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TMI Blog2015 (6) TMI 609X X X X Extracts X X X X X X X X Extracts X X X X ..... nces are identical in all the three appeals, hence, we will consider the facts in the case of Outotech GmbH in ITA No. 431/Kol/14 and decided the issues first in this appeal. ITA No.431/K/2014 3. The first issue in this appeal of assessee is against the taxability of supply of equipment in India. For this, assessee has raised following grounds:- "Taxability of supply of equipment in India 2(a) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that a part of the income earned by the appellant from sale of equipment to the Indian customers accrues or arises in India and thus taxable in India under the provisions of the Act read with the provisions of India-Germany Double Taxation Avoidance Agreement (DTAA). 2(b) On the facts and in the circumstances of the case and in law Ld. AO/DRP has erred in holding that title of the equipment sold by appellant has passed on to the Indian customers in India and while reaching to this conclusion has further erred in misinterpreting various clauses of Sales of Goods Act, 1930. 2(c) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that the sale of equipment by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion of attribution on account of sale of equipment does not arise. 2(i) v, Ld. AO/DRP erred in holding that since the Acceptance Tests were carried out at customers' site in India the supervisory PE has a role to play in offshore sale of equipment without appreciating the fact that all the operation relating to design, fabrication and manufacture of the equipment were undertaken outside India and hence there is no role of supervisory PE in offshore sale of equipment. 2(j)On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that the Protocol [Item 1(a)] to Article 7 of the DTAA is not applicable to the Supervisory PE and hence the benefit of the same cannot be given to the appellant. 2(k) On the facts and in the circumstances of the case and in law, Ld. AO failed in holding and Ld. DRP erred in not appreciating that there is no provision of sale PE under Article 5 of the DTAA. 2(l) On the facts and in the circumstances of the case and in law, Ld.AO/DRP erred in holding that the judgment of Ishikawajma-Harima Heavy Industries Ltd. Vs. DIT 288 ITR 408 and other judicial precedents relied upon by the appellant were based on their own facts wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement with TATA Steel, Kalingangar (No. TATA-KPO/CON/SP/FOB) Scope of Work Clause 1.1.17. - Contractor's responsibility for completeness The contractor shall be fully liable and responsible for completeness of work that include all equipment, to fulfill the functional requirement of work as a whole and contractor's aforesaid responsibility shall be construed as included in the contract price. All items of equipment, whether specifically mentioned or not in the Technical Specification but which are usual and/or necessary for completion of work under the contract and are necessary for proper, efficient, sale and stable construction, operation and maintenance of the work and/or for the fulfillment of the performance guarantees, shall be supplied or provided or executed by the contractor without any additional price implication and without any dilution of this liabilities and responsibilities under contract. Clause 16 : Cold tests, integrated cold test and start up 16.1 Cold tests shall be performed on all plant and equipment and items converted under the contract, individual sub-assemblies of the unit sand shall be designed to conduct the systematic check of the components ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lear that the scope of Contract is not confined merely to dispatch of equipment on FOB basis overseas but linked to free and trouble fee operation of the such equipment in the plant. Further acceptance of equipment is linked to the fulfillment of the performance guarantee obligations which includes Cold Test etc., As such when the acceptance of the equipment supplied is directly linked to the performance of test run, the assessee's argument fell flat. The contract is to be interpreted in the main object of the parties who have entered into such contract. Though the price of the equipment, designs is separately shown, the real intent of the Indian customer is to erect the plant. It cannot be ignored that the plant cost is more than 100 crores. When the equipment becomes the integral part of the plant and till such state is the obligation of the assessee to ensure smooth commissioning of the plant, the contract cannot be viewed in isolation and in parts. From the contacts it is noticed that the main purpose of the supply of equipment is to erect plant and such intention is not to be missed. The Hon'ble AAR in the case of Alstom Transport SA [2012] 208 Taxman 223 (AAR) held as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the answer would be an obvious NO. If the enclosure 1 is closely examined, the entire equipment, designs becomes plant and this may be the reason, the liquidated damages are confined to 35% of the contract value. The absence of return of goods clause is apparently cannot be incorporated since the equipments part and parcel of the plant and cannot be goods in real sense. Enclosure-1 to the FOB contract is as under: FOB (Contd.) 