9911796707
TMI Blog2017 (2) TMI 634X X X X Extracts X X X X X X X X Extracts X X X X ..... y of equipments. The Assessee received payments in respect of performance of services and supply of equipment under the following contracts in India: * Supply, installation, testing and commissioning of Advances Surface Movement Guidance Control System (,ASMGCS') at Chennai, Mumbai and Kolkata airports by Airport Authority of India ('AAI') (Airport Authority of India (Mumbai, Chennai and Kolkata airport) * Supply, installation, testing and commissioning of Air Traffic Control system at the Delhi airport by AAI (Airport Authority of India (Delhi airport) * Establishment of Yes se I Traffic Service system in the Gulf of Kuchchh (GOK contract) * Contract to provide annual maintenance of the Y ATMS system installed by ONGC (ONGC AVTMS - Annual Maintenance Contract) * Contract to provide interface between the VATMS network and the naval network to enable down load of data by navy from the Y ATMS (ONGC V ATMS - Extra Work) 3. The nature of activities undertaken by the Assessee and receipts from the said activities during the subject year for each project was as follows: HITT Holland Institute of Traffic Technology BV AY 2010-11 Details of Income Revenue from various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profits earned by the Assessee are in foreign currency - USD for GOK Project and Euro for other projects. Such profits have been converted to INR as per the mechanism prescribed under Rule 115 of the Income tax Rules, 1962 ('Rules ') using an exchange rate Euro = INR 59.63 and USD = INR 44.67. 5. The assessee had established a Project Office ('PO') in India in the year 2005 for the GOK Project, However, it has not performed any activity in relation to any of its contracts in India from the said PO. The project office has only been used to collect money and pay certain expenses on behalf of the Assessee through its bank account. Therefore, no part of the contract execution has been carried out through the PO in India. Therefore the Assessee did not have a Permanent Establishment (PE) in India. This has been accepted by the DRP in its directions dated 23.12.2013 at page-21 para-7. 6. Under section 4 of the Act, the charge to tax is on the total income of every person. Section 5 of the Act explains the scope of total income of every person. Section 5(2) lays down the scope of total income of every person who is a non-resident. Any income received or deemed to be received i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the same kind of transactions carried on by the PE or not, which is referred to as "Full Force of Attraction" principle. As to which principle is applicable in a given case depends on the clauses of the convention between two countries. Article 7(1) of the DTAA between India and Netherlands provides for taxing profits of the enterprise in the other state only to the extent they are attributable to the PE in the other state, adopting "No Force of Attraction" principle. With the above broad principles in mind we will now consider the facts of the present case and the rival contentions on behalf of the assessee and the revenue on the various grounds of appeal raised by the Assessee before us. 7. For the subject year, the assessee filed its return of income for the subject AY declaring income of INR 1,19,26,000 pertaining to training income received from AAI(Mumbai, Chennai and Kolkata Airport) Project as 'Fees for technical services', taxable on a 'gross' basis at the rate of 10 percent as per the provisions of Article 12(2) of the India-Netherlands Double Taxation Avoidance Agreement (' DTAA'). The assessee's return was selected for regular assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Dispute Resolution Panel, Kolkata (hereinafter referred to as the 'Hon 'ble DRP') has further erred in confirming that all the revenue from separate and distinct transactions, being part of a single and composite contract should be offered to tax in India since such contract is indivisible for tax purposes. 11. The Assessee was awarded a contract by Airports Authority of India (AAI) for Supply, Installation, Testing & Commissioning (SITC) of Advance Surface Movement Guidance Control System (ASMGC) at Chennai, Mumbai and Kolkata Airports. The Purchase order of AAI was dated 15.4.2008. Annexure-I to the said purchase order gives the details of items to the supplied. Clause-1 of the said purchase order reads thus: "1. PRICE: The items in the Annexure-I and Annexure IA will be supplied at a total cost of Euro 45,77,726 (Euros Four Million Five Hundred Sevety Seven Thousand Seven Hundred Twenty Six only) and Rs. 1,09,33,569 (Ten Million Nine Hundred Thirty Three Thousand Five Hundred Sixty Nine only). The Price is FOB, Netherlands and is firm and fixed." Annexure-I referred to in the purchase order is given as Annexure-1 to this order. It can be seen from Annexure-1 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel for the Assessee therefore prayed that the relevant ground may be treated as infructuous. Ground A is accordingly dismissed as infructuous. 