GE HYDRO FRANCE,DELHI vs. DCIT, CIRCLE INT.TAX. 1(3)(1), NEW DELHI

5. That the assessing officer erred on facts in recording that the aforesaid receipts arose from offshore supplies to THDC and National Hydroelectric Power Corporation Ltd ("NHPC"), whereas, the said receipts only pertained to THDC, as also recorded by the DRP in order dated 28.03.2023.

6. That the DRP/ assessing officer erred on facts and in law in alleging that the Appellant was awarded single composite contract on turnkey basis by THDC, which was artificially split into five separate contracts to avoid payment of legitimate taxes in India.

7. That the DRP/ assessing officer erred on facts and in law in arbitrarily holding that the Appellant had business connection in India during the subject assessment year.

8. That the DRP/ assessing officer erred on facts and in law in arbitrarily holding that there exists Dependent Agent Permanent Establishment ("PE") of the Appellant in India.

9. That the DRP/ assessing officer erred on facts and in law in arbitrarily holding that there exists Fixed Place PE of the Appellant in India.

10. That the DRP/ assessing officer erred on facts and in law in arbitrarily holding that the Appellant has Construction PE in India.

the panel upholds the decision of the AO and the objections raised by the assessee in ground number 3 are rejected" 4.2.4 Since, there is no change in the factual matrix, the panel finds no ground to interfere with the conclusion of the AO as regards taxability of receipts from offshore sale of equipments. 4.2.5 As regards the attribution of income from offshore supply of equipments, the AO has observed that both offshore as well as onshore component of single composite project have to be taken into account in determining profit attributable to the PE as leaving one part would deviate from the arm's length profit. It is further observed that the assessee has admittedly maintained books of accounts for its supervisory PR in India, however income from offshore sales of equipments have not been included in the sale. The AO has further invoked provision of section 44888 to tax the profits from offshore supplies equipment 10% of total amount projected to be receive by the assessee during the relevant financial year and such profits are charged to tax @40% plus surcharge. The approach adopted by the Assessing Officer for attribution of profits, the panel following its decision in the AY 2019-20, finds no ground to interfere with the conclusion of the in this regard. Accordingly, the approach adopted by the AO for profit attribution to PE is upheld.”

5.2 The directions of the Ld. DRP for AY 2018-19 and 2019-20 on this issue were challenged by the assessee before the Tribunal and the Co-ordinate Bench vide its order dated 15.03.2024 in & 2086/Del/2022, cited supra, decided the matter in favour of the assessee. The relevant extracts of the said order are reproduced as under: “5. The assessee is a foreign company incorporated in France and tax resident of France. The assessee is a hydro power equipment supplier. During the year under consideration, the assessee earned following income from various Indian customers: S. Custome Nature of Amount Whether r receipt received in AY offered to N 2018-19 (in tax in ITR o. Rs.) 1. THDC Offshore 38,46,36,867 Not offered India supply of to tax Ltd. goods in (“THDC”) relation to ongoing contract 2. National Offshore 3,10,31,524 Offered to Hydroele activity by ctric Project tax Power Office Corpn. relating to Ltd. contract (“NHPC”) with NHPC 3. CE Income 96,45,476 Offered to Power from Fees tax India for Ltd. Technical Service TOTAL 42,53,13,867

6. The assessee filed its original return of income for the AY 2018-19 on 30.11.2018 reporting total income of Rs. 1,19,97,750/-. The ld. AO passed draft assessment order dated 30.09.2021 under section 143(3) r.w.s. 144C of the Act for AY 2018-19, wherein following additions were proposed to be made to the returned income:- S. No. Particulars 1. Income from THDC 38,46,36,867 2. Income from onshore activity 3,10,31,524 from NHPC 3. Income from fees for technical 96,45,476 services from GEPIL 4. Express for duty drawback 3,20,01,335 claim written off Total 45,73,15,202

7. The assessee thereafter filed objections against the aforesaid draft assessment order before the Learned Dispute Resolution Panel (“ld. DRP”), & 2086/Del/2022 GE Hydro France Page | 5 which were dismissed. Pursuant to the directions issued by the ld. DRP under section 144C(5) of the Act, the ld. AO passed final assessment order dated 29.07.2022 under section 143(3) r.w.s. 144C(13) of the Act, assessing the total income of the assessee at Rs.46,93,12,952/-.