260 Enclosure - 1 Break-up of price for design, manufacture and supply of imported plant, machinery and equipment with auxiliaries and initial fills, commissioning spares on F.O.B. basis for Sinter Plant at Kalinganagar, Orissa Sl. No. Item Descriptions Qty. Nos. Wt. MT s Country of Origin Currency Fixed FOB price, packed (Euro) 1.O Plant and Equipment/items, complete in all respects 1.1 1.1.1 1.1.2 1.1.3 etc. 1.2 Electrics &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or various projects in the year under consideration. Revenue noted that as per the contracts for sale of equipment, the conclusion of sale is subject to various accepted tests and others, and also envisages that certain percentage of the payment will be payable upon the successful completion of those tests. Clauses exist in the contracts regarding the company liable for payment of liquidated damages in the event of performance guarantee parameters not being met. Therefore, the same has concluded in India and as the existence of a PE has already been admitted by assessee, then as to why attribution of profits from sale of Equipment should not be made. Ld. Counsel explained the factual and legal position with regard to sale of equipment before addressing the specific query with regard to acceptance tests and the attribution of profits from sale of equipment to the PE raised by revenue. According to Ld. Counsel the contracts relating to sale of equipment were broadly undertaken in the following manner: (i) The designing, procurement of material, fabrication and manufacturing of equipment was undertaken outside India. The Company is not involved in the manufacturing of equipment and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd imported special embedment's that may be required for the Equipment on F.O.B. Basis" Clauses related to transfer of title/property in equipment outside India "Schedule 3 1.1 Delivery of imported Equipment and Commissioning Spares The FOB Delivery of all imported Equipment as listed in break-of Price given in Enclosure-I of this Agreement, will be completed by the Contractors within twenty three months (23) months from the Contract Effective Date.... SCHEDULE 4 TERMS OF PAYMENT 4.1.1 5% of Contract price for imported Equipment and items along with related designs and drawings for imported equipment will be payable by telegraphic transfer, within three (3) months from Contract Effectiveness Date.... 4.1.3 75% of the Price of each and every part shipment for Equipment will be payable as per Billing cum Schedule approved by the Purchaser as per Schedule-5 of this Agreement and against presentation of following dispatch documents proving that the goods are delivered FOB port of shipment: 4.2 Mode of payment 4.2.2 Payments as per clause 4.1.3 and 4.14 are payable at sight against presentation of the stipulated documents out of an irrevocable letter of credit allowing partial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.4 of Schedule 3 of the Contract, the Purchaser shall be at liberty to inform the Contractor accordingly and give the Contractor notice as reasonably practical, setting forth particulars of such defect or failure. The Contractor shall, with all speed and at his own expense, make it comply with the requirement of the Contract. Should he fail to do so within a reasonable time, the Purchaser may repair and / or replace, at the cost of the Contractor, the whole or any portion of the plant, as the case may be, which is defective or fails to fulfill the requirements of the Contact. Such repair / and or replacement shall be carried out by the Purchaser, where reasonably possible to the same Technical specification. The Contractor's liability under this clause shall be to pay the purchaser all direct resulting cost for such repairs / or replacement, subject to a limit of 35% of the Contract price." In view of the above, Shri Khaitan argued that the relevant extract of delivery/title transfer and other clauses under various contracts for which equipment has been supplied during the year under consideration to demonstrate that the sale has taken place outside India has already been explain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns can be taxed in India. In other words, if no operation is carried out in India, then no profit can be taxed in India. Thus, the point that merit consideration is whether the assessee has carried out any operation in India in relation to sale of equipment. According to Sh. Khaitanthe facts mentioned in above paragraphs including the clauses for TKPO project agreement clearly demonstrate that all the activities relating to designing, fabrication and manufacturing took placed outside India and 75% of the payment 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 submitted to the customer and such payment has to be made through irrevocable letter of credit. It is needless to mention that no buyer would make the substantial payment for equipment of which the property has not been transferred to him. The irrevocable letter of credit further makes it clear that even if the ship does not sail or deliver the goods to the destination, the assessee receives payment out of L/C, guaranteed by the bank, upon FOB delivery. Therefore, it is clearly evident that the sale of equipment took place outs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that all the activities relating to manufacturing and sale of equipment took place outside India. Therefore, the assessee wishes to submit that no PE has been constituted in India with respect to sale of equipment and hence no profits from sale of equipment can be taxed in India. Further, for the projects for which supervisory PE has been constituted in India, it is submitted to designing, fabrication and manufacturing of equipment was done outside India and sale has also taken place outside India and hence profits arising from sale of equipment is not taxable under the provisions of DTAA. 3. Ld Counsel stated that the above position has also been accepted by the Settlement Commission for Financial years 2007-08 and 2008-09, whereby after examining the facts of the case of the assessee it was held by the Commission that sale of equipment is not taxable in India both under the provisions of the Act and DTAA. Further, the significant portion of revenue from sale of equipment for the