13. Ground "B" raised by the Assessee relates to Airport Authority of India (Delhi Airport) Project. The Assessee was awarded a turnkey contract for supply, installation, testing and commissioning ('SITC') of Air Traffic Control ('ATC') at the Delhi airport by Airports Authority of India ('AAI') in the year 2008. The copy of the purchase order for supply, installation, testing and commission (SITC) of Air Traffic Control (ATC) systems at New Delhi Airport dated 4.12.2008 is placed at page 242 to 250 of the Assessee's paper book. The operative portion of the purchase order reads thus: "Airports Authority of India (AAI), hereinafter referred to as Purchaser is pleased to place a purchase order on M/S.HITT Holland Institute of Traffic Technology B.V., Netherlands, hereinafter referred to as supplier, for supply, installation, testing & commissioning (SITC) of ATC System at New Delhi Airport as per details in Annexure-I 1. PRICE: The items in Annexure-I will be supplied at a total cost of Euros 2,74,165 (Euros Two Hundred Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and that the action of the AO in treating the receipts as business income was not correct. The DRP nevertheless directed that AO to treat the payment made for supply of software and its license viz., (Rupee equivalent of Euro 85,500 ) as payment towards royalty u/s.9(1)(vi) of the Act. The DRP also held that all revenues arising from separate and distinct transactions, are part of a composite contract and that these contracts were indivisible and dependent contract for different activities. It can be seen from Annexure-2 to this order which is part of the purchase order of AAI that the Assessee had to install, test, commission and train persons to use the machine. The consideration attributable to the said activity was a sum of Euro 1,62,795(gross) (Net) Euro1,54,655. The DRP held that this sum was in the nature of "Fees for Technical Services" (FTS) rendered and was taxable in the hands of the Assessee in India. Aggrieved by the order of the DRP, the Assessee has raised Gr.B before the Tribunal. Gr.No.B-1 & B-2 relate to the grievance of the Assessee in bringing to tax Euro 85500 as royalty and Gr.B-3 relates to the grievance of the Assessee in brining to tax Euro 162795 as "Fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hardware equipment supplied is not 'Royalty'. In this regard it was submitted that embedded software supplied along with equipment merely facilitates its operation/ functioning and there is no independent existence/ use of such loaded software. The software so supplied is an integral part of the equipment supplied and hence, amounts of sale of hardware, not taxable as 'royalty'. In this regard, the learned counsel for the Assessee placed reliance on the certain judicial pronouncements. Our attention was drawn to the decision of the Hon'ble Delhi High Court in the case of DIT v. Ericsson AB (2012) 343 ITR 470 (Delhi HC) wherein it was held that if software supply is an integral part of the equipment system and such software loaded on the hardware doesn't have any independent existence, it is not permissible for the Revenue to assess sale of hardware and sale of software separately. The relevant extracts have been reproduced below: "55 .......We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Delhi SB) ADIT vs Siemens Aktiengesellschaft (2013) 19 ITR(T) 336 (Mumbai ITAT) 20. The learned DR relied on the directions of the DRP. We have considered the rival contentions. In the light of the judicial pronouncements referred to above, we are of the view that the sale of equipment and its accessories with software imbedded in the equipments cannot be taxed in the hands of the assessee as business income as the Asssessee does not have a PE in India to which the profits can be said to be attributable. In the circumstances, 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. 21. In view of the above conclusion, we do not wish to go into the other arguments raised by the learned counsel for the Assessee that what was transferred by the Assessee as software embedded in the equipment will not amount to transfer of 'copyright' but only transfer of a 'copyrighted article'. In this regard the submission was: * As per Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act introduced with retrospective effect from 1 April 1976 cannot be read into India- Netherlands DTAA * The Finance Act, 2012, has inserted Explanation 4 to section 9( 1 )(vi) of the Act, with retrospective effect from 01 April 1976, clarifying that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use computer software. Based on this amendment, the Hon 'ble DRP has held that the amount of consideration for supply of software in the present case also amounts to 'royalty'. * In this regard, reliance