Contract Particulars Contractor No. 1. Planning, Design and Hindustan Engineering of 4x250 MW Tehri Construction Pumped Storage Plant Company Ltd. and Alstom Hydro France 2. Civil Works of 4 x 250 MW Hindustan Tehri Pumped Storage Plant Construction Company Ltd.

Storage Plant 9.2. As is evident from the above, under the THDC Agreement, the assessee is executing Contract No.3, i.e., supply of electro- mechanical plant & machinery and hydro-mechanical plant & machinery (Offshore Component). The said Contract No.3 is hereinafter referred to as "THDC Contract No.3 for Offshore Supply". As per the said THDC Contract No.3 for Offshore Supply read with Particular Conditions of Contract, the transfer of ownership, for the plants and & 2086/Del/2022 GE Hydro France Page | 7 equipment (including spares) supplied from foreign country, was done on "FOB" basis. The relevant clause is reproduced hereunder:- "Sub-Clause 7.7 Ownership of Plant and Material "The Ownership of imported material will be transfer on "FOB" basis. The ownership of indigenous material will transfer on "Ex. Work" basis" 9.3. As per the THDC Overall Agreement, the consortium members are jointly and severally responsible and liable to THDC. Separate roles and responsibilities of consortium members emanate under the aforesaid THDC Overall Agreement, which are separate and independent of each other, and separate consideration was agreed between the parties for each independent scope of work defined in the 5 different contracts entered into between THDC and the consortium formed by the assessee. For the work relating to offshore supply of plant and equipment, the assessee was to receive consideration in foreign currency, as is evident from perusal of Clause 1 of THDC Contract No.3 for Offshore Supply.

9.4. The ld. AO observed that THDC contracts executed by the Consortium formed by the assessee were single composite contracts awarded on turnkey basis which were deliberately split into 5 contracts by the parties for tax purposes. Firstly, in terms of the THDC Overall Agreement, the consortium of the assessee and THDC agreed that the Tehri Project shall be executed through separate five contracts, as tabulated supra. X X X 9.5. Based on the Overall Agreement with THDC, it was submitted that Joint and Several responsibility of the Consortium is provided and according the ld. AO alleging that assessee bears all the responsibilities and liabilities for execution of the contracts under THDC Overall Agreement has no basis. Rather assessee is jointly and severally liable along with the other consortium members under all the Agreements. It was submitted that assessee acted as a leader of the consortium for the purposes of ensuring coordination of the inter-related tasks between the members of the consortium undertaking the project but did not assume responsibility and liability (other than to THDC) for work to be performed by the independent contractors being consortium members, responsible for undertaking onshore work under separate and independent contracts with THDC. We find that the Hon‟ble Jurisdictional High Court in the case of Linde AG, Linde Engineering Division vs DDIT reported in 365 ITR 1 (Del) had held that that the fact that contractual obligations of one of the consortium members were not limited merely supplying equipment, but were for performance of the entire contract, would not necessarily imply that entire income relatable to the contract could be deemed to accrue or arise in India; only that portion of income which is reasonably attributable to operations carried on in India would fall within the tax net in India. The Hon'ble Delhi High Court further held that since the consortium arrangement was for limited purpose of presenting a common face and complying with conditions laid down by the employee therein, with no intention to form an Association of Persons (AOP), work to be performed by both members was separate, definite and divisible, no member had any role to play with respect to scope of work allocated to other member, payments to be made for separate items of work were specified in the respective contract and consideration was to be paid directly to the concerned members in accordance with separate invoices raised by them, the members neither shared costs nor risks and also managed their own deliverables, it could not be said that the members formed an AOP for being assessed to tax as such. Thereafter, CBDT issued Circular No.7/2016 with a view to avoiding tax disputes and providing consistency in approach while handling cases where consortium is formed to implement large infrastructure projects, particularly EPC contracts and Turnkey & 2086/Del/2022 GE Hydro France Page | 14 contracts, wherein certain attributes were enumerated for deciding whether a consortium arrangement would be treated as AOP or not. In view of the said Circular, Special Leave Petition (SLP) filed by the Department against the aforesaid decision in the case of Linde AG, was dismissed by the Hon‟ble Supreme Court which is reported in 242 Taxman 371 (SC). 9.6. Further we find that the Hon‟ble Supreme Court in the case of IshikawajmaHarima Heavy Industries Ltd vs DIT reported in 288 ITR 408 (SC), it was observed that even in the case of a composite turnkey contract, the taxability of the different components has to be individually seen. The pertinent observations of the Hon‟ble Supreme Court in this regard are as under: “17.............. 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 segment are also different.

