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Judgment
The above two cross appeals by the assessee and the Revenue are preferred against the order dated 28.01.2015 framed under section 144C(13) r.w.s 143(3) of the Income-tax Act, 1961 [hereinafter referred to as 'The Act'] pertaining to Assessment Year 2011-12.
The substantive grievance of the assessee is that the Assessing Officer/DRP grossly erred in concluding that the assessee has a Permanent Establishment [PE] in India in the nature of Dependent Agent PE [DAPE] as per the provisions of Article 5(4) of the India – USA DTAA.
The substantive grievance of the Revenue is that the DRP erred in holding that the receipts for design and drawing should be taxed u/s 44DA of the Act instead of FTS u/s 9(1)(vi) of the Act.
The underlying facts in both the appeals are identical. Therefore, both the appeals are disposed of by this common order for the sake of convenience and brevity.
The representatives of both the sides were heard at length, case records carefully perused. Relevant documentary evidences brought on record in the form of Paper Book carefully perused.
Briefly stated, the facts of the case are that the appellant company is an entity incorporated in the United States of America and is engaged in manufacturing and selling of products and equipments primarily for the North American Steel Industry. Products are generally used by steel companies to improve their iron desulfurization.
During the year under consideration, the assessee earned Revenue from Rashtriya Ispat Nigam Limited [RINL] and from Steel Authority of India Limited [SAIL]. The assessee company has undertaken the following two projects during the year:
(i) Project with SAIL for design and engineering supply of drawings and equipment’s, supply of plant and equipment’s including commissioning of spares, foreign supervision, training of personnel in India, ocean freight, etc.
(ii) Project with RINL for technology design, engineering of hot metal desulphurization plant SMS-2 complete in all respects for imported portion on discrete turnkey basis.
The assessee filed NIL return of income as it believed that no part of its income from engineering supply is taxable in India.
The Assessing Officer was carried away with the Service Agreement between the assessee and Rajalaxmi International Corporation [RIC] dated 01.02.2005 and formed a belief that RIC forms DAPE of the assessee.
A perusal of the assessment order shows that, after extracting the responsibilities from the agreement between the assessee and RIC, the Assessing Officer referring to Article 5 of the India-USA DTAA, came to the conclusion that RIC is an agent of the assessee. Referring to the agreement, the Assessing Officer was of the opinion that :
(i) All rights of representation of the assessee remains with RIC, to whom commission is paid;
(ii) The assessee exercises substantial degree of control over RIC;
(iii) RIC has habitually exercised authority to conclude contracts in the name of the assessee with the clients and finally concluded by treating RIC as DAPE in terms of Article 5(4)(i) of the DTAA and referring to the decision of the Hon'ble Delhi High Court in the case of Rolls Royce Vs DDIT, the Assessing Officer attributed Rs. 77,514/- to the income of the assessee.
Further, following the directions of the DRP, the Assessing Officer treated the amount received from RINL and SAIl as taxable as FTS u/s 9(1)(vii) of the Act.
We have given thoughtful consideration to the orders of the authorities below. The whole controversy revolves around whether RIC is DAPE. It would be pertinent to refer to the relevant article of the India – USA DTAA, which is Article 5 and the same reads as under:
“5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arms length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph.”
A perusal of the aforesaid Article shows that a person shall not be deemed to have a PE if it carries on business through a broker, general commission agent, or any other agent of an independent status, if such person is acting in the ordinary course of his business.
