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TMI Blog2024 (7) TMI 701X X X X Extracts X X X X X X X X Extracts X X X X ..... the income from service contract should not be taxed under section 44BB of the Act. It is now settled position that the ld. DR cannot improve the case of the AO and therefore, we are unable to accept the without prejudice contention raised by the ld. DR. Further, we noticed that the Department has not raised this specific contention even before the Hon ble Bombay High Court where the following question of law has been raised by the Department. Assessee appeal allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... ively to act as agency responsible for implementation of the Nuclear Power Plant,. The original agreement of co-operation for construction was entered into between the Republic of India and the then Union of Soviet Socialist Republic (USSR) on 20.11.1988 and subsequent to the disintegration of the USSR a supplementary agreement dated 20.06.1998 was agreed between Republic of India and the Russian Federation. Both these agreements are referred to as Inter Governmental Agreements (IGA). Pursuant to the said agreement assessee and NPCIL have entered into three service contracts and four off shore supply contracts. Service contracts included supply of detailed project report for Nuclear Power Station, elaboration of working documentation for the project, deputation of contractors, specialists at Nuclear Power Plant site, training of NPCIL's operation and maintenance personnel. The offshore supply contract envisaged supply of equipment and materials from third countries on free on board basis. The status of the various Power Plants units as on 31.03.2020 was that Unit 1 & 2 is completed and commenced operations, Units 3 & 4 and 5 & 6 are construction in process. 4. During the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2015-16 and has been consistently holding that the receipts towards offshore supply contract should not form part of the income to be taxed under section 44BBB of the Act. The Ld. AR in this regard drew our attention to the findings given by the Tribunal for AY 2007-08 (ITA No. 8074/Mum/2010 dated 10.01.2017) which is the lead year with regard to the impugned issue. The ld. AR also drew our attention to the finding given by the AO and DRP wherein the facts for the year consideration being identical to the above AYs and that the addition is made for the reason that the issue should be kept alive. Accordingly, it is a submission of the ld. AR that the findings given by the Co-ordinate Bench of the Tribunal in earlier years with regard to the impugned issue is applicable for the year under consideration also. 7. The Ld. Departmental Representative (DR) on the other hand, relied on the order of the AO and the DRP. 8. We have heard the parties and perused the material on record. 9. We noticed that the Co-ordinate Bench in assessee's own case has considered the same issue for earlier AYs and has been consistently holding that the receipt towards offshore supply contract cannot fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transferred from the contractor to the customer at the moment of transfer of such supplies to the carrier. Further Article 13.3 & Article 23 of the Appendix-1 provided for consequences of termination of contract and liquidated damages respectively. Similar terms are contained in other agreements. An analysis of the above clauses indicates that the overall contract provided for separate/specific terms & conditions for supply of the equipment and also provided for consequences for default of the terms. The same was not dependent upon the service contracts. The supplies were made on FOB basis at Russian Port and undisputedly, the payments for supplies were made in US Dollars. The consideration for each of the contract was separate and they were fixed for FOB Russian Port deliveries. 14.3 Regarding applicability of CBDT instruction No. 1829, a perusal of clauses 4 & 7 of the said instruction shows that the instructions were meant to be applied in case projects were undertaken by Consortium of foreign companies. Due to its misuse, the circular was subsequently withdrawn by Instruction No. 5 of 2009 and upon perusal of clause 2 of these instructions, it becomes more clear that instru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss chargeable to Tax as 'business income'. There is no dispute that, in the present case, the assessee fulfils the eligibility test as provided in the section. The only dispute is with respect to the quantum of the receipts to which 10% is to be applied for the purposes of arriving at the business income. The Ld. AR submits that section 44BBB could be invoked for the purposes of computation of business income only when a receipt is chargeable to tax under the act. The AR further submits that reference to the expression 'turnkey power project' in section 44BBB of the act has no effect on the issue arising in the present case. There is no dispute that the project in the present case is Turnkey power project which satisfies conditions of 44BBB. Further, the presumptive taxation as per the provisions of section 44BBB could be claimed by eligible assessee who is only engaged in civil construction or only erection or only testing or only commissioning of plant and machinery in connection with a turnkey power project. Such assessee may not even supply the plant and machinery. If in such a case, section 44BBB would apply only to income relating to civil construction or erec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows: "Section 44BB is no doubt described as a "Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils" but the terms "Notwithstanding anything to the contrary" refer to sections 28 to 41 and as sections 43 to 43A. In other words, section 44BB is no doubt a special provision but only with reference to the system of computation of the taxable income, which