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TMI Blog2021 (6) TMI 331X X X X Extracts X X X X X X X X Extracts X X X X ..... recting the said sum to be excluded. 2. That the Ld AO/DRP has failed to appreciate that, the Appellant is a tax resident of Japan and is required to be assessed in accordance with the provisions of Double Tax Avoidance Agreement between India and Japan and the Appellant, since had no Permanent Establishment (PE) in India for supply made to Maruti Suzuki India Limited (MSIL) no income could be held to be taxable in India. 2.1 That the Ld AO/DRP has erred in making addition of Rs. 2,36,88,712/- in respect of an amount stated to be an income attributable for supplies made by Appellant to MSIL (i.e. the estimated and assumed sum) from Japan. The learned AO, has erred in not appreciating that such income, as has been held to be attributable on the supplies made, since was not attributable to its permanent establishment has been misconceived and the addition so made be thus held as untenable which addition deserves to be deleted. 2.2 That the Ld AO/DRP has erred in holding that the alleged profit of supplies of equipment by the Appellant to MSIL are taxable in India despite the fact that title of equipment had passed in Japan and supplies had also been made in Japan and not in Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. That the Ld. AO/DRP has grossly erred in adopting the amount of capital gain accrued to the appellant at Rs. 7,31,67,675 as against declared capital gain of Rs. 90,93,355 as declared in return of income, thus, enhancing the income by Rs. 6,40,74,320. 3.1 That the Ld. AO though computed the capital gain of Rs. 7,31,67,675 has erred in adopting the said sum at Rs. 1,50,72,540 which was really the tax calculated on such income. 3.2 That the Ld. AO/DRP erred in computing capital gain on sale of equity shares of Indian company, SML Isuzu Ltd by considering fair market value of shares as Rs. 393 per share as per rule 11 UA (1) (c) (ii) instead of Rs. 383.43 per share being the agreed sale price as per the share purchase agreement entered between the appellant and Isuzu Motors Ltd, Japan without any basis or any provision under the Act thus, enhancing the sales consideration at Rs. 62,56,09,233 instead of Rs. 61,03,74,932. 3.3 That the Ld AO/DRP erred in computing capital gain by considering total sales consideration at JPY 1,01,34,40,086 instead of JPY 90,94,58,648 being the sale consideration already agreed vide the sale purchase agreement entered between the assessee and Isuzu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PE in India and the PE received being integral part of supply is not taxable in India. The Hon'ble Delhi High Court vide its order dated 16/11/2015 in Assessment Year 1992-93 to 1996-97 accepted the contention of the assessee and held that the assessee did not have any PE for supervisory activities and income is taxable under Article 12(2) of the India- Japan DTAA. In such circumstances to maintain this and to avoid unending litigation, the assessee company offered the said sum of Rs. 23.71 crore to tax under Article 12(2) of the DTAA. The return was selected for scrutiny assessment. The Assessing Officer issued a draft assessment order dated 18/3/2016 under the provisions of Section 144C of the Income Tax Act thereby proposing to make following variation to the return income of the assessee:- Particulars Amount (in Rs.) as per revised return of income Amount (in Rs.) as assessed A Business Income Income from Various projects as per return of income -1,27,500 1,27,500 Add: Income from foreign supplies (Profit attributable to supplies of equipment by the 'A' to MSIL) Nil 3,39,28,632 Total business income from Project and supplie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an is a foreign company and is tax resident of Japan. For the AY 2013-14, it had filed its return of total income on 29.11.2013, declaring an income at Rs. 45,48,94,340/-, however revised the same on 27.03.2015 offering its taxable income at Rs. 70,17,54,131/-. In the revised return, the assessee had offered to tax (as had been offered in preceding year too) 'supervision fee', which is a sum of fee in the original return of income filed on 29.11.2013 and had been claimed as not taxable in India. The said sum of returned income is not in dispute and is not the subject matter of the instant appeal. The return of income filed by the assessee was selected for scrutiny and the ACIT by a draft order of assessment dated 18.03.2016 passed u/s l44C(l) of the Act, computed the total income of the assessee at Rs. 74,16,61,950/- as against the returned income of Rs. 70,17,54,131/-. The Ld. AR submitted that the Assessing Officer while computing the total income of the assessee at Rs. 74,16,61,950 in his draft order, had made following additions: (i) Rs. 3,38,01,132/-, as income from foreign supplies as per the last para of item 4 of his order. (ii) Rs. 7,31,67,674.59, as long-term capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take any activity of installation and commissioning of equipment supplied and was providing supervision services of the installation and commissioning to MSIL. Thus, the Ld. AR contended that in so far as the supplies made, no profit had accrued to it in India as it had not undertaken any activity of installation and commissioning of equipment supplied and was independently and separately providing