Deputy Commissioner Of Income Tax vs Paul Wurth Italia SPA

“1.

The assessee, M/s. Paul Wurth Italia S.p.A ("the assessee" or "PWIT") is a company incorporated under the laws of Italy having its registered office at Via Balleydier 7, Genova, Italy and is a tax resident of Italy.

2.

The assessee is engaged in the business of supply of plant and equipment ("equipment"), integrated designs and drawings ("designs"), designs for indigenous equipment, designs for civil works, spare parts and rendering of services to its customers for iron making blast furnace projects in various parts of the world.

3.

For all the years under appeal, the assessee had supplied equipment, spare parts and designs to various customers in India. Besides the same, it also rendered services of supervision of erection and commissioning of the plant as supplied and training of the customer's personnel. The assessee has no office or place of business in India.

4.

During the years under appeal, the assessee had supplied equipment and performed onshore supervisory services in relation to the following customers:

a)

Rashtriya Ispat Nigam Limited;

b)

TATA Steel Limited;

c)

Bhushan Steel Limited;

d)

Steel Authority of India Limited;

e)

Bhushan Power and Steel Limited; and

f)

JSW Steel Limited

The details of the contracts entered into by the assessee relevant for the years under consideration are enclosed as part of the relevant paper-books furnished on record.

5.

The assessee had entered into separate agreements with such Indian customers which clearly provide for a divisible scope of work and specifies separate consideration payable for each activity to be performed such as:

a)

manufacture and delivery of equipment and integrated designs;

b)

designs for indigenous equipment;

c)

designs for civil works;

d)

supervision of erection and commissioning of the equipment by deputation of personnel at customer's site; and

e)

technical assistance services.

6.

The plant and equipment supplied to various customers are designed, manufactured and fabricated according to each customer's requirements, at the assessee's premises/ factories located outside India.

7.

The assessee supplied equipment, designs and spare parts to various Indian customers, from Italy, outside India, as per the terms of contract which provide that the risk and title in equipment, spare parts as well as designs is transferred outside India.

8.

The amounts received towards offshore supply of equipment, spare parts and offshore designs under various contracts in India, were claimed as non-taxable in India under the provisions of the Act as well as the Agreement for Avoidance of Double Taxation between India and Italy ("DTAA") as such goods were supplied outside the taxable territories of India and all activities in connection therewith were done outside India.

9.

In respect of the supervisory activities performed by the assessee, incidence of a permanent establishment ("PE"), i.e., supervisory PE did exist in India in terms of Article 5(2)(j) of the DTAA as conditions mentioned therein were satisfied. The assessee follows 'Completed Contract Method' for revenue recognition in respect of supervisory revenue, taxable on net income basis in the year of completion of such projects under Article 7 of DTAA.

10.

For all the years under appeal, the learned Assessing Officer ("AO") passed assessment orders under section 143(3) read with section 144C(1) of the Act, wherein, it was held that the consideration accruing for offshore supply of equipment, integrated designs, designs of Indigenous equipment and civil works and spare parts is liable to tax in India. The Ld. AO alleged that the assessee has a fixed place PE in India (in addition to the admitted supervisory PE) in terms of Article 5(1) and held that revenue from offshore supplies is attributable to such PE. Thereafter, the Ld. AO arbitrarily attributed 50% the profits (calculated as per global profitability) to the said PE in India and taxed the same. While doing so, the Ld. AO referred to the terms of the contracts with Tata Steel Limited as being representative of all other agreements. Being aggrieved by the addition made by the Ld. AO, the assessee filed an appeal with the Hon'ble Commissioner (Appeals) ["CIT(A)"].

11.

In appellate proceedings of the first year, i.e. AY 2010-11, the Hon'ble CIT(A) granted relief to the assessee on the issue of taxability of offshore supply of equipment, designs and spare parts. While holding so, the Hon'ble CIT(A) held that a fixed place PE in terms of Article 5(1) of the DTAA is not constituted in the hands of the assessee.

However, the Hon'ble CIT(A) held that supervisory activities performed by the assessee in India do not constitute a supervisory PE under Article 5(2)(j) of the DTAA. Having held that the assessee has no PE in India, the Hon'ble CIT(A) proceeded to re-characterise the onshore supervisory receipts as fees for technical services ('FTS') under Article 13 of the DTAA instead of 'business profits' under Article 7.

12.

In the appellate proceedings for the AY 2012-13, AY 2013-14, AY 2014-15 and AY 2015-16, the Hon'ble CIT(A) followed his earlier order of AY 2010-11 and granted reliefon taxability of offshore supply of equipment, Integrated designs and spare parts, while also re-characterising supervisory revenue as 'FTS' rather than 'business profits'.

13.

Additionally, in the assessment years AY 2012-13, AY 2013-14, AY 2014-15 and AY 2015-16, the Hon'ble CIT(A) also re-characterised revenue from designs relating to Indigenous equipment and civil works as royalty/ FTS and taxed the same under Article 13 of DTAA.

14.

The assessee had preferred an appeal with the Hon'ble Tribunal against the following findings of the Hon'ble CIT(A):

a)

re-characterisation of supervisory revenue as FTS instead of Business Profits (all years in appeal);

b)

re-characterisation of consideration for supply of designs relating to indigenous equipment as royalty/ FTS (AY 2012-13, AY 2013-14, AY 2014-15 and AY 2015-16);

c)

re-characterisation of consideration for supply of designs relating to civil works as royalty/ FTS (AY 2012-13 and AY 2014-15);

d)

charging of interest under section 234B and section 234C of the Act (AY 2012-13 and AY 2015-16); and

e)

levy of interest under section 234A of the Act (AY 2014-15).

15.

The Revenue is in appeal before the Hon'ble Tribunal against the relief granted by the Hon'ble CIT(A) in respect of taxability of consideration for offshore supply of equipment, integrated designs and spares."

“Note on Business activities

Paulwurth Italia S.p.A. incorporated in July 2005, located in Genova, Italy gathers long-lasting know-how and competences in the management of large projects for the construction of integrated plants, as well as in the execution of engineering and site supervision services, in the field of blast furnaces, coke making as well as direct reduction plants.

Paul Wurth products and services cover the full range of blast furnace projects ranging from complete new iron making plants. furnace modernisations and relines, new or upgraded equipment and systems, plant automation and process control systems, engineering design services through to equipment maintenance and spare parts. Paul Wurth Italia provides operational and system design advice and on-site services for blast furnace operation and maintenance activities.

Paul Wurth Italia is also an experienced partner for coke making projects. Paul Wurth portfolio includes the design and construction of complete coke oven plants, coke oven. batteries, coal processing plants. coke oven gas treatment. by-product and auxiliary plants.

In India, Paulwurth Italia caters to iron and steel industry and non-ferrous metal sector. Paulwurth Italia, primarily, had entered into various contracts with Indian customers for offshore supplies. drawings and designs and supervisory activities with respect to Blast Furnace Projects. The Indian customers include Tata Steel Limited, Rashtriya Ispat Nigam Limited and Bhushan Steel Limited.

Separate contracts have been entered into each for offshore supplies, drawings and designs and supervision activity and as a consequence, the price consideration has also been separately mentioned for each and every activity under the respective contracts.”

Detail of Contract

“9.0 RESPONSIBILITY FOR PERFORMANCE OF AGREEMENT

9.1 Performance of Contract

The Contractor shall be responsible for the due performance of the in all respects according to the intent and meaning of the designs, specifications and all other documents etc forming part of the Contract.

Any approval that the Purchaser/Engineer may have given in respect of the stores, materials or other particulars work or workmanship involved in the Contract (whether or without test carried out by the contractor and witnessed by the Purchaser/Engineer) shall not bind the purchaser/engineer. Notwithstanding, any approval or acceptance given by the Purchaser/Engineer, it shall be lawful for the Purchaser/Engineer to reject the material after arrival at incoming material section or any time later on within the warranty period when the defect is detected, if it is found that the materials/equipment supplied by the Contractor are not in conformity with the terms and conditions in any or all respects.”

“1.1.7 Contractor's Responsibility for Completeness.

The Contractor shall be fully liable and responsible for completeness of Plant, Machinery and Equipment, as per Contractor's battery limits including Equipment/items directly procured by the Purchaser as per division scope of work as detailed in Technical Specification in conjunction with this Contract that include all Plant, Machinery and Equipment, to fulfil the functional requirement of Work as a whole and Contractor's aforesaid responsibility shall be construed as included in the Contract price. All items of Plant, Machinery and Equipment, whether specifically mentioned or not in the Technical specification but which are necessary for completion of work as per Contractor's battery limits and division scope of work as detailed in Technical Specification in conjunction with this Contract and are necessary for proper, efficient, safe and stable construction, operation and maintenance of the work and / or for the fulfillment of the performance guarantee, shall be supplied or provided or executed by the Contractor without any additional price implication and without any dilution of his liabilities and responsibilities under the contract.”

"(i)

The contract may be for work to be done for remuneration and for supply of materials used in the execution of the work for a price;"

“Whether, On the facts and in the circumstances of the case, whether the CIT(A) erred in not appreciating that the assessee had permanent establishment (PE) in India and hence the supply of equipment (including drawings and designs) was attributable to such PE, rendering the profits relatable to such supplies, liable for taxation in India owing to the force of attraction rule embedded in Article 7(1) of the India- Italy Treaty.”

“1.

Grounds of Departmental Appeals: Whether on the facts and in the circumstances of the case, whether the CIT(A) erred in not appreciating that the assessee permanent establishment (PE) in India and hence the supply of equipment ( including drawings and designs) was attributable to such PE, rendering the profits relatable to supplies, liable for taxation in India owing to the force of attraction rule embedded in Article 7(1) of the India-Italy Treaty?

2.

Article 7 of the India Italy DTAA is reproduced

ARTICLE 7

BUSINESS PROFITS

1.

The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment.

Clause (a) represents the standard "Attribution" rule (taxing what the PE actually does). Clauses (b) and (c) represent the "Force of Attraction" rule. They expand the tax net to capture direct transactions by the Head Office (HO) in the Source State, provided those transactions are "same or similar" to what the PE does.

3.

AO has also discussed this in detail in clause (vii) and clause (vill) of the assessment order on page 7 of 21 to page 9 of 21.

4.

Rellance is placed on Shanghai Electric Group Co. Ltd. Vs. Deputy Commissioner of Income-tax, Circle-3(1)(2), International Taxation, New Delhi [2017] 84 taxmann.com 44 (Delhi - Trib.)/[2018] 170 ITD 34 (Delhi - Trib.)/[2017] 190 TTJ 11 (Delhi-Trib.) [14-07-2017] wherein the Hon'ble ITAT Delhi has interpreted the India-China DTAA to include the Force of Attraction rule. The clauses in the said DTAA are identical to the India-Italy DTAA. The relevant paragraphs are extracted below

268.

The extension of taxability of profits of PE by including profits directly or indirectly attributable, is akin to the provisions of Article 7(1)(b) and 7(1)(c) of the UN MC which provides that in addition to the 'profits attributable to the permanent establishment' the taxability of PE profits will also extend to '(b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment'. The connotations of 'profits indirectly attributable to permanent establishment' will extend to these two categories. These categories clearly incorporate a force of attraction rule. The basic philosophy underlying the force of attraction rule is that when an enterprise sets up a permanent establishment in another country, It brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can properly tax all profits that the enterprise derives from that country whether the transactions are routed and performed through the PE or not.

269.

The provisions of Article 7(1) of India China DTAA, include same results as sought to be achieved by article 7(1)(c) of UN MC. As to the scope of this provision, one may find guidance from the UN MC Commentary in this regard.

270.

Therefore, the connotations of 'profits indirectly attributable to permanent establishment' do indeed extend to incorporation of the force of attraction rule being embedded in article 7(1). In addition to taxability of income in respect of services rendered by the PE in India, any income inrespect of the services rendered to an Indian project, which is similar to the services rendered by the permanent establishment, is also to be taxed in India in the hands of the assessee, irrespective of the fact whether, such services are rendered through the permanent establishment, or directly by the general enterprise. There cannot be any professional services rendered in India which are not, at least indirectly, attributable to carrying out professional work in India. This indirect attribution, in view of the specific provisions of India-China tax treaty, is enough to bring the income from such services within ambit of taxability in India. The twin conditions to be, thus, satisfied for taxability of related profits are:

(i)

the services should be relatable to the services rendered by the PE in India; and

(ii)

the services should be 'directly or indirectly attributable to the Indian PE', i.e., rendered to a project or client in India.

To the facts of the present case, both these conditions stands satisfied. The extension of taxability of profits of PE by including profits directly or indirectly attributable, is akin to the provisions of Article 7(1)(b) and 7(1)(c) of the UN MC, which provide that in addition to the 'profits attributable to the permanent establishment' the taxability of PE profits will also extend to '(b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment. The connotations of 'profits indirectly attributable to permanent establishment' will extend to these two categories. These categories clearly incorporate a force of attraction rule. The basic philosophy underlying the force of attraction rule is that when an enterprise sets up a permanent establishment in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can properly tax all profits that the enterprise derives from that country whether the transactions are routed and performed through the PE or not.

In effect, profits relating to services rendered by assessee, whether rendered in India or outside India, in respect of Indian projects are taxable in India, and are attributable to the supervisory PE of assessee in India, as they are effectively connected with each other.

So, the taxation of offshore supplies is triggered by the Force of Attraction Rule especially as per India-Italy DTAA. Since the wording of the India-US DTAA is standard to the UN Model, Indian courts rely on precedents set under similar treaties (e.g., India-UK, India-USA, India-Belgium).

A. Linklaters LLP vs. ITO (2010) - ITAT Mumbai

Relevance: This is the leading case on Article 7(1)(c) (Service PE and "same or similar activities").

Facts: A UK law firm had a PE in India. It also rendered services to Indian clients from Its London office (offshore). The Revenue argued that the offshore services were "attracted" to the Indian PE.

Ruling: The Tribunal held that the entire income was taxable in India under the Force of Attraction rule because the services rendered from London were of the "same or similar kind" as those rendered by the PE in India. Extract from Judgment: "The connotation of the provisions of Article 7(1)(b) & (c) is that... if an enterprise has a permanent establishment in a state, that state may tax... profits of the enterprise derived from the other business activities of the same or similar kind as those effected through the permanent establishment... The profits from the services rendered by the head office are attracted to the Indian PE because they are of the same or similar nature."

The Shanghai Electric judgment further clarifies that services rendered to an Indian project are taxable if they are effectively connected to the PE, even if rendered directly by the head office.

"In addition to taxability of income in respect of services rendered by the PE in India, any income in respect of the services rendered to an Indian project, which is similar to the services rendered by the permanent establishment, is also to be taxed in India in the hands of the assessee, irrespective of the fact whether, such services are rendered through the permanent establishment, or directly by the general enterprise... In effect, profits relating to services rendered by assessee, whether rendered in India or outside India, in respect of Indian projects are taxable in India, and are attributable to thesupervisory PE of assessee in India, as they are effectively connected with each other."

So, in regard to the India-Italy DTAA, the force of attraction rule is applicable, and the AO has also discussed the same in detail, and hence, by the binding judicial precedent, the Hon'ble Bench may uphold the orders of the AO based on the above ground.

5.

The assessee provides EPC services for blast furnaces to major Indian clients, including Tata Steel Limited, Rastriya Ispat Nigam Limited, and Bhushan Steel Limited. The entire issue is whether the contracts executed by the assessee constitute a composite contract or can be divided into parts as envisaged by the assessee, thus avoiding the taxability of offshore supply in India. The nature of contracts needs to be analyzed, and during this year the only projects that are executed are New Blast Furnace 1 - Tata Steel and New Blast Furnace 3 - Vizag with Rastriya Ispat Nigam Ltd. The nature of the revenues is discussed on page 437 of the paper book, and the same clearly shows that offshore sales of equipment/spares and offshore drawings and designs totaling Rs 206.10 crores and Rs 44.95 crores have not been attributed to the PE, while the supervision and technical assistance have been attributed to the PE. The issue pertains to whether this contract is a composite contract or a divisible contract and whether all the parts of the contract are inextricably linked and inseparable and thus require attribution of the entire revenue to the PE.

6.

The Assessee relies heavily on the form of the transaction-separate invoices and separate agreements to argue for non-taxability, invoking the Supreme Court's decision in Ishikawajima-Harima Heavy Industries Ltd. However, the revenue submits that the facts of the present case are materially distinguishable. In Ishikawajima, the court dealt with a divisible contract where the PE played no role in the supply. In contrast, the assessee in the present case acted as a single bidder for a turnkey solution. The risk of the equipment does not transfer to the client at the foreign port of shipment; rather, it remains with the assessee until the successful commissioning of the blast furnace in India.

7.

Contract with Tata Steel Limited, Jamshedpur: Please refer to page 231 of the paper book to see whether the agreement for the design, manufacture, and supplyof imported plant machinery and equipment with auxiliaries for the I blast furnace at Tata Steel Limited, Jamshedpur, is given. The salient features are discussed below.

a. This is one single contract, and the contract was awarded to the assessee alone, unlike other contracts, where usually a consortium or some Indian players are involved, allowing the project to be considered divisible. Needless to say, the bidding for the contract would have been done also as a single bidder. There were no separate bidders or consortium bidding for the various parts of the contracts.

b. Now Schedule I gives the scope of work and technical specification, which is on page 237. The scope of work includes design, procurement of materials, manufacture/fabrication, inspection, testing, and supply. Now in 1.0, General, it is clearly mentioned that technical specification no. SBF/EIM/20 dated August 2008 was agreed upon first. This technical specification acts as an "Umbrella Agreement" or a "Master Service Agreement" that governs every subsequent transaction. The separate contracts for supply and services are merely subsets or execution modules of this overarching understanding. The revenue submits that when a supply contract is strictly governed by a master schedule that also dictates erection and commissioning, the supply cannot be Independent. The AO has discussed this in detail in para 5.1 of the order.

c. Now on page 238 there is an explicit clause that integrates all the subparts and makes the contractor responsible for completeness. Now it can happen that in a divisible contract, liability and risks should get divided. Now the risk of one part has a bearing on the other part. Now a true divisible contract has all the risks split and the price determined as per the functions and risks assumed. Now in case the contract is artificially split, but the risk and liability do not get split, then the entire contract cannot be said to be a divisible contract. Now in this, as per para 1.1.7, the contractor is made liable for the entire contract, and it clearly states that it shall be construed as included in the contract price. Now again the umbrella agreement reference is brought in here, wherein it is clearly mentioned that all itemsshould come from that agreement. So, although the contracts are divisible, the risks and liabilities are not divisible and clearly show that this is a composite contract. The AO has dealt with this in para 5.1 to 5.13 and the same is relied upon.

d. Now on page 239, in clause 1.1.11, there is regular meetings that have happened between the assessee and the Indian customers right from the stage of design, manufacture, and supply. This is a detalled project control milestone control report that is being demanded. The fact that the contractor was present from the design stage to manufacture to supply is inevitable from these conditions.

The assessee admits to having a PE in India for supervision. However, the Revenue contends that the role of this PE was not passive or limited to erection. It was the "brains and hands" of the assessee in India, facilitating the offshore supply itself. It is established by the above staff that PE staff attended these meetings in India, discussing design parameters and manufacturing progress, thereby actively participating in the "offshore" activities from Indian soil.

As per clause 10.2 (page 263), the contractor is required to obtain approvals from Indian statutory authorities like the Boiler Inspector and Controller of Explosives. The fact that the assessee is responsible for obtaining Indian regulatory approvals for the equipment proves that the assessee's responsibility for the goods extends into India.

e. On page 241, schedule -2, the price is in EUROs. The majority of EPC contracts typically consist of two components: one in Indian rupees for installation and commission, but these prices are in euros for both. It is explicitly stated that the contract price for all contractual obligations to be fulfilled by the contractor under this agreement, including initial fills and commissioning items, shall be 47,560,000/-euros. Now this price is one price bid and not separate bids for various contracts. Now page 242 becomes important; therein, in Enclosure -1, it states that the breakup ofthe contract price would be provided on page 243. Now the contracts were never separate, and instead it was an artificial split.

f. In page 244, scheduled -3, delivery and liquidated damages, and it is clear that the contractor is responsible for coordinating delivery of all equipment, and there is a clear-cut liquidated damages levy for delay of the entire contract. The liquidated damages are not defined for each contract. Also on page 245, the performance guarantee parameters are for the commissioning of the entire equipment and not for each component that has been artificially divided.

g. Page 247 clearly shows that there is a milestone payment, and now in this it is important to note in clause 4.1.4 that a certain price is not paid till the commissioning of the project. There is something called an integrated cold test, which needs to be done, and only then will the payment be released.

Also, in clause 4.1.5, certain money would be released only if a provisional acceptance certificate were issued.

h. In divisible contracts, it is standard practice to price offshore supplies in foreign currency (Euro/USD) and onshore services in local currency (INR) to reflect the distinct economic environments. The fact that the entire turnkey price is in Euros suggests a unified commercial negotiation. In a pure sale of goods, payment is typically completed upon delivery (FOB/CIF) against shipping documents. However, the payment schedule here retains significant portions of the price until events that occur in India are completed:

i.

Clause 4.1.4: A certain percentage of the price is withheld until the "Integrated Cold Test" is completed.

ii.

Clause 4.1.5: Further payments are released only upon the issuance of a "Provisional Acceptance Certificate" (PAC).

iii.

Implication for Title Transfer: The assessee argues that title passed offshore. However, economic ownership involves the transfer of risk and reward. If the assessee does not get paid fully until the equipment is successfully tested in India, the assessee continues to bear the economic risk of the goods while they are on Indian soil.

i.

Schedule 6 on page 260 clearly shows how the project structure worked and how instructions and directions were given to the assessee during the entire stage of the project. Project control and organization would have been place-based on this contract for effective management of EPC contracts. Page 261, clause 8.1.4, clearly shows that the contractor's guarantee of performance is for the whole project and not for individual parts. Para 8.2 shows that any repair would also be carried out within 12 months. Even if it does not comply with technical specifications or is defective, everything would be replaced within 12 months.

j. Page 262 gives the performance of the contract. Clause 9.1 clearly states that the contractor shall be responsible for the due performance of the contract in all respects according to the Intent and meaning of the designs, specifications, and all other documents forming part of the contract. This clearly shows the performance is not divisible; risks are also not divisible. On page 10.2, it is also mentioned that the contractor will also get all approvals from the statutory authorities, like approval of the boiler inspector for steam-related items, approval of the inspector for weights and measures, and approval of the controller of explosives.

k. Page 266, clause 12.0, clearly shows that there was an inspection at the contractor's and/or subcontractor's premise. The entire check of quality of raw materials, quallty of workmanship, dimensional accuracy of manufactured parts, and functional tests all were done under the supervision of the customer. Now this cannot be high seas sales wherein there is no role for the Indian customer and he is not involved in any process. Every stage of the contract is integrated, and the final contract is executed only when the commissioning or the acceptance tests are complete.

