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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 ..... e 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. - SHRI KULDIP SINGH, JM MS PADMAVATHY S, AM For the Appellant/Assessee : Shri Manish Kanth / Manas Kulkarni, AR For the Revenue/Respondent : Shri Ajay Kumar Sharma, CIT-DR ORDER Per Padmavathy S, AM: This appeal is against the final order of assessment passed by the Dy. Commissioner of Income Tax, International Tax Circle 1(1)(2), Mumbai dated 30.01.2023 passed under section 143(3) r.w.s. 144C(13) of the Income tax Act, 1961 (in short the Act') for the AY 2020-21. The assessee raised the following grounds: Taxability of payment received under Offshore Supply Contracts 1) The learned DCIT/DRP erred in holding that the amount of Rs. 3267,27,22,775 received by the appellant company from the Offshore Supply Contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 under consideration, the assessee has re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore 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 form part of the business income chargeable to tax under section 44BBB of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 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 instruction no. 1829 were with regard to the execution of power projects on turnkey basis with certain specified features and covered s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 erection or testing or commissioning of plant and machinery as the case may be, there is no reason why income relatable to supply of plant and machinery should also be taxed under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 which was by resort to provisions of sections 28 to 41 etc. The decision taken by the AM renders otiose/redundant the provisions of section 5 inasmuch as all assessees engaged in the business of exploration of mineral oils ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 11. In view of the above discussion, we uphold the order of the first appellate authority and dismiss ground No. 1 of the Revenue.' This decision has been approved by Bombay High Court in ITA No. 1328 of 2011 order dated 18/03/2014 wherein the Bomba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 received/deemed to be accrued in India. Section 9 deals with income which are deemed to accrue or arise in India. The relevant of Section 9 is extracted below: 'Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed to accrue or arise in India : (i) all income accruing or arising, whether directly or indirectly, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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'. There were separate contracts for supply as well as services and supply contracts were not dependent upon service contracts. This being the factual position, we find that explanation 1(a) comes into play in the instant case. Hence, the income which is deemed to accrue/arise in India shall be only with respect to those business operations that are carried out in India. 14.11 In the light of above discussion, we proceed to analyze the various case laws relied upon by both counsels. 14.12 In the case of Ishikawajma-Harima Heavy I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract 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 nexus doctrine, thus, plays an important part in assessment of tax. Tax is levied on one transaction where the operations which may give rise to income may take place partly in one territory and partly in another. The question which would fall for our consideration is as to whether the income that arises out of the said transaction would be required to be proportioned to each of the territories or not. 27. Income arising out of operation in more than one jurisdiction would have territorial nexus with each of the jurisdiction on actual basis. If that be so, it may no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 several components based on the place where the operations were performed. It was concluded that the taxability of income arising from a receipt in India would depend upon the fact whether any operation in connection with the earning of such received was carried out in India. Applying the said principle to the assessee's case, we find that the assessee stand on a better footing as it has separate supply and service contracts, the terms of which are independent of each other. The impugned receipts were relatable to the offshore supply contracts, which have been entirely performed outside India. The revenue has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 Ishikawajma Harima Heavy Industries Co. Ltd. v. Director of Income tax [2007] 288 ITR 408 wherein it has been held that offshore supplies are not taxable even in the case of a turnkey contracts as long as the title passes outside the country and payments are made in foreign exchange. .. 27. Applying the aforesaid law enunciated by the Supreme Court in the case of Ishikawajma Harima Heavy Industries Co. Ltd. (supra), there can be no manner of doubt that the offshore supplies in the instant case are not chargeable to tax in India. The instant case, in fact, in our view stands on a better footing as two separate contracts have been en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffshore 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 supply contract was received outside India through the mechanism of a Letter of Credit in foreign exchange while the consideration for onshore contract was received, for the most in Indian rupees with a nominal amount in foreign currency, the latter being for training charges. The title to the equipment supplied from outside India was transferred in favour of PGCIL outside India. In the case of Ishikawajima Harima Heavy Industries Co. Ltd. (supra), it was transferred on the high seas but in the instant case, it was transferred in the country of origin itself as soon as the goods were loaded upon the mode of transfer to be used to convey the plant and machinery, i.e., the shipping vessel, even prior ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontention 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 agreements with various Cellular Operators and entered into three contracts with them namely (1) Overall Agreement, (2) the Supply of Agreement and (3) the Installation Agreement. 37. In the present case, we are concerned with the income earned by the assessee as a result of supply of hardware and software licence under the Supply Agreement. If this Supply Agreement is taken as standalone Agreement, the facts on record show that such supplies under this agreement were made overseas. The property in goods had passed on to the buyer under the Supply Contract outside India where the equipment was manufactured. As per the judgment of Supreme Court in Ishikawajima Harima Heavy Industries Ltd.'s (supra), such agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the equipment supplied by the assessee. . 41. We, find that the terms of contract make it clear that acceptance test is not a material event for passing of the title and risk in the equipment supplied. It is because of the reason that even if such test found out that the system did not conform to the contractive parameters, as per article 21.1 of the Supply Contract, the only consequence would be that the Cellular Operator would be entitled to call upon the assessee to cure the defect by repairing or replacing the defective part. If there was delay caused due to the acceptance test not being complied with, Article 19 of the Supply Contract provided for damages. Thus, the taxable event took place outside India with the passing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought 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 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. 43. Thus, Overall Agreement does not result the income accruing in India. The execution of an overall agreement is prompted by purely commercial considerations as the India Cellular Operator would be desirous of having a sing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oir 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 by 'Authority for advance Ruling' and as per Section 245S, the decision is binding only on the applicant and also in respect of those transactions in relation to which ruling has been sought. 14.17 DR contended that Madras High Court in Ansaldo Energia Spa v. (supra) distinguished the case of SC in Ishikawajma-Harima Heavy Industries Ltd. (supra) and held as under: Therefore, what follows is, if a contract is a composite contract in spite of the apparent demarcation into separate parts, the mere fact that for offshore supply the title passed outside India alone will not decide taxability. In Ishikawajima Harima Heavy Industries Ltd.'s case (supra), both the title and consideration passed outside the taxable territory and very importantly, it was found that it was not a composite contract, nor was there a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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. It therefore stands on an altogether different footing. Finally in Ansaldo Energia SPA's case (supra) even after the goods were supplied from abroad, the manufacturing activities continued in India 'as a continuous and ongoing process' and there was a reference in the supply contract itself that the responsibility was with the assessee company till the local parts and the portion of the machinery which was to be designed, fabricated, manufactured and sent from abroad were fused together. In the instant case, however, no activities under the supply contract were carried out in India and there was no such overlapping of responsibilities envisaged under the Supply Contract and the Erection Contract performed by the respondent through its head office and permanent establishment. Ansaldo Energia SPA's case (supra) is thus clearly in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 has been applied on 'net payment basis' by the assessing officer. Revenue is free to recompute the income of the assessee as per the statutory provisions. With these observations, Ground No.3 of assessee's appeal is allowed. The payment towards offshore supply contracts being accruing outside India, would not form part of business receipts for the purpose of Section 44BBB. 10. It is an admitted fact that the fact with regard to the impugned issue are identical to the earlier years and that the same contract are applicable for the year under consideration, therefore respectfully following the above decision of the Co- ordinate Bench, we hold that for the year under consideration also the impugned income do not form part of business receipts for computation of income under section 44BBB of the Act. 11. During the course of hearing, the ld. DR mad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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