supervision services of the installation and commissioning of such equipment, which is taxable under Article 12(2) of Double Taxation Avoidance Agreement (DTAA) and has also been so separately taxed in return of income. The Ld. AR submitted that the assessee had no PE in India under Article 5 of the Double Taxation Avoidance Agreement between India and Japan and that supplies of equipment to MSIL has not been made in India. Alternatively and without prejudice, the Ld. AR further contended that even if it is held that the assessee has a PE in India then too, no amount of alleged profit could be taxed in India since no such alleged profit could be attributed to such PE in India as per Article 7 of the DTAA and that the Assessing Officer has erred in holding that 50% of the estimate of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the DRP that the assessee is also engaged in installation and supervision, is wholly misplaced. It is undisputed fact that the assessee is not engaged in any installation. It is however not denied that it was making supervision of installation and had received supervision fee separately which is offered to tax in return of income and is an undisputed fact. Further the finding of the DRP that the transactions of offshore supply and installation and supervision by it, were closely interlinked and continuous is wholly irrelevant factor. The transactions of supplies made are independent and separate with the supervisory fee for MSIL. The consideration for supplier and supervision is also separate. In fact, the Assessing Officer himself has not brought to tax any such alleged profit from supplies made to MSIL from A.Y. 2014-15 onwards. This is evident from assessment order for A.Y. 2016-17. The Assessing Officer had framed an assessment on 24.12.2018, even before the Tribunal has pronounced its judgment on 01.07.2019, for the aforesaid assessment year, where he did not himself bring to tax any such sum. The Assessing Officer has specifically mentioned in its order: "3. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at page 343 of the PB for the A.Ys 2014-15, 2015-16 and 2016-17, whereby, there is no dispute in case of offshore supply of equipment. The assessee had also placed on record the order of assessment for A.Y. 2016-17 to establish that no addition has been made by the Assessing Officer himself for the A.Y. 2016-17. The assessee, however, submits that the Hon'ble High Court of Delhi in the case of NPCC reported in [2016] 66 Taxman.com 15 has also held that income could be assessed to tax in India, where offshore supplies have been made and assessee does not have a PE in India. Similar is the findings of the Hon'ble Uttarakhand High Court in the case of M/s Samsung Heavy Industries Ltd. reported in 42 Taxman.com 140. 11. The Ld. DR submitted that the assessee is tax resident of Japan. The assessee claimed that no income could be held to be taxable in India since PE did not exist in respect of supply made to MSIL (Maruti Suzuki India Limited). The Assessing Officer attributed a sum of Rs. 2.36 Crore as income towards supply of material to MSIL. The Assessing Officer's findings are summed up as under:- * Composite contract where the scope of the contract included supply, transportati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejection of equipment supplied by the assessee. If the equipment itself can be rejected even after its installation, in such a scenario, how one can take a position that sale was completed outside India. The Ld. DR prayed that the bench may also ask for the complete set of agreement and invoice in respect of the other supplies made during the year. The Ld. DR submitted that at page no. 80 of the paper book contains the list of equipment supplied by the assessee to MSIL. A particular item at sr. no. 4 mentions the Title of PO as "Design, manufacture and supply of cross bar type..... Press Line". This shows that the assessee is required to supply the equipment only after its design and manufacturing as per the given requirements of the client. Further, the assessee submitted copy of PO (PO No. 245563) in respect of only one item which is appearing at serial no. 7 of the list. Perusal of the invoice and related agreements shows that the equipment was manufactured as per the specifications provided by the client. The Ld. DR further pointed out at Page no. 83 and 84 of paper book and submitted that these documents shows "technical part" which spells out the scope of work. It is provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f rejection of equipment is determinative factor in deciding the transfer of title. If the supplied good to Indian client stands rejected, how it can be considered as completed outside India. 12. Based on the aforesaid clauses in the agreement in respect of the submitted invoice, it is evident that the assessee continued to undertake the risk of rejection of the supply, therefore, the transfer of ownership will not change the legal position that off-shore supply is taxable in India. It is a case where the functions in the nature of technical supervision have been performed by the assessee company in India. Further, while performing the supervisory functions, the intangible asset in the form of technical know-how has been put to use. Therefore, there is a need to attribute further profits to the PE for those functions/risks as discussed above that have not been considered. The Ld. DR prayed that the assessee must provide/submit complete set of agreement and invoice in respect of the other supplies made during the year to ensure that all supplies are governed by similar terms and conditions of the agreement as discussed above. 