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TMI Blog2023 (4) TMI 532X X X X Extracts X X X X X X X X Extracts X X X X ..... nding of Ld. AO that GE India ( Alostom-I) was actively involved in soliciting business for the assessee. In fact, there is substance in the contention of Ld. Sr. Counsel that in the bidding structure of present nature there is no question of someone soliciting the business, as it was a case of open bid to which Indian and Foreign entities, both, were eligible to make the offer of bid. There is no question of any agent and principle relationship between the assessee and the Indian associate for a very substantial reason that PGCIL has treated in its contract documents, ALSTOM-I to be its Independent Contractor . There is substance in the argument of Ld. Sr. Counsel on the basis of judgment of E-funds IT solutions [ 2017 (10) TMI 1011 - SUPREME COURT ] that the onus was on the department to prove the existence of PE. The Bench is of considered opinion that such an onus can be considered discharged by specific reference to the evidence. No evidence is brought on record to show that the Indian Associate was employed by any act of the assessee to represent the assessee independently while dealing with PGCIL. On the contrary what is established is that it was the assessee at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit from off-shores supplies made to PGCIL to the alleged business connection or PE and application of Section 44BBB is not sustainable. Tax Authorities below have fallen in error to hold that off-shores supplies to PGCIL are taxable in India. The assessee was merely under liability for making off-shores supplies to PGCIL under the First contract for which the revenue earned is not taxable in India. Consequently, ground no. 3 to 8 are decided in favour of the assessee. AO did not follow DRP directions - HELD THAT:- The Bench is of considered opinion that once the foundation of the findings of Ld. AO on the basis of dependent agent PE status of GE T D India and SFO technologies in not sustained by this Bench, the foundation of his reasoning in para no above stands washed away. At the same time what comes up is that assessee had claimed that there was no agreement with GE T D and SFO technologies and on the basis of orders and invoices generated, the supplies were made. On the basis of general terms and conditions, purchase orders were raised and on the basis of which the offshore supplies were made to these two Indian companies. Ld. AO was under obligation to give effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g, engineering, manufacturing and supply of electric equipment that help in the transmission and distribution of power, commissioning and servicing of transmission and distribution systems on turnkey basis. During the relevant assessment years, the assessee had earned income from various Indian customers which the assessee claimed was not taxable as income was from offshore supplies only. The case of assessee was selected for scrutiny due to large claim of refund against tax deducted source. The record shows the assessee was awarded a contract by Power Grid Corporation India Ltd. (hereinafter referred to as PGCIL) for setting up a 3000 MW HUDC Terminal in Chhattisgarh, India. 2.1 There were three contracts of following nature; First contract , also called off-shore contract was for supply of plant and equipment including spares outside India, Type test and Training to be conducted outside India. Second and third contract were on-shore supply contract and on-shore service contract which were assigned to an associate enterprise M/s. GE T D India Ltd (here in after also referred also as ALSTOM-I or Indian Associate ). 2.2 The Ld. AO, considered it to be a cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 7 of the India-IJK DTAA. The sub-article (2) of Article 7 of the DTAA which prescribes the mechanism is reproduced as under: (2) Where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, the profits which that permanent establishment 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 permanent establishment shall be treated for the purposes of paragraph 1 of this Article as being the profits directly attributable to that permanent establishment. Therefore, the profits attributable to the PE should be the Arm s length profit i.e. profit that an independent person under the same or similar conditions engaged in similar activities (EPC contract for Power Project on turnkey basis) should earn. From the above discussion, it is now clear that both offshore as well as onshore components of the single composite project have to be taken into account in determining profit attributable to the PE as leaving one part wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2022, being barred by limitation, is bad in law, and void-ab-initio. Re: Offshore supply receipts of Rs.l 107,81,49,081 from PGCIL 3. That the DRP/ assessing officer erred on facts and in law in holding that receipts of Rs. l107,81,49,081 from offshore supplies to Power Grid Corporation of India Ltd ( PGCIL ) are taxable in India under the provisions of the Act. 4. That the DRP/ assessing officer erred on facts and in law in arbitrarily holding that the Appellant had business connection in India during the subject assessment year. 5. That the DRP/ assessing officer erred on facts and in law in arbitrarily holding that GE T D India Limited ( GETDIL ) constitutes Dependent Agent Permanent Establishment ( PE ) of the Appellant in India and that the Appellant has Construction PE in India. 