was placed on the following judicial pronouncements wherein courts have held that the amendments into the domestic provisions by way of a unilateral amendment cannot be read to interpret the provisions of the bilateral DTAAs entered into by two sovereign countries. Some of these judgments are given below: DDIT vs Reliance Industries Ltd. (2016) 69 taxmann.com 311 (Mumbai IT AT) DIT v. Skies Satellite B.V. 2016 382 ITR I 14 (Delhi HC) DIT v/s Infrasoft Ltd. (2013) 264 CTR 329 (Delhi HC) DIT v. Nokia Network O.Y. (2013) 358 ITR 259 (Delhi HC) CIT . Siemens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other services and training of employees is only for ½ day, which is only to familiarize the customer with the use/ operation of the equipment supplied under this project. The legal issue at hand is whether the consideration received for provisions of such services is taxable as FTS under the provisions of India- Netherlands DTAA or not. 26. In this regard the submission of the learned counsel for the Assessee was that under Article 12(5) of the India-Netherlands DTAA, FTS is taxable in the other country only when the FTS "make available" technical knowledge, experience, skill, know-how or process. Article 12(5)(b) of the India-Netherlands DTAA defines the term 'fees for technical services' as follows: 'fees for technical services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 4 of this Article is received; or (b) make available technical knowledge, ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Birla Corporation Limited vs. ACIT (2015) 153 ITD 679 (Jabalpur ITAT) has held that installation, commissioning or assembly activities do not involve transfer of technology and are hence not taxable as FTS. The relevant extract of the judgment has been reproduced below: "By no stretch of logic, installation or assembly activities even involve transfer of technology in the sense that recipient of these services can perform such services on his own without recourse to the service provider, nor has it been the case of/he authorities below. For this short reason alone, the installation, commissioning or assembly activities cannot constitute fees for technical services, or fees for included services- as these are termed in Indo US tax treaty." 29. It was submitted that project management. Installation, testing and commissioning services rendered by the Assessee cannot be said to enrich the personnel of AAI with such knowledge that they can perform such services in the future on their own. Therefore, such activities in relation to installation, testing and commissioning etc. cannot 'make available' any technical knowledge, skills etc. to AAI and therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. We therefore allow Gr.B-3 raised by the Assessee. 32. The next dispute is with reference to the Gulf of Kuchch (GOK) Project. Grd.C raised by the Assessee in the grounds of appeal deal with the grievance of the Assessee in respect of assessment of income from this project. The Government of India (Ministry of Shipping, Directorate General of Lighthouses and lightships) intended (GOK), Gujarat. For this project an agreement dated 16.3.2005 was entered into between DGLL and a consortium lead by M/S.Telecommunications Consultants India Ltd. (TCIL). The Assessee was also part of the said consortium besides another entity M/s.M.L.Dalmiya & Co. Ltd. This consortium was awarded a turnkey contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Assessee is a Fixed Place PE of the appellant in India and that the appellant also had an 'Installation PE' in India as per Article 5(3) of the India-Netherlands DTAA. However, the Hon 'ble DRP Panel held that since no business activity has been carried out by the defunct PO, the same cannot be treated as a PE of the Assessee. However, the allegation of constitution of an 'Installation PE' was still upheld by the Hon'ble DRP. After holding that the Assessee has an 'Installation PE' in India, the Ld. AO has attributed the following amount of profits to the alleged 'Installation PE' of the Assessee in India, which have been included in the assessed income: (Copy of the invoice enclosed at PB page 285) S.No. nature Revenue Revenue Profits attributed (EURO) (in INR) @ 10% (in INR) I Off-shore supply of equipment 907,813 40,551,986 4,055,198 2 Off-shore provision of services 55,937 2,498,689 249,869 TOTAL 963,749 43,050,675 4,305,067 Further, while passing the assessment order, the Ld. AO has observed that as per Sale of Goods Act, 1932 ('SOG Act'), sale is conclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the DRP's directions wherein it has been observed as follows on this aspect: "3.1.4 On the issue of Installation PE being constituted, the project in which the Assessee company has been involved through a contractual agreement with DGLL and consortium agreement with TCIL and MDL was basically an installation project which is squarely covered under Article 5(3) of the India- Netherlands DTAA. The Assessee's claim that no installation activity has happened during the subject assessment year cannot be accepted as the project has to be seen in a holistic way. In the project undertaken, based on the consortium agreement, the assessee company plays a major role and contributes significantly in the composite work and the project has continued for more than 12 months. 