DCIT (IT) -4(2)(1), MUMBAI vs. SAFEGATE INTERNATIONAL AB, MUMBAI

Date of Hearing – 17.08.2017 Date of Order – 08.11.2017

2 M/s. Safegate International A.B. O R D E R PER SAKTIJIT DEY, J.M.

Aforesaid appeal by the Revenue and Cross–objection by the assessee are against the order dated 19th December 2014, passed by the Dispute Resolution Panel–IV (for short “the DRP”), Mumbai, for the assessment year 2011–12.

3 M/s. Safegate International A.B. International Airport Pvt. Ltd. (MIAL). The scope of work as per the sub–contract agreement with L&T are Part–A – supply of Airfield, Ground Lighting Equipment; Part–B – Overview the design, installation, testing, commissioning and integration of the supplied items with experienced staff; and Part–C – development, design, supply, installation, testing and commissioning a control and monitoring system. For the impugned assessment year, the assessee filed its return of income on 29th September 2011, declaring total income of ` 45,71,583. During the assessment proceedings, the Assessing Officer noticed that, though, the assessee has offered its income from installation and commissioning services carried out in India, however, it has excluded the income from off–shore supplies and has not offered it for taxation. The Assessing Officer, therefore, called upon the assessee to explain the reason for not offering the income from off–shore supplies to tax. In response to the query raised by the Assessing Officer, the assessee submitted that off–shore supplies are not taxable in India as title to the goods passed outside the territory of India. The Assessing Officer, however, did not find merit in the submissions of the assessee. The Assessing Officer after examining the contracts entered in to by the assessee was of the view that they are composite contracts and the assessee is not only responsible for supply of equipment, but also for the proper marking, packing, loading, transportation, custom clearance, delivery at project

4 M/s. Safegate International A.B. side, unloading of all the equipment required for the purpose of the contract. He observed, the contract is for supply, erection, installation, integration, testing and commission, etc., including the training of the employees. He observed, in case of sub–contract with L&T, the assessee is also responsible up to 21 days after even installation and training of manpower. He observed, the assessee is also to bear all the risks till it is handed over to the L&T. Thus, it was held by the Assessing Officer, not only the contract is a composite one under the sole responsibility of the assessee, but, the assessee is also responsible for training, provision of skilled manpower as well. The Assessing Officer observed, merely because consideration for off–shore supply operation is mentioned separately, would not make the contract divisible one since the assessee is required to take care of everything. Thus, ultimately, the Assessing Officer held that the amount received by the assessee towards off–shore supplies would be taxable in India and, accordingly, added back the amount to the income of the assessee while confirming the draft assessment order. Against the addition proposed in the draft assessment order, the assessee filed objections before the DRP.

5 M/s. Safegate International A.B. clearly spell out the on–shore and off–shore portion of works / services. On going through both the contracts entered into by the assessee the Panel found that the payment to be made in respect of off–shore and on–shore operation has also been quantified separately in terms of Indian rupee as well as in Euros. They found that as far as on–shore activities attributable to Permanent Establishment (P.E.) is concerned, the assessee has worked out profit on such income and offered it to tax. The DRP observed, though, the Assessing Officer has observed that the contracts with DIAL and MIAL are composite contract, however, the operation of work to be executed in India is clearly spelt out. They observed, neither it is the case of the Assessing Officer that receipt from works executed in India has not been returned to assessee nor it is his case that there has been overstatement of the price of the off–shore equipment and understatement of cost of on–shore works. According to the DRP, the Assessing Officer has only concentrated on the claim of non– chargeability of the off–shore supply and has sought to bring it to tax. On the contrary, the DRP observed, clause 1.1.3 of the sub–contract with L&T clearly spells out that the off–shore supplies were on carriage, insurance and freight (CIF) basis. Similarly, the contract with DIAL lays down that off–shore supply of imported plant and equipment was to be on cost of insurance paid (CIP) basis. The DRP referring to the definition of the term CIF and CIP as available in Incoterms–2000,

