J.M. VOITH SE & CO. KG (EARLIER VOITH PAPER GMBH & CO. KG),NEW DELHI vs. DCIT, CIRCLE- 3(1)(1), INTERNATIONAL TAXATION , NEW DELHI

improper.

arbitrarily applied the profit rate of 10%, the first appellate authority has

13 ITA No. 4862/Del/2019

reduced it to 5%. However, neither of them has provided any basis for

estimation of such profit. He submitted, as per the global profitability

statement, the margin earned by global paper division is 2.28% of the

sales. Therefore, when the assessee had provided a basis, the

departmental authorities were not justified in applying profit rate purely

on estimate basis.

observations of the Assessing Officer and learned Commissioner

(Appeals). Further, he submitted, the contract with security paper mill

at Hoshangabad is a single contract and the assessee was given

integrated work of design, manufacturing, supply, installation, start-up,

commissioning work of the entire 6000 MTs paper mill. He submitted

that as per the terms of the contract, the assessee was required to

hand over a complete paper mill at deliverable stage. He submitted,

what the assessee had supplied from outside India are parts and

components of the paper mill, which comes into shape once the

installation and erection is complete and start-up and commissioning is

done. Thus, he submitted, the contract with the assessee is to set up

the paper mill and not supply of certain parts and equipments of the

14 ITA No. 4862/Del/2019

paper mill. He submitted, assessee’s liability and obligation in terms of

contract does not end on completion of supply of materials, but still

remains to be discharged till satisfactory commissioning of the paper

plant. He submitted, for erection/installation and other related services,

assessee’s personnel have visited India and were actively involved not

only in the installation/erection process, but also the supervisory work.

He submitted, the contract, read as a whole, would demonstrate that

the scope of work under the contract is a single integrated activity, i.e.,

setting up a state of art 6000 MTs per annum paper making machine.

He submitted, the assessee is not involved in supply of material on

standalone basis. He submitted, even, the payment to be made

towards supply of plants and equipments of the paper mill is linked to

satisfactory test run, commissioning and performance. Thus, he

submitted, the assessee’s claim that the revenue received from supply

of plant and equipment made from outside India is not taxable in India,

is unacceptable, as, such plant and machinery have been incorporated

in India by the assessee itself in terms with the contracts.

that the assessee had a PE in India is beyond doubt, as the Assessing

15 ITA No. 4862/Del/2019

Officer has established on record that the project office acted as a PE.

Further, assessee’s personnel have frequently visited India not only

for work of installation, commissioning, start-up, but also supervisory

work. Thus, it is proved on record that the assessee had both fixed

place PE as well as the installation/supervisory PE in India.

Representative submitted, since, the assessee has been unable to

substantiate any justifiable reason for acceptability of global profit rate,

the decision of learned Commissioner (Appeals) in estimating the profit

of the PE at 5% is reasonable.

relied upon and perused materials on record. The issue arising for

consideration is the taxability of income received from supply of plants,

equipments, spares etc. It is the case of the assessee that plants,

equipments and spares have been manufactured and supplied from

outside India, hence, they are not taxable in India. The assessee has

also claimed that it does not have any PE in India.

ongoing contracts in India. In so far as the contract with Security Paper

16 ITA No. 4862/Del/2019

Mill (SPMCIL), otherwise known as project Hoshangabad is

concerned, in response to a global tender issued by SPMCIL, the

assessee participated in the bid and was successful. As per the terms

of the bid, the assessee agreed to design, supply, erect, install, and

commission 6000 MTs per annum capacity of state of art CWBN paper

making machine compatible with slitter, sheet cutter, inspection

packaging line, mould cover plant, facilities to incorporate security

features like water mark, windowed security thread, security fibres etc.

and other allied items.

and the General Manager, Security Paper Mill on 24.06.2010. As per

the object clause of the agreement, scope of work of the assessee is

for design, supply, erection, commissioning and performance run of

6000 MTs per annum capacity of state of art CWBN paper making

machine compatible along with slitter, sheet cutter, inspection,

packaging line, mould cover plant. The expression ‘Mill’, as per

agreement, is defined as the paper mill at Hoshangabad. The ‘project’

means the implementation of the project proposed by the seller as

contained in the agreement. The term ‘supply’ means one line CWBN

17 ITA No. 4862/Del/2019

paper making machine which shall be supplied by the seller

(assessee) to SPMCIL. The definition of ‘plant’ as per agreement is –

design, supply, installation, commissioning of one CWBN paper

machine along with compatible slitter, sheet cutter, inspection,

packaging line and mould cover making plant with state of art

technology dedicated for production of currency/security papers on

turnkey basis.