projects mentioned in the table below was covered under the settlement application and the major supplies had happened during the said period. During the year under consideration, the assessee has raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eries". (Emphasis Supplied) Thus the profits, if any, of the offshore supply of equipment will not be attributable to the PE even if the equipment is delivered in connection with the activities of the said PE." 8. On the other hand, Ld. CIT, DR Shri Vijay Kumar only relied on the orders of DRP and that of the AO. According to him, the assessee provided drawings, designs & engineering documents relating to steel industry to Indian customers for the operation and maintenance of the plant and claimed that supply of drawings, designs & engineering documents constituted 'outright' sale, not connected with assessee's PE in India and hence not taxable in India. The assessee also placed reliance upon various judicial pronouncements, namely, Scientific Engineering House (P) Ltd. v. CIT 157 ITR 86 (SC) and Modern Treads (India) LTD. v. DCIT 69 ITD 115 (ITAT Jaipur). The AO gave a finding that the payment for supply of drawings, designs & engineering documents constituted "royalty" under Explanation 2 to section 9(1)(vi) of the Income Tax Act as well as under Article 12(3) of the India-German DTAA. The AO, in his order, noted from the assessee's contract with TATA Steel, Jamshedpur in whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ientific experience" alludes to the concept of "knowhow" (vide paragraph 11 of the OECD Commentary on Article 12). As commonly understood, 'know-how' is the accumulated fund of knowledge acquired by years of observation, research, experimentation and experience. It grows in the shape of a formula, drawings, patterns, blue prints, specifications and so on. The material form it takes, not only facilitates preservation, collation and reference, but also makes it perceptible and visible and easily capable of being transmitted to others. Though physical records of know-how such drawings, designs, engineering and manufacturing data is imparted to another person, know-how is not lost to its owner who still continues to retain it for his own use. Therefore, income arising from an agreement under which such record is parted with cannot properly be termed as capital receipt. Technology is a science or body of knowledge applicable to the production of goods or services. Modern machinery is the product of technology. The concept of transfer of technology is complex phenomenon involving rights, obligations privileges and commitments of the parties concerned. The transaction permits access and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formula and does not guarantee the results thereof". (iv) The provision of know-how must be distinguished from the "provision of services, in which one of the parties undertakes to use customary skills of his calling to execute work himself for the other party". Viewed from the above perspective and development of law on the subject, both the AO and DRP have correctly applied the law to the facts of the present case. The secrecy & confidentiality clause in the agreement under which the supply of drawings, designs, etc., was made cannot justify the assessee's claim of it being an 'outright' sale of goods. By the transfer of drawings, designs, engineering information, etc. the recipient was enabled to ensure the operation and maintenance of the plant set up and the manufacturing process of the plant. The recipient was enabled to use or was imparted with the information concerning industrial, commercial or scientific experience through the said transfer. This would necessarily bring the payment within the ambit of "royalty" in terms of clause (iv) of Explanation 2 to section 9(1)(vi) of the Act as well as Article 12(3) of the India-German DTAA. In the case of CIT vs. Klayman Procela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. We have gone through judgments relied upon by assessee, wherein it has been decided that the income from offshore sale of equipment is not taxable in India. The case law of Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd.(supra), wherein dealing with the case of a Japanese Company, one of the similar issues that was whether the amounts received/receivable by the assessee a foreign company, for the off-shore supply of equipment and materials to an Indian Company was liable to be taxed in India under the provisions of the Act or the India-Japan Tax Treaty. That was a case wherein break-up of contract price for each of the segments i.e. for supply, services and construction and erection were separately given in the Agreement. In that connection, the Hon'ble Supreme Court held, on pages no 430 and 444 of the report, as under: "... It is not in dispute th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto existence only on conclusion of the transaction giving rise to the supplies of the fabricated platforms. The Installation PE emerged only after the contract with ONGC stood concluded. It emerged only after the fabricated platform was delivered in Korea to the Agents of ONGC. Therefore, the profits on such supplies of fabricated platforms cannot be said to be attributable to the PE. There is one more reason for coming to the aforestated conclusion. In terms of para (1) of Article 7, the profits to be taxed in the source country were not the real profits but hypothetical profits which the PE would have earned if it was wholly independent of the GE. Therefore, even if we assume that the supplies were necessary for the purposes of installation (activity of the PE in India) and even if we assume that the supplies were an integral part, will no part of profits on such supplies can be attributed to the independent PE unless it is established by the Department that the supplies