6 M/s. Safegate International A.B. a compendium of pre–defined commercial terms brought out periodically by the international chamber of commerce which clearly communicates the task, costs and risks, associated with the transportation and delivery of goods in the context of international trade. The DRP observed, as per the definition provided therein both CIF and CIP cast the responsibility of payment on the seller for the following activities which are, export customs declaration, etc., carried to port of export, unloading of truck at Port of export, loading of vessel on port of export, sea / air carriage to port of import and insurance. The DRP found that in case of CIF, the payment for unloading at Port of import and loading on truck at Port of import are the responsibility of the buyer. In the case of CIP, they could be the responsibility of the buyer or seller. The DRP observed, as per the definition of CIP, delivery on CIP basis would mean passage of title of goods in the port of loading. Since, the off–shore supply for the DIAL contract was on CIF basis and that for the MAIL contract was on CIP basis, the DRP ultimately held that the title of goods supplied under both the contracts have passed hands at the Swedish Port of loading. Therefore, the sale was completed outside the territory of India, hence, the amount received from such off–shore supply of goods / equipments are not taxable in India. In this context, the DRP relied upon the decision of the Hon'ble Supreme Court in DIT v/s Ishikawajma-Harima Heavy Industries Ltd. [2007] 158 Taxman 259

7 M/s. Safegate International A.B. (SC). After exhaustively referring to the observations made by the Hon'ble Supreme Court in the aforesaid decision, the DRP ultimately concluded, since supply and service obligation as also off–shore and on–shore obligation having been distinctly and separately provided in the contract, it cannot be said that the contracts are indivisible. Therefore, only such income which is attributable to the operation in India, shall be charged to tax in India. The DRP held, the assessee having offered all income relating to on–shore components of the contract, the claim of the assessee in not offering the income from off– shore supplies is justified. The DRP held since the P.E. in India was no way involved in the transactions relating to such supplies it cannot be made taxable. The DRP observed, since the exercise of attribution under the treaty can only be carried out in respect of income of the P.E., it automatically rules out the attribution of activities such as supply which came out before formation of P.E. Accordingly, the DRP directed the Assessing Officer to complete the assessment by excluding the amount received from off–shore supplies.

8 M/s. Safegate International A.B. supply, erection, installation, testing, commissioning and training, system delivery at project site. There is no bifurcation or splitting of contract into various parts. The assessee has not entered into two agreements i.e., one for material supply and another for installation. Referring to certain terms of contract, the learned Departmental Representative submitted, the contractor has not agreed anywhere for independent supply of material. At no place, the contract mentions that the assessee would bifurcate the contract in to off–shore supplies to be paid in Euro and on–shore service to be paid in Indian rupee. Rather, the price schedule has three portions with price attribution to them which form the base for final quotation. For that the contract cannot be split into two segments. He submitted, as per the terms of contract the assessee was to be given possession of site from the design stage. The assessee shall provide full time competent staff from start of contract. He submitted, the P.E. has also played a role in design and development of materials manufactured out side as well as at the time of manufacture. He submitted, the contract reveals that P.E’s continuous interaction is required for approval of design till manufacturing stage. He submitted, though, the sale is on CIF basis P.E. is required to decide the route to be taken for equipment supply on Indian highways before goods reach site. To emphasise the fact that the P.E. was also involved in the off–shore supply of goods / equipments, the learned Departmental Representative relied upon

9 M/s. Safegate International A.B. OECD guidelines and comments by Klaus Vogel. In this context, he also relied upon the decision of the Hon’ble Madras High Court in Ansaldo Energia Spa v/s ITAT & Ors, [2009] 310 ITR 237 (Mad.). The learned Departmental Representative submitted, the terms of the contract would reveal that the assessee was responsible for receipt of goods in India billed on CIF basis. He submitted, the delivery of goods as per the contract was to be made at site and the contractor was responsible for deciding routes to ensure no damage to highway, staff equipments. He submitted, the assessee was not only entrusted with the supply of material but was also required to carry out training of manpower and delivery programme for materials associated with such supply. Learned Departmental Representative submitted, the price schedule in the contract does not reflect any scientific basis of segmentation in Part-A, B and C based on estimate. In the light of nature of contract, price is not severable. He submitted, documentation with respect to supply of equipment to be submitted at the plant site on CIF basis. Risk of material has to be borne by the assessee from the date of notice to proceed till 21 days after completion of contract. This according to the learned Departmental Representative, indicates that the title of goods did not pass outside India. In this context, he relied upon the decision of the Tribunal, Delhi Bench, in Baker Hughes Asia Pacific Ltd. and others v/s ACIT, [2014] 151 ITD 76 (Del.). Learned Departmental Representative submitted,

