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2024 (3) TMI 1369 - AT - Income TaxIndia taxable in India - receipts from offshore supplies to THDC India Ltd ( THDC ) - Existence of Business Connection and Permanent Establishment (PE) in India - Income deemed to accrue or arise in India - Proof of business connection in India during the subject assessment year - DRP/AO attributing 100% profits from offshore supplies made to THDC to the alleged business connection/ PE. HELD THAT - AO had made the addition towards offshore supplies by observing that there is a business connection of the assessee in India u/s 9(1)(i) of the Act. We are unable to comprehend ourselves to accept to this proposition in as much as title transfer in respect of equipment supplied by the assessee to THDC on an offshore basis happened outside India. Payments are made in foreign currency and that too are received by the assessee outside India. The law is very well settled by the decision of Ishikawajma-Harima Heavy Industries Ltd 2007 (1) TMI 91 - SUPREME COURT that if the sale is concluded outside India and the property in goods is passed outside India; the payment of consideration is received outside India; no activity in relation to such offshore supply is conducted in India, then income from such offshore supplies cannot be made liable to tax in India as assessee does not constitute Business Connection in India. It is also pertinent to note that under the Contract No.3 which is in dispute before us, Offshore Supply under THDC Contract, supply of plant and equipment was to take place on FOB basis. Title to and property in the goods shipped by the assessee stood transferred at the port of shipment and the event of sale clearly took place outside the territory of India. In these facts, the income arising out of such sale cannot be said to have accrued or arisen in India. The accrual of income derived from offshore supplies cannot be attributed to any operation in India and therefore, no income can be deemed to accrue or arise in India. Fixed Place PE of the assessee in India - AO had merely reproduced the observations made in the assessment order of some other assessee with respect to PGCIL contract without appreciating the fact that the receipts were earned by the assessee herein from THDC and NHPC project during the year under consideration. There was no contract undertaken by the assessee with PGCIL and no amounts were received from PGCIL by the assessee. This clearly proves the complete non-application of mind on the part of the ld. AO. Either way, it is trite law that onus is on the revenue to establish that there exists a PE of the foreign entity in India, which has not been discharged by the revenue in the instant case. Construction PE of the assessee in India under the provisions of Article 5(2) of India-France DTAA - As all the findings of Delhi Tribunal in GE Group company cases relied upon by the ld. AO cannot be made applicable to the facts of the assessee herein. It is also relevant to understand that Contract No. 03 between THDC and assessee is in dispute before us with regard to offshore supply. Admittedly THDC is a Government of India Undertaking, which had split the contracts. Splitting of contracts is not done at the behest of the assessee. The case laws relied upon hereinabove for non-existence of Fixed Place PE in India would apply for nonexistence of Construction PE also. Hence we have no hesitation to hold that the assessee does not have a Construction PE in India and accordingly no income earned by the assessee from operations and activities undertaken outside India could be brought to tax in India in terms of Article 5(2) of India-France DTAA. We hold that there cannot be attribution of Business Connection u/s 9(1)(i) of the Act, alleged PE (both Fixed Place and Construction PE) and applicability of provisions of section 44BBB of the Act in respect of receipts for offshore supplies in the instant case. Application of Section 44BBB of the Income-tax Act - We find that since the amount under consideration pertain to offshore supply of plant and equipment, for which sale was completed outside India and title to the goods was transferred outside India without any role of the alleged PE in India, the provisions of section 44BBB of the Act per se cannot be made applicable in the instant case. We find that reliance in this regard was placed on case of DDIT vs Mitsui Co Ltd 2020 (2) TMI 1053 - ITAT DELHI Even otherwise, we have already held that that there is no PE of the assessee in India and hence as per Article 7 read with Protocol thereon of India UK DTAA, income earned out of offshore supplies cannot be brought to tax in India in the hands of the assessee. Here the treaty provisions are also beneficial to the assessee herein and hence on this count also, there cannot be taxability of income in respect of offshore receipts in the hands of the assessee. Since we have already held that there is no PE of the assessee in India, the other argument advanced by the ld. AR that there would be no attribution of profits in view of operational or net loss at global level, need not be gone into as adjudication of the same would become merely academic in nature. Thus, we hold that assessee was engaged in offshore supply of plant and equipment pursuant to contract with THDC and that the said contract was not artificially split for gaining any tax advantage as alleged by the revenue; there is no business connection of the assessee in India; there does not exist Fixed Place PE or Construction PE of the assessee in India and provisions of section 44BBB of the Act are not applicable in the instant case. Hence we hold that the addition made by the ld. AO by bringing to tax receipts from offshore supply is hereby directed to be deleted. Decided in favour of assessee. Disallowance of deduction of claim on account of write off of duty draw back - HELD THAT - We find that the assessee had duly written off the amount of duty drawback receivable after knowing the fact that JDGFT had rejected the claim of the assessee that Chamera project does not qualify as a mega power project under the foreign trade policy. In our considered opinion, the said claim is made by the assessee in its normal course of business and accordingly be eligible for deduction as a trading loss u/s 28 of the Act itself. In the instant case, the assessee had duly proved that the said duty drawback is irrecoverable from the Govt. Similar issue arose before the coordinate bench of this Tribunal in the case of NEC Technologies India Pvt Ltd 2023 (6) TMI 1322 - ITAT DELHI as inclined to hold that the input cost is revenue in nature and accordingly service tax paid on such revenue cost is also eligible to claim as revenue expenditure u/s. 37(1). The said loss is also allowable as business loss u/s 37(1) of the Act. Levy of interest u/s 234B - AR argued that interest u/s 234B of the Act is not chargeable on the ground that the buyer has deducted tax at source and remitted to the account of the Central Govt in accordance with the proviso to section 209(1)(d) of the Act and hence there would be no liability for the assessee to pay advance tax - HELD THAT - In the present case, THDC, who is buyer of offshore supplies made by the assessee which has been brought to tax by the ld AO in the final assessment order, had duly deducted tax at source before making the said payment. Hence, it was submitted that there was no default on the part of the assessee in payment of advance tax - interest u/s 234B of the Act is not chargeable in the instant case. Accordingly, the Ground raised by the assessee is allowed. Chargeability of interest u/s 234C - The law is well settled that the said interest should be charged only on the returned income and not on the assessed income. Accordingly, the Ground raised by the assessee is allowed. Chargeability of interest u/s 234D of the Act, which is consequential in nature.
