M/s. Voith Paper GmbH, New Delhi V. DDIT, New Delhi

ITA 1077/DEL/2014

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 4929 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 11 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-02-2020
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 04-07-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 25-02-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Transfer pricing; Double taxation relief; Principle of natural justice; International transaction; Deemed to accrue or arise in india; Retrospective amendment; Permanent establishment; Advance ruling; Question of law; Initiation of penalty proceedings; TDS; Set aside
• Section: 143(3); 5(2); 234B; 260A; 195; 41(2); 201; 144C; 191; 208; 64; 113; 43; 48; 9(1); 9(1); 9(1); 73; 72; 13; 119; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: D, NEW DELHI BEFORE SHRI O.P. KANT, ACCOUNTANT MEMBER AND SHRI K.N. CHARY, JUDICIAL MEMBER ITA NO.1077/DEL/2014 ASSESSMENT YEAR: 2010-11 M/S. VOITH PAPER GMBH, C/O-MOHINDER PURI & CO., CAS, 1A-1D, VANDHNA, 11, TOLSTOY MARG, NEW DELHI VS. DDIT, CIRCLE-2(2), NEW DELHI PAN :AADCV3751B (APPELLANT) (RESPONDENT) ORDER PERO.P. KANT, AM: THE ASSESSEE HAS PREFERRED THIS APPEAL AGAINST THE FINAL ASSESSMENT ORDER DATED 02/01/2-14, PASSED BY THE D EPUTY DIRECTOR OF INCOME TAX, CIRCLE-2(2), INTERNATIONAL TAXATION, NEW DELHI (IN SHORT THE LD. ASSESSING OFFICER), IN PU RSUANT TO THE DIRECTION DATED 27/12/2013 OF LD. DISPUTE RESOLUTIO N PANEL(DRP). THE GROUNDS RAISED IN THE APPEAL ARE RE PRODUCED AS UNDER: APPELLANT BY SHRI AJAY VOHRA, SR. ADV. SHRI AKSHAY UPPAL, CA RESPONDENT BY SHRI G.K. DHALL, CIT(DR) (INTL. TAXATION) DATE OF HEARING 28.11.2019 DATE OF PRONOUNCEMENT 21.02.2020 2 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 1. THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ORDER OF DEPUTY DIRECTOR OF INCOME-TAX (INTERNATION AL TAXATION), DELHI (A.O.) U/S 143(3) IN PURSUANCE OF DIRECTION ISSUED U/S 144C BY DISPUTE RESOLUTION PANEL (DRP) IS PERVERSE, BAD IN LAW AND VOID, BEING CONTRARY TO LAW AND PRINCIPLES OF NATURAL JUSTICE. 2. THAT THE LEARNED A.O. HAS ERRED IN COMPUTING INC OME AT RS. 16,14,04,346/- AS AGAINST RETURNED INCOME OF RS. NI L. 3.(A) THAT THE LEARNED A.O. AND DRP HAVE ERRED IN LAW AND ON FACTS IN HOLDING THAT AN INCOME OF RS.16,14,04,346/- IN RELA TION TO CONTRACT FOR SUPPLY OF EQUIPMENT, IS DEEMED TO ACCRUE OR ARI SE IN INDIA UNDER SECTION 9(1 )(I) OF THE INDIAN INCOME-TAX ACT (THE ACT) AND CONSEQUENTLY IS TAXABLE IN INDIA IN TERMS OF SECTIO N 5(2) OF THE ACT. (B) THAT THE LEARNED A.O./DRP HAS ERRED ON FACTS AN D IN LAW IN HOLDING THAT SALE OF EQUIPMENT WAS CONCLUDED IN IND IA BASED ON INCORRECT INTERPRETATION OF TERMS AND CONDITIONS OF CONTRACT IN RESPECT OF SUPPLY OF EQUIPMENT. (C) THAT THE LEARNED A.O./ DRP HAS MISDIRECTED THEM SELVES IN HOLDING THE SUPPLY AND SERVICE CONTRACTS IN THE NAT URE OF COMPOSITE CONTRACT AND ALSO THAT THE ACTIVITIES HAV E BEEN DISSECTED FOR THE PURPOSE OF TAX AVOIDANCE. (D) THAT THE LEARNED AO/DRP HAS ERRONEOUSLY HELD TH AT THE RELEVANT TWO CONTRACTS WERE IN THE NATURE OF NON-DIVISIBLE ' WORKS CONTRACT' AND ERRONEOUSLY RELIED ON THE DECISION OF HINDUSTAN SHIPYARD (2000) 119 STC 533; (2000) 6 SCC 579, NOT APPLICABL E ON FACTS AND IN LAW. (E) THAT THE LEARNED A.O./DRP HAS MADE ERRONEOUS OB SERVATIONS, ASSUMPTIONS OF FACTS, IN COMING TO THE CONCLUSION T HAT THE BUSINESS ACTIVITIES CARRIED OUT BY THE SERVICE (DEE MED) PE OF THE APPELLANT IN INDIA CONTRIBUTED TO THE EARNING OF PR OFITS EARNED BY THE APPELLANT FROM OFFSHORE SUPPLY OF EQUIPMENTS WI THOUT APPRECIATING THAT ALL THE EQUIPMENTS WERE MANUFACTU RED AND SUPPLIED FROM OUTSIDE INDIA AND THE SERVICE PE HAD NO ROLE TO PLAY IN THE SAME. (F) THAT THE LEARNED A.O. / DRP HAS GROSSLY ERRED I N LAW AND ON FACTS THAT CONSIDERATION FOR SALE OF PLANT AND EQUI PMENT WAS LIABLE TO TAX IN INDIA ON INCORRECT APPRECIATION OF THE PR OVISIONS OF SUPPLY CONTRACT, WRONG INTERPRETATION OF THE PROVISIONS OF THE ACT AND DTAA BETWEEN INDIA AND AUSTRIA. (G) THAT THE LEARNED A.O. AND DRP HAVE MISDIRECTED THEMSELVES ON WRONG ASSUMPTIONS OF FACTS AND IN LAW IN NOT ACCEPT ING THE CLAIM 3 ITA NO.1077/DEL/2014 VOITH PAPER GMBH THAT SUPPLY OF EQUIPMENT REPRESENTED CONSIDERATION OF THE NATURE OF BUSINESS PROFITS' NOT LIABLE TO TAX IN INDIA, A S PER THE PROVISIONS OF DTAA BETWEEN INDIA AND AUSTRIA READ WITH THE ACT . (H) THAT THE LEARNED AO AND DRP HAVE GROSSLY ERRED IN HOLDING THAT THE ASSESSEE HAD A PROJECT OFFICE/BRANCH OFFICE IN INDIA WHICH CONSTITUTED A PE. (I) THAT THE LEARNED AO AND DRP HAVE GROSSLY ERRED IN STATING THAT ALLEGED PE WAS INVOLVED IN MARKETING ACTIVITY IN IN DIA WITHOUT ANY BASIS. (J) THAT THE DECISIONS AS RELIED UPON BY THE LEARNE D AO ARE DISTINGUISHABLE, NOT APPLICABLE, ON FACTS OF THE AS SESSEE. (K) THAT THE LEARNED A.O./DRP HAS ERRED IN NOT FOLL OWING THE DECISIONS OF HONBLE SUPREME COURT OF INDIA AND JUR ISDICTIONAL HIGH COURT IN THE FOLLOWING CASES WHERE, ON SIMILAR FACTS, IT HAS BEEN HELD THAT CONSIDERATION FOR SUPPLY OF PLANT AN D EQUIPMENT, FROM OUTSIDE INDIA, WAS NOT LIABLE TO TAX IN INDIA. (I) COMMISSIONER OF INCOME TAX AND ANOTHER VS. HYUN DAI HEAVY INDUSTRIES COMPANY LIMITED (291 ITR 482 SC); (II) ISHIKAWAJIMA - HARIMA HEAVY INDUSTRIES LTD. - VS. DIRECTOR OF INCOME TAX, MUMBAI (228 ITR 408 SC). (III) DIRECTOR OF INCOME TAX, NEW DELHI VS. LG CAB LES LTD.[2011] 197 TAXMAN 51 (DELHI) (L) THAT THE LEARNED A.O. / DRP HAS WRONGLY AND WIT HOUT ANY BASIS ERRED IN HOLDING THAT THE ASSESSEE HAS A BUSINESS C ONNECTION AND FIXED PLACE OF BUSINESS IN INDIA WHERE FROM BUSIN ESS OF THE ASSESSEE WAS WHOLLY OR PARTLY CARRIED ON. (M) THAT THE LEARNED A.O./ DRP HAS ERRED IN HOLDING THAT THE ASSESSEE HAD A FIXED PLACE P.E BY ERRONEOUSLY LINKI NG IT THYSSENKRUPP COMPANIES BELONGING TO A DIFFERENT GRO UP. (N) THAT WITHOUT PREJUDICE, THE LEARNED A.O./ DRP H AS ERRED IN APPLYING FAR ANALYSIS AND BENCHMARKING OF UN-COMPAR ABLE COMPANIES IN COMPUTING PROFIT ATTRIBUTABLE IN INDIA IN RELATION TO SUPPLY OF EQUIPMENT AT RS. 16,14,04,346 AND FAILED TO APPRECIATE THAT GLOBAL INCOME STATEMENT- OR APPELLANT WAS ALSO SUBMITTED. THAT ATTRIBUTION OF PROFITS, AS MADE, ON SUCH BENCH MARKING BY THE LEARNED AO, WITHOUT PROVIDING DETAILS TO THE ASSESS EE, IS TOTALLY UNJUSTIFIED AND ILLEGAL AND ALSO FAIL TO CONSIDER T HE RESULT OF THE GLOBAL ACCOUNTS OF THE ASSESSEE. 4 ITA NO.1077/DEL/2014 VOITH PAPER GMBH (O) WITHOUT PREJUDICE, THE LEARNED A.O./ DRP HAS ER RONEOUSLY HELD THAT ON FACTS, PROFIT ATTRIBUTABLE IN RESPECT OF SU PPLIES IS 35% OF THE PROFIT ACCRUING FROM OFF SHORE SUPPLIES. THE SAID A TTRIBUTION IS ARBITRARY, HIGHLY EXCESSIVE AND HAS NO RATIONALE WH ATSOEVER, AND IS AGAINST THE PRINCIPLES OF ATTRIBUTION AS LAID DO WN UNDER THE PROVISIONS OF INCOME-TAX ACT, DTAA BETWEEN INDIA AN D AUSTRIA AND VARIOUS DECISIONS OF HONBLE HIGH COURT, SUPREM E COURT OF INDIA. RELIANCE MADE ON THE DECISION OF HONBLE DEL HI HIGH COURT IN THE CASE OF ROLLS ROYCE IS UNJUSTIFIED AS THE SA ME IS NOT APPLICABLE ON THE FACTS OF THE ASSESSE. (P) WITHOUT PREJUDICE, THE COMPUTATION OF REVENUE REGARDING THE OFFSHORE SUPPLY OF EQUIPMENT HAS BEEN ERRONEOUSLY M ADE AS THE RATE OF EXCHANGE FOR CONVERSION INTO RUPEES OF INCO ME EXPRESSED IN FOREIGN CURRENCY HAS BEEN TAKEN ARBITRARILY AND NOT AS PER RULE 115 OF THE INCOME TAX RULES. 4. THAT THE LEARNED A.O./ DRP HAS ERRED IN DIRECTIN G THE CHARGING OF INTEREST UNDER SECTION 234A, 234B, & 234D AS THE SA ME IS NOT ATTRACTED ON FACTS. RELIANCE MADE BY THE LEARNED AO/DRP ON DE CISION OF DIT VS ALCATEL LUCENT (ITA NOS.327/2012, 338/2012 AND 339/ 2012) AND DIT VS ALCATEL LUCENT WORLD SERVICES INC (ITA NOS.326/2 012, 329/2012 AND 336/2012) IS NOT JUSTIFIED, AS THE SAME IS NOT APPL ICABLE ON FACTS. 5. THAT THE LEARNED A.O. HAS ERRED IN INITIATING PE NALTY PROCEEDINGS UNDER SECTION 271(1 )(C) OF THE INCOME-TAX ACT, 196 1, THE PROVISIONS OF WHICH ARE NOT ATTRACTED ON THE FACTS. 6. THAT THE ASSESSEE MAY BE ALLOWED TO ADD, SUPPLEM ENT, REVISE, AMEND GROUNDS AS RAISED HEREINABOVE. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSES SEE, M/S VOITH PAPER GMBH (IN SHORT THE VOITH) IS A COMPANY INCORPORATED UNDER THE LAWS OF THE AUSTRIA, HAVING IT REGISTERE D OFFICE AT LINZER 55, A-3100 ST. POELTRAN, AUSTRIA. THE ASSESSEE COMP ANY IS ONE OF THE MARKET LEADER IN CONCEPT, TECHNOLOGY, PROJECT P LANNING, SALE, ENGINEERING, PROCESSING, SOURCING AND MARKETING OF BOARD AND PACKAGING PAPER MACHINES. 2.1 FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE FIL ED RETURN OF INCOME ON 28/03/2012 DECLARING NIL INCOME IN STA TUS OF A NON- 5 ITA NO.1077/DEL/2014 VOITH PAPER GMBH RESIDENT INDIAN (NRI). IN THE RETURN OF INCOME FILE D, THE ASSESSEE DECLARED ITS ADDRESS AS C/O MOHINDER PURI & CO. 1A -D VANDANA BUILDING 11, TOLSTOY MARG, NEW DELHI. 