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2015 (6) TMI 609 - AT - Income TaxTaxability of supply of equipment in India - India-Germany Double Taxation Avoidance Agreement (DTAA) - Held that - The designing, procurement of material, fabrication and manufacturing of equipment was undertaken outside India. From the facts of the case it is clear that the Company is not involved in the manufacturing of equipment and such equipment were sourced from third party vendors based outside India. From the agreements and documents it is clear that the equipment was directly sold by the assessee on export sale basis and the title/ownership in the equipment was transferred outside India i.e. before the equipment reached India. Even the consideration/payment for sale of equipment was received outside India in foreign currency and majority of the payment (80% - 85% including 10% advance) for each and every part of shipment becomes payable upon delivery of equipment on FOB foreign port of shipment once shipping and other documents are send to the customer. Such payments are made through irrevocable letter of credit. From the documents and evidences it is very much clear that the buyers were the Indian customers who were independent and unrelated parties and purchased the equipment from the assessee on their own account. From the agreements it can be gathered that the contracts for the sale of equipment were concluded on a principal to principal basis. Under the contracts, customers inspection of the equipment was to be taken place outside India and assessee did not have any office or place of business in India Accordingly, the clause of acceptance tests is merely in the nature of warranty provisions. Even the reliance placed by AO on various clauses of Sales of Goods Act is misplaced. Since the Hon ble Delhi High Court in the case of LG Cables Ltd., 2010 (12) TMI 948 - Delhi High Court after considering the provisions of Sales of Goods Act held that such acceptance tests are merely in the nature of warranty provisions. Even there is no PE for sale of equipment in view of the decision of Hon ble Supreme Court in the case of Hyundai Heavy Industries, 2007 (5) TMI 196 - SUPREME Court and in addition to this, there is no concept called sale PE under DTAA. In light of the facts and legal position, we hold that the profit arising to the assessee from sale of equipment is not taxable in India. - Decided in favour of assessee. Assessing the income from supervisory services - what profit percentage can be attributed to such activity in the absence of any books of account maintained by the assessee? - DRP has decided this issue of taxability of income earned from supervisory services in India by the assessee and adopted the profit margins at 27.5% of profit attribution - Held that - the assessee reported to have earned gross revenue from supervisory services amounting to ₹ 10,35,15,673/- out of which ₹ 1,85,60,360/-, being 17.93% of the gross revenue, was allocated to the Indian PE. In assessment, AO had enhanced this allocation to 27.50% which works out to ₹ 2,84,66,810/-. The DRP also confirmed the action of the AO for the reason that on identical facts and circumstances, the ITSC attributed profits @ 27.50% in the assessee s own case for AYs 2008-09 and 2009-10 respectively. For the AYs 2008-09 & 2009-10 before the ITSC and now for AY 2010-11 before the AO, the assessee admitted to have PE in India to which the impugned supervisory services were effectively connected, but no books of accounts were maintained for the same. This was in clear violation of provisions of section 40AD of the Act. In such circumstances, the factual finding of the ITSC towards attribution of profits to the extent of 27.50% on the revenue earned from supervisory activities in India cannot be faulted with and for the very same reason, the action of the AO in attributing profits @ 27.50% was rightly confirmed by DRP - Decided against assessee. Income earned from supply of designs and drawings in India - AO/DRP erred in holding that the income earned by the appellant from sale of designs and drawings is taxable as Royalty under Article 12(3) of the DTAA read with the provisions of Section 9(1)(vi) of the Act and is not in the nature of sale of product - Held that - Retaining intellectual property in designs and drawings is similar in the nature to the retaining of patented rights in any goods/machinery. Restriction on the intellectual property in designs and drawings sold by the assessee for the purpose of setting up a plant in India does not change the character of the transaction from the sale of the product to the use of licence/know-how. Normally, designs and drawings sold by foreign customers were used by Indian customers for internal business purposes for setting up of their plants and not for any commercial exploitation. Accordingly, the designs and drawings sold by the assessee tantamounts to the use of copyrighted article rather than use of a copyright and is, therefore, in the nature of business income. - Decided in favour of assessee. Disallowance of credit for TDS - Held that - The claim of the assessee is that the original TDS certificates were submitted before the AO during the course of assessment proceedings in support of its claim of TDS. But the AO has not allowed the claim in full. We direct the AO to verify the TDS certificates and allow the claim actually.- Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Taxability of supply of equipment in India. 2. Income from supervisory services. 3. Taxability of income from supply of designs and drawings. 4. Denial of TDS credit. 5. Levy of interest under Sections 234A and 234B of the Income Tax Act. Detailed Analysis: 1. Taxability of Supply of Equipment in India Facts and Arguments: - The assessee, a tax resident of Germany, engaged in the business of providing solutions for metals and minerals processing industries, supplied equipment to Indian customers. - The assessee argued that the equipment was designed, fabricated, and manufactured outside India, and the sale was concluded on an FOB basis at a foreign port, with payment received outside India. - The Assessing Officer (AO) and Dispute Resolution Panel (DRP) held that a part of the income from the sale of equipment accrued in India, as the contracts included clauses for performance tests and liquidated damages, implying the sale was not complete until these tests were successful. Judgment: - The Tribunal held that the equipment sale was concluded outside India, as the title passed on FOB terms and the majority of the payment was received upon delivery at the foreign port. - The acceptance tests were deemed warranty provisions and did not affect the conclusion of the sale. - The Tribunal relied on precedents including Ishikawajma-Harima Heavy Industries Ltd. vs. DIT and DIT vs. Ericsson A.B., holding that profits from offshore supply of equipment were not taxable in India. - The issue was decided in favor of the assessee, concluding that no portion of the receipts from the sale of equipment could be taxed in India under the Act or the DTAA. 2. Income from Supervisory Services Facts and Arguments: - The assessee provided supervisory services in India and attributed a profit margin of 17.93% based on comparable Indian companies. - The AO and DRP applied a profit margin of 27.5%, based on the Settlement Commission's decision for earlier years. Judgment: - The Tribunal upheld the 27.5% profit margin, noting that the assessee failed to demonstrate the functional similarity of the services of the comparable companies. - The Tribunal found no reason to deviate from the Settlement Commission's decision, confirming the AO's and DRP's approach. - The issue was decided against the assessee. 3. Taxability of Income from Supply of Designs and Drawings Facts and Arguments: - The assessee supplied designs and drawings for setting up plants in India. The AO and DRP treated the income as "royalty" under Section 9(1)(vi) of the Act and Article 12(3) of the DTAA. - The assessee argued that the designs and drawings were sold as products, with the sale concluded outside India and payment received abroad. Judgment: - The Tribunal held that the designs and drawings were largely based on standard technologies and were used by Indian customers for internal purposes, not for commercial exploitation. - The Tribunal referred to Scientific Engineering House P. Ltd. vs. CIT and Modern Threads (India) Limited V DCIT, concluding that the income was business income, not royalty. - The issue was decided in favor of the assessee, holding that the income from the sale of designs and drawings was not taxable in India. 4. Denial of TDS Credit Facts and Arguments: - The assessee claimed that the original TDS certificates were submitted to the AO, but the credit was not fully allowed. Judgment: - The Tribunal directed the AO to verify the TDS certificates and allow the credit accordingly. 5. Levy of Interest under Sections 234A and 234B Facts and Arguments: - The assessee challenged the levy of interest under Sections 234A and 234B. Judgment: - The Tribunal held that the charging of interest is consequential and directed the AO to recompute it based on the revised assessments. Conclusion: The Tribunal allowed the appeals partly, confirming the non-taxability of income from the sale of equipment and designs and drawings in India, while upholding the profit margin for supervisory services as determined by the AO and DRP. The Tribunal also directed the AO to verify and allow the TDS credit and recompute the interest under Sections 234A and 234B.
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