1.

Page 274, clause 16.0 refers to the cold tests, blowing in operation, and first tapping. This is an integrated cold test for commissioning of the equipment, and only after this is the integrated cold test certificate issued. On page 276, there is a provisional acceptance and the conditions prescribed there. So clearly in 17.2.1, page 276, the plant itself would be operated by the contractor. Now clause 17.7.17 on page 277 clearly shows that the risks are not completely passed on till the successful tests. Clause 18.0 also gives the rejection of the entire contract if found defective after handing over or commissioning. Now in the case of divisible contracts, each part will actindependently, and the risks are divisible. In this case, the risks are not divisible, and hence the risks assumed are as a whole and not for individual parts of the contracts.

m. Page 378 gives the agreement for foreign technicians' services for supervision of detailed engineering in India; manufacture of indigenous equipment; erection; blowing-in; commissioning; and demonstration of performance tests is also enclosed. Now foreign technicians were available throughout, providing supervision services at the site from initial design, engineering, and procurement to the commissioning side. Clause 1.2 on page 382 makes this clear. Also in clause 1.2.1, it is mentioned that supervision of detailed engineering in India is also done. There is supervision of the manufacture of indigenous equipment and also supervision of erection, blowing in operation, and commissioning. Now all the supervision for every part of the contract is carried out in one contract. This is not a divisible contract but a composite one. Here it can be noticed that supervision of detailed engineering has happened in India. This is much before the procurement stage. This is an EPC contract, and if engineering contracts are not divisible, then the procurement part and commissioning part can never be divisible. Also, the foreign technicians also conduct performance guarantee tests and all tests as prescribed by the contract. Now page 387 clearly gives the breakup of the above man-days as follows:

i.

Detailed engineering in India - 100 man-days

ii.

Manufacturing of indigenous equipment-150 man-days

iii.

Erection, blowing and commissioning, and demonstration of performance tests-4450 man-days.

On page 394 the deployment schedule clearly shows that foreign technicians were involved from the engineering to the commissioning stage. There is a master time schedule given in the technical specification that is the umbrella agreement, which is never disclosed to the department or ITAT.

n. Page 414 gives the agreement for technical assistance for sourcing various items, and the scope clearly shows that, as per clause 1.1.1 (page 419), therisks are not dual assessee is involved in pre-ordering activities and dispatching to receipt of the items from various vendors.

o. Now the superficial splitting of three agreements-one for the supply of equipment, design, and drawings; one for supervision services; and one for foreign technician assistance-shows that the scope was artificially split while the risk and liability for performance still continued as a whole. The contract was split, but the risk was not split. And again, supervision was all throughout the project, from engineering to commissioning. Now to say that the contract was not composite just because there are three separate agreements is completely not plausible since the supervision itself was not indivisible.

Judicial Precedents Applicable in this case

The Revenue submits that the facts of Paul Wurth are covered squarely by the ratio decidendi of the following landmark judgments. The table below illustrates the direct applicability:

Judicial Precedent	Core Legal Principle (Ratio)	Applicability to the Facts of Paul Wurth
Shanghai Electric Group Co. Ltd. v. DCIT' (ITAT Delhi)	Force of Attraction: Under DTAAS (like India-China/India-Italy), if a PE exists, profits from direct sales (offshore) effectively connected to the PE are taxable. Risk Transfer: If the seller bears risk until successful commissioning (despite FOB delivery), the sale is not "offshore" in substance.	PE Nexus: Paul Wurth has a PE involved in design, supervision, and statutory approvals. The offshore supply is "effectively connected" to this PE. Risk: Clause 17.7.17 retains risk until "Integrated Cold Test." Thus, like Shangbai Electric, the sale is not complete at the foreign port.
Ansaldo Energia SPA v. ITAT (Madras High Court)	Look-at Approach: Courts must look at the "entire conspectus" of the contract. If responsibility is "end-to-end" (Single Bidder), splitting into Supply/Services is a "facade." the contract	Single Responsibility: Paul Wurth acted as a single bidder. Clause 1.1.7 makes the contractor liable for the "entire contract as a whole." The splitting of contracts is artificial, mirroring the Ansaldo scenario where the subsidiary was a facade.
Durr Systems GmbH v. DCIT (TAT Chennai)	Two Stages of Risk: Even if title passes offshore, if "Risk over Completed Project" passes only commissioning, the Assessee has a PE in respect of offshore supplies. Storage PE: Storing goods at site creates a PE.	Deferred Risk: Paul Wurth's Clause 18.0 allows rejection of the entire contract (including supply) if the plant fails commissioning. This confirms that the "Risk over Completed Project" remains with Paul Wurth in India, creating a taxable nexus.
MERO Asia Pacific Pte Ltd (Authority for Advance Rulings)	Milestone Payments: If payments are released based on project milestones (e.g., testing, commissioning)	Payment Schedule: Schedule 2 of the Paul Wurth contract withholds payments until "Integrated Cold Test" and
	rather than just shipment, the contract is composite.	"Provisional Acceptance Certificate" (PAC). This links the payment for goods directly to the performance of services in India.

The Assessee's reliance on Ishikawajima-Harima is misplaced because, in that case, the Supreme Court found that the PE had no role in the offshore supply. In Paul Wurth, the PE's involvement is pervasive (design coordination, statutory approvals, inspection). Therefore, the later judgments of Shanghai Electric, Ansaldo, and Durr Systems-which distinguish Ishikawajima on the basis of PE involvement and risk retention-are the binding precedents applicable to this case.

Hence, it is humbly submitted that the department appeal on the fact that the assessee had a PE in India and hence the supply of equipment (including drawings and designs) was attributable to such PE, rendering the profits from such supplies liable for taxation in India owing to the force of attraction rule embedded in Article 7(1) of the India-Italy Treaty may be upheld. The Hon'ble CIT(A) has not appreciated the facts stated above. (emphasis supplied by us)

“1.

For 2012-13

a. The departmental grounds of appeal are the same, and there is no variation in this. The submission made in AY 2010-11 is applicable.

b. In para 3.3 of the assessment order, the AO has clearly mentioned that orders of AY 2010-11 are followed.

c. In para 3.4 of the assessment order, it is clearly mentioned that the assessee has admitted to PE. However, whether in certain years income is added or not is because of the project completion method recognition. The underlying fact remains that the supervision services were being done.

d. In para 4(iii), the AO has mentioned that M/s Paul Wurth India itself is a subsidiary since the Indian company has played a very important role in signing of the contracts, as evident from the signature of the authorized signatory of the Indian company on the contract. The Indian company has authority to conclude contracts. Again, the Indian AE premises is also at the disposal of the assessee. The assessee is an EPC contractor with a long history in India and has been doing business for a long time. To say PE does not exist is not correct.

e. In para 4(iv), it is clearly mentioned that the place of the project was at the disposal of the assessee and that supervision and installation were carried out by the assessee's employees.

f. Para 4(vii) discusses the force of attraction rule that once supervision services are offered, the entire amount becomes attracted. So, the AO has concluded that PE exists and the force of attraction is also attracted.

g. The arguments on the contracts submitted for AY 2010-11, that the contracts are one composite contract, are squarely applicable here. AO has discussed the same in paras 5.1 to 5.13 of the order.

h. However, on an alternate basis, AO has also held payments for designs and drawings as royalty/FTS in paragraphs 6 and 7.

i.

In para 8, the AO has clearly mentioned that supervision fees are offered.

j. In para 9, the AO has taken the entire receipts and attributed them to the PE based on force of attraction, and the same has been taxed accordingly.

2.

For 2013-14/2014-15

a. The departmental grounds of appeal are the same, and there is no variation in this. The submission made in AY 2010-11 is applicable.

3.

For 2015-16-There is no departmental appeal.

a. In the assessment order, the detailed description of the contracts is provided in para 5.

b. Para 5.1.1 gives the nature of payment, and also on supervisory services the TDS is also deducted.

c. Para 4 on page 10 gives the details of the existence of the business connection/PE.

d. Para 6 again provides the nature of contracts and effectively proves they are composite in nature. All the tests stated in the earlier submissions are also applicable in this.

e. Para 8.2, AO has clearly held that the payments on account of drawings of indigenous equipment are clearly linked to the PE and should be attributed to the PE. The entire contract is a single composite contract, and hence this cannot be done in isolation.

f. Para 9 clearly shows that the assessee has admitted that the receipts for such services are taxable in India.

g. Para 11 shows the AO has attributed only Rs 88,52,320/- to the PE, and since the same is below the monetary limit, no appeal has been filed by the department.

4.

It is very evident that the existence of the PE and non-divisibility of contract is proved beyond any doubt. In the case of Shanghai Electric Group Co. Ltd. vs. DCIT, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) provided a detailed analysis of the composite nature of contracts and the application of the Force of Attraction (FOA) principle. Below are the relevant paragraphs and legal extracts from the judgment.

1. On the Composite Nature of the Contract

The Tribunal concluded that the agreements for supply and supervision were not independent but formed a single, integrated transaction aimed at delivering a functional power plant.

Integrated Form: "The substance of all contracts very clearly indicates to be composite in form, as there is no division in the contract in respect of supply and services... the payments are not separately linked with services and supply, but is to be made on the basis of stages of completion of the contract irrespective of the equipment brought at the project site".

Inextricable Links: "On perusal of clauses under both the parts, it is clear that both the agreements are inextricably linked with each other".

Dominant Intention: "It is amply clear that the dominant intention of the parties was to set up a power plant in India... none of the agreements are executed exclusively for sale of BTG [Boiler, Turbine, and Generator] equipment".

Performance Guarantees: The Tribunal noted that the intention was for the property in equipment to pass only when it reached the site and functioned successfully, evidenced by the fact that the assessee provided "Performance Bank Guarantee and Advance Bank Guarantee to Owners... much before any payment is made".

Artificial Splitting: "Thus, splitting of this transaction under supply and services will be wholly artificial and neither will it have a rational basis, nor can it be recognized for the purposes of computation of profits attributable to the PE [Permanent Establishment]".

2. On the Application of Force of Attraction (FOA)

The Tribunal held that the India-China Double Taxation Avoidance Agreement (DTAA) incorporates a "Force of Attraction" rule through the "directly or indirectly attributable" clause in Article 7.

Philosophy of FOA: "The basic philosophy underlying the force of attraction rule is that when an enterprise sets up a permanent establishment in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can properly tax all profits... whether the transactions are routed and performed through the PE or not".

Scope of Taxability: Under this rule, profits are taxable if services are "relatable to the services rendered by the PE in India" and are "directly or indirectly attributable to the Indian PE".

Nexus with Indian Projects: "In effect, profits relating to services rendered by assessee, whether rendered in India or outside India, in respect of Indian projects are taxable in India, and are attributable to the supervisory PE... as they are effectively connected with each other".

3. Business Connection and Profit Attribution

Business Connection: The Tribunal found a "real and intimate relationship" between the assessee's activities outside and inside India, establishing a business connection under Section 9(1)(1) of the Income-tax Act.

Attribution Rate: Based on a Functions, Assets, and Risk (FAR) analysis, the Assessing Officer attributed 25% of the global profits accruing from offshore supplies to the Indian PE, a calculation the Tribunal upheld.

The above judgements ate squarely applicable in the current case and as furnished in earlier hearings is applicable for all the other years.

In the case of [2023] 157 taxmann.com 679 (Delhi Trib.), Pico Deepali Overlays Consortium (By Deepali Designs Exhibits (P.) Ltd.), the Hon'ble Delhi Tribunal has dealt with this in elaborate detail on what constitutes a composite contract.

Establishing the status of a consortium as an Association of Persons (AOP) depends on whether its members act as a unified entity for a common project. In the case of Pico Deepali Overlays Consortium vs. DCIT, the Delhi ITAT determined that despite internal work-splitting, the consortium functioned as a single "whole composite contract" and was therefore taxable as an AOP.

1. Determination of a Unified Project (Composite Nature)

The Tribunal emphasized that tax liability is determined by the "project" as a whole, rather than by how members split work internally.

Whole Project Objective: The consortium was formed to accomplish a "project" as a whole, which encompassed operations, supplies, and services required for the full completion of the contract.

Irrelevance of Internal Assignment The internal assignment of works among members was considered irrelevant for determining statutory tax obligations.

Consortium as a Tax Unit: The intention was for the consortium to be assessed as a single unit for tax purposes.

2. Unified Control and Management

A critical indicator of an AOP is the presence of a centralized authority overseeing the entire project.

Supreme Board: A "Board of the JV" acted as the supreme body to decide on all issues regarding policy, organization, and project execution supervision.

Supervisory Power: This Board held supervisory power even over the specific scope of work assigned to individual members.

Common Representative: The appointment of a common representative with powers of general management and quality control supervision further evidenced unified control.

3. Joint Liability and Risk Sharing

The shared risks and collective accountability to the contractee (CWGOC) supported the AOP status.

Joint and Several Liability: Members agreed to be jointly and severally liable to the client for fulfilling project requirements and contractual or legal obligations.

Collective Risk: Even with assigned scopes, members were not independently responsible for the risk of their specific work. Shared Costs: General deductions from payments by the client were apportioned among members (e.g., 80% to two members and 20% to the third), showing shared financial risk.

Unified Insurance: A common representation was authorized to obtain insurance policies in the name of the consortium for all JV activities.

4.

Profit and Revenue Sharing Despite claims of being an "independent contractor," the financial arrangements indicated mutual interest.

Revenue Forfeiture: One member (Deepali Designs) agreed to "forego 23 per cent of its gross revenue" to another member, which the Tribunal classified as revenue sharing.

Future Contract Sharing: Provisions existed for sharing the value of any new contracts awarded to the consortium, further proving ongoing unified interest.

Judicial Precedents Distinguished The Tribunal distinguished several case'laws and rulings that the appellant cited to support its claim of being an independent contractor rather than an AOP member. The Tribunal noted that each case must be determined on its own distinctive facts and that none of the following cases featured the specific clauses found in Pico Deepali regarding how statutory tax obligations for the project were to be fulfilled.

The distinguished judicial precedents include:

 Van Oord Acz Bu, In re  Hyundai Rotem Co. Korea/Mitsubishi Co., In re  Linde AG, Linde Engineering Division v Dy. DIT  CIT. Oriental Structural Engineers (P.) Ltd.  ADIT & Persys Punj Llyod JV  Soma TRG Joint Venture v. CIT  ITO.JMC PPPL (JV)  ACIT. RNGS Consortium  ITO v. Kalindee Karthik JV  ITO. LOT HCC Joint Venture  Backbone Projects Ltd. v. ITO  Pr. CIT v. Backbone Projects Ltd.  G. Murugesan & Brothers v. CIT The two judgements of the Delhi Tribunal have laid down a precedent, and the facts of the assessee's case are covered by these judgements. Hence, it is humbly submitted that the above may be considered. Apart from this, the following judgments shared in the last hearings are also applicable. This detailed analysis examines the legal principles established in the provided case laws regarding the characterization of contracts as composite and indivisible, and the resulting tax implications for foreign enterprises and consortiums in India.

1.

The Doctrine of Composite Indivisible Contracts A contract is treated as composite when multiple activities such as engineering, offshore supply, and onshore services are so interlinked that they form a single integrated project.

 Inextricable Links: In M/s. Durr Systems GmbH, the Tribunal concluded that "all the activities... from engineering stage to commissioning stage were inextricably and originally linked". Even though the contract was split into three parts at the instance of the assessee, it was held to be a "single composite contract" because the contractor's liability ceased only upon successful execution of the entire turnkey project.

 End-to-End Activity: Similarly, in J.M. Voith SE & Co. KG, the ITAT Delhi Bench found that the assessee was given an "integrated end-to-end activity" of setting up a paper mill on a turnkey basis, covering design, supply, and performance runs.

 Facade for Tax Purposes: In M/s. Ansaldo Energia SPA, the Madras High Court confirmed that split contracts were a "facade" and that they were "interlacing". The Court noted that the splitting was for the convenience of the assessee and that the client (NLC) safeguarded its interest by fixing "overall responsibility" on the appellant.

2.

Determinants of Taxability and Permanent Establishment (PE) When a contract is found to be composite, income from offshore supplies (which is normally non-taxable if title passes abroad) may be taxed in India if a Permanent Establishment is involved.

 Custody and Risk Transfer: In Durr Systems, the Tribunal held that because imported materials were kept in a "Storage area on site" under the assessee's custody until installation, the "passing of Risk on Equipment to customer is to happen only... post installation". This presence of a site office/storage area for more than the threshold period constituted a PE.

 Payment Milestones vs. Sales: In Shanghai Electric Group Co. Ltd., the Tribunal noted that payments were not separately linked with services and supply but were made "on the basis of stages of completion of the contract irrespective of the equipment brought at the project site". This indicated the contract was composite in form.

 Organic Linkage: The AAR in MERO Asia Pacific Pte Ltd. emphasized that the Project Office (PE) played a "significant role in design, selection and procurements of materials" used in India, creating an "organic link" between activities inside and outside India.

3.

Consortiums as an Association of Persons (AOP) When entities form a consortium for a single project, they are often assessed as a single taxable unit (AOP) if they act with unified control.

 Unified Project Objective: In Pico Deepali Overlays Consortium, the ITAT held that tax liability was to be determined for the "project as a whole". The assignment of works inter-se was irrelevant for statutory tax obligations.

 Joint and Several Liability: The members' agreement to be "jointly and severally liable... in respect to the fulfillment of the requirement of the project" was a key factor in establishing AOP status.

 Unified Management: The existence of a "Board of the JV" as a "supreme body...to decide upon all the issues regarding policy and organization" evidenced unified control and management.

The above submissions may be taken on record, and based on the detailed discussions and arguments presented, it is requested that the Hon'ble Bench may hold that the contracts are composite in nature and, on account of the Force of Attraction attribute, profits to the PE on similar activities or projects carried out by the assessee. PE has come into existence right from the beginning of the bidding of the contracts to the commissioning of the contracts and post-commissioning of the contracts. The assessee has also not denied the supervisory PE. The argument of the assessee and CIT-Appeals that PE does not arise is completely unacceptable.

5.

Since there was very little time for preparation and all the paper books and appeal sets have been sent only on Friday night, it is humbly requested that time be permitted for the department to file a short synopsis of any further arguments countering the arguments made by the assessee. This is only for any additional arguments taken by the assessee. Notwithstanding this, the submission made for AY 2010-11 is comprehensive and laysdown the direction of the department's arguments. It is humbly submitted that the Hon'ble bench can investigate any new contracts from the decision and decide as per the merits of each case.” (emphasis supplied by us)

“C. DEPARTMENT'S APPEAL BEFORE ITAT (AY 2010-11, AY 2012-13, AY 2013- 14 and AY 2014-15)

5. Taxability of offshore supply of equipment, integrated designs, spare parts and designs for indigenous equipment and civil works

5.1.

This issue relates to the addition made by Learned AO in respect of taxability of consideration for offshore supply of equipment, designs and spare parts. The Learned AO erroneously held that the title in respect of the aforesaid goods had passed in India and that the assessee has a 'business connection' in India and, thus, revenue therefrom is liable to tax in India.

The Learned AO also wrongly held that the assessee has a fixed place PE in terms of Article 5(1) of the DTAA in the form of its Indian group entity, namely, Paul Wurth India Private Limited ("PW India"), as well as the site of the customer at which onshore services are rendered. Consequently, the Learned AO held that revenue from offshore supply of plant and equipment, designs and spare parts is attributable to the alleged Fixed Place PE in India and, therefore, taxable in India.

5.2.

While holding so, the Learned AO wrongly observed that the assessee had undertaken marketing activity, manufacturing activity, signing of contracts, conclusion of sale etc from such alleged PE in India. Based on such wrong notion, the Learned AO arbitrarily assumed an attribution rate of 50% of the global profits relating to such offshore supplies.

5.3.

In the appellate order for the AY 2010-11, the Hon'ble CIT(A) granted full relief to the assessee on the issue of taxation of offshore supply of plant and equipment, designs and spare parts. In the appellate order for the AY 2012-13, AY 2013-14, AY 2014-15 and AY 2015-16, the Hon'ble CIT(A) followed the order of AY 2010-11 and granted relief to the assessee on the issue of taxation of supply of plant and equipment, integrated design and spare parts. However, in the orders of the aforesaid subsequent years, consideration for designs related to indigenous equipment and civil works was re-characterised as Royalty / FTS. The assessee's contentions in this regard and rebuttal to the observations made by the Ld. AO are summarised hereunder:

Property in respect of goods passes to buyer outside India

5.4.

At the outset, it is submitted that where all activities in relation to offshore supplies, such as manufacture, design, fabrication as well as sale of such goods is completed outside India, no part of the income from such supplies can be said to accrue or arise in India in terms of the provisions of Act. Furthermore, where the consideration for such supplies is received outside India in foreign currency, no income can be said to be received or deemed to be received in India.

5.5.

It is submitted that the sale of goods is said to be complete outside India where the property in respect of the goods pass to the buyer outside India. In various judicial pronouncements dealing with supply of machinery in turnkey contracts, it has been held that where the title / ownership in respect of the goods passes to the buyer at high seas, income from such offshore supplies is not liable to tax in India in terms of the Act.

5.6.

In the instant case, all activities relating to manufacture, design, fabrication etc. of the plant and machinery has taken place in the factory of the assessee company in Italy. As per the relevant terms of the contract entered into with the Indian customers, the risk and title in the goods passed outside India. On sample basis, relevant terms of the offshore supply contract with TSL (Project M1030) are reproduced below for ease of reference:

 Incoterm: INCOTERM has clearly been mentioned as Free on Board ('FOB), in terms of which, the ownership in the goods was transferred to the buyer as soon as the goods were loaded on the vessel at the port of embarkment [Refer Clause 1.1.1 (page 237 of Paper-book AY 2010-11) / clause 2.1 (page 241 of Paper-book AY 2010-11)].

