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Income Tax Appellate Tribunal, DELHI ‘D’ BENCH,
ORDER PER NAVEEN CHANDRA, ACCOUNTANT MEMBER:- This appeal by the assessee is preferred against the order dated 30.05.2016 framed under section 144C(3) r.w.s147/143(3)of the Income-tax Act, 1961 [hereinafter referred to as 'The Act'] pertaining to Assessment Year 2008-09.
The grievances of the assessee read as under: “1. That in the facts and circumstances of the case and in Law the LD Assessing Officer ("AO") under reference from the Dispute Resolution Panel-IV (CIT(A) grossly erred in determining an Income of Rs. 2,26,06,476/- while passing the final
2. That on the facts and circumstances of the case and in law, the LD, AO has erred in holding that the Appellant has a Permanent Establishment ("PE") in the form and DAPE inM/s. Rajalakshmi International Corporation (Proprietor Anand Mathur) 3. That on the facts and circumstances of the case & in law, the Ld AO/CIT(A) grossly erred in treating the services in relation to preparation of design as FTS without appreciating that the same is inextricably linked with the supply of equipment and cannot be termed as FTS in view of Article 12(5) of the DTAA.
Prepaid Taxes, Interest u/s 234A, 234B& 234C a) The Ld AO has applied interest under 234B& 234C without giving credit of the prepaid taxes and credit of tax deducted at source. b) That in the facts and circumstances of the case & in law, the Ld AO erred in levying interest u/s 234B of the Act.
5. General a) The above grounds of objections are independent and without prejudice to each other. b) The above grounds of appeals are without prejudice to each other. That the appellant craves leave to add, alter, amend or withdraw all or any objections herein or add any further grounds as may be considered necessary either before or during the hearing of these objections."
The representatives of both the sides were heard at length, case records carefully perused. Relevant documentary evidences brought on record in the form of Paper Book carefully perused.
4. The assessee has filed an application dated 06.06.2024 praying for condonation of delay on the ground of change in address and the assessee being an overseas company based out of USA.
There is a delay of 157 days. Findings the reasons for delay to be reasonable, we condone the delay.
Briefly stated, the facts of the case are that the appellant company is an entity incorporated in the United States of America and is engaged in manufacturing and selling of products and equipmentprimarily for the American Steel Industry. Products are generally used by steel companies to improve their iron desulfurization.During the year under consideration, the assessee earned Revenue from RashtriyaIspat Nigam Limited [RINL] and from Steel Authority of India Limited [SAIL]. The assessee company has undertaken the following two projects during the year: (i) Project with SAIL for design and engineering supply of drawings and equipment’s, supply of plant and equipment’s including commissioning of spares, foreign supervision, training of personnel in India, ocean freight, etc. (ii) Project with RINL for technology design, engineering of hot metal desulphurization plant SMS-2 complete in all respects for imported portion on discrete turnkey basis.
The assessee had not filed any return of income for the year under consideration. The AO observed that the assessee had three Fees for Technical Services as follows: i) Supplies of equipment & commissioning of spares - $15,02,160 ii) Drawing & design - $4,91,215.56 iii) Training charges- $18,000 Total- $5,09,215.56 8. As the assessee had not filed any return, the AO issued notice u/s 148 dated in response to which the assessee filed NIL return of income stating that no part of its income from engineering supply is taxable in India. The AO however, determined the profit @3.5% from supply of equipment in India to SAIL during the year, amounting to Rs.21,15,642/-[ 3.5% of Rs. 6,04,46,918/- (USD 15,02,160 * Rs 40.24)] as taxable business income.
The AO also taxed the revenue earned from Drawing and Design and Training charges, received from SAIL, amounting to 2,04,90,834/- [ $5,09,215.56 * 40.24] @ 10% on account of services as FTS u/s 9(1)(vii) r.w.s. 115A.
The assessee has denied having a PE in India. The Assessing Officer however, from a study of the Service Agreement between the assessee and Rajalaxmi International Corporation [RIC] dated 01.02.2005, has held that Rajalaxmi International Corporation [RIC], a proprietorship of Anand Mathur, in India, had acted as dependent SAIL and RINL. The crux of the dispute between the Revenue and the assessee therefore is, whether RIC is a dependent agent permanent establishment in order to tax the business income of the assessee in India and that the receipts for design and drawing is taxable as FTS u/s 9(1)(vii) of the Act.
