ILJIN ELECTRIC CO. LTD,MUMBAI vs. DCIT (IT) CIR 2(2)(1), MUMBAI

PER SAKTIJIT DEY, J.M.

Captioned appeals at the instance of the assessee are directed against the assessment orders passed under section 143(3) r/w section 144C(13) of the Income Tax Act, 1961 (for short "the Act") in pursuance to the direction of the Dispute Resolution Penal (DRP), for the assessment years 2011–12 and 2012–13.

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ITA no.1023/Mum./2015 – A.Y. 2011–12

“The appellant objects to the order dated 14 January 2015 passed by the Deputy Commissioner of Income Tax (International Taxation)-(2)(2)(1), Mumbai ('the AO') for the assessment year 201112, pursuant to the directions dated 22 December 2014 issued by the Dispute Resolution Panel ('DRP') under section 144C(5) of the Income-tax Act, 1961 ('the Act') on the following among other grounds. Ground No. 1: Income in relation to offshore supply is not taxable in India. 1.1 The learned AO / DRP erred in law and in facts in seeking to tax in India, a sum of Rs. 300,65,923 as against the income of Rs. 57,41,665 offered to tax for the year under consideration. 2. The learned AO / DRP erred in law and in facts in considering revenue from Offshore Supplies for the purpose of computing the appellant's income taxable in India, without appreciating that the same is not taxable in India both as per the Act as well as the Double Taxation Avoidance Agreement between India and Korea. Ground No. 2: Income, if any, should be taxable only to the extent it can be attributed to operations in India 2.1 Without prejudice, the learned AO / DRP erred in treating the entire profit (arrived at on a presumed basis of 10% of revenues, including revenue from Offshore Supplies) as taxable in India without undertaking an attribution thereof to the Permanent

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Establishment / alleged business connection in India. 2.2 The learned AO I DRP erred in disregarding the submissions made and the grounds of objections raised by the appellant. Ground No. 3: Levy of interest under section 234B of the Act: 3.1 The learned AO has erred in law and in fact, in levying interest under section 234B of the Act disregarding the fact that the appellant is a non-resident whose income is subject to tax deduction at source (which is supported by lower withholding tax certificates issued by the tax authorities in its case). Ground No. 4: Levy of interest under section 234D of the Act: 4.1 The learned AO has erred in law and in fact, in levying interest under section 234D of the Act. Ground No. 5: General: 5.1 Each of the foregoing grounds of appeal is without prejudice to the other. 5.2 The appellant craves leave to add, alter, amend, substitute and/or modify in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal.”

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1.“Contract dated 12th November 2008, for supply, laying, testing and commissioning of 60KV (E) Grade Single Core 400 sq.mm Copper Conductor XLPE Insulated feeder Cables and Associated Switch Gear.”

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show cause notice issued by the Assessing Officer it was submitted by the assessee as under:–

Off–shore supplies were manufacturing in Korea by the  Head Office. Other functions including finance general management, marketing, business development, etc., were handled from within Korea; The project office in India had no role to pla in relation to  off–shore supplies; None of the employees of the project office was involved in  the off–shore supplies. The goods involved in off–shore supplies were sold outside India on a principal–to–principal basis by the Head Office in Korea directly to the employers / contractee; The title to the off–shore supplies was transferred outside  India to the employers upon loading onto the transportation medium outside India. The off–shore supplies were clear in India on employer’s account; Off–shore supplies could not be loaded onto the  transportation medium outside India without inspection by the employers and acceptance to their satisfaction. The only liability which remained with the contractor was warranty in relation to the off–shore supplies (during the defect liability period) and general responsibility for care and custody of off–shore supplies and risk of loss or damage thereof (since the laying, testing and commissioning involved handling of the off–shore supplies owned by the employer; The consideration for off–shore supplies was denominated  in U.S. $ given that it formed consideration for supplies made by the head office from outside India, whereas consideration for on–shore supplies and on–shore services was denominated in Indian rupees since the same related to efforts of the project office; The payment in relation to off–shore supplies was received  outside India by the head office; The risk in relation to the off–shore supplies was  transferred outside India to the employers. In this context, it was further submitted, in case of MRV, the off–shore supplies were made on carriage and insurance paid (CIP) basis and in case of DMRC, the payments were on delivered duty unpaid

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(DDU). It was further submitted employers were named as co– insurance with respect to the insurance in relation to off–shore supplies; In case of termination of contract, the contract, inter–alia,  is entitled to receive consideration for the supplies made (notwithstanding they may not have been installed); The application in relation to off–shore supplies emanated  from the contracts entered into by the company. The contracts were awarded to the company on the basis of its credentials and expertise in relation to manufacturing cables and accessories. The said credentials and expertise were possessed by the Head Office because of which the contracts were secured and in pursuance thereto off–shores were made by the Head Office; The project office had no role to play in making off–shore  supplies. In fact, the project office had no role to play in securing the contract which lead to the obligation to make the off-shore supplies; The installing of cables and commissioning thereof was  awarded to the company owning to the employer’s judgment that it would be preferable that the said activities were carried out by the suppliers. Hence, the distinct activities of installation and commissioning were awarded to the company. In connection with the distinct activities, the company established the project office since the activities could only be undertaken in India which required physical presence in India. Therefore, the project office has no role to play either in securing or in executing the activities of off–shore supplies. It was submitted by the assessee from the very beginning, the contracts for supply and installation activities were envisaged as distinct activities. Only for the purpose of conveyance, the distinct contracts were documented as single contract for both the activities, however, the activities retained their distinct character and consideration in the contract.

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the bid document and the contract but also a number of judicial precedent including the decision of the Hon'ble Supreme Court in Ishikawajima Harima Heavy Industries v/s DIT, 288 ITR 408 (SC). Relying upon the judicial precedents, it was submitted by the assessee, the contract entered into by the assessee are for distinct and separate activities and well defined obligations provided therein relating to off–shore supplies, on–shore supplies and on–shore services. It was submitted, though, the contracts are umbrella contracts the same are in the nature of divisible contracts since the consideration for various activities has been stated separately along with the distinct scope of work. It was submitted, even in case of a composite contract supply has to be segregated from the installation activities have determine the tax liability thereof in India. It was submitted by the assessee, as per the provisions contained under section 5(2) and 9(1)(i) only that portion of income which accrues or arise or deemed to have accrued or arisen in India can be brought to tax. It was submitted, as per the Double Taxation Avoidance Agreement (DTAA) between India and Korea, the amount of income which is attributable to the operations / P.E. in India is taxable in India. Thus, it was submitted, on the basis of the provisions of the Act and DTAA, only that much of the off–shore supplies can be made taxable which is attributable to operations in India. It was