A perusal of page 54 of the paper book shows the list of contracts entered into by RIC which is as under:
S.No
Name of the Party & Address
Date of Contract
1
Inland Refractories Co. 38600 Chester Road, Avon, Ohio 44011-02339
23-03-2009
2
TATA Steel UK Consulting Limited 30 Millbank, London, SW1P 4WY, UK
21-04-2011
3
Schenck Process India Limited Plot Nos. 67-82, Tupudana Industrial Area (New), Hatia
03-02-2012
4
Barnes Group Inc. 10367 Brecksville Road, Brecksville, OH 44141
19-07-2013
5
McKeown International Inc. 1106, South Mays, Suite 100, Round Rock, TX 78664, USA
15-01-2014
6
Technosulphur Sistema De Tratamento De Metais Liquidos S. A Rua 1° de Junho, 2,000, Bairro Vale Das Palmeiras, Sete Lagoas, Minas Gerails, CEP
01-02-2014
It can be seen that RIC is also engaged with other persons. Therefore, it can be safely concluded that RIC was not dependent on the assessee for its finances. On the contrary, it was just engaged in its individual capacity vide Sales and Representative Agreement to assist the company in supply of the services/products to customers, in performing the final performance tests and in final settlement of the companies contractual obligations under contract, if required by the company. It would be apt to refer to the part of the contract which reads as under:
“Representative shall at all-time act as an independent contractor and the Company shall not exercise control over the activities and operations of Representative. Additionally, nothing in this agreement shall be construed or applied to create relationship of partners, agency, and joint ventures or of employer and employee between the Company and Representative. As an independent contractor, it is understood and agreed that the company has no obligation to Representative under federal, state or local laws regarding employee liability and that the total commitment and liability of the company in regard to this Agreement is the payment of the Commission as defined under Schedule A. Neither party is authorized to make any commitment or representation, express or implied, on the other parties behalf unless authorized to do so in writing by such other party.”
A perusal of the entire contract with RIC shows that RIC is an independent consultant having no rights to conclude contract on behalf of the assessee so as to construe as a permanent establishment in India. Since, in its independent professional capacity it provides similar services to other clients as mentioned elsewhere.
Further probe of facts show that one Shri Anand Mathur runs a consultancy business in the name and style of M/s Rajlaxmi International Corporation and the assessee seeks his service to represent it in India for its project in India. The assessee executes projects i.e supply, erection and commission of desulphurization plant on turnkey basis through international competitive bidding process.
The role of the RIC Shri Anand Mathur, representative, was by and large to find a project partner for the assessee to undertake the supply and erection of indigenous components. Besides, RIC is engaged for the liasoning service of the project on behalf of the assessee who neither intended nor empowered to conclude a project on behalf of the assessee.
On careful appreciation of facts, we are of the considered view that RIC is an independent consultant to provide certain liasoning service. In fact, the project is executed jointly by the assessee and its consortium partner in India M/s Beekay Engineering Corporation. The two contracts are as under:
S.No
Prices (Currency)
ESM, USA (USD)
BEEKAY (INR)
1
Design & Engineering
a) Imported (FOB) (Refer Table - 1)
6,94,494
2
b) Indigenous (At site) (Refer fable - 2)
-
32,00,000
Supply of Plant & Equipment
a) Imported (FOB) (Refer '['able - 3)
19,88,580
-
b) Indigenous (At site) (Refer fable - 4)
-
16,80,00,000
3
Supply of Refractories (At site)
a) Imported (FOB) (Refer 'fable - 5)
b) Indigenous (At site) (Refer fable - 6)
Inch in 2b
4
Supply of Commissioning Spares
a) Imported (FOB) (Refer 'fable - 7)
14,300
b) Indigenous (At site) (Refer Table - 8)
-
Inch in 2b
5
Civil Engineering Work including Supplies (Refer Table - 9)
6,04,67,000
6
Supply of Fabricated Building Steel Structures at site including Sheeting, Glazing and Shop Painting (Refer Table - 10)
-
3.00,00.000
7
Erection of Building Steel Structures including Sheeting, Glazing and Final Painting (Refer Table
30,00,000
8
a) Erection of Refractories
Incl. in 9
b) Works Contract Tax on Erection of Refractories (Refer Table -11)
Inch in 9
9
Storage, Handling, Erection, Commissioning, and P. G. tests of Plant & Equipment (Refer Table -11)
1,50,00,000
10
Eoreign Supervision Charges in India during Erection, Start-up, Commissioning and P. G. Tests(Refer Table - 12)
72,000
11
Training Charges (Refer Table - 13)
24,000
12
Ocean Freight, Customs clearance (excluding Customs duty), Port Clearance & Inland Transportation for Imported Items for which prices are quoted
38,150
22,45,000
13
Comprehensive Marine cum Erection
-
32,00,000
14
Total Contract price (1 to 13)
28,31,524
28,51,12,000
15
CENVAI Credit
-
2,64,83,234
Contract Price (Net of CENVAT
28,31,524
25,86,28,766
Applying an exchange rate of 44.30 per USD whereas the value of supply by ESM is Rs. 12.54 Crores, the value of supply, services and erection done by the consortium partner Beekay Engineering Corporation is Rs. 28.51 Crore accounting for 69% of the Contract value.