 Payment Terms: Payment was made outside India in foreign currency through telegraphic transfer/ Irrevocable Letter of Credit, wherein, 90% as advance or at the time of delivery (unrelated to onshore services) [Refer Clause 4.2.1 and 4.2.2 (page 250 of Paper-book AY 2010-11)].

 Responsibility for Clearance: Tata Limited, London are the buying agent and authorised to liaise and make shipping arrangements on behalf of TSL i.e., purchaser. Further, TM International Logistics, Kolkata is the clearing agent of imported equipment on behalf of TSL [Refer Clause 5.2 (page 252 of Paper-book AY 2010-11), 5.4.2 (page 253 of Paper-book AY 2010-11) and 5.5 (page 254 of paper-book AY 2010-11)].

 Custom Clearance: Buyer i.e. TSL is responsible for custom clearance and payment of custom duty [Refer Clause 5.3 (page 253 of Paper-book AY 2010-11) and Clause 2.3.2 (page 242 of Paper-book AY 2010-11)].

 Shipping Arrangements: Shipping arrangements on behalf of buyer i.e., customer to be done by an independent party, TKM GmbH [Refer Clause 5.4.2 (page 253 of Paper-book AY 2010-11).

 Responsibility for insurance: Buyer l.e., TSL is responsible for arranging and paying for Insurance [Refer Clause 2.3.3 (page 242 of Paper-book AY 2010-11)].

5.7.

The Indian Courts have unequivocally held that where goods are sold on Free On Board (FOB) / Cost Insurance Freight (CIF) basis through a letter of credit, and

shipping documents are handed over to the buyer or his agent, the title in respect of the goods passes to the buyer outside India. Thus, in such cases, sale of goods is complete outside India and, therefore, no part of the income from offshore supplies is liable to tax in India under the provisions of the Act.

5.8.

In this regard, reliance is placed on the Judgement of the Hon'ble Supreme Court in Ishikawajima-Harima Industry Ltd. v. DIT [2007] 288 ITR 408, wherein, it was held that where the transfer of property of the goods is transferred outside India on CFR basis, the transaction could not be taxed in India (paragraph 79 of the Judgement).

5.9.

It is also worthwhile to refer to the Judgement of the Hon'ble High Curt of Delhi in Linde AG v. DDIT [2014] 268 CTR 274, wherein, at paragraph 90, it was held that the term FOB clearly indicates that the ownership of the material to be supplied by Linde would transfer to OPAL, the moment the materials were placed for shipment. In the facts of Linde AG (supra), the payment was undertaken through a letter of credit and the buyer (OPAL) was named as the consignee.

5.10.

In Mahabir Commercial Co Ltd v. CIT [1972] 86 ITR 417, the Hon'ble Supreme Court held that where the seller had sold goods on CIF basis through a letter of credit and handed over the shipping documents to the buyer or his agent, the sale of goods was complete outside India. Therefore, the Hon'ble Court concluded that the profit from sale was not liable to tax in India.

5.11.

The High Court of Delhi In DIT v. LG Cables [2011] 237 CTR 438, was concerned with similar facts where the shipping documents clearly showed the name of the buyer (PGCIL) as the Importer. The terms of the contract indicated that the title in respect of the goods passed to the buyer as soon as the goods were loaded on the ship at the port of shipment and the shipping documents were handed over the nominated bank where the letter of credit was opened. The Hon'ble Court while relying on the Apex Court's decision in Ishikawajima (supra) held that the sale in respect of the equipment supplied was concluded outside India and, thus, no part of such income could be brought to tax in India.

5.12.

In the instant case, the goods were delivered by the seller (i.e., the Assessee) to the carrier (shipping company) on FOB basis and, therefore, the ownership of the plant and equipment passed to the buyer upon loading onto the vessel in Germany. Also, the payment has been effectuated through Letter of Credit and therefore, the relevant title documents were already handed over to the bank. Moreover, the buyer is named as the 'consignee' of the goods. Furthermore, the case of the Assessee is on an even stronger footing, inasmuch as it the Assessee was not responsible for payment of custom duty and port clearances, which demonstrates that the buyer was the owner of the goods much before the goods had crossed the taxable boundaries of India. Here it may be mentioned that in the facts of Ishikawajima (supra) and LG Cables (supra), the Assessee was responsible for custom clearances.

Thus, in the instant case, it is amply clear that the property in respect of the goods had passed to the buyer, l.e. TSL, outside the taxable territories of India.

5.13.

The aforesaid view is followed in various decisions of the Hon'ble Delhi Bench of the Tax Tribunal. In this regard, reliance is placed on the following decisions wherein, in similar facts, it was held that where the ownership in respect of the goods had passed to the buyer outside India, the income from offshore supplies is not taxable in India:

 DSD Noell GmbH v. DCIT [2023] 157 taxmann.com 64 (Delhi - Trib.);

 DDIT v. Mitsui & Co. Ltd. [2020] 118 taxmann.com 379 (Del-Trib.);

 Schindler China Elevator Company Ltd. v. ACIT [2023] 103 ITR(T) 567 (Delhi-Trib.); and  Smiths Detection Asia Pacific Pte. Ltd v. DCIT [TS-19-ITAT-2025 (Del-Trib.)]

5.14.

However, in total ignorance of the aforesaid facts and legal position which were furnished during the course of the assessment, the Learned AO erroneously observed that the Appellant had failed to substantiate that the title had passed outside India (paragraph 5.3 of assessment order of AY 2010-11). Instead, the Learned AO misdirected himself by applying the provisions of section 24 of the Sale of Goods Act, 1930 (hereinafter, referred to as "SOGA") and holding that title transferred only when the buyer was satisfied with the quality and condition of the goods.

5.15.

The Learned AO failed to appreciate that the subject goods ought to be regarded as 'future goods' in terms of section 2(6) of SOGA. Section 23 of the SOGA governs the passage of title in respect of future goods. In terms of Section 23, the title passes when the goods are unconditionally appropriated. It is also provided that where the seller delivers the goods to the buyer or carrier or a bailee without any 'right of disposal, the seller is deemed to have unconditionally appropriated the goods to the contract. In the instant case, the goods have been delivered by the seller (i.e., the Assessee) to the carrier (shipping company) on FOB basis. Furthermore, the payment has been effectuated through Letter of Credit, i.e., the relevant title documents have been handed over to the bank. Furthermore, the buyer has been named as the consignee of the goods. Thus, it is amply clear that the seller did not retain any control over such goods. Moreover, nowhere does the contract indicate that the seller has retained the right of disposal of the goods.

5.16.

Acceptance Test Clause is an irrelevant clause for passage of title: The learned AO also wrongly inferred that presence of an acceptance clause results in passing of title in India. In this regard, it is submitted that in various decisions it has been held that acceptance test is not relevant for determining transfer of title. This position has been settled beyond doubt by the Hon'ble Delhi High Court in the case of LG Cables (supra), wherein, it was held that the mere fact that 15% of the payment was to be retained by the buyer after operational acceptance on erection and completion of the system cannot be construed to mean that the title in the goods did not pass to the buyer in the country of origin. A similar view was taken in another decision of the Hon'ble Delhi High Court in Nortel Networks India International Inc. v DIT [2016] 386 ITR 353 and the decision of the Hon'ble Delhi Bench of the Tribunal in DSD Noel (supra).

5.17.

Right to Reject is an irrelevant clause for passage of title: Further, the Ld. AO has contended that the Indian customer i.e., Tata Steel Limited has retained the right to reject the goods supplied and, therefore, the ownership in the goods passes only after the same reach India. Such an inference drawn is grossly incorrect as mere right of rejection cannot be construed to indicate that the title in the goods passed in India after delivery of goods. What is relevant is whether such a right to reject results in 'repudiation' of contract.

5.18.

The learned AO Ignored Clause 15.1 (Page 274, Paper-book AY 2010-11) and Clause 18.1 (Page 278, Paper-book AY 2010-11) of the offshore supply contract which clearly states that if a 'right to reject' is exercised, the Contractor (l.e., the Assessee) shall be required to make the goods comply with the requirements of the contract. In other words, the contractor is required to make good the defect. Even if the contractor fails to rectify the defect, the necessary portion (whole or part, depending on the defect) shall be replaced by the purchaser at the cost of the Contractor. Similar provisions are also incorporated in Clause 8.2 to 8.4 (Page 261-262, Paper-book AY 2010-11) of the offshore supply agreement which deals with repairs within 12 months period of integrated cold tests.

5.19.

Thus, the Purchaser does not have the right to repudiate or cancel the contract, incase any defect is found in any part of the equipment so supplied. Moreover, such defects in a part of the equipment shall not relieve the contractor from performing the remaining part of its contract. As per clause 25.2.1.1 to 25.2.1.4 (Page 283, Paper-book AY 2010-11), the situations whereby the Purchaser can cancel the contract are mentioned and none of the situations listed therein envisage a case where goods supplied are defective.

In this regard, reliance is placed on the judgement of the Hon'ble Supreme Court in the case of Mahabir Commercial Co. Ltd. (supra) and Hon'ble Delhi High Court in the case of LG Cables Limited (supra) wherein, the Court has held that mere right to examine and repudiate the goods does not postpone the passage of title in the goods supplied. The Hon'ble Supreme Court in Mahabir Commercial Co. Ltd. (supra) held ... 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..."

Further, Hon'ble Delhi High Court in Para 31 in its decision of LG Cables Limited (supra) held ... The buyer's right to examine and repudiate the goods in law does not, by itself, indicate that the property in the goods had not passed..."

Contracts cannot be treated as composite 'works' contract

5.20.

The Ld. AO had alleged that the contracts for offshore supplies and onshore services were artificially split and must be regarded as a composite contract. It is humbly submitted that separate contracts were entered into for the offshore supply of goods (page 231, Paper-book AY 2010-11), vis-à-vis onshore supervisory services (page 378, Paper-book AY 2010-11), which is undisputed. Each portion of the work had a separate scope, pricing, payment terms, obligations and responsibilities.

5.21.

Even otherwise, the AO has failed to note the meaning of 'work' in the context of the offshore supply contract. As per clause 1.1.1 (page 237 Paper-book) to clause 1.1.6 (page 238 Paper-book) of the Offshore Supply Contract, the scope of work is only limited design, inspection, testing and supply of imported equipment and materials.

5.22.

Further, the issue of composite contracts stands settled decisively by the Hon'ble Supreme Court In Ishikawajima-Harima Heavy Industries Ltd (supra). In the facts of the aforesald decision, one single turnkey contract was entered into, with a clear demarcation between scope, pricing, responsibilities for offshore work vis-à-vis onshore services. The Hon'ble Court observed that the supply segment and service segment were dealt with separately. Applying the principle of apportionment and doctrine of territorial nexus, the Court held that only such part of the income as is attributable to the operations in India is liable to tax in India. Considering that all parts of the transaction of supply of equipment was carried on outside India, the transaction of sale couldn't be taxed in India.

5.23.

The case of the assessee is on a stronger footing, inasmuch as separate contracts are entered into for offshore portion and onshore portion. Also, it is reiterated that all activities relating to offshore supplies such as manufacture, design, fabrication and sale of such goods was completed outside India and, thus, income thereof cannot be brought to tax in India. The aforesaid view of the Supreme Court was also followed by the High Court of Delhi in the case of LG Cables Limited (supra) and Ericsson AB [2012] 343 ITR 470.

5.24.

Moreover, whilst erroneously concluding that the contracts entered into by the assessee with Indian customers are composite 'works' contract, the learned AO placed reliance on certain judicial pronouncements which are not even applicable on the facts of the instant case on account of the following reasons:

Decision relied by Learned AO	Rebuttal
Hindustan Shipyard v. State of AP [(2000) 6 SCC 579 (SC)	Distinguished in Ishikawajima (supra) as the same relates to Indirect tax law
Vodafone International Holdings B.V. v. UOI 317 taxmann.com 202 (SC)	Distinguished in Linde AG (supra) as the 'look at approach' only related to tax avoidance scheme and doesn't decide the issue of 'situs' as is relevant for the instant case. Also distinguished in Michelin Tamil Nadu Tyres (P.) Ltd. [2018] 401 ITR 164 (AAR New Delhi)
Advance Rulings in Alstom Transport SA [2012] 349 ITR 292 and Roxar Maximum Reservoir Performance WLL [2012] 349 ITR 189	Distinguished in DIT v. Nokia Networks ΟΥ [2013] 358 ITR 259 (Del) and Nippon Steel Engineering Co. Ltd., In re [2021] 431 ITR 453 (AAR New Delhi), as in the facts of such cited Advance Rulings, the assessee was performing installation activities. In the instant case, the assessee is not performing installation activities. Furthermore, Alstom Transport SA (supra) was also distinguished in Michelin Tamil Nadu Tyres (P.) Ltd. (supra).

Indian Group Entity cannot be regarded as a Fixed Place PE

5.25.

At the outset, the Learned AO wrongly presumed that PW India is an Indian subsidiary of the assessee. It may be mentioned that PW India is only a related party of the assessee and not a subsidiary. The Learned AO has wrongly presumed that a Fixed Place PE of the assessee gets constituted in India as PW India has played a role in signing of contracts in India. The learned AO has failed to demonstrate as to how PW India has satisfied the test prescribed under Article 5 of the DTAA to constitute a Fixed Place PE in the hands of the assessee.

5.26.

In this regard, it is submitted that contract with the Indian customer was signed by the AGM of PW India (Mr. S Dipam) only as a witness to the Agreement. Having a witness to a written Contract is an essential requirement of law and the same, cannot, by any stretch of imagination, lead to an inference that the Indian group entity had any role in the signing of the contract. In this regard, reliance is placed on the decision of Hon'ble Delhi High Court in the case of Ericsson AB (supra).

5.27.

Even otherwise, in terms of Article 5(6) of the DTAA, it is amply clear that the mere existence of a subsidiary does not lead to creation of a PE in India. Further, in various decisions, it is held that subsidiary cannot, all by itself, lead to constitution of PE which have been reproduced herein below:

 DIT v. E-Funds IT Solution Inc. [2016] 240 Taxman 298 (SC);

 Bombardier Transportation GmbH v. DCIT [2023] 154 taxmann.com 18 (Del); and  Nokia Networks OY v. JCIT [2018] 94 taxmann.com 111 (Delhi - Trib.) (SB)

5.28.

Therefore, it follows that incidence of a fixed place PE does not arise in the hands of the assessee and, thus, the finding of the Learned AO is unfounded.

Installation site of the customer cannot lead to constitution of a Fixed Place PE

5.29.

The Learned AO has wrongly presumed that the installation / commissioning site of the customer is a fixed place PE since such site is at the disposal of the assessee and is being used for carrying out the core business activities of the assessee.

5.30.

It is settled beyond doubt by the Hon'ble Supreme Court in Formula One World Championship Ltd. v. CIT [2017] 80 taxmann.com 347 that a site can be regarded as a 'Fixed Place PE' only if there is a 'dominant control' over such site.

Further, the Hon'ble Delhi High Court in the case of Progress Rail Locomotive Inc. (Formerly Electro Motive Diesel Inc.) v. DCIT [TS-374-HC-2024 (Del)] and PCIT v. Samsung Electronics Co. Ltd. [TS-21-HC-2025 (Delhi HC)] has held that a fixed place PE is not constituted in respect of an Indian subsidiary sans satisfaction of disposal test.

5.31.

In the instant case, the employees of the assessee merely have access to the site office where they perform supervisory activities. Such employees cannot carry out any business activity for any other customer and enter or exit such site as a matter of will or right. The facilities shared by the Indian customer namely, TSL, continues to remain under the control of TSL only. As such, the site is restricted only to supervisory activities pertaining to the project of TSL. Thus, the site cannot be regarded as a Fixed Place PE of the assessee.

Issue of Attribution to PE and Applicability of Force of Attraction under Article 7(1)

5.32.

It is reiterated that all activities relating to offshore supplies such as manufacture, design, fabrication, sale etc. were completed outside the taxable territories of India. Where no operation relating to supply is carried on in India, no question of incidence of tax arises in India under the provisions of the Act. This aspect is evident from a bare reading of Explanation 1(a) to section 9(1)(i) of the Act which states as under:

"Explanation 1.-For the purposes of this clause-

(a)

in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India"

5.33.

Even under the provisions of the DTAA, the supervisory PE under Article 5(2)(j) had no role to play in the activity of supply of goods, the activities of which were carried on outside India. This is due to the fact that supervisory activities is a stage subsequent to the completion of supply of goods. As such, it is submitted that the PE came into existence only after the offshore supplies were complete and, thus, attribution to such PE is unwarranted. In this regard, one may usefully refer to the Judgement of the Hon'ble Supreme Court in the case of CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482 and the Delhi High Court in LG Cables Limited (supra) wherein it was held that mere existence of PE does not warrant attribution as the PE should be involved in the business activity of the offshore supplies.

5.34.

However, in the assessment order, the Learned AO has erroneously held that the mere fact that the assessee has admitted to a supervisory PE, It exposes itself to the entire gamut of income that it earns in India, whether or not through the PE. While observing so, the Learned AO heavily relied on the Force of Attraction ("FOA") clause in Article 7(1) of the DTAA.

5.35.

At the outset, it is submitted that the concept of FOA clause exists only under tax treaties rather than the provisions of the Act. It is axiomatic that the FOA clause, even if included in a particular tax treaty, cannot expand the scope of taxation under the provisions of the Act. As already submitted, income from supply of plant and equipment, designs and spare parts is not liable to tax under the provisions of Section 5 read with section 9 of the Act inasmuch as no part of the operations relating to supply of equipment is carried out in India. Therefore, expansion of the scope of taxation by invoking the FOA clause is unwarranted.

5.36.

Without prejudice, even under the provisions of the DTAA, the FOA clause is not applicable in the facts of the instant case. The Learned AO has failed to appreciate that the FOA clause operates only if sales or business activities are carried out 'in the other State'. As such, only the income in relation to the sales or business activities carried out in India fall under the scope of the FOA clause.

5.37.

As mentioned in above, the entire activities such as designing, fabrication, sale etc. pertaining to offshore supply of equipment, spares and designs were carried outside India, Thus, neither any sales were made 'in' India nor any business activities qua the offshore supplies were carried out in India.

In the instant case, the DTAA incorporates only a 'limited' FOA rule. The equipment, spares and designs supplied cannot be regarded as 'same or similar to onshore supervisory activities or even as 'business activities'. The aforesaid has been dealt by the Hon'ble Mumbai Bench of the Tribunal in the case of DCIT v. Roxon ΟΥ [2007] 106 ITD 489, wherein, the Hon'ble Tribunal was examining the applicability of the FOA clause under the old DTAA between India and Finland (which is identical to the FOA clause in the India-Italy DTAA), in a case involving a turnkey contract. While referring to the commentary to the UN Model Tax Convention, the Hon'ble Bench held that in order to invoke the FOA clause, the PE should also be involved in the same or similar activities. An installation PE comes into existence only due to installation activities, rather than activities of sale from such PE. The Bench held that supply of equipment from the head office cannot be regarded as same or similar to the activities of installation. Even otherwise, the stage of an installation PE comes much later than the supply of equipment. Thus, the Hon'ble Bench concluded that the question of invoking the FOA Article 7(1)(b)] clause to an installation PE would never arise. As regards applicability of Article 7(1)(b), i.e., the FOA on account of business activities, the Hon'ble Tribunal held that the question of applicability of this clause in respect of sale of goods does not arise. In view thereof, the invocation of FOA clause by the Learned AO in the facts of the instant case is unfounded.

5.38.

During the course of the hearing held on 17.12.2025 before your Honours, the Departmental Representative ("Learned DR") had placed heavy reliance on the FOA clause and also filed written submission dated 17.12.2025 in this regard. The assessee's detailed rebuttal to such arguments put forth by the Learned DR are provided in Appendix to the instant submissions.

Excessive rate of attribution

5.39.

Without prejudice to the aforesaid contention of the assessee, the Learned AO erred in applying an ad-hoc, arbitrary and highly excessive attribution rate of 50% to the revenue of offshore supplies. Whilst doing so, the learned AO wrongly held that the assessee's major activity comprised of marketing activity as well as part of manufacturing activity such as signing of contracts, training activity, conclusion of sale, installation, commissioning, testing etc. which took place on the Indian soil and are fully related to the activities in India and to the Indian projects.

5.40.

It is submitted that he aforesaid contention of the Learned AO is erroneous on the following counts:

a)

place of signing is of no consequence as held by the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Company Ltd.(supra);

b)

as established the title had passed outside India and, therefore, the sale cannot be said to be concluded in India;

c)

the learned AO failed to produce any evidence of carrying of any manufacturing or marketing activity by the assessee in India;

d)

the assessee did not perform any installation service but rather only supervision; and

e)

it is erroneous to factor in activities like training, commissioning, testing, supervision etc. in the attribution rate, as the said activities are already taxed in the hands of the assessee.

As such, no activity is performed in India qua the offshore supplies which warrants such an excessive attribution rate.

5.41.

For justifying excessive attribution rate, the reliance placed by the Learned AO on Rolls Royce PLC vs. DIT [2011] 339 ITR 147 (Delhi) in which an attribution rate of 35% was upheld is distinguishable on facts. In said decision, consumer goods were being sold by the non-resident through its Indian subsidiary which was carrying out marketing activities. However, in the instant case no marketing or manufacturing activities were being carried out in India.

5.42.

In this regard, it is reiterated that revenue from offshore supplies is not attributable to the Supervisory PE of PWIT in India as the said PE has no role to play in such offshore supplies. Accordingly, income from offshore supplies is not liable to tax in India.”