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submitted, as the project office is in no manner involved in the activities of off–shore supplies, the payments received towards off– shore supplies cannot be made taxable in India. The Assessing Officer after considering the submissions of the assessee and perusing the relevant contracts observed that entire revenues were generated from single composite contract and for this purpose, assessee has set–up project office for execution of contract in India. He observed, all supplies or service, whether on–shore or 0ff–shore, are finally utilised in India for the purpose of executing the main contract with the employers viz. MRVC and DMRC. He observed, there is a profit element in off–shore supplies and it has a business connection in India as these off–shore supplies were finally utilised in India. He observed, assessee by applying a dissecting approach has bifurcated the composite contract into on–shore and off–shore supplies. He was of the view that a “Look At Approach” should be taken rather than “Look Through Approach”. The Assessing Officer observed, the assessee set– up its project office in India for executing the contract. The Assessing Officer observed, as the project office is executing the contract in India, on turnkey basis the entire amount received in pursuance to the contract comes within the purview of scope of income as envisaged under section 5(2). Therefore, as the assessee is having a direct business connection in India within the meaning of section 9(1) and it

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has a fixed place of business in India by virtue of its project office exclusively for the purpose of executing the contracts and the goods relates to off–shore supplies are inextricably linked to the P.E., the entire amount received in connection with the contract has to be taxed as business receipt of P.E. in India. As far as the judicial precedents relied upon by the assessee, the Assessing Officer observed that the ratio laid down in the case of Ishikawajima Harima Heavy Industries (supra) would not be applicable due to difference in facts. He observed, in the case decided by the Hon'ble Supreme Court, the tax treaty under consideration was with Japan which is different from tax treaty with Korea. He further observed, in case of Ishikawajima Harima Heavy Industries (supra), the goods were delivered in high sea and transfer of title also took place in high sea. Whereas, in assessee‟s case, no such facts are involved. He also observed, the assessee did not furnish any specific evidence to prove this fact. Thus, on the basis of aforesaid analysis of facts the Assessing Officer finally concluded that the entire amount received by the assessee in pursuance to the execution of contract is taxable in India as per the Act as well as DTAA. Since the assessee had offered income relating to on–shore supply and services, the Assessing Officer brought an amount of ` 21,97,62,373 relating to off–shore supplies to tax. Further, the Assessing Officer observed, the assessee having not offered

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profitability on the entire contract, it has to be estimated @ 10% on the entire receipt from the contract in terms of section 44BB / 44BBB. Accordingly, he passed a draft assessment order. Being aggrieved, the assessee filed objections before the DRP.

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handed over to employer, the transfer of ownership of the cable procured from overseas on loading to the mode of transport for delivery at Indian Ports is only notional and for the limited purpose of making insurance claim due to damage / loss in transit. Even the custom duty on such material is payable by the assessee. Delivery at the ports is to be taken by the assessee and transported to the site and assessee is responsible for the quality, security, storage, testing, performance of such cable till completion of contract and transfer of facility on completion. The DRP observed, the contract awarded to the assessee has not been split into separate parts for supply of off–shore equipments and supply of on–shore equipments and on–shore services. The overall price of the contracts remains fixed. The DRP observed, the assessee has received money from contract on account of supplying, laying, testing and commissioning of extra high voltage cables. Thus, all revenue generated from composite contracts with Indian entities. All supplies or service, whether on–shore or off–shore, were finally utilised in India for the purpose of the main contract of the employers. Though, the assessee is applying a dissecting approach by bifurcating the composite indivisible and single contract into on–shore and off–shore purpose, but undoubtedly, there is a profit element in off–shore supply and has a business connection in India since all the supplies and services are finally utilised in India. Splitting up of a

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single indivisible and composite contract is not permissible for the limited purpose of taxation of income from off–shore supplies. The DRP observed, there is no dispute that the assessee has P.E. in India and all works related to contracts including off–shore supplies are done through such P.E. and the P.E. is responsible for completion, quality and subsequent warranty of the project. Relying upon the decision of the Tribunal, Chennai Bench, in Ansaldo Energia Spa, 115 TTJ 942, which was upheld by Hon'ble Madras High Court in Ansaldo Energia SPA v/s ITO, 310 ITR 237 (Mad.), the DRP repelled the assessee‟s argument that income received from off–shore supply of equipments and material is not taxable in India as it is a sale on principal–to– principal basis. The DRP observed, the passing of property outside India is only indicative and the responsibility of the assessee continues till the equipment is installed, erected, commissioned and the project is completed. That being the case, the argument of passing of property outside India in the equipment is notional. It also observed, payment outside India in foreign currency for the supply of equipment is irrelevant to determine the taxability. The DRP also observed, as the assessee has a project office in India for the purpose of executing the contract, the entire amount received in terms of the contract comes within the scope of income as provided under section 5(2) and the assessee has a direct business connection in India

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within the meaning of provisions of section 9(1) by virtue of its project office exclusively set–up to execute the contracts and supply goods. Ultimately, the DRP observed, the off–shore supply being inextricably linked to the P.E., the entire amount received under the contract including the off–shore supplies should be taxed as business receipt of P.E. Thus, the DRP upheld the draft assessment order. In terms of the directions of the DRP, the Assessing Officer finalized the assessment. Aggrieved, the assessee is in further appeal before the Tribunal.

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invoice raised for off–shore supplies, the learned Authorised Representative submitted, the invoice raised clearly indicates that the sale was effected by the Head Office in Korea to the employer directly in foreign currency. Referring to the bid documents, learned Authorised Representative submitted the employer while inviting bid has made it clear that bidders must give break-up of the prices in the manner indicated in the price schedule. He submitted that, as per the price schedule the bidder has to separately mention the bid price for supply of plant and equipment from abroad, supply of plant and equipment from within employer‟s country, local transportation and services. It also provided that bidder shall make a grand summary of each schedule. Clause 11.4 of the bid document also provides that plant and equipment to be supplied from abroad shall be collected on a CIF Port of entry, CIP border point basis or CIP named place. Referring to clause 12.1, he submitted the bid document also provided that for plant and equipment to be supplied from abroad the bidder has to quote the price in foreign currency and as far as plant and equipment to be supplied from within the employers country the price should be collected in currency of employer‟s country. He submitted, as per clause 12.1(a), the bidder cannot bid for off–shore supplies otherwise than by way of foreign currency. Learned Authorised Representative submitted, in terms with the bid documents, assessee made off–shore

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supplies from the head office at Korea itself and transfer of title over the goods took place outside India to the employers upon loading of the plant and equipment onto the transportation medium outside India. He submitted, even the payment for off–shore supplies was received outside India by the head office. He submitted, the project office was not in existence either at the time of bidding or execution of the contract. Only after entering into contract the project office was established for the limited purpose of undertaking on–shore supplies and on–shore services, however, the project office had no role to play in relation to off–shore supplies. He submitted, none of the aforesaid facts have been controverted by the Departmental Authorities. Learned Authorised Representative submitted, as off– shore supply is a distinct component of the turnkey contract and the title to the goods passed outside India, no income is received or deemed to be received or accrues or arise or is deemed to accrue or arise in India. He submitted, Explanation–1(a) to section 9(1)(i) specifies that only so much of income is taxable in India as can reasonably be attributable to the operations carried out in India. He submitted, as the only operations in India relate to on–shore supplies and on–shore services, income from these activities having already been offered to tax by the assessee, no further tax liability can arise. Therefore, income from off–shore supplies is not chargeable in India as