9.7. The ld. AO had observed that Base Erosion and Profit Shifting (BEPS) Action Plan 7 addresses and prohibits splitting up of contracts by parties for artificial avoidance of PE status, which has now been included in Article 13 - Artificial Avoidance of Permanent Establishment Status through the Specific Activity Exemptions of the Multilateral Instrument ("MLI"), and therefore, the arrangement of the assessee to split the otherwise single contract into various contracts with a view to avoid PE status is not permissible. In this regard, we find that the application of BEPS Action Plan 7 read with Article 13 Multilateral Instrument is an issue which was in the air and was in nascent stage as the OECD members had not come into consensus for the same so as to make it applicable for the years under consideration. Accordingly, the same cannot be applied for the AY under consideration. 9.8. We find that the ld. AO had made the addition towards offshore supplies by observing that there is a business connection of the assessee in India u/s 9(1)(i) of the Act. We are unable to comprehend ourselves to accept to this proposition in as much as title transfer in respect of equipment supplied by the assessee to THDC on an offshore basis happened outside India. Payments are made in foreign currency and that too are received by the assessee outside India. The law is very well settled by the decision of Hon‟ble Supreme Court in the case of Ishikawajma- Harima Heavy Industries Ltd vs DIT reported in 288 ITR 408 (SC) and Hon‟ble Jurisdictional High Court and other Hon‟ble High Courts that if the sale is concluded outside India and the property in goods is passed outside India; the payment of consideration is received outside India; no activity in relation to such offshore supply is conducted in India, then income from such offshore supplies cannot be made liable to tax in India as assessee does not constitute „Business Connection‟ in India. It is also pertinent to note that under the Contract No.3 which is in dispute before us, Offshore Supply under THDC Contract, supply of plant and equipment was to take place on "FOB" basis. At the cost of reiteration, we hold that title to and property in the goods shipped by the assessee stood transferred at the port of shipment and the event of sale & 2086/Del/2022 GE Hydro France Page | 16 clearly took place outside the territory of India. In these facts, the income arising out of such sale cannot be said to have accrued or arisen in India. The accrual of income derived from offshore supplies cannot be attributed to any operation in India and therefore, no income can be deemed to accrue or arise in India. 9.9. The ld. AO had further alleged that there is a Fixed Place PE of the assessee in India. The assessee had stated that it does not have PE in India apart from the project office which is set up for rendering services in connection with the contract with NHPC project and the income earned by such Project Office is already offered to tax by the assessee in the return filed in India. We find that the ld. AO had concluded that there exists a Fixed Place PE of the assessee in India without bringing on record any evidence to demonstrate that the assessee has a fixed place available at its disposal in India which was used for purposes of undertaking core business activities of the assessee in India. It was submitted that even prima facie, the „disposal test‟ is not satisfied in the instant case i.e. the fixed place must be available to the assessee for its use without any hindrance and further that such fixed place must be used for carrying on the core business of the assessee in India. Infact we find that the ld. AO had merely reproduced the observations made in the assessment order of some other assessee with respect to PGCIL contract without appreciating the fact that the receipts were earned by the assessee herein from THDC and NHPC project during the year under consideration. There was no contract undertaken by the assessee with PGCIL and no amounts were received from PGCIL by the assessee. This clearly proves the complete non-application of mind on the part of the ld. AO. Either way, it is trite law that onus is on the revenue to establish that there exists a PE of the foreign entity in India, which has not been discharged by the revenue in the instant case. Reliance in this regard is placed on the decision of Hon‟ble Supreme Court in the case of CIT vs eFunds IT Solution reported in 399 ITR 34 (SC) ; DIT vs Samsung Heavy Industries Co Ltd reported in 117 taxmann.com 870 (SC) ; decision of Hon‟ble Jurisdictional High Court in the case of DIT vs Mitsui & Co. Ltd reported in 399 ITR 505 (Del); & 2086/Del/2022 GE Hydro France Page | 17 decision of Hon‟ble Jurisdictional High Court in the case of National Petroleum Construction Co vs DCIT reported in 421 ITR 24 (Del). Hence we have no hesitation to hold that the assessee does not have a Fixed Place PE in India and accordingly no income earned by the assessee from operations and activities undertaken outside India could be brought to tax in India in terms of Article 7 of India- France DTAA. 9.10. The ld. AO had further alleged that there is a Construction PE of the assessee in India under the provisions of Article 5(2) of India –France DTAA. It was submitted that this conclusion has been reached by the ld. AO without discharging the primary onus of bringing on record any document, evidence or information based on which such conclusion has been reached by him. As stated earlier, in the instant case before us, in respect of offshore supplies made by the assessee, the title to the goods as per the contract had been transferred outside India, sales concluded outside India and no part of the profit with respect to the same could be attributed to the alleged PE in India. It was specifically submitted by the ld.AR before us that the ld. AO had stated in his order that this is a legacy issue and it is already covered in favour of the revenue by the decision of the Delhi Tribunal in GE Group company cases for Asst Year 2001-02. But it is pertinent to note that assessee herein became part of GE group only in the year 2015 which is also admitted by the ld. AO in his order. Hence all the findings of Delhi Tribunal in GE Group company cases relied upon by the ld. AO cannot be made applicable to the facts of the assessee herein. It is also relevant to understand that Contract No. 03 between THDC and assessee is in dispute before us with regard to offshore supply. Admittedly THDC is a Government of India Undertaking, which had split the contracts. Splitting of contracts is not done at the behest of the assessee. The case laws relied upon hereinabove for non-existence of Fixed Place PE in India would apply for nonexistence of Construction PE also. Hence we have no hesitation to hold that the assessee does not have a Construction PE in India and accordingly no income & 2086/Del/2022 GE Hydro France Page | 18 earned by the assessee from operations and activities undertaken outside India could be brought to tax in India in terms of Article 5(2) of India-France DTAA.

