2022 (7) TMI 839 - AT - Income Tax

Income accrued in India - income on account of sale of goods is taxable in India or not - CIT(A) held that the receipts on account of supply of equipment Taurus 60 and other accessories cannot be taxed in India as all the activities in relation to manufacturing of the equipment took place outside India - HELD THAT - The purchase order in regard to supply of Taurus 60 and other accessories do not mention about any services in regard to installation and commissioning to be provided by the appellant company. No separate price for such services is quoted in the purchase order. The only basis for the assessing officer for concluding that the sale of equipment is concluded in India is that the appellant has admitted that it has supervised the turbine change out in India. As it is held in paragraphs above that the receipts on account of supply of equipment Taurus 60 and other accessories cannot be taxed in India as all the activities in relation to manufacturing of the equipment took place outside India and sale was carried out on a principle to principle basis. The transaction was at arm s length and the consideration is also received outside India in foreign currency. As in ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD. VERSUS DIRECTOR OF INCOME-TAX 2007 (1) TMI 91 - SUPREME COURT where income arises out of operations performed in more than one jurisdiction, then it has a nexus with each of the jurisdictions and no one state can exercise its right to tax the income which has not arisen in that state. Accordingly, only that part of the work which is attributable to business operations carried out by the Appellant in India is taxable in India. In the present case, therefore, at the most the supervisory services for installation and commissioning etc., provided in India at the premises of the buyer, can be considered to be taxed in India. The appellant had submitted during the assessment proceeding that it had offered tax on such services (Installation, commissioning and supervision) on gross basis at the rate of 10.506% u/s 115A of the Act. The assessing officer has not disputed this fact in the assessment order. He has not made any separate addition on this account. The only addition made by the assessing officer on account of sale of the machine to SI Group-India Ltd. As held that the receipts on account of supply/sale of equipment Taurus 60 and other accessories cannot be taxed in India as all the activities in relation to manufacturing of the equipment took place outside India. The services rendered by the personnel of the appellant company for the purpose of installation and commissioning of the turbine has accrued in India and therefore taxable in India. - Decided in favour of assessee.

Summary

Issues Involved:
1. Non-rectification of mistake apparent on record.
2. Erroneous levy of surcharge and education cess.
3. Taxability of receipts on account of supply of overhauled equipment and associated services.

Detailed Analysis:

1. Non-rectification of Mistake Apparent on Record:
The assessee contended that the CIT(A) erred in holding that a speaking order cannot be modified and failed to recognize an apparent mistake in the order dated 14 June 2017. The mistake involved the erroneous levy of surcharge and education cess on rates considered as per the Double Taxation Avoidance Agreement (DTAA). The assessee argued that the non-application of a specific provision of the Income-tax Act, 1961, constitutes a mistake apparent on record. The CIT(A) concluded that the appellant was seeking modification under the guise of rectification without appreciating that the beneficial rate of tax as per DTAA was not applied, thus constituting a mistake apparent on record. The CIT(A) did not adjudicate on the merits of the rectification application, which the assessee claimed was an error.

2. Erroneous Levy of Surcharge and Education Cess:
The CIT(A) upheld the levy of surcharge and education cess on income from troubleshooting services taxable at a special rate of 15% as per the India-USA DTAA. The CIT(A) did not consider that as per Article 2 of the India-USA DTAA, tax includes any surcharge thereon. The CIT(A) also ignored Circular 728 dated 30 October 1995, which provides for the application of rates as per DTAA or the relevant Finance Act, whichever is beneficial to the assessee. The CIT(A) failed to follow the binding decision of the ITAT, Delhi in the case of OSRAM India Pvt. Ltd. vs. DCIT. The tribunal examined various judgments and provisions, concluding that the deduction for taxes paid as cess cannot be allowed as a deduction. The Finance Bill, 2022 clarified that education cess is not an allowable expenditure while computing profits and gains from business or profession, effective retrospectively from AY 2005-06. The tribunal dismissed the grounds taken by the assessee, stating that the matter had attained finality.

3. Taxability of Receipts on Account of Supply of Overhauled Equipment and Associated Services:
The Revenue appealed against the CIT(A)'s decision that receipts from the supply of overhauled equipment (turbine/gas producer assembly Taurus 60) are not taxable in India. The CIT(A) found that the purchase order from SI Group India Ltd was for the supply of new equipment, not overhauling services. The equipment was manufactured in the USA, and the sale was concluded outside India under an ex-works arrangement. The CIT(A) held that the sale of equipment took place outside India, and the income from such sale is not taxable in India. The CIT(A) also noted that the appellant had offered tax on installation and commissioning services provided in India at the rate of 10.506% u/s 115A of the Act. The assessing officer's addition of Rs.1,14,58,250/- on account of the sale of equipment was deleted. The tribunal affirmed the CIT(A)'s well-reasoned order, dismissing the Revenue's appeal.

Conclusion:
The tribunal dismissed both the assessee's and the Revenue's appeals, upholding the CIT(A)'s decisions on all counts. The tribunal confirmed that the levy of surcharge and education cess is not deductible, and the income from the supply of equipment manufactured and sold outside India is not taxable in India. The tribunal's order was pronounced in the open court on 29/04/2022.