S.
No
Description
Prices (Currency)
Eoreign (USD)
Indian (Rs)
1
Design & Engineering
a) Imported (CIF) (Refer
Appendix - 15-1)
5,92,826
-
b) Indigenous (Refer Appendix - 15 -
-
15,00,000
2
Supply of Plant & Equipment
a) Imported (CIF) (Refer
Appendix - 15-3)
1082135
b) Indigenous (FOR site) (Refer Appendix - 15-4)
251640000
3
Supply of Refractories (At site)
NA
-
a) Imported (CIF) (Refer Appendix - 15-5)
Included
b) Indigenous (FOR site) (Refer
Appendix - 15 - 6)
4(a)
Supply of Commissioning Spares
a) Imported (CIF) (Refer
Appendix - 15 - 7a)
14300
-
b) Indigenous (FOR site) (Refer
Appendix - 15 - 8a)
-
Included
4(b)
Supply of Insurance Spares
i)Imported (CIF) (Refer
Appendix- 15-7b)
NA
-
ii)Indigenous (FOR site) (Refer
Appendix-15-8b)
-
N• A
5
Civil Engineering Work including Supplies (Refer Appendix -15- 9)
"
NA
6
Supply of Fabricated Building Steel Structures at site including Sheeting, Glazing and Shop Painting (Refer Appendix 15- 10)
7
Erection of Building Steel Structures including Sheeting, Glazing and Final Painting (Refer
Appendix 15 - 10)
NA
8
torage, Handling, Errection, Commissioning and P.G(Refer
Appendix -15-1 la)
1,50,00,000
9
) Erection of Refractories (Refer Refer Appendix -15-1 lb)
NA
Included
10
Foreign Supervision Charges in India during Erection, Start up, Commission and PG Tests (Refer
Appendix -15-12)
72,000
11
Training Charges(Refer Appendix
- 15-13)
24,000
12
Comprehensive Insurance for Storage, Erection, Testing & Commisioning and till PRAC is
issued for all the
20,00,000
13
Custom Clearing and Forwarding Operation at Chennai/ Vishakhapatnam Port, Inland Transportation for all the imported items including drawing and documents) for which prices are quoted in Foreign Currency)
and Insurance after CIF delivery till delivery at site
NA
5,00,000
14
Total Contracts Priee(l to 13)
1,785,261
270640000
15
CENVAT credit (refer clause
23.13 of GCC)
15.1
Excise Duty including education
3,37,00,000
15.2
Counter veiling Duty (CVD) including Education cess Structures at site including Sheeting, Glazing and Shop
Nil
Nil
15.3
Input Tax Credit(ITC) on APVAT
Nil
Nil
16
Contract Price (Net of CENVAT ITC)
1,785,261
236,940,000
Applying an exchange rate of 44.30/USD whereas the value of supply by / ESM is Rs. 7.78 Crore (USD 17,56,261 X 44.30), the value of supply, services and erection done by the consortium partner Beekay Engineering Corporation is Rs. 27.06 Crore accounting for 78% of the Contract value.”
A perusal of the above two contracts shows that in the case of RINL, consortium partner M/s Beekay Engineering Corporation is 78% of the contract value and in the case of the contract with SAIL [Bhilai Steel Plant], the value of supply services and erection done by the consortium partner is 69%.
Considering the facts of the case in totality and in appreciation of the agreement with RIC, we are of the considered opinion that RIC does not constitute DAPE of the assessee under the relevant article of the India – USA DTAA.
We are also of the considered view that the consortium partner M/s Beekay Engineering Corporation has done its work by way of a separate contract and, therefore, the same cannot be held as installation PE of the assessee. There is no dispute that the assessee has supplied only engineering design, that too, from abroad and consideration in view thereof has also been received from outside India and since we have held that RIC is not DAPE within the meaning of Article 5 of the India – USA DTAA, there is no question of any attribution to the assessee. In light of the afore-mentioned discussion, the appeal of the assessee is allowed and that of the Revenue is dismissed.
In the result, the appeal of the assessee in ITA No. 2343/DEL/2015 is allowed and that of the Revenue in ITA No. 1644/DEL/2015 is dismissed.