9.11. We hold that there cannot be attribution of Business Connection u/s 9(1)(i) of the Act, alleged PE (both Fixed Place and Construction PE) and applicability of provisions of section 44BBB of the Act in respect of receipts for offshore supplies in the instant case. We find that the ld. AO had computed the taxability of the assessee in India by applying the provisions of section 44BBB of the Act which provide that 10% of the amount paid or payable in or outside India to a foreign company or any person on its behalf, on account of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government, shall be deemed to be the income chargeable to tax under the head „Profits and gains from business or profession‟. We find that since the amount under consideration pertain to offshore supply of plant and equipment, for which sale was completed outside India and title to the goods was transferred outside India without any role of the alleged PE in India, the provisions of section 44BBB of the Act per se cannot be made applicable in the instant case. We find that reliance in this regard was placed on the co-ordinate bench of Delhi Tribunal in the case of DDIT vs Mitsui & Co Ltd reported in 118 taxmann.com 379. Even otherwise, we have already held that that there is no PE of the assessee in India and hence as per Article 7 read with Protocol thereon of India UK DTAA, income earned out of offshore supplies cannot be brought to tax in India in the hands of the assessee. Here the treaty provisions are also beneficial to the assessee herein and hence on this count also, there cannot be taxability of income in respect of offshore receipts in the hands of the assessee.

