2014 (3) TMI 368 - AT - Income Tax

Nature of Contract - Whether it is a case of composite contract Held that - A composite price has been given as per Article 2 of the Contract Agreement as Contract Price, but it is a sum total of the clearly demarcated prices for onshore supplies and services and offshore supplies and Designs - the AO was initially not correct in holding that the contract was a composite one devoid of any bifurcation towards onshore and offshore supplies and services, which stand was subsequently altered to the correct position - it is wide off the mark to categorize the contract agreement as a composite one since all its major four components are distinctly identifiable with separate consideration for each. Income from offshore supply of equipment - Where title to the goods passed Held that - There is material on record to indicate that apart from imparting training to employees of SAIL in India, the assessee was obliged to carry out certain activities associated with the installation and commissioning of such equipment in India - merely because the risk passed in India, it cannot be said that the sale took place in India - no income can be said to have arisen in India the title to goods shall be considered to have passed outside India when delivery was made on high sea and the payment was also received outside India thus, the title of goods in respect of said offshore supply of equipment was transferred outside India. Whether sale price includes any consideration for services rendered or to be rendered in India - Held that - The assessee undertook to incur some expenses towards test and inspection at site that is in India, conduct repair during defect liability period again in India etc. -These expenses are to be borne by the assessee - The possibility of compensation for such things being included in foreign supervision charges cannot be ruled out without verification - It is palpable that if the charges for such things are not included in any other component of price, then these have to be considered as part and parcel of the sale price, which would require its splitting up to determine the amount attributable to such testing charges etc. in India - thus, the sale price of offshore supply of equipment also includes some consideration for services rendered or to be rendered by the assessee in India - As such details are not readily available, the order on this issue is set aside and the matter is remitted back to the AO. Taxability of offshore supply of equipment - Taxability of price for offshore supply of equipment and compensation for services rendered in India Held that - No income was chargeable to tax because no part of the consideration was towards the services to be rendered in India, in CIT & Anr. VS. Hyundai Heavy Industries Co. Ltd. 2007 (5) TMI 196 - SUPREME Court it has been held that no such taxability can also arise in the present case as there was no allegation made by the Department that the price at which billing was done for the supplies included any element for services rendered by the PE - income for which everything is done in India is fully taxable but the principle of apportionment applies to tax that part of the composite income which is relatable to operations carried out in India, leaving aside that part of income which is not so - the sale price of offshore equipments, which is quid pro quo for services rendered in India is chargeable to tax in India. Attribution of income to services rendered in India Held that - The nature of services to be rendered may be quite cost or labour intensive, while in another case, it may not be so - There cannot be any straitjacket sacrosanct formula for such attribution thus, it would be appropriate if the AO after such determination gives value to such services if these are included in the sale price of offshore supply of equipments - As regards training expenses, it has already been held that compensation for such training in India is part and parcel of the sale price of offshore supply of equipments - The value to such training is directed to be assigned by the AO after considering the number of man days and rate per man day for such training and considered for taxation. Income from onshore supply of equipments Income from on shore services Held that - Assessee received ₹ 15.03 crore from SAIL through NCC during the financial year relevant to the assessment year - This amount has been included by the Assessing Officer in the total income of the assessee - The assessee agrees in principle that the income from onshore supply of equipment is chargeable to tax in India - As it has been accepted by the assessee that such amount is chargeable to tax in the correct year the amount is correctly chargeable to tax in the correct year - The assessee agrees that Foreign supervision charges' are for the services rendered in India - The word Foreign' has been used qua the assessee, being a non-resident - As it has been accepted by the assessee that such amount is chargeable to tax in the correct year thus, in principle the amount is chargeable to tax in the correct year. Income from design & engineering services Held that - It is totally incorrect to say that such Drawings and designs for which consideration of Euro 150900 was received be considered as offshore supply of equipments and hence exempted from taxation The decision in Director of Income Tax Vs Rio Tinto Technical Services (2012)340 ITR 507 - in the absence of any bifurcation, an estimated allocation has to be made for tax purposes - The 'fees for technical services' shall be deemed to accrue or arise in India and shall be included in the total income of the non- resident, whether or not the non-resident has rendered services in India - With the retrospective substitution of the Explanation, also covering the year under consideration - the consideration for Designs and drawings is liable for inclusion in the total income of the assessee u/s 9(1)(vii) of the Act. Computation of Income - How much is income for the current year Held that - There was fallacy in the assessee's contention that it did not supply any equipment or render any services to SAIL and the entire amount received by it was in the nature of advance - Thus income attributable to such services rendered in India is chargeable to tax during the year in question - no income can be charged to tax simply on the receipt of advance, similarly the taxability cannot be postponed to the release' of the amount for which invoice is made much after the supply of goods - The relevant point of taxation is the actual supplying of goods and actual rendering of services and not when the invoice is raised as per the peculiar terms of the contract or the amount is received - As the relevant dates of actual supply of equipments are not available, this aspect is also directed to be examined by the AO and resultantly charging income to tax for the period during which actual goods were supplied or services rendered thus, the order is set aside and the matter remitted back to the AO for working out the income for the year under consideration. Transfer pricing adjustment Held that - It is axiomatic that when the delegated legislature provides in unequivocal terms that the total operating costs' should to be considered, the TPO or the assessee cannot at their sweet-will choose to substitute such base with any other suitable base as per their convenience thus, the calculation of OP/OC set aside and the AO/TPO is directed for fresh adjudication for computing OP/TC of the assessee as well as comparables by considering net operating profit margin' as numerator and total operating costs' as denominator Decided partly in favour of Assessee.