“REBUTTAL OF LEARNED DEPARTMENT REPRESENTATIVE'S SYNOPSIS

The Assessee, M/s. Paul Wurth Italia S.p.A ("the Assessee") hereby submits as under the point-wise rebuttal of the synopsis dated December 17, 2025, and December 22, 2025, filed by Learned Department Representative ('DR'):

A. Rebuttal of Synopsis dated December 17, 2025

S. No.	Para Reference	Learned DR Synopsis	Rebuttal of Synopsis
1	Para 4 (page2/13)	The Force of Attraction ("FOA") clause in Double Avoidance Taxation ("DTAA") Agreement between India and China are identical to the FOA clause in DTAA between India and Italy.	Article 7(1) of the applicable DTAA between India and China (as it stood at relevant time) employed a full FOA clause whereas, the DTAA between India and Italy employs only a limited FOA clause. As such, the FOA clause in both the treaties are not identical. Also kindly refer to para 5.32 to 5.38 of written submissions, wherein, it is submitted that the FOA is not applicable in the case of installation /supervisory PE
2	Para 6 (Page 5/13)	In Hon'ble Supreme Court decision of Ishikawajima Harima Heavy Industries Company Ltd. v. DIT [2007] 288 ITR 408, the Court dealt with the divisible contract.	In subject decision, the Assessee had entered into a single composite contract containing separate scope of work (1) offshore supply; (2) offshore services; (3) onshore supply; and (4) onshore services. As such, the contention of existence of divisible contracts in Ishikawa's Case is erroneous.
3	Para 6 (Page 5/13)	The Assessee in the present case acted as a single bidder for a turnkey solution.	The aspect of single bidder is irrelevant for determining taxability of offshore supply of goods.
4	Para 6 (Page 5/13)	The risk of equipment does not transfer to the customer at the foreign port of shipment but remains with the Assessee till successful commissioning of the blast furnace in India.	The title as well as risk of loss in the equipment got transferred to the customer at the foreign port of shipment (Refer Para 5.4 to 5.19 above of our detailed submissions). As held by the Delhi High Court in LG Cables [2011] 237 CTR 438, this aspect is irrelevant and does not postpone the passage of title.
5	Para 7(a) (Page 6/13)	As per Page 231 of Paper-book AY 2010-11, Assessee has entered intoa single contract with customer, TATA Steel Limited, Jamshedpur for I Blast Furnace.	Assessee has entered into separate contracts for offshore supplies vis a vis onshore service. Please refer to Para5 of our synopsis for details of contracts. Thus, the Ld. DR has proceeded on a wrong footing. Elsewhere in Para 7(b) (Page 6/13), learned DR has himself contradicted by stating that"..the separate contracts for supply and services are merely subsets or execution modules of this overarching understanding...".
6	Para 7(b) (Page 6/13)	As per Page 237 of Paper-book AY 2010-11, Clause 1.0 (General) of Schedule 1 gives scope of work and technical specification. This technical specification acts as an "Umbrella Agreement" or "Master Service Agreement" that governs every subsequent transaction. The separate contracts for supply and services are mere subsets.	The learned DR has grossly erred by considering the technical specification as the "Umbrella Agreement" or "Master Service Agreement". The technical specifications primarily contain proprietary information about technical aspects of the project and are therefore irrelevant. Even otherwise, in the below mentioned judicial pronouncements, it has been held that such umbrella contracts/overall responsibility clauses are irrelevant: Ericsson AB [2012] 343 ITR 470 (Del) (Refer Para 44), and DIT v. Nokia Networks ΟΥ [2013] 358 ITR 259 (Del) (Refer Para 19 and 20)
7	Para 7(c) (Page 6/13)	As per Page 238 of Paper-book AY 2010-11, Clause 1.1.7 (Contractor's Responsibility for Completeness), the contractor is made liable for the entire contract.	As per subject clause, the Contractor is only made responsible for ensuring completeness of supply of plant machinery and equipment undertaken under offshore supply contract of imported plant machinery and equipment. Further, under Clause 1.1 (Scope of Work) in Schedule 1 (Refer Page 237 of Paper-book AY 2010-11), the Contractor (i.e., Assessee) is only responsible for undertaking supply of imported equipment and as such, is not responsible for any other scope of work which are covered under separate contracts. This is evident from clause 31 (Refer page 287 of the paperbook of AY 2010-11) wherein, Total Liability under the Contract is restricted to the consideration value of offshore supplies. It is therefore submitted that the risks are also divisible in the facts of the instant case.
8	Para 7(d) (Page 7/13)	As per Page 239 of Paper-book AY 2010-11, Clause 1.1.11 (Submission of Progress Report), regular meetings took place between the Assessee and the Indian customer right from the stage of design, manufacture, and supply. This is a detailed project control milestone control report being demanded from the Assessee.	Presence of such clause in generic in nature incorporated for the sole purpose of ensuring coordination and timely completion. These meetings re held at the stage of manufacture of goods and much before, the constitution of a Supervisory PE. Such meetings neither result in any PE on their own nor have the effect of postponement of the passage title of goods.
		It is established that the Permanent Establishment ("PE") staff attended these meetings in discussing parameters India design and manufacturing progress, thereby actively participating	Nowhere does the subject clause contain presence of PE staff in attending meetings in India. The Supervisory PE admitted by the Assessee came into existence at a much later stage i.e., upon
		in the "offshore" activities from Indian soil.	commencement of supervisory activities in India. As such, presence of PE staff at the designing and manufacturing stage is incorrect.

As per Page 263 of Paper-book AY 2010-11, Clause 10.2 (Statutory Enactment The Assessee did not obtain Governing the Work), the any such statutory approvals contractor is required to as regards offshore supply of obtain approvals from Indian goods is concerned. As such, statutory authorities like the the said clause is not Boiler Inspector and applicable. Even otherwise, Controller of Explosives. This the aspect of obtaining proves extension of Assessee's statutory approvals is an the responsibility for goods to irrelevant factor and does India. not postpone the passage of title of goods in India. Such clauses are inserted for administrative convenience as the only the supplier has the technical knowledge to liaise with the relevant officials for procurement of license. The same, cannot by any stretch of imagination, lead to the inference that the Assessee continues to hold responsibility of the goods in India. No evidence has been brought on records by the Revenue that such approvals were ever obtained by the

“Further, in the subject synopsis, the learned DR has placed reliance on certain judicial pronouncements which are not applicable on facts of the instant case mentioned as under:

1.

Shanghai Electric Group Co. Ltd. v. DCIT [2018] 170 ITD 34 (Del-Trib.)

It is submitted that the reliance placed by the Ld. DR on the decision of Shangai Electric Group Co. Ltd is misplaced, inasmuch as the said decision is distinguishable on the facts. In the decision of DDIT v Mitsui & Co. Ltd. [2020] 118 taxmann.com 379, the Hon'ble Tribunal, while distinguishing the said case, has referred to paragraph 179 of the decision in Shanghai Electric Group Co. Ltd and held as under at paragraph 44:

"44.

In this case, the Tribunal has observed that in respect of the contracts entered into by Shanghai Electric Group Company Ltd., all the payments were related to entire work entrusted upon the company which included supervisory services that the company has to render in India. It has been observed by the Tribunal that there were no identifiable payments exclusively made for supply of equipment and none of the agreements were executed exclusively for the sale of BTG equipment. However, in the case of the assessee, a perusal of appendix 1 of first contract at page No. 6 shows that the payments of offshore supply of plant and equipment supplied from abroad is related with sale of equipment. Thus, the facts of the assessee's case are on different footing than that of Shanghai Electric Group Company. Further, in the present case there are separate contracts for the offshore supplies and onshore supplies and onshore services. Price of each component have been separately specified. The offshore supplies have been completed outside India with ownership as well. Payment is being made through LC outside India. Further, the PE had no role to play in offshore supplies. On all these issues the assessee's case is similar to that of the case in the case of LG Cables Ltd. (supra)."

Moreover, in the decision of Shanghai Electric, the assessee was responsible for unloading of goods in India and responsible for payment of custom duty.

Even in the present facts, separate contracts have been entered for offshore supplies and onshore services. The price of each of the said components has been separately agreed and identified and the sale of offshore supplies has been carried outside India. Furthermore, the assessee is not responsible for custom clearances. In view thereof, it is submitted that the decision of Shanghai Electric Group Co Ltd (supra) is distinguishable and not applicable to the present facts.

2.

Ansaldo Energia SPA (2009) 178 Taxman 57 (Mad HC)

The aforesaid decision of the Madras High Court is clearly distinguishable on facts. In the decision of LG Cables Ltd (supra), the Hon'ble High Court has explained the decision of the Madras High Court in para 34 of its decision as under:

"34.

Heavy reliance was placed by the learned counsel for the revenue on the decision of the Madras High Court in Ansaldo Energia SPA v. ITAT [2009] 310 ITR 237. But in our view the said case is clearly distinguishable on facts. In the case of Ansaldo Energia SPA (supra) it was held by the Madras High Court that the Indian subsidiary of Ansaldo, I. e., ASPL, was a legal facade which was created for taxation purposes and was not actually engaged in executing onshore contracts. It is for this reason that 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. 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 inapplicable to the fact situation in the present case and is therefore of no avail to the revenue."

In the facts of the present case, there is no allegation made by the revenue that a legal façade was created for tax avoidance purposes. Furthermore, a supervisory PE was already admitted by the assessee in respect of onshore services. Also, in the present facts, the assessee had right from inception, entered into separate contracts for offshore and onshore portion, unlike the facts in Ansaldo (supra). Furthermore, in the present facts, there is no allegation of loading of onshore contract price onto the offshore contract price. Furthermore, in the present case, no activities relating to offshore supplies were carried in India and thus, no linkage between such offshore supplies and onshore activities could be established.

Thus, it is submitted that the decision of Ansaldo (supra) is not applicable in the instant case.

3.

Durr Systems GmbH v. DCIT [2023] 155 taxmann.com 582 It is submitted that the reliance placed by the Ld. DR on the decision of Durr Systems GmbH is misplaced, inasmuch as the said decision is distinguishable on the following facts:

Durr Systems GmbH had a storage site where goods were delivered for subsequent installation and therefore, the goods were at the risk of Durr. The Hon'ble Tribunal held that such storage site is a PE (Para 6 of decision]. It is submitted that the case of the assessee is on a different footing, as the assessee does not have any storage site in India.

Durr Systems GmbH had claimed that it was only performing onshore supervision activities (which only was offered to tax in India), whilst the installation work was subcontracted to Durr Systems India had claimed that it was only performing supervision, while installation was given to Durr India Private Limited. However, a survey revealed that Durr Systems GmbH was also engaged in installation activities. Based on such incorrect statement, doubts were cast on the pricing of the contract. As such, the Hon'ble Tribunal applied the decision of Ansaldo Energia SpA (supra) to hold that revenue from offshore supplies is liable to tax in India.

In the facts of the present case, there is no such finding of the revenue authorities which would warrant such a presumption.

It is submitted that the Hon'ble Tribunal did not consider applicability of Protocol of DTAA between India and Germany, even though the assessee in such case had placed heavy reliance thereupon. Para 1(a) of the said Protocol (with reference to Article 7) clarifies beyond doubt that where goods are supplied from the head office, the same shall not be attributable to any building site, construction site, assembly activities or installation activities.

None of the above facts are present in the subject appeal and accordingly, the subject decision relied upon by the learned DR is clearly distinguishable and not applicable to the facts of the Assessee. Further, the subject decision was also cited before Hon'ble Delhi Bench of Tax Tribunal in case of Smiths Detection Asia Pacific Pte. Ltd v. DCIT [TS-19-ITAT-2025 (Del-Trib.)] yet, the Hon'ble Tribunal placing reliance on Ishikawajima Harima Heavy Industries Company Ltd. (supra) proceeded to decide the appeal in favour of the Appellant.

4.

MERO Asia Pacific Pte Ltd., In re* [2016] 73 taxmann.com 17 (AAR-New Delhi)

It is submitted that the reliance placed by the Ld. DR on the advance ruling of MERO Asia Pacific Pte Ltd., In re is also misplaced. The facts of the said case are entirely different from the facts of the present case as explained hereunder:

The contracts entered by the sald assessee was a composite works contract without any bifurcation with respect to the offshore part and onshore part [para 7.3(j) of decision].

The Project Office which constitutes a PE of Mero in India, had existed prior to supply of equipment [para 7.3 (c) of decision].

Payment milestones as agreed in the contract were not related with sale of goods and were linked to other stages of design, supply, commissioning etc [para 7.3 (k) of decision].

Mero Asia Pacific Pte Ltd was also beneficiary of the transit insurance and therefore, assumed risk in respect of the goods till the same were delivered [para 6.11(c) and 7.3(i)).

None of the above facts are present in the subject appeal and accordingly, the subject decision relied upon by the learned DR is clearly distinguishable and not applicable to the facts of the Assessee. Further, the subject decision has also been distinguished by Hon'ble AAR New Delhi in the case of Michelin Tamil Nadu Tyres (P.) Ltd. [2018] 401 ITR 164 wherein, the aforesaid aspects were taken into account.”

“B. Rebuttal of Synopsis dated December 22, 2025

 Incoterm: INCOTERM has clearly been mentioned as Free on Board ('FOB), in terms of which, the ownership in the goods was transferred to the buyer as soon as the goods were loaded on the vessel at the port of embarkment [Refer Clause 1.1.1 (page 237 of Paper-book AY 2010-11) / clause 2.1 (page 241 of Paper-book AY 2010-11)].

 Payment Terms: Payment was made outside India in foreign currency through telegraphic transfer/ Irrevocable Letter of Credit, wherein, 90% as advance or at the time of delivery (unrelated to onshore services) [Refer Clause 4.2.1 and 4.2.2 (page 250 of Paper-book AY 2010-11)].

 Responsibility for Clearance: Tata Limited, London are the buying agent and authorised to liaise and make shipping arrangements on behalf of TSL i.e., purchaser. Further, TM International Logistics, Kolkata is the clearing agent of imported equipment on behalf of TSL [Refer Clause 5.2 (page 252 of Paper-book AY 2010-11), 5.4.2 (page 253 of Paper-book AY 2010-11) and 5.5 (page 254 of paper-book AY 2010-11)].

 Custom Clearance: Buyer i.e. TSL is responsible for custom clearance and payment of custom duty [Refer Clause 5.3 (page 253 of Paper-book AY 2010-11) and Clause 2.3.2 (page 242 of Paper-book AY 2010-11)].

 Shipping Arrangements: Shipping arrangements on behalf of buyer i.e., customer to be done by an independent party, TKM GmbH [Refer Clause 5.4.2 (page 253 of Paper-book AY 2010-11).

 Responsibility for insurance: Buyer l.e., TSL is responsible for arranging and paying for Insurance [Refer Clause 2.3.3 (page 242 of Paper-book AY 2010-11)].

9.6

In this regard, the Hon’ble Delhi High Court in the case of Linde AG v. DDIT [2014] 268 CTR 274 in para no. 90 has observed that the term “Free on Board”

(FOB) clearly indicates that the ownership of the material supplied would be transferred to the purchaser the moment the material were placed for shipment and the payment was received by the contractor through a letter of credit and the buyer was named as the consignee. The relevant para no. 90 of the order is reproduced as under:

“90.

FOB is an abbreviation of "Free on Board" and clearly indicates that the ownership of the material to be supplied by Linde would transfer to OPAL, the moment, the materials were placed for shipment. The petitioner had pointed out that shipping Documents/Bill of Lading also recorded the name of Linde as a Consignor and OPAL as a Consignee. In terms of the Contract, Linde and Samsung were fully responsible for any damage/loss during the transportation of the equipment and material. However, the same would not in any manner contradict the position that the ownership of the material in question was transferred to OPAL overseas. The petitioner has also submitted that the payment for design and engineering, supply, insurance and spares and consumables was to be paid to Linde in Euros and for the balance onshore work the payments were to be made in INR. According to the petitioner, this also indicated the portion of work that was required to be done overseas.”

“ 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.

(4)

The fact that the contract was signed in India is of no material consequence, since all activities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country.

(5)

There exists 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 section 9(1) (1) 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.”

“3.

Kindly refer to point no.19 of the assessee's submission dated 5th February, 2013 wherein the particulars of AE in India, Paulwurth India Private Limited have been provided. It was also informed to your goodself that during the relevant FY, the assessee did not enter into any transaction with the above referred Indian AE.

Further, in respect of the queries raised by your goodself, we would like to inform you as under:

3.1

The assessee is not holding any direct shareholding in the capital of AE in India. However, the assessee company and the AE in India are the subsidiaries of their parent company M/s.Paulwurth SA, Luxemburg (having 100% shareholding).

3.2

The AE in India is a separate legal entity and was incorporated in 1993 for the purpose of undertaking blast furnace construction projects for the eminent Indian steel producers. Therefore, Indian AE is functioning independently and generating revenue from its operations by sale of products and sale of services etc. to its customers.

So far as the assessee company is concerned, the Indian AE may provide some administrative support to the assessee company such as assistance regarding travel/local stay arrangements for their personnel in India as and when required by the assessee company.”

“... 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 is an appeal under section 260A of the Income-tax Act, 1961 ('the Act') admitted on the following substantial questions of law :-

1.

Whether the Income-tax Appellate Tribunal is justified in not holding that the contract in question is not a composite one and, therefore, the assessee is not liable to pay tax in India in respect of offshore service?

2.

Whether the levy of interest under section 234B for short deduction of TDS is mandatory and is leviable automatically? ……..

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 entered into between the parties, albeit on the same day, one for the offshore supply and the other for the onshore services, but even assuming that both these contracts need to be read together as a composite contract, the issue in controversy is nevertheless squarely covered by the decision of the Supreme Court in Ishikawajma Harima Heavy Industries Co. Ltd. 's case (supra). It is beyond dispute that PGCIL had issued irrevocable letter of credit in favour of the respondent-assessee and in paragraph 31. 2 agreed that the property in the goods will pass to the buyer (PGCIL) as and when the respondent-assessee loads the equipment onto the mode of transport for transportation from the country of origin. The stipulation in the second agreement (Erection Contract) relating to certain performances by the respondent-assessee including port handling, custom clearance, transportation, insurance, handling on site, unloading at transportation site, testing and commissioning to the satisfaction of the buyer are in a separate agreement for a separate consideration which is clearly enunciated in the second agreement as follows:-

"Whereas the employer desires to engage the contractor for performance of all activities within India subject to the terms and conditions hereinafter appearing.”

28.

As regards the payment for the performance of the activities within India, the contract price aggregating to INR 59,982,160 plus US Dollars 88,400 was specifically and separately fixed by Article (2) of the contract titled "Contract price in terms of payment". This consideration was separate from the consideration for the supply of equipment and there appears to be no justification to intermingle the two. The consideration for the offshore supply of equipment, it is repeated at the risk of repetition, accrued when the goods were sold. The performance of duties as envisaged in the second contract, viz., the Erection Contract, by no stretch of imagination can be conceived to postpone the transfer of property under paragraph 31. 2 of the agreement, which property passed on to the buyer simultaneously with the "loading onto the mode of transport to be used to convey the plant and equipment from the country of origin to the country of import. " Although the entire consideration was not paid on shipment of equipment, but non-payment of a part of the price could not prevent the transfer of equipment. The passing of the property to the purchaser, as rightly held by the Tribunal had nothing to do with the payment of the entire price of the equipment to the seller. Even otherwise, a substantial amount in this case was paid to the seller outside India and the Tribunal observed that for the unpaid price the purchaser could have resorted to the provisions of section 46 of the Sale of Goods Act, which read as under:

"46.

Unpaid seller's rights. (1) Subject to the provisions of this Act and of any law for the time being in force, notwithstanding that the property in the goods may have passed to the buyer, the unpaid seller of goods, as such has by implication of law-

(a)

A lien on the goods for the price while he is in possession of them;

(b)

In case of the insolvency of the buyer a right of stopping the goods in transit after he has parted with the possession of them;

(c)

A right of resale as limited by this Act.

(2)

Where the property in goods has not passed to the buyer, the unpaid seller has, in addition to his other remedies, a right of withholding delivery similar to and co-extensive with his rights of lien and stoppage in transit where the property has passed to the buyer.

29.

Thus, the mere fact that 15 per cent of the payment was to be retained by the PGCIL to be paid 130 days after operational acceptance on erection and completion of the system cannot be construed to mean that the title in the goods did not pass to the buyer in the country of origin.

30.

Then again, in our considered opinion, undue importance cannot be attached to the fact that the agreement imposed on the assessee-company the obligation to handover the equipment functionally completed. This obligation has been rightly construed by the Tribunal to be in the nature of a trade warranty and the Tribunal in this regard has rightly observed as follows:-

"14.

1 But in the case in hand, there is no power either with the seller (the assessee) or with buyer (PGCIL) to repudiate the contract. Warranty is to give equipment after erection in the running condition. The normal trade warrantees could not be mixed up and taken as a right of repudiation or right of disposal of equipment with the buyer or with the seller. The property in equipment having been passed on handing over the equipment to the ship with the delivery of documents to the bank under irrevocable letter of credit, the terms referred to above could not affect the passing of the property. Thus when goods were transferred outside India, the taxable income accrued outside India. It being not attributable to any operation carried out in India, no portion of the same was taxable in India.

31.

We may note also that the buyer's right to examine and repudiate the goods in law does not by itself indicate that the property in the goods had not passed, as is evident from the provisions of section 59 of the Sale of Goods Act, which read as under:-

"59.

Remedy for breach of warranty. (1) Where there is a breach of warranty by the seller, or where the buyer elects or is compelled to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not by reason only of such breach of warranty entitled to reject the goods; but he may-

(a)

Set up against the seller the breach of warranty in diminution or extinction of the price; or

(b)

Sue the seller for damages for breach of warranty.

(2)

The fact that a buyer has set up a breach of warranty in diminution or extinction of the price does not prevent him from suing for the same breach of warranty if he has suffered further damage.”

32.

The aforesaid position was accepted in the case of Kwei Tek Chao v. British Traders and Shippers Ltd. 2 Q. B. 459 (Q. B) which was duly approved by the Supreme Court in the case of Mahabir Commercial Co. Ltd. (supra) wherein it was held as under:-

“……Where in pursuance of the contract the seller delivers the goods to the buyer or to a carrier or other bailee whether named by the buyer or not for the purposes of transmission to the buyer and does not reserve the right of disposal he is deemed to have unconditionally appropriated the goods to the contract. The buyer's assent to the passing of the property in the said circumstances is implied and that when the seller dispatches the goods and delivers them to the common carrier for purposes of transit to the buyer, the common carrier not only receives the goods as agent of the buyer but also assents to the appropriation made by the seller. Where however the intention is clearly indicated and the carrier assents it is immaterial by what document the consignment is effected. In cases where the seller bears the freight for the transmission of the goods free of cost to the buyer, the property in the goods passes to the buyer as soon as they are sent to the carrier, though there may be a provision that they are to be paid for by the buyer on behalf of the seller after the arrival of the goods. But where however the seller exercises a right of disposal or where he agrees to deliver the goods at their destination, the carrier is the seller's agent and the delivery is not a final appropriation. The intention of the parties is therefore one of the important elements in determining the situs where the property passes to the buyer in pursuance of the contract. The decided cases are of little help and are only illustrative of the principles which are applicable for determining when the goods are unconditionally appropriated to the contract. In the case of transactions of sale of goods between the buyer and seller living in two different countries, the contract may envisage, the seller sending the goods through a carrier and the payment being made either at that place or at the place where the buyer resides. In such a transaction the banks have come to play an important part and the bankers' commercial credit system facilitates merchants domiciled in different countries and assures payment to the seller on the one hand and delivery of the goods contracted for to the buyer on the other. This is done by means of what are known as letters of credit which under the terms of the contract the seller may insist on the buyer to provide for in a bank doing business in the place of the seller's domicile….”

