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TMI Blog2023 (7) TMI 982X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Project Office for the transaction in question and what is the basis for attributing the profit at 35% to the PE. Moreover, before AO it was stated by the assessee company that the goods were passed through the Project Offices purely for the purpose of customs duty compliances. The lower authorities have not adverted anything on this aspect. As on account of loss no profit could be attributed - As following the binding judgment of CIT (International Taxation) Vs. Nokia Solutions and Net Works OY [ 2022 (12) TMI 700 - DELHI HIGH COURT] we are of the considered view that the authorities below were not justified in attributing the profit to the assessee when there was loss. We, therefore, direct the Assessing Officer to delete the impugned addition - Decided in favour of assessee. - ITA No. 2259/DEL/2022 And ITA No. 2260/DEL/2022 - - - Dated:- 19-7-2023 - Shri Shamim Yahya, Accountant Member And Shri Kul Bharat, Judicial Member For the Assessee : Shri Ajay Vohra, Sr. Adv. And Shri Sharad Mathur, CA For the Department : Shri Vijay Vasanta, Sr. DR ORDER PER KUL BHARAT, JM: These two appeals, by the assessee, are directed against separate asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that consideration for supply of Plant Equipment, from outside India, was not liable to tax in India: (i) Ishikawajima - Harima Heavy Industries Ltd. - Vs. Director of Income tax, Mumbai (228 ITR 408 SC) (ii) Director of Income Tax, New Delhi Vs. LG Cables Ltd. (2011) 197 Taxman 51 (Delhi). (iii) Linde AG, Linde Engineering Division Vs. DDIT (2014) 44 taxmann.com 244 (Delhi). 3(f) That without prejudice, the learned ACIT and DRP have on mere surmise and guesswork erroneously held that the profit attributable to PE in respect of Offshore Supplies is 35% of the profit accruing from Offshore supplies, which is arbitrary, highly excessive and has no rationale whatsoever and is against the principles of attribution as laid down under the provisions of the Act and DTAA between India and Japan. 3(g) That without prejudice, the learned ACIT and DRP have erred in applying group global profitability of 6.87%, which is completely arbitrary, unjustified and thus makes the adjustment illegal. 3(h) That without prejudice, the learned ACIT and DRP have failed to give cognizance to the fact that financials of DFCCIL projects show a loss from operations, thereb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een held that consideration for supply of Plant Equipment, from outside India, was not liable to tax in India: (i) Ishikawajima - Harima Heavy Industries Ltd. - Vs. Director of Income tax, Mumbai (228 ITR 408 SC) (ii) Director of Income Tax, New Delhi Vs. LG Cables Ltd. (2011) 197 Taxman 51 (Delhi). (iii) Linde AG, Linde Engineering Division Vs. DDIT (2014) 44 taxmann.com 244 (Delhi). 3(f) That without prejudice, the learned ACIT and DRP have on mere surmise and guesswork erroneously held that the profit attributable to PE in respect of Offshore Supplies is 35% of the profit accruing from Offshore supplies, which is arbitrary, highly excessive and has no rationale whatsoever and is against the principles of attribution as laid down under the provisions of the Act and DTAA between India and Japan. 3(g) That without prejudice, the learned ACIT and DRP have erred in applying group global profitability of 6.87%, which is completely arbitrary, unjustified and thus makes the adjustment illegal. 3(h) That without prejudice, the learned ACIT and DRP have failed to give cognizance to the fact that financials of DFCCIL projects show a loss from operations, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical collaboration agreements for last many years 1.4 Business Income comprises of income from various projects under execution with several Indian customers in the Power sector and Railways, including projects with Dedicated Freight Corridor Corporation of India Ltd. (DFCCIL), Ministry of Railways. The assessee has reported its income from performance of Onshore activities relating to the projects through 9 Project offices and 1 branch office which are considered as PE and profits added to the total business income earned in India. 1.5 The basis of taxation has been accepted by the tax department in all earlier years. 1.6 Hitachi Ltd was awarded two new contracts for Rail business by DFCCIL (i) WDFC P-5 Project as part of S.A.F.E. Consortium for Design and construction of Signal and Telecom Works for double line railway involving Train Detection System, Electronic interlocking in stations, Automatic Signalling in Block Sections, Train Monitoring and Diagnostic systems as well as all related equipment, peripherals and works (ii) WDFC P-5A project as part of I.N. Signal Consortium for Design and Construction of Train Protection Warning System including testing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the equipment to India and delivered the goods at site in India. Custom clearance of Offshore equipment supplied is responsibility of Hitachi Ltd.- Indian Project Offices, however all activities in relation to the same are carried out by Mitsui Co. Ltd. and goods are only passed through the Project Offices for the purpose of Customs duty compliance in India including payment of Customs Duty and IGST, which in turn is charged back to Hitachi Ltd Japan by the Project office. The activities relating to Customs clearance are covered under the scope of work for Onshore portion of the contract. Accordingly, as per the terms of the contract with DFCCIL, the Offshore goods supplied from Japan were handed over to Mitsui Co. Ltd. in Japan for transportation and delivery at site, thus no activity in respect of Offshore portion of the Contract is attributable to the PEs of assessee in India. 