objects, the assessee shall provide machinery and equipments,

engineering services, specialist staff and training. The agreement

further provides that the assessee shall carry out plant engineering,

planning, execution, monitoring, coordinating of not only items within

the scope of supply, but also for items supplied by the contractee by

using scientific technique, i.e., project management software and tools

for timely completion of the project. It also provides that the assessee

shall provide technical assistance by way of coordination of erection

and technical erection check, final check with SPMCIL during taking

over. The terms of the agreement further provide that only after

satisfying its obligations under the contract, the assessee shall be

18 ITA No. 4862/Del/2019

entitled to withdraw all its personnel remaining in the mill after

commissioning of the new plant has taken place. The agreement also

provides that the contractee shall store all received equipments and

parts of the new plant at the site at its risk and expenses. The

agreement provides that the contractee shall provide well equipped

office with tables and chairs for assessee and its staff in charge of the

project on site. The contractee is also required to provide lodging and

boarding facilities at Hoshangabad for the personnel of the assessee

for the entire period of stay.

spares to be sold are on FOB European port basis and the seller has

to guarantee that the plant and machinery, being supplied, are of state

of the art technology. The seller shall also guarantee availability of

spares for 15 years and there should not be any major fault in the new

plant for at least five years of its installation and commissioning. The

seller is also required to provide a certificate that technology, being

supplied and the plant being installed, shall not be out of market for at

least fifteen years and spares shall be available during that period.

Clause-9 of the agreement provides that the seller shall arrange

19 ITA No. 4862/Del/2019

shipment of the new plant within a period of 18 months and the seller

shall be responsible for starting and commissioning of the equipment

supplied. It also provides that technical supervisors/engineers of the

seller will be in charge of the installation, starting and commissioning of

the new plant. It also provides that the erection of the new plant shall

be completed within the project time schedule. The terms of the

agreement provide that when the seller is of the opinion that different

sections of the new plant, i.e., paper machines, slitter re-winders,

cutter, inspection packaging line and mould cover plant are ready for

start-up, it shall have to notify purchaser/contractor in writing of its

intention to begin the start up and indicate the date, on which it can

commence. During the start-up, the seller shall be responsible for

technical operators of the processing line and will operate the technical

process with its supervisory personnel together with purchaser’s

personnel.

that the machinery and equipments are ready for performance testing,

it shall notify in writing the purchaser to start the performance testing. If

the test reveals that each unit does not meet the guaranteed

20 ITA No. 4862/Del/2019

performance, the seller have to take necessary steps to correct such

deviation without any delay. The agreement provides that the new

plant shall be regarded as commissioned and accepted when the

conditions specified in Annexure-6 are fulfilled. The agreement also

provides that the seller shall provide training to authorised persons of

the purchaser in the technique and skills required to operate and to

repair the new plant. Training can be on the job training or classroom

training. The seller is also required to keep training to the mould cover

making plant personnel and maintenance personnel. The training to be

given by the assessee is both at its site and also at the installation site.

As per the terms of the agreement, the assessee is also required to

furnish bank guarantee as security deposit and also performance

guarantee. The payment schedule as per the terms of contract, reveals

that they are on mile-stone basis and 10% out of total cost of goods

supplied shall be released after receipt of all the goods and erection,

commissioning, start-up and trial run with training and issue of

acceptance certificate. Though, the agreement stipulates the cost of

equipments and the cost of erection, commissioning, training charges

etc. under distinct and separate heads, however, the payments are

linked to completion of project. The agreement also provides that the

21 ITA No. 4862/Del/2019

seller has to pay liquidity damages at specified rate for its failure to

have the new plant commissioned as per the time schedule under the

agreement. The agreement also vests right upon the purchaser to

terminate the contract in case of any default in carrying out any of the

terms, conditions, covenants of the agreement, the supplier is not

entitled to payment of any charges on any account or any portion

thereof with respect to any part not completed by the supplier in

accordance with the terms of agreement. Clause 38 of the contract

provides that any dispute arising under the agreement shall be

governed and interpreted in accordance of laws of India and subject to

exclusive jurisdiction of the competent courts of New Delhi.