were not at arm's length price. No such taxability can arise in the present case as the sales were directly billed to the Indian Customer (ONGC). No such taxability can also arise in the present case assessee th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ma (supra). In Ishikawajma (supra) there was a turnkey contract with four separate component activities turnkey contract with four separate component activities, viz., offshore supply, offshore services, onshore supply and onshore services awarded by Petronet LNG to a consortium of companies led by the Japanese company Ishikawajma-Harsima. In the instant case there are two separate contracts i.e., offshore supply and the onshore services contract awarded by the PGCIL to the respondent-assessee. As in the said case the considerations for offshore contract and onshore contract are separate and distinct from each other, inasmuch as the consideration in the case of offshore supply contract was received outside India through the mechanism of a letter of credit in foreign exchange while the consideration for onshore contract was receive, for the most in Indian rupees with a nominal amount in foreign currency, the latter being for training charges. The title to the equipment supplied from outside India was transferred in favour of PGCI outside India. In the assessee of Ishikawajma (supra), it was transferred on the high seas but in the instant case, it was transferred in the country of or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act and India-Russia Tax Treaty. The AAR while deciding the case in favour of the assessee, at page no. 420 of the report held as under: "In view of our above analysis, perusal of documents and case laws, we find that no portion of consideration is received by the applicant in India. Further, no income accrues or arises in India to the applicant as all the transactions took place outside India. The materials were shipped outside India, the title and property passed outside India (on high seas) and the payment was received outside India and therefore the applicant is not liable to pay income-tax in India. In view of our discussion, it is ruled that the applicant is not liable to pay tax under the provisions of the IT Act read with India-Russia DTAA in respect of the amount received from the NTPC for execution of offshore supply contract and we therefore answer the question in the negative." Further the AAR in the case of Hyosung Corpn. In re (AAR) (2009) 314 ITR 343 dealing with the issue similar to the one which is involved in the case of assessee i.e. as to whether the offshore supply of equipment, materials etc., were liable to tax under the provisions of the Act and In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplied from outside India, it was held that the direct sale of equipment by the Finnish entity from outside India to the Indian customers is not taxable in India. The Mumbai Bench of this Tribunal, at page no 291 of the report, held as under: "...As per art 7(2) profits attributable to a PE are the profits "which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE". Thus, the profits of the PE are to be calculated as if the PE is hypothetically independent of the enterprise of which it is a PE. The profits to be taxed in the source country are thus not the real profits made by the enterprise but hypothetical profits which the PE would have earned if it was wholly independent of the enterprise of which it is PE. Therefore, even if it is assumed that the supplies were necessary for the purpose of the activities of the PE and were integral part of the activities thereof, unless I is established at the supplies were not at an arm's length price to the PE no part of profits on such supplies can be treated as attri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T UP ... ... ... 16.5 The Purchaser shall promptly issue the Integrated Cold Test Certificate upon successful completion of Integrated Cold Tests. 17. PROVISIONAL ACCEPTANCE ... ... ... ... ... 17.7 On the satisfactory completion of the performance test and on signing of the Completion protocol between the purchaser and the Contractor, the Purchaser will promptly issue a Provisional Acceptance Certificate for the plant ... ... ... .. Schedule 4 Terms of Payment ... ... ... ... 4.1.5 5% of Contract Price for the imported Equipment along with related designs and drawings will be payable on satisfactory completion of Integrated Cold Test... ... 4.1.6 5% of Contract Price for the imported Equipment along with related designs and drawings will be payable after the issue of Provisional Acceptance Certificate... 4.1.6 The last 5% of the Contract Price for the imported Equipment along with related designs and drawings will be payable after the issue of Final Acceptance certificate." 3.4 Limited Damages for Non-fulfillment of the Performance Guarantee parameters. The total liquidated damages (LD) for non-fulfillment of the Performance Guarantee parameters/values as defined below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of tests, Hon'ble Delhi High Court, at page no. 460 of the report, has held as under:- "29. Thus, the mere fact that 15% of the payment was to be retained by the PHCIL to be period 30 days after operational acceptance on erection and completion of the system cannot be construed to mean that the title in goods did not pass to the buyer in the contrary of origin. 