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per the provisions of section 5 r/w section 9. Learned Authorised Representative submitted, as the project office had no role to play in relation to off–shore supply, income from off–shore supply is not attributable to the P.E. in India. Therefore, as per article 7 of the treaty between India and Korea, it is not taxable in India. In support of such contention, the learned Authorised Representative heavily relied upon the decision of the Hon'ble Supreme Court in Ishikawajima Harima Heavy Industries (supra) and took us through the relevant portions of the judgment. Further, referring to the decision of the Hon'ble Jurisdictional High Court in DIT v/s Xelo Pty. Ltd., (203 Taxman 475), the learned Authorised Representative submitted, in the said case the Hon'ble Jurisdictional High Court while examining identical nature of contract with Metro Railway for supply of equipment and services off–shore as well as on–shore in a turnkey project has held that as the terms of contract distinctly set out the quantum of off–shore supplies and also the quantum of payment for the same, it cannot be brought to tax in India. In this context, learned Authorised Representative also relied upon the following decisions also:–

i) DIT v/s Toyo Engineering Corp. ITA no.663/2011, dtd 23.1.2013 ii) DIT v/s Siemens Akliongesellschaft, ITA no.1033/2011; 20.11.2012 iii) DIT v/s L.G. Cable Ltd., 237 CTR 438; and iv) National Petroleum Construction v/s DIT, 383 ITR 648.

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no.8862/Mum./2011, dated 6th January 2016. He submitted, in the said decision, the Tribunal, while relying upon the decision of the Hon'ble Madras High Court in Ansaldo Energia Spa (supra), had also observed that the decision in the case of Ishikawajima Harima Heavy Industries (supra). He submitted, as per these decisions, even if title in respect of off–shore supply of goods passed outside India it alone cannot decide the issue of taxability. He submitted, the AAR in case of Roxar Maximum Reservoir Performance WLL, 349 ITR 189, also observed that a contract has to be read as a whole and the purpose for which the contract is entered into by the party is to be ascertained from the terms of the contract. Relying upon the said decision, learned Departmental Representative submitted, when the contract is a composite contract, the off–shore supply of goods being inextricably linked to its utilisation in execution of contract in India is taxable in India. He submitted, when there is no doubt that the contract is for a turnkey project, from survey stage to successful commissioning stage, and it is not a contract for supply of goods, it is to be assumed that the assessee has undertaken complete responsibility of the entire turnkey project of which off–shore supply of goods is a part. He submitted, off–shore supply of goods being inextricably connected with the turnkey project, it cannot be divorced from the off–shore installing and commissioning. Therefore, he submitted, off–shore supply of

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goods being a part of turnkey project has a strong economic and territorial nexus with India. Hence, the income from off–shore supply which is attributable to assessee‟s P.E. is required to be brought to tax in India under section 9(1)(i) of the Act r/w Article–7 of DTAA. Refuting the contention of the learned Authorised Representative that the contract has been distinctly demarcated into off–shore supply and on–shore installation, therefore, income from off–shore supply is not connected with on–shore installation, the learned Departmental Representative submitted that such demarcation has been artificially made, hence, does not change the character of composite contract. He submitted, as far as the contractee is concerned, it does not matter to it as it is concerned with the completion of complete turnkey project. Therefore, such a demarcation is only a chosen method of execution of turnkey project.

i) Roxar Maximum Reservoir Performance WLL, 349 ITR 189;

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ii) Ansaldo Energia SpA, 310 ITR 237; iii) Sedco Forex International Inc. v/s CIT, [2008] 299 ITR 238 (Uttrakhand) iv) Verizon Communication Singapore Pvt. Ltd. v/s ITO, 361 ITR 575 (Mad.); and v) Dongfang Electric Corporation v/s DCIT, 52 SOT 496;

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(supra). He submitted, as no definition of the word “through” has been provided under India–Korea DTAA by virtue of Article–3(2), the meaning of “through” provided in Explanation–4 to section 9(1)(i) is applicable to DTAA also. He submitted, even the Courts have held that Explanation inserted by Finance Act retrospectively can be read into DTAAs. He submitted, the expression „directly or indirectly‟ used in section 9(1)(i) and Article 7 of the India Korea DTAA are wide enough to take into its ambit the off–shore supply contract. The learned Departmental Representative submitted, even otherwise also, by virtue of force of attraction rule, the off–shore supply of goods is attributable to assessee‟s P.E. in India, therefore, income attributable to off–shore supply of goods has to be taxed in India. The learned Departmental Representative submitted, the fact that out of the total consideration, Rs. 22 crores has been ascribed to off-shore supply of goods and only Rs.8.00 crores had been ascribed to on–shore installation raises a strong suspicion as to the attempt on the part of the assessee to keep bulk of consideration out of tax net in India by claiming off–shore supply of goods not attributable to P.E. in India and thus, not taxable in India. Learned Departmental Representative submitted, the decision of the Hon'ble Supreme Court in Ishikawajima Harima Heavy Industries (supra), will not be applicable to assessee‟s case in view of number of developments having taken place thereafter

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and the said decisions no longer make the decision of Hon'ble Supreme Court in Ishikawajima Harima Heavy Industries (supra) a good precedent to follow. He submitted, even the decision of the Hon'ble Supreme Court in Ishikawajima Harima Heavy Industries (supra), is factually distinguishable as in that case, it was consortium of 5 parties which undertook the contract for which the price and role of each member of the consortium have separately been fixed and it was on these facts the Hon'ble Supreme Court found that by implication, the contract was a divisible one and the off–shore supply made by it had no territorial nexus to India. On the other hand, the assessee‟s contract is a composite one, hence, not severable. He submitted, while in assessee‟s case, contractee invited bids from single parties, in case of Ishikawajima Harima Heavy Industries (supra), bid was invited from a consortium of five parties. He submitted, in case of Ishikawajima Harima Heavy Industries (supra), the treaty under consideration was India Japan DTAA and as per Para–6 of the protocol to the said DTAA extent of income that can be taxed has to be determined on the basis of part played by the P.E. in the transaction and the Court had given a finding that P.E. had not played any part in respect of off–shore supply of goods. He submitted, the decision in DIT v/s Xelo Pty. Ltd. (supra), would also not apply for the reason for which Ishikawajima Harima Heavy Industries (supra) is not applicable.

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He submitted, the decision of the Hon'ble Delhi High Court in L.G. Cables Ltd. (supra), is not applicable as the non–resident company was awarded two separate contracts one for off–shore supply of goods and services and another for on–shore erection, installation, etc. He further submitted that in the case of L.G. Cables Ltd. (supra), the Hon‟ble High Court did not discuss the decision of Roxar Maximum Reservoir Performance WLL (supra) and Ansaldo Energia SPA (supra). He submitted, the Hon‟ble High Court also did not have the benefit of the Hon'ble Supreme Court‟s decision in the case of Vodafone International Holdings B.B. (supra). Thus, it was submitted by the learned Departmental Representative the consideration received towards off–shore supply of goods was rightly taxed in India.