3.2 As per the DTA between India and Japan, Article 7 deals with Business Profits. As per clause 1 of the Article 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 contractin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on offshore supplies can, in any case, be attributed to the PE, as held by the Hon'ble Delhi High Court in the case of Commissioner of Income - Tax(lnternational Taxation) v. Nokia Solutions and Networks OY (2023) 147 Taxmann.com 165 (Delhi) (copy enclosed herewith). 3.4 Further, without prejudice to the above, an arbitrary rate of 35% of Offshore Income has been applied as attribution of profits to the Indian PEs without stating any reasons for doing so. It may be noted that the Indian Project Offices of the assessee have merely undertaken assistance in custom clearances of the goods supplied from outside India on behalf of its Head Office. The custom duty and other levies paid by the Indian PEs have been claimed back from the Head Office. The provision of services for custom clearances is part of the onshore portion of the Contract with DFCCIL, profit wherefrom have already been offered to tax and assessed as such in the completed assessment under section 143(3) of the Act. Lastly, without prejudice to the aforesaid submission that no profit on Offshore supplies can be attributed to the PE in the form of project office(s) in view of (i) goods being manufactured in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Co. M/s Mitsui Co. receives payment from the customer of Hitachi, DFCCIL, for its shipping and transportation activities. After collection of equipment from Hitachi Ltd., Mitsui then ships the equipment to India and deliver the goods on site in India. The AO has also noted that during the year under consideration, the assessee through its transporter and shipper, M/s Mitsui Co. made offshore supply of Rs. 10,57,98,128/- for one project and Rs. 10,39,33,100/-, totaling to Rs. 20,97,31,228/- for the year. The AO has also recorded a finding that the assessee has PE in the form of multiple project offices, for which this offshore supply of equipment are made and accordingly, the revenue from offshore supply is directly attributable to the PE. Since the manufacturing activity for which equipment supplied is carried out from outside India, therefore only 35% of the profits from offshore supply is considered to be attributable to the PE in India and chargeable to tax @ 40% (excluding surcharge and cess). Considering the global profitability of 6.87%, he calculated the profit from offshore supply at Rs. 1,44,08,535/-. Further, the profit attributable to the India PE @ 35% was compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of CIT (International Taxation) Vs. Nokia Solutions and Net Works OY (supra), wherein the Hon ble Court has held as under: 10. We may note, that the impugned order passed by the Tribunal has proceeded on the basis, albeit on a demurrer, that the respondent/assessee has a Permanent Establishment [ PE ] in India, and thereafter gone on to discuss, as to whether any profits could be attributed to it. 11. The Tribunal has returned a finding of fact, that the respondent/assessee recorded a global net loss in the relevant assessment year, and therefore no profit could have possibly been attributed to it. 11.1 A discussion on this aspect is set forth in the following paragraphs of the impugned judgment passed by the Tribunal: 19. The assessee emphatically denies that the Appellant has a P.E. in India. However, without any prejudice to that basic contention, the assessee submitted that even assuming without conceding that the assessee has a P.E in India, no profit or income can at all be attributed to the P.E as the net profit of the assessee is loss and there are no taxable attributable profits available. The AO has incorrectly determined the profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove. 22. The revenue appealed before the Hon'ble Delhi High Court against the said Special Bench Judgment and the only ground raised by the Department was with regard to the rate of Net Profit (20%) applied by the Special Bench and not with regard to the method of taking the net profit rate of the foreign enterprise. The revenue department has thus accepted the finding of the Special Bench with regard to the Net Profit margin method and has allowed that finding to become final. The same method of attribution of profits to the P.E, on the basis of the Net Profit rate of the foreign enterprise has been applied by the revenue in the cases of three other assesses who were in the same field of business as the Appellant viz. ZTE, Huawei and Nortel. Each of these assessees was engaged in the supply of telecom equipment to Indian telecom operators. The ITAT order passed in the case of Notel specifically records that in the cases of each of these two assessees, the revenue had adopted the Net Profit rate of the foreign enterprise for determining the amount of profit income which was attributable to each enterprise's respective P.E. 23. Hence, applying the said Special Ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed the payments made by the Appellant to NSN India for the services rendered by NSN India as a deduction from the profit attributable to the alleged PE. If the said payments are allowed as a deduction from the gross profit figures taken by the A.O., then again the resultant figure would be losses. Consequently, even if the method of attribution adopted by the A.O. is considered to be correct, in any event, there would be no profit/income attributable to the PE. The computation is as under: Particulars Amount (INR) Gross Margin of the alleged PE (as determined by the AO) 6,62,39,89,219 Less: Deduction for actual payments to NSN India during the relevant A.Y.: (a) Compensation for network management support 1,28,53,61,568 (b) Compensation for marketing support 2,49,01,07,317 (c) Compensation for R D Support 5,60,25,53,834 Net operating profit/loss of the alleged PE (2,75,40,33,500) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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