2.2 THE ASSESSEE HAD ENTERED INTO TWO CONTRACTS ON 19/ 06/2008 WITH THE CENTURY PULP AND PAPER COMPANY (CPPC), A DIVISION OF M/S. CENTURY TEXTILE INDUSTRIES LTD, FOR EQUIPMENT SUPPLY AND SERVICE FOR COMMISSIONING OF 620 TPD MULTILAYER P ACKAGING COATED BOARD PLANT. THE SUPPLY INCLUDED FOR ENGINEE RING, DESIGNING, MANUFACTURING, DRAWING AND SUPPLYING OF MACHINERY FOR 620 TPD MULTILAYER PACKAGING COATED BOARD PLANT AND SERVICE INCLUDED FOR SUPERVISION OF ERECTION, START-UP, TRA INING, COMMISSIONING AND PERFORMANCE TEST OF SAID MACHINER Y. 2.3 DURING THE SCRUTINY ASSESSMENT PROCEEDINGS FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE PROVIDED DETAILS OF BOTH THE CONTRACTS OF EQUIPMENT SUPPLY AND SERVICE CONTR ACTS. THE SUMMARY OF THE CONTRACT PRICE OF EQUIPMENT SUPPLY AND SERVICE CONTRACT, REPRODUCED BY THE ASSESSING OFF ICER IN THE IMPUGNED ORDER IS EXTRACTED AS UNDER: SUMMARY OF SUPPLY CONTRACT PRICE INVOICED ON THE CU STOMER S. NO. YEAR OFFSHORE SUPPLY OF EQUIPMENT DRAWING & DEIGNING EURO EURO 1. AY 2010-11 (FY 2009-10) 67,481,776 NIL 2. AY 2011-12 (FY 2010-11) 1,017,024 NIL TOTAL 68,498,600 NIL SUMMARY OF SERVICE CONTRACT PRICE RECEIVED FROM THE CUSTOMER. S.NO. YEAR PAYMENT RECEIVED (NET OF TAXES) PAYMENT (GROSSED UP RECEIVED @10%) EURO INR EURO INR 6 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 1 AY 2010-11 (FY 2009-10) 59,400 3,631,260 66,000 4,034,734 2 AY 2011-12 (FY 2010-11) 1,889,400 114,953,535 2,099,033 127,726,150 3 AY 2012-13 (FY 2011-12) 1,496,400 96,042,812 1,662,667 106,714,236 TOTAL 3,445,200 214,627,608 3,828,000 238,475,120 2.4 THE ASSESSEE HAS SUPPLIED THE MACHINERY PARTS IN F INANCIAL YEAR 2009-10 (RELEVANT TO ASSESSMENT YEAR UNDER CON SIDERATION) AND SUBSEQUENT FINANCIAL YEAR. DURING THE YEAR UNDE R CONSIDERATION, THE ASSESSEE RAISED INVOICES FOR SUP PLY OF COMPONENTS OF MACHINERY FROM 14 TH SEP., 2009 TO 9 TH DECEMBER, 2009 AND SHIPPED THE CONTAINERS THROUGH SEA. THE PE RSONNEL OF THE ASSESSEE COMPANY VISITED FROM 14/12/2009 TO 31/ 03/2010 FOR SUPERVISION OF THE ERECTION, START UP, TRAINING , COMMISSIONING AND PERFORMANCE TEST OF THE TPD PLANT. 2.5 IT WAS CONTENDED BY THE ASSESSEE THAT INCOME IN RE SPECT OF OFF-SHORE SUPPLY OF EQUIPMENT WAS NOT TAXABLE AS PER THE PROVISIONS OF THE INCOME-TAX ACT, 1961 (IN SHORT T HE ACT) AS WELL AS UNDER DOUBLE TAX AVOIDANCE AGREEMENT (DTAA) BETW EEN INDIA AND AUSTRIA. THE ASSESSEE SUBMITTED THAT IT HAD NO FIXED PLACE OF BUSINESS IN INDIA AS PER ARTICLE 5(2) OF THE DTAA B ETWEEN INDIA AND AUSTRIA AS FAR AS OFFSHORE SUPPLY OF MACHINERY WAS CONCERNED. 2.6 REGARDING THE SERVICE CONTACT, IT WAS SUBMITTED TH AT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE WAS ENGA GED IN UNDERTAKING SUPERVISION OF ERECTION IN RELATION TO MACHINES SUPPLIED BY THE ASSESSEE FROM OUTSIDE INDIA, WHICH IS AN ACTIVITY INCIDENTAL TO THE PLANT AND FOR EXECUTION OUTSIDE A CTIVITIES, FOR WHICH THE ASSESSEE DEPUTED ITS PERSONAL FROM TIME T O TIME. SUCH 7 ITA NO.1077/DEL/2014 VOITH PAPER GMBH SERVICE ACTIVITIES IN RELATION TO THE MACHINE, WERE CONTINUED FOR A PERIOD EXCEEDING SIX MONTHS AND THUS BY VIRTUE OF P ROVISION OF ARTICLES 5(2)(I) OF THE DTAA BETWEEN INDIA AND AUST RIA, ONLY IN RESPECT OF SAID SERVICE ACTIVITY, THE ASSESSEE HAD A DEEMED PERMANENT ESTABLISHMENT (PE) IN INDIA. 2.7 THE ASSESSEE DECLARED INCOME IN RESPECT OF SUPERVI SION ACTIVITY FOR TAXATION ON THE RECEIPT BASIS FOLLOWIN G COMPLETED CONTACT METHOD (CCM). UNDER CCM, THE AMOUNT RECEIVE D FROM THE CUSTOMER AND THE COSTS INCURRED IN RESPECT OF SUPER VISION ACTIVITY DURING THE YEAR WAS CARRIED OVER TO THE NEXT FINANC IAL YEAR(S) TILL THE PROJECT ACTIVITY WAS COMPLETED. IN THE FINANCIA L YEAR IN WHICH THE INSTALLATION ACTIVITY WAS COMPLETED, ALL THE AM OUNTS INVOICED ON THE CUSTOMER ARE BROUGHT FORWARD AS INCOME TO TH E PROFIT AND LOSS ACCOUNT AND SIMILARLY ALL THE COSTS AND EXPENS ES BROUGHT FORWARD FROM EARLIER YEAR(S) ARE TRANSFERRED TO PRO FIT AND LOSS ACCOUNT FOR THE PURPOSE OF DETERMINING THE NET PROF IT AND NET TAX PAYABLE BY THE ASSESSEE. 2.8 DURING ASSESSMENT PROCEEDINGS, THE LEARNED ASSESSI NG OFFICER EXAMINED THE CONTRACTS AGREEMENTS AND FOUND THAT BOTH CONTRACTS OF SUPPLY AND SERVICE CONSTITUTED AS COMP OSITE CONTRACT. ACCORDING TO THE LEARNED ASSESSING OFFICER (AO), IN VIEW OF BUSINESS CONNECTION, THE PART OF THE INCOME FROM OF FSHORE SUPPLY OF MACHINERY WAS DEEMED TO ACCRUE OR ARISE IN INDIA AND HENCE TAXABLE UNDER SECTION 9(1) OF THE ACT. THE AO WAS O F THE VIEW THAT SAID PART OF INCOME FROM OFFSHORE SUPPLY OF MACHINE RY, WAS ALSO TAXABLE IN INDIA IN TERMS OF THE DTAA BETWEEN INDIA AND AUSTRIA. THE AO ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE THA T IT HAD A PERMANENT ESTABLISHMENT (PE) IN INDIA, IN THE FORM OF PROJECT 8 ITA NO.1077/DEL/2014 VOITH PAPER GMBH OFFICE AND AS PER ARTICLE 7(1) OF THE DTAA BETWEEN INDIA AND AUSTRIA, THE PROFITS OF THE ENTERPRISE ATTRIBUTABLE TO THE PE IN INDIA WOULD BE TAXABLE IN INDIA. THE AO COMPUTED TH E SUPPLY OF MACHINERY DURING THE YEAR AT RS. 472,97,97,680/-AND IN THE SHOW CAUSE, HE PROPOSED THAT IN OFFSHORE SUPPLIES S EGMENT, THE ROLE OF PE WAS AKIN TO DISTRIBUTION FUNCTION I.E. T HE PE HAS FIRST PURCHASED THE EQUIPMENT /PLATFORM FROM THE HEAD OFF ICE (HO) AND THEN SOLD TO INDIAN CUSTOMER. ACCORDING TO THE AO, THE TRANSACTION OF SUCH PURCHASE BY AND TRANSFER OF EQU IPMENT TO THE PE WAS INTERNATIONAL TRANSACTION, WHICH WAS NOT R EPORTED BY THE ASSESSEE FOR TRANSFER PRICING ADJUSTMENT. THE AO CA RRIED OUT BENCHMARKING OF DISTRIBUTION FUNCTION OF THE PE A ND BASED ON SET OF COMPARABLES, COMPUTED AVERAGE MARGIN FOR DI STRIBUTION SERVICES AT 9.75 PERCENTILE. ACCORDINGLY, HE PROPO SED PROFIT MARK- UP AT AVERAGE MARGIN OF 9.75 % ON SUPPLY OF RS. 472 ,97,97,680/- WHICH AMOUNTED TO RS. 46,11,55,273/-. 2.9 THE ASSESSEE OBJECTED FOR CONSIDERING THE TAXABILI TY OF PROFIT FROM SUPPLY OF MACHINERIES MADE FROM OUTSIDE INDIA, AS ACCORDING TO THE ASSESSEE SALE OF MACHINERY WAS MAD E OUTSIDE INDIA AND THE PAYMENT WAS ALSO RECEIVED OUTSIDE IND IA AND THUS NO PART OF OFFSHORE SUPPLY WAS TAXABLE IN INDIA. IN SUPPORT OF THE CLAIM, THE ASSESSEE RELIED ON VARIOUS JUDICIAL PRON OUNCEMENTS. 2.10 AFTER CONSIDERING SUBMISSION OF THE ASSESSEE, THE AO MADE FACTUAL OBSERVATION ABOUT THE ACTIVITIES OF THE ASS ESSEE IN PARA 8 OF THE ASSESSMENT ORDER, WHICH IS EXTRACTED AS UNDE R FOR READY REFERENCE: 9 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 1. THE ASSESSEE HAS ENTERED INTO A CONTRACT WITH C ENTURY PULP AND PAPER COMPANY FOR SUPPLY OF PAPER MACHINE AND UNDERTAKING SUPERVISION OF ERECTION, STARTUP TRAINI NG COMMISSIONING AND PERFORMANCE SERVICES. 2. THERE IS OFF-SHORE SUPPLY AND SUPERVISION SERVI CES. 3. FROM THE PERUSAL OF SCOPE OF ACTIVITIES, IT IS SEEN THAT ASSESSEE WAS CARRYING OUT ALL THE DRAWINGS, DESIGN AND ENGIN EERING ALONG WITH SUPERVISION OF ERECTION, COMMISSIONING E TC. OF TPD PLANT 4. FROM THE SCOPE OF ACTIVITIES IT IS CLEAR THAT , THAT THE ACTIVITIES ARE OF THE NATURE OF COMPOSITE CONTRACT ACTIVITY BU T ACTIVITIES HAVE BEEN DISSECTED JUST FOR THE PURPOSE OF TAX AVO IDANCE. 5. THE SITUS OF WORK IS IN INDIA AND THE OBJECTIVE OF COMPOSITE NATURE OF WORK IS TO PROVIDE THE GOODS IN DELIVERAB LE STATE TO CENTURY PULP AND PAPER COMPANY. 6. OFF SHORE SUPPLIES ARE INTEGRAL PART OF SUPERVI SION OF FINAL COMMISSIONING AND INSTALLATION OF TPD PLANT 7. DURING THE YEAR THERE IS OFFSHORE SUPPLIES AMOU NTING TO RS. 472,97,97,680/- 2.11 ACCORDING TO THE AO, SUPPLY CANNOT BE TERMED AS CON TRACT FOR SALE OF EQUIPMENT BECAUSE MACHINERIES THOUGH MA NUFACTURED IN AUSTRIA BUT WERE REQUIRED FOR MANUFACTURING AND COMMISSION OF TPD PLANT IN INDIA. THE AO RELIED ON THE DECISIO N OF HONBLE SUPREME COURT IN THE CASE OF HINDUSTAN SHIPYARD (20 00) 119 STC 533 AND CONCLUDED THAT THE CONTRACT OF SUPPLY A ND SERVICE IN RELATION TO COMMISSION OF TPD PLANT IS A COMPOSITE CONTRACT. THE FINDING OF THE ASSESSING OFFICER IN RELATION TO CO MPOSITE CONTRACT ARE REPRODUCED AS UNDER: 11. I HAVE EXAMINED FACTS OF THIS CASE ALONG WITH THE RATION DECIDENDI ABOVE REFERRED TO JUDGMENT OF HONBLE SUP REME COURT AND HAVE NOTED THAT DICTUM OF LAW FOR SECOND CATEGORY O F CONTRACT (II) AS DISCUSSED ABOVE IS SQUARELY APPLICABLE TO THE IDENT ICAL FACTS OF THE CASE UNDER CONSIDERATION. IN THIS CASE ASSESSEE HAD ENTERED INTO A CONTRACT WITH CPPC TO DESIGN, BUILD, MANUFACTURE, S UPPLY, INSTALLATION, TESTING AND COMMISSION OF MACHINERY F OR TPD PLANT. THE SUPPLY OF MACHINES WAS NECESSARY AND INCIDENTAL TO DESIGN, MANUFACTURE, INSTALLATION, TESTING AND COMMISSION O F ABOVE FACILITY I.E. MACHINERY FOR TPD PLANT IN INDIA. IT IS NOT CA SE OF ASSESSEE THAT 10 ITA NO.1077/DEL/2014 VOITH PAPER GMBH THE CONTRACT WAS SIGNED FOR SUPPLY OF MACHINES ONLY AND SOME TECHNICAL WORK WAS REQUIRED TO BE DONE AS INCIDENTA L TO MACHINES ONLY AND SOME TECHNICAL WORK WAS REQUIRED TO BE DON E AS INCIDENTAL TO SALE OF EQUIPMENTS. EVEN THOUGH THE ASSESSEE DUR ING THE ASSESSMENT PROCEEDINGS, MENTIONED THAT THE SUPPLY O F MACHINERY FOR TPD PLANT AND THE INSTALLATION AND COMMISSIONING SE RVICES ARE SEPARATE AND INDEPENDENT OF EACH OTHER, A CAREFUL P ERUSAL OF THIS DOCUMENT REVEAL THAT AS PER THE TERMS AND CONDITION S OF THE CONTRACT THE EFFECTIVE MANDATE GIVEN TO THE ASSESSEE IS IN T HE NATURE OF COMPOSITE CONTRACT . THE PURPOSE AND INTENTION OF C PPC WAS TO INSTALL A FULLY FUNCTIONAL MACHINERY FOR TPD PLANT IN WORKING CONDITION AT THE AIRPORT AND THE ASSESSEE COMPANY W AS GIVEN THIS RESPONSIBILITY. THEREFORE, RESPECTFULLY FOLLOWING T HE ABOVE PRINCIPLE AS LAID DOWN BY HONBLE APEX COURT, I AM OF CONSIDE RED VIEW THAT THE IMPUGNED CONTRACT IS NOTHING BUT A CONSOLIDATED CON TRACT WAS FOR DESIGN, BUILD, MANUFACTURE, SUPPLY, INSTALLATION, T ESTING AND COMMISSIONING, OF MACHINERY FOR TPD PLANT I.E. WORK CONTRACT AND THE CONTRACT CANNOT BE SUBDIVIDED AS CONTRACT FOR SALE OF EQUIPMENTS AND CONTRACT FOR TECHNICAL SERVICES AS WAS WRONGLY BEEN ARGUED ON BEHALF OF ASSESSEE. 