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upon the decision of Hyundai Heavy Industries Co. Ltd., 291 ITR 482 (SC), it was submitted, all profits of a non–resident company from its business connection in India would be taxable in India but only so much of the profit having economic nexus with P.E. in India would be taxable in India. As far as the contention of the Department that the decision rendered in case of Ishikawajima Harima Heavy Industries (supra) is no more a good law in view of the subsequent development on the issue, the learned Authorised Representative submitted, the decisions relied upon by the learned Departmental Representative, while advancing such proposition, have either been over–ruled or has been held as inapplicable, therefore, those decisions cannot be made applicable to assessee‟s case. Thereafter, the learned Authorised Representative proceeded to distinguish each of the decisions relied upon by the learned Departmental Representative.

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ITR 001, the Hon‟ble High Court held that though instruction no.1829 (supra), was withdrawn subsequently, however, the reason for the withdrawal is something else and it has nothing to do with any change in understanding of law. He submitted, instruction no.1829 (supra) does not lay down the principle of divisibility of contract, whereas, it primarily deals with status of consortium for tax purposes and related issues arising and, that too, specifically for power projects. He submitted, in many of the decisions wherein it has been held that off– shore supply is not taxable, instruction no.1829 (supra) is not at all being referred to. As far as contention of the learned Departmental Representative regarding applicability of Explanation–4 to section 9(1)(i), learned Authorised Representative submitted, though, Explanation–4 of section 9(1)(i) was inserted by Finance Act, 2012, much before the draft assessment order, as well as final assessment order, however, none of the Departmental Authorities including DRP have referred to the said Explanation. He submitted, even otherwise also, Explanation–1(a) to section 9(1)(i), would apply and not Explanation 4. He submitted, in Explanation 1(a), the word “through” does not appear. Therefore, by virtue of Explanation 1(a) to section 9(1)(i) territorial nexus is required for taxing the income in India as held by the Hon'ble Supreme Court in Ishikawajima Harima Heavy Industries (supra). He submitted, even assuming Explanation 4 is to

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be considered for the purpose of section 9(1)(i), however by virtue of said Explanation 4, off–shore supply is not taxable since off–shore supply is by means of, in consequence of order by reason of the contract, entered into with the employer and not by means of or in consequence of or by reason of P.E. / business connection. He submitted, in assessee‟s case, reverse is true, as the project office came into existence as a consequence of the contract entered into by the assessee with the employer. He submitted, the word “through” cannot be regarded as a term not defined in DTAA, but defined in the Act. He submitted, Explanation 4 is specific to the deeming provisions of section 9(1)(i) and cannot apply even to the other provisions of the Act, since it is not a definition contained in section 2 of the Act, hence, cannot be read into DTAA by relying upon Article 3(2) of the DTAA. He submitted, the decisions relied upon by the learned Departmental Representative are not in the context of Explanation to Section 9(1)(vi) and Explanation below section 9(2), therefore, do not have relevance to the present case. He submitted, even otherwise also, in the case of DIT v/s New Skies Satellite B.V., (382 ITR 114), the Hon‟ble Delhi High Court after considering a number of decisions referred to by the learned Departmental Representative, including Verizon Communication Singapore Pte. Ltd. v/s ITO, 361 ITR 575 (Mad.) and Siemens Alkiongesellschaft (supra), held that Explanation

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to section 9(1)(vi) inserted by Finance Act, 2012, will not affect the corresponding article of the DTAA and the interpretation thereunder unless such change is incorporated into the DTAA itself. The learned Authorised Representative referring to Article–7(1) of the DTAA submitted that the word “through” appears only in the first sentence and not in the second sentence which specifies the portion of profit that can be taxed under Article–7. Learned Authorised Representative submitted, when the Courts decided that off–shore supplies are not taxable in India, Explanation 4 to section 9(1)(i) was already in the statute book. The learned Authorised Representative submitted, the argument of the Departmental Authorities that the word “directly” or “indirectly” as well as force of attraction rules provided in Article–7 of India-Korea DTAA, are factually incorrect as the word “indirectly” is not appearing in Article 7(1) of the DTAA and the India Korea DTAA does not contain force of attraction rule. As far as the allegation of the Department that consideration is heavily skewed in favour of off–shore supply of goods, the learned Authorised Representative submitted, such allegation is without any basis and it is neither a case of Assessing Officer nor the DRP. He submitted, even otherwise also, the contention of the learned Departmental Representative is factually incorrect which is very much evident from the contract value. The learned Authorised Representative finally submitted, though, the

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learned Departmental Representative has tried to distinguish the decision of the Hon'ble Supreme Court in Ishikawajima Harima Heavy Industries (supra) as well as other decisions relied upon by the assessee, however, the assessee‟s case is fully covered by these decisions.

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decided. MRVC on 15th July 2008, invited international competitive bid for supply, laying, testing and commissioning of 66 KV (E) Grade Single Core 400 sq.mm. Copper Conductor XLPL Insulated Feeder Cables for Borivili, Vile Parle section of Mumbai Suburban of Western Railway as per clause 10 of the Bid. The scope of work as per the bid, is supply, laying, testing and commissioning of 66 KV (E) Grade Single Core 400 sq.mm. Copper Conductor XLPL Insulated Feeder Cables in certain sections of Western Railway. The completion period of the contract is six months from the date of award of contract. At this stage we think it appropriate to deal with certain clauses of the Invitation For Bid (IFB). Clause 10 of the IFB provides price schedule. Clause 11.3 of the IFB, reads as under:–

11.3 Bidder’s shall give a breakdown of the prices in the manner and detail called for in the price schedule. Where no price schedules are included in the bidding documents, bidders shall present their prices in the following manner:– Separate numbered schedules shall be used for each of the following elements. The total amount from each schedule (1 to 4) shall be summarized in a grand summary (schedule 5) giving the total bid price (s) to be entered in the bid form. Plant and equipment (including mandatory Schedule no.1 spare parts) supplied from abroad Plant and equipment (including Mandatory spare parts) supplied from within the employer’s Schedule no.2 country. Local Transportation Schedule no.3 Installation Services Schedule no.4 Grand Summary (Schedule no.1 to 4) Schedule no.5 Recommended Spare Parts Schedule no.6

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Bidders shall note that the plant and equipment included in schedule numbers 1 and 2 above exclude materials used for civil, building and other construction works. All such materials shall be included and priced under schedule no.4, Installation Services.”