33.

In the case of Sri Ram Bearings Ltd. (supra) the Hon'ble Supreme Court held as under:-

"The only controversy is with respect to the taxability of 165,000 US Dollars which is stipulated as the consideration for sale of trade secrets. The agreement specifically states that the said sale is effected in Japan. We are unable to see on what basis it can be said that any part of the said amount has been earned in India. "

34.

Heavy reliance was placed by the learned counsel for the revenue on the decision of the Madras High Court in Ansaldo Energia SPA v. ITAT [2009] 310 ITR 237. But in our view the said case is clearly distinguishable on facts. In the case of Ansaldo Energia SPA (supra) it was held by the Madras High Court that the Indian subsidiary of Ansaldo, i. e., ASPL, was a legal facade which was created for taxation purposes and was not actually engaged in executing onshore contracts. It is for this reason that 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. 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 inapplicable to the fact situation in the present case and is therefore of no avail to the revenue.

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 Ishikawajma 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 Ishikawajma-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 Ishikawajma 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 to the goods reaching the high seas. Once the title was transferred in the aforesaid manner, there was no provision either in the agreement or in law providing a recourse to the respondents to take back the title.

36.

With regard to the setting up of a permanent establishment also, the permanent establishment of the respondent in the instant case, as in the case of Ishikawajma Harima Heavy Industries Co. Ltd. (supra), had no role to play in the execution of the offshore supply contract and as a matter of fact was set up for the sole purpose of enabling the performance of the onshore services contract.

37.

The contract, however, in the instant case as in the case of Ishikawajma Harima Heavy Industries Co. Ltd. (supra) would be said to have been successfully performed only after the satisfactory commissioning and erection of the plant and equipments. Since the permanent establishment was not at all involved in the transaction of the offshore supply of equipment, the existence of the permanent establishment [which as held in Ishikawajma Harima Heavy Industries Co. Ltd. 's case (supra) is for the purpose of assessment of income of a non-resident under the Double Taxation Avoidance Agreement], would be irrelevant in the instant case.

Clause (a) of Explanation (1) to section 9(1) would not be attracted at all which provides that in the case of a business where all operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. In the instant case there were no operation qua the agreement for supply of 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.

38.

In view of the aforesaid we answer the question No. 1 in the affirmative in favour of the respondent-assessee and against the Revenue. In these circumstances, question No. 2 does not arise for our consideration in the instant case. It may, however, be noted for academic interest alone that the question No. 2 has been answered by this Court in Director of Income-tax v. Mitsubishi Corpn. [IT Appeal No. 491 of 2008, dated 30-8-2010].

39.

Accordingly, the appeal stands disposed of.”

“Whether, On the facts and in the circumstances of the case, whether the CIT(A) erred in not appreciating that the assessee had permanent establishment (PE) in India and hence the supply of equipment (including drawings and designs) was attributable to such PE, rendering the profits relatable to such supplies, liable for taxation in India owing to the force of attraction rule embedded in Article 7(1) of the India- Italy Treaty.” (emphasis supplied by us).

“36.

With regard to the setting up of a permanent establishment also, the permanent establishment of the respondent in the instant case, as in the case of Ishikawajma Harima Heavy Industries Co. Ltd. (supra), had no role to play in the execution of the offshore supply contract and as a matter of fact was set up for the sole purpose of enabling the performance of the onshore services contract.”

ARTICLE 7 BUSINESS PROFITS

1.

The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (6) sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment. (emphasis supplied by us)

ITA No. 5164/Del/2017 for A.Y. 2010-11(Assessee’s Appeal)

“7. Issue of taxability of amounts received as consideration for supervisory PE, being supervision of installation activity.

The appellant has itself offered income from supervisory activity as business income holding that a supervisory PE was created. During the year under consideration, the appellant reportedly received following receipts:

Sr. No	Nature of Activity	RINL	TSL	BSL	Total
1	Supervision	19,69,02,082	3,27,59,544	0	22,96,61,626

It was noted from the notes forming part of computation of income of the appellant for AY 2010-11, being items (iii) and (iv) as follows:-

"3 During the year, the company has performed supervisory activities under the following contracts:

(a)

Contract for supervision, testing and commissioning and training for blast furnace 3 with Rashtriya Ispat Nigam Limited

(b)

Contract for supervision of detailed engineering, supervision of manufacture of indigenous equipment and supervision of tests and blowing in operation and commissioning for Blast Furnace I with Tata Steel Ltd.

For the above mentioned 2 contracts, the company's personnel visited customes sites in India. As per the number of days of visit for each contract and duration of each of the 2 contrats, PEs come into existence in terms of provisions of DTAA between India and Italy. As the activities in each of the 2 contracts would continue in FY 2010-11, 2011-12 and so on, the profit/(loss) of the said activities will be determined on completion of each project respectively. As such, receipts have been shown as advances and costs have been shown as work in progress.

Therefore, no income has been declared for FY 2009-10. Cash basis followed.

5.

The company has also received technical assistance fee in relation to a contract with Tata Steel Ltd. as per which the company has rendered certain services for sourcing of stipulated imported equipment/ items and preparation of appropriate documentation for enabling the customer for placing the orders to the recommended vendors for effecting the supplies. Such services rendered by PWIT are covered u/s 115A of the IT Act 1961 and therefore liable to tax @ 10.5575% of the gross amount, which was deducted at source and shown hereinabove."

Incidentally, besides the amount of Rs. 22,96,61,626/-, the appellant had received technical assistance fee from M/s Tata Steel Ltd. amounting to Rs. 2,19,34,898/-. This income has been offered for tax @ 10.5575%. In fact, the return of income filed was only for this income of Rs. 2,19,34,898/-.

7.1

Vide order sheet noting dated 27.03.2017, the following was required of the appellant, and a notice of enhancement/ variation of income given to the appellant as follows:-

"Appear Ms. Ritu Gyamlani and Sh. Prabhjyot Singh, CAs. Ms. R. Gyamlani is requested to please explain/ clarify as to why should changes received on a/c of supervisory fee not be treated as FTS FS within the meaning of IT Act, 1961, or the relevant DTAA. She is requested to examine the order of Hon'ble ITAT Hyderabad Bench in the case of M/s GFA A GmbH, order dated 27.06.2014. She is requested to please examine the order of Hon'ble Delhi HC in the case of CIT vs. Sumitomo, order dated Nov. 16, 2015 (287 CTR 042).

To this extent, this may be considered as a notice of enhancement/ variation.

Adjourned for 30.03.2017.

“This has reference to our earlier hearing held in connection with the captioned matter and our submissions furnished on record from time to time.

During the course of discussions, your Honour had requisitioned us to show cause as to why consideration on account of Supervisory services should not be regarded as Fee for Technical Services (FTS')/Fee for Included Services (FIS') within the meaning of the Income-tax Act, 1961 (Act') or the Agreement for Avoidance of Double Taxation (DTAA') between Indian and Italy.

In this regard, we, on behalf of and under the instructions of the Appellant, do hereby, submit as under.

1.

During the relevant year, the Appellant had undertaken certain supervision of erection, commissioning with regard to following projects: New Blast Furnace 3- Vizag-Rashtriya Ispat Nigam Limited(M870) New Blast Furnace 1- Tata Steel Limited (M1030)

2.

To undertake such supervisory activities, the Appellant deputed its personnel to various customers sites, from time to time. It would be apt to mention that the duration of such supervisory activities did exceed six months.

3.

Here, it would be relevant to reproduce the provisions of Article 5(2)( j) of the DTAA as under.

"ARTICLE 5(2) The term "permanent establishment" includes especially,-

(j)

a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, project or activities, if any) continue for a period of more than six months, or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment"

4.

The aforesaid provisions do suggest that where activities of supervisory nature in India exceed a period of six months, a Permanent Establishment in terms of Article 5(2)(j) is constituted in India in the hands of the Appellant.

In view of the fact that the Appellant was engaged in supervisory activities during the subject period which had exceeded the threshold of six months, it is evident that a PE does arise in terms of Article 5(2)(j) of the DTAA.

5.

Accordingly, the consideration from supervisory activities have been characterized as 'Business Profits' in terms of Article 7 of the DTAA and the profits thereof attributable to the PE have been offered to tax.

This view was adopted by the Appellant while filing its return for the captioned year and was not disputed by the Ld Assessing Officer (AO) in the impugned order.

It may be also be noted that vide our submission dated February 6, 2017, the dates for commencement and cessation of the supervisory activities for each of the projects was duly furnished with your office.

6.

During the course of an earlier hearing with your Honour, you had requisitioned the Appellant to show cause as to why the consideration from such supervisory services should not be regarded as FTS in terms of the provisions of the DTAA.

In this regard, the relevant text of section 9(1)(vii), wherein the expression FTS is defined, is reproduced hereunder.

Explanation 2].- For the purposes of this clause," fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head" Salaries"./

Also, for ease of reference, the provision of Article 13-Royalty and FTS of the DTAA have been extracted hereunder:

"The term "fees for technical services" as used in this Article means payments of any amount to any person other than payments to an employee of the person making payments, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel.

7.

Whilst, the aforesaid services may fall within the purview of FTS in terms of Explanation to Section 9(1)(vii) or Article 13, nevertheless, in the instant case, the same shall be governed by Article 5(2)(j) of the DTAA, the same being specific in nature.

8.

Furthermore, during the course of the last hearing, your Honour had invited our attention to the decisions of Income Tax Appellate, Tribunal (ITAT) in case of GFA Anlagenbau GmbH [ITA TS-383-ITAT-2014) as well as the decisions of Hon'ble High Court of Delhi in case of CIT Vs Sumitomo Corporation [(287) CTR (Del) 420].

Your Honour had requested us to furnish our response as to why, the ratio of the aforesaid decisions ought not to be applicable in the instant case.

9.

It may be mentioned that in the decision of Hon'ble Tribunal in the case of GFA Anlagenbau (supra), it was held that where an enterprise is engaged in supervisory activities without being engaged in construction, installation or assembly project, such supervisory activities would not lead to constitution of PE in India in terms of Article 5(2)(j) of the DTAA.

10.

A bare perusal of the provisions of Article 5(2)(j) suggests that in order to fall within the purview of "supervisory activities in connection therewith" it is not necessary that the construction, installation and assembly project should be undertaken by the assessee himself.

11.

The aforesaid view does also find support from the commentary on Model Tax Convention on Income and Capital, 2010 by Organization for Economic Cooperation and Development ('OECD') related to paragraph 3 of Article 5.

12.

In view of the aforesaid, it is, humbly submitted that the decision of GFA Anlagenbau GmbH (supra) does require reconsideration.

13.

Furthermore, the aforesaid position has also been upheld by the jurisdictional Tribunal in the decision of Steel Authority of India Ltd Vs ACIT [2007] 105 ITD 679, wherein it was held that even if the installation or assembly project did not belong to the assessee, supervisory activities by themselves, in such a situation, would constitute a PE.

The relevant passage of the aforesaid judgment is extracted hereunder.

"7.1xxxxxxxxxx Therefore, it follows that if supervisory activities are carried out in connection with installation or assembly project, the same may constitute a PE, if other conditions are satisfied. This clause, unlike other clauses of this para, deals with service activities such as assembly or installation, which have to be rendered at the premises of the enterprise in the Contracting State. It also includes supervisory activities in connection with installation, etc. However, there is no condition that such activities need to be where installation service is also provided by the enterprise of the other Contracting State. Such a PE is called a service PE in the common parlance. Since the control and domain over the premises may not be with that enterprise, therefore, there is an additional condition of rendering such services for a period exceeding six months. Therefore, we are of the view that clause (i) of para 2 stands in distinction with other clauses. In other words, the building site or construction, installation or assembly project need not be that of the assessee and supervisory activities carried out in connection therewith becomes PE of the assessee if they continue for a period exceeding 6 months. Therefore, even if the installation or assembly project does not belong to the assessee, it is a fact that he has been providing supervisory services for installation purposes as and such services have been provided for a period exceeding six months. To our mind, supervisory activities by themselves, in such a situation, constitute PE. Consequently, we are of the view that the provision contained in para 5 of article 13 is applicable. Therefore, we will have to examine the issue of computation of profit of the PE under article 7 of the DTAA."

(Emphasis supplied)

14.

The aforesaid principle has been upheld by various benches of the Tribunal. In this regard, reliance is placed on the following decisions:

JDIT Vs Krupp Uhde GmbH (2009) 28 SOT 254 (Mum)

Aditya Birla Nuvo Ltd Vs ADIT [2011] 44 SOT 601 (Mum)

15.

It would not be out of place to highlight that the revenue, themselves being aggrieved by the decision of the Hon'ble Tribunal in the case of GFA Anlagenbau (supra), has preferred an appeal before Andhra Pradesh High Court. The matter before the Hon'ble High Court is currently sub judice.

As such, it is neither the case of the appellant nor the revenue that the supervisory activities, all by itself, do not lead to the incidence of PE in terms of Article 5 of the DTAA.

In view thereof, it is most respectfully submitted that in the facts of the instant case, a supervisory PE in terms of Article 5(2)(j) of the DTAA does exist.

16.

As regards the decision of the Hon'ble Delhi High Court in Sumitomo Corporation (supra), it is submitted that the facts of the said decision are clearly distinguishable from the present facts and accordingly, do not have a bearing to the instant case.

17.

In the facts of the said decision, the question for consideration before the Hon'ble High Court was whether, for the purpose of duration test for determining the incidence of PE, duration of individual projects should be considered or the same should be aggregated. The Hon'ble Court held that since the duration of individual projects was less than 180 days, incidence of PE did not arise.

However, in the present facts, the duration of each supervisory project had exceeded 180 days. This fact has been reiterated during the course of the assessment proceedings and was never disputed by the Ld. AO.

As such, the decision of the Hon'ble Delhi HC in Sumitomo Corporation (supra) has no relevance to the instant facts.

18.

In view of the aforesaid and placing strong reliance on the decision of the jurisdictional bench of the Tribunal in Steel Authority of India Ltd Vs ACIT (supra), it is hereby submitted that the supervisory activities undertaken by the appellant do result in constitution of a PE in terms of Article 5(2)(j) of the DTAA and thus, consideration thereof ought to be characterized as Business Profits' in terms of Article 7, rather than FTS under Article 13 of the DTAA.

We trust the matter is clarified to your satisfaction. However, in case your honour does not concur with our views, we request for another opportunity of being heard.”

“7.3

I have examined the issue at hand and the appellant's reply. When an entity renders supervision with regard to plant and machinery supplied by it from offshore, supervision of installation cannot be termed as having a PE in India when the same is not effectively connected with any PE in India. Further, the supervision activity was substantively not carried out in India, as is clear from the less/ insignificant number of days when the foreign technicians were in India. The term effectively connected, as used in Article 12(5) of India-Japan DTAA is not to be construed as the opposite of legally connected but in the sense of something really connected. Similarly, the term effectively connected appears in clause 5 of Article 13 of India-Italy DTAA.

The aforesaid has been held by the Hon'ble ITAT, Delhi Bench in the case of M/s Sumitomo Corporation, dated 27.02.2014, reported in 43 taxmann.com 2 (Delhi-Trib.), 31 ITR(T) 310, 162 TTJ 46 (Delhi-Trib.). In this case, the Hon'ble Delhi High Court, while discussing provisions of India-Japan DTAA, had set aside the matter to the ITAT Delhi, to consider and adjudicate the following ground:

"Whether in the facts and circumstances of the case 'fee for technical services received by the assessee from M/s Maruti Udyog Ltd. was taxable under Article 12(2) or Article 12(5) read with Article 7(3) of DTAA?" 18

The Hon'ble ITAT in their order dated 27.02.2014, as aforesaid, at para 5 has elaborated and adjudicated the aforesaid ground.

"As held earlier in this para, the solitary issue remains is whether this fee for technical services is taxable under Article 12(2) of DTAA of India and Japan or under Article 12(5) read with Article 7(3) of the DTAA. Supervision fee can be taxed as a business income only when it is related to PE in India or there is a supervisory PE in India, otherwise the same is taxable under Article 12 (2) of the DTAA. Facts of the case show that assessee had PE in respect of the Raichur project and Basin Bridge project but the income earned in supervisory services is not attributable to any of these PE. For applying the Article 12 (5) of Indo Japan DTAA, certain requirements are to be fulfilled. Firstly, (i) the beneficial owner of the FTS being a resident of Japan should carry on business in India in which the FTS arises through a PE; (ii) the contract in respect of which FTS is paid, should be effectively connected with such PE. When these two conditions are satisfied then only provisions of Article 7 of the Indo Japan DTAA will apply. In that situation only, the fee for technical services has to be brought to tax in accordance with Article 7 of DTAA as "business profits". In the assessee's case, the revenue authorities had proceeded to invoke Article 7 of DTAA on the basis that the assessee's Local Officer in India was in fact acting as a PE of the assessee, the assessee had a PE in India in respect of its Raichur Project and Basin Bridge Project prior to 15.09.1992 and PE in India in respect of designing, engineering, supply and installation for YE2 car project of MUL from 15.09.1992, the supervision period in respect of 10 contracts had to be aggregated to find out if there was a PE for rendering supervisory services for more than 180 days in India, and the contract for supervision was for one principal, i.e., MUL, in respect of the paint and assembly shop of MUL. Therefore, the time spent on each contract has to be aggregated to satisfy the test of existence PE. On this basis, the Revenue authorities treated the income from contracts for supervision as arisen directly or indirectly from the PE. In our considered view, for applying the Article 12 (5) of DTAA, we have to consider the conditions which are required to apply this Article to the facts and circumstances of the assessee's case. The supervision fee in dispute in all these appeals relate to fee received for installation of equipment supplied to MUL. Article 12 (5) of DTAA between India and Japan is on the line of OECD Model Convention wherein the clause allows the state where the PE is located to tax only those profits which are economically attributable to the PE. The income should arise as a result of activities of PE. The state where the PE is located can tax the income only, if a connection exists, between the income and the PE. Thus, Article 12(5) of Indo Japan DTAA adopts "No Force of Attraction" principle. Similarly, the term "effectively connected" used in the language of Article 12 (5) of DTAA between Indo Japan is not to be construed as the opposite of "legally connected" but in the sense of something "really connected". The connection must be real in substance. In fact producing activities should be closely connected in terms of relationship besides being connected economically also with the PE. The facts of the case shows that LO was only facilitating the communication of the Head Office with MUL and was nowhere involved in the supervisory activities. Simply existence of the LO cannot be merely a basis that assessee was having supervisory PE in India. The facts show that LO was not permitted to carry out any trading, commercial or industrial activity. There is no evidence whether the LO has violated the conditions laid down by RBI in this regard. The assessee has established a project office with the approval of RBI for each separate project. The supply of indigenous equipment, installation and commissioning of equipment at MUL by the assessee was carried out by the project office at MUL of the assessee company and the income arising out of such activity was offered to tax on net income basis as part of profits of MUL, which is not disputed. The revenue has tried to establish that the assessee was having PE in respect of supply of equipment and this was based on the assumption that local office in India was in fact performing all functions which a PE would do and supervision period of all the contracts have to be aggregated and the same becomes more than six months or 180 days. The ITAT in earlier order has clearly held that revenue has never made out any case that local office existed in India for supply of equipment was in fact satisfying all the conditions of a PE. In the earlier order, ITAT has held that so long as the LO performs functions which are preparatory and auxiliary in nature, that shall not constitute a PE. In respect of the supervision PE, it has been also observed that the purchase orders were procured by the assessee through its head office pursuant to competitive bidding on global tender floated by MUL and the terms and conditions of each purchase orders were different in the sense not linked with the other purchase orders. The performance guarantee given by the assessee was also different for different work. The work of installation and supervision were done independently. One purchase order was not dependent on the completion of work of installation of some other purchase orders. The nature of the equipment supplied by the assessee was used in different stages of production and at different sections of car manufacturing process. Even equipment supplied under one purchase order were not complemented to the equipment supplied in another purchase order. The installation of equipment was to be carried out by MUL. The technicians were deputed for supervisions of work from Japan. Separate tenders were floated for each of the purchase orders and the assessee was not the only bidder and there were other enterprises which were awarded purchase orders also. There are finding of ITAT that the period of supervision under each contract was less than the period of 180 days as contemplated in Article 5(4) of the DTAA. It is also held that where there are several sites where supervision is going on in a country, the rule is that the test of minimum period should be determined for each individual site or installation project. The assessee rendered supervision to the plant and machinery supplied by it from Japan. To supervise installation cannot be termed as having a PE in India when the same is not effectively connected with any PE in India." (emphasis supplied)

Thereafter, in the same paragraph, the finding was given as follows by the Hon'ble ITAT.

"Considering all these facts and oral and written submissions by both sides, we hold that the income is taxable as "fee for technical services" as per Article 12(2) of the DTAA between India and Japan. In view of the above observations and findings, we hold that the FTS received by the assessee for Assessment Years 1992-93, 1993-94, 1994-95 and 1996-97 are covered under Article 12 (2) of the Indo Japan DTAA and liable for the tax @ 20%."

The matter travelled to Hon'ble Delhi High Court (Bench consisting of Hon'ble Justices Sh. S. Murlidhar and Sh. Vibhu Bakhru), which vide order dated 16.11.2015 in ITA Nos. 714,716,717,719 and 789/2014 reported as (2017) 80 taxmann.com 247 (Delhi/(2016) 382 ITR 75 (Delhi)/(2016) 287 CTR 420) adjudicated the matter. The Hon'ble High Court upheld the order of Hon'ble ITAT dated 27.02.2014 as aforesaid.