9.12. Since we have already held that there is no PE of the assessee in India, the other argument advanced by the ld. AR that there would be no attribution profits in view of operational or net loss at global level, need not be gone into as adjudication of the same would become merely academic in nature. X X X 10. To sum up, we hold that assessee was engaged in offshore supply of plant and equipment pursuant to contract with THDC and that the said contract was not artificially split for gaining any tax advantage as alleged by the revenue; there is no business connection of the assessee in India; there does not exist Fixed Place PE or Construction PE of the assessee in India and provisions of section 44BBB of the Act are not applicable in the instant case. Hence we hold that the addition made by the ld. AO by bringing to tax receipts from offshore supply is hereby directed to be deleted.”

8. Ground no.15 is against the DRP/assessing officer in bringing to tax receipts amounting to Rs.3,07,83,774 received by the assessee from GEPIL in respect of offshore supplies made to it. 8.1 The Assessing Officer has brought to tax the above amount amounting to Rs.3,07,83,774/- received by the assessee from GE Power India Ltd. (GEPIL) in respect of supplies made to it by the common discussion/reasoning as for treating the receipts of Rs.86,76,13,943/- from offshore supply to THDC India Ltd. The Ld. DRP confirmed the above action of the Assessing Officer on the ground that it had confirmed the action of the Assessing Officer in the draft assessment order for Assessment Year 2018-19 and in earlier years by holding that the assessee has a PE in the form of a fixed place and dependent agent PE (DAPE) through GEPIL. The relevant discussion made by the Ld. DRP is reproduced as under: “4.2.6 In ground number 2(ix) it is submitted that of the total receipts from offshore supplies Rs. 3.07,83,774/- pertains to the receipts from M/s GEPII, in respect of offshore supplies made to it. It is submitted that receipts amounting to Rs.3,07,83,774/ received by the assessee from GEPIL for offshore supplies made to it, the allegation in the assessment order that GEPIL served as PE of the assessee is unsustainable and is not supported by any facts. It is submitted that in such a scenario, the end customer of the assessee was GEPIL itself, i.e., the Indian entity which is alleged to also be the PE of the assessee. It is submitted that the end customer cannot constitute PE of the non-resident enterprise in respect of the same transaction. Therefore, without prejudice to the aforesaid, the amounts of receipts from GEPIL for offshore supply made to it by the assessee shall be excluded from the scope of assessment. The panel has considered the submissions. As observed by the AO at page 119 of the DAO, in the Assessment for AY 2018-19 an earlier year, the applicant has a PE in the form of a fixed place and dependent agent PE through GEPIL. The same has also been upheld by the DRP. However, the AO is directed to examine the profit element in the supply of equipment to GEPIL held as dependent agent PE of the assessee, separately and pass a speaking order in this regard.” 8.2 As we have seen that the Co-ordinate Bench of the Tribunal in para 10 of its order dated 13.03.2024 for Assessment Years 2018-19 and 2019-20 in the case of the assessee and as discussed above, had held that there is no business connection of the assessee in India and also there does not exist fixed place PE or construction PE of the assessee in India and provisions of Section 44BBB of the Act are not applicable in its case. Therefore, respectfully relying upon the same, we hold that amount amounting to Rs.3,07,83,774/- received by the assessee from GE Power India Ltd. (GEPIL) is not taxable in India. Ground no.15 of the appeal is allowed.

9. Ground no.16 is against the action of the Assessing Officer in levying interest under 234B of the Act. This ground is consequential in nature. The Assessing Officer is directed to levy interest under Section 234B of the Act as per law and keeping in view the order of the Co-ordinate Bench in assessee’s own case for Assessment Years 2018-19 and 2019-20 as adjudicated in respect of ground no.18 of the appeal filed by the assessee. Ground no.16 of the appeal is partly allowed.