11.1 IN THIS CASE DESIGNING, MANUFACTURING, COMMISS IONING AND CALIBRATION OF ABOVE REFERRED TO MACHINERY FOR TPD PLANT WAS COMPLETE RESPONSIBILITY OF ASSESSEE COMPANY WHICH W AS ONLY ONE CONTRACTOR TO IMPLEMENT THE CONTRACT AND IT HAD FUR NISHED PERFORMANCE GUARANTEE AND GUARANTEE FOR TIMELY COMP LETION OF THE PROJECT OF BUILDING AND COMMISSIONING THESE MACHINE RY FOR TPD PLANT. IT IS NOT CASE WHERE SEPARATE CONTRACT WERE SIGNED BY DIFFERENT PARTIES TO EXECUTE A PROJECT. HONBLE SUPREME COURT IN CASE OF ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD. VS. DIT, MUMBAI (SUPRA) EXAMINING THE CONTRACT FOR SALE AND SERVICES HAS HE LD AS UNDER: WE DO NOT THINK THAT THESE OBSERVATIONS FURNISH A UNIVERSAL TEST THAT WHENEVER THERE IS A CONTRACT TO FIX CER TAIN ARTICLES MADE BY A MANUFACTURER THE CONTRACT MUST BE DEEMED ONE FOR SALE AND NOT OF SERVICE. THE TEST IN EACH CASE IS W HETHER THE OBJECT OF THE PARTY SOUGHT TO BE TAXED IS THAT THE CHATTEL AS CHATTEL PASSES TO THE OTHER PARTY AND THE SERVICE R ENDERED IN CONNECTION WITH THE INSTALLATION ARE UNDER A SEPARA TE CONTRACT OR ARE INCIDENTAL TO THE EXECUTION OF THE CONTRACT OF SALE. 12. I HAVE EXAMINED THE FACTS OF THE CASE IN LIGHT OF ABOVE REFERRED TO RATIO DECIDENDI AS LAID DOWN BY HONBLE APEX COURT AND I HAVE NOTED THAT IN THIS CASE ASSESSEE HAD NOT RENDERED SERVICE S TO FIX CERTAIN ARTICLE OR EQUIPMENT, BUT IN THIS CASE EQUIPMENTS ( MACHINERY FOR TPD PLANT) AND SPARES WERE REQUIRED TO DESIGN, BUILD MA NUFACTURE, COMMISSION, CALIBRATE AND OPERATION OF ABOVE REFERR ED TO MACHINERY FOR TPD PLANT. THESE EQUIPMENTS WERE PART OF MACHIN ERY FOR TPD PLANT. IN VIEW OF THESE FACTS IT IS HELD THAT IT IS THE WORK CONTRACT AND 11 ITA NO.1077/DEL/2014 VOITH PAPER GMBH THE SAME CANNOT BE HELD AND DIVIDED AS CONTRACT FOR SALE OF EQUIPMENTS. 13. THE PECULIAR FACTS OF THIS CASE IS COVERED IN F AVOR OF DEPARTMENT BY THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COUR T IN CASE OF CIT VS. MITSUI ENGINEERING AND SHIP BUILDING CO. LTD. ( 2003) 259 ITR 248 (DELHI) WHEREIN THE CONTENTION WAS THAT THE FIN DING THAT THE CONTRACT FOR DESIGNING, ENGINEERING, MANUFACTURING, SHOP TESTING AND PACKING UP TO FOB PORT OF EMBARKATION COULD NOT BE SPLIT UP SINCE THE ENTIRE CONTRACT WAS TO BE READ TOGETHER AND WAS FOR ONE COMPLETE TRANSACTION. IT WAS IN THE SAID FACT SITUATION HELD THAT IT WAS NOT POSSIBLE TO APPORTION THE CONSIDERATION FOR DESIGN ON ONE PART AND THE OTHER ACTIVITIES ON THE OTHER PART. THE PRICE P AID TO THE ASSESSEE WAS THE TOTAL CONTRACT PRICE WHICH COVERED ALL THE STAGES INVOLVED IN THE SUPPLY OF MACHINERY. IN CONSTRUING A CONTRACT, THE TERMS AND CONDITIONS THEREOF ARE TO BE READ AS A WHOLE. A CON TRACT MUST BE CONSTRUED KEEPING IN VIEW THE INTENTION OF THE PART IES. IN THIS CASE THE INTENTION OF THE ASSESSEE WAS TO DESIGN, BUILT, MANUFACTURE, COMMISSION, CALIBRATE AND OPERATION OF MACHINERY F OR TPD PLANT NOT THE SALE OF TRADE ITEMS. IN THIS CONTEXT THAT T HESE CONTRACTS UNDER CONSIDERATION ARE COMPOSITE CONTRACT WHICH COULD NO T BE SPLITTED TO DEMONSTRATE FOB SALE OF EQUIPMENTS AS SEPARATE ACTI VITY RESPECTFULLY FOLLOWING THE RATIO DECIDENDI OF CITED AUTHORITY I AM, OF CONSIDERED VIEW THAT THESE CONTRACTS CANNOT BE SPLI TTED TO HOLD THAT SALE OF SPARES AND EQUIPMENT NEEDED FOR COMMISSIONI NG OF THESE REPAIR FACILITY WAS A SEPARATE CONTRACT FOR SALE. 2.12 THEREAFTER, THE ASSESSING OFFICER WENT ON TO HOLD THAT INCOME FROM THE COMPOSITE CONTRACT WAS TAXABLE UNDE R SECTION 9(1) THE INDIAN INCOME-TAX ACT AS THE INCOME DEEMED TO ACCRUED OR ARISE IN INDIA THROUGH OR FROM THE BUSINESS CONN ECTION IN INDIA. IN VIEW OF THE DECISION OF THE HONBLE SUPRE ME COURT IN THE CASE OF CIT VS RD AGARWAL & CO. (1965) 56 ITR 20 (SC ), AND DECISION OF THE HONBLE ANDHRA PRADESH HIGH COURT I N THE CASE OF GVK INDUSTRIES LTD. VS ITO (1997) 228 ITR 564 (AP), HE SUMMARIZED THE ESSENTIAL OF BUSINESS CONNECTION A S UNDER: (I) A REAL AND INTIMATE RELATION MUST EXIST BETWEEN THE TRADING OR OTHER BUSINESS ACTIVITIES BY A NON-RESIDENT CARRIED ON OUTSIDE INDIA AND THE ACTIVITIES WITHIN INDIA; 12 ITA NO.1077/DEL/2014 VOITH PAPER GMBH (II) THE RELATION CONTRIBUTES DIRECTLY OR INDIRECTL Y TO THE EARNING OF INCOME BY THE NON-RESIDENT IN HIS BUSINESS; A COURS E OF DEALING OR CONTINUITY OF RELATIONSHIP AND NOT A ME RE ISOLATED OR STRAY NEXUS BETWEEN THE BUSINESS OF THE NON-RESI DENT OUTSIDE INDIA AND THE ACTIVITY IN INDIA, WOULD FURN ISH A STRONG INDICATION OF BUSINESS CONNECTION. 2.13 IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE , THE AO CONCLUDED THE TAXABILITY UNDER INDIAN INCOME-TAX AC T AS UNDER: 17. IN THE LIGHT OF ABOVE STATED DICTUM OF LAW I H AVE EXAMINED THE FACTS OF THE CASE AND HAVE NOTED THAT IN THIS CASE, ASSESSEE HAD BUSINESS CONNECTION IN INDIA IN THE YEAR UNDER CONS IDERATION FOR EARNING INCOME FROM SUPPLY OF TPD PLANT AND SUPERVI SORY SERVICES. IN THIS CASE THE BUSINESS OF ASSESSEE WAS TO DESIGN , BUILD, MANUFACTURE, SUPPLY AND SUPERVISION OF INSTALLATION , TESTING AND COMMISSIONING OF MACHINERY FOR TPD PLANT FOR INDI AN CUSTOMER (CPPC). THE ASSESSEE HAD CARRIED OUT THE BUSINESS A CTIVITIES IN INDIA THROUGH ITS DEEMED PE IN INDIA AND THESE ACTI VITIES HAD CONTRIBUTED IN EARNING OF THE PROFIT BY ASSESSEE BO TH ON ACCOUNT OF SUPERVISORY SERVICES AND SUPPLIES OF EQUIPMENT NEED ED FOR TPD PLANT. THESE FACTS HAVE PROVED BEYOND DOUBTS THAT T HERE WAS A REAL AND INTIMATE RELATIONSHIP ON CONTINUOUS BASIS BETWE EN THE BUSINESS ACTIVITIES CARRIED ON IN INDIA AND BUSINESS OF THE ASSESSEE WHO IS A NON-RESIDENT AND THIS RELATIONSHIP HAD RESULTED IN ACCRUAL OF INCOME TO THE ASSESSEE BOTH ON PROVIDING SUPERVISORY SERVI CES AND SUPPLIES OF DESIGN, DRAWING AND EQUIPMENT TO INDIAN CUSTOMER . IT IS PROVED FROM ABOVE DISCUSSION THAT ALL THE THREE ESSENTIAL FEATURES OF THE BUSINESS CONNECTION MENTIONED ABOVE ARE PRESENT IN THIS CASE. THEREFORE, THE INCOME ACCRUING OR ARISING TO THE AS SESSEE BY WAY OF PROFIT FROM DESIGN, MANUFACTURE, SUPPLY OF MACHINES , SUPERVISION OF INSTALLATION, TESTING AND COMMISSIONING OF MACHINER Y FOR TPD PLANT TO INDIAN CUSTOMER SHALL BE DEEMED TO ACCRUE OR ARR IVE IN INDIA U/S 9(1 )(I) OF THE ACT AND CONSEQUENTLY SAME IS TAXABL E IN INDIA UNDER DOMESTIC LAW IN TERM OF SECTION 5(2) OF THE ACT. 2.14 THE AO ALSO HELD EXISTENCE OF THE PE IN INDIA AND TAXABILITY UNDER THE DTAA BETWEEN INDIA AND AUSTRIA. THE DTAA HAS DEFINED THE PE AS A FIXED PLACE OF BUSINESS THROUGH WHICH THE BUSINESS OF AN ENTERPRISE IS WHOLLY OR PARTLY CARRI ES OUT. THE EXISTENCE OF DEEMED PE IN RESPECT OF SUPERVISION AC TIVITIES HAS NOT 13 ITA NO.1077/DEL/2014 VOITH PAPER GMBH BEEN DISPUTED BY THE ASSESSEE IN VIEW OF EMPLOYEES OF THE ASSESSEE WERE STATIONED AT THE CPPC TPD PLANT IN TH E YEAR UNDER CONSIDERATION FOR SUPERVISING THE ERECTION AND COMM ISSIONING OF THE TPD PLANT. THE AO IS OF THE VIEW THAT THE ADDRE SS MENTIONED IN THE RETURN OF INCOME WAS AT THE DISPOSAL OF THE ASSESSEE FOR A VERY LONG DURATION AND IT WAS INVOLVED IN MARKETING AND PRE CONTRACT NEGOTIATIONS DONE BY THE ASSESSEE, AND THU S, PE OF THE ASSESSEE EXISTED FROM BEGINNING OF THE SUPPLY CONTR ACT. THE RELEVANT FINDING OF THE AO IS REPRODUCED AS UNDER: 18.2 FURTHER, IN THE TAX AUDIT REPORT FURNISHED IN FORM 3 CB AND FORM 3CD UNDER RULE 6G(1)(B) OF THE INCOME TAX RULE S , 1962 OF THE ASSESSEE (RELATED TO THE PERMANENT ESTABLISHMENT IN INDIA FOR THE CONTRACT WITH FORD INDIA PVT. LTD, THE ADDRESS OF T HE PE IS MENTIONED AS MOHINDER PURI& CO 1A-D, VANDHNA BUILDING 11, TO LSTOY MARG NEW DELHI- 110001. IN THE RETURN OF INCOME FILED BY ASSESSEE ALSO THE SAME ADDRESS IS MENTIONED AS THE ADDRESS OF THE ASSESSEE. ALSO, THE UNDERSIGNED IS ALSO THE ASSESSING OFFICER OF OTHER GROUP COMPANIES OF THE ASSESSEE (M/S THYSSENKRUPP ELEVATO R AUSTRALIA PTY. LIMITED AND M/S THYSSENKRUPP AIRPORT SYSTEM SA ) BOTH THESE COMPANIES HAVE BRANCH OFFICE / PROJECT OFFICE AT TH E SAME ADDRESS AS GIVEN BY ASSESSEE. THEREFORE THERE CAN BE NO DIS PUTE ON THE FACT THAT THIS ADDRESS IS A PLACE OF BUSINESS AND THIS P LACE OF BUSINESS IS AT THE DISPOSAL OF THE ASSESSEE. NEXT LET US EXAMIN E WHETHER ANY BUSINESS ACTIVITY IS CARRIED OUT FROM OR THROUGH TH IS PLACE OF BUSINESS. IN THE FORM 3CD MENTIONED ABOVE IN COLUMN NO 9 (B) IT IS MENTIONED THAT THE BOOKS OF ACCOUNTS OF THE PE ARE MAINTAINED IN THE COMPUTER SYSTEM. IN FORM 3CD AND 3CB SUPRA THE ADDRESS OF THE ASSESSEE IS AT SUPRA. THEREFORE THERE IS NO REASON TO PRESUME THAT THE COMPUTER SYSTEM MENTIONED SUPRA IS NOT INSTALLE D AT THE ADDRESS OF THE ASSESSEE. MAINTENANCE OF BOOKS OF ACCOUNTS I S A CORE BUSINESS ACTIVITY WHICH IS CARRIED OUT FROM THE ABO VE MENTIONED PLACE OF BUSINESS. THE RETURNS OF THE ASSESSEE ARE BEING FILED IN INDIA SINCE LAST MANY YEARS AND IN ALL THE RETURNS THE ADDRESS OF ASSESSEE REMAINS THE SAME. THEREFORE IT IS IMPLIED THAT THIS PLACE OF BUSINESS IS AT THE DISPOSAL OF ASSESSEE FOR SUFFICI ENTLY IONA DURATION TO BE CALLED AS PERMANENT ESTABLISHMENT. THEREFOR E THE ASSESSEES SUBMISSION THAT THE PE CAME INTO EXISTENCE AFTER TH E SUPPLY UNDER THE IMPUGNED CONTRACT IS COMPLETED, IS NOT CORRECT. IN FACT THE PE WAS VERY MUCH INVOLVED IN THE 'MARKETING AND PRE-CONTRA CT NEGOTIATIONS DONE BY ASSESSEE. 