13. The Ld. DR further pointed out that the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer adopted such basis to make addition. The Ld. AR further submitted that before the Tribunal, revenue can support the order of the Assessing Officer but cannot make out a new case. Aforesaid submission of the assessee is supported by following judicial precedents: i. The Mumbai Bench of the Tribunal in Ms. Aishwarya K. Rai 121 ITD 204 (Mum) held that the learned D.R. can support the action of the A.O. with any arguments and that he can rely on any case law in support of the A.O's cast but he cannot make out any new case which was not the subject matter of consideration by the A.O. or the first appellate authority. It further held that to find fault in the assessment order is outside the; domain of the argument of the Ld. DR., as such powers vests with the Commissioner u/s 263 for revising any order which is erroneous and prejudicial to the interests of Revenue. ii. Mumbai Special Bench of the Tribunal in Mahindra & Mahindra Ltd. Vs DCIT (2009) 313 ITR AT) 263 (SB), held that, in our considered opinion the Ld. DR. has no jurisdiction to go beyond the order passed by the A.O. He cannot raise any point different from that considered by the AO or the CIT(A). His scop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 to 2012-13. This submission is borne out from the draft assessment order, where in para 3.2, the Assessing officer has stated that: "3.2. The submissions of the assessee have been considered and are not found acceptable. The facts of the case are identical to those in the preceding years and the submission of the assessee are almost on the same lines as in the preceding years except placing further reliance on the decisions in the case of Ahmed Bhai Umarbahi 18 ITR 372 (SC)." In such circumstances, grounds raised in the memo of appeal in respect of taxability of income arising from offshore supplies is covered in favour of the assessee by the order of the Tribunal for preceding assessment years in the case of the assessee itself, and hence the addition made is liable to be deleted. 18. The Ld. AR submitted that in subsequent assessment years for the A.Ys 2014-15, 2015-16 and 2016-17 in the similar facts and circumstances, there is no dispute in case of offshore supply of equipment to MSIL, and the same is also evident from the order of assessment for Assessment Year 2016-17 wherein no addition has been made by the Assessing Officer for the A.Y. 2016- 17. In view thereof, onc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal. In view thereof, once, the Assessing Officer himself has accepted that facts are similar to earlier years, and in the subsequent assessment years, the Assessing Officer himself has accepted that offshore supplies made to MSIL is not taxable in India, the addition made in this year is unsustainable in law. 20. In so far as the contention of the Ld. DR that terms and conditions as per the agreement do provide for the rejection of equipment supplied by the assessee and once the equipment itself can be rejected even after its installation, in such a scenario, the sale was not completed outside India, the Ld. AR submitted that such a condition is wholly fallacious and misconceived. The Ld. AR submitted that in this case, acceptance of equipment is not the essence of contract, but time is the essence of contract. Further, under the agreement, the seller is entitled to correct the non-confirming goods, and hence it is not a case of acceptance of goods by the Indian buyer which is the essence of the contract. Further in respect of delay, the purchaser is entitled for the liquidated damages as provided in clause 11 of the PO. In such, circumstances, it is not a case where the purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the condition that the goods should re-vest in the seller if on an examination by the buyer he finds them not to be in accordance with the contract. It is not necessary to consider this aspect because in any case the ascertainment of the obligations under the contract will determine to what extent the transfer of property is subject to a condition or if the property passes conditionally whether the ownership left in the seller is the reversionary interest in the property in the event of the conditions subsequent operating to restore it to him. In any case where the performance of some condition is imposed upon the buyer but is not made a condition of the transfer of the property, the property once passed is not revested in the seller by the buyer's subsequent default." 