10 M/s. Safegate International A.B. there is no separate agreement with regard to off–shore supply of material Further, separate price for off–shore and on–shore contract is purely on ad–hoc basis, hence, not reliable. Therefore, it will be incorrect to conclude that the contract is divisible and can be segregated to supply and service operations. He submitted, DRP has completely erred in holding that supply on CIF / CIP basis would mean delivery of goods outside India. He submitted, it is also equally wrong to conclude that the off–shore and on–shore terms are clearly spelt in the contract. He submitted, on the contrary, off–shore manufacturing is intricately linked with on–shore design / feed back / approval of contractor / employer. There are also links with other systems to be factored during design. He submitted, the assessee or his representative is required to be on site from start of the contract to take care of these issues which are closely connected with supply of material. He submitted, the assessee has not substantiated loss in the product supply segment through documentary evidence. Therefore, the profit of the assessee has to be computed on consolidated basis by aggregating both on–shore and off–shore revenue earned by the assessee during the year. In support of his contention, the Learned Departmental Representative also relied upon the following decisions:– i) Authority For Advance Rulings (I.T) v/s Metro Asia Pacific Pte Ltd., In re, [2016] 73 traxmann.com 17 (AAR);

11 M/s. Safegate International A.B. ii) DIT v/s Nokia Networks OY, [2012] 25 taxmann.com 225 (Del.)

12 M/s. Safegate International A.B. of materials from Sweden was made by the assessee on CIF basis and as per clause 1.1.3.3. the assessee is not responsible for attendance, handling and transport up to and including uploading at the project site if the materials are supplied on CIF basis. He submitted, as per the contract supply of goods from outside the territory of India is on CIP basis, hence, the title over such goods passes once it is loaded and dispatched in the country of origin. Learned Authorised Representative drawing our attention to the total project value as provided in the contract submitted, for each part of the contract, there is a separate price schedule. He submitted, for Part–A, which is for supply of materials the price is provided in Euros. Whereas, for Part–B which relates to design, development, installation, testing, commissioning, etc. Price to be paid is in Indian rupee. He submitted, as far as Part–C of scope of work is concerned, both the supply portion and service portion have to be paid in Euros. He submitted, rights and liabilities under each part of the contract has been clearly spelt out. He submitted, though, the contracts executed with DIAL and L&T are composite contracts, however, they are divisible in nature, since, both of them clearly spell out the scope of work and the consideration for off–shore and on–shore work separately. He submitted, as far as income from on–shore activities are concerned, the assessee has offered it to tax while excluding the amount received from off–shore activities as it is not chargeable to tax in India. He submitted, the 13 M/s. Safegate International A.B. supplies on CIF and CIP basis in terms of the contract clearly demonstrate that the title over the goods had passed in the port of loading and sale was concluded outside India. He submitted, the off– shore supplies of goods had no connection with the P.E. in India as the P.E. was established for installation and came into existence after the supplies were made. Since, the P.E. was not responsible for off–shore supply, no profit from the off–shore supply can be attributed to P.E. He submitted, even the payments in respect of off–shore supplies were received outside India. Thus, it was submitted, the DRP was correct in excluding the off–shore supply portion from the income taxable in India. In support of his contention, the learned Authorised Representative relied upon the following decisions:– i) DIT(IT) v/s Siemens Aktiengesellschaft, of 2011 (Bom.), dated 20.11.2012; ii) DIT(IT) v/s Toyo Engineering Corporation, ITA no.663 of 2011, dated 23.01.2013; iii) DIT v/s Nokia Networks OY, 358 ITR 259 (Del.); iv) Linde AG, Linde Engineering Division v/s DDIT, 365 ITR 1 (Del.); v) DIT(IT) v/s Xelo Pty Ltd., 203 taxman 475 (Bom.); and vi) ILJIN Electric Co. Ltd. v/s DCIT, ITA no.1023 and 5642/ Mum./2015, dated 14.10.2016.