3.15. In view of the above facts, this panel has found that the proposed order of the Assessing Officer in creating an Installation PE for the Assessee company in the said project is correct." 36. We have given a very careful consideration to the rival submissions. From a readin of the Directions of the DRP it is clear that the DRP considered the PO of the Assessee established for the GOK project as not constituting a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia and the payment in respect of the same also was received outside India. Accordingly, income from such off-shore supply of equipment was not offered to tax in India by the appellant since the same did not accrue/ arise in India. It was the plea of the Assessee that the purchase order raised by TCIL on the Assessee clearly states that sale of equipment by the Assessee is on "high seas sales" basis. It gives reference to the high seas sale agreement between TCIL and DGLL which would need to be executed before the ship delivering the equipment reaches the frontiers of India. A copy of these documents are enclosed at Page 281 to 291 of the paper-book. It was claimed that the AO has completely disregarded the documents furnished by the Assessee proving that the equipment was supplied at the off-shore level. The learned counsel for the Assessee placed reliance on several judicial pronouncement in support of his claim that income from off-shore supply of equipment cannot be taxed in India. In particular strong reliance was placed on the decision of the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Limited vs. DIT (2007) 288 ITR 408 (SC). The learned DR howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this project is at 300 to 303 of the paperbook. It was also the plea of the Assessee that during the previous year, the presence of its personnel in India was merely for a period of 54 days, the purpose of which was mainly for discussions with customers about the status of the project, hurdles faced etc. Such personnel did not utilize any fixed place during their visit to India and largely stayed at hotels, visited offices of the customers etc. 40. The revenue brought to tax the AMC fee received as business profits attributable to an installation PE in terms of Article 5(3) of India-Netherlands DTAA. According to the revenue, the ONGC project was in existence for a period of more than six months and therefore constituted an Installation PE of the Assessee in India. The revenue further relied on the fact that a sub-contractor had carried out AMC work in India on behalf of the Assessee and therefore the Assessee had a virtual presence in India for execution of the project. Aggrieved by the order of the AO, the Assessee has raised Gr."D" before the Tribunal. 41. The Assessee has raised Gr.D-1 & 2 challenging the finding of the DRP that there existed an installation PE of the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce the essential condition of carrying out' Installation activity' is not fulfilled in the case of the appellant, it cannot be held that the Assessee has an 'Installation PE' in lndia during the subject year. The learned counsel for the Assessee placed reliance on the following judicial precedents in which it has been held that in the absence of installation activity, the Assessee could not be said to have an 'Installation PE' in India: Andhra Pradesh High Court in Commissioner v. Visakhapatnam Pori Trust (1983) 144 ITR 146 (AP HC) UHDE GMBH V. DEPUTY COMMISSIO ER OF INCOME-TAX [1997] 57 TTJ 447 (Mumbai ITAT) Deputy Commissioner of Income-tax v. CIT Alcatel [1993] 47 ITD 275 (Delhi ITAT) 43. It was further submitted that Maintenance Services performed post completion of installation cannot lead to 'Installation PE'. It was reiterated that formal acceptance of the VATMS system for the ONGC Project was done in October 2007 and the one year warranty period of the VATMS system has also expired. During the subject year, the Assessee has only provided maintenance services after expiry of the warranty period of the VATMS system. Hence, such AMC service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 5(1) of the India-Netherlands DTAA. It was reiterated that the employees of the Assessee were present in India merely for a period of 54 days during the subject year, that too for discussions with customers about the status of the projects, hurdles faced etc. Hence, it cannot be said that the Assessee has a fixed place PE in India for this Project. It was therefore contended that the Assessee does not have any PE in India for