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2023 (4) TMI 532 - AT - Income TaxIncome taxable in India - PE in India - receipts on account of off-shore supplies - proceeded to attribute business income to PE in India - allegation of the Revenue about an artificial split of contract - HELD THAT - The bench is of considered opinion that the Ld. Tax Authorities below have fallen in error in concluding that there was an artificial split of a contract and that there was one inseparable, indivisible and composite contract. AO has not given any substantial reason on the basis of evidence while what weighted heavily in the mind of Ld. DRP was that the supply of equipment on the basis of off-shore contract would have been rendered meaningless in the absence of services of supervision, erection commissioning etc. all of which was an indivisible part of the contract. The Bench is of considered opinion that when the allegation of the Revenue about an artificial split of contract is not sustained and it is established that the assessee has entered into the First Contract , in its independent capacity, there is no force in the finding of Ld. AO that GE India ( Alostom-I) was actively involved in soliciting business for the assessee. In fact, there is substance in the contention of Ld. Sr. Counsel that in the bidding structure of present nature there is no question of someone soliciting the business, as it was a case of open bid to which Indian and Foreign entities, both, were eligible to make the offer of bid. There is no question of any agent and principle relationship between the assessee and the Indian associate for a very substantial reason that PGCIL has treated in its contract documents, ALSTOM-I to be its Independent Contractor . There is substance in the argument of Ld. Sr. Counsel on the basis of judgment of E-funds IT solutions 2017 (10) TMI 1011 - SUPREME COURT that the onus was on the department to prove the existence of PE. The Bench is of considered opinion that such an onus can be considered discharged by specific reference to the evidence. No evidence is brought on record to show that the Indian Associate was employed by any act of the assessee to represent the assessee independently while dealing with PGCIL. On the contrary what is established is that it was the assessee at whose proposal, ALSTOM-I was accepted to be an Associate of the assessee and the employer PGCIL treated ALSTOM-I as its independent contractor on the terms and conditions, as laid down in the bidding document. If there was any involvement of the employees of Indian Associate, at any stage in the meetings between assessee and the PGCIL that was bound to be there and outcome of the fact that assessee and its Indian associate were required to work in tandem and that does not give rise to existence of a dependent agent P E of the assessee. Question of Indian Associate being a Construction PE - Again there is force the contention of Ld. Sr. Counsel that the findings of Ld. Tax Authorities below are not on the basis of any facts and evidence. The case of assessee as submitted and established is that under First contract it was merely liable to make offshore supplies. Thus, assessee was not engaged in any construction project in India. Its revenues were outcome of the offshores supplies and services rendered off shore. Thus, there was no question of constitution of the Construction PE as per Article 5(2) of the DTAA. Applicability of Section 44BBB - It can be observed that the foundation of it was existence of a PE. The assessee under the First contract was merely under obligation to make off shore supplies and wherein property in the goods transferred outside Indian, therefore as Section 44BBB does not speak of engagement of a foreign company for supply in connection with the turnkey Power Project, the provisions of Section 44BBB are not applicable. DRP has fallen in error in sustaining application of Section 44BBB of the Act, on premises that the assessee is involved in the end to end execution of the project in India. The revenue derived by the assessee were on the basis of offshore supplies and not out of any construction, erection, testing or commissioning activities of a turnkey power project in India. Thus, the application of section 44BBB to such revenue, which is not per se taxable India, is not sustainable. Tax authorities below failed to appreciate the distinction between the existence of a business connection and the income accruing or arising out of such business connection, which is clear and explicit. It is established that assessee had no business connection or dependent agent PE or construction PE in India. The attribution of profit from off-shores supplies made to PGCIL to the alleged business connection or PE and application of Section 44BBB is not sustainable. Tax Authorities below have fallen in error to hold that off-shores supplies to PGCIL are taxable in India. The assessee was merely under liability for making off-shores supplies to PGCIL under the First contract for which the revenue earned is not taxable in India. Consequently, ground no. 3 to 8 are decided in favour of the assessee. AO did not follow DRP directions - HELD THAT - The Bench is of considered opinion that