6. That the DRP/ assessing officer erred on facts and in law in attributing 100% profits from offshore supplies made to PGCIL to the alleged business connection/ PE. 7. Without prejudice, that the DRP/ assessing officer erred on facts and in law in computing incoms-fem-effehere supplies by applying section 44BBB of the Act. 8. That the DRP/ assessing officer erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Authorities below have erred in understanding the nature of three agreements entered between the assessee, its associate ALSTOM-I and employer PGCIL. It was submitted that Ld. Tax Authorities have fallen in error in concluding that there was an artificial splitting of the contract between the assessee and ALSTOM-I. Referring to the contracts executed between the assessee and PGCIL, made available on page no. 6 to 249 of the paper book, it was submitted that engaging an Associate was an integral part of the bid proposal and the execution of two separate contracts between PGCIL and ALSTOM-I was part of bidding documents. It was submitted that Ld. Tax Authorities below have selectively construed the recitals of the bid and contract documents. 9.1 It was submitted that tax authorities below have also fallen in error in construing the business connection in India without appreciating that the sales were concluded outside India and the property in goods under the offshore agreement had passed outside India. No payment or consideration was received within India. Specially referring to judgment in IshikaWasma- Harima Heavy Industries Ltd. vs. DIT : [2007] 288 ITR 408 (SC) Ld. Sr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s engaged in independent contracts under the bid and was independent entity. Referring to the financial statements of GE T D India Limited, available on page no. 429 to 437 for F.Y. 2017-18 and 438-445 for F.Y. 2018-19 it was submitted that related party transactions have been disclosed and it was submitted that the Indian associates has several independent source of revenue. The income earned from the two contracts was independently offered to Tax under the Act. 9.6 As with regard to the Associate constituting a Construction PE, he submitted that the associate was independent and responsible for concluding the contracts and the role of assessee was limited to off-shore supplies. In this context he specifically contended in regard to the findings of construction PE that there was no factual evidence to support the findings. Assessee was not involved into any activity of construction project and as supply is not included in the activities taxable in the provisions, so Article 5(2) of the treaty was not applicable. 9.7 He also referred to Section 44BBB of the Act and submitted that as assessee was merely a supplier to PGCIL so provisions which are otherwise applicable in cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stressed that the onus is on Department to prove existence of PE and for that he relied CIT vs eFunds IT Solution: 399 ITR 34 (SC), DIT vs Samsung Heavy Industries Co Ltd: 426 ITR 1 (SC), DIT vs Mitsui Co Ltd: 399 ITR 505 (Del) and AB SciexPte Ltd vs ACIT: 195 ITD 384 (Del Trib.) 9.8.6 As with regard to principles of attribution to business connection/ PE he relied DIT vs Morgan Stanley Co Inc: 292 ITR 416 (SC), DIT vs Morgan Stanley Co Inc: 292 ITR 416 (SC), The Anglo French Textile Co Ltd vs CIT: 25 ITR 27 (SC), Annamalais Timber Trust and Co vs CIT: 41 ITR 781 (Mad), CIT vsBertrams Scotts Ltd: 31 Taxman 444 (Cal), CIT vs Hyundai Heavy Industries Co Ltd: 291 ITR 482 (SC), Samsung Heavy Industries Co Ltd vs DIT: 265 CTR 109 (Uttarakhand), Affirmed by the Supreme Court in 426 ITR 1(SC), DCIT vs Roxon OY: 106 ITD 489 (Mum Trib.) 10. Ld. DR however, supported the findings of Ld. Tax Authorities below and submitted that it was not a case of consortium but one consolidated bid was fragmented. It was submitted that the PGCIL had invited bid and assessee was the contractor and the Associate, Indian entity was given authority to execute the local work while the responsibil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some reading of the contract and context of terms. In regard to this principle of law the Hon ble Supreme Court in Ishikawajma-Harima Heavy Industries Ltd. (supra) has observed in para no. 60 as follows :- In construing a contract, the terms and conditions there of are to be read as a whole. A contract must be construed keeping in view the intention of the parties. No doubt, the applicability of the tax laws would depend upon the nature of the contract, but the same should not be construed keeping in view the taxing provisions. 