the subject year. 45. On the question of the role of sub-contractor in India and the allegation of the revenue that there was virtual presence of the Assessee in India through the subcontractor, it was submitted by the learned counsel that these allegations cannot be the basis to hold that the Assessee had an 'Installation PE' in India since no installation activity was carried out by the Assessee in India during the subject year. It was submitted that even assuming that the entire maintenance activity was performed by Elcome (an independent local contractor), it cannot be said that the business of appellant was carried out in India, so as to constitute its PE in India. In this regard the argument of the learned counsel for the Assessee was that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be a harmonious construction of Article 5(1) and Article 5(2)/ Article 5(3) of the DTAAs: National Petroleum Construction Company vs. ADIT (2016) 238 Taxman 40 (Delhi HC) Pintsch Bamag (2009) (318 ITR 190) (AAR) Cal Drive Marine Construction (Mauritius) Ltd (2009) 315 ITR 334 (AAR) BKI/HAM VOF vs. ACIT (200 I) 70 TTJ 480 (Delhi IT AT) Fugro Engineers B.Y. v. Assistant Commissioner of Income tax (OS D), Range-I, Dehradun (2008) 26 SOT 78 (Delhi ITAT) It was submitted that since the Assessee was not involved in any activity at the project site in India, it does not satisfy the 'business test' as prescribed in Article 5( 1) of the India Netherlands DTAA and therefore it cannot be said to have an Installation PE in India, even if it is assumed that the installation activity has been carried out in India beyond the threshold prescribed in the India-Netherlands DTAA. Time spent by subcontractor not to be included when "entire work" carried out by such subcontractor. Reference in this regard was made to the OECD commentary on 'Taxation of Income and Capital' of Article 5(3) at Para 19 states the following with regard to subcontracting in case of installation projec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 48. The next issue that arises for consideration in this appeal is the 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). The grievance of the Assessee are projected in Gr. "E" raised by the Assessee before the Tribunal. 49. We have already seen while deciding the Gr."D" that the Assessee installed VATMS system (completed in October 2007) for ONGC. ONGC wanted provide an interface betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was submitted that software installed/ embedded in the equipment merely facilitates its functioning and there is no independent existence/ use of such loaded software. By supplying such software, the appellant has not provided the codes/ program language underlying such software to the customer. The customer was handed over the equipment as a whole and did not have any knowledge of the codes/ language in the software. Therefore, such payments for software installed on the equipment are not in the nature of 'royalty 'income as per the provisions of Article 12(4) of the India Netherlands DTAA. The reasons for the same have been enumerated in detail in Ground "B" of the submissions relating to the Airports Authority of India (Delhi Airport) project. It was submitted that the payment for provision of such off-shore services in relation to provision of the interface cannot be classified as FTS since such services do not 'make available' any technical knowledge, skills etc. to the customer in India. The learned counsel for the Assessee reiterated submissions made with respect to the concept of 'Make Available' in context of FTS in case of the AAI (Delhi) Projec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e levy of interest under section 234A and 234B of the Act as directed by the Hon'ble DRP. Accordingly, relief on this ground has already been given and hence, the same may not be relevant for adjudication in the appeals. Hence the ground of appeal is dismissed as infructuous. 54. In Ground F- 2, the Assessee has projected its grievance regarding the action of the AO has in not granting due credit of taxes deducted at source amounting to INR 986,285 to the Assessee. It was submitted that the Assessee had claimed credit of taxes deducted at source ('TDS ') of INR 2,852,660 in its income tax return for the subject year. However, while passing the assessment order, the Ld. AO has allowed credit of TDS only to the extent of INR 1,866,375. Hence, there is a short credit amounting to 1NR 986,285 on the apparent ground that the same is not appearing in the online tax credit statement i.e. Form 26AS of the appellant for the subject year. The amount of TDS credit short granted of INR 986,285 represents the tax deducted by a Government Company, a customer of the Assessee. The same is not being reflected in the Form 26AS of the Assessee since ONGC did not have the PAN of the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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