11.4 In the schedules, bidders shall give the required details and a breakdown of their prices as follows: (a) Plant and equipment to be supplied from abroad (Schedule no.1) shall be / quoted on a CIF port-of-entry, CIP border point basis or CIP-named place. In addition the FOB price (or the FCA price, as the case may be) shall also be indicated. (b) Plant and equipment manufactured or fabricated within the Employer's country (Schedule No.2) shall be quoted on an EXW (ex-factory, ex-works, ex-warehouse or off-the-shelf as applicable) basis, and shall be inclusive of all costs as well as duties and taxes paid or payable on components and raw materials incorporated or to be incorporated in the facilities. (c) Local transportation, insurance and other services incidental to delivery of the plant and equipment (Schedule No. 3). (d) Installation Services shall be quoted separately (Schedule No. 4) and shall include rates or prices for all labor, contractor's equipment, temporary works, materials, consumables and all matters and things of whatsoever nature, including operations and maintenance services, the provision of operations and maintenance n1.nua1s, training etc., where identified in the bidding documents as necessary for the proper execution of the installation services, including all taxes, duties, levies and charges payable in the Employer's country as of twenty eight (28) days prior to the deadline for submission of bids. (e) Recommended spare parts shall be quoted separately (Schedule 6) as specified.”

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“12.1 Prices shall be quoted in the following circumstances:– (a) Plant and equipment cove red under ITB sub–clause 11.4(a) to be supplied from abroad shall be quoted entirely in the currency of any bank member country. If the Bidder wishes to be paid in a combination of amounts in different currencies, it may quote its price accordingly but use no more than three foreign currencies. (b) Plant and equipment covered under ITB sub–clause 11.4(b) to be supplied within the Employer’s country, shall be quoted in the currency of the Employer’s country unless otherwise specified in the Bid Data Sheet. (c) Unless otherwise specified in the Bid Data Sheet, local transportation, insurance and other services incidental to delivery of the plant and equipment covered under ITB sub– clause 11.4(c) and installation services covered under ITB sub–clause 11.4(d) shall be quoted in either foreign and / or local currency, depending upon the currency in which the costs are to be incurred and in accordance with the provisions of ITB sub–clause 11.4(a) and (b) above.”

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Total Cost (`) Item Description $ 1,259,445 = INR 1A Supply from abroad 55,554,119 Supply from within the 1B INR 29,984,210 employer’s country 1C Structure of taxes INR 19,845,316 Inland transportation, insurance 1D INR 5,871,941 and other incidental charges Agent Commission on CIF INR 1,111,082 INR 112,366,668 (Rupees Eleven Crore Twenty Total: Three Lakh Sixty Six Thousand Six Hundred Sixty Eight only)

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undertaken by the contractor have been distinctly and separately earmarked and provided. As could be seen from clause 12.1 of the IFB, it requires the bidder to separately mention the bid currency in respect of plant and equipment to be supplied from abroad. On reading of clause 12.1 (a & b), it is evident, as per the IFB, price for plant and equipment to be supplied from abroad is to be quoted entirely in foreign currency, whereas, price for plant and machinery to be supplied within the employer‟s country should be quoted in the currency of the employer‟s country,i.e., in rupee terms. Thus, reading of the bid document itself indicates that the employer / contractee wanted the contract to be knocked down to different compartments / parts. Further, Schedule–1(A) and 1(B) of the contract clearly identifies the nature and scope of off–shore supplies and on–shore supplies and service and the price to be paid. Thus, reading of IFB as well as contract as a whole makes it clear that, though, the contract document is one but the scope of work envisaged therein are distinct and separate which is evident from the price schedules under the contract. Further, as far as off shore suppliers are concerned, Clause 31 of the Contract speaks of transfer of ownership of the plant and equipment. As per clause 31.1 ownership of plant and equipment including spare parts to be imported into the country where the site is located shall be transferred to the employer upon loading onto the

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mode of transport to be used to convey the plant and equipment from the country of origin to India. Clause 31.5 provides, notwithstanding the transfer of ownership of plant and equipment the contractor shall be responsible for care and custody together with risk or loss or damage thereto until completion of the facilities or the part thereof in which such plant and equipments are incorporated. On a perusal of the invoice raised towards off–shore supplies, copies of which are submitted in the paper book, we find that sales were effected directly by the company from Seol, Korea, or some other foreign destinations to the employer MRVC and goods were transported to India. It is also evident that price charged in the invoice is in dollar. Thus, as could be seen, in terms of clause 31.1 of the contract, ownership over the plant and equipments got transferred to the name of MRVC once the plant and equipments were loaded on the mode of transport from the country of origin to India. It is also not disputed that payment for off- shore supplies were made outside India. On a reading of the IFB and the contract as a whole it appears that from the very beginning, the intention of the parties to the contract is to treat the off–shore supplies as a distinct and separate component of the contract. It is not disputed that in pursuance to the contract, assessee has supplied the goods not only from Korea but other countries to India. The issue before us is whether the price received towards supply of plant and

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equipments from abroad is taxable in India by virtue of a business connection through its P.E. It is the case of the Department that as the assessee is executing a turnkey project and the contract is a composite one and since the work of laying, testing and commissioning is executed through the P.E. in India, the assessee has a territorial and economic nexus with India, therefore, profit arising out of off–shore supply of plant and equipment should be deemed to accrue or arise in India in terms of section 9(1)(i) of the Act. The aforesaid argument of the Department has to be examined in the light of relevant statutory provisions, provisions of India-Korea DTAA as well as judicial precedents cited before us.

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section (2) of section 5 r/w Explanation–1 makes it clear that income accruing or arising outside India will not come within the purview of total income as per section 5.

“(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non- resident; or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or

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(c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident:”

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only should give a break–down of the price while bidding for the work, but, clause 11.3 of the IFB specifies the mode and manner of providing price for different components of work. As per the IFB, in Schedule–1, the bidder has to provide the price for plant and equipment including mandatory spare parts supplied from abroad, in Schedule–2 should contain price for plant and equipment including mandatory spare parts supplied from within the employer‟s country (India). Schedule–3 should contain price for local transportation. Schedule–4 is for price for installation, service and in Schedule–5, the bidder has to provide a grand summary of price quoted in Schedule–1 to 4. In addition, clause 12.1 of the IFB also requires the bidder to quote the price for supplies to be made from abroad in the foreign currency, whereas, the price to be quoted for goods to be supplied within India is to be quoted in Indian currency. It is relevant to mention that the breakdown of price as per schedules provided in IFB were also incorporated in the contract executed between the parties and as far as off–shore supplies are concerned, the payment is to be made in U.S. dollar. Further, clause 31.1 provides that the transfer of ownership of goods to be supplied from abroad would take place as soon as the goods are loaded onto the mode of transportation. The sale invoices raised also demonstrate that the sale was effected in the country of origin where goods were manufactured i.e., in Korea or some other countries like Switzerland,