14. Thus, it will be relevant to reproduce some major clauses of agreements and contracts entered between the PGCIL and the assesse, unlike selectively done by the Revenue Authorities below. The Off-shore contract agreement along with 11 Appendices dated 17.08.2012 is available at page no. 6 to 43 of the paper book and is the basic document and the relevant clauses of same starting from page 9, are reproduced as below :- WHEREAS the Employer is desirous of setting up 800kV, 3000 MW HVDC Terminal ' Package associated with Western / Northern Region Interconnector for IPP Projects in Chhattisgarh under National Grid improvement Project a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... U.P. Area, Phase-ll, New Delhi-110020 and business address as A-7, Sector-65, : ca-201301, (hereinafter referred to as ALSTOM-l as their Associate for the purpose of executing the On-Shore Supply Contract and On-Shore Services Contract) and furnished ALSTOM-l written unequivocal consent vide their letter dated 26.11.2011 (enclosed in their First Stage bid) to work as Employer s independent Contractor, on the terms and conditions as laid down in the Bidding Documents. WHEREAS the associate proposed by ALSTOM has been accepted by the Employer, as above, subject to the condition that ALSTOM shall be overall responsible and liable for the execution of all the three Contracts irrespective of the fact that the Employer will enter into the First Contract with them and the Second Contract and the Third Contract with ALSTOMI. Further, in the Contract Documents, for First Contract the word Contractor shall mean ALSTOM, who had submitted the bid and shall, for the purpose of 'Second Contract' and Third Contract , include' ALSTOM-I - the Permitted Associate of ALSTOM. Accordingly, without prejudice to the overall responsibility and the liability of ALSTOM for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransportation, insurance, delivery at site, handling, storage, erection including associated civil works, testing and commissioning of all the Plant and Equipment including mandatory Spares supplied under the Off- Shore Contract and On-Shore Supply Contract, Training in India etc. and any other services specified in the Contract Documents of said contract, for complete execution of 800kV, 3000 MW HVDC Terminal Package associated with Western / Northern Region Interconnector for IPP Projects in Chhattisgarh under National Grid Improvement Project . Notwithstanding the award of work under three separate Contracts in the aforesaid manner, ALSTOM shall be overall responsible to ensure the execution of all the three Contracts to achieve successful completion and operational acceptance / taking over of the facilities by the Employer as per the requirements stipulated in the respective Contract Documents. It is expressly understood and agreed by ALSTOM that any default or breach by its Associate, ALSTOM-l under the Second Contract and/or Third Contract shall automatically be deemed as a default or breach of this First Contract also and vice-versa, and any such default or breac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h under National Grid Improvement Project , as detailed in the Bidding Documents referred hereinabove. The scope of work inter-alia includes the following: Design, engineering, manufacture, testing at manufacturer s works and CIF supply of all off-shore equipment and materials from country(ies) outside India including Type Testing and training to be conducted outside India . The scope of work under this Notification of Award (NOA) shall also include all such items which are not specifically mentioned in the Bidding Documents and/or your bid but are necessary for the successful completion of your scope under the Contract for the construction of 800kV, 3000 MW HVDC Terminal Package associated with Western / Northern Region Interconnector for IPP Projects in Chhattisgarh under National Grid Improvement Project , unless otherwise specifically excluded in the Bidding Documents or in this NOA. 2.2 As per the Record Notes of Clarification Meetings (referred to in para 1.5 above) and the acceptance of proposed Associate confirmed vide our communication dated 01.03.2012 (referred to in para 1.6 above), we have notified your Associate M/s. ALSTOM T D India Limited vide our Noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cover damages under those contract(s), shall give us an absolute right to terminate this Contract, at your risk, cost and responsibility, either in full or in part and/or recover damages under this First Contract as well. However, such default or breach or occurrence in the Second Contract and/or Third Contract , shall not automatically relieve you of any of your obligations under this 'First Contract. It is also expressly understood and agreed by you that the equipment/materials supplied by you under this 'First Contract and by your Associate M/s. ALSTOM T D India Limited under the Second Contract , when erected, installed commissioned by your Associate M/s, ALSTOM T D India Limited under the Third Contract' shall give satisfactory performance in accordance with the provisions of the Contract. 15. When these minutes dated 28.10.2011 are considered, the clause 1.3 makes it apparent that in the bid itself ALSTOM-I was proposed and confirmed as an Associate for the purpose of executing the on-shore supply and service contracts. So having an Indian Associate was an integral part of the Bid and not introduced at the discretion of the assessee. Reference in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on shore contracts to the permitted associate ALSTOM-I, which was classified as independent contractor of employer, coupled with the execution of separate contracts with defined scope of work of each contract, required each party to perform its obligation under the respective contracts awarded to them separately and to receive the consideration under the contracts independent to each other. The terms negotiated and document executed firmly establish that there was no mix up in the role and identity. 