It has been held by the Hon'ble ITAT, Hyderabad Bench in the case of M/s GFA Anlagenbau Gmbh vs. Deputy/ Assistant Director of Income-tax (Intl. Tax.)-1, Hyderabad, 47 taxmann.com 313, 34 ITR 73, 165 TTJ 126, that technical and supervisory services do not create a PE in the absence of an independent site operation. Paras 12.5 till 12.10 of that order are relevant and are reproduced hereinafter:

"12.5

With respect to Article 5(1) i.e., whether the assessee's supervisory activities would constitute a Permanent Establishment being a "fixed place of business", we refer to the decision of Special Bench of the Tribunal in the case of Motorola Inc. (supra) where in the Hon'ble Special Bench observed as follows:

'127. We now turn to the provisions contained in Article 5 of the DTAA. Article 5.1 states that the term "Permanent Establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. The thrust of the Assessing Officer's contention has been that since the employees of the assessee and / or LME came to India frequently and since the Indian company (ECI) provided facilities to these employees, the office of ECI constituted a fixed place of business for the assessee. The OECD commentary on Double Taxation refers to a "fixed place" as a link between the place of business and a specific geographical point. It has to have a certain degree of permanency. It is emphasized that to constitute a "fixed place of business", the foreign enterprise must have at its disposal certain premises or a part thereof. Phillip Baker in his. Commentary on Double Taxation Conventions and International Tax Law (3rd edition) states that the nature of the fixed place of business is very much that of a physical location, i.e. one must be able to point to a physical location at the disposal of the enterprise through which the business is carried on. On the other hand, possession of a mailing address in a state without an office, telephone listing or bank account - has been held not to constitute a permanent establishment. Further, the fixed place of business need not be owned or leased by the foreign enterprise provided it is at the disposal of the enterprise in the sense of having some right to use the premises for the purposes of its business and not solely for the purposes of the project undertaken on behalf of the owner of the premises. (emphasis supplied)

Here the assessee is clearly doing the supervision of project of the Indian company and has no fixed place of business. Only its technicians deputed to India in one project stayed in India for more than 180 days. Nothing was brought on record that the technicians are operating from a fixed place in the custody of assessee. As per the terms the stay and transportation are undertaken by Indian company. Applying the rationale of the Special Bench it cannot be said that the assessee has a fixed place of business for its supervisory activities. We also find support in the Tribunal decision of Airlines Rotables Ltd v. Jt. DIT (Internatonal Taxation) [2011] 44 SOT 368 (Mum) where providing spares and component support services for aircrafts by UK company to JAL India were not held to constitute a Permanent Establishment in India.

12.6

Now coming to the specific PE clause, namely Article 5(2)(i) invoked by AO/DRP, a literal reading of the Article leads to the conclusion that supervisory activities by themselves cannot constitute a PE; they are to be in connection with a building, construction or assembly activity of the non-resident which is not the case here as the assessee provides only supervisory activities. We find support in the internationally renowned book of famous Author Klaus Vogel (Third Edition), it has been stated at page

306, M., N.74 as follows:-

"According to paragraph 17 MC Comm.Art. 59 (supra m.no.66), planning and supervision is included in the term 'building site or construction project' only if carried on by the building contractor himself (that is overlooked by OstBMF 2 SWI 288 (1992); DTC Austria/Korea; correctly, OstBMF 4 SWI 6 (1994): DTA Austria/Germany; of, also infra m.no.81). Planning and supervision proper carried on by a separate enterprise is not covered, according to MC Comm. An enterprise that did no more than plan and supervise building works could at most, MC Comm. continues, constitute a permanent establishment under the general rule of Article 5(q), but its fixed place of business could normally not be considered as 'permanent'."

It is very clear that Article 5(2)(i), though it talks about supervisory activities, does not cover the instant case as assessee do not have any building site or construction site of its own. The activities being of a technical nature clearly fall under the Fees for Technical Service (FTS) 1.e., Article 12 of the India-German DTAA and is taxable at the rates specified therein.

12.7

Furthermore, Article 12(5) cannot apply to remove the assessee from the Article 12 and jump to Article 7 r.w. Article 5. Article 12(5) reads as follows:

"Article 12-Royalties and Fees for Technical Services

5.

The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply."

For Article 12(5) to apply, the condition precedent is for the assessee to have a Permanent Establishment through which its activities are carried out and as we have discussed above such a condition is not met in the instant case. Therefore Article 12(5) which takes the scope of services out of FTS (Article 12) and into Article 7 read with Article 5 does not apply to the assessee's case.

12.8

This can also be examined in a different angle. A.O. has not invoked the service PE concept while considering the permanent establishment of the assessee in India. Admittedly, the basis for A.O's invoking the provisions of Article-5 of DTAA is on the basis of the fact that three of the technicians deputed for supervising the activities in the case of M/s. Jindal Steel Power Ltd., has stayed in India exceeding 183 days and filed their returns with ITO (International Taxation), Mumbai. The technicians are (a) Schefer Rudiger Hermann (b) Zimmer Kinroad Ernst (c) Icha Franz Otto. Just because these three technicians stayed in India while supervising the work undertaken by the assessee in India, it cannot be considered that their place of stay can be 'fixed place of business' for the assessee. Had the A.O. examined the total period of deputing technicians to India and also examined whether establishment where assessee had any 'permanent place' to supervise the activities, then, issue could be examined in the light of service PE considerations. However, A.O. only undertook the issue of stay of technicians in India, which in our opinion cannot be considered for examining the 'permanent establishment' of assessee in its supervising work. On this reason also, we are of the opinion that A.O. has not made out any case for invoking Article-7 of DTAA.

12.9

As for contention that the period of supervisory activities did not exceed a period of six months in all projects and such projects of the assessee do not constitute 'Permanent Establishment' we do not find it necessary to adjudicate on this ground, as we have held that supervisory activities have to be in connection with the non-resident's "building site, construction or assembly project". Since we have held that the receipts of the assessee are in the nature of 'FTS' and do not fall under Article 7 read with Article 5, there is no need to adjudicate this contention. Before parting with this aspect, we may note that even otherwise, we find it incorrect to aggregate all contracts of the foreign company in India and consider it as one. Unless otherwise linked with each other, contracts should be individually assessed with respect to the duration test. We are supported in this behalf by the decision of the Bombay Bench of the Tribunal in Asstt. DIT (Internatonal Taxaton) v. Valentine Maritime (Mauritius) Ltd. [2011] 45 SOT 34/10 taxmann.com 209 wherein this position has been lucidly explained.

12.10

In conclusion, in light of the facts and circumstances of the instant case, we are of the opinion that the assessee's supervisory activities do not constitute a Permanent Establishment in India under the provisions of the Indian Income Tax Act as well as Article 5 of the India-German Treaty. Assessee should be assessed for its supervisory activities under Article 12 of the India-Germany DTAA. Therefore, we hold Ground Nos. 3, 4 and 5 in favour of the assessee." (emphasis supplied)

An analysis of the order of Hon'ble ITAT, as aforesaid, is as hereinafter:

The Hon'ble ITAT relied on the High Court decision in the case of Clouth Gummiwerke Akrineqesellschaft (238 ITR 861) (AP) (1999) to conclude that supervisory activities carried out by the technicians in India are taxable as FTS under the Income Tax Act. Further, the supervisory activities carried out at project sites in India would not constitute a fixed place PE under the provisions of the Income Tax Act as Foreign Company does not have the right to operate such sites independently. The ITAT thus held that supervisory activities fell within the ambit of Section 9(1)(vii) of the IT Act as FTS.

It was observed that the concept of fixed place of business was no different from the general provision of Article 5(1) of Model Conventions and tax treaties. Hence, it was also held that such supervisory activities did not constitute a fixed place of business u/s 92F(iiia) of the Act, as the taxpayer rendered its services at the project sites of its clients and did not own or operate such sites independently.

Relying on the Delhi Tribunal Special Bench (in the case of Motorola Inc. vs. DCIT 2005 95 ITD 269 Delhi SB) decision where it held that technicians were not operating from a fixed place in the taxpayer's custody and hence, it could not be said that the taxpayer had a fixed place of business in India for its supervisory activities under Article 5(1).

The Tribunal also held that supervisory activities by themselves could not constitute a PE under Article 5(2)(1), if they were not in connection with the taxpayer's building, construction or assembly activities. In the given case, the taxpayer was only providing supervisory services, which were technical in nature and hence, was taxably as FTS under Article 12 of the tax treaty.

Similar issue was before Hon'ble AP High Court in the case of CIT vs. Visakhapatnam Port Trust dated 17.06.1983 reported as 144 ITR 146 (AP). It was held at para 72 as follows:-

"72.

In our opinion, Mr. Bremer did not carry on any construction, installation or assembly project or the like on behalf of the German company in India. He was only delegated to Indian for supervision. As already pointed out, the work of construction, installation or assembly was actually done by the Port Trust and not by the German engineer. It is not, therefore, permissible to equate the situation with one where the German engineer has, instead of merely supervising the above operations, was himself in charge of those operations on behalf of the German company. The Income-tax Tribunal was, therefore, right in holding that the role of Mr. Bremer does not result in bringing the German company within the clasue (bb). In this context it may be noted that the very same Indo-German Agreement came up for consideration before the Income tax Appellate Tribunal, Delhi, and the said Tribunal had also taken a view similar to the one taken by the Hyderabad Tribunal, when it held that the mere supervision done by the German engineering in that case, viz., of Mr. Ritacher, on behalf of M/s Carl Schenck of West Germany in respect of erection and commissioning of a plant at Hyderabad did not amount to the German manufacturer having a permanent establishment in India-vide Bharat Heavy Electricals Ltd. US. ITO (1982) 65 Taxation (section 6) p. 12, (Appellate Tribunal decision)." (emphasis supplied)

7.4

In light of the above, I hold that the amounts received as consideration for supervisory activity amounting to Rs. 19,69,02,082/- and Rs. 3,27,59,544/-, are to be taxed as 'Fee for Technical Services' in the hands of the appellant. The same are to be taxed at the rate beneficial to the appellant, i.e., beneficial of the two- (i) IT Act, 1961 or (ii) The rates specified in the India-Italy DTAA.”

“2.1.

That having regard to the facts of the case and in law, the Ld. CIT(A) has erred in characterizing revenue from supervisory activities as Fee for Technical Services ('FTS') in terms of Article 13 of the Agreement for Avoidance of Double Taxation between India and Italy ('DTAA'), instead of 'Business Profits' under Article 7, which were taxable in India on net basis;

2.2.

That while making the impugned addition, as the Hon'ble CIT(A) grossly erred holding that incidence of a Permanent Establishment ('PE') in terms of Article 5(2)(j) of the DTAA did not arise in the hands of the Appellant, during the previous year relevant to the subject Assessment Year;

2.3.

That while making the impugned addition, the Hon'ble CIT(A) misdirected himself by observing that the supervisory activities undertaken by the Appellant were not effectively connected with PE and as such not taxable as 'Business Profits' under Article 7 of the DTAA;

3.

That the Learned CIT(A) erred in making enhancement amounting to Rs. 22,96,61,626 to income, of receipts shown by the assessee, which are not liable to tax in the relevant year, as per system of accounting followed by the Assessee and always accepted;”

“2. ISSUE 2: Taxation of onshore supervisory revenue as FTS [Issue applicable for All Years)

2.1.

This ground deals with the finding of the Hon'ble CIT(A) that incidence of a PE does not arise under Article 5(2)(j) of the DTAA and consequent re-characterisation of onshore supervisory fees as FTS under Article 13 instead of taxing it as business profits under Article 7 of the DTAA.

2.2.

The aforesaid addition / adjustment has been made by the Hon'ble CIT(A) for all the years under consideration, i.e. AY 2010-11, AY 2012-13, AY 2013-14, AY 2014-15 and AY 2015-16.

The assessee had entered into various contracts with its customers for foreign technicians' services for supervision of detailed engineering in India, manufacture of indigenous equipment, erection, blowing-in, commissioning and demonstration of performance tests. A copy of the said contract is enclosed at Page 378 of the Paper book of AY 2010-2011. In respect of the supervisory activities performed by the assessee, incidence of a supervisory PE did arise in India under Article 5(2)(j) of the DTAA as the duration of such activities continued for a period exceeding six months. The assessee follows the 'Completed Contract Method' for revenue recognition in respect of its supervisory revenue, taxable on net income basis in the year of completion of such projects under Article 7 of DTAA. The revenue from the supervisory activities received in the years under litigation were offered to tax on a net basis in the subsequent years, the details of which were furnished during the course of the proceedings before the Hon'ble CIT(A).

2.3.

It is submitted that in all the years under appeal, the Ld. AO has accepted the stand of the assessee as regards existence of a supervisory PE is concerned. However, the Hon'ble CIT(A) has erred by rejecting the stand of the assessee on the following counts:

a)

the onshore duration of supervisory activities is for an insignificant duration;

b)

the supervisory revenue is not effectively connected to the PE in India; and

c)

supervisory activities by themselves, cannot lead to the existence of a PE in India.

2.4.

Resultantly, the Hon'ble CIT(A) taxed the revenue from supervisory revenue received during the year on gross basis under Article 13. While doing so, the Hon'ble CIT(A) ignored the fact that the profit from supervisory activities had already been taxed under Article 7 in the returns of the assessee of subsequent years in which the relevant project had completed by following Completed Contract Method. Resultantly, the enhancement made by the Hon'ble CIT(A) also resulted in double taxation.

2.5.

It is submitted that the enhancement made by the Hon'ble CIT(A) is based on the premise that incidence of a PE does not arise in the hands of the assessee. However, the fact that a supervisory PE exists is undisputed. Therefore, it is the case of both the assessee as well as well as the tax department that the revenue earned from such activity is taxable under Article 7 of the DTAA.

2.6.

Furthermore, in the previous hearing before the Hon'ble Bench, the Learned DR has conceded this aspect. Nevertheless, without prejudice, the Appellant assails the erroneous observations of the Hon'ble CIT(A) as under:

Onshore duration of supervisory activities is for an insignificant duration

2.7.

The duration of activities for all the supervisory projects far exceeded the threshold of six months as prescribed by Article 5(2)(j) of the DTAA. For instance, the onshore duration mentioned for Tata Steel M1030 project is 4700 man days as per contract [Clause 1.2.12.1 on Page 386, Paper-Book AY 2010-11]. The duration of onshore supervisory activities performed by the assessee for all relevant contracts were furnished on record with the office of the Hon'ble CIT(A). In this regard, your Honour may refer to Page 42 Paper-Book AY 2010-11-Submission dated 6th February 2017 filed with Hon'ble CIT(A).

2.8.

A perusal of the aforesaid details clearly establishes that all the onshore supervisory projects had continued for a period exceeding six months and, thus, incidence of a PE under Article 5(2)(j) arises in respect thereof. However, the Hon'ble CIT(A) ignored the aforesaid factual detail submitted and proceeded to observe in a mechanical manner that foreign technicians visited India for less / insignificant days.

2.9.

Even otherwise, the Hon'ble CIT(A) failed to appreciate that having regard to the peculiar language of Article 5(2)(j) of the DTAA, the duration of projects is required to be aggregated, even in case of unconnected projects. In this regard the relevant provisions of Article 5(2)(j) of the DTAA are reproduced hereunder:

"a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, project or activities, if any) continue for a period of more than six months, or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment"

2.10.

Based on such position, even if a PE exists for one project on account of its duration exceeding six months, it is immaterial to ascertain the separate duration of other onsite projects, as the combined duration would exceed six months. This position emanating in the DTAA between India and Italy has been acknowledged in the decision of JDIT v. Krupp Uhde GmbH [2009] 28 SOT 254 (Mum).

2.11.

In view thereof, it is submitted that incidence of a supervisory PE under Article 5(2)(j) arises in the facts of the instant case. Supervisory revenue is effectively connected to PE in India

2.12.

It is submitted that in the instant case, the supervisory activities itself have lead to constitution of PE under Article 5(2)(j) of the DTAA. It is therefore axiomatic that business profits from supervisory activities are effectively connected to as well as also attributable to the supervisory PE under Article 5(2)(j) of the Act.

2.13.

In the order passed under section 250 of the Act the Hon'ble CIT(A) held revenue from supervisory services are not effectively connected to the PE and, therefore, must be taxed as FTS under Article 13 of the DTAA. While holding so, the Hon'ble CIT(A) misread the decision of the Hon'ble ITAT and Hon'ble High Court of Delhi in CIT v. Sumitomo Corporation [2016] 283 ITR 75.

2.14.

In the facts of the Sumitomo Corporation (supra), the Tribunal had, in an earlier order, arrived at a finding that individual purchase orders, where durations were less than six months, would not lead to the constitution of a supervisory PE under Article 5(4) of the DTAA between India and Japan. Therefore, in the absence of a PE, the supervisory services were regarded as 'FTS' under Article 12 of the DTAA between India and Japan.

Further, before the Hon'ble Delhi High Court in Sumitomo Corporation (supra), the issue was whether in the absence of satisfaction of a supervisory PE clause, such FTS could be held to be 'effectively connected' to the other PE of the assessee, being the Project Office, where the installation activities were being carried on. This is evident from paragraph 20 of the order of the Hon'ble High Court which is reproduced as under:

"20.

On remand, the ITAT held by the order dated 27st February 2014 that the assessee had no PE in India and that the supervisory services were not connected through any of its other PE in India and that since the supervision fee was earned in India it is taxable under Article 12(2) of DTAA at 20%."

2.15.

In this regard, the Hon'ble Delhi Tribunal as well as the Hon'ble Delhi High Court in Sumitomo Corporation (supra) held that such FTS cannot be held to be effectively connected to the 'other PEs' of the assessee. Thus, the question of being effectively connected to some other PE had arisen only because the individual projects did not satisfy the supervisory PE threshold of six months as per Article 5(4) of the DTAA between India and Japan. Where such duration threshold had been met, supervisory revenue would have certainly led to constitution of supervisory PE and the same would be effectively connected to such supervisory PE, resulting in taxability under Article 7 of such DTAA.

2.16.

Thus, in the case of the assessee, the Hon'ble CIT(A) has grossly erred in following these decisions to hold that supervisory receipts can never be effectively connected to a PE. without appreciating the facts that existed in these cases and also misinterpreting the ratio of the Hon'ble High Court of Delhi.

2.17.

In this regard, your Honours attention is drawn to the decision of the Hon'ble Delhi Bench of Tribunal in the case of Andritz AG v. DCIT [2024] 165 taxmann.com 76 wherein, it was held that onshore supervisory receipts shall constitute a PE under the DTAA between India and Austria. The Hon'ble Tribunal held that such receipts being effectively connected with the supervisory PE, shall be taxed on net basis as 'Business Profits' under Article 7 rather than 'FTS' under Article 12 of the DTAA.

2.18.

In view thereof, it is humbly submitted that supervisory receipts are taxable under Article 7 of the DTAA instead of Article 13 of the DTAA.

Supervisory activities all by themselves, can lead to constitution of PE in India

2.19.

While passing the appellate order under section 250 of the Act, the Hon'ble CIT(A) relied on the decision of the Hyderabad Bench of the Hon'ble Tribunal in the case of GFA Anlagenbau GmbH v. DDIT (34 ITR 73) to hold that where the non-resident engaged in supervision activities does not operate the building/ construction/installation / assembly sites independently, such supervisory activities cannot constitute a PE in India. Based on such erroneous finding, the Hon'ble CIT(A) held that a supervisory PE is not constituted in the hands of the assessee and, therefore, the supervisory revenue is taxable under Article 13 of the DTAA.

2.20.

It is submitted that under the DTAA, Incidence of a supervisory PE under Article 5(2)(1) may arise even if the foreign enterprise does not operate the building/construction/installation / assembly sites independently. This position is evident from the decision of the Delhi Bench of the Hon'ble Tribunal in Steel Authority of India Ltd v. ACIT [2007] 105 ITD 679. In the said decision, it was held that even if the assessee itself is not engaged in the building or construction site, installation or assembly project, nevertheless, supervisory activities shall constitute a PE. Reliance is also placed on the decisions of the Mumbai Bench of the Hon'ble Tribunal in JDIT v. Krupp Uhde GmbH [2009] 28 SOT 254 and Aditya Birla Nuvo Ltd v. ADIT [2011] 44 SOT 601, wherein, a similar view was held.

2.21.

Furthermore, this position has also been upheld by the Hon'ble Delhi Bench of the Tribunal in in the case of Andritz AG (supra).

2.22.

In view of the aforesaid decisions of the jurisdictional Bench of the Hon'ble Tribunal, it is submitted that a supervisory PE exists in India in terms of Article 5(2)(j) of DTAA and the revenues earned therefrom ought to be taxed as 'Business Profits' under Article 7 of the DTAA.

2.23.

Furthermore, the reliance of the Hon'ble CIT(A) on the decision of GFA Anlagenbau GmbH (supra) is misplaced. The view adopted by the Hon'ble Tribunal in the said decision was based on the commentary on the OECD Model Tax Convention. In theModel Tax Convention, Article 5 does not stipulate a provision for supervisory PE. Such restrictive language of the Model Tax Convention is in contradistinction with the relevant provisions of the DTAA and, therefore, has no persuasive value to the present case. Furthermore, the DTAA between India and Italy is based upon the United Nations Model Tax Convention, Article 5 of the said convention does also include a provision for Incidence of a supervisory PE.

Furthermore, in the decision of GFA Anlagenbau GmbH (supra), the Vishakhapatnam Bench of the Tribunal relied upon the decisions of the Andhra Pradesh High Court in Clouth Gummiwerke Akrineqesellschaft v. CIT [1999] 238 ITR 861 as well as Vishakapatnam Port Trust [1983] 144 ITR 146, both of which are clearly distinguishable.

The decision of Clouth Gummiwerke Akrineqesellschaft (supra) is not applicable to the present case, inasmuch as the decision was entirely based on the provisions of section 9(1)(vil) of the Act, without recourse to the relevant tax treaty.

The decision of Hon'ble High Court of Andhra Pradesh in the case of Vishakapatnam Port Trust (supra) was based upon the definition of PE as per Article 2 of the erstwhile Agreement for Avoidance of Double Taxation between India and Germany, which has since, been replaced by the tax treaty between the two countries signed on June 19, 1995. The relevant Article 2 of the erstwhile Indo-German DTAA did not stipulate any provision for incidence of a PE by virtue of supervisory activities and thus, the Hon'ble High Court came to a conclusion that mere supervisory activities do not lead to constitution of a PE. However, your Honours would appreciate that under the revised DTAA between India and Germany, a supervisory PE clause has been insertedin Article 5(2)(1) which is pari materia with Article 5(2)(j) of the DTAA between India and Italy. Thus, supervisory activities, even on a stand-alone basis, shall constitute a PE if the stipulated duration threshold is met.