was earlier being done by sections 28 to 41, etc. It cannot replace, supersede or "lean" in favour of section 5 which is the charging section whereby the scope of total income of an assessee whether it be of a resident or it be of a non-resident is worked out. It would be necessary in every case whether it be that of a resident or that of a non-resident to first of all decide as to whether a particular receipt or an item of income is liable to be included in the total income vis-a-vis section 5 and if it is to be so included then the question would arise as to how the taxable part thereof is to be computed and at this stage section 44BB steps in and the said section having replaced the earlier system of comparing the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be deemed to accrues for arise in India. The use of the word 'shall' in the said Explanation is unequivocally indicative of the legislative mandate contained therein. The Explanation, in no uncertain terms, envisages only such type of income to be deemed to accrue or arise in India, under section 9(1)(i). Thus, the income presently under consideration cannot be said to be deemed income just because either the agreement was signed in India or the income has been received in India. The requirements of the Explanation to section 9(1)(i) having not been met, the income is not deemed income. Since the income in question cannot even be construed to be deemed income of the assessee. Since the income in question cannot even be construed to be deemed income of the assessee, there is no taxable income to be computed and so section 44BB is inapplicable. Only a part of mobilization/demobilisation work, which is attributable to the operations carried out by the assessee in India, is taxable in India. The services rendered by the assessee are not covered by the notification bearing No. GSR-304 (E), dated 31st March, 1983 - Saipem SPA v.. Dy. CIT [2004] 86 TTJ 1 (Delhi)(TM) followed.& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s have been entered into between two Government representatives and hence the question of tax evasion does not arise as per decision of Hon'ble Bombay High Court dated 16/10/2008 in ITA No. 389 of 2008 .West Coast Paper Mills Ltd., (supra) wherein the court has observed: "The Tribunal has considered that aspect of the matter in the light of the material on record and recorded the findings that it is not a sham or bogus transaction. One of the grounds considered for recording that finding is that when the other party is a statutory body, the question of evasion of tax does not arise, and therefore, according to the tribunal, influence of collusion cannot be drawn. Hence, no question of law arises." Hence, the argument that the contract is skewed in favour of supply contracts cannot be presumed. Revenue has nowhere made those allegations and there is nothing on record to substantiate the same. 14.8 Now, the only question left to be decided is whether the impugned income from OSC are taxable as per the substantive provisions and DTAA. As per Section 5, a non- resident is liable for tax on incomes where are received/accrued in India or which are deemed to be receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in our considered opinion, the meanings given to certain expression which were not otherwise defined/clarified in the Treaty could derive their meaning from domestic law. 14.9 Having observed so, we now proceed to analyze the effect of explanation 1(a) vis-à-vis Section 9(1)(i). Explanation 1(a) restrict the applicability of deeming provisions of Section 9(1)(i) in respect of those business incomes of which all the operations are not carried in India. Conversely, deeming provisions are restricted to only those part of the income which can reasonably be attributable to the operations carried in India meaning thereby in case business operations are carried in two different taxing territories, then deeming provisions of Section 9(1) (i) shall apply qua operations carried in India only and not to any other operations. In other words, explanation 1(a) provides for separate treatment of business operations carried in India and carried outside India. 14.10 After analyzing the various contractual terms of supply contracts in para 14.2, we have already concluded that title in goods passed outside India, payments were in foreign currency, the deliveries were on 'FOB basis' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supply segment and service segment have been specified in different parts of the contract is a pointer to show that the liability of the appellant thereunder would also be different. 19. The contract indisputably was executed in India. By entering into a contact in India, although parts thereof will have to be carried out outside India would not make the entire income derived by the contractor to be taxable in India. We would, however, deal with this aspect of the matter a little later." Therefore the court clearly held that mere fact that the contract is a 'turnkey' one would not make the entire income of the non-resident assessee from such contract as being chargeable to tax in India. The court thereafter referred to the principle of apportionment as enshrined in the act and considered the aspect of taxability of such receipts to the extent relatable to the operations carried out in India and further observed as under: "25. For our benefit we may notice the provisions of section 42 of the Income-tax Act, 1922. It provided that only such part of income as was attributable to the operations carried out in India would be taxable in India. 