11. The assessee agitated by the additions, approached the CIT(A), who confirmed the action of AO except he deleted the Training Service fee as FTS and directed to include the same as part of sales proceeds of equipment as it is integrated to the sale of equipment.
12. Aggrieved the assessee is before us.
13. The ld AR of the assessee at the outset stated that the additions made by the AO flows from the assessment made for the AY 2011-12 which has been decided in favour of the assessee by the ITAT in ITA no 2343/Del/2015. The ld AR also relied on the order of CIT(A) for AY 2007-08 and 2013-14 as also the decision of hon’ble Delhi Court in Ericsson A.B. in ITA 204/2007 and Supreme Court decision in the case of Ishikawajma-Harima.
14. It is the say of the ld AR that the contracts with SAIL and RINL were awarded to the assessee on the basis of competitive bidding of the PSUs. The ld AR further emphasized that Anand Mathur of RIC is a RIC is not wholly and exclusively working for the assessee.
15. Per contra, the ld DR stated that as per the contract between the assessee and the RIC, the non-compete and the non-solicitation clause shows that the assessee has control over its agent RIC. The ld DR submitted that wholly and exclusively working for the assessee is relevant in the later year but not in the instant year.
We have heard the rival submissions and have carefully perused the materials on record. The whole controversy revolves around whether RIC is DAPE of the assessee so as to tax the assessee business income in india. This controversy was resolved by the coordinate bench of ITAT, Delhi benches in AY 2011-12 in & 1644/Del/2015 vide order dated 21.02.2022. We find that the ITAT has given a clear finding that the RIC is not a DAPE. It held as follows: “10. A perusal of the assessment order shows that, after extracting the responsibilities from the agreement between the assessee and RIC, the Assessing Officer, referring to Article 5 of the India-USA DTAA, came to the conclusion that RIC is an agent of the assessee. Referring to the agreement, the Assessing Officer was of the opinion that : (i) RIC had exclusive rights to represent the company in connection with the sale of the products of the company for a commission. Sale to the customer pursuant to a contractual commitment binding on such customer which is obtained by the Representative during the term of this agreement.
(ii) The assessee exercises substantial degree of control over RIC; (iii) RIC has habitually exercised authority to conclude contracts in the name of the assessee with the clientsand finally concluded by treating RIC as DAPE in terms of Article 5(4)(i) of the DTAA and referring to the decision of the Hon'ble Delhi High Court in the case of Rolls Royce Vs DDIT, the Assessing Officer attributed Rs. 21,15,642/- to the income of the assessee.
Further, following the directions of the DRP, the Assessing Officer treated the amount received from RINL and SAIl as taxable as FTS u/s 9(1)(vii) of the Act.
We have given thoughtful consideration to the orders of the authorities below. The whole controversy revolves around whether RIC is DAPE. It would be pertinent to refer to the relevant article of the India – USA DTAA, which is Article 5 and the same reads as under: “5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arms length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph.”
A perusal of the aforesaid Article shows that a person shall not be deemed to have a PE if it carries on business through a broker, general commission agent, or any other agent of an independent status, if such personis acting in the ordinary course of his business.
We find from a perusal of page 54 of the paper book which shows the list of contracts entered into by RIC which is as under:
S.No Name of the Party & Address Date of Contract Inland Refractories Co. 23/03/2009 1 38600 Chester Road, Avon, Ohio 44011- TATA Steel UK Consulting Limited 30 21/04/2011 2 Millbank, London, SW1P 4WY, UK 3 Schenck Process India Limited 03/02/2012 Plot Nos. 67-82, Tupudana Industrial Area (New), Hatia 4 Barnes Group Inc. 19/07/2013 10367 Brecksville Road, Brecksville, OH 5 McKeown International Inc. 15/01/2014 1106, South Mays, Suite 100, Round Rock, TX 78664, USA 6 Technosulphur Sistema De Tratamento De 01/02/2014 MetaisLiquidos S. A Rua 1° de Junho, 2,000, Bairro Vale Das
It can be seen that RIC is also engaged with other persons. Therefore, it can be safely concluded that RIC was not completely dependent on the assessee for its finances.On the contrary, it was justwas just engaged in its individual capacity vide Sales and Representative Agreement to assist the company in supply of the services/products to customers, in performing the final performance tests and in final settlement of thecompanies contractual obligations under contract, if required by the company. It would be apt to refer to the part of the contract which reads as under: “Representative shall at all-time act as an independent contractor and the Company shall not exercise control over the activities and operations of Representative. Additionally, nothing in this agreement shall be construed or applied to create relationship of partners, agency, and joint ventures or of employer and employee between the Company and Representative. As an independent contractor, it is understood and agreed that the company has no obligation to Representative under federal, state or local laws regarding employee liability and that the total commitment and liability of the company in regard to this Agreement is the payment of the Commission as defined under Schedule A. Neither party is authorized to make any commitment or representation, express or implied, on the other parties behalf unless authorized to do so in writing by such other party.”
