2006 (3) TMI 236 - AT - Income Tax

Deduction of Tax At Source - income deemed to accrue or arise in India on the contracts - non-resident - PE in India or not - contracts are simple sale contracts and or works contracts - Whether section 195 is applicable to the facts of the case in view of the complexity and multiplicity of agreements between various parties on terms of payment - HELD THAT - The fact that the contract is arranged in accordance with the loan agreement between the Government of India and the Overseas Economic Co-operation Fund of Japan (OECF) dated 10th February, 1988 concerning the Yen credit ID-P 43 (Project Aid) for Srisailam Left Bank Power Station Project and that the fact that the payment to the contractor shall be made through an irrevocable letter to credit to be issued by the Bank of India, Tokyo or as otherwise prescribed under the loan agreement referred to above, does not detract from the fact that the primary liability of payment towards goods and services lie with the assessee-company and it is the assessee-company who has to process the claims and initiate the payment process in terms of the various agreements. The fact also remains that the payments have been made in this case for and on behalf of the assessee. It is the executing agency which triggers the payment and while passing a bill direction for deduction of tax as per section 195 while making a payment could be made by the assessee. No payment could have been released without the officers of the assessee-company passing the bills consequent to claim made by the contractor. Delay in passing of the entries in the books of account for whatever reason does not erase the fact that the payments have been made in the impugned assessment years. Once the payment is made section 195 of the Act is attracted. Thus we uphold the finding of the first appellate authority and dismiss this ground of the assessee. In our considered opinion the judgments relied on by the learned Standing Counsel for the revenue, to drive home the point that the intention of the parties as can be gathered from the agreements and other documents is that the property in the goods passed to the buyer only in India though it is a C.I.F. contract, does not advance the case of the Revenue. The mere fact that more than 80% of the contract value pertains to activities that have been undertaken in Japan clearly points out that the element of contract was most densely grouped in Japan and not in India. Just because equipment has been purchased and it is made operational by assembling the same at the buyer's place of work and supervising the erection of such machinery does not make a supply contract into a turnkey contract or work contract. We emphasize the fact that in all the documents the supplier was obliged to depute personnel to supervise the erection, commissioning and testing all these equipments. Thus in our considered opinion, this is a pure sale contract and not a work contract. PE in India or not - The undisputed fact is that the non-resident Sumitomo Corporation has filed its return in India and has paid advance tax and assessments were made. While so, we do not understand as to how the learned counsel for the assessee argues stating that there was no permanent establishment in this country. A plain reading of the Double Taxation A voidance Agreement at any rate does not contemplate that each and every work has to have a separate and independent permanent establishment. 'Permanent Establishment' is an inclusive definition and under article 5(4) there is deeming provisions which in our view applies to this case. The deductee had a place of management as well as a building site for more than six months, and it suo motu filed its returns of income. Thus on this sole fact itself, we uphold the contention of the learned standing counsel. Thus the finding of the first appellate authority that the assessee has permanent establishment in India in terms of article 5 of the DTAA is upheld. Whether any part of the transaction should be attributable to the permanent establishment in India - The supervisory personnel of the non-resident company have spent a number of years i.e., beyond the period of six months in this country and this factor goes against the claim made by the assessee. Thus we uphold the findings of the first appellate authority on this issue also. The argument of the assessee that no proof or evidence has been brought out by the Assessing Officer to prove that the permanent establishment has in fact income which is attributable to it in this transaction is devoid of merit. The correspondence filed by the learned Standing Counsel speaks otherwise. This brings us to article 7 of DTAA. A plain reading of article 7 show that only that portion of income which is attributable to the permanent establishment in this country is taxable in this country. Definitely the entire contract cannot by any stretch of imagination be treated as income which is attributable to the permanent establishment. At best, the supervisory charges which formed less than 3 per cent of the total value of the contract can be said to be attributable to the permanent establishment. The profit arising out of these service contracts, if any, has to be considered as taxable income in the hands of the non-resident company. Liability to deduct tax in terms of section 195 - Applying the ratio of the judgment of the jurisdictional High Court in the cases of Visakhapatnam Port Trust and Sundwiger EMFG Co. 2003 (2) TMI 35 - ANDHRA PRADESH HIGH COURT , we have held that this is a contract of sale and that no portion of income is chargeable to tax in India. When no portion of the gross remittances is liable to charge under the Indian Income-tax Act, there is no liability for deduction of tax u/s 195 as per the Board Circular No. 786 dated 7-2-2000 and it is well-settled that the circulars are binding. Even otherwise for the reason that Sumitomo Corporation has filed its return of income and paid taxes thereon, it cannot be said that default, if any, that has occurred, still continues in the present case thus warranting levy of interest u/s 201(1A). We follow the judgment of the Hon'ble Gujarat High Court in the case of Rishikesh Apartments Co-op. Housing Society Ltd. 2001 (6) TMI 17 - GUJARAT HIGH COURT . Thus we hold that the plant and machinery purchased by the assessee were manufactured outside India and is exported to India and the supply of the material is a transaction involving trading with India and not trading in India and thus the profits if any arising in the manufacture and export of the material to India are not attributable to the permanent establishment of Sumitomo Corporation. It is an international transaction on principle to principle basis and therefore, the profits, if any, arising from manufacture and export of such material are not chargeable to tax under the Indian Income-tax Act. Hence there is no liability on the part of the assessee to deduct tax in terms of section 195. Thus, the appeals of the assessee are hereby allowed. Payments made to BHEL as payments made as per section 194C of the Act - After hearing both parties on this issue, we find that the ratio of the judgment of the jurisdictional High Court in the case of Visakhapatnam Port Trust 1983 (6) TMI 31 - ANDHRA PRADESH HIGH COURT is in favour of the assessee. Relevant extracts are already given above. In that case the jurisdictional High Court held that the agreement between the German Company and the Poona Company did not also amount to the German Company having permanent establishment in India as there was neither any identity of interest nor identity of character nor of personality nor was there any unit for profit making between the Poona Company and the German Company so that the former may be treated as the Indian agent of the latter. In any event BHEL is a public sector company and there is no allegation by the Revenue that it has not filed its returns of income or that it is an assessee in default for that particular assessment year. Thus we uphold the order of the first appellate authority though not only for reasons mentioned by him but also for the reasons given by us in our order above. In the result, while the appeals of the assessee are allowed, the appeals filed by the Revenue are dismissed.