19. The Ld. Tax Authorities below have actually fallen in error in construing the aforesaid discussed clauses because what appears to be a narrow and not a pragmatic approach. As observed above, they were selective in considering the bid and contract documents clauses and failed to take note of it as a whole and to understand the business prudence of such Bidding involving International entities, while dealing with Indian entities, for such infrastructural contracts. The Ld. AO has merely focused on the fact of three contracts, alleging that a single composite contract awarded on turnkey basis was split artificially into three sub-contracts by the assessee. The matter of fact happen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of award, which makes reference to contract price and it will be beneficial to reproduce the whole of it, from the notification of award dated 21.06.2012, available at page no. 127 of paper book as under :- 3.0 Contract Price 3.1 The total Contract Price for the entire scope of work under this Contract shall be GBP 107,590,567 + EURO 68,835,118+USD 13,559,144 (Great Britain Pound One Hundred Seven Million Five Hundred Ninety Thousand Five Hundred Sixty Seven Plus Euro Sixty Eight Million Eight Hundred Thirty Five Thousand One Hundred Eighteen Plus USD Thirteen mijlion Five Hundred Fifty Nine Thousand One Hundred ' Forty Four Only) as per the following break-up : Sl. No. Price Component Amount 1. CIF Price Component GBP EURO USD 107,590,567 68,835,118 13,559,144 2. Type Test Charges Included 3. Training Charges Included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cuted such infrastructural facility contracts. The intention being successful commissioning of the project and that it is not abandoned or frustrated due to involvement of many parties, each performing some part, by shouldering any delay or latches, on other unrelated party. 21.1 In this context, reliance can be placed on the judgment of Hon ble Delhi High Court in Linde AG, Linde Engineering Division (supra) wherein dealing with the reasons for having such clauses to make parties to a consortium being joint and safely liable under a contract, Hon ble High Court observed in para 53 and 55 as follows : 53. We are also unable to accept the contention that the fact that Samsung and Linde had agreed to be jointly and severally liable for performance of the contract, would be sufficient to hold that they constituted an Association of Persons for the purposes of the Act. Linde and Samsung agreeing to be jointly and severally liable to OPAL for due performance of the Contract only indicates that Linde and Samsung had accepted a contractual obligation towards a third party, the same does not by itself lead to a conclusion that the said members had formed an Association of Persons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersons. In this illustration each one of the participants works towards a common project with a certain level of cooperation. However, since the said participants do not act as a single cohesive entity, but perform their independent allocated works, they cannot be considered as an Association of Persons. In order to consider independent agencies as an Association of Persons, it is necessary that they form a joint enterprise with a greater level of common management. An element of mutual agency and joint action for mutual purpose is also necessary. Mere obligation to exchange information, between independent agencies, for co-ordinating their independent tasks would not result in an inference that the agencies had constituted an Association of Persons. 22. Hon ble Delhi High Court in the Linde AG Case (supra) has also referred to case of Hyundai Rotem Co., in re [2010] 323 ITR 277/190 taxman 314 (AAR) which was also referred by the assesse before Ld. Tax Authorities below and where the facts were that Hyosung Corporation submitted a bid for execution of the works relating to 800 KV/400KV Tehri Pooling Station which was floated by Power Grid Corporation of India Limited (Powe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ificial split of contract is not sustained and it is established that the assessee has entered into the First Contract , in its independent capacity, there is no force in the finding of Ld. AO that GE India ( Alostom-I) was actively involved in soliciting business for the assessee. In fact, there is substance in the contention of Ld. Sr. Counsel that in the bidding structure of present nature there is no question of someone soliciting the business, as it was a case of open bid to which Indian and Foreign entities, both, were eligible to make the offer of bid. 25.1 There is no question of any agent and principle relationship between the assessee and the Indian associate for a very substantial reason that PGCIL has treated in its contract documents, ALSTOM-I to be its Independent Contractor . There