once the foundation of the findings of Ld. AO on the basis of dependent agent PE status of GE T D India and SFO technologies in not sustained by this Bench, the foundation of his reasoning in para no above stands washed away. At the same time what comes up is that assessee had claimed that there was no agreement with GE T D and SFO technologies and on the basis of orders and invoices generated, the supplies were made. On the basis of general terms and conditions, purchase orders were raised and on the basis of which the offshore supplies were made to these two Indian companies. Ld. AO was under obligation to give effect to the orders of DRP in a substantive manner but without there being anything on record to show on the part of the Ld. AO that the supplies were in regard to PGCIL contract with the assessee, the addition was made by ignoring invoices. Thus, these grounds are sustained and decided in favour of the assessee. Taxing global operation fee received from GETDIL as Fees from Technical Services ( FTS ) - HELD THAT - The essence of make available clause is that the technical knowledge or skills of the provider should be imparted to be absorbed by the receiver so that the receiver can deploy similar technology or technique in the future without dependent upon the provider. However, in the case in hand for the services rendered, there is renewal of contract on annual basis and the nature of services are all prima facie managerial in nature. They have also passed the arm s length tests. Thus Ld. Tax authority below have fallen in error in taxing global operation fee received from GETDIL as Fees from Technical Services ( FTS ) under the provisions of the Act and the India-UK DTAA, without appreciating that provision of said services by the Appellant did not satisfy the make available clause contained in Article 13(4)(c) of the India-UK DTAA. Ground is adjudicated in favor of assessee.
Issues Involved:
1. Validity and Limitation of the Assessment Order. 2. Taxability of Offshore Supply Receipts from PGCIL. 3. Existence of Business Connection and Permanent Establishment (PE) in India. 4. Attribution of Profits to PE and Application of Section 44BBB. 5. Taxability of Offshore Supply Receipts from GE T&D and SFO Technologies. 6. Taxability of Global Operation Fee as Fees for Technical Services (FTS). Summary: 1. Validity and Limitation of the Assessment Order: Grounds 1 and 2 were not pressed by the appellant's counsel. Ground 1 was general, and Ground 2 was not argued. 2. Taxability of Offshore Supply Receipts from PGCIL: The assessee contended that the tax authorities erred in treating the three separate contracts as an artificial split of a single composite contract. The contracts were independently executed, and the offshore supplies were concluded outside India. The Supreme Court's decision in Ishikawajma-Harima Heavy Industries Ltd. vs. DIT was cited, emphasizing that offshore transactions where transfer and payment occur outside India are not taxable in India. The Tribunal agreed, noting that the contracts were separate and independently executed, and the offshore supplies were not taxable in India. 3. Existence of Business Connection and Permanent Establishment (PE) in India: The Tribunal found no evidence of a dependent agent PE or construction PE in India. The Indian Associate (ALSTOM-I) was an independent contractor, and there was no agent-principal relationship. The Tribunal emphasized that the onus was on the department to prove the existence of a PE, which was not discharged. The Tribunal concluded that there was no business connection or PE in India. 4. Attribution of Profits to PE and Application of Section 44BBB: The Tribunal held that Section 44BBB, which applies to foreign companies engaged in the business of civil construction or erection of plant or machinery, was not applicable to the assessee, as it was merely supplying offshore equipment. The revenue earned from offshore supplies was not taxable in India, and the application of Section 44BBB was not sustainable. 5. Taxability of Offshore Supply Receipts from GE T&D and SFO Technologies: The Tribunal noted that the Assessing Officer did not comply with the binding directions of the Dispute Resolution Panel (DRP) to exclude receipts from GE T&D and SFO Technologies if they were not related to the PGCIL contract. The Tribunal found that the offshore supplies to these entities were not related to the PGCIL contract and were not taxable in India. 6. Taxability of Global Operation Fee as Fees for Technical Services (FTS): The Tribunal found that the services provided by the assessee did not satisfy the 'make available' clause in Article 13(4)(c) of the India-UK DTAA. The services were primarily managerial and did not involve imparting technical knowledge or skills to the recipient. The Tribunal concluded that the global operation fee was not taxable as FTS under the DTAA. Conclusion: The Tribunal allowed the appeal, deleting the impugned final assessment additions and ruling in favor of the assessee on all contested grounds. The offshore supplies and global operation fee were not taxable in India, and there was no PE or business connection established.
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