Summary

Issues Involved:
1. Applicability of Section 195 of the Income-tax Act.
2. Nature of the contracts: whether they are contracts of sale or turnkey contracts.
3. Determination of Permanent Establishment (PE) and attribution of profits.
4. Grossing up of payments under Section 195A.
5. Payments made to BHEL and applicability of Section 194C.

Detailed Analysis:

1. Applicability of Section 195 of the Income-tax Act:
The core issue was whether the assessee was liable to deduct tax at source under Section 195 of the Income-tax Act. The assessee argued that no payment was made by it to Sumitomo Corporation, as payments were made directly by the Government of India through an irrevocable letter of credit established in Japan. The Tribunal upheld the Commissioner of Income-tax (Appeals)'s finding that the payments were made on behalf of the assessee, and thus, the assessee was responsible for ensuring tax deduction at source. The Tribunal agreed with the Commissioner that the mode of payment did not change the fact that the payment was made for the assessee, and the responsibility for TDS rested with the assessee.

2. Nature of the Contracts: Sale or Turnkey:
The Tribunal examined whether the contracts were for the sale of equipment or turnkey contracts. The contracts in question involved the supply of turbines, generators, switchgear, and cables. The Tribunal found that the contracts were for the supply of goods and not turnkey contracts. The Tribunal noted that the equipment was shipped FOB (Free on Board) from Japan, and the title passed to the assessee outside India. The Tribunal emphasized that the contracts were for the sale of goods and not for the provision of services, even though there were supervisory services involved, which were incidental to the sale.

3. Determination of Permanent Establishment (PE) and Attribution of Profits:
The Tribunal examined whether Sumitomo Corporation had a PE in India and if any part of the profits was attributable to such PE. The Tribunal upheld the Commissioner's finding that Sumitomo Corporation had a PE in India as defined under Article 5 of the DTAA between India and Japan. However, the Tribunal noted that only the portion of income attributable to the PE in India could be taxed in India. The Tribunal concluded that the supervisory charges, which formed a small percentage of the total contract value, could be considered as income attributable to the PE.

4. Grossing Up of Payments under Section 195A:
The Tribunal addressed whether the payments made to Sumitomo Corporation should be grossed up under Section 195A. The Tribunal found that there was no specific agreement between the parties that the assessee would bear the tax liability of Sumitomo Corporation. Therefore, the Tribunal concluded that there was no obligation on the assessee to gross up the payments. The Tribunal also noted that Section 10(6A) and 10(6B) were not applicable as there was no evidence that the agreements were approved by the Central Government.

5. Payments Made to BHEL and Applicability of Section 194C:
The Tribunal examined whether the payments made to BHEL were subject to Section 194C. The Tribunal upheld the Commissioner's finding that Section 195 did not apply to payments made to BHEL, but Section 194C would be applicable. The Tribunal noted that BHEL was a public sector company and there was no allegation that it had not filed its returns or was an assessee in default.

Conclusion:
The Tribunal allowed the appeals of the assessee and dismissed the appeals filed by the Revenue. The Tribunal concluded that the contracts were for the sale of goods and not turnkey contracts, the payments were made on behalf of the assessee, and the assessee was responsible for TDS under Section 195. The Tribunal also found that only the portion of income attributable to the PE in India could be taxed, and there was no obligation to gross up the payments. The payments made to BHEL were subject to Section 194C and not Section 195.