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TMI Blog2025 (1) TMI 806X X X X Extracts X X X X X X X X Extracts X X X X ..... arded to the assessee and the fact that the assessee engages in artificial splitting of contracts - HELD THAT:- AO has not disputed the fact that the compensation paid to SDVS was provided on a cost-plus arm's length markup. The issue of artificial splitting of contract has been dealt elsewhere in the order where the ITAT has given a finding that the work orders, splitting the scope of work between the assessee and its subsidiary in India, have been dully approved/agreed upon by the clients of the assessee and therefore we find the AO s allegation of splitting the contract has no legs to stand. Assessee argument that the maintenance receipts from Glidepath cannot be taxed in the hands of the assessee as the SDVS has been remunerated on a cost-plus basis and that where there is an international transaction under which a non-resident compensates another enterprise at arm's length price taking into account all the risk-taking functions of the enterprise, nothing further would be left to be attributed to the enterprise in India - SDVS was adequately remunerated on which it has already paid its due tax in India and there is no reason for further attribution. The assessee has cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factual submission made by the Assessee. 2.3 The Ld. AO/DRP erred both on facts and in law in not appreciating that Assessee does not satisfy the prescribed conditions/principles for determination of PE in India. 2.4 The Ld. AO while referring to the annual maintenance receipts received by the branch of the Assessee from a third party 'Cochin International Airport Ltd' has erred in stating that the Assessee has a PE in India and has linked the entire consideration from different contracts (Mangalore Port Trust, Airports authority of India and Cochin International Airport) to such PE in India without establishing and demonstrating the role of negotiation and execution of these contracts. 4.1 Without prejudice to the above fact, the Ld. AO has wrongly placed reliance on Article 14 of the Multilateral Convention (MLI) which prohibits artificial splitting of contracts for avoidance of PE status since the other contracting state (Singapore) has reserved the right for the entirety of Article 14 not to apply to its Covered Tax Agreements. 2.5 Ld. AO/Ld. DRP erred in concluding that the entire arrangement is akin to having a Joint venture (JV) of Assessee with its Indian entity in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he PE has been involved and such profits shall only be regarded as attributable to the PE to the extent appropriate to the part played by the PE in those transactions. 5. Maintenance receipts received from Glidepath New Zealand ('Glidepath') 5.1 That the Ld. AO erred in holding that maintenance receipts received by Assessee from Glidepath are receipts of the PE of the Assessee in India by alleging that the Assessee engages in artificial splitting of contracts to complete its contractual obligations, wrongly alleging that all the documents relating to agreement entered between Assessee and Glidepath were not submitted during the assessment proceedings. 5.2 The Ld. AO erred in not appreciating that SDAP has further subcontracted maintenance work to SDS India for which compensation has been given on cost plus arm's length markup and there should not be any further attribution in India. 6. Receipts from Cochin International Airport Ltd. ('CIAL'), Tirumala Tirupati Devasthanams ('TTD') Kerala Industrial and Tech Consultancy Organization 6.1 That the Ld. AO/ Ld. DRP has erred in adding back Rs. 4,00,086 received from Cochin International Airport, Rs. 1,13,142 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Rs. 97,43,51,252/- have been claimed to be exempt. Additional receipts from Glidepath Ltd., CIAL, Kerala Industrial and Tech Consultancy Organization Ltd. (KITCOL), and Tirumala Tirupati Devasthanams (TTD) were added to the Appellant's income by the Ld. Assessing Officer. All these receipts, totaling to INR 102,70,33,721/-, are subject matter of the current dispute. The assessee has contended that it does not have a PE in India. 8. The ld. AR has argued that Ground Nos.1 to 4 involve a common ground of taxability of offshore supply of equipment. At the very outset, the ld. counsel for the assessee submitted that the ITAT in ITA No. 2258/Del/2022, in assessee's own case for A.Y 2019-20 on similar facts and issues, rejected the contention of the revenue that there was any artificial splitting of the contracts and deleted the additions in respect of offshore equipment supply. The ld. counsel for the assessee submitted that following the principle of consistency, additions in the A.Ys under consideration should be deleted. 9. The ld AR explained the factual matrix of the case by stating that the assessee, on 06.02.2018 had received three work orders as follows: i) work order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncorrectly concluded that the assessee's branch office formed a PE for the offshore supplies. The branch office was only for CIAL maintenance and had no role in the offshore supply contracts. Further contention of the ld. counsel for the assessee is that Assessing Officer erred in attributing 100% profits from the sale of equipment ignoring the established principle that profits can only be attributed if the authorities first establish, which they have failed to do so in the present set of facts, that there is a PE in relation to the international transaction and there is some nexus between alleged PE and such international transaction. 