15 M/s. Safegate International A.B. in India. As discussed elsewhere in the order, in the course of hearing, the learned Authorised Representative has taken us through the contract executed by the assessee with L&T Ltd. with regard to the airfield ground lighting works of Mumbai International Airport. On a reading of the contract as a whole it appears, work to be executed by the assessee has been segregated to three parts. The scope of work as provided in Appendix–I of the sub–contract agreement with L&T has been segregated in to three parts. Part–A provides for only supply of equipment. Whereas, Part–B of the contract relates to design, installation, testing, commissioning and integration of supplied items either by the assessee or others. Part–C of the contract includes design, testing, installation, commissioning as well as supply of equipment. It is, however, evident from the contract, payment for the supply of equipment are to be made in Euros whereas payment for design, installation, commission, etc., has to be made in Indian rupees. It is also to be noted that as per the terms of contract off– shore supply of equipment are to be made on CIF and CIP basis. Thus, on a reading of the contract with L&T it becomes clear that, though, it is a composite contract, however, it is divisible in nature as the work to be carried out by the contract has been specifically demarcated / segregated into separate components. Undisputedly, as far as supply of equipment is concerned, such equipments have been manufactured / produced in Sweden are to be supplied on CIF basis. Thus, as held by 16 M/s. Safegate International A.B. the DRP, supply of goods / equipment on CIF basis pre–supposes that title of goods passes once the goods are loaded to the carrier, hence, the sale becomes complete. Same is the case with sale made on CIP basis which has happened in the case of contract with DIAL. There is no dispute that the off–shore supplies in case of both the contracts are either on CIF or on CIP basis and payments have been made in Euros, that too, outside India. Moreover, the invoice raised for supply of equipment, sample copies of which have been placed in paper book, clearly indicate that the supply of equipment has been made in the name of either DIAL or L&T Ltd. The invoices also indicate that the payments were to be made outside India. Thus, as could be seen, the title of goods insofar as it relates to off–shore supply of equipment was transferred in the name of contractee at the port of loading i.e., outside India. It is also relevant to note, the observations of the Assessing Officer that the P.E. is involved in design and supervising the production of equipments is not supported by any evidence. On the contrary, the material brought on record clearly reveal that the P.E. has no role to play as far as it relates to off–shore supply of equipments and materials which is evident from the fact that not only the goods were supplied from Sweden and other countries on CIF/CIP basis but payments have been made directly to the assessee outside India in foreign currency and in the bank account of the assessee in Sweden. Therefore, the P.E. has no connection with the off–shore

17 M/s. Safegate International A.B. supply of goods. Therefore, only because the contracts entered into by the assessee are single composite contracts it cannot be said they are indivisible. Rather, the reading of contract as a whole clearly demonstrates that the scope of work as per the contract is divisible in nature and has been segregated to supply portion and erection and commissioning portion. Therefore, the off–shore supply of equipments having been effected from outside the territory of India and the sale having been completed outside territory of India, the ratio laid down by the Hon'ble Supreme Court in Ishikawajma-Harima Heavy Industries Ltd. (supra) squarely applies to the facts of the present case. Therefore, there is no need to refer to any other decisions which were relied upon by the parties before us. However, for the sake of completeness we may observe that in case of ILGIN Electric Co. Ltd. v/s DCIT, ITA no.1023/Mum./ 2015 and ITA no.5642/Mum./2015 dated 14th October 2016, which is on an identical issue involving taxability of income received from off–shore supply of equipments / goods, this Bench had an occasion to go through most of the decisions cited before us in the present appeal and having discussed the ratio laid down in these decisions, ultimately concluded that the ratio laid down in the case of Ishikawajma-Harima Heavy Industries Ltd. (supra) still holds the field and in terms of ratio laid down therein, the income received from off–shore supply of equipments in case of a divisible contract is not taxable in India. Therefore, applying the ratio laid down

18 M/s. Safegate International A.B. in the decisions referred to above, we uphold the directions of the DRP in the impugned order. Grounds are dismissed.

C.O. no.28/Mum./2016