14 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 18.3 IT IS EVIDENT FROM ABOVE REFERRED TO FACTS THA T ASSESSEE HAD CARRIED OUT BUSINESS OF DESIGN, MANUFACTURE, SUPPLY AND SUPERVISION OF INSTALLATION, TESTING AND COMMISSIONING OF MACHI NERY FOR TPD PLANT FROM THE PE OF ASSESSEE IN INDIA. THE SUPPLIES OF M ACHINERY FOR TPD PLANT WERE A PART OF A COMPOSITE CONTRACT. ACCORDIN GLY, A PART OF THE PROFIT EARNED BY ASSESSEE ON SUPPLY WAS ATTRIBUTABL E TO FIX PLACE OF PE OF ASSESSEE IN INDIA. 2.15 THE AO ALSO REJECTED THE CONTENTION OF ASSESSEE TH AT MACHINERY FOR TPD PLANT WERE DELIVERED OUTSIDE INDI A AND THUS NO PROFIT FROM OFFSHORE SUPPLY COULD BE ATTRIBUTED TO THE PE OF THE ASSESSEE, OBSERVING AS UNDER: 18.4 THE CLAIM OF ASSESSEE THAT MACHINERY FOR TPD PLANTS WERE DELIVERED OUTSIDE INDIA IN AUSTRIA, ACCORDINGLY NO PROFIT FROM OFFSHORE SUPPLY COULD BE ATTRIBUTED TO THE PE OF ASSESSEE IN INDIA. I HAVE CAREFULLY EXAMINED THE TERM AND CONDITION OF AGREEM ENT AND HAVE NOTED THAT THE CLAIM OF ASSESSEE IS FACTUALLY INCOR RECT. AS PER THE TERMS AND CONDITIONS OF THE AGREEMENT ASSESSEE HAS TO DELIVER MACHINERY FOR TPD PLANT IN RUNNING CONDITION AFTER COMPLETING SUPERVISION OF THE INSTALLATION COMMISSIONING AND T ESTING. IN SUCH A CONDITION ASSESSEES CONTENTION THAT EQUIPMENTS ARE SOLD TO CPPC IN HIGH SEAS CANNOT BE ANYTHING BUT A TAX AVOIDANCE SC HEME. WHEN ASSESSEE IS REQUIRED TO HAVE POSSESSION OF THE GOOD S AT THE WORK SITE FOR SUPERVISION OF INSTALLATION, THE PASSING O F POSSESSION IN HIGH SEAS TO CPPC AND AGAIN TAKING IT BACK AT THE SITE I S HIGHLY ILLOGICAL. NO PURPOSE OTHER THAN TAX EVASION CAN BE SERVED FRO M THIS TRANSACTION. FURTHER THERE IS NO DOCUMENTARY EVIDEN CE ALSO OF THE RECEIPT OF THESE GOODS BY THE ASSESSEE OR ITS AGENT AT THE WORK SITE. EVEN AS PER SECTION 19 (1) OF SALES OF GOODS ACT TH E TITLE OF GOODS PASSES WHEN THE CONTRACTING PARTIES INTEND IT TO PA SS. IN THIS CASE, WHEN THE INTENTION OF ONE OF THE CONTRACTING PARTIE S (CPPC) IS TO RECEIVE THE GOODS IN WORKING CONDITION, THE MERE DO CUMENTS STATING THAT THE TITLE HAS PASSED OVERSEAS HAVE NO VALUE AS THE NATURE OF GOODS IN THIS CASE IS SUCH WHICH CANNOT BE IMAGINED TO BE IN WORKING CONDITION HIGH SEAS. BOTH THESE FACTS ARE C ONTRADICTING EACH OTHER THEREFORE ONLY ONE OF THEM CAN BE FACT. SINCE THE OTHER CLAUSES OF THE IMPUGNED CONTRACT ARE IN OPERATION, THE TITL E OVER THE GOODS CANNOT PASS OVERSEAS. 15 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 2.16 THE AO ALSO EXAMINED THE CLAIM OF THE ASSESSEE THA T TITLE OF THE MACHINERY SUPPLIED PASSED OUTSIDE INDIA IN THE LIGHT OF SALE OF GOODS ACT, 1930 (IN SHORT THE SGA). THE AO REFER RED TO SECTION 19(1) OF THE SGA, WHICH PROVIDES THAT IN A CONTRACT FOR SALE OF GOODS, THE PROPERTY IS TRANSFERRED TO THE BUYER AT SUCH TIME AS THE PARTIES TO THE CONTRACT INTEND IT TO BE TRANSFERRED . THE SECTION 19(2) OF THE SGA PROVIDES AS INTENTION OF THE PARTI ES HAS TO ASCERTAIN FROM TERMS OF CONTRACT, THE CONDUCT OF PA RTIES, THE CIRCUMSTANCES OF THE CASE. THE AO AFTER EXAMINING T HE CIRCUMSTANCES PROVIDED IN SECTION 19(2) OF SGA, HEL D THAT THE PARTIES INTENDED TO PASS TITLE OF THE EQUIPMENT IN INDIA ONLY. THE OBSERVATIONS OF THE AO ARE REPRODUCED AS UNDER: SECTION 19(1) OF THE SALE OF GOODS ACT PROVIDES IN A CONTRACT FOR THE SALE OF GOODS, THE PROPERTY IS TRANSFERRED TO A BUY ER AT SUCH TIME AS THE PARTIES TO THE CONTRACT INTEND IT TO BE TRANSFE RRED. HOWEVER SECTION 19(2) OF THE ACT PROVIDES THAT FOR THE PURP OSE OF ASCERTAINING THE INTENTION OF THE PARTIES, REGARD SHALL BE HAD T O: A. THE TERMS OF THE CONTRACT; B. THE CONDUCT OF THE PARTIES; AND C. THE CIRCUMSTANCES OF THE CASE B. THE CONTRACT HAS TO BE READ AS A WHOLE TO ASCERT AIN THE INTENTION OF THE PARTIES. C. THE DEFINITION OF THESE TERMS CLEARLY INDICATES THAT THE ENTIRE RISK IS BORNE BY THE SUPPLIER AND CARRIAGE AND INSU RANCE CHARGES PAID TILL THEIR DELIVERY AT AIRPORT/ SEAPORT IN IND IA. THE REPEATED REFERENCE BY THE ASSESSEE TO INCOTERMS 2000 DOES NO T ALTER THE SITUATION BECAUSE THE EXPRESSION BY ITS VERY DEFINI TION IN THE AGREEMENT MEANS THE OBLIGATION TO BEAR THE CARRIAGE AND INSURANCE CHARGES UPTO AIRPORT/ SEAPORT IN INDIA. IT WOULD BE ILLOGICAL TO READ THAT THE PARTIES PARTICULARLY CENTURY PULP AND PAPE R COMPANY IN INDIA, CAN AGREE TO THE DELIVERY AT ANY AIRPORT/ SE APORT OUTSIDE INDIA. 19.2 IN VIEW OF ALL THE ABOVE REFERRED CLAUSES, IF THE AGREEMENT IS READ AS A WHOLE, THE INTENT OF THE PARTIES IS CLEAR THAT THE TITLE TO THE 16 ITA NO.1077/DEL/2014 VOITH PAPER GMBH EQUIPMENT PASSES IN INDIA AT THE SITE WHERE THE DEL IVERIES ARE MADE OR IN A WORST SCENARIO AT THE AIRPORTS/SEAPORTS IN INDIA. 19.3 UNDER NORMAL CIRCUMSTANCES, THE RISK AND TITLE WOULD GO TOGETHER. IN THE PRESENT CASE, THE TERMS OF THE AGR EEMENT READ AS WHOLE AND THE CONDUCT OF THE PARTIES GO TO INDICATE THAT THE DOCUMENTS SUBMITTED BY ASSESSEE DURING THE COURSE O F ASSESSMENT LIKE BILL OF LADING, INVOICES, IMPORT DOCUMENTS ETC DO NOT DEMONSTRATE THE TRUE INTENT OF THE PARTIES. THIS CONDITION OF T HE SUPPLY CANNOT BE MET IT THE GOODS ARE DELIVERED ON HIGH SEAS THE FU LL SATISFACTION CAN BE REACHED ONLY IN INDIA AFTER THE PROVISIONAL ACCEPTANCE. ONE CANNOT PICK UP ONE PART OF SUPPLY OBLIGATION AND CO NTEND THAT THE TITLE HAS PASSED WITH THE DISCHARGE OF THAT OBLIGAT ION. INCOTERMS 2000 ONLY REFER TO THE TERMS OF THE AGREEMENT GENER ALLY ACCEPTABLE BETWEEN THE CONTRACTING PARTIES WITH REGARD TO OBLI GATION TO BEAR THE COST OF TRANSPORTATION, INSURANCE TILL THE POINT OF DELIVERY. THUS, IF THE AGREEMENT IS VIEWED AS A WHOLE, IT DEMONSTRATES THA T THE SUPPLIER HAS THE OBLIGATION TO DELIVER THE GOODS AT THE RELE VANT SITE IN INDIA AND THE DOCUMENTS SHOWING THAT THE TITLE PASSES IN HIGH SEAS DOES NOT REFLECT THE ACTUAL MODE AND DELIVERY OF THE SUP PLY NOR THE TRUE INTENT OF THE PARTIES. SECTION 19(2) OF SALES OF GO ODS ACT PROVIDES FOR THE FACTORS TO DETERMINE THE INTENT OF THE PARTIES AND IF DESPITE THE DECLARATION TO THE CONTRARY UNDER THE SECTION 19(1) , IF IT IS FOUND AS A MATTER OF FACT THAT THE DELIVERIES HAD BEEN MADE IN INDIA IT WOULD BE OPEN TO REVENUE TO ASSERT THAT TITLE TO THE GOODS H AD PASSED IN INDIA. 2.17 THE AO FURTHER REFERRED TO SECTION 21 OF THE SGA, WHICH PROVIDES THAT WHERE THERE IS A CONTRACT FOR SALE OF SPECIFIED GOODS AND SELLER IS BOUND TO DO SOMETHING TO THE GOODS FO R THE PURPOSE OF PUTTING THEM IN A DELIVERABLE STATE, THE PROPERT Y DOES NOT PASS UNTIL SUCH THING IS DONE AND THE BUYER HAS NOTICE T HEREOF. THE AO OBSERVED THAT IN THE INSTANT CASE, THE ASSESSEE PRO VIDED GOODS IN DELIVERABLE STATE IN INDIA. THE RELEVANT FINDING OF THE AO IS REPRODUCED AS UNDER: 19.4 SECTION 21 OF THE SALES OF GOODS ACT PROVIDES THAT WHERE THERE IS CONTRACT FOR SALE OF SPECIFIC GOODS AND SELLER I S BOUND TO DO SOMETHING TO GOODS FOR THE PURPOSE OF PUTTING THEM IN A DELIVERABLE STATE THE PROPERTY DOES NOT PASS UNTIL SUCH THING I S DONE AND THE BUYER HAS NOTICE THEREOF. IN THE PRESENT CASE, THE SALE IS NOT OF 17 ITA NO.1077/DEL/2014 VOITH PAPER GMBH STANDARD GOODS BUT OF COMPONENTS OF PASSENGER BOARD ING BRIDGES, UNLESS THESE COMPONENTS ARE ASSEMBLED, INSTALLED, C OMMISSIONED AND TESTED, THESE SUPPLIES WOULD BE WORTHLESS. THES E COMPONENTS AND EQUIPMENTS REACHED THE DELIVERABLE STATE ONLY W HEN THEIR INSTALLATION IS COMPLETED AND PERFORMANCE ESTABLISH ED THROUGH THE PROVISIONAL OR FINAL TESTING. THE ASSESSEE HAS DEFI NITE OBLIGATION TO ACHIEVE THIS MILESTONE AND UNLESS THIS IS DONE THE PROPERTY CANNOT PASS. UNLIKE OTHER KINDS OF OVERSEAS SUPPLIES WHERE THE SUPPLIER HAS NO OTHER OBLIGATION BEYOND THE POINT OF SHIPMEN T, IN THE PRESENT CASE, THE OBLIGATION OF THE SUPPLIER EXTENDS TO THE GEOGRAPHICAL LIMITS OF INDIA WHERE HE HAS TO PUT THE SUPPLY INTO A DELI VERABLE STATE. IN THE EQUIPMENTS BEING DISCUSSED IN THE PRESENT CASE, THE VARIOUS COMPONENTS ARE INTEGRAL PART OF THE WHOLESOME TECHN OLOGY AND THESE CANNOT BE VIEWED INDEPENDENTLY. 