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etc. Thus, reading of the IFB as well as contract as a whole clearly demonstrate that the work entrusted under the contract is divisible and is divided into several components and the intention of the parties to the contract always has been to segregated the off–shore supplies of plant and equipments from the on–shore supplies and services. In other words, the intention of the parties to the contract was to treat the off–shore supplies of plant and equipment as a distinct and separate component of work having no connection with the on–shore supply and services. Thus, if we examine these facts vis-à-vis provisions contained under section 5(2) and 9(1)(i), firstly, it cannot come within the scope of total income under section 51(2) of the Act as the sale relating to off–shore supply were not only completed outside India with the transfer of ownership over the goods but the payments were also received outside India. Secondly, income cannot be deemed to accrue or arise in India through or from any business connection in India in terms of section 9(1)((i) because the income relating to off–shore supplies cannot be attributable to the operations carried out in India. Admittedly, off–shore supplies were made outside the territorial jurisdiction of India and also the transfer of ownership over the goods was also outside the territorial jurisdiction of India. Moreover, the income relating to off–shore supply cannot be considered to be through any business connection in India because

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none of the conditions of Explanation–2 to section 9(1)(i) are fulfilled. Undisputedly, the project office (P.E) of the assessee came into existence only after the formalization of the contract between the assessee and MRVC. Therefore, the P.E. had no role to play either in obtaining the contract or off–shore supply of goods made by the assessee. Insertion of explanation 4 to section 9(1)(i) by Finance Act, 2012, in our view, will not improve the situation for the department, for the following reasons. Explanation 1(a) of section 9(1)(i) makes it clear, only that part of income which can reasonably be attributable to operations carried out in India will be deemed to accrue or arise in India. As per explanation 4 of section 9(1)(i) the word „through‟ shall mean „by means of‟, „in consequence of‟ or „by reason of‟. Thus, if explanation 4 is read alongwith section 9(1)(i) it would mean, income would deem to accrue or arise in India if it is „by means of‟ or „by reason of‟ or „in consequence of‟ the business connection in India. If facts of assessee‟s case is examined in terms of explanation 2 to section 9(1)(i), the income derived from off-shore supply cannot be held to be through any business connection in India, hence, cannot be deemed to accrue or arise in India as per section 9(1)(i) of the Act. Moreover, though, explanation 4 to section 9(1)(i) existed in the statute when the Assessing Officer and DRP passed their orders, none of them referred to the said provision. Therefore, at this stage Ld.

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Departmental Representative cannot build up a new case. Since we have held that income derived from off-shore supplies is not taxable under the provisions of the Act, there is no need to examine the applicability of Double Taxation Avoidance Agreement. However, for the sake of completeness we also intend to examine the aspect of taxability of off-shore supply under the provisions of India-Korea Double Taxation Avoidance Agreement. Article-7 of the treaty which provides for taxability of business profits reads as under:- “ARTICLE-7 BUSINESS PROFITS “1.The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting state through a permanent establishment situated therein. If the enterprise carries on business as aforesaid the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. 3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment including executive and general administrative expenses so incurred 'whether in the State in which the permanent establishment is situated or elsewhere, which are allowed under the provisions of the domestic law of the Contracting State in which the permanent establishment is situated. 4. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise;

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shore supply will not be taxable in India even under the treaty. Having held so, we consider it appropriate now to analyse the ratio laid down in certain judicial precedents which have a direct bearing on the issue.

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assessee and the Department in relation to its taxability under the Income Tax Act. While the assessee claimed that the amount received towards 0ff–shore supply and off–shore service being outside the territorial jurisdiction of India is not taxable under the Income Tax Act, however, the Department was of the view that as the assessee was having a P.E. in India, it has a business connection and, therefore, the amount received towards off–shore supplies and off–shore services will also be taxable under the Act. While doing so, the Department held that the contract executed between the parties is a composite contract and the off–shore supply and 0ff–shore services are inextricably linked to the other activities since it is a turnkey project and the contract is not divisible. The Hon'ble Supreme Court observed, even if a particular contact is fashioned as a turnkey contract or a turnkey project, they are not of much significance. Merely, for the reason that it is a turnkey contract, it would not mean that for the purpose of taxability, the entire contract must be considered to be an integrated one so as to make the assessee pay tax in India. The Court observed, taxable event in execution of a contract may arise at several stages in several years. The liability of the parties may also arise at several stages. The obligations under contracts are distinct one. The supply obligation is distinct and separate from the service obligation. The price for each of the components of the contract is separately being

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dealt with. The price in each of the scheme is also different. The Court observed, the very fact that in the contract, the supply segments and service segment have been specified in different parts is a pointer to show that the liability of the assessee would also be different. The Court after analyzing the scope of work as contained in the contract, observed, imposition of tax on income arising from a business connection, have to be considered keeping in view the scope and intent of the contract. The Hon'ble Supreme Court observed territorial nexus doctrine plays an important part in the assessment of tax, therefore, the issue to be decided is, as to whether income arising out of a particular transaction would be required to be apportioned to each of the territories wherein operations were carried out. The Court observed, income arising of operations in more than one jurisdiction would have territorial nexus with each of the jurisdiction on actual basis. In that case, it will not be correct to contend that the entire income accrues or arise in each of the jurisdiction. The Hon'ble Supreme Court, after analysing the terms of the contract vis-a-vis the provisions contained under section 9 of the Act, as well as relevant articles of the DTAA observed, where the payments for off–shore and on–shore supply of goods and services is clearly demarcated, it cannot be held to be a composite contract. The Hon'ble Supreme Court held, a contract must be construed keeping in view the

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intention of the parties. Though, the applicability of tax would depend upon the nature of the contract but the same should not be construed keeping in view the taxing provisions. The Hon'ble Supreme Court referring to Klaus Vogel on double taxation conventions observed that the distinction between the existence of a business connection and income accruing or arising out of such business connection is clear and explicit. Where the P.E. is not involved in the disputed transaction, in any way, the P.E. would be excluded from being a part of the cause of income itself, hence, there would be no business connection. The Court observed, when the off–shore supply and services were rendered outside India and the P.E. has no role to play in respect of earning of income thereto, the income arising therefrom cannot be attributable to the P.E. so as to bring it within the charge of tax. For attracting the taxing statute, there has to be some activities of the P.E. Even under the DTAA, the tax liability in respect of overseas transaction would not arise in India, in view of the specific provisions of section 9, as the said provision has a direct territorial nexus. The Hon‟ble Court observed, relief under the DTAA having regard to the provisions contained under section 90(2) of the Act, would arise only in the event the taxable income of the assessee arises in one contracting State on the basis of accrual of income in another contracting State on the basis of residence. However, insofar as

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accrual of income in India is concerned, taxability must be read in terms of section 4(2) r/w section 9 whereupon the question of seeking assessment of such income in India on the basis of DTAA would arise. The Court held where different severable parts of the composite contract are performed in different places, the principle of apportionment can be applied to determine which fiscal jurisdiction can tax that particular part of the transaction. The Court observed, this principle helps to determine where the territorial jurisdiction of a particular state lies to determine its capacity to tax an event. Applying it to composite transaction which has some operation in one territory and some in others is essential to determine the taxability of various operations. Therefore, the concept‟s of profit of business connection and P.E. cannot be mixed up. Whereas, business connection is relevant for the purpose of application of provisions of section 9, concept of P.E. is relevant for assessing income of a non–resident under the DTAA. The Court observed, when the entire transaction was completed on high seas, the profit on sale will not arise in India, therefore, the transaction itself having been excluded from the scope of taxation of the Act, the application of DTAA would not arise. Finally the Court as far as taxability of off–shore supply under the Act is concerned, summed up its conclusion as under:–

“79. We, therefore, hold as under:– Re : Offshore Supply :

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(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. (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 section 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.