22. The Ld. AR further submitted that Article 7(1) of the DTAA between the India and Japan, clearly provide that the profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. The Ld. AR submitted that it is an admitted fact that the assessee has no PE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Avoidance Agreement between India and Japan. The supplies of equipment to MSIL were not made in India. As regards to the inclusion of profit from offshore supplies made is concerned, same is no more res-integra. In fact, the facts of the present case are similar to the earlier years which are also verified by the Assessing Officer in the assessment order. In respect of the inclusion of the estimated profit, the Tribunal in its consolidated order dated 01.07.2019 pertaining to the A.Ys 2001-02 to 2003-04, 2007-08, 2010-11, 2011-12 and 2012-13 has held in para 9 that the goods were sold from outside India. the Tribunal held as under: "9. In the present case the goods were sold to MUL from outside India. Thus, the risk and title were also transferred outside India and no transaction took place in India. The custom clearance, inland transportation were also done by the MUL on its own and assessee at no stage involved in the said activities. There was no PE involved in the sale. In fact supervision was done after the supply of equipments. The revenue could not establish that the assessee is having fixed place PE or supervisory PE. The ratio laid by the Hon'ble Apex Court in case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee is a company incorporated as per the rules of Japan, and is engaged in the business of supply of equipments for various projects & also executed erection & commissioning of the equipments at the various project sites in India. 4.The reply of the assessee as well as the audited financial results have been perused and no adverse inference could be drawn. " In the draft order of assessment in para 3.2, the Assessing Officer observed that the facts of the case are identical to those in the preceding years. Therefore, the Assessing Officer as well as the DRP was not correct in making addition in respect of income from offshore/foreign supplies and thereby no allowing setting off of business loss against such income. Ground Nos. 2, 2.1, 2.3, 2.4, 2.5, 2.5, 2.6, 2.7, 2.8 and 2.8.1 are allowed. 26. As regards to Ground Nos. 3, 3.1, 3.2, 3.3, 3.4, 3.5, 3.6 and 4 relating to addition of Rs. 7,31,67,674/- pertaining to computation of long-term capital gain on transfer of shares to a non-resident, the Ld. AR submitted that in so far as the computation of capital gain made by the Assessing Officer in the draft order, the same was also objected to in the objections filed befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Yen payable by one nonresident to another non-resident in Japan and no remittance was to be made from India to Japan. There is no concept of any fair market value for the purposes of section 48 of the Act. Further, rule 11UA applied by the Assessing Officer for determining the fair market value has not applicability for Section 48 of the Act and also, provision of section 56 is not applicable on the assessee. The Assessing Officer has in any case has erred in not giving set off of longterm capital loss of Rs. 18,93,13,933/- . The Assessing Officer has not given any opportunity of being heard before re-computing the capital gain, thereby not following the principle of natural justice. 27. During the course of pendency of proceedings before the DRP, apart from the objections, the assessee had also furnished its written submissions on 17.10.2016. In response to the submissions made as aforesaid, the Assessing Officer furnished a remand report. In the said report, the Assessing Officer did not adversely comment upon assessee's objection pertaining to offshore supplies made. However, in respect of the computation of capital gain, it was merely commented by him that as the shares wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit attributable to India from the A's business in India as under:- Total sale of the A' Globally = Rs. 2190357134 Net profit of the A' globally = Rs. 232.54 (billion year) Total sale of the 'A' globally Rs. 2190357134 Net profit of the 'A' globally Rs. 232.54 (billion year) Net profit %+ 3.09 Hence income from offshore supplies by 'A' to MSIL= 2190357134-3.09*50 10.0* 100" The calculation of the Assessing Officer was strongly objected to by the assessee in the course of DRP proceedings. The Ld. AR expressed surprise over the adoption by the Assessing Officer of 50% as the profit attributable to India. According to the Ld. AR, it had no scientific or rational basis. The methodology, as per the Assessing Officer was unknown to law. In this context the Panel examined the position taken by the Assessing Officer. The Ld. AR submitted that the percentage taken by the Assessing Officer had no legal basis is partly accented by the assessee as no reason was given by the Assessing Officer as to how 50% of 232.45 billion yen i.e. 3.09% of the global profit's i.e. 232.45 billion yen was attributable to India. As per the guidelines on attribution of profits, only th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... go behind it to some supposed underlying substance'. The Ld. AR contended that the transaction of sale of shares was between two unrelated parties and was negotiated at the rate prevailing at the time the agreement was signed bases rate as per stock exchange duly mentioned in the agreement whereas the Assessing Officer adopted the fair market value rate as on date of transfer of shares quoted at stock exchange @393 per share. The Ld. AR further contended that rate agreed and received as per the agreement shall prevail for determining the sale consideration and rate as on the date of transfer is not relevant for the purpose of Section 48 of the Act. Various contentions raised before the DRP have been stated in the objections. 