30. Then again, in our considered opinion, undue importance cannot be attached to the fact that the agreement imposed in the assessee company the obligation to handover the equipment functionally completed. The obligation has rightly been construed by the Tribunal to be in the nature of a trade warranty.... "31. We may note also that the buyer's right to examine and repudiate the goods in law does not itself indicate that the property ion goods had not passed, as it is evident from the provisions of section 59 of the Sale of Goods Act, which read as under:- '59. Remedy for breach of Warranty - (1) Where there is a breach of warranty by the seller, or where the buyer elects or is compelled to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not by reason only of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in India, inasmuch as the assessee was entitled to inspect and satisfy itself about the quality and standard of the machinery supplied. We do not see any substance in this contention. The various clauses in the agreement referred to above make it clear that the sale of machinery was F.O.B. European port, and the time of fulfillment of delivery was prescribed as the date of the bills of lading. The payment was also to be made outside India. The agreement further makes it clear that the insurance risk during the course of the journey was that of the assessee and it paid for the same : even the freight charges from the European port to the place of destination were paid by the assessee. Thus, judged from any angle, the sale of machinery, which are "goods" within the meaning of the Sale of Goods Act, was completely outside India. A mere provision in the agreement that the assessee is entitled to satisfy itself about the quality and standard of the machinery in India cannot, in the circumstances of this case, detract from the fundamental position that the sale took place outside India. In such a situation, one has to apply the test of predominance and decide where the sale took place? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PE only the income arising on account of supervisory activities can be taxed in India since the PE has been constituted merely on account of rendition of supervisory services under Article 5(2)(i) of the DTAA which provides that "The term "permanent establishment: includes especially, - (i) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities continue for a period exceeding six months.". The entire value of the invoices raised by the assessee on the rendition of supervisory services during the year under consideration (for which a supervisory PE has been constituted) has already been offered to tax at the net profit rate of 17.93% and therefore, no further attribution is warranted. As far as sale of equipment is concerned, no PE of the assessee is constituted in India for any of the projects and hence there cannot be any question of attribution of profits to PE for sale of equipment. This position has also been accepted by the ITSC in the order passed for Financial Years 2007-08 and 2008-09. The relevant observation of the ITSC is reproduced below: "...With regard to the attribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This position has also been affirmed by the Mumbai Tribunal in the case of M/s Krupp Udhe GmbH vs Addl. CIT (28 SOT 254), which is also based on India-Germany DTAA. In this regard, the Mumbai Tribunal has held as under:- "24. We have gone through the various treaties referred to by the learned counsel for the assessee. The perusal of such treaties shows that whenever the contracting parties intended that different sites should be taken together, they had expressly provided so. For example, in the Indo-Denmark Treaty, Article 5(2)(k) provides as under: 'Article 5: Permanent Establishment:- 1. .... ... .. 2. The term 'permanent establishment' includes especially: a) to j)... ... k) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of 183 days or more. (Since Sub-clauses a to j are not relevant, the same are not reproduced above)' Similar provisions have been made in Article 5 of the various treaties entered into by India width China, USA, Canada Italy etc., It is pertinent to note that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is held that in computing the minimum period of 6 months, various sites cannot be considered together particularly when different contracts had no effective interconnection with each other. In the present case, the assessee had entered into various contracts with various parties in respect of various independent projects located at different places. Hence, the lower authorities were not justified in considering the various sites together while computing the minimum period of six months prescribed in Article 5(2)(i) of the DTAA." 19. In view of the above facts and legal position, we are of the view that the sale of equipment is concluded outside India because all work relating to manufacturing, designing, fabrication etc. of equipment is done outside India and sold to the assessee directly on export sale basis. The contract provides for delivery of equipment on FOB Foreign Port of Shipment majority of payments i.e. 80-85% for each and every part of shipment becomes payable upon delivery of equipment on FOB foreign Port of Shipment the above payments are through irrevocable letter of credit which makes it clear that even if the ship does not sail or deliver the goods to the desti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the profit arising to the assessee from sale of equipment is not taxable in India. This issue of assessee's appeal is allowed. 20. The next issue in this appeal of the assessee is against the order of DRP and that of the AO in assessing the income from supervisory services. For this, assessee has raised following grounds: "Income from Supervisory Services 3(a) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in ignoring the net profit rate of 17.93% on gross revenue based on the average margin of comparable companies as considered by the appellant for computing the taxable income from supervisory services in India without showing any cogent reason. 3(b) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in considering the net profit rate of 27.5% for computing the taxable income from supervisory services in India which is excessive." 