2.24.

In view of the aforesaid, the decision of GFA Anlagenbau GmbH (supra) is not applicable to the Instant case. Therefore, in accordance with the ratio of Andritz AG (supra) and Steel Authority of India Ltd (supra), it is submitted that a supervisory PE does arise in the hands of the assessee under Article 5(2)(j) of the DTAA and, therefore, supervisory revenue is taxable as Business Profits under Article 7 of the DTAA rather than as FTS under Article 13 of the DTAA.

Re-characterisation of supervisory revenue as FTS leads to Double Taxation of Income

2.25.

It is reiterated that in terms of the revenue recognition method followed consistently by the assessee, profits from supervisory revenue are taxed as business profits under Article 7 in the year of completion of the contract. For the purpose of the same, the assessee maintains books of accounts and prepares financial statements in relation to the revenue and costs associated with the supervisory PE. For instance, in the first year in litigation, i.e., the AY 2010-11, the assessee had received supervisory fees which was offered to tax in the previous year relevant to the AY 2015-16 and AY 2018-19 on a net basis under Article 7 of the DTAA. Such method adopted by the assessee was duly accepted by the revenue authorities during the course of assessment proceedings and, therefore, is not the subject matter of dispute with the revenue authorities.

2.26.

However, the Hon'ble CIT(A) erroneously held that supervisory revenue is taxable as FTS under Article 13 in the year of receipt. Resultantly, the enhancement made by the CIT(A) has led to double taxation, inasmuch as the same was already offered to tax in the return of the year in which the relevant project was completed. It is submitted that such enhancement made by the Hon'ble CIT(A) leading to double taxation of Income is unfounded, erroneous and Impermissible in law.

2.27.

In this regard, reliance is placed on the decision of Andritz AG (supra) wherein at para 21, the Hon'ble Bench has held that where such revenue has already been offered in subsequent years which the department has accepted, no further addition can be made.

2.28.

It is therefore submitted that incidence of a supervisory PE does arise in the hands of the assessee in all the years under litigation. Therefore, income from supervisory activities is liable to tax as business profits under Article 7 and not as FTS under Article 13. The arguments in support of the aforesaid ground are summarised hereunder:

a)

the assessee performed onshore supervisory activities for all relevant projects for a period exceeding six months;

b)

the revenue from supervisory activities is attributable to the supervisory PE and, thus, the same is taxable under Article 7 of the DTAA;

c)

a supervisory PE may arise independently even if the foreign assessee is not operating the building site, construction site, installation project, assembly project; and

d)

as the profits from the supervisory activities were offered to tax as business profits and assessed in the subsequent years, thus, no further taxation can be made in the years under litigation.”

Article 5(4) of the India-Japan DTAA

“An enterprise shall be deemed to have a permanent establishment in a contracting State and to carry on business through that permanent establishment if it carries on supervisory activities in that Contracting State for more than six months in connection with a building site or construction, installation or assembly project which is being undertaken in that Contracting State.”

Para 28 of the Order of the Hon’ble Delhi High Court.

“28.

It was in the above background that the ITAT examined each of the POs for the various AYs in a tabular form. On examination of the POs, a common feature which emerged was that the supervisors were to come from Japan and MUL had to bear the cost of their air tickets as well as their boarding and lodging in India. The period of supervision in the case of the individual contracts did not exceed the period of 180 days. In other words, they did not constitute a supervisory PE in terms of Article 5(4) of the DTAA.”

“14.

In Ground no. 4, the assessee has called into question the taxability of amount received towards onshore supervisory services as FTS by applying the rate of 10% on gross basis.

15.

Briefly the facts are, as per the composite contracts entered with SAIL, the assessee, in addition to providing offshore design and engineering services and offshore supply of plants and equipments was also required to provide onshore supervisory services. For provision of onshore supervisory services, the assessee received Revenue from SAIL in India. In course of assessment proceedings, the Assessing Officer observed that though, the assessee admitted that it had a supervisory Permanent Establishment (PE) in India for providing onshore supervisory services, however, it has not offered the revenue received from such services in the return of income. Therefore, he concluded that the amount received towards onshore supervisory services, being attributable to the supervisory PE, has to be treated as FTS and taxed on gross basis by applying the rate of 10%. Though, the assessee contested the aforesaid decision of the Assessing Officer before learned first appellate authority, however, it was unsuccessful.

16.

At the very outset, learned Senior Counsel appearing for the assessee did not dispute the fact that the assessee had supervisory PE in India in respect of onshore supervisory services provided to SAIL. However, he submitted, the assessee, being a tax resident of Austria, is entitled to the benefits provided under India - Austria DTAA. Drawing our attention to India - Austria Tax Treaty, he submitted that as per Article 7(5) & (6) read with Article 12(5) of the treaty, even assuming that onshore supervisory charges received by the assessee are in the nature of FTS, since they are effectively connected with the supervisory PE, they have to be taxed as business profits under Article 7 of the DTAA. He submitted, in that event, it has to be taxed on net basis after deduction of all expenses. Proceeding further, he submitted, the assessee followed accountancy policy of recognizing revenue from onshore supervisory services through project completion method. He submitted, since all the projects with SAIL were ongoing during the year under consideration, the assessee offered the income to tax on completion of projects in assessment year 2014-15 and the Assessing Officer, while completing the assessment, has also accepted such income. Therefore, he submitted, there is no reason to tax such income again in the impugned assessment year, as; it would amount to double addition of the same income.

17.

Learned Departmental Representative relied upon the observations of the Assessing Officer and learned first appellate authority.

18.

We have considered rival submissions and perused the materials on record. Before we proceed to decide the issue, we must observe that the assessee has admitted that onshore supervisory services were provided to SAIL through supervisory PE in India. Thus, it is established on record that the assessee had a supervisory PE. There is also no dispute to the fact that, being a tax resident of Austria, the assessee is entitled to avail benefit under India - Austria DTAA. The Assessing Officer, undoubtedly, has treated the receipts as FTS and taxed it at the rate of 10% on gross basis. Learned first appellate authority endorsed the view of the Assessing Officer on the reasoning that in terms of Article 12(4) of the treaty, the amount received towards onshore supervisory services has to be taxed as FTS at the rate of 10%.

19.

On a reading of Article 7 of India - Austria DTAA, it becomes clear that business profits of an Austrian entity, having PE in India, is taxable under Article 7 of the treaty in the source country, after allowing expenses relating to the PE. Paragraph 5 of Article 7 of the treaty provides that the profit attributable to the PE shall be determined by same method followed year by year, unless there is good and sufficient reason to depart from such method. Whereas, paragraph 6 of Article 7 of the treaty provides that where the profits include items of income, which are also dealt with separately in other Articles of the treaty, then the provisions of those Articles shall not be affected by the provisions of this Article. It is a fact that the departmental authorities have treated the amount received from onshore services as FTS. Article 12(4) of the treaty deals with FTS and paragraph 2 of Article 12 provides that both royalty and FTS shall be taxed on gross basis by applying the rate of 10%. However, paragraph 5 of Article 12 carves out an exception by providing that in a case where royalty and FTS are connected with PE in the source country, then the provisions of Article 7 or Article 14 would apply. In other words, even though, the receipts are in the nature of FTS, however, if it is connected to the PE, it has to be treated as business profit under Article 7. Therefore, in our view, the departmental authorities fell into error in taxing the receipts from onshore supervisory services as FTS under Article 12(4) of the treaty on gross basis. We hold that the receipts from onshore services, being attached to the supervisory PE in India, have to be taxed on net basis under Article 7 of the treaty.”

India-Austria DTAA

“ ARTICLE 5

PERMANENT ESTABLISHMENT

1.

For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

2.

The term "permanent establishment" includes especially :—

(i)

a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (for the same or connected project, site or activities) continue for a period of more than six months”

India-Italy DTAA.

“ARTICLE 5

PERMANENT ESTABLISHMENT

1.

For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of the enterprise is wholly or partly carried on.

2.

The term "permanent establishment" includes especially:

(j)

a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, project or activities, if any) continue for a period of more than six months, or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment : Provided that for the purpose of this paragraph, an enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it provides services or facilities in connection with or supplies plant and machinery on hire used or to be used in, the prospecting for, or extraction or production of mineral oils in the State.” (emphasis supplied by us)

21. ITA No. 2696/Del/2018 (AY2012-13) (Assessee’s Appeal)

“4.2 Taxability of Drawings and Designs Supplied by the Appellant:

4.2.1

The second issue which is closely related to the issue discussed in the preceding para 4.1 and raised in the aforesaid Grounds of appeal relates to the consideration from supply of drawings and designs. In this regard, my predecessor CIT (A) had relied on the judgement of CIT VS Neyveli Lignite Corporation and also M/s Linde AG vs DDIT.

4.2.2

The central ratio of the aforesaid judgments was that drawings and designs were integral to the equipment being supplied and therefore separate attribution of income could not be made from the sale of drawings and designs. The finding of the hon. High Courts in this regard basically laid stress on the issue that where drawings and designs were inextricably linked to the supply of equipment, they could not be separately treated for the purpose of sale. The AO has also treated them to be an integral part of the sale but effectively connected it to the PE deemed to exist in India. On this issue however, I do not fully agree with my predecessor that the entire receipts from sale of drawings and designs are not taxable in India. This is due to the reasons discussed in the following paragraphs.

4.2.3

During the course of appeal proceedings, the assessee submitted a Paperbook detailing the receipts, the copies of contracts, computation of income and also the copy of submissions made before the AO. On Pg 1 of the Paperbook, the assessee submitted the computation of income for the FY 2011-12, a table prepared by the assessee in respect of sale of equipment and sale of drawings and designs was as under:

Amount to be disclosed in the tax return and

Supply (including Drawings and Designs)

Drawings Indigenous Equipment

Drawings for civil works

claimed as exempt in
Tata-1030	35441210
RINL-0870	96768626
BSL-0930	1795716780	2316757	13836087
BSL-0980	42837928	18925982	67782746
SAIL-1130	481482586	218858880
Tata Steel-spares	91508534
Tata Steel-1190	21123900
TATA-1090	47830344	4477378	14989486
BSL-1070	178060535	23471000
RINL-F1200 (spares)	3426376
BSL 1260,1261	551806563
	3346003381	268049996	96608320

4.2.4

It is seen from the aforesaid table that in respect of the contracts entered, the revenue streams of the assessee are basically of 3 types. One corresponds to supply (including drawings and designs). The second corresponds to drawings and designs for indigenous equipment and the third corresponds to drawings for civil works. The respective receipts from the 3 streams are as under:

a. Supply (including Drawings and Designs): Rs.3346003381

b. Drawings Indigenous Equipment: Rs.268049996

c. Drawings for civil works: Rs.96608320

4.2.5

The assessee's arguments in his submissions continuously harp on the point that drawings and designs are inextricably linked to the supply of equipment. As far as the drawings and designs forming a part of supply which totals to Rs.334.60 crore, the argument holds some water. In fact, in the previous AY, i.e. AY 2010-11 the CIT(A) had not attributed any separate profit from sale of drawings and designs considering it to be a part of the supply. The findings of the CIT (A) drew support from the fact that "Further, the Hon'ble Delhi High Court in the case of Linde AG vs. DDIT [2014] 44 taxmann.com 244 (Delhi)

"Question no. (ii) framed for consideration of the Authority invites a ruling on the basis that the offshore services falling within the scope of services by Linde are inextricably linked with the Offshore supply of equipment and material and cannot be considered as technical services on a standalone basis. This is a question of fact which would have to be considered at an appropriate stage. However, if it is accepted that the services provided by Linde relating to design and engineering are inextricably linked with the manufacture and fabrication of the material and equipment to be supplied overseas and form an integral part of the said supplies, then the services rendered by Linde would not be amenable to tax under Section 9(1)(vii) of the Act. Consideration for such services would not be considered as "Fees for Technical Services" for the purposes of Section 9(1)(vii) of the Act. This view has also been expressed by the Authority Rotem Co., In re [2005] 279 ITR 165/148 Taxman 411 (AAR). The relevant extract of the said decision reads as under:-

"16.

The principle which emerges from the decisions in the aforementioned cases is that in a contract for manufacture, installation, sale or supply of goods the element of services will always be present. Where services are inextricably linked with manufacture, installation, sale or supply, they cannot be evaluated for the purpose of FTS; it is only where services are separable and independent that the FTS will be assessable."

It is clarified that in order to fall outside the scope of Section 9(1)(vii) of the Act, the link between the supply of equipment and services must be so strong and interlinked that the services in question are not capable of being considered as services on a standalone basis and are therefore subsumed as a part of the supplies."

The consideration for 'drawings and designs' is inextricably linked to the supply of equipment. Supply of equipment is being held to be non taxable as a PE is not constituted in India (as analyzed in detail earlier in this order). Accordingly, consideration for drawings and designs is also held to be non taxable."

4.2.6

However for the appeal order passed by me for the assessment year 2013-14, the position was slightly changed and the revenue from supply of drawings for indigenous equipment was brought to tax. The present order is also based on my order for AY 2013-14.

4.2.7

From the above argument, the amount referred above in clause (a) i.e. Rs 334.60 crore, can be accepted to be a composite payment for drawings and supply and such drawings were a part of supply. The consideration for such drawing in coherence with the above findings of the Jurisdictional High Court in Linde supra can be not taxed in India in the absence of a PE.

4.2.8

There is, however, a second revenue stream wherein the assessee has received an amount of Rs.26.80 crore for drawings related to indigenous equipment which is mentioned at clause (b) of the above para 4.2.3. These are only drawings and designs supplied by the appellant and the consideration is for the same. The whole argument of the assessee that these are inextricable to the supply falls flat since there is no corresponding supply which these drawings are accompanying. The copies of the contracts supplied by the assessee also clearly show that there are contracts for certain Blast Furnaces where only drawings have been supplied for the indigenous equipment or the furnaces also available to the assessee. Such drawings can never be inextricably linked to the supply of equipment. Further, the definition of royalty under the DTAA is as under:

ARTICLE 12: ROYALTIES AND FEES FOR TECHNICAL SERVICES -

1.

Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State, 1

[2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent.]

3.

The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use:

(a)

any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information;

(b)

any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) or 4(c) of Article 8.

4.

The term "fees for technical services" as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services:

(a)

are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or

(b)

make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or

(c)

consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein.

For the purposes of (b) and (c) above, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person.

5.

Notwithstanding paragraph 4, "fees for technical services" does not include payments: (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a); (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the payment; (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 14 (1) for services rendered in connection with an installation or structure used for the exploration or exploitation of natural resources referred to in paragraph 2(j) of Article 5; (g) for services referred to in paragraphs 4 and 5 of Article 5.

6.

The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply.

7.

Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, a statutory body or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 8. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of royalties or fees for technical services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement.

Under Section 9 of the Income Tax Act, royalty has been defined as under:

Royalty Explanation 2 to Sec 9(1)(vi) Royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for-

(i)

the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property

(ii)

the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property

(iii)

the use of any patent, invention, model, design, secret formula or process or trade mark or similar property

(iv)

the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill

(iva)

the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB (sec 44BB contains special provisions pertaining to the business of exploration of minerals, oils etc -dealt with in the chapter" Profits and gains of business or profession)

(v)

the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or

(vi)

the rendering of any services in connection with the activities referred to in the above clauses.

4.2.9

Under the DTAA clause 3(a) of Article 12, it is clear that the term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use any design or model, plan. Under the section 9 of the Income-tax Act clause (iii) of the Explanation 2 also Royalty means consideration the use of any patent, invention, model, design.

4.2.10

On both accounts, it is clear that the consideration paid for supply of design for indigenous equipment, is liable to be taxed as royalty under the Treaty as well as the Income Tax Act. The appellant was also given a specific opportunity to explain as to why this amount not be taxed as Royalty. The Appellate in his reply dated 27.11.2017 has simply stated that such drawings have been prepared and fabricated at Appellant's factory located outside India and therefore, are eligible to the same tax treatment as consideration for supply of equipment. This argument is totally fallacious and without any basis. The treatment for supply of equipment and supply of design is different since design and drawing is categorically covered in the definition of royalty. The appellant also states that these designs and drawings facilitate the customer in fabrication of indigenous equipment which should meet the parameters of equipment applied by appellant. This test also fails on the ground of inextricable link to supply or an integrated supply of equipment and design as held by the jurisdictional court. The courts have clearly held that only where there is a composite contract for supply of equipment and drawings of such equipment, shall the contract not be split for the consideration related to drawing. In the assessee's case, it is a standalone contract for supply of drawing and design. Further, such drawings are related to the indigenous equipment of the client. In view of this, the amount of Rs 26.80 crore which has already been received by the appellant in the FY 2011-12 is charged to tax as Royalty @ 10%.

4.2.11

It is further seen that during the current financial year there is a third revenue stream of the appellant wherein an amount of Rs.9.66 cr has been received as shown in part (c) of Para 4.2.3. This is the consideration received for drawings provided by the appellant for carrying out civil works. The arguments presented in the aforesaid paragraphs 4.2.6 to 4.2.9 are applicable in respect of these receipts also. These receipts are not linked to any supply and cannot be termed as a part of equipment supplied. These have to be judged and assessed to tax on a standalone basis. A drawing and design has been developed and delivered to the client for the civil works to be carried out in the client's premises. As the supplies of design and drawing are not linked to the equipment supplied the same are required to be charged to tax @ 10% as royalty. The appellant had also argued that there is an outright sale of the drawings and therefore the same cannot be brought to tax under the term royalty. It is clearly mentioned that the drawings per se are not paid for the physical object constituting the drawing. The consideration paid is for the design included in the drawings which is utilized by the appellant to align his indigenous equipment as well as other civil works. The concept of outright sale considering drawings to be an object is a misleading proposition since the consideration received by the appellant is for delivery of a design through drawing. Both under the definition of royalty as well as fee for technical services the same is liable to be brought to tax@ 10%. Therefore this amount of Rs.96608320 is charged to tax @10%.”

“2.1.

That having regard to the facts of the case and in law, the Hon'ble CIT(A) has erred in characterizing the receipts amounting to Rs.36,46,58,316/-from offshore supply of certain drawings and designs as 'Royalty' as well as 'Fee for Technical Services' ('FTS') in terms of the provisions of the Act and the Agreement for Avoidance of Double Taxation between India and Italy ('DTAA') and thus rejecting the contention of the Appellant that the same was not liable to tax in India;

2.2.

That without appreciating the facts of the case and erroneous interpretation of law, the Hon'ble CIT(A) has grossly erred in holding that relevant amount for offshore supply of certain drawings and designs was not inextricably linked to the offshore supply of equipment;

2.3.

That without prejudice, the Hon'ble CIT(A) has grossly erred by failing to appreciate that supply of designs and drawings ought to be regarded as offshore sale of goods, which is not liable to tax in India under the Act as well as the DTAA;”

B. ASSESSEE'S APPEAL

(AY 2010-11, AY 2012-13, AY 2013-14, AY 2014-15 and AY 2015-16)

1. ISSUE 1: Consideration for supply of designs for indigenous equipment and civil works cannot be characterised as royalty or FTS

1.1.

The assessee had entered into contracts with inter alia, Tata Steel Limited ("TSL"), for supply of designs for manufacture of indigenous equipment as well as supply of designs for civil works. In particular, the assessee had entered into the following contracts with Tata Steel Limited:

a)

Contract dated October 27, 2008, for supply of imported designs and drawings for manufacture of indigenous equipment; and

b)

Contract dated October 27, 2008, for supply of imported designs and drawings for civil and structural work

1.2.

Whilst the Ld. AO had treated the revenue from sale of such designs as business income, in the orders passed under section 250 of the Act, the Hon'ble CIT(A) had enhanced the assessment by holding that consideration for such designs were of the nature of royalty as well as FTS.

The aforesaid enhancement was also made by the Hon'ble CIT(A) in his orders for the AY 2012-13, AY 2013-14, AY 2014-15 and AY 2015-16.

1.3.

In this regard, it is submitted that the designs for indigenous equipment and civil works supplied by it are tailor-made to suit the specifications and requirement of equipment installed by the customer. Such designs are fabricated as per the specifications of each customer having regard to the equipment to be supplied.

Designs for indigenous equipment enables the customer to facilitate procurement /manufacture of local equipment which is thereafter integrated with the imported equipment manufactured by the assessee, to ensure that the equipment functions properly. Similarly, designs for civil work enable the customers to carry out necessary civil works for proper installation / operation of the imported plant and machinery supplied by the assessee.

1.4.

Without the supply of designs for indigenous equipment and civil works, the offshore equipment supplied by the assessee would not serve any useful purpose and thus, is a prerequisite for proper functioning of the imported equipment. The rationale for provision of such designs is only to ensure seamless integration of local equipment and civil works with the proprietary equipment supplied by the assessee. This aspect is evident from clause 19.1 of the contract with TSL for supply of Imported Designs and Drawings for Manufacture of Indigenous Equipment (page 328 of the PB of AY 2010-11) as well as clause 19.1 of the contract with TSL for supply of Imported Designs and Drawings for Civil and Structural Work (page 370 of the PB of AY 2010-11). The said clause states that that the designs etc. shall be used by the purchaser only for the purpose of 'completing, operating and maintaining the plant'.

1.5.

The agreements for supply of designs for indigenous equipment (page 293, Paper-Book AY 2010-11) and civil construction (page 336, Paper-Book AY 2010-11) are themselves styled as 'Supply of Imported Designs' and thus, the parties intend it to be of the nature of goods. For instance, second paragraph of Clause 19.1 (page 328/page 370, Paper-Book AY 2010-11) of the designs contract with TSL states that that the designs etc. shall be used by the purchaser only for the purpose of 'completing, operating and maintaining the plant.

1.6.

It is submitted that nowhere in the agreement does the purchaser/ customer receive any right to commercially exploit the Intellectual Property Rights ('IPR). The buyer utilises the designs only for self-consumption/ internal business purpose, rather than to exploit the incorporeal rights embedded in such design. The transfer of design by the assessee to various buyers ought to be regarded as supply of a product rather than a transaction of usage of IPRs or a transaction of service. Thus, the learned CIT(A) has grossly erred by treating the sale of such imported designs both as royalty and as FTS.

1.7.