26. Territorial ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessment of income of a non-resident under a Double Taxation Avoidance Agreement, and the latter is for the application of section 9 of the Income tax Act. (6) Clause (a) of Explanation 1 to section 9(1)(i) states that only such part of the income as is attributable to the operations carried out in India, are taxable in India. (7) The existence of a permanent establishment would not constitute sufficient 'business connection', and the permanent establishment would be the taxable entity. The fiscal jurisdiction of a country would not extend to the taxing entire income attributable to the permanent establishment. (8) There exists a difference between the existence of a business connection and the income accruing or arising out of such business connection. (9) Paragraph 6 of the Protocol to the DTAA is not applicable, because, for the profits to be 'attributable directly or indirectly', the permanent establishment must be involved in the activity giving rise to the profits." Therefore, though the contract in that case was a turnkey or a composite contract, the Supreme Court dissected the activities to be performed as per the said contract into sever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osite contract, the terms of the contract distinctly set out the quantum of offshore supplies to be made by the assessee to the Metro railways and also the quantum of payment to be received by the assessee from Metro Railways outside India. In our opinion, if the composite contract specifically record the quantum of goods to be supplied outside India and even the payment is made outside India, then no fault can be found with the decision of ITAT in holding that the income arising from offshore supplies are not taxable in India" 14.14 Similarly, in L.G. Cable Ltd., (supra)there was only one contractor and revenue contended that property in the equipment passed only after the satisfactory performance. The court made the following observation:-- "19. The contention of the learned counsel for the revenue during the course of arguments that offshore supplies are not taxable only in the case of sale of goods simpliciter, and that the contract is a turnkey contract split/divided into offshore and onshore supplies at the instance of the respondent assessee, in our considered opinion, is not sustainable in view of the authoritative pronouncement of the Supreme Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion in the following manner:-- "35. In the final analysis we have no hesitation in holding that viewed from any angle, the fact situation in the instant case is almost identical to that in the case of Ishikawajma Harima Heavy Industries Co. Ltd. (supra) and the law as enunciated by the Supreme Court in the said case will squarely apply to the facts of the present case. If at all there is a difference, the facts in the present case stand on a better footing than in Ishikawajma Harima Heavy Industries Co. Ltd.'s case (supra). In Ishikawajima Harima Heavy Industries Co. Ltd.'s case (supra) there was a turnkey contract with four separate component activities, viz., offshore supply, offshore services, onshore supply and onshore services awarded by Petronet LNG to a consortium of companies led by the Japanese company Ishikawajima-Harima. In the instant case there are two separate contracts i.e., offshore supply and the onshore services contract awarded by the PGCIL to the respondent assessee. As in the said case the consideration for offshore contract and onshore contract are separate and distinct from each other, inasmuch as the consideration in the case of offshore sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equipment, which was carried out in India, and therefore, no income could be deemed to have accrued or arisen in India whether directly or indirectly or through any business connection in India." Therefore this decision also brings out that though the contract was a composite and an indivisible one as well as a non-resident assessee was required to perform certain functions to the satisfaction of the buyer after completion of the sale of the equipment, the income relating to offshore supply of equipment was not chargeable to tax in India. 14.15 Similarly the decision of Delhi High Court in Ericsson A.B. (supra)was also related with turnkey project being executed by a non-resident assessee. The main contention of the revenue was that as assessee had overall responsibility in respect of entire contract and hence offshore supplies were also chargeable to tax. The court observed as under:-- '36. In order to decide the issue at hand, let us recapitulate some of the salient features. The assessee is a foreign Company. Its activities involved supply of hardware and software as well as installation and commissioning of the two and also after sale services. It entered into a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilst in the case of the assessee, it has been found as a fact by both the appellate authorities that no permanent establishment existed; (v) the mere signing of the contract pursuant to which the supply was made in India, in both cases does not result in giving rise to a tax liability in India; (vi) the existence of the overall responsibility clause was held to be irrelevant in Ishkawajima's case and likewise the overall agreement executed in the assessee's case should not make any difference to the taxability of the equipment supplied; (vii) giving the nomenclature of a turnkey project or works contract is not relevant in determining whether any profit arising from the supply of equipment pursuant to such contract was chargeable to tax in India; (viii) the Supreme Court relied upon Instruction No. 1829 to come to the conclusion that the existence of an overall responsibility clause was not material in determining the tax liability arising from the offshore supply of equipment and as the said instruction continues to be in force for the assessment year relevant to the present appeals, the existence of an overall agreement should make no difference to the taxability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al position that the sale took place outside India. In such a situation, one has to apply the test of predominance and decide where the sale took place ? On a combined reading of the clauses of the agreement, we have no doubt that the sale of machinery did take place outside India." 