21. Briefly stated facts are that the assessee had provided supervisory services in India during the relevant year and earlier years also. The assessee was merely engaged by its customers for supervising the detailed engineering, installation and commissioning activity undertaken independ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus considered it reasonable to apply a profit percentage of 27.5% on the income earned by the assessee from providing supervisory services. The assessee contended that the profit percentage of 17.93% is based on the margins earned by the similar Indian comparable companies. The AO cannot simply reject the same without showing any basis. The attribution before the ITSC cannot be considered as binding for the subsequent years and this fact has also been stated by the Ld. AO while dealing with the taxability for sale of equipment. Thus reference by the AO of proceedings before ITSC is not relevant and is contradictory to his own stand. Such decision of ITSC was accepted merely to buy peace and to avoid protracted litigation with the Income Tax Department for those years and a letter to this effect was also filed with the AO. The assessee's main contention is to examine the profit rate independently on the basis of comparable margins of Indian companies which it had furnished rather than relying on settlement commission order. There is no dispute that the assessee has a supervisory PE in India. Above all, after admitting income on its own, in the return of income (outside the purvi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the business of engineering and technical services and such comparable companies have been rightly relied upon by assessee in order to arrive at the net profit margin of 17.93% on gross revenue earned from supervisory services. It was contended that the final order of the ITSC for FY 2007- 08 and 2008-09, the margins of comparable companies was not a basis before the ITSC and hence, the ITSC did not had an occasion to analyse the same. It was contended that the decision of ITSC was accepted to buy peace and to avoid protracted litigation with the revenue. We find that even now before us the assessee could not file any reason to deviate from the decision of the ITSC wherein the profit margins were rightly applied at 27.5%. Hence, this issue of assessee's appeal is dismissed. 24. Sh. Vijay Kumar Ld. CIT-Dr stated facts and made argument that the assessee reported to have earned gross revenue from supervisory services amounting to Rs. 10,35,15,673/- out of which Rs. 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 Rs. 2,84,66,810/-. The DRP also confirmed the action of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not been transferred to the customer the nature of transaction will change from sale of goods to use of license." 26. Brief facts relating to this issue are that the assessee provided drawings, designs & engineering documents relating to steel industry in India to the customers for the operation and maintenance of the plant. During the year under consideration, the assessee raised invoices to the tune of Rs. 79,42,01,177/-. The DRP and the AO holds the income earned from supply of drawings and designs as taxable in India. The DRP for taxing the income earned from supply of drawing and designing observed as under: "The AO in his draft assessment order after giving due consideration to the arguments of the assessee opined that the consideration received by the assessee is not a sale but Royalty under Article 12(3) of the DTAA as well as Explanation 2 to Section 9(1)((vi) of the IT Ac. The AO based his conclusion on the following reasons. 1. The supply of design and drawing s does not pertain to any sale of goods but takes the characteristics of granting of a license allowing the Indian client to use it. 2. The AO has made reference to Design Act, 2000 and the decision in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting up a plant in India does not change the character of the transaction from the sale of the product to the use of license/know-how. 4. The mere fact that the word license has been used in the agreement would not make any difference in the taxability of the income. 5. Although Hon'ble ITSC has held the payment received by Design and Drawings as royalty in its order, the assessee does not agree with such decision of the ITSC. Such decision of ITSC was accepted merely to buy peace and to avoid protracted litigation with the income tax department for those years and a letter to this effect was also filed with the AO. AO's reliance on Design Act, 2000 and the decision of The Wimco Limited vs. Meena Match Industries (AIR 1983 Delhi 537) are not relevant in the instant case since this is the case where designs and drawings have been sold to the Indian customers for the internal purpose of setting up plants and not for commercial exploitation. We have carefully considered the arguments put forth by the assessee before us. Similar contentions have been made before the Hon'ble ITSC. The Hon'ble ITSC after an elaborate discussion held as under in its order dated 30-12-2011. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned the TDS certificate filed before us by the Ld. AR and observe that some of the payments on which TDS has been deducted are on account of technical services. We further observe that the technical know-how provided by the applicants is so highly specialized that the clients have to heavily depend on the applicant's skill and expertise for setting up the plant and make it fully operational. Thus we have reason to believe that technical services in fact have also been provided to the Indian companies by the applicants, and the fees paid for the same are included in the consideration received by the applicants for making over the designs and drawings to the Indian customers. Keeping in view the facts of the case and taking an overall view, we estimate that 40% of the consideration is towards fees for technical services which is taxable under Section 9(1)(vi) of the IT Act. 78. Therefore we hold, that 60% of the payments received by both the applicants for making over the designs and drawings to the Indian customers are in the nature of royalty payments and balance 40% payments are fees for technical services. Further, as per the IT Act, as well as he respective DTAA; both kind of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee's paper book. Consideration/payments for the basic engineering work were received by the assessee outside the territory of India in foreign currency. All the contracts were net of tax contracts and the liability to pay taxes was on the Indian customers. 28. The relevant clauses of contracts for supply of imported designs and drawings for civil and structural work, utilities etc for Tata Steel Pellet project ('Tata Pellet project') are reproduced below: Clauses relating to scope of work - Tata Pellet Project "Schedule I Article 1.1 SCOPE OF WORK FOR SUPPLY OF IMPORTED DESIGDNS AND DRAWINGS In consideration of the payments to be made by the purchaser, the Contractor shall be responsible for supply on FOB basis of following imported designs and drawings as detailed in the Technical Specification. In the event of air transportation at the sole direction of the purchaser, "FOB port of shipment' shall be considered as FCA airport of dispatch.' 1.1.1 Supply of imported designs and drawing for civil and structural work, utility and other services, erection, start-up, commissioning and demonstration of performance tests for Pelletising Plant on FOOB port of shipment to be submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee may include supply of material, equipment, drawings documents, guaranteeing the work. The responsibility of the assessee did not stop with the supply of the equipment and when the contract is for the work, the supply component need not be viewed separately.' As can be seen from the above, it was not a case of sale of equipment simplicitor, but it involves a host of services employed at the site level to complete the whole plant. Unless these services and other obligations at the site level are not separately compensated at arm's length, it cannot be said that the price paid for supply of equipment was at arm's length. A bare perusal of the contract documents would suggest that no separate remuneration or compensation for services like Cold Test, Integrated Cold Test, Start-up, local level training, performance test, etc., have been provided. This could be possible only if compensation for such services was actually embedded in the price set for the supply of equipment itself. In other words, a portion of profit having its situs in India at the plant site level always stood loaded in the supply of equipment which is now sought to be labeled as offshore supply not amena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uments did not perform any mechanical operations or processes but that cannot militate against their being a plant since they were in a sense the basis tools of the assessee's trade having a fairly enduring utility, though owing to technological advances, they might or would in course of time become obsolete. We are, therefore, clearly of the view that the capital asset acquired by the assessee, namely, the technical know-how in the shape of drawings, designs, charts, plans, processing date and other literate falls within the definition of "plant" and is, therefore, a depreciable asset". (Emphasis supplied) Since the assessee supplied the designs and drawings for setting up plants in India, in light of the above judgment, such designs and drawings partake the character of a product and accordingly, it is clear that the income arising to the assessee is in the nature of business income. 31. A similar issue arose before Jaipur Bench of the ITAT in the case of Modern Threads (India) Limited V DCIT 69 ITD 115(Jp), wherein brief facts were that Modern Threads, an Indian company was interested in building in India a plant for the production of PTA. It, therefor, entered into an agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 license/know-how and the mere fact that the word license has been use in the agreement would not make any difference. The assessee explained that the design and drawings sold by it were used by the Indian customers for internal business purpose of setting up of their plants and not for any commercial exploitation. Accordingly, the designs and drawings sold by the assessee tantamount to the use of a 'copyrighted article' rather than use of a 'copyright' and is therefore in the nature of business income. Reliance in this regard is also placed on Commentary on Double Tax Conventions by Klaus Vogel. The relevant extract is reproduced below: "....In a partial transfer of rights the consideration is likely to represent a royalty only in very limited circumstances. One such case is where the transferor is the author of the software (or has acquired from the author his rights of distribution and reproduction) and he has placed pat of his rights at the disposal of a third party to enable the latter to develop or exploit the software itself co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er a license agreement with the copyright holder, copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying where they do n more than enable the effective operation of the program by the user, should be disregarded in analysing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as commercial income in accordance with Article 7. 