Summary

Issues Involved:

1. Income from contract with Steel Authority of India Ltd.
2. Transfer Pricing Adjustment.

Detailed Analysis:

A. Income from Contract with Steel Authority of India Ltd.

I. Income from Offshore Supply of Equipment

1. Where Title to the Goods Passed?

The assessee, a non-resident company from Korea, claimed that the title of goods for offshore supply passed outside India, with the transfer of risk occurring on the high sea. The DRP accepted this argument, but the DR argued that the PE in India played an active role in the supply. The tribunal held that the title of goods passed outside India, as the delivery and payment were made outside India.

2. Whether Sale Price Includes Any Consideration for Services Rendered or to be Rendered in India?

The tribunal found that the sale price included training charges and potentially other costs such as defect liability and inspection charges. These services were rendered in India, and their compensation was included in the sale price of the equipment.

3. Taxability of Price for Offshore Supply of Equipment and Compensation for Services Rendered in India

The tribunal held that the profit from offshore supply of equipment simplicitor is not chargeable to tax in India. However, the compensation for services rendered in India is chargeable to tax. The tribunal directed the AO to verify the dates of actual supply and determine the value of services rendered in India.

4. Attribution of Income to Services Rendered in India

The tribunal directed the AO to determine the value of services rendered in India, such as training and other costs, and attribute income accordingly.

II. Income from Onshore Supply of Equipments

The assessee received Rs. 15.03 crore for onshore supply of equipment, which was claimed to be an advance. The tribunal held that this amount is chargeable to tax in the correct year and directed the AO to verify the actual supply and services rendered.

III. Income from Onshore Services

The assessee received Foreign Supervision Charges for services rendered in India. The tribunal held that this amount is chargeable to tax in the correct year and directed the AO to verify the actual services rendered.

IV. Income from Design & Engineering Services

The assessee received Euro 150900 for Design and Engineering services, claimed to be an advance. The tribunal held that this amount is chargeable to tax as fees for technical services under section 9(1)(vii) of the Act and directed the AO to determine the actual services rendered during the year.

How Much is Income for the Current Year?

The tribunal directed the AO to determine the income for the year under consideration by verifying the actual supply of goods and services rendered. The tribunal set aside the impugned order and restored the matter to the AO for fresh determination.

B. Transfer Pricing Adjustment

The assessee entered into a construction contract with its AE and subcontracted the project to an independent third party. The TPO initially proposed a TP adjustment of Rs. 4,46,82,666/-, which was later reduced to Rs. 2,15,27,090/-. The tribunal found that the TPO excluded certain expenses from the cost base, which was not sustainable. The tribunal directed the AO/TPO to recompute the OP/TC of the assessee and comparables by considering the total operating costs. The tribunal set aside the calculation of OP/OC and directed fresh computation for determining the correct ALP.

Conclusion

The appeal was partly allowed for statistical purposes, with directions for fresh determination by the AO/TPO on various aspects of income from the contract with SAIL and transfer pricing adjustment.