16. A perusal of the entire contract with RIC shows that RIC is an independent consultant having no rights to conclude contract on behalf of the assessee so as to construe as a permanent establishment in India. Since, in its independent professional capacity it provides similar services to other clients as mentioned elsewhere.
17. Further probe of facts show that one Shri Anand Mathur runsa consultancy business in the name and style of M/s Rajlaxmi International Corporation and the assessee seeks his service to represent it in India for its project in India. The assessee executes projectsi.e supply, erection and commission of desulphurization plant on turnkey basis through international competitive bidding process.
The role of the RIC Shri Anand Mathur, representative, was by and large to find a project partner for the assessee to undertake the supply and erection of indigenous components. Besides, RIC is engaged for the liasoningservice of the project on behalf of the assessee who neither intended nor empowered to conclude a project on behalf of the assessee. 19. On careful appreciation of facts, we are of the considered view that RIC is an independent consultant to provide certain liasoning service. In fact, the project is executed jointly by the assessee and its consortium partner in India M/s Beekay Engineering Corporation. The two contracts are as under:
S.No Description Prices (Currency) ESM, USA (USD) BEEKAY (INR) 1 Design & Engineering a) Imported (FOB) 694,494 (Refer Table - 1) b) Indigenous (At - 32,00,000 2 site) (Refer fable - Supply of Plant & Equipment a) Imported (FOB) 1,988,580 - (Refer '['able - 3) b) Indigenous (At - 16,80,00,000 site) (Refer fable - 3 Supply of Refractories (At a) Imported (FOB) - (Refer 'fable - 5) b) Indigenous (At Inch in 2b site) (Refer fable - 4 Supply of Commissioning Spares a) Imported (FOB) 14,300 “ (Refer 'fable - 7) b) Indigenous (At - site) (Refer Table - Inch in 2b • 5 Civil Engineering 6,04,67,000 Work including Supply of Fabricated - 3.00,00.000 6 Building Steel Structures at site including Sheeting, 7 Erection of Building 30,00,000 Steel Structures including Sheeting, 8 a) Erection of Incl. in 9 Refractories b) Works Contract Inch in 9 Tax on Erection of Refractories (Refer 9 Storage, Handling, 1,50,00,000 Erection, Commissioning, and P. G. tests of Plant 10 Eoreign Supervision 72,000 Charges in India during Erection, Start-up, 11 Training Charges 24,000 (Refer Table - 13) 12 Ocean Freight, 38,150 22,45,000 Customs clearance (excluding Customs duty), Port Clearance & Inland 13 Comprehensive - 32,00,000 Marine cum Erection 14 Total Contract price 2,831,524 28,51,12,000 (1 to r 13) 15 CENVAI Credit - 2,64,83,234 Contract Price (Net 2,831,524 25,86,28,766 of CENVAT)
Applying an exchange rate of 44.30 per USD whereas the value of supply by ESM is Rs. 12.54 Crores, the value of supply, services and erection done by the consortium partner Beekay Engineering Corporation is Rs. 28.51 Crore accounting for 69% of S. Description Prices (Currency) Eoreign (USD) Indian (Rs) 1 Design & Engineering a) Imported (CIF) (Refer 592,826 - Appendix - 15-1) b) Indigenous (Refer Appendix - 1,500,000 - 15 - 2 Supply of Plant & Equipment a) Imported (CIF) (Refer 1082135 Appendix - 15-3) b) Indigenous (FOR site) 251640000 (Refer Appendix - 15-4) 3 Supply of Refractories (At NA - a) Imported (CIF) (Refer Included Appendix - 15-5) b) Indigenous (FOR site) (Refer Appendix - 15 - 6) 4(a) Supply of Commissioning a) Imported (CIF) (Refer 14300 - Appendix - 15 - 7a) b) Indigenous (FOR site) - Included (Refer Appendix - 15 - 8a) 4(b) Supply of Insurance Spares i)Imported (CIF) (Refer NA - Appendix- 15-7b) ii)Indigenous (FOR site) - NA (Refer Appendix-15-8b) • 5 Civil Engineering Work " NA including Supplies (Refer 6Supply of Fabricated Building NA Steel Structures at site including Sheeting, Glazing and Shop 7 Erection of Building Steel NA Structures including Sheeting, Glazing and Final Painting 8 Storage, Handling, Errection, 15,000,000 Commissioning and P.G(Refer 9 a) Erection of Refractories NA Included (Refer Refer Appendix -15-1 10 Foreign Supervision Charges in 