2024 (4) TMI 985 - AT - Income Tax

Income deemed to accrue or arise in India - Taxability of income earned from offshore supplies and attribution of profit to the permanent establishment (PE) in India - AO attributing 25% profits to the PE in India - HELD THAT - The end to end activity covers design supply erection commissioning performance run of the entire paper mill. Thus the assessee has to complete a single integrated project in terms of the contract. The agreement further reveals that assessee s obligation under the contract does not end with the supply of goods and equipments but would only end with the satisfactory commissioning and performance run of the paper mill. Only after the satisfactory performance run the assessee can receive full payment qua the supply of goods and equipments. Thus supply of goods and equipment from outside India cannot be treated as a standalone activity. On the contrary as per the scope of work under the agreement the assessee has to deliver the project of the Security Paper Mill and hand over to the contractee at deliverable stage as a complete package. The contract between the assessee and the contractee is not for purchase of plant and equipments simpliciter but a complete paper mill to be installed and commissioned at deliverable stage. That being the factual position emerging on record assessee s contention that the income received from supply of plants and equipments is not chargeable to tax in India as the supplies were made from outside India in our view is not acceptable. Not only the assessee has entered into a single contract providing for purchase installation commissioning performance-run of a single unit of 6000 MTs Security Paper Mill but the assessee is required to ensure proper functioning of the paper mill after commissioning through start-up and test-run. Thus these facts clearly indicate that the contract is a composite indivisible contract of setting up the paper mill in India. That being the case it cannot be said that the receipts from offshore supplies of plant and equipments etc. are not taxable in India. On a careful scrutiny of assessment order and first appellate order we observe that receipts from offshore supplies are in relation to four projects in India. The departmental authorities have referred only to terms of agreement between the assessee and SPMCIL Hoshangabad. Whereas the terms of the agreement with other three parties viz. J.K. Paper Ltd. Bank Note Paper Mill India Pvt. Ltd. Mysore and Tamil Nadu Newsprint and Papers Ltd. Tamilnadu to whom the assessee has supplied plant and equipments have not at all been examined. From the submissions of the assessee prima facie it appears that the terms of the contracts in different projects are not identical. In fact in case of project at Tamil Nadu the assessee has entered into two separate contracts one for supply of material and other for onshore services. Therefore if offshore supplies of plant and material do not have any relation to onshore services they cannot be brought to tax in India. These facts have not been verified by going into the terms of the contract by the departmental authorities. Even to what extent the PE of the assessee if at all there is one in India is involved in manufacture and supply of plant and equipments has not been properly gone into by the departmental authorities. Thus without properly analysing the role of PE in offshore activities 25% of the receipts arising out of offshore supplies cannot be attributed to PE as it is purely on adhoc basis. AO has attributed profit rate of 10% to the receipts/income of the PE which has been reduced to 5% by Commissioner (Appeals) - In our view the estimation of profit is purely on adhoc basis without any rationale. When the assessee has furnished evidence to show that the global profit rate in the paper division is at 3% there is no justification for adopting the rate at 10% or 5%. The reasoning of departmental authorities in adopting the estimated profit rate is based on conjectures and surmises. If learned Commissioner (Appeals) was of the view that the activities and obligations of different contracts for different supplies would be different he should have examined each of the contracts and accordingly decided the profit rate. The departmental authorities have examined only one of the contracts. Whereas they have not gone through the terms of other contracts. We cannot accept the estimation of profit at 5% by Commissioner (Appeals). It is further to be noted that assessee s contention regarding existence or otherwise of PE in terms of paragraph 7 1(a) and (b) of Protocol to India-Germany DTAA has not at all been considered by learned first appellate authority. Since various claims and contentions of the assessee have not been considered by the departmental authorities while attributing part of the receipts from offshore supplies as income of the PE we are inclined to restore the issue to the AO for de novo adjudication after providing reasonable opportunity of being heard to the assessee. Grounds are allowed for statistical purposes.

Summary

Issues Involved:
1. Taxability of income earned from offshore supplies.
2. Attribution of profit to the permanent establishment (PE) in India.

Summary:

1. Taxability of Income Earned from Offshore Supplies:
The core issue concerns the taxability of income earned by the assessee, a non-resident corporate entity from Germany, from offshore supplies. The assessee entered into contracts with Indian entities for the design, manufacture, supply, installation, and commissioning of paper machines. The Assessing Officer (AO) argued that the contracts are turnkey/composite projects, and thus part of the profit from offshore supplies should be taxed in India. The assessee contended that the contracts are divisible, and activities related to offshore supplies were conducted outside India, making the income non-taxable in India. The AO, however, observed that the contracts involved end-to-end activities including onshore services, implying a composite contract aimed at tax avoidance. The Commissioner of Income-tax (Appeals) agreed with the AO but reduced the estimated profit rate on offshore supplies from 10% to 5%.

2. Attribution of Profit to the Permanent Establishment (PE) in India:
The AO concluded that the assessee had a PE in India, either in the form of a supervisory PE or a fixed place PE, and attributed 25% of the profit from offshore supplies to the PE. The assessee argued against this, stating that the PE, if any, was only involved in onshore activities and not in the offshore supply of equipment. The assessee referenced the India-Germany Double Taxation Avoidance Agreement (DTAA) and various judicial precedents to support their claim. The Tribunal noted that the contracts' terms were not uniformly examined and that the AO's profit attribution was based on conjecture. The Tribunal restored the issue to the AO for a de novo adjudication, emphasizing the need for a detailed analysis of each contract and the role of the PE in offshore activities.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to re-evaluate the taxability of offshore supply income and the profit attribution to the PE in India, considering the specific terms of each contract and the relevant provisions of the India-Germany DTAA.