Thus, the aforesaid designs for indigenous equipment and civil works are inextricably linked to the supply of equipment and an integrated part thereof. The aforesaid position is undisputed, inasmuch as the Ld. AO has himself admitted this fact in the assessment order under section 143(3) of all years. For instance, in paragraph 6 of the assessment order for the AY 2012-13, the AO has stated that "It is seen from discussion in para 5 above that the payments for supply of designs and drawings form an integral part of the entire contract...". The Ld. AO thereafter proceeded to tax revenue from supply of aforesaid designs in the same manner as supply of plant and machinery.

1.8.

In view thereof, the aforesaid design related to indigenous equipment and civil works ought to be characterised as supply of 'plant' rather than royalty or FTS under section 9(1)(vi) or section 9(1)(vii), respectively. Such view draws support from the Judgement of the Hon'ble Supreme Court in Scientific Engg. House (P.) Ltd. v. CIT [1986] 157 ITR 86 (SC), wherein, designs were held to be of the nature of 'plant". Furthermore, the Himachal Pradesh High Court in the case of CIT v. Maggronic Devices (P.) Ltd. [2010] 190 Taxman 382 (HP), while relying on the aforesaid judgement of the Supreme Court, held that designs are of the nature of plant and the consideration thereof cannot be characterised as royalty.

1.9.

Similarly, in CIT v. Neyveli Lignite Corporation Ltd [2002] 243 ITR 459 (Mad), it was held that in a contract for design, manufacture, supply erection and commissioning of machinery, drawings were supplied only to ensure that the buyer is able to operate the plant as per the desired specifications. Supply of such designs is only incidental to the performance of the machinery. As such, the Hon'ble Madras High Court held that the provisions of section 9(1)(vi) and 9(1)(vii) have no application in respect of such payments.

1.10.

Similarly, in CIT v. Davy Ashmore India Ltd. [1991] 190 ITR 626 (Cal), the High Court held that the consideration for the transfer of designs cannot be regarded as royalty as the definition thereof only brings within its scope a payment for use thereof unlike the definition in the Act which brings within its scope even consideration for a transfer.

1.11.

A similar view has been held in the recent decisions of Delhi Bench of Hon'ble in the case of SMS Concast AG v. DDIT (ITA no. 1361/Del/2012) and DSD Noell GmbH v. Dy./ Asst. CIT (ITA no. 3186/Del/2016 & Ors) which has followed the judgement of jurisdictional high Court in Linde AG (supra).

1.12.

Your Honours' attention is also drawn to the decision of the Kolkata Bench of the Hon'ble Tribunal in Outotec GmbH v. DDIT [2015] 172 TTJ 337. In the facts of the said decision, the assessee had entered into a similar contract with TSL for supply of imported designs and drawings for civil and structural work, utility and other services etc. on FOB basis (paragraph 28 of the decision). The said designs were needed as per the specifications by the customers to erect the plant. The Hon'ble Tribunal observed that the aforesaid designs were used by customers for the purpose of setting up plants rather than for commercial exploitation. As such, the Hon'ble Tribunal concluded that the aforesaid designs partake the character of business income rather than royalty.

1.13.

Furthermore, in the facts of another decision of the Kolkata Bench of the Tribunal in Outotec GmbH v. DCIT [2017] taxmann.com 270, the assessee had supplied designs and drawings for, inter alia, manufacturing of indigenous equipment (Refer paragraph 7.1 of the decision). The Hon'ble Tribunal held that supply of such designs is a sale of a copyrighted article and therefore of the nature of business income. A similar view was held in Outotec Finland OY v. DCIT [2019] taxmannn.com 69 (Kol), wherein, it was held that sale of such imported designs could neither be classified as royalty nor as FTS. The consideration thereof could only be characterised as business income.

1.14.

In Tata Steel Ltd v. ITO (ITA No.1086/Mum/2017) (Mum-Trib.), the Hon'ble Mumbai Bench of Tribunal held that designs and drawings supplied by the non-resident was for proper assembly of sophisticated imported plant along with smaller indigenous machinery. The Tribunal held that the designs were supplied to the assessee only for the purpose of completing, operating and maintaining the plant. Furthermore, the same was critically essential for setting up the plant and in their absence the plant could not have been installed. In other words, the designs and drawings were not merely inextricably linked with the plant, but the plant would not have been installed and commissioned without such designs. In view thereof, the Tribunal came to a conclusion that such designs could not be regarded as FTS and treated as business profits not liable to tax in India.

1.15.

Accordingly, it is submitted that the consideration for the supply of designs for manufacture of indigenous equipment and civil works can neither be characterised as royalty nor as FTS. The supply of designs is akin to the sale of a product and as such, the income thereof can only be characterised as business profits and assessed in terms of Article 7 of the DTAA. Reliance is placed on the judgement of the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd v. CIT [2021] 125 taxmann.com 42 (SC) which had reiterated the distinction between a 'copyright and a 'copyrighted article', in the context of a computer software. The Court in this landmark case, has held that income from supply of a 'copyrighted article' cannot be regarded as a use of a 'copyright, for the purpose of the definition of 'Royalty', under the provisions of the Act.

1.16.

It is also submitted that the Hon'ble CIT(A) contradicted himself by holding that the aforesaid designs are also of the nature of 'FTS', having already held the same to be 'royalty. It is submitted that both the aforesaid transactions are materially different and mutually exclusive. Whilst a transaction of royalty postulates use of IPRs, only a transaction of 'service' could be characterised as FTS. It is reiterated that the sale of imported designs is a transaction of sale of product rather than a 'contract of service'.

In this regard, reliance is placed on the following decisions wherein it was held that supply of designs cannot be regarded as 'service' and, therefore, cannot be characterised as FTS:

o Abishek Developers v. ITO [2008] 24 SOT 45 (Bang-Trib);

o Skoda Export Co Ltd v. DCIT (ITA No. 1176/H/96) (Vizag-Trib.);

o Hindustan Petroleum Corporation Ltd v. ADIT [2016] 69 taxmann.com 166 (Mum-Trib.); and

o Outotec Finland OY v. DCIT [2019] taxmannn.com 69 (Kol-Trib.)

1.18.

At this juncture, it is submitted that the consideration for such designs was received by the assessee outside India in Euros through a letter of credit. Furthermore, the aforesaid designs were sold outside India on an FOB basis, which evidences the fact that the title in respect of such designs had passed outside India. The same is evidenced by the following clauses:

a)

Clause 4.1.2 of the contract for supply of imported designs and drawings for manufacture of indigenous equipment (Refer page 304 of the paper book for AY 2010-11); and

b)

Clause 4.1.2 of the contract for supply of imported designs and drawings for civil and structural work (Refer Page 347 of the paper book for AY 2010-11).

1.19.

It is is submitted that the revenue from supply of such designs was neither received in India nor did it accrue or arise in India or be deemed to accrue or arise in India. In view thereof, consideration from sale of such designs is not liable to tax in India under the provisions of the Act. Furthermore, even under the provisions of the DTAA, the revenue from supply of such designs ought to be characterised as business profits, which is not attributable to the supervisory PE of the assessee. As such, the revenue from supply of such designs is not taxable in India even under the provisions of the DTAA.

1.20.

At the cost of reiteration, summary of the submissions made above is as under:

a)

the designs for manufacture of indigenous equipment and civil works are inextricably linked with the offshore supply of plant & equipment;

b)

all the activities pertaining to such drawings and design are undertaken outside India and the consideration thereof is also received outside India in foreign currency;

c)

such receipts from offshore designsshall be treated akin to offshore supply of plant & equipment;

d)

such receipts are of the nature of sale of product and therefore, can neither be characterised as royalty nor as FTS, as wrongly alleged by the Hon'ble CIT(A);

e)

similar to offshore supply of plant & equipment, income from such offshore supply of such imported designs is not liable to tax in India under the provisions of the Act as the sale thereof was completed outside India;

f)

such receipts for offshore designsbeing in the nature of business income are not attributable to the PE in India and, therefore, not taxable under Article 7 of the DTAA.”

ARTICLE 13 ROYALTIES AND FEES FOR TECHNICAL SERVICES

“3.

The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.

4.

The term "fees for technical services" as used in this Article means payments of any amount to any person other than payments to an employee of the person making payments, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel.”

“7.

Ground No. 3 (a) and (b) raised by the assessee relates to addition made by AO/DRP holding that the sale of designs and drawings by the appellant is not in the nature of sale of product and the income earned from such sale is taxable under Article 12 of India-Germany Double Taxation Avoidance Agreement (DTAA) and the income earned by the appellant from sale of designs and drawings is taxable as Fees for Technical Services as per Article 12 of the DTAA.

7.1

The brief facts qua the issue are that the assessee has provided design and drawing to Indian Customers during the year under consideration relating to steel industry. In the year under consideration the assessee has raised invoices for sale of design and drawing amounting to Euro 55,28,921 (equivalent to Rs 37,28,70,465/- by applying the TT Buying rate on the payments of 31.03,2012). During the assessment proceedings the assessee submitted the copies of contracts for sale. On perusal of the copies of contracts for sale, the AO observed that the income arising from the said transactions should be considered taxable as Royalty under the provisions of the Act read with the provisions of the DTAA.

In response to the question asked by the AO, the assessee company submitted the factual and legal position with regard to sale of design and drawings stating the followings:

(i)

Under the contracts, the scope of the assessee was limited to designs and drawings being in the nature of basic engineering for which work was done primarily outside the territory of India. Basic engineering includes sale of designs and drawings to the customers that pertain to the location plot plan, layout drawings, placement of various equipment, types of equipment to be installed, process description, manufacturing of indigenous equipment in India etc. that are needed as per specifications by the customers to erect the plant;

(ii)

The assessee has access to a wide range of technologies such as sinter plant technology, pellet plant technology etc that are required for the purpose of setting up/erection of plants. Such technologies are developed after undertaking various research and development activities;

(iii)

The designs and drawings are largely the products of the aforesaid technologies that are sold to its Indian customers after being modified, to meet their requirements. The modification activities have been performed by the assessee in its own country i.e. the entire work has been undertaken/performed outside India;

(iv)

The designs and drawings sold by the assessee were used by the Indian customers for internal business purpose of setting up of their plants and not for any commercial exploitation;

(v)

Sale of designs and drawings has also been affected outside India. Copy of the sample airway bill evidencing that the delivery of designs and drawings for various projects has taken place outside India has been already enclosed with the submission;

(vi)

Consideration/payments for the basic engineering work were received by the assessee outside the territory of India in foreign currency.

The assessee had further submitted to AO that the basic engineering packages sold by the assessee company to the Indian customers have been designed largely on the basis of standard technologies available with it. The consideration received by the assessee was therefore for the sale of a product which is embedded in the plant set up by the Indian customers. Accordingly, the income earned from the sale of designs and drawings is in the nature of business income being the consideration received from the sale of a product. The assessee had also submitted that the restriction imposed by it on the intellectual property in designs and drawings sold by the assessee for the purpose of setting up a plant in India does not change the character of the transaction from the sale of the product to the use of license/know how and the mere fact that the word license has been used in the agreement would not make any difference.

It was also submitted by the assessee that the designs and drawings sold by it were used by the Indian customers for internal business purpose of setting up of their plants and not for any commercial exploitation. Accordingly, the designs and drawings sold by the assessee tantamount to the use of a 'copyrighted article' rather than use of a 'copyright'. The assessee also placed reliance upon various Judicial Pronouncements, namely of Scientific Engineering House (P.) Ltd. v. CIT [1986] 157 ITR 86/[1985] 23 Taxman 66 (SC), Modern Threads (I) Ltd. v. Dy. CIT [1999] 69 ITD 115 (JP) (TM), DIT v. Infrasoft Ltd. [2014] 220 Taxman 273/[2013] 39 taxmann.com 88 (Delhi). In support of its contention, the assessee had also relied upon certain clauses of contracts of supply of imported designs and drawings for Bhushan Power and Steel Plant - Pellet Plant].

However, the ld AO rejected the assessee's submissions and noted that by the transfer of drawings, designs, engineering information, etc., the recipient was enabled to ensure the operation and maintenance of the plant set up and the manufacturing process of the plant. The recipient was enabled to use or was imparted with the information concerning industrial, commercial or scientific experience through the said transfer. This would necessarily being the payment within the ambit of "royalty" in terms of clause (iv) of Explanation 2 to section 9(1)(vi) of the Act as well as Article 12(3) of the India-German DTAA. In the case of CIT v. Klayman Porcelains Ltd. [1998] 229 ITR 735/96 Taxman 221 (AP), the Hon'ble Andhra Pradesh High Court held that:

". . . . if the amount in question had been paid by the Indian company to the non-resident company for imparting of any information concerning the working of or use of patent, invention, model, design, secret formula or process or trade mark or similar property or if it was paid for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill, the amount would fall within the meaning of 'royalty', as defined in Explanation 2 of section 9(1). This is a question of fact to be determined on the facts and circumstances of each case and the terms of agreement under which there has been a transfer".

The AO noted that in the present case, the supply of drawings, designs, engineering documents, etc. clearly fall within the ambit of expression "for imparting of any information concerning industrial, commercial or scientific experience" which is clearly stipulated in clause (iv) of Explanation 2 of section 9(1)(vi) of the Act as well as in Article 12(3) of the India-Germany DTAA.

Further the judgment of Hon'ble Supreme Court in the case of Scientific Engineering House (P.) Ltd. (supra) relied upon by the assessee deals with the capitalization of assets in the books of purchaser and has no applicability in the case of the assessee. Similarly, other judgments relied upon by the assessee are based on their own facts and are not applicable in assessee's case. Therefore, the income from designs and drawings is held to be taxable as Royalty @ 10% on gross basis. The total income of the assessee with regard to designs and drawings is therefore computed as under:

Particular	Amount
Income from designs and drawings (taxable as Royalty @ 10% on gross	Rs. 37,28,70,465/-

basis)

7.2

Aggrieved by the order of the AO, the assessee company filed objection before the Hon'ble DRP against proposed item of addition on account of 'Sale of Designs and Drawings" vide the draft assessment order dated 26.03.2015, on the above issue. The Hon'ble DRP upheld the contention of the Assessing Officer but directed that said transaction be categorized as FTS (Fees for Technical Services). The Hon'ble DRP reached this conclusion after relying on Article 12(4) of the Indo-German DTAA wherein it is stipulated that "The term 'fees for technical services' as used in this Article means payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical or other personnel but does not include payments for services mentioned in Article 15 of this Agreement." The Hon'ble DRP held that the said transaction is in the nature of FTS since (i) the assessee has access to a wide range of technologies for the purposes of setting up/erection of plants (ii) which were developed after research and after necessary modification and thereafter (iii) these designs and drawings were sold to Indian customer who used the same for internal business purpose of setting up of their plants. The ld. Counsel of the assessee could not rebut query in respect of categorization of the transactions as FTS. Therefore, in view of the above mentioned direction of the Hon'ble DRP, the addition made in the draft assessment order on account of Royalty from sale of Designs was categorized as Fees for Technical Services and assessed as such by AO.

7.3

Not being satisfied with the order of DRP/AO, the assessee is in appeal before us. The ld Counsel for the assessee has stated before us that said issue is fully covered by the judgment of Hon'ble ITAT Kolkata, in assessee's own case for assessment years 2005-06 to 2007-08, & 2010-11 and 2011-12, which are reproduced below:

(i)

In assessee's own case ITA NO. 431/432/kol/2014 A.Y 2010-11 & ITA No. 283/kol/2015 -Outotec Gambh (supra) A.Y 2011-12

"37.

From the above facts and legal position, it is clear that the basic engineering packages sold by the assessee to the Indian customers have been largely designed on the basis of standard technologies available with it. The consideration was, therefore, for the sale of the product, which is embedded in the plant set up by the Indian customers and does not constitute royalty and is in the nature of business income. Since the work was done outside India and sale was taken place outside India, such income is not taxable under the provisions of the Act and DTAA. Retaining intellectual property in designs and drawings is similar in the nature to the retaining of patented rights in any goods/machinery. Restriction on the intellectual property in designs and drawings sold by the assessee for the purpose of setting up a plant in India does not change the character of the transaction from the sale of the product to the use of licence/know-how. Normally, designs and drawings sold by foreign customers were used by Indian customers for internal business purposes for setting up of their plants and not for any commercial exploitation. Accordingly, the designs and drawings sold by the assessee tantamounts to the use of copyrighted article rather than use of a copyright and is, therefore, in the nature of business income. This issue of assessee's appeal is allowed."

(ii)

In assessee's own case ITA NO. 331,332,334/kol/2015 A.Y 2004-05 to 2007-08 & ITA no. 328,329,330/kol/2015 - Outotec Gambh (supra) A.Y 2005-06 to 2007-08 & ITA no. 274,275,276,277.

"16.

Respectfully following the decision of the Co-ordinate Bench of the Tribunal we hold that the sale of designs and drawings is sale of a copyrighted article and therefore, income earned there from is in the nature of business income. Hence, this ground of the assessee is allowed."

Thus, respectfully following the decision of the Tribunal in assessee company's own case in assessment years 2007-08 to 2011-12, whereby the issue was decided in favour of the assessee company as set out above, therefore we hold that the sale of designs and drawings is sale of a copyrighted article and therefore, income earned there from is in the nature of business income. Hence, this ground of the assessee is allowed.

7.4

In the result, the appeal filed by the assessee (Ground No. 3(a) & (b)), is allowed.”

“2.

The brief facts are brought out in Para 1 of the final assessment order which is extracted for ready reference: “Outotec(Finland) Oy(‘assessee’) is incorporated in Finland and is a tax resident of the same. The assessee is worldwide leader in providing innovative and environmentally sound solutions for a wide range of customers in metals processing industries. During the Financial Year 2014- 15, with regard to Indian projects, the assessee has primarily earned revenue from (i) sale of designs and drawings; (ii) rendition of technical services; (iii) license fees; and (iv) testing and other services.”

3.

The assessee company filed its return of income on 26.11.2015 declaring total income of Rs.1,89,38,136/-. It offered to tax income from rendition of technical services of Rs.1,82,71,454/- and income from royalty(licence fees) of Rs.6,66,682/-. It did not offer to tax income received from the sale of designs and drawings of Rs.2,80,87,244/- and income from rendering testing and other services of Rs.3,36,21,283/-. The assessee’s case is that, income from sale of designs and drawings is a sale of copyrighted article and the income derived therefrom is business income and as the assessee does not have a permanent establishment in India, and hence the business profits are not taxable in India. On the issue of income from rendering of testing and other services, the assessee company relies on Article 12(5) of the India-Finland DTAA and as the services, in question, had been rendered outside India, it claimed that the same is not taxable in India. ……………

16.

The similar issue was considered in the group case of the assessee in the case of Outotec Gmbh vs. DCIT in ITA No.160 & 193/Kol/2016 for Assessment Year 2012-13 wherein the decision in the case of Outotec Gmbh vs. DCIT in ITA No.431 & 432/Kol/2014 (supra) was followed. The findings of the Hon’ble DRP was that the transactions is in the nature of FTS that (i) the assessee had access to a wide range of technologies for the purpose of setting up/construction of the plants, (ii) it was developed after research and after necessary modification and thereafter (iii) these designs and drawings were sold to Indian customers who used the same for internal business purpose of setting up of their plants. These findings were reversed and the ground of appeal of the assessee was allowed.

17.

Consistent with the view taken therein, we hold that the income from sale of designs and drawings cannot be classified, either as royalty or as FTS. The income has to be considered as business income and as the assessee does not have PE in India, it cannot be brought to tax in India.”

“5.

That the Hon’ble CIT(A) failed to dispose off the grounds taken by the Appellant in relation to levy of interest under section 234A and 234B of the Act, which were not applicable in law and on the facts of the case.”

“3.1.

The learned AO has erred by charging interest under section 234B of the Act for the AY 2012-13 and AY 2015-16.

As per the Judgement of the Hon'ble Supreme Court in the case of DIT v. Mitsubishi Corporation [2021] 130 taxmann.com 276, interest under section 234B of the Act cannot be charged in the case of a non-resident for the AYs prior to the AY 2013-14 as the assessee is entitled to reduce the amount of income-tax which would be deductible or collectible, in computation of its advance tax liability. The amendment introduced by Finance Act, 2012 in section 209(1)(d) is applicable only from the financial year 2012-13 onwards. As such, no interest under section 234B is applicable for the AY 2012-13.

3.2.

For interest charged under section 234B for the AY 2015-16, the ground raised by the assessee is consequential in nature.”

“That the Ld .CIT(A) has erred in not disposing off the ground taken by the appellant in relation to the erroneous computation of taxable income, tax payable and incorrect credit of tax deducted at source (‘TDS’) as computed by the Assessing Officer in the assessment order.”

“5.

That the Hon'ble CIT(A) failed to dispose off the grounds taken by the Appellant in relation to levy of interest under Section 234A of the Act, which was not applicable in law and on the facts of the case.”

“ 4. Charging of interest under Section 234A of the Act (AY 2014-15) The Learned AO has erred in charging interest under section 234A of the Act. In this regard,

we would humbly like to submit that the assessee filed its original return of income for the AY 2014-15 on November 29, 2014. In accordance with the provisions of section 139(1) of the Act, the due date for filing of a corporate tax return for such year was November 30, 2014. As the assessee filed its original return of income before the due date, no interest under section 234A of the Act can be levied.”

“5.

That the Hon’ble has erred in incorrectly disposing off the ground taken by the appellant in relation to grant of credit of tax deducted at source (‘TDS’) as computed by the Assessing Officer in the assessment order.

“6.

That the Hon’ble CIT(A) has erred in sustaining the levy of interest under section 234B and 234C which was not applicable in law and on facts of the case.”

Charging of interest under Section 234B and Section 234C of the Act

Interest under Section 234B

3.1.

The learned AO has erred by charging interest under section 234B of the Act for the AY 2012-13 and AY 2015-16.

Xxxxxxxxxxxxxxxxxxxxx

3.2.

For interest charged under section 234B for the AY 2015-16, the ground raised by the assessee is consequential in nature.

Interest under section 234C

3.3.

Learned AO has erred in charging interest under section 234C of the Act for the AY 2012-13 and AY 2015-16. It is submitted that interest under section 234C of the Act is applicable on the returned Income and not the assessed income. Further, for the AY 2012-13 and AY 2015-16, the assessee was eligible to a tax refund and as such, it is submitted that interest under section 234C was erroneously levied in the assessment for such years.