Issues Involved:
1. Validity and Limitation of Assessment Order. 2. Taxability of Offshore Supply Receipts. 3. Existence of Business Connection and Permanent Establishment (PE) in India. 4. Application of Section 44BBB of the Income-tax Act. 5. Alleged Splitting of Contracts. 6. Taxation of Income from Onshore Activities. 7. Disallowance of Duty Drawback Written Off. 8. Taxation of Fees for Technical Services (FTS). 9. Computation of Tax Demand and Penalty Proceedings. 10. Levy of Interest under Sections 234B, 234C, and 234D. 11. Initiation of Penalty Proceedings under Section 270A. Detailed Analysis: 1. Validity and Limitation of Assessment Order: - The assessee challenged the assessment order dated 29.07.2022, claiming it was barred by limitation and thus void-ab-initio. However, this ground was not pressed by the assessee during the proceedings, leading to its dismissal. 2. Taxability of Offshore Supply Receipts: - The assessee argued that receipts from offshore supplies to THDC were not taxable in India as the sale and transfer of ownership occurred outside India. The Tribunal held that since the title transfer and payment occurred outside India, the income from such offshore supplies could not be taxed in India, following the precedent set by the Supreme Court in Ishikawajma-Harima Heavy Industries Ltd. 3. Existence of Business Connection and Permanent Establishment (PE) in India: - The Tribunal found no evidence of a "Fixed Place PE" or "Construction PE" in India. The assessee's activities in India were limited to a project office for NHPC, and the income from this was already taxed. The Tribunal emphasized that the onus to prove the existence of a PE lies with the Revenue, which was not discharged in this case. 4. Application of Section 44BBB of the Income-tax Act: - The Tribunal ruled that Section 44BBB, which prescribes a presumptive tax rate for foreign companies involved in specific projects, was not applicable to the offshore supply receipts as the sale was concluded outside India, and no part of the activity was conducted by a PE in India. 5. Alleged Splitting of Contracts: - The Revenue's claim that the contracts were artificially split to avoid tax was rejected. The Tribunal noted that the contracts were split by THDC, a government entity, and not at the behest of the assessee. The Tribunal relied on the Delhi High Court's ruling in Linde AG, which held that consortium arrangements for specific project components do not constitute an Association of Persons (AOP) for tax purposes. 6. Taxation of Income from Onshore Activities: - The income from onshore activities by the project office under the NHPC contract was offered to tax by the assessee. The Tribunal noted that the Revenue's addition resulted in double taxation, which was unwarranted. 7. Disallowance of Duty Drawback Written Off: - The Tribunal allowed the deduction of the duty drawback written off, recognizing it as a business loss under Section 37(1). The duty drawback was deemed irrecoverable after the rejection of the claim by the JDGFT. 8. Taxation of Fees for Technical Services (FTS): - The Tribunal found that the income from FTS was already offered to tax as "Income from Other Sources" and any addition by the Revenue resulted in double taxation. 9. Computation of Tax Demand and Penalty Proceedings: - The Tribunal addressed the erroneous computation of tax demand and the incorrect application of a 40% tax rate without considering the presumptive rate under Section 44BBB. The issue of set-off of brought forward losses was also noted, as the Revenue disallowed it under the presumptive taxation scheme. 10. Levy of Interest under Sections 234B, 234C, and 234D: - The Tribunal ruled that interest under Section 234B was not chargeable as the tax was deducted at source by the buyer, THDC. Interest under Section 234C should be charged only on the returned income, and the interest under Section 234D was deemed consequential. 11. Initiation of Penalty Proceedings under Section 270A: - The Tribunal found the initiation of penalty proceedings to be premature and dismissed the ground related to it. The appeals for both assessment years were partly allowed, with specific issues remanded back to the Assessing Officer for factual verification.
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