is substance in the argument of Ld. Sr. Counsel on the basis of judgment of Hon ble Supreme Court in CIT vs. E-funds IT solutions (supra) that the onus was on the department to prove the existence of PE. The Bench is of considered opinion that such an onus can be considered discharged by specific reference to the evidence. No evidence is brought on record to show that the Indian A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rst Contract assessee was only supposed to make off shore supplies. Otherwise too it is appearing from the recitals of First Contract that the procurement by PGCIL, was on the basis of, CIF Indian Port of Entry supply . The title in property had passed out side India. The payments were also made outside India in terms of this contract. The settled proposition of law in this regard, rightly relied by Ld. Sr Counsel for assessee, is sustainable and the relevant conclusion in para 79, from the judgment of Hon ble Supreme court in the case of Ishikawajma-Harima Heavy Industries Ltd. (supra) is reproduced below ; Re : Offshore Supply : (1) That only such part of the income, as is attributable to the operations carried out in India can be taxed in India. (2) Since all parts of the transaction in question, i.e. the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India. (3) The principle of apportionment, wherein the territorial jurisdiction of a particular state determines its capacity to tax an event, has to be followed. 29. Thus, the Bench is inclined to conclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re operations in India were concerned and the same has been upheld by the Ld. DRP. It is pertinent to mention here that once PE has been established for a transaction, it needs not to be established for each and every transaction. Moreover, the supplies are of very high technical specifications, customised machinery and given that the assessee company is a leader in its field, these supplies were to be assembled and made operational/commissioning in India only by itself or its associated enterprises (which is GE T D in this case), thus such receipts are taxable as discussed in preceding paras. Without prejudice to the above, the assessee company has not furnished copy of agreement of offshore supply with GE T D and SFO Technologies. It has only furnished sample invoices in case of Offshore supply made to GE T D. In absence of any underlying agreement, assessee s claim that offshore supply made to GE T D and SFO technologies is not related to PGIL contract can not be ascertained.In view of the above, the offshore supplies made to GE T D and SFO Technologies are taxable as per DTAA and Income Tax Act. Further, the DRP has also upheld the taxability ofGlobal operation fee amounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and fixtures, providing of technical support in respect of system failure, process performance, spares and maintenance and Training of local support engineers on system. c) Project managed introduction of new products into manufacturing units d) Coordinate and manage introduction of design changes- Technical support and liaison between units and teams, E.g. R D. e) Master Data- Creation of product configurators on Global IT system, creation of products and materials on global system for use within local unit, training for local units in adaptation of Bom s, routings and configuration in line with global rules, providing of technical assistance and support and product structure realted issues and Training of local team in configurator development. f) Indirect support- Technical support to suppliers on process support, test system design and support, text fixture design and support, technical/quality issue resolution. g) Component approval Provide technical data and specifications and Training of local support engineers on system use. h) Localisation- Provision of technical details, technical support for supplier development, facilitation of qualifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urement of raw materials, setting quality standers, supply general and contracts. The industrialization support for SMP services details and descriptions have been given in appendix II available at page no. 377 of the paper book. Ld. DRP has merely taken into consideration the sub-heads of Global Industrialization support services, which have infact already accrued to tax. Ld. Tax Authorities below have approached the issue with the very general discussion without appreciation of any evidence and facts to show that how the other services fall into the category make available clause. The essence of make available clause is that the technical knowledge or skills of the provider should be imparted to be absorbed by the receiver so that the receiver can deploy similar technology or technique in the future without dependent upon the provider. However, in the case in hand for the services rendered, there is renewal of contract on annual basis and the nature of services are all prima facie managerial in nature. They have also passed the arm s length tests. Thus Ld. Tax authority below have fallen in error in taxing global operation fee of Rs.8,12,37,030 received from GETDIL as Fees from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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