assessee was given one integrated end to end activity of setting up a

6000 MTs capacity per annum state of art CWBN paper making

machine compatible with slitter, sheet cutter, inspection packaging line

and mould cover plant on turnkey basis, which is otherwise known as

the mill. The end to end activity covers design, supply, erection,

commissioning, performance run of the entire paper mill. Thus, the

assessee has to complete a single integrated project in terms of the

22 ITA No. 4862/Del/2019

contract. The agreement further reveals that assessee’s obligation

under the contract does not end with the supply of goods and

equipments, but would only end with the satisfactory commissioning

and performance run of the paper mill. Only after the satisfactory

performance run, the assessee can receive full payment qua the

supply of goods and equipments. Thus, supply of goods and

equipment from outside India cannot be treated as a standalone

activity. On the contrary, as per the scope of work under the

agreement, the assessee has to deliver the project of the Security

Paper Mill and hand over to the contractee at deliverable stage as a

complete package. The contract between the assessee and the

contractee is not for purchase of plant and equipments simpliciter, but

a complete paper mill to be installed and commissioned at deliverable

stage. That being the factual position emerging on record, assessee’s

contention that the income received from supply of plants and

equipments is not chargeable to tax in India, as the supplies were

made from outside India, in our view, is not acceptable. Not only the

assessee has entered into a single contract providing for purchase,

installation, commissioning, performance –run of a single unit of 6000

MTs Security Paper Mill, but the assessee is required to ensure proper

23 ITA No. 4862/Del/2019

functioning of the paper mill after commissioning through start-up and

test-run. Thus, these facts clearly indicate that the contract is a

composite indivisible contract of setting up the paper mill in India. That

being the case, it cannot be said that the receipts from offshore

supplies of plant and equipments etc. are not taxable in India.

scrutiny of assessment order and first appellate order, we observe that

receipts from offshore supplies are in relation to four projects in India.

The departmental authorities have referred only to terms of agreement

between the assessee and SPMCIL, Hoshangabad. Whereas, the

terms of the agreement with other three parties, viz., J.K. Paper Ltd.,

Bank Note Paper Mill India Pvt. Ltd., Mysore and Tamil Nadu

Newsprint and Papers Ltd., Tamilnadu, to whom the assessee has

supplied plant and equipments, have not at all been examined. From

the submissions of the assessee, prima facie, it appears that the terms

of the contracts in different projects are not identical. In fact, in case of

project at Tamil Nadu, the assessee has entered into two separate

contracts, one for supply of material and other for onshore services.

Therefore, if offshore supplies of plant and material do not have any

24 ITA No. 4862/Del/2019

relation to onshore services, they cannot be brought to tax in India.

These facts have not been verified by going into the terms of the

contract by the departmental authorities. Even, to what extent the PE

of the assessee, if at all there is one in India, is involved in

manufacture and supply of plant and equipments, has not been

properly gone into by the departmental authorities. Thus, in our view,

without properly analysing the role of PE in offshore activities, 25% of

the receipts arising out of offshore supplies cannot be attributed to PE,

as it is purely on adhoc basis.

10% to the receipts/income of the PE, which has been reduced to 5%

by learned Commissioner (Appeals). In our view, the estimation of

profit is purely on adhoc basis without any rationale. When the

assessee has furnished evidence to show that the global profit rate in

the paper division is at 3%, there is no justification for adopting the rate

at 10% or 5%. The reasoning of departmental authorities in adopting

the estimated profit rate is based on conjectures and surmises. If

learned Commissioner (Appeals) was of the view that the activities and

obligations of different contracts for different supplies would be

25 ITA No. 4862/Del/2019

different, he should have examined each of the contracts and

accordingly decided the profit rate. As discussed earlier, the

departmental authorities have examined only one of the contracts.

Whereas, they have not gone through the terms of other contracts. In

the aforesaid circumstances, we cannot accept the estimation of profit

at 5% by learned Commissioner (Appeals). It is further to be noted that

assessee’s contention regarding existence or otherwise of PE in terms

of paragraph 7, 1(a) and (b) of Protocol to India-Germany DTAA has

not at all been considered by learned first appellate authority. Since, various claims and contentions of the assessee have not been

considered by the departmental authorities, while attributing part of the

receipts from offshore supplies as income of the PE, we are inclined to restore the issue to the Assessing Officer for de novo adjudication after

providing reasonable opportunity of being heard to the assessee. Grounds are allowed for statistical purposes.

Order pronounced in the open court on 23rd April, 2024.

Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) VICE-PRESIDENT VICE-PRESIDENT Dated: 23.04.2024

26 ITA No. 4862/Del/2019

*aks/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT Assistant Registrar ITAT New Delhi