42. We may also usefully referred to the judgment of the High Court in Mahabir Commercial Co. Ltd. v. CIT [1972] 86 ITR 417 (SC) wherein following principle was enunciated: "Even though the property in the goods may pass to the buyer when the documents are handed over, the buyer may yet retain the right to examine and repudiate the goods but this right generally which a buyer has in c.i.f. contract does not by itself indicate that the property in the goods has not passed to him. This supposed incongruity was sought to be explained per curiam in Kwei Tek Chao v. British Traders and Shippers Ltd. (1954) 2 K.B. 459. that if property passed when the documents are transferred that property is subject to the condition that the goods should revest 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 be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntuality the assessee was entitled to contract price attributable to the supply and services executed as at the date of termination. In case of deficiencies/default in the equipment, the assessee was liable to pay liquidated damages only for the delay. Therefore there may be an overall responsibility for carrying out the entire agreement but yet the same was not relevant for determining the taxability of income arising from offshore supply of equipment. Similar view has been taken by the Delhi High Court in DIT v. Nokia OY [2013] 358 ITR 259/212 Taxman 68/[2012] 25 taxmann.com 225 and Delhi High in Linde AG, Linde Engg. Division, (supra) which, in turn, placed reliance on Apex Court's decision in Ishikawajma-Harima Heavy Industries Ltd. (supra). 14.16 Ld. DR has relied upon the decision in Roxar Maxmium Reservoir Performance WLL (supra), where the authority for advance rulings has held that a contract has to be read as a whole. The purpose for which the contract is entered into by the parties is to be ascertained from the terms of the contract. AAR held that income from offshore supply of goods was taxable in India. But as rightly pointed by Ld. AR, the decision was rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the Madras High Court also noticed that the subsidiary company i. e., ASPL already existed in India prior to the award of the contract. In the instant case, there is no such allegation made by the Department and as a matter of fact also the respondent assessee in the present case had established a Permanent Establishment in India after the award of the contract for the specific purpose of executing the onshore contract. Again in Ansaldo Energia SPA's case (supra), it is noteworthy that initially a single contract was awarded to Ansaldo Energia SPA's case (supra) and later on at the instance of Ansaldo Energia SPA's case (supra) the contract was split into four separate contracts. In the instant case, right from the inception and as part of the documents, two separate contracts, i. e. , a contract for offshore supplies and another contract for onshore services were executed between the PGCIL and the respondent assessee. Yet again, in Ansaldo Energia SPA's case (supra) there was a specific allegation that the contract was 'loaded on' to the contract price for offshore contract whereas no such allegation has been made in the case of the respondent assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the instant case in hand. 15. Therefore, after analyzing the various case laws, statutory provisions, DTAA provisions and contractual terms and respectfully following judgment of Hon'ble Supreme Court in Ishikawajma Harima Heavy Industries Ltd., (supra) we are inclined to hold that Offshore Supply contracts were 'carried and concluded' outside India and hence no income there-from deemed to accrue or arise in India as per Section 9(1) and DTAA provisions and accordingly, not chargeable to tax. The receipts thereof do not form part of receipts for the purpose of computational provisions of Section 44BBB. Explanation 4 could not overcome the limitation imposed by Explanation 1(a) to Section 9(1)(i) and hence, the impugned income do not form part of business receipts for computation of income u/s 44BBB of the Act. We held so. 16. At the same time, we also observe that impugned payment has been paid by NPCIL to ASE on 'net' basis and NPCIL has borne the burden of tax on behalf of the assessee. DRP rightly observed that 'Grossing up' of the impugned payment was required to be done as per Section 195A before applying 44BBB of the act. But Section 44 BBB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 44BB of the Act. It is now settled position that the ld. DR cannot improve the case of the AO and therefore, we are unable to accept the without prejudice contention raised by the ld. DR. Further, we noticed that the Department has not raised this specific contention even before the Hon'ble Bombay High Court where the following question of law has been raised by the Department. 14. Whether the Tribunal erred in directing to exclude the amount received by the assessee on account of offshore supply contracts from computation of its total income under section 44BBB of the Act and whether the Tribunal correctly interpreted the provisions of section 44BBB of the Act and the terms of India-Russia DTAA on this aspect ?) 15. From the above, it is clear that the Department is not contesting the taxability of income from service contracts under section 44BBB of the Act before the Hon'ble High Court also, given this we are not in a position to admit the alternate plea of the ld. DR and we restrict our adjudication to the issue raised by the assessee before us with regard to whether the receipts from offshore supply contract is forming part of the income considered for taxabili ..... X X X X Extracts X X X X X X X X Extracts X X X X
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