31. The Ld. AR specifically contended and without prejudice to the contention that the capital gain offered by the assessee should be accepted as against the capital gain determined by the Assessing Officer that the assessee should be allowed a set off of brought forward long-term capital losses of Rs. 18,93,13,933/-. However, the DRP in respect of determination of capital gain, held and directed as under: "The taxable long-term capital gains in terms of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be computed u/s 45 or 48 of the Act as per the present facts. In fact, the present transaction does not fall in any clause of section 56 of the Act. The Ld. AR further pointed out that section 45 specifically provides cases where sale consideration should be adopted at fair market value which does not cover the present case. The Ld. AR further submitted that the DRP thus ignored the provisions of section 48 of the Act where income is computed and in the alternative further erred in not issuing direction to have given set off of with the unabsorbed brought forward capital loss. In fact, the authorities had failed to appreciate that agreement of sell had been made on 25th November 2011 but effectively delivery/transfer was made in April 2012. In such circumstances the rate prevailing in the market as per stock exchange on 25/11/2011 had to be adopted and not on the date, when delivery was given. The Ld. AR submitted however the same is also relevant as per section 48 of the Act. The Ld. AR submitted that the Assessing Officer had committed two errors while computing capital gain at Rs. 7,31,67,674/-, the first one being he had adopted conversion rate percentage TTBR i.e. telegra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rate was Rs. 393.00 per share. * The AO, erroneously invoked Rule 11UA(C)(ii), and applied Bombay stock exchange rate as was on 13th April 2012 instead of adopting sale rate of 383.42, as per the agreement of sale and was also the rate as per BSE. The rate of sale was agreed at 383.42 (see Pg. 193). Rule 11UA(C)(ii) has no application. The Assessing Officer adopted conversion rate of yen to rupees at Rs. 0.62 as against Rs. 0.62520. The Assessing Officer has apparently committed an error of law besides on facts. He proceeded to adopt market rate on the date of delivery of shares instead of sale consideration accruing on 25.11.2011, which was Rs. 383.42 and had been agreed and also represented market rate as on that date Rule 11UA admittedly has no role to play. Secondly, the correct rate of conversion of JPY was Rs. 0.62520; whereas the Assessing Officer has adopted 0.62. This is apparently incorrect. There is no basis to adopt the rate of 0.62 instead of Rs. 0.62520. Thirdly, there was a brought forward capital loss to be set off of Rs. 18,93,13,933/- which is inclusive of Rs. 15,44,28,976/- for the AY 2005-06 as is evident from the order of assessment for the A.Y. 2005-06. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of computation of capital gain as per Rule 11UA of Income Tax Rules, 1962 is required to be adopted, the said rate was 0.6252 and as such the computation made by the assessee had been correctly adopted by it, appears to be just and proper. Thus, we direct the Assessing Officer to adopt the actual rate of conversion i.e. 0.6252 after verifying the same. Thus, we remand back this issue to the file of the Assessing Officer for proper adjudication after verifying the actual rate of conversion and adopt the same as per the observations made by us hereinabove. Needless to say, the assessee be given opportunity of following principles of natural justice. Ground Nos. 3, 3.1, 3.2, 3.3, 3.4, 3.5, 3.6 and 4 are partly allowed for statistical purpose. 36. As regards to Ground No. 5 relating to initiation of penalty proceedings, the same is consequential, hence not adjudicated at this juncture. 37. As regards to ground No. 6 pertaining to full credit of TDS, the Ld. AR submitted that the assessee filed its return of income and claimed credit of TDS of Rs. 7,11,65,180/-. The same is also appearing in Form 26AS of the assessee for Assessment Year 2012-13. The Ld. AR further submitted that all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed for statistical purpose. 43. As regards to Ground No. 8 pertaining to interest under Section 234C of the Act, the Ld. AR submitted that the Assessing Officer has levied interest u/s 234C of the Act of Rs. 76,23,106/-. The Ld. AR submitted that the interest under Section 234C is leviable on default in payment of advance tax installment on returned income and not on assessed income. The Ld. AR submitted since there was no default on the part of the assessee in payment of advance tax as per returned income, such interest levied is highly erroneous. The Ld. AR submitted that interest u/s 234C of the Act is levied only when the assessee fails to deposit the tax based upon its return of income. As per the return of income tax payable aggregated to Rs. 6,92,78,828 which was duly discharged by TDS. It is not understood on what basis the Assessing Officer had levied the tax u/s 234C of the Act of Rs. 76,23,106/- which was not levied. Further, in case due relief is granted based on merits of the case as well as allowing set-off against brought forward business loss, long term capital loss and full TDS credit, there will not be any liability of tax and consequential interest under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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