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outside India i.e., in Korea and the transfer of title over the goods was effected to the employer outside territorial jurisdiction of India. This fact is not only proved from the actual sale event but also the clauses of the contract. Further, the P.E. has no role to play either in obtaining the contract or in relation to off–shore supplies. That being the case, the profits arising from off–shore supplies is not taxable under the provisions of the Act if considered vis–a–vis section 5(2) r/w Explanation–1(a) and section 9(1)(i) of the Act. Therefore, the question of applicability of DTAA does not arise.

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(supra). The same view has also been expressed in the following decisions:–

i) DIT v/s Toyo Engineering Corporation; ITA no.663/2011, 23.1.2013 ii) DIT v/s L.G. Global Ltd., 237 CTR 438; iii) National Petroleum Construction v/s DIT, 383 ITR 648; and iv) DIT v/s Siemens Akliongesellschaft, 310 ITR 320 (Bom.)

Learned Departmental Representative observed, in terms of 31. provisions of section 5(2) r/w section 9 of the Act, source rule applies as per which if there is an economic or territorial nexus with the income received by non–resident outside India, it is deemed to accrue or arise in India as per the provisions of section 9 as well as DTAA. In this context, learned Departmental Representative has relied upon certain decisions. Hereinafter, we will briefly deal with the decisions relied upon by the learned Departmental Representative and their applicability to the facts of the case.

One of the decision relied upon by the Ld. Departmental 32. Representative is in the case of Orpak System Ltd. vs. ADIT (176 TTJ 655) On a careful reading of the said decision we find that it is factually distinguishable. Factual analysis of the order indicate that

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separate bills raised by the assessee in dollar terms for supply of equipments and in rupee terms for the work relating to installation was to suit its convenience and was not contemplated by the HPCL (contractee / employer). However, in the present case, it is very much evident from the IFB that it is the employer which wanted the bidders to quote their price for off–shore supply and on–shore supply separately in foreign currency and rupee terms respectively. Further, the Tribunal in Orpak Systems Ltd. (supra) has followed the decision of Ansaldo Energia SPA (supra) while coming to its conclusion. On a reading of the aforesaid decision of the Hon‟ble Madras High Court, we find it was decided on the peculiar facts arising in that case. In the case of Ansaldo Energia SPA (supra), it was a single bidder and the employer never intended to segregate the bid price, however, at the instance of the contractor, the bid amount was broken up which is not the case with the assessee. On the contrary, the facts in assessee‟s case are more or less identical to the facts arising in the case of Ishikawajima Harima Heavy Industries (supra) the Hon'ble Delhi High Court in L.G. Global Ltd. (supra), The Tribunal, Delhi Bench in Techchnip Italy SPA v/s ACIT, 136 TTJ 403 (Del.) and AAR in the case of L.G. Global Ltd., 337 ITR 35, have held that the decision in Ansaldo Energia SPA (supra) is peculiar to its facts and cannot be applied in all cases. On a reading of the decision rendered in case of Roxar

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Maximum Reservoir Performance WLL (supra) it is noticed that heavy reliance has been placed on the proposition laid down in case of Vodafone International Holdings B.V vs. UOI (2012) 341 ITR 1, that look at approach instead up look through approach has to be taken. However, in the facts of the present case there is no need to adopt such approach as the IFB as well as contract document make the intention of the parties clear that the offshore supplies were to be kept as a distinct and separate transaction and not to be included with the on source supply and services. When the terms of the contract are specific there is no need to adopt a look at or look through approach. Moreover, in case of Linde AG, Linde Engineering Division vs. DDIT(2014) 44 taxmann.com,244, the Hon‟ble Delhi High Court relying upon the decision of Ishikawajima Harima Heavy Industries (supra) held as under:- “84.In our view, the approach as well as the conclusion of the Authority is flawed. First of all, the Authority erred in proceeding on the basis that the contract as a whole was the subject of taxation. The subject matter of taxation was not the Contract between the parties but the income that the petitioner derived from the Contract. Thus, the situs of the object of the Contract would not be as relevant as determining the situs where the income of Linde had accrued or arisen. By virtue of Section 4 of the Act, income tax is charged in respect of the total income of a person. By virtue of Section 5 of the Act, the scope of total income of a non-resident is limited to income which is received or deemed to be received in India and income which accrues or is deemed to accrue or arise in India. It, therefore, follows that the object of inquiry would have to be to determine whether any income of Linde accrued or arose in India or whether any income could be deemed to accrue or arise in India. The fact that the

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contractual obligations of Linda were not limited to merely supplying equipment, but were for due performance of the entire Contract, would not necessarily imply that the entire income which was relatable to the Contract could be deemed to accrue or arise in India. 85. The principle of apportionment of income on the basis of territorial nexus is now well accepted. Explanation 1(a) to section 9(1)(i) of the Act also specifies that only part of income which is attributable to operations in India would be deemed to accrue or arise in India. It necessarily follows that in cases where a contract entails only a part of the operations to be carried on in India, the assessee would not be liable for the part of income that arises from operations conducted outside India. In such a case, the income from the venture would have to be appropriately apportioned. The Supreme Court in the case of Ishikawajima Harima Heavy Industries (supra) had considered this aspect and held that merely because a project is a turnkey project would not necessarily imply that for the purposes of taxability, the entire contract be considered as an integrated one. The taxable income in execution of a contract may arise at several stages and the same would have to be considered on the anvil of territorial nexus. The decision in the case of Ishikawajima Harima Heavy Industries (supra) is clearly applicable to the facts of the present case as in that case also the contract in question was for a turnkey project where the object was to setup a Liquefied Natural Gas(LNG) receiving, storage and degasification facility. Indisputably, insofar as obligations of parties are concerned, this contract was also an indivisible contract. The Supreme Court held that for the purposes of determining the taxability, it was necessary to enquire as to where the income sought to be taxed had accrued or arisen. The impugned ruling is thus clearly contrary to the decision of the Supreme Court in Ishikawajima Harima Heavy Industries (supra).”

The Hon‟ble Court while considering the plea of look at vs. look through approach referred to the decision of the Hon‟ble Supreme Court in the case of Vodafone International Holdings B.V.(supra) and observed as under:-

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91.For the above reason, Section 9(1)(i) cannot by a process of interpretation be extended to cover indirect transfers of capital assets/property situate in India. To do so, would amount to changing the content and ambit of Section 9(1)(i).” 87. In the present case also, Linde has contended that it being nonresident is not liable to pay tax in India and the sweep of Section 9(1) of the Act cannot be extended to income whch has not accrued or arisen in India.

