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2017 (2) TMI 634 - AT - Income TaxTransfer of copyrights - India-Netherlands DTAA - whether the consideration received for provisions of such services is taxable as FTS under the provisions of India- Netherlands DTAA or not? - PE in India - Held that - The action of the DRP in directing the treat the sum of Euro 154655 as FTS cannot be sustained. A perusal of the invoice in this regard together with the purchase order clearly shows that what the Assessee did was installation, testing and commission and training. The training was half-day training and was intended to familiarize the Assessee with the operation of the equipment. In the light of the India-Netherlands DTAA Article 12(5)(b) and in the light of the various judicial pronouncements referred to in the earlier paragraphs on this issue, it cannot be said that the services rendered make available technical knowledge, experience, skill, know-how or process etc. It cannot be said that the sum in question was in the nature of FTS chargeable to tax under the Treaty. Assessment of income from Gulf of Kuchch (GOK) Project - PE in India - Held that - For constituting Installation PE within the meaning of Article 5(3) of the India-Netherlands DTAA the test of duration of time for which the activities are carried out in India becomes relevant. In the present case the question is computation of the duration of time. The supply of equipments that have to be installed by the consortium could be said to be a direct preparation for coming into existence of an Installation PE. The DRP has not given any specific reason for coming to the conclusion that there existed an installation PE of the Assessee in India except to observe that the project has to be seen in a holistic way. Even if one were to look at the project in a holistic way, the question still remains open whether the supply of equipments by itself would constitute an installation PE. There are no provisions in the treaty providing for circumstances such as the present one when it can be said that an installation PE has come into existence. There are no circumstances brought out to show that the parties resorted to treaty abuse. In the given circumstances, we are unable to uphold the findings of the DRP that there existed an Installation PE of the Assessee and profit arising out of off-shore supply of equipments are attributable to the installation PE and therefore taxable in India as business profits. Since the Assessee did not have a PE in India, such profits cannot be brought to tax in India. Taxation of income arising out of Assessee s AMC contract with ONGC for supply, installation, testing and commissioning of Vessel and Air Traffic Management System (VATMS) - Held that - since the VATMS equipment was already accepted and handed over to the customer in the year 2007 and no installation activity was carried out in India during the subject year, it cannot be held that the Assessee had an Installation PE in India in the subject year. As far as the conclusion of the revenue that the independent contractor of the Assessee in India created a virtual presence of the Assessee in India so as to create an installation PE, given that the entire onshore maintenance contract has been performed by an independent local contractor in India, it cannot be said that the business of the Assessee has been carried out by the presence of the local contractor in India, so as to create its PE in India. The examination of whether a PE exists needs to be determined based on the activities of the foreign enterprise in India. Since no activities have been carried out by the Assessee in India with respect of such maintenance activity, it is unreasonable to conclude that the business of the Assessee was carried out in India through such subcontractor, to constitute its PE in India. We therefore hold that receipts in the form of AMC fees from ONGC on VATMS cannot be brought to tax in India as business income. In view of the above conclusion, the question of what quantum of income has to be attributed to the PE in India that is agitated in Gr.No.D-3 & 4 do not require any consideration. Taxation of income arising out of Extra Work Contract performed by the Assessee in respect of contract with ONGC for supply, installation, testing and commissioning of Vessel and Air Traffic Management System (VATMS) - Held that - The revenue cannot bifurcate the consideration towards software and license embedded in the equipment from the combined sale value of the equipment and accessories and seek to bring to tax the amount bifurcated for software as in the nature of Royalty as envisaged under section 9(l)(vi) of the Act. For the reasons given in para 41 to 47 of this order, we hold that there was no installation PE in existence in so far as the ONGC VATMS AMC project is concerned. Therefore the receipts in question cannot be brought to tax India. Credit of taxes deducted at source- Held that - It would be just and appropriate to direct the AO to consider the TDS certificate produced by the Assessee and after verification allow credit for prepaid taxes without insisting on the TDS being reflected in Form 26AS. The ground is treated as allowed.
Issues Involved:
1. Taxability of revenue from separate and distinct transactions under a single composite contract. 2. Taxability of income from on-shore supply of software and licenses as 'royalty'. 3. Classification of income from on-shore services as 'fees for technical services' (FTS). 4. Attribution of income to a Permanent Establishment (PE) in India. 5. Taxability of income from off-shore supply of equipment. 6. Taxability of income from Annual Maintenance Contract (AMC) services. 7. Taxability of income from extra work contracts. 8. Levy of interest under sections 234A and 234B. 9. Credit for taxes deducted at source (TDS). Issue-wise Detailed Analysis: 1. Taxability of Revenue from Separate and Distinct Transactions Under a Single Composite Contract: The Assessee was awarded contracts by the Airports Authority of India (AAI) for Supply, Installation, Testing & Commissioning (SITC) of systems at various airports. The AO attributed 50% of the receipts from providing services as income chargeable to tax in India under Sec.44DA. The DRP held that the PO was not involved in business activity related to the project, hence no profits could be attributed to the PO. The Tribunal dismissed this ground as infructuous since the PO was not operational. 2. Taxability of Income from On-shore Supply of Software and Licenses as 'Royalty': The Assessee argued that the software supplied was embedded in the hardware and could not operate independently. The Tribunal held that the software and licenses were part of the hardware and not taxable as 'royalty' under Article 12(4) of the India-Netherlands DTAA, relying on judicial precedents like DIT v. Ericsson AB. 3. Classification of Income from On-shore Services as 'Fees for Technical Services' (FTS): The Tribunal found that the services provided by the Assessee, including installation, testing, and commissioning, did not 'make available' technical knowledge or skills to AAI. Therefore, the income could not be classified as FTS under Article 12(5) of the India-Netherlands DTAA. 4. Attribution of Income to a Permanent Establishment (PE) in India: The Tribunal examined whether the Assessee had an Installation PE in India under Article 5(3) of the India-Netherlands DTAA. It concluded that no installation activity was carried out during the relevant previous year, and hence, there was no Installation PE. Therefore, the income from off-shore supply of equipment could not be taxed in India. 5. Taxability of Income from Off-shore Supply of Equipment: The Tribunal held that since the Assessee did not have a PE in India, the profits from off-shore supply of equipment could not be brought to tax in India. The supply was on a high-seas sales basis, and the title passed outside India. 6. Taxability of Income from Annual Maintenance Contract (AMC) Services: The Tribunal found that the AMC services were performed post-completion of the installation and involved only maintenance activities. These services did not constitute 'installation activity' and therefore did not create an Installation PE. The income from AMC services could not be taxed in India. 7. Taxability of Income from Extra Work Contracts: The Tribunal held that the income from off-shore provision of services related to the extra work contract with ONGC could not be classified as 'royalty' or FTS. Since there was no PE in India, the income could not be taxed in India. 8. Levy of Interest Under Sections 234A and 234B: The Tribunal noted that the AO had deleted the levy of interest under sections 234A and 234B pursuant to a rectification application. This ground was dismissed as infructuous. 9. Credit for Taxes Deducted at Source (TDS): The Tribunal directed the AO to consider the TDS certificates produced by the Assessee and allow credit for prepaid taxes after verification, even if the TDS was not reflected in Form 26AS. Conclusion: The Tribunal partly allowed the appeal, providing relief on several grounds, including the non-existence of a PE, non-taxability of embedded software as royalty, and directing the AO to grant TDS credit based on certificates provided.
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