14.2 The method of transferring the computer program to the transferee is not relevant. For example it does not matter whether the transferee acquires a computer disk containing a copy of the program or directly receives a copy on the hard disk of her computer via a modem connection. It is also of relevance that there may be restriction on the use to which transferee can put the software." 34. Further, the Authority For Advance Ruling in the case of GeoQueste Systems B.V. In re., 327 ITR 1(AAR) dealing with the non-taxability of payment for software, held that payments would not constitute 'royalty' since the licensed product could not be commercially ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are incorporated in Section 14. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, in our view, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. However, where, for example, the owner of copyright over a literary work grants an exclusive license to make out copies and distribute them within a specified territory, the grantee will practically step into the shoes of the owner/grantor and he enjoys the copyright to the extent of its grant to the exclusion of others. We may in this context usefully refer to the well-reasoned opinion expressed by OECD in its Commentary on Article 12. "Transfers of rights in relation to software occur in many different ways ranging from the alienation of the entire rights in the copyright in a programme to the sale of a product which is subject to restrictions on the use to which it is put........Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the programme by the user, should be disregarded in analyzing the cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction 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. This issue of assessee's appeal is allowed. 38. The next ground in this appeal of assessee is against the order of AO not allowing credit for TDS. For this, assessee has raised following ground: "5. On the facts and in the circumstances of the case and in law Ld. AO has erred in denying TDS credit to the extent of Rs. 3,38,43,393/-." 39. We have gone through the facts and arguments of both the sides. 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. 40. The next issue in this appeal of assessee is as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DTAA for offshore sale of equipment to the Indian customers and accordingly no income, from such sale of equipment is taxable in India under the provision of the DTAA. 2(g) That on the facts and in the circumstances of the case Ld. AO/DRP erred in holding that for the purpose of supervisory PE under Article 5(2)(k) of the DTAA all site or project need to be clubbed together and hence once there is a supervisory PE the role of such PE in other contracts for offshore sale of equipment cannot be ruled out without appreciating the fact that the appellant has not rendered su9pervisory services for the contracts relating to offshore sale of equipment and hence such clause would not apply in the case of the appellant. 2(h) On the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that since the performance tests were carried out at customers' site in India the supervisory PE has a role to play in offshore sale of equipment without appreciating the fact that all the operation relating to design, fabrication and manufacture of the equipment were undertaken outside India and hence there is no role of supervisory PE in offshore sale of equipment. 2(i) On th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance Agreement (DTAA). 2(b) That on the facts and in the circumstances of the case and in law Ld. AO/DRP erred in holding that title of the equipment sold by appellant has passed on to the Indian customers in India and while reaching to this conclusion has further erred in misinterpreting various clauses of Sales of Goods Act, 1930. 2(c) That on the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that the sale of equipment by the appellant were not concluded until successful completion of various tests at the customers' sites in India without appreciating the fact that these tests are merely in the nature of warranty provision and this fact has been confirmed by the various courts/Tribunals//AAR in several judicial precedents. 2(d) That on the facts and in the circumstances of the case and in law, Ld. AO erred in rejecting the reliance placed by the appellant on the decisions of Hon'ble Delhi High Court in the case of DIT Vs. LG Cable Ltd.[237 CTR 438] and other related judicial precedents merely on the contention that such decisions are sub-judice before the Hon'ble Apex Court. 2(e) That on the facts and in the circumstances of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same assessment year 2010- 11, hence, taking a consistent view and applying the same decision, we allow this issue of assessee's appeal in this case also. 48. The issue as regards to taxability of supervisory services income in India, the assessee has raised following grounds: "Income from Supervisory Services 4. That on the facts and circumstances of the case and in law, Ld. AO/DRP erred in increasing the net profit rate to 27.5% on the gross revenue from supervisory services against the net profit rate of 16.49% applied by the appellant." 49. As the facts and circumstances are exactly identical to the facts and circumstances of the case of Outotec GambH for the same assessment year 2010- 11, hence, taking a consistent view and applying the same decision, we dismiss this issue of assessee's appeal in this case also. 50. The next issue in this appeal of assessee is against the order of DRP and that of the AO in taxing income earned from supply of designs and drawings in India. For this, assessee has raised following grounds: "Taxability of income from supply of design and drawings: 4(a). That on the facts and in the circumstances of the case and in law, Ld. AO/DRP grossly e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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