72,000 India during Erection, Start up, Commission and PG Tests 11 Training Charges(Refer 24,000 Appendix - 15-13) 12 Comprehensive Insurance for 2,000,000 Storage, Erection, Testing &Commisioning and till PRAC is 13 Custom Clearing and NA 500,000 Forwarding Operation at Chennai/ Vishakhapatnam Port, Inland Transportation for all the imported items including 14 Total Contracts Priee(l to 13) 1,785,261 270640000 15 CENVAT credit (refer clause 23.13 of GCC) 15.1 Excise Duty including education 33,700,000 15.2 Counter veiling Duty (CVD) Nil Nil including Education cess Structures at site including 15. Input Tax Credit(ITC) on Nil Nil 3 APVAT 16 Contract Price (Net of 1,785,261 236,940,000 ITC)
Applying an exchange rate of 44.30/USD whereas the value of supply by / ESM is Rs. 7.78 Crore (USD 17,56,261 X 44.30), the Beekay Engineering Corporation is Rs. 27.06 Crore accounting for 78% of the Contract value.”
A perusal of the above two contracts shows that in the case of RINL, consortium partner M/s Beekay Engineering Corporation is 78% of the contract value and in the case of the contract with SAIL [Bhilai Steel Plant], the value of supply services and erection done by the consortium partner is 69%.
Considering the facts of the case in totality and in appreciation of the agreement with RIC, we are of the considered opinion that RIC does not constitute DAPE of the assessee under the relevant article of the India – USA DTAA.
We are also of the considered view that the consortium partner M/s Beekay Engineering Corporation has done its work by way of a separate contract and, therefore, the same cannot be held as installation PE of the assessee. There is no dispute that the assessee has supplied only engineering design, that too, from abroad and consideration in view thereof has also been received from outside India and since we have held that RIC is not DAPE within the meaning of Article 5 of the India–USA DTAA, there is no question of any attribution to the assessee. In light of the afore-mentioned discussion, the appeal of the assessee is allowed and that of the Revenue is dismissed”.
We find that the ITAT has decided the issue of whether RIC is DAPE in terms of contract dated 01.02.2005 in favour of the assessee. We find that for the instant year, the same contract with RIC exist, hence the facts as available in AY 2011-12 remains the same in AY 2008-09. Respectfully following the decision of the coordinate bench of ITAT as above, we are of the considered view that RIC is not DAPE within the meaning of Article 5 of the USA-India DTAA and hence no business income can be attributed to the assessee for taxation in India. The grounds of appeal
no 1 and 2 are allowed.
18. We also find that there is no dispute that the Drawing and design has been supplied from outside India and the payment for the same has been received outside India. We find force in assessee’s argument that supply of Drawings and Designs are an integral part of Imports and are highly integrated to the supply of the Plant, Machinery and equipment. Without the Drawings, the other supplies are of no worth. We are of considered view therefore that being a component of supply of Plant and Machinery and being an accrual overseas, the receipts on account of Drawing and designs formed part of business income within the purview of Article 7 of the USA-India DTAA and the same can not be taxed separately under Article 12 of the USA-India DTAA. Since it has been decided that the assessee doesn’t have a DAPE in India nor an installation PE in India, the receipts on account of Drawing and Design can notbe taxed as Income in India nor the same be attributed to the assessee as FTS u/ 9(1)(vii) of the Income Tax Act. Ground no 3 is allowed.
19. We also find the CIT(A) in AY 2007-08 and AY 2013-14 has deleted the additions made by the AO and allowed the appeal of the assessee on identical issues following the decision of ITAT for the AY 2011-12. 20. Grounds regarding Prepaid Taxes, Interest u/s 234A, 234B & 234C are consequential in nature. 21. In the result, the appeal of the assessee in allowed. The order is pronounced in the open court on 25.02.2025.