13. The ld AR argued that the Assessing Officer incorrectly determined that the assessee's offshore equipment supply income is taxable in India under Section 9(1)(i)(a) of the tax Act, 1961 claiming a business connection in India. It is stated that it is well-established that income from offshore equipment sales, where title and risk pass outside India, is not subject to Indian tax, as held by several court, including Ishikawajima Harima Heavy Industries Limited [2007] 158 Taxman 259 (SC). The assessee has no Indian operations related to thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the FAR of the PE of the assessee. The Assessing Officer erroneously applied the ad hoc operating profit margin of 'similar' businesses at 14.62% to the assessee's income, without specifying the nature of such 'similar' businesses and the source of their income. 18. The ld. counsel for the assessee further contended that the global operating profit margin is 9.198% which was computed on the basis of the audited financial statement for year ending July 2019 and July 2020. In view of the above, the ld. counsel for the assessee submitted that even if it is concluded that the assessee has a PE in India, operating profit margin of 9.198% shall be applied instead of 14,62% on 100% income of Rs. 102,70,33,721/- and therefore addition should be restricted to Rs. 9,44,66,562/- (9.198% of Rs. 102,70,33,721) instead of Rs 15,01,52,330/- (14.62% of INR 102,70,33,721). 19. Coming to receipts from KITCOL, TTD and maintenance receipts from CIAL, the ld. counsel for the assessee submitted that they have already been offered to tax in other AYs. Therefore, they cannot be subjected to double-taxation. The reconciliation of the receipts along with invoices evidencing the receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ma Harima Heavy Industries [supra] is distinguishable as in that case there were consortium of 5 parties and every party has a specific job for which they received specific payments. The same is not the case in the hand of assessee. The contract that was won by the assessee is for entire project of supply equipment and installation of the same equipment. There is no bifurcation of payment of contract amount and the contract itself is complete and integrated agreement. It is submitted by the Learned DR that the risk for the supply of the equipment has not passed offshore. 25. It is stated by the ld DR that all these arguments are applicable in each of the work done for Cochin International Airport, for Mangalore Port Trust and for Airport Authority of India. It is stated by the Learned DR that assessee has assumed overall responsibility to deliver the whole project as a whole. It is vehemently argued that the assessee is creating an artificial bifurcation of supply and installation whereas in fact, the assessee has one complete contract for supply and installation for all the 3 projects in India. 26. The ld. DR has relied on the case of the Ansaldo Energia Spa of the Supreme Court a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that such another country can tax all profits that the GE derives from the sources country-whether though PE or not. It is the act of setting out a PE which triggers the taxability of transactions in the source State. Therefore, unless the PE is set up, the question of taxability does not arise-Whether the transactions are direct or they are through the PE. In the case of a Turnkey Project, the PE is set up at the installation stage while the entire Turnkey Project, including the sale of equipment, is finalized before the installation stage. The setting up of PE, in such a case, is a stage subsequent to the conclusion of the contract. It is as a result of the sale of equipment that the installation PE comes into existence. However, this is not an absolute rule. In the present case, there was no allegation made by the Department that the PE came into existence even before the sale took place outside India. Similarly, in the present case, there was no allegation made by the Department. that the price at which ONGC was billed/invoiced by the assessee for supply of fabricated platforms included any element for services rendered by the PE. In the present case, we are concerned with ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a, and therefore cannot be deemed to accrue or arise in the country. (5) There exists a distinction between a business connection and a permanent establishment. As the permanent establishment cannot be said to be involved in the transaction, the aforementioned provision will have no application. The permanent establishment cannot be equated to a business connection, since the former is for the purpose 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 S. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T has given a finding that the work orders, splitting the scope of work between the assessee and its subsidiary in India, have been dully approved/agreed upon by the clients of the assessee and therefore we find the AO s allegation of splitting the contract has no legs to stand. 37. We also find force in the assessee argument that the maintenance receipts from Glidepath cannot be taxed in the hands of the assessee as the SDVS has been remunerated on a cost-plus basis and that where there is an international transaction under which a non-resident compensates another enterprise at arm's length price taking into account all the risk-taking functions of the enterprise, nothing further would be left to be attributed to the enterprise in India. SDVS was adequately remunerated on which it has already paid its due tax in India and there is no reason for further attribution. The assessee has correctly placed reliance on the decision of the Hon'ble Supreme Court ruling in Morgan Stanley Co. [2007] 162 taxman 165 (SC). In view of the above discussion we hold that the receipt from Glidepath cannot be subjected to tax in the hands of the Assessee and we direct the AO to delete the addit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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