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2020 (2) TMI 1053 - AT - Income TaxIncome from offshore supplies - Income attribution - composite contracts - Offshore supply qua PE - amount paid or payable to the assessee whether in or out of India irrespective of whether towards offshore supply or towards onshore services become income u/s 5 and 9 of the Act by fiction created u/s u/s 44BBB - order of the CIT(A) holding the assessee a Dependent Agent Permanent Establishment - DTAA between India and Japan - HELD THAT - A perusal of the decision of the Hon ble High Court in LG Cables 2010 (12) TMI 948 - DELHI HIGH COURT shows that the Hon ble High Court has dealt with each of the issues raised by the AO in the present case. The Hon ble High Court has also referred to the decision of the apex court in the case of Ishikawajima Harmia Heavy Industries Co. Ltd. Vs. Director of Income-tax 2007 (1) TMI 91 - SUPREME COURT as held that the existence of PE would not constitute sufficient business connection. It has further been held that there exist a difference between the existence of a business connection and the income accruing or arising out of such business connection. The Apex Court has further held that para 6 of the protocol to the DTAA is not applicable because for the profits to be attributable directly or indirectly, the PE must be involved in the activity giving rise to the profits. In view of the above discussion, we are of the considered opinion that the ld.CIT(A) is correct in holding that the income from offshore supplies is not liable to tax in India both u/s 44BBB as well as under the provisions of Article 7 r.w. para 6 of DTAA between India and Japan. Accordingly, grounds No.1 and 2 raised by the Revenue are dismissed. Liaison offices - liaison offices do not constitute PE liable to tax in India. Since the facts and the issue involved are same in in assessee s own case in the immediately preceding assessment year 2005-06 we hold that the Liaison offices of the assessee do not constitute PE liable to tax in India. No income is liable to be attributed in India even if Mitsui Co. Ltd., constituted a DAPE Dependent Agent Permanent Establishment of the assessee in India Determination of income from Teesta and Purulia projects on cash basis instead of mercantile basis - HELD THAT - AO applied section 44BBB in respect of onshore supplies and onshore services in computing the income on the basis of amount accrued. We find the ld.CIT(A) at para 5.3 of the order has discussed the issue and held that as per the provisions of section 44BBB, it is a presumptive module. The relevant observation of the CIT(A) is at para 5.3 of his order. The ld. DR could not controvert the findings given by the ld.CIT(A). In our opinion, the ld.CIT(A) was fully justified in holding that while computing the presumptive income books of account are not required to be maintained. Therefore, what is received by the assessee during the year a fixed percentage of such receipt is deemed to be the income. In absence of any distinguishable features brought before us by the ld. DR in the findings given by the ld.CIT(A), we do not find any infirmity in the same. Accordingly, the same is upheld and the ground raised by the Revenue is dismissed.
Issues Involved:
1. Applicability of Section 44BBB for offshore supplies. 2. Taxability of income from offshore supplies under DTAA between India and Japan. 3. Determination of Permanent Establishment (PE) status of Liaison Office (LO). 4. Attribution of income to Dependent Agency Permanent Establishment (DAPE). 5. Method of accounting for income from projects (cash vs. mercantile basis). Detailed Analysis: 1. Applicability of Section 44BBB for Offshore Supplies: The assessee, a foreign company incorporated in Japan, entered into contracts involving offshore and onshore supplies and services for the Teesta and Purulia projects. The AO contended that the income from offshore supplies should be taxed under Section 44BBB of the Income-tax Act, 1961. However, the CIT(A) held that Section 44BBB does not apply to offshore supplies, as the provision is intended for civil construction, erection, testing, or commissioning activities within India. The CIT(A) relied on the Supreme Court's decision in Hyundai Heavy Industries and the ITAT's decision in Saipem S.P.A., which clarified that Section 44BBB cannot override the basic principles of income attribution under Section 5 of the Act. The Tribunal upheld this view, stating that offshore supplies are not covered under Section 44BBB and should not be taxed in India. 2. Taxability of Income from Offshore Supplies under DTAA: The AO argued that the income from offshore supplies should be taxed under Article 7 read with paragraph 6 of the DTAA between India and Japan, asserting that the project office in India played a role in these supplies. The CIT(A), however, found that the offshore supplies were completed outside India, with the title of the goods passing to the buyer upon loading onto the transport in Japan. Citing the Delhi High Court's decision in LG Cables Ltd. and the Supreme Court's decision in Ishikawajma Harima Heavy Industries, the CIT(A) concluded that offshore supplies were not taxable in India as the Permanent Establishment (PE) in India had no role in these transactions. The Tribunal agreed, noting that the contracts were similar to those in the LG Cables case, where the High Court had ruled that offshore supplies were not taxable in India. 3. Determination of Permanent Establishment (PE) Status of Liaison Office (LO): The AO claimed that the Liaison Office (LO) constituted a PE in India under Article 5 of the DTAA. The CIT(A) disagreed, relying on previous appellate orders and the ITAT's decision, which had consistently held that the LO did not constitute a PE. The Tribunal upheld this finding, referencing its own prior rulings in the assessee's case, which determined that the LO's activities were limited to preparatory and auxiliary functions and did not create a PE. 4. Attribution of Income to Dependent Agency Permanent Establishment (DAPE): The AO attributed income to the assessee's Indian operations, asserting that Mitsui & Co. India Pvt. Ltd. (MIPL) constituted a DAPE. The CIT(A) rejected this, noting that the Transfer Pricing Officer (TPO) had found the transactions between the assessee and MIPL to be at arm's length, following the Supreme Court's ruling in Morgan Stanley. The Tribunal concurred, emphasizing that the TPO's analysis was comprehensive and that no further income needed to be attributed to the PE. It referenced the Delhi High Court's decision in BBC Worldwide Ltd., which supported the view that proper transfer pricing analysis negates the need for additional profit attribution to a PE. 5. Method of Accounting for Income from Projects: The AO computed the income on a mercantile basis, while the CIT(A) held that under the presumptive taxation scheme of Section 44BBB, income should be computed on a cash basis. The Tribunal upheld the CIT(A)'s decision, noting that under Section 44BBB, income is deemed to be a fixed percentage of the receipts, which aligns with cash basis accounting. Conclusion: The Tribunal dismissed the Revenue's appeals and upheld the CIT(A)'s decisions, confirming that offshore supplies were not taxable under Section 44BBB or the DTAA, the LO did not constitute a PE, no additional income needed to be attributed to the DAPE, and income from the projects should be computed on a cash basis. The Tribunal's findings were consistent with established judicial precedents and the specific facts of the case.
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