2016 (9) TMI 16 - AT - Income Tax

Income attributed to the offshore supply - Existence of PE in India - Held that - Section 9(1)(i) of the Act provides that income shall be deemed to accrue or arise in India if such income has accrued or arisen through or from a business connection in India. Further Explanation 1 to section 9(1)(i) of the Act provides that where a business of which all the operations are not carried out in India the income of the business deemed to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. Admittedly no portion of the offshore supplies involved any activities in India as all the activities in relation to the earning of income from offshore supplies took place outside India. Now even assuming that on account of contract being signed in India a business connection had been established still we have to examine the issue from India US DTAA point of view as the assessee was eligible to claim benefit under the treaty. As per Article 7(1) of the India US DTAA the business income of a US entity can be taxed in India only if it had PE in India. The AO held that assessee had PE in India for installation and commissioning and supply which also included the indigenous supply and presence of its personnel/ entities for providing training to ONGC personnel. These observations are primarily with reference to the contract being treated as a composite contract and does not refer to which PE as per Article 5 of the India-US treaty was there. Admittedly the assessee had no fixed place of business in India and its employees only gave training for proper execution of the project. Further assessee company did not take the services of any person in India except for supply of indigenous parts and therefore there was no dependent agent PE in India also. The AO has not brought on record any evidence to substantiate that the income from offshore supplies was attributable to alleged PE. Further if we consider the AO s view that there was installation PE then too as per Article 5(2)(j)&(k) there should have been presence for more than 120 days then only installation PE could be considered. The AO has not commented on this aspect. Therefore the entire findings of AO on the issue relating to PE are without any basis. Therefore considered from all perspectives no income can be attributed to the offshore supply.

Summary

Issues Involved:
1. Validity of reassessment proceedings.
2. Nature of the contract (composite, pure supply, or divisible).
3. Taxability of offshore supplies.
4. Taxability of onshore supplies.
5. Taxability of consideration for installation and inspection activities.
6. Taxability of consideration for training services.
7. Inclusion of service tax as part of receipts.
8. Attribution of income to alleged Permanent Establishment (PE) in India.
9. Charging of interest under section 234B.

Detailed Analysis:

1. Validity of Reassessment Proceedings:
The assessee challenged the reassessment proceedings on the grounds of unreasonable delay in rejecting objections and lack of opportunity to be heard. The Tribunal found no merit in the technical objection raised by the assessee, stating that the order passed under section 195 only prima facie determines the income chargeable for TDS and cannot be equated with assessment proceedings under section 143(3). Therefore, the reassessment proceedings were held valid, and ground no. 2 was rejected.

2. Nature of the Contract:
The Tribunal examined whether the contract with ONGC was a composite contract, a pure supply contract, or a divisible contract. The contract included multiple scopes of work with separate considerations for each component. The Tribunal concluded that the contract was divisible, not composite, as the consideration for various activities was separately identified and not dependent on the completion of other activities. This was evidenced by the terms of delivery and payment, which indicated that the title in goods passed offshore.

3. Taxability of Offshore Supplies:
The Tribunal held that no income could be attributed to offshore supplies as the title in goods passed offshore (FOB and FCA terms). The offshore supplies did not involve any activities in India, and even if a business connection was established, the income from offshore supplies could not be taxed in India under the India-US DTAA without a PE in India. The AO failed to substantiate the existence of a PE in India. Therefore, ground nos. 3 and 4 were allowed.

4. Taxability of Onshore Supplies:
The onshore supply of equipment was subcontracted to HGS India, which supplied goods directly to ONGC. The assessee claimed no profit was earned on this transaction as it was a reimbursement of actual value. The Tribunal restored this matter to the AO for verification, as it was not examined earlier. Ground no. 5 was allowed for statistical purposes.

5. Taxability of Consideration for Installation and Inspection Activities:
The Tribunal noted that the AO did not examine whether the necessary conditions for installation PE (presence for more than 120 days) were fulfilled. The matter was restored to the AO for proper verification of facts. Ground no. 6 was allowed for statistical purposes.

6. Taxability of Consideration for Training Services:
The assessee did not press this ground but requested verification to avoid double taxation, as onshore revenue was taxed in AY 2009-10. The Tribunal refrained from giving any direction as the ground was not pressed. Ground no. 7 was dismissed.

7. Inclusion of Service Tax as Part of Receipts:
The AO included USD 8500 for service tax as part of the contract receipts. The Tribunal restored this issue to the AO for independent examination, as it was not considered separately earlier. Ground no. 8 was restored to the AO.

8. Attribution of Income to Alleged PE in India:
The Tribunal upheld the estimation of 15% income attributable to the alleged PE in India for installation and training activities, subject to AO's verification of the existence of PE. Ground nos. 9 and 10 were dismissed with the observation that the functions performed in relation to installation and training were nominal compared to the overall contract.

9. Charging of Interest Under Section 234B:
The charging of interest under section 234B was held to be consequential. The AO was directed to recalculate the interest while giving effect to the appellate order. Ground no. 11 was addressed accordingly.

Revenue's Appeal:
The department's appeal regarding the application of a 15% profit rate on gross contractual receipts was dismissed, as the Tribunal upheld the 15% estimation subject to AO's verification of PE.

Stay Petition:
The stay petition was rendered infructuous and dismissed as the appeals were disposed of.

Conclusion:
The assessee's appeal was partly allowed, the departmental appeal was dismissed, and the stay petition was dismissed. The Tribunal provided detailed directions for the AO to re-examine specific issues and verify facts as necessary.