been allowed. Following similar reasonings, these grounds of the assessee are also allowed.

ITA Nos.2801,4329 & 4367/Del/2011 & 795/Del/2012

No.3 raised by the assessee is concerned, after hearing both the sides, we find this ground is identical to ground No.3 in filed by the assessee. We have already decided the issue and the ground raised by the assessee has been allowed. Following similar reasonings, this ground of the assessee is also allowed. (By the Revenue) (for A.Y. 2008-09)

66. The grounds raised by the Revenue are as under:- “1. On the facts and in the circumstances of the case the Ld CIT(A) has erred in holding that the off shore supplies in respect of ‘Teesta’ and ‘Purilia’ projects cannot be taxed @10% u/s 44BB of the IT Act.

2. On the facts and in the circumstances of the case the Ld CIT(A) has erred in holding that the profits than can be attributed to the PE of the assessee should be 20% and not 50% as determined by the AO.

3. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in holding that the assessee’s income from ‘Teesta’ and ‘Purilia’ projects should be taxed on cash basis instead of Mercantile basis. 4.The appellant craves to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal.”