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Industries (supra) has not been diluted by the decision of Vodafone International Holdings & BV (supra) and still continues to be good law. The same view was again expressed by Hon‟ble Delhi High Court in the case of DIT vs. Nokia NetworksOY( 358 ITR 259). The decision of Sedco Forex International (supra) relied upon by the learned Departmental Representative is also not applicable due to difference in facts. As far as decision in case of Verizon Communications Singapore Pte. Ltd., v/s ITO, (361 ITR 575) (Mad.) is concerned in that case the decision of Ishikawajima Harima Heavy Industries (supra) was referred to in the context of taxability of offshore services and explanation to section 9(2). Moreover it pertains to taxability of royalty in terms of section 9(1)(vi) hence factually different from assessee‟s case. Further in case of DDIT v/s New Skies Satellite, B.V., 382 ITR 114, the Hon‟ble Delhi High Court while considering the law propounded in case of Verizon Communications Singapore Pte. Ltd. (supra) observed it did not cite reason for the extension of the amendments to the double taxation avoidance agreement. The Hon‟ble Delhi High Court went on to observe no amendment to the act, whether retrospective are prospective, can be read in a manner so as to extend its operation to the terms of an international treaty. The Hon‟ble Court observed a declaratory amendment, much less one, which may seek to overcome an unwelcome judicial interpretation of

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law cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. The Hon‟ble Court observed employing interpretive amendments in domestic law as a means to imply contoured effects in the enforcement of treaties falls just short of a breach but is never the less indefensible. In view of the aforesaid observations of the Hon‟ble Delhi High Court we are of the opinion that this decision will not be applicable. The other decisions cited by the learned Departmental Representative for the same reason are not applicable, hence, we did not felt the need to discuss them individually.

The contention of the learned Departmental Representative that 33. CBDT instruction no. 1829 has been withdrawn will not have much relevance on the issue.

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facts involved in case of Ishikawa Jima Harima Heavy Industries Ltd.(supra) hence, the principles laid down therein would squarely apply to assessee‟s case. Therefore applying the ratio laid down therein we hold that the amount received towards offshore supply is not taxable in India. As far as contract with DMRC is concerned it is evident from the observations of the departmental authorities that the nature of contract is similar to MRVC. Therefore our aforesaid observations will equally apply to the offshore supplies made by assessee in relation to this contract also. In the aforesaid view of the matter we hold that the amount received by the assessee in respect of offshore supplies would not be taxable in India. Ground no.1, is allowed.

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supply and service as well as off–shore supplies on presumptive basis by applying rate of 10% in terms of section 44BB and 44BBB. Though, the assessee had challenged the estimation of profit at 10% of the total contract receipt, however, the DRP upheld the order of the Assessing Officer.

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excluded from the contract receipt for computing income of the assessee. As far as the applicability of section 44BB/44BBB are concerned, on careful reading of these provisions, we have found that while section 44BB is applicable to business of exploration of mineral oil, section 44BBB is applicable to foreign companies engaged in the business of civil construction, erection, testing, or commissioning in connection with a turnkey power project approved by the Central Government. Thus, estimation of income @ 10% on presumptive basis by applying aforesaid provisions is not proper. Moreover, Assessing Officer has not pointed out any specific defect in the accounts of the assessee. That being the case, we direct the Assessing Officer to compute the income of the assessee from revenue earned on account of on–shore supply and on–shore services after verifying the accounts of the assessee and examining the genuineness of expenditure claimed. The ground no.2, is allowed for statistical purposes.

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the payer. However, the DRP did not accept the contention of the assessee and sustained levy of interest.

i) NGC Network Asia LLC, 222 CTR 85; ii) G.E. Package Power Inc., 373 ITR 65; iii) DIT v/s Xelo Pty Ltd., 203 taxmann.com 475; and iv) Satellite TV Asia Region Ltd. v/s DDIT, 117 TTJ 249 (Mum.).

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Court in Xelo Pty Ltd. (supra) expressed similar view. The Tribunal, Mumbai Bench, in Satellite TV Asia Region Ltd. (supra) after taking into account the decision of the Hon'ble Delhi High Court in Alcatel Lucent USA Inc. (supra) observed, the primary liability of deducting tax was that of the payer. Hence, no interest is leviable on the assessee under section 234B for failure to pay advance tax. Therefore, in principle, we agree with the assessee that levy of interest under section 234B is not proper. This ground is allowed.

ITA no.5642/Mum./2015 – A.Y. 2012–13

“The appellant objects to the order dated 26 November 2015 passed by the Deputy Commissioner of Income Tax (International Taxation)-(2)(2)(1), Mumbai ('the AO') for the assessment year 201213, pursuant to the directions dated 30 September 2015 issued by the Dispute Resolution Panel ('DRP') under section 144C(5) of the Income-tax Act, 1961 ('the Act') on the following among other grounds. Ground No. 1: Income in relation to offshore supply is not taxable in India.

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1.1 The learned AO / DRP erred in law and in facts in seeking to tax in India, a sum of Rs. 3,23,18,384 for the year under consideration, as against the loss of Rs. 1,25,79.964 declared by the appellant in its return of income. 1.2 The learned AO I DRP erred in law and in facts in considering revenue from Offshore Supplies for the purpose of computing the appellant's income taxable in India, without appreciating that the income therefrom is not taxable in India both as per the Act as well as the Double Taxation Avoidance Agreement between India and Korea. Ground No. 2: Income, if any, should be taxable only to the extent it can be attributed to operations in India. 2.1 Without prejudice, the learned AO I DRP erred in treating the profit from Offshore Supplies (arrived at on a presumed basis of 10% of revenue from Offshore Supplies) as taxable in India without undertaking an attribution thereof to the Permanent Establishment / alleged business connection in India. 2.2 The learned AO I DRP erred in disregarding the submissions made and the grounds of( objections raised by the appellant. Ground No. 3: Disallowance of expenditure in relation to contract with Transmission Corporation in India. 3.1 The learned AO 8 DRP erred in law and facts in disallowing in the year under consideration, expenses of Rs.2,20,05,206 incurred by the Project Office in relation to Onshore Supplies and Onshore Services for the Contract entered into with Transmission Corporation of Andhra Pradesh Limited. Ground no.4: Levy of interest under section 234B of the Act: 4.1 The learned A.O. has erred in law and in fact, in levying interest under section 234B of the Act disregarding the fact that the appellant is a non–resident whose income is subject to tax deduction at source (which is supported by lower withholding tax certificates issued by the tax authorities in its case.”

64 Iljin Electric Co. Ltd.

65 Iljin Electric Co. Ltd.

Sd/- Sd/- SAKTIJIT DEY JASON P. BOAZ ACCOUNTANT MEMBER JUDICIAL MEMBER

MUMBAI, DATED: 14.10.2016 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary (Dy./Asstt. Registrar) ITAT, Mumbai