2.18 THE AO ALSO REFERRED TO SECTION 41(1) AND 41(2) O F SGA , WHICH PROVIDES THAT WHERE GOODS ARE DELIVERED TO TH E BUYER , WHICH HE HAS NOT PREVIOUSLY EXAMINED , HE IS NOT DE EMED TO HAVE ACCEPTED THEM UNLESS AND UNTIL HE HAS HAD A REASONA BLE OPPORTUNITIES OF EXAMINING THEM FOR THE PURPOSE OF ASCERTAINING WHETHER THEY ARE IN CONFORMITY WITH THE CONTRACT. T HE AO FINALLY OBSERVED IN PARA 20 OF THE ASSESSMENT ORDER AS TITL E OF THE MACHINERY SUPPLIED PASSED IN INDIA. THE RELEVANT PA RA IS REPRODUCED AS UNDER: 20. A READING OF THE AFORESAID SECTIONS OF THE SAL E OF GOODS ACT WILL SHOW THAT WHERE THERE IS A CONTRACT FOR THE SALE OF SPECIFIC GOODS AND THE SELLER IS BOUND TO DO SOMETHING TO THE GOODS FO R THE PURPOSE OF PUTTING THEM INTO A DELIVERABLE STATE, THE PROPERTY DOES NOT PASS UNTIL SUCH THING IS DONE AND THE BUYER HAS NOTICE T HEREOF. THIS CLEARLY SHOWS THAT OPERATIONALIZATION AND FULL AND GUARANTEED WORKING CONDITION IN ACCORDANCE WITH TECHNICAL SPEC IFICATIONS ARE THE REQUIREMENTS FOR THE CONTRACTED GOODS TO BE PUT INT O A DELIVERABLE STATE AND THE PROPERTY DOES NOT PASS UNTIL SUCH THI NG IS DONE IE WORKING CONDITION AS PER TECHNICAL SPECIFICATIONS AND THE BUYER HAS NOTICE THEREOF THOUGH THE PROVISIONAL ACCEPTANCE .E ST. AS PER TERMS AND CONDITIONS OF ABOVE REFERRED AGREEMENTS AND THE DISCUSSION IN THE PARA ABOVE IT IS AMPLY CLEAR THAT ASSESSEE WAS RESPONSIBLE FOR PROCUREMENT, TRANSPORT, RECEIVING., UPLOADING AND S AFE KEEPING OF ALL 18 ITA NO.1077/DEL/2014 VOITH PAPER GMBH THE EQUIPMENT REQUIRED IN THE COMPLETION OF WORK WH ICH INCLUDE THE SUPPLY OF 620 TPD PLANT FROM AUSTRIA. IN TERM AND C ONDITION OF THE AGREEMENT, THE OFFSHORE SUPPLIES BECOME THE PROPERT Y OF THE EMPLOYER ONLY WHEN THE SAME WAS DELIVERED AT SITE E VEN THEREAFTER THE CONTRACTOR I.E. ASSESSEE CONTINUED TO BEAR THE RISK IN RESPECT OF SUCH ITEM AS THE SAME IN ITS CUSTODY TILL INSTALLA TION, COMMISSIONING AND TESTING. 2.19 THE AO, THEN PROCEEDED TO HOLD THAT SALE OF EQUIPME NT WAS CONCLUDED IN INDIA AND THE PE IN INDIA PLAYED ROLE IN MARKETING AND THUS PART OF PROFIT OF SUPPLY OF MACHINERY OF T PD PLANT IS DIRECTLY ATTRIBUTABLE TO THE PE OF THE ASSESSEE IN INDIA. THE RELEVANT PART OF THE FINDING OF THE AO IS REPRODUCE D AS UNDER: 21. ALL THESE ANALYSIS MAKES IT CLEAR THAT THE SAL E OF EQUIPMENTS IS CONCLUDED IN INDIA.PE OF ASSESSEE IN INDIA WAS DIRE CTLY INVOLVED IN DESIGN, BUILD, MANUFACTURING AND SUPERVISION OF COM MISSIONING OF MACHINERY FOR TPD PLANT FACILITY AND SUPPLY OF MACH INERY FOR TPD PLANT WAS NEEDED TO MAKE THIS MACHINERY FOR TPD PLA NT FUNCTIONAL. THESE FACTS CLEARLY SUGGEST THAT THERE WAS EXTREMEL Y CLOSE CONNECTION BETWEEN THE ASSESSEE AND PE IN INDIA I.E . PE AND ASSESSEE COMPANY WERE SAME AND ONE. IT IS A PROVEN FACT THAT SUPPLY OF EQUIPMENT WERE INCIDENTAL AND ESSENTIAL T O DESIGN, BUILD, MANUFACTURE, COMMISSION MACHINERY FOR TPD PLANT AND IS PART OF ONE AND COMPOSITE AGREEMENT. THE ASSESSEE HAD EARNED SU PERVISION FEE AND INCOME FROM SUPPLIES ONLY FROM ITS BUSINESS ACT IVITIES CARRIED ON THROUGH PE IN INDIA. ALL THE TRANSACTION INCLUDING SUPPLY OF EQUIPMENT OFFSHORE HAD TAKEN PLACE WITH THE INVOLVE MENT OF THE PE OF ASSESSEE IN INDIA. THE ABOVE REFERRED TO FACTUAL MATRIX OF THIS CASE THAT SUBSTANTIAL PART OF THE BUSINESS ACTIVITI ES OF ASSESSEE OF MANUFACTURING AND COMMISSIONING OF MACHINERY FOR TP D PLANT WERE CARRIED OUT IN TAXABLE TERRITORY OF INDIA AND SUPPL Y OF MACHINERY FOR TPD PLANT WAS INCIDENTAL TO WORK CONTRACT AND FOR T HIS REASON A PART OF PROFIT ON SUPPLY IS DIRECTLY ATTRIBUTABLE TO THE PE OF ASSESSEE IN INDIA. 21.1 IT IS NOT CASE OF A PROJECT WHERE SUPERVISION SERVICES WERE REQUIRED TO FIX UP A PLANT AND MACHINERY I.E. TECHN ICAL SERVICES WERE INCIDENTAL TO SALE OF PLANT AND MACHINERY. IN THE C ASE OF ASSESSEE A CONTRACT WAS SIGNED BETWEEN ASSESSEE AND CPPC TO DE SIGN, BUILT, MANUFACTURE AND SUPERVISION OF ERECTION AND COMMISS IONING OF MACHINERY FOR TPD PLANT IN INDIA AND SUPPLY OF MACH INERY FOR TPD PLANT WERE INCIDENTAL TO WORK CONTRACT AND WERE ESS ENTIAL REQUIREMENT AND WERE PART OF THESE MACHINERY FOR TP D PLANT. IN OTHER WORDS SUPPLY OF EQUIPMENT WAS INCIDENTAL TO M AIN BUSINESS 19 ITA NO.1077/DEL/2014 VOITH PAPER GMBH ACTIVITY OF ASSESSEE COMPANY PROVIDING TECHNICAL SE RVICES FOR DESIGN, BUILD, MANUFACTURE AND SUPERVISION OF INSTALLATION, TESTING AND COMMISSION OF MACHINERY FOR TPD PLANT. FOR ALL THE SE REASONS, IT IS AMPLY CLEAR THAT THERE WAS SUFFICIENT TERRITORIAL N EXUS BETWEEN SUPPLIES AND PE OF ASSESSEE COMPANY IN INRJIA IT IS ALSO IMPORTANT TO CONSIDER THE FACT THAT THE CONTRACT WITH CPPC WAS N EGOTIATED AND SIGNED IN INDIA. 21.2 IN THIS CASE SUPPLIES OF EQUIPMENT WERE MADE O NLY TO BUILD AND COMMISSION MACHINERY FOR TPD PLANT IN INDIA THROUGH PE OF ASSESSEE AND THESE SUPPLIES WERE INCIDENTAL TO RENDERING TEC HNICAL SERVICES FOR MANUFACTURING AND SUPERVISION OF ERECTION AND C OMMISSIONING OF MACHINERY FOR TPD PLANT. ACCORDINGLY, IT CANNOT BE PLEADED THAT SALE OF MACHINERY FOR TPD PLANT WAS NOT DIRECTLY CONNECT ED WITH PE. IT IS ALSO PROVED FROM THE FACTS AS RECORDED ABOVE THAT I N THIS CASE THAT ALL THE BUSINESS ACTIVITIES OF MANUFACTURING AND SU PERVISION OF ERECTION AND COMMISSIONING OF MACHINERY FOR TPD PLA NT AS WELL AS INCIDENTAL SUPPLIES WERE CARRIED ON IN INDIA (DELIV ERY AT SITE) AND A PART PROFIT ON SUPPLY WAS ATTRIBUTABLE TO THE PE IN INDIA. 21.3 IN VIEW OF THE DISCUSSIONS CONTAINED ABOVE, IT IS HELD THAT PROFIT EARNED BY ASSESSEE FROM SUPPLY OF EQUIPMENTS IS DIR ECTLY ATTRIBUTABLE TO THE PE OF ASSESSEE IN INDIA. THE EQ UIPMENT MACHINERY FOR TPD PLANT NEEDED FOR SUPERVISION FOR ERECTION A D COMMISSIONING OF THESE FACILITIES WERE MANUFACTURED BY ASSESSEE I N AUSTRIA BUT WERE UTILIZED FOR CREATION OF MACHINERY FOR TPD PLA NT IN INDIA. THEREFORE A PART OF BY ASSESSEE ON OFFSHORE SALE/SU PPLY WAS DIRECTLY ATTRIBUTABLE TO PE IN INDIA. 2.20 THE AO COMPUTED THE PROFIT ATTRIBUTABLE TO THE PE IN THE LIGHT OF THE RATIO OF THE DECISION OF THE HONBLE D ELHI HIGH COURT IN THE CASE OF ROLLS ROYCE PLC 339 ITR 147C(DELHI) AT 35% OF THE PROFIT FROM OPERATION OF SUPPLY OF MACHINERY. THE R ELEVANT PART OF THE ORDER IS REPRODUCED AS UNDER: 21. AS DISCUSSED SUPRA THAT OUT OF THE ABOVE ACTIV ITIES DRAWING, DESIGNS AND MANUFACTURING OF EQUIPMENT IS DONE OUTS IDE INDIA BUT MARKETING AND RELATED ACTIVITIES AND SUPERVISION OF ERRECTION AND COMMISSIONING IS DONE IN INDIA. AS DISCUSSED SUPRA, PE IS PLAYED ROLE IN MARKETING AND RELATED ACTIVITIES AND SUPERV ISION. 21.1 TAKING GUIDANCE FROM ROLLS ROYCE 35% OF THE PR OFIT ACCRUING FROM THE OFFSHORE SUPPLIES TO THE INDIAN OPERATIONS FOR THE ROLE PLAYED BY THE PE CAN BE ATTRIBUTED. PROFIT FROM OFF SHORE SUPPLIES CAN BE COMPUTED BASED ON THE ASSESSEES GLOBAL PROFITAB ILITY AFTER 20 ITA NO.1077/DEL/2014 VOITH PAPER GMBH MAKING CERTAIN ADJUSTMENTS FOR DEPRECIATION AND PRO VISIONS ETC. ANOTHER METHOD CAN BE TO ESTIMATE A PERCENTAGE OF G ROSS AMOUNTS RECEIVED AS OFFSHORE SUPPLY. FOR THIS, THE PROFIT M ARGINS OF SOME COMPARABLE COMPANIES DOING SIMILAR ACTIVITY CAN BE ADOPTED AS A GUIDANCE AND PROFITS ATTRIBUTABLE CAN BE WORKED OUT . 21.2 THE ASSESSEE HAS SUBMITTED GLOBAL CONSOLIDATED ANNUAL ACCOUNT WHICH CANNOT BE RELIED UPON AS IT CONSOLIDA TES ALL THE SUBSIDIARY COMPANIES ACCOUNTS ALSO. IN ABSENCE OF S TANDALONE ANNUAL ACCOUNT A PROFIT OF 9.75% (PROFIT MARGIN EST IMATED AS PER PARA 7 ABOVE) IS ASSUMED AS PROFIT EARNED BY THE CO MPANY AND 35% OF SUCH PROFITS ARE ATTRIBUTED TO PE. WITH THESE REMARKS, THE TOTAL INCOME OF THE ASSESSE E IS COMPUTED AS UNDER: INCOME AS PER RETURN OF INCOME FILED ON 28.03.2012 - NIL INCOME FROM OFFSHORE SUPPLY CALCULATION OF INCOME FROM OFFSHORE SUPPLY PARTICULARS FY 2009-10 GROSS OFFSHORE SUPPLY REVENUES (INR) = EXCHANGE RATE @ 70.09 RS. 472,97,97,680 PROFIT ON THE BASIS OF 9.75% RS. 46,11,55,274 ATTRIBUTION IN INDIA (%) 35% TOTAL TAXABLE INCOME RS. 16,14,04,346 2.21 THE AO PASSED THE DRAFT ASSESSMENT ORDER DATED 30/03/2013 UNDER SECTION 143(3) READ WITH SECTION 1 44C(1) OF THE ACT AND ATTRIBUTED INCOME FROM OFFSHORE SUPPLY TO TAX IN INDIA AS COMPUTED ABOVE. 2.22 THE OBJECTIONS FILED BY THE ASSESSEE AGAINST THE D RAFT ASSESSMENT ORDER BEFORE THE LD. DRP, DID NOT FIND A NY FAVOUR AND REJECTED BY THE LEARNED DRP IN ITS DIRECTION DATED 27/12/2013. 2.23 PURSUANT TO THE DIRECTION OF THE LEARNED DRP, THE ASSESSING OFFICER PASSED IMPUGNED FINAL ASSESSMENT ORDER DATE D 21 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 02/01/2014, CONFIRMING ALL THE ADDITIONS MADE IN TH E DRAFT ASSESSMENT ORDER. AGGRIEVED WITH THE ADDITION MADE IN FINAL ASSESSMENT ORDER, THE ASSESSEE IS BEFORE THE TRIBUN AL RAISING THE GROUNDS AS REPRODUCED ABOVE. 3. THE GROUND NOS. 1 AND 2 OF THE APPEAL ARE GENERAL IN NATURE AND THEREFORE WE ARE NOT REQUIRED TO ADJUDICATE UPO N SPECIFICALLY. 3.1 IN GROUND NOS. 3 [FROM 3(A) TO 3(M)], THE ISSUE OF INCOME ARISING ON SUPPLY OF MACHINERY HELD BY THE LOWER AU THORITIES AS INCOME ACCRUED IN THE HANDS OF THE ASSESSEE AS PER PROVISIONS OF THE INCOME-TAX ACT AS WELL AS UNDER THE PROVISIONS OF DTAA BETWEEN THE INDIA AND AUSTRIA, HAVE BEEN RAISED. 3.2 BEFORE US, THE LD. COUNSEL OF THE ASSESSEE FILED A PAPER-BOOK CONTAINING PAGES 1 TO 216 AND MADE SUBMISSIONS IN S UPPORT OF THE GROUNDS RAISED. THE LEARNED COUNSEL ALSO FILED WRITTEN SUBMISSION. THE LD. DR ON THE OTHER HAND SUPPORTED THE ORDER OF THE LOWER AUTHORITIES AND CONTENDED THAT THE ASSESS EE IS LIABLE FOR TAX BOTH UNDER THE ACT AS WELL AS UNDER THE DTAA BE TWEEN INDIA AND AUSTRIA IN RESPECT OF COMPOSITE WORKS CONTRACT OF SUPPLY AS WELL AS SERVICE. THE LEARNED DR ALSO FILED WRITTEN SUBMISSIONS. THE LEARNED COUNSEL FILED HIS REJOINDER TO THE SUBM ISSIONS OF THE LEARNED DR. 3.3 WE HAVE HEARD RIVAL SUBMISSION OF BOTH THE PARTIES AND PERUSED THE RELEVANT MATERIAL ON RECORD INCLUDING T HE ORDER OF THE LOWER AUTHORITIES AND THE PAPER BOOK FILED BY THE A SSESSEE. 3.4 IN THIS CASE, THE ASSESSEE HAS ENTERED INTO TWO CO NTRACTS WITH CPPC, A DIVISION OF M/S CENTURY TEXTILE AND INDUSTRIES LTD: (A) EQUIPMENT SUPPLY CONTRACT DATED 19/06/2008 -FOR ENGINEERING, DESIGNING, MANUFACTURING, DRAWING AND 22 ITA NO.1077/DEL/2014 VOITH PAPER GMBH SUPPLYING OF MACHINERY FOR 620 TPD MULTILAYER PACKAGING COATED BOARD PLANT. (B) SERVICE CONTRACT DATED 19/06/2008- FOR SUPERVISION OF ERECTION, START-UP, TRAINING, COMMISSIONING AND PERFORMANCE TEST OF SAID MACHINERY. BOTH THE ABOVE CONTRACTS HAVE BEEN SIGNED IN INDIA ON SAME DATE. 3.5 IN THE FACTS OF THE CASE, THE CONTENTION OF THE AS SESSEE IS THAT THE SUPPLY OF EQUIPMENT IS FROM OUTSIDE INDIA, WHICH IS ONLY A OFFSHORE SUPPLY AND NO INCOME CORRESPONDING TO TH E SAME ACCRUED OR ARISEN IN INDIA IN TERMS OF ACT. THE ASS ESSEE HAS REFUTED CONTENTION OF THE INCOME-TAX AUTHORITIES TH AT CONTRACT OF SUPPLY AND CONTRACT OF THE SERVICE BOTH CONSTITUTE A COMPOSITE CONTACT FOR SETTING UP OF THE TPD PLANT. THE ASSESS EE HAS ALSO CONTESTED THAT THERE WAS NO FIXED PLACED PE AS FAR AS SUPPLY CONTRACT IS CONCERNED AND THEREFORE NO PROVISIONS O F THE DTAA ARE APPLICABLE FOR INCOME FROM SUPPLY OF THE CONTRACT I S CONCERNED. 3.6 THE VARIOUS ISSUES HAVE BEEN RAISED IN THE ABOVE G ROUNDS. THE FIRST ISSUE IS WHETHER THE TWO CONTRACTS CONSTI TUTE A COMPOSITE CONTRACT AS HELD BY THE ASSESSING OFFICER OR WHETHER THE MACHINERY SUPPLY CONTRACT WAS ONLY OFFSHORE SUP PLY, INDEPENDENT OF CONTRACT OF SUPERVISION OF ERECTION OF THE MACHINERY. COMPOSITE CONTRACT 4. REGARDING THE FINDING OF THE ASSESSING OFFICERTHAT THE CONTRACT IS A COMPOSITE CONTRACT FOR SETTING UP A P LANT AND THE 23 ITA NO.1077/DEL/2014 VOITH PAPER GMBH TRANSACTION HAS BEEN SEGREGATED INTO TWO SEPARATE C ONTRACTS FOR PURCHASE AND SERVICE FOR TAX AVOIDANCE ONLY AND OFF SHORE SUPPLIES ARE INTEGRAL PART OF SUPERVISION AND FINAL COMMISSI ONING AND INSTALLATION OF TPD PLANT, THE LD. COUNSEL OF THE A SSESSEE CONTENDED THAT SAME ARE ERRONEOUS FINDING. THE LEAR NED AO HAS HELD THAT THE SUPPLY OF MACHINERY WAS NECESSARY AND INCIDENTAL TO DESIGN, MANUFACTURE, INSTALLATION, TESTING AND C OMMISSIONING OF THE TPD PLANT IN INDIA AND THE IMPUGNED CONTRACT IS NOTHING BUT A CONSOLIDATED CONTRACT FOR DESIGN, BUILD, MANU FACTURE, SUPPLY, INSTALLATION, TESTING AND COMMISSIONING OF MACHINERY OF THE TPD PLANT, I.E., WORK CONTRACT AND THE CONTACT CANNOT BE SUBDIVIDED AS CONTRACT FOR SALE OF EQUIPMENT AND CO NTRACT FOR TECHNICAL SERVICES. THE AO PLACED HIS RELIANCE ON T HE DECISION IN THE CASE OF CIT VS MITSUI ENGG. & SHIP BUILDING (2003) 259 ITR 248 (DELHI) AND HINDUSTAN SHIPYARD LTD. (2000) 119 STC 533 (SC). THE LD. COUNSEL OF THE ASSESSEE RELIED ON THE DECI SION IN THE CASE OF DIT VS ISHIKAWAJMA HARIMA HEAVY IND USTRIES LTD., 288 ITR 408 (SC) AND SUBMITTED THAT OBLIGATIO N OF THE ASSESSEE FOR THE CONTRACTS OF SUPPLY OF EQUIPMENT A ND SUPERVISION ARE DISTINCT AND SEPARATE, WHICH WERE EXECUTED BY T HE ASSESSEE WITH SEPARATE PRICES AND THUS, IT CANNOT BE SAID TH AT BOTH CONTRACTS ARE A COMPOSITE CONTRACT. 4.1 REGARDING THE FINDING OF THE ASSESSING OFFICER THA T SITUS OF WORK IS IN INDIA AND OBJECTIVE OF COMPOSITE NATURE OF THE WORK IS TO PROVIDE THE GOODS IN DELIVERABLE STATE TO CPPC, THE LD. COUNSEL SUBMITTED THAT AS FAR AS SITUS OF SUPPLY IS CONCERN ED IT WAS NOT IN INDIA BUT FOR INSTALLATION IT IS WITHIN INDIA. 24 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 4.2 THE LD. DR, ON THE OTHER HAND, SUBMITTED THAT THE CLAIM OF THE ASSESSEE THAT THE SUPPLY & SERVICE CONTRACTS AR E SEPARATE, INDEPENDENT AND SEVERABLE CONTRACTS CANNOT BE ACCEP TED ON ACCOUNT OF THE FOLLOWING OBSERVATIONS PROVISIONS IN THE CONTRACTS [PAGES ARE REFERRED W.R.T. ASSESSEES PAPER BOOK FOR 2010-11 ] - INTENTION OF THE PURCHASER WHEREAS THE PURCHASER DESIRES TO INSTALL A 620 TPD MULTILAYER PACKAGING COATED BOARD PLANT ... [PB FOR 2010-11, P.157&186]AND THE ASSESSEE IS COMMITTED TO THE SUCCESS OF THE PROJECT . [15, P.179] - THE TERM PLANT AS USED IN THE CONTRACT HAS A VERY WIDE AMBIT THAT INCLUDES IN ITS SWEEP NOT ONLY THE MACHINERY PROVIDED BY SUPPLIER (3.1; P.162) BUT ALSO THE MACHINERY OTHERWISE PROCURED BY THE PURCHASER (3.2; P.163)] TO BE ERECTED ON SITE. [P.160] - THE TERM MACHINERY ALSO HAS A WIDE CONNOTATION THAT INCLUDE SUPPORTS, EMBEDMENT ETC. [3.1.2; P.162] - EXAMINATION OF THE NATURE OF GOODS SUPPLIED UNDER SUPPLY CONTRACT I.E. PRESS SECTION AND PRESS ROL LS [P.14, 36]; WIRE SECTION AND COATING SECTION [P.19,36,45]; DRYER CYLINDER[P.24 & 32]; HEAD BO X [P.28];MECHANICAL DRIVE[P.36,49]; MCS [P.36]; DCS [P.36];MG DRYER [P.41]; PARTS FOR HEAD BOX [P.4 5]; PARTS FOR MASTER REEL [P.45];CONTROL CABINETS [P.45];QCS WITH CD CONTROLS [P.45];AIR DRYING SY STEM [P.49];MG HOOD [P.54];HOOD& VENTILATION SYSTEM [P.58];DEWATERING SYSTEM [P.58]; PNEUMATIC SYSTE M [P.58];CONTROL ROOM EQUIPMENT [P.58]; FIBRE RECO VERY SYSTEM [P.58];DRYER SECTION [P.62];HYDRAULIC SYSTEM[P.62];LUBRICATION SYSTEM [P.62]; WET END [P.62]; APPROACH FLOW SYSTEM[P.62] AND STOCK PREPARATION [P.62] ETC. CLEARLY BRING OUT THE FAC T THAT THESE GOODS ARE NOT IN A DELIVERABLE STATE AS PER THE TERMS OF THE SUPPLY CONTRACT. THESE ARE MERELY PARTS/SECTIONS OF THE PLANT AND DONT HAVE ANY INDEPENDENT FUNCTIONS/USAGE FOR THE PURCHASER AND 25 ITA NO.1077/DEL/2014 VOITH PAPER GMBH NEEDS TO BE ASSEMBLED TO FULFILL/SATISFY THE PURPOS E OF THE CONTRACT. - THE ABOVE OBSERVATION THAT THE INDIVIDUAL COMPONENT S SUPPLIED UNDER THE SUPPLY CONTRACT DOES NOT HAVE AN Y INDEPENDENT USE FOR THE PURCHASER IS RECONFIRMED BY CLAUSE 13.5 OF THE CONTRACT WHICH STATES THAT THE DATE OF COMPLETION OF DELIVERY IS THE DATE OF DELIVERY OF THE LAST CONSIGNMENT TO BE SUPPLIED. [13.5, P.171]. - ANOTHER IMPORTANT FEATURE THAT ESTABLISHES THE INTE R- LINKAGE BETWEEN THE SUPPLY & SERVICE CONTRACT IS TH E PROVISION FOR MONTHLY PROGRESS REPORT [ART-17 OF SUPPLY CONTRACT, P.180 & ART-16 OF SERVICE CONTRACT , P.201]. IF THE CONTENTION OF THE ASSESSEE IS TO BE ACCEPTED, THERE IS NO NEED FOR A MONTHLY PROGRESS REPORT IN RESPECT OF SUPPLIES THAT ARE INDEPENDENT OF THE SERVICE OBLIGATIONS. - PERHAPS, THE MOST SIGNIFICANT INDICATOR OF THE INTE R- LINKAGE AND INTERDEPENDENCY BETWEEN THE SUPPLY CONTRACT AND SERVICE CONTRACT IS THE PRESENCE AND PRIMACY OF THE PERFORMANCE WARRANTEE CLAUSE [ART-4 OF SUPPLY CONTRACT, P. 163] WHICH IS ONE OF THE SERVICE/SUPERVISORY OBLIGATIONS OF THE ASSESSEE UND ER THE SERVICE CONTRACT. [ART-2 OF SERVICE CONTRACT, P.191]THIS IS THE UMBILICAL LINK BETWEEN THE SUPPLY AND SERVICE CONTRACT. A SEPARATE ART-4 IN THE SUPPLY CONTRACT IS EXCLUSIVELY DEVOTED TO THIS WHICH PROVI DES THAT THE SUPPLIER SHALL WARRANTEE THE PERFORMANCE OF THE PLANT..AND [EVEN] THE MACHINERY/ACCESSORIES TO B E PROVIDED BY THE PURCHASER [HAVE TO] FULFILL[S] THE PRECONDITIONS DEFINED BY THE SUPPLIER. [P.163] TOWARDS THIS END, THE SUPPLY CONTRACT PRE SUPPOSES A NUMBER OF TEST RUNS [ART-4.2, P.163]. ALTHOUGH PERFORMANCE WARRANTEE AND OTHER TESTS ARE RELEVANT AND PART OF THE SERVICE PARAMETERS, NEVERTHELESS, IT FINDS PROMINEN T MENTION THROUGHOUT THE ENTIRE SUPPLY AGREEMENT. THE PRIMACY OF THIS ARTICLE/EXERCISE CAN BE GAUGED FROM THE FACT THAT THE FINAL ACCEPTANCE OF THE GOODS SUPPLIE D HINGES UPON THE SUCCESS OF THE PERFORMANCE WARRANTE E TEST. THUS, AS PER ART-6 THE MACHINERY WILL NOT BE DEEMED TO HAVE BEEN FORMALLY FINALLY ACCEPTEDBY 26 ITA NO.1077/DEL/2014 VOITH PAPER GMBH THE PURCHASER UNTIL PERFORMANCE GUARANTEES HAVE BEEN ACHIEVED..... AFTER FULFILLMENT OF THE PERFORMANCE GUARANTEE, THE PURCHASER WILL ISSUE TO THE SUPPLIER A FINAL ACCEPTANCE CERTIFICATE . [6.1, 6.2 & 6.3; P.166] SIMILARLY, INSUFFICIENT FULFILLME NT OF THE PERFORMANCE GUARANTEE PARAMETERS WILL LIABLE TH E SUPPLIER FOR LIQUIDATED DAMAGES. [ART-15.2, P.173]I F THIS IS NOT SUFFICIENT, AS PER ART-7.3 OF THE GENERAL TE RMS OF CONTRACT IF THE SUPPLIER SHOULD COMMIT A BREACH OF NON-FULFILLMENT OF THE MINIMUM PERFORMANCE GUARANTEES........THEN THE PURCHASER SHALL HAVE THE RIGHT TO TERMINATE THE CONTRACT. [P.177] - THE SERVICE CONTRACT , ON THE OTHER HAND SPECIFICALLY PROVIDES IN THE SCOPE OF SERVICES PROVISION FOR PERSONNEL SERVICES FOR SUPERVISION OF ERECTION, ST ART-UP, TRAINING, COMMISSIONING AND PERFORMANCE TEST(S) . [P.186, 191] EVEN THOUGH AS PER ART-6.1(A) OF THE SPECIFIC TERMS & CONDITIONS OF CONTRACT PROVIDES TH AT [AND THE ASSESSEE ARGUES THAT] THE PURCHASER SHALL CARRY OUT THE ERECTION, COMMISSIONING, STARTUP AND PERFORMANCE TEST(S) UNDER THE SUPERVISION OF THE SUPPLIER [P.193], ART. 7.1 PROVIDES THAT SUPPLIER SHALL BE RESPONSIBLE FOR ENSURING CORRECTNESS OF ERECTION OF ALL MACHINERIES SUPPLIED BY THE SUPPLIER [P.194] AND IN CASE OF NON-FULFILLMENT OF THE MINIMUM PERFORMANCE GUARANTEE, THE PURCHASER SHALL HAVE THE RIGHT TO TERMINATE THE [SERVICE] CONTRACT. [ART- 6.2 OF GENERAL TERMS & CONDITIONS TO SERVICE CONTRA CT, P.198] - IN OTHER WORDS, THE PERFORMANCE WARRANTEE CLAUSE UNDER BOTH THE SUPPLY & SERVICE CONTRACT ACT AS A CROSS-FALL BREACH CLAUSE WHERE THE NON-FULFILLMENT OF THIS CLAUSE MAY LEAD TO THE TERMINATION OF BOTH THE SUPPLY AS WELL AS THE SERVICE CONTRACT. THE MACHINERY, PLANT AND PROJECT SHALL NOT BE COM PLETE UNLESS AND UNTIL THE SAME CLEARS PERFORMANCE WARRANTY TEST AND IN THE EVENT OF NON-FULFILLMENT OF THE MINIMUM PERFORMANCE GUARANTEE . [7.3, P.177] THE SUPPLY CONTRACT CAN BE TERMINATED AND THE PRICE ALREADY PAID BY THE PURCHASER HAS TO BE REFUNDED AGAINST RETURN OF MACHINERY ALREADY DELIVERED . [7.5, 27 ITA NO.1077/DEL/2014 VOITH PAPER GMBH P.178] SIMILARLY, THE SERVICE CONTRACT CAN ALSO BE TERMINATED FOR THE NON-FULFILLMENT OF THE MINIMUM PERFORMANCE GUARANTEE. [6.2; P.198] IN FACT, THE TERMS AND CONDITIONS GOVERNING THE SERVICE CONTRACT ARE SO IDENTICAL TO THAT OF SUPPLY CONTRACT THAT CL. 6. 4 OF THE SERVICE CONTRACT ALSO PROVIDES FOR THE REFUN D OF PRICES PAID BY THE PURCHASER AND RETURN OF MACHINERY RECEIVED BY IT IN THE EVENT OF TERMINATION OF SERVICE CONTRACT. [6.4; P.198] ACCOUNTING PRACTICE BY THE ASSESSEE - IT IS NOT THAT THE PROVISIONS OF BOTH THE SUPPLY & SERVICE CONTRACTS ESTABLISH THEIR COMPOSITENESS AND INTER-LINKAGE. IN PRACTICE TOO, THE ASSESSEE ITSELF TREATS BOTH THE SUPPLY & SERVICE CONTRACTS AS AN INDIVISIB LE COMPOSITE CONTRACT. THE ASSESSEE FOLLOWS CASH SYSTEM OF ACCOUNTING FOR THE RECOGNITION OF ITS REVENUE. AS PER THE TERMS OF THE SERVICE CONTRACT REMUNERATION/ SUPERVISION CHARGES ARE PAYABLE O N A FIXED RATE PER MAN-DAY BASIS. [CL.3; P.191]. THE CO ST FOR SERVICES UNDER THE CONTRACT TO BE CHARGED ON THE BA SIS OF ACTUAL SERVICES RENDERED USING THE DAILY RATES. [3.9; P.193].AS PER CL.4 OF THE SERVICE AGREEMENT DEALING WITH THE TERMS OF PAYMENT, PAYMENTS OUT OF THE LETTER OF CREDIT SHALL BE MADE AGAINST THE FOLLOWING DOCUMENT S: (A) SUPPLIERS MONTHLY INVOICE (B) COPY OF MONTHLY TIME SHEET ISSUED BY THE SUPPLIER AND COUNTERSIGNED BY T HE PURCHASER. [CL.4.2; P.193] HOWEVER, EVEN THOUGH THERE IS NO PROVISION OF ADVANCE PAYMENT OF REMUNERATION/SUPERVISION FEE PAYABLE UNDER THE SERVICE CONTRACT THE ASSESSEE ITSELF, ACCOUNTS FOR THE SUPERVISION FEE RECEIVED UNDER SERVICE CONTRACT AS ADVANCE RECEIVED WORK IN PROGRESS [P.95 TO 97] UNDER COMPLETION OF CONTRACT METHOD ALTHOUGH IT FOLLOWS A CASH SYSTEM OF ACCOUNTING . IN THE NOTES TO THE ACCOUNTS FOR A.Y. 2012-13, THE ASSESSEE STAT ES 3. THE SERVICE CONTRACT DATED JUNE 19 2008 WAS COMPLETED ON MARCH 19, 2012 AND PE IN INDIA CEASED TO EXIST AFTER THE SAID DATE. THE COMPLETION CERTIFICATE HAS ALSO BEEN RECEIVED FROM CPP. ACCORDINGLY, THE INCOME EARLIER TREATED AS ADVANCE FROM CUSTOMER HAVE NOW BEEN OFFERED TO TAX AND COST EARLIER TREATED AS WIP 28 ITA NO.1077/DEL/2014 VOITH PAPER GMBH HAS BEEN TRANSFERRED TO P&L. 4(B) IN RELATION TO TH E AGREEMENT DT. JUNE 19, 2008, COMPANIES PERSONNEL VISITED CUSTOMERS SITE AND AS PER THE NUMBER OF DA YS VISITED AND DURATION OF THE CONTRACT, PE CAME INTO EXISTENCE IN TERMS OF PROVISIONS OF DTAA BETWEEN IND IA AND GERMANY. COMPLETED CONTRACT METHOD HAS BEEN FOLLOWED BY VPS IN REGARD TO THIS PROJECT. THE CONT RACT WAS EXECUTED AND COMPLETION CERTIFICATE WAS OBTAINED IN THE CURRENT FY 2011-12 AND ALL THE PAYMENTS WERE ALSO RECEIVED DURING THE RELEVANT YEA R., THUS, PROFIT/LOSS OF THE SAID PROJECT HAS BEEN RECO GNIZED IN THE FY 2011-12. [P.269, PB 2011-12] ANOTHER FACT THAT LENDS CREDENCE TO THE FACT THAT T HE CONTRACTS ARE INTIMATELY CONNECTED COMPOSITE CONTRA CTS IS THAT NOT ONLY RECEIPTS FROM SUPERVISORY SERVICES ARE OFFERED ON PROJECT COMPLETION BASIS, VARIOUS EXPENSES RELATED TO THE PROJECT ARE ALSO CLAIMED AGAINST THESE RECEIPTS . THUS, DURING A.Y. 2010-11 EXPENSES TOWARDS TECHNICAL PLANNING EXECUTION OUTSIDE INDIA AND IN 2011-12 EXPENSES TOWARDS TECHNICAL PLANNING COST, SUB-CONTRACTORS COST, ERECTION CHARGES OUTSIDE INDIA ETC. WERE CLAIMED AGAINST THE SUPERVISION FEE. IN OTHER WORDS, WHILE ON THE ONE H AND THE ASSESSEE CLAIMS THAT THE CONTRACT FOR SUPPLY AN D THE CONTRACT FOR SERVICES ARE TWO INDEPENDENT CONTR ACTS NOT LINKED TO EACH OTHER, ON THE OTHER, THE ASSESSE E ITSELF TREATS BOTH THESE CONTRACTS ARE LINKED AND RECOGNIZES/OFFERS THE INCOME FROM SERVICE CONTRACT AFTER THE RECEIPT OF COMPLETION CERTIFICATE. IN THE REJ OINDER, THE LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT THE INFERENCE DRAWN BY THE LEARNED CIT(DR) THAT BECAUSE THE APPELLANT WAS BOUND BY PERFORMANCE WARRANTY CLAUSE AND CPPC WAS ENTITLE TO TERMINATION THE CONTRACT IN THE EVENT OF NON-FULFILLMENT OF THE SAM E, THE EQUIPMENT SUPPLY AND SERVICE CONTRACT WERE A COMPOSITE CONTRACT AND INCOME FROM OFFSHORE WORKS I S IPSO FACTO TAXABLE IN INDIA, WAS INCORRECT INASMUCH AS THE REVENUE HAS FAILED TO APPRECIATE THAT THE OFFSH ORE WORKS HAVE BEEN UNDERTAKEN OUTSIDE INDIA IN TERMS OF SECTION 9 OF THE ACT. HE SUBMITTED THAT ONCE IT IS 29 ITA NO.1077/DEL/2014 VOITH PAPER GMBH ESTABLISHED THAT THE TITLE TO THE GOODS HAS BEEN TRANSFERRED TO THE BUYER OUTSIDE INDIA, THEN, EVEN IN CASE OF COMPOSITE CONTRACTS, INCOME FROM OFFSHORE SUPPLY ACTIVITY HAS TO BE SEGREGATED FROM THE ONSHO RE ACTIVITIES UNDERTAKEN IN INDIA AND THE TAXABILITY T HERE OF DETERMINED INDEPENDENTLY. FINDINGS: 5. ON CONSIDERATIONS OF THE FEATURES OF BOTH THE CONTR ACTS HIGHLIGHTED BY THE LD. DR, WE ARE OF THE VIEW THAT BOTH CONTRACTS CANNOT BE SEEN INDEPENDENTLY. ON PERUSAL OF VARIOUS CLAUSE OF THE AGREEMENT, IT IS AMPLY CLEAR THAT DOMINANT PURPOSE OR INTENTION OF THE BUYER FROM VERY BEGINNING IS INSTALLATION OF MULTILAYER PACKAGING COATED BOARD PLANT UNDER SUPERVISION OF T HE ASSESSEE. AS THE ASSESSEE WAS ALSO SPECIALIZED IN MANUFACTURI NG OF EQUIPMENT REQUIRED FOR SETTING UP OF TDD PLANT, THE ASSESSEE WAS INVOLVED IN SUPPLY OF THE SAME. THE PLANT IN ITSEL F IS NOT A SET OF MACHINERY ONLY BUT THE CONTRACTOR WAS REQUIRED TO C ONSTRUCT A FACILITY OF MANUFACTURING THE PRODUCTS OF THE BUYER . THE VARIOUS MACHINERIES SUPPLIED LIKE PRESS SECTION, PRESS R OLLS, WIRE SECTION ,COATING SECTION, DRYER SECTION ETC. A RE KIND OF COMPONENTS OF THE PLANT TO BE CONSTRUCTED OR ERECTE D UNDER THE SUPERVISION OF THE ASSESSEE. THESE GOODS IN ITSELF ARE COMPONENTS OF PLANTS, WHICH HAS BEEN DELIVERED BY THE ASSESSEE . THE INTENTION OF THE PARTIES WAS TO PROVIDE TO THE BUYER A PLANT IN DELIVERABLE STATE WHICH IS ALSO CLEAR FROM THE OTHER TERMS OF C ONTRACT LIKE DATE OF COMPLETION OF DELIVERY AS LAST DATE OF DELIVERY OF LAST CONSIGNMENT, PROVISION OF MONTHLY PROGRESS REPORT B OTH IN SUPPLY AND SERVICE CONTRACT, PERFORMANCE WARRANTEE CLAUSE. THE FINAL 30 ITA NO.1077/DEL/2014 VOITH PAPER GMBH ACCEPTANCE OF THE SUPPLY OF GOODS WAS DEPENDENT ON THE SUCCESS OF PERFORMANCE WARRANTEE TEST. THE SERVICE CONTRACT HAS A PROVISION OF TERMINATION CLAUSE IN CASE OF FAILURE OF PERFORMANCE AND RETURN OF MACHINERY SUPPLIED UNDER SUPPLY CONTR ACT AND REFUND OF MONEY. ALL THESE TERMS MAKE IT CLEAR THAT BOTH THE SUPPLY AND SERVICE CONTRACT ARE INTRINSICALLY LINKE D AND NOT SEVERABLE. IT WAS NOT POSSIBLE FOR THE BUYER TO ASS EMBLE OR ERECT THE PLANT FROM ANY OTHER CONTRACTOR WITHOUT THE SUP ERVISION OF THE ASSESSEE AND THEREFORE, THE BUYER MADE ITS INTENTIO N OF GETTING THE GOODS IN A DELIVERABLE STATE OF PLANT. THE ARTIFICI AL DIVISION OF COMPOSITE CONTRACT INTO SUPPLY AND SERVICE MAY BE O N PAPER BUT THE CONDUCT OF THE PARTIES AND TERMS AND CONDITION OF THE CONTRACT MANIFEST THAT IN SUBSTANCE IT WAS A COMPOSITE CONTR ACT. THE ACCOUNTING PRACTICE FOLLOWED FOR RECOGNIZING OF REV ENUE FROM SERVICE ON COMPLETION OF THE PROJECT ALSO SUPPORT T HE INTENTION OF THE PARTIES TO TREAT THE ERECTION OF THE PLANT AS C OMPOSITE PROJECT. 5.1 ALL THE ABOVE TERMS AND CONDITIONS OF THE CONTRACT CITED BY THE LD. DR, WHEN READ TOGETHER CLEARLY BRING OUT TH E REAL NATURE AND ESSENCE OF BOTH THE CONTRACTS AS PART OF ONE CO MPOSITE AND TURNKEY WORKS CONTRACT. 5.2 THE LEARNED ASSESSING OFFICER HAS RELIED ON THE DE CISION OF THE HONBLE SUPREME COURT IN THE CASE OF HINDUSTAN SHIPYARD (SUPRA) AS UNDER: 10. IN HINDUSTAN SHIPYARD (2000) 119STC533 (SC); ( 2000) 6 SCC 579, THE QUESTION WHICH AROSE FOR CONSIDERATION WAS WHETHER A CONTRACT CONSTITUTED A SALE OR WORKS CONTRACT. LAYI NG DOWN THE TESTS THEREFORE, HAVING REGARD TO THE TERMS AND CONDITION S CONTAINED THEREIN, IT WAS OPINED THAT A CONTRACT OF SALE OF G OODS WAS SEPARATE FROM A CONTAINED THEREIN, IT WAS OPINED THAT A CONT RACT OF SALE OF GOODS WAS SEPARATE FROM A CONTRACT FOR WORKS AND LA BOUR. IN REGARD 31 ITA NO.1077/DEL/2014 VOITH PAPER GMBH TO THE CATEGORIES OF CONTRACT, IT WAS STATED (PAGE 592 OF {2003} 6SCC AND PAGE 546 OF {2000} 119 STC): (I) THE CONTRACT MAY BE FOR WORK TO BE DONE FOR RE MUNERATION AND FOR SUPPLY OF MATERIALS USED IN THE EXECUTION OF THE WO RK FOR A PRICE; (II) IT MAY BE A CONTRACT FOR WORK IN WHICH THE USE OF THE MATERIALS IS ACCESSORY OR INCIDENTAL TO THE EXECUTION OF THE WOR K; AND (III) IT MAY BE A CONTRACT FOR SUPPLY OF GOODS WHER E SOME WORK IS REQUIRED TO BE DONE AS INCIDENTAL TO THE SALE. 10.1. WHEREAS THE FIRST CONTRACT WAS HELD TO BE A C OMPOSITE CONTRACT, THE SECOND WAS HELD TO BE A CONTRACT FOR WORK AND L ABOUR NOT INVOLVING THE SALE OF GOODS; AND THE THIRD WAS HELD TO BE A CONTRACT OF SALE WHERE THE GOODS WERE SOLD AS CHATTELS AND T HE WORK DONE WAS MERELY INCIDENTAL THERETO. 5.3 THE AO HAS HELD THAT SUPPLY OF MACHINERY WAS INCIDE NTAL TO THE ERECTION AND COMMISSION OF THE PLANT. THE RELEV ANT PARAGRAPH IS REPRODUCED AS UNDER: 11. I HAVE EXAMINED FACTS OF THIS CASE ALONG WITH THE RATION DECIDENDI ABOVE REFERRED TO JUDGMENT OF HONBLE SUP REME COURT AND HAVE NOTED THAT DICTUM OF LAW FOR SECOND CATEGORY O F CONTRACT (II) AS DISCUSSED ABOVE IS SQUARELY APPLICABLE TO THE IDENT ICAL FACTS OF THE CASE UNDER CONSIDERATION. IN THIS CASE ASSESSEE HAD ENTERED INTO A CONTRACT WITH CPPC TO DESIGN, BUILD, MANUFACTURE, S UPPLY, INSTALLATION, TESTING AND COMMISSION OF MACHINERY F OR TPD PLANT. THE SUPPLY OF MACHINES WAS NECESSARY AND INCIDENTAL TO DESIGN, MANUFACTURE, INSTALLATION, TESTING AND COMMISSION O F ABOVE FACILITY I.E. MACHINERY FOR TPD PLANT IN INDIA. IT IS NOT CA SE OF ASSESSEE THAT THE CONTRACT WAS SIGNED FOR SUPPLY OF MACHINES ONLY AND SOME TECHNICAL WORK WAS REQUIRED TO BE DONE AS INCIDENTA L TO MACHINES ONLY AND SOME TECHNICAL WORK WAS REQUIRED TO BE DON E AS INCIDENTAL TO SALE OF EQUIPMENTS. EVEN THOUGH THE A SSESSEE DURING THE ASSESSMENT PROCEEDINGS, MENTIONED THAT THE SUPP LY OF MACHINERY FOR TPD PLANT AND THE INSTALLATION AND CO MMISSIONING SERVICES ARE SEPARATE AND INDEPENDENT OF EACH OTHER , A CAREFUL PERUSAL OF THIS DOCUMENT REVEAL THAT AS PER THE TER MS AND CONDITIONS OF THE CONTRACT THE EFFECTIVE MANDATE GI VEN TO THE ASSESSEE IS IN THE NATURE OF COMPOSITE CONTRACT . T HE PURPOSE AND INTENTION OF CPPC WAS TO INSTALL A FULLY FUNCTIONAL MACHINERY FOR TPD PLANT IN WORKING CONDITION AT THE AIRPORT AND THE A SSESSEE COMPANY WAS GIVEN THIS RESPONSIBILITY. THEREFORE, RESPECTFU LLY FOLLOWING THE ABOVE PRINCIPLE AS LAID DOWN BY HONBLE APEX COURT, I AM OF 32 ITA NO.1077/DEL/2014 VOITH PAPER GMBH CONSIDERED VIEW THAT THE IMPUGNED CONTRACT IS NOTHI NG BUT A CONSOLIDATED CONTRACT WAS FOR DESIGN, BUILD, MANUFA CTURE, SUPPLY, INSTALLATION, TESTING AND COMMISSIONING, OF MACHINE RY FOR TPD PLANT I.E. WORK CONTRACT AND THE CONTRACT CANNOT BE SUBDI VIDED AS CONTRACT FOR SALE OF EQUIPMENTS AND CONTRACT FOR TECHNICAL S ERVICES AS WAS WRONGLY BEEN ARGUED ON BEHALF OF ASSESSEE. 5.4 FURTHER, WHAT CONSTITUTE A CONTRACT AS COMPOSITE CO NTRACT, THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. MITSUI ENGINEERING AND SHIP BUILDING CO. LTD. (2003) 259 I TR 248 (DELHI) HAS OBSERVED AS UNDER: 1. THE QUESTION WHICH HAS BEEN RAISED IN THIS APPE AL UNDER SECTION 260A OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE 'ACT'), IS THE INTERPRETATION OF 'ROYALTY' AS ENVIS AGED UNDER EXPLANATION 2 APPENDED TO SECTION 9(1) OF THE ACT. BY REASON OF THIS EXPLANATION WHICH PROVIDES THAT THE INCOME SPECIFIE D THEREIN SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA SPECIFIES SIX ITEMS WHICH WOULD COME WITHIN THE SCOPE THEREOF. THE COMMISSION ER OF INCOME- TAX (APPEALS) AS ALSO THE INCOME-TAX APPELLATE TRIB UNAL HAVE ARRIVED AT A FINDING OF FACT THAT BY REASON OF THE AGREEMEN T ENTERED INTO BY AND BETWEEN THE ASSESSED AND THE TRANSFEREE, NO ROY ALTY COULD BECOME CHARGEABLE. MR. KHANNA, LEARNED COUNSEL FOR THE APPELLANT, HAS IN SUPPORT OF THIS APPEAL, HOWEVER, SUBMITTED T HAT DESIGN IS ONE OF THE COMPONENTS WHICH HAS BEEN TRANSFERRED TOGETH ER WITH ENGINEERING, MANUFACTURING, SHOP TESTING, PACKING U P TO F. O. B. PORT OF EMBARKATION FOR A CONSIDERATION OF RS. 4,74,000 AND THUS THE SAME COULD COME WITHIN THE PURVIEW OF ONE OR THE OT HER CLAUSES CONTAINED IN EXPLANATION 2 TO SECTION 9(1) . HAVING CONSIDERED THE SUBMISSIONS MADE AT THE BAR, WE ARE OF THE OPINION THAT IT IS NOT POSSIBLE TO APPORTION THE CONSIDERATION FOR DESIGN ON THE ONE PART AND ENGINEERING, MANUFACTURING, SHOP TESTING, PACKI NG UP TO F. O. B. PORT OF EMBARKATION. IN THAT VIEW OF THE MATTER, IN OUR OPINION, THE TRANSFER OF DESIGN, IF ANY, VIS-A-VIS OTHER WOULD N OT COME WITHIN THE PURVIEW OF THE SAID EXPLANATION. THIS ASPECT OF THE MATTER IS COVERED BY A DIVISION BENCH JUDGMENT OF THE MADRAS HIGH COU RT IN THE CASE OF CIT V. NEYVELI LIGNITE CORPORATION LTD . [2000] 243 ITR 459, 463, WHERE IT WAS HELD AS UNDER : 'IN A CONTRACT FOR THE DESIGN, MANUFACTURE, SUPPLY, ERECTION AND COMMISSIONING OF MACHINERY WHICH DOES NOT INVOLVE L ICENSE OF THE PATENT CONCERNING THE MACHINERY, OR COPYRIGHT OF IT S DESIGN, MERE SUPPLY OF DRAWINGS BEFORE THE MANUFACTURE IS COMMEN CED TO ENSURE THAT THE BUYER'S REQUIREMENTS ARE FULLY TAKEN CARE OF AND THE SUPPLY 33 ITA NO.1077/DEL/2014 VOITH PAPER GMBH OF DIAGRAM AND OTHER DETAILS TO ENABLE THE BUYER TO OPERATE THE MACHINES, AND ALSO TO ASSURE THE BUYER, THAT THE MA CHINES WILL PERFORM TO THE SPECIFICATION REQUIRED BY THE BUYER, SUCH SUPPLY IS ONLY INCIDENTAL TO THE PERFORMANCE OF THE TOTAL CON TRACT WHICH INCLUDES DESIGN, MANUFACTURE AND SUPPLY OF THE MACH INERY. THE PRICE PAID BY THE ASSESSED TO THE SUPPLIER IS A TOTAL CONTRACT PRICE WHICH COVERS ALL THE STAGES INVOLVED IN THE S UPPLY OF MACHINERY FROM THE STAGE OF DESIGN TO THE STAGE OF COMMISSION ING. THE DESIGN SUPPLIED IS NOT TO ENABLE THE ASSESSED TO COMMENCE THE MANUFACTURE OF THE MACHINERY ITSELF WITH THE AID OF SUCH DESIGN . THE LIMITED PURPOSE OF THE DESIGN AND DRAWINGS IS ONLY TO SECUR E THE CONSENT OF THE ASSESSED FOR THE MANNER IN WHICH THE MACHINE IS TO BE DESIGNED AND MANUFACTURED, AS IT WAS MEANT TO MEET THE SPECI AL DESIGN REQUIREMENTS OF THE BUYER. THE CONTRACT BETWEEN THE ASSESSED AND THE MANUFACTU RER DOES NOT ANYWHERE REFER TO ANY SPECIFIC PATENT OWNED BY THE SUPPLIER WHICH THE BUYER IS PERMITTED TO EXPLOIT. ALL THAT THE CON TRACT PROVIDES IS AN INDEMNITY TO THE BUYER, TO PROTECT THE BUYER AGAINS T ANY ACTION BY A THIRD PARTY CLAIMING PATENT, TRADE MARK OR OTHER RI GHTS IN THE EQUIPMENT SUPPLIED. NONE OF THE SUB-CLAUSES IN EXPLANATION 2 UNDER SECT ION 9(1)(VI) WOULD, IN THE CIRCUMSTANCES OF THIS CASE, BE CAPAB LE OF BEING REGARDED AS COVERING THE DESIGN AND ENGINEERING CAR RIED OUT BY THE SUPPLIER OF THE MACHINERY ABROAD. THERE IS NO TRANS FER OR LICENSE OF ANY PATENT, INVENTION, MODEL OR DESIGN. THE DESIGN REFERRED TO IN THE CONTRACT IS ONLY THE DESIGN OF THE EQUIPMENT REQUIR ED TO BE MANUFACTURED BY THE SUPPLIER ABROAD AND SUPPLIED TO THE PURCHASER. THE INFORMATION CONCERNING THE WORKING OF THE MACHI NE IS ONLY INCIDENTAL TO THE SUPPLY AS THE MACHINERY WAS TAILO R-MADE FOR THE BUYERS. UNLESS THE BUYER KNOWS THE WAY IN WHICH THE MACHINERY HAS BEEN PUT TOGETHER, THE MACHINERY CANNOT BE MAIN TAINED IN THE BEST POSSIBLE WAY AND REPAIRED WHEN OCCASION ARISES . NO LICENSE OF ANY PATENT IS INVOLVED. SUB-CLAUSE (VI) AND ALSO (V II) OF SECTION 9(1) WOULD HAVE NO APPLICATION AS THE DESIGN WAS ONLY P RELIMINARY TO THE MANUFACTURE AND INTEGRALLY CONNECTED THEREWI TH. THE OTHER THREE SUB-CLAUSES ALSO IN THE CIRCUMSTANCES OF THE CASE ARE NOT ATTRACTED.' 2. IN VIEW OF THE AFOREMENTIONED POSITION, WE ARE O F THE OPINION THAT NO SUBSTANTIAL QUESTION OF LAW ARISES FOR CONSIDERA TION IN THIS APPEAL. 3. THE APPEAL STANDS DISMISSED. 34 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 5.5 THE HONBLE AP HIGH COURT IN THE CASE OF L&T LTD. [ SUPRA] QUOTED THE OBSERVATIONS OF HONBLE SC IN THE CASE O F STATE OF KARNATAKA V. BANGALORE SOFT DRINKS P. LTD. (2000) 1 17 STC 413 (SC) , WHERE THE HONBLE SC HELD THAT IN TURN-KEY PROJECTS, MORE PARTICULARLY OF THE KIND INVOLVED IN THIS BATC H OF WRIT PETITIONS, THE SAME PERSON HAS BEEN ENTRUSTED WITH THE RESPONS IBILITY OF PROCURING MATERIAL, AND OF ERECTION AND INSTALLATIO N OF EQUIPMENT. WHILE IN-BUILT SAFEGUARDS ARE PROVIDED IN ALL THE C ONTRACTS TO ENSURE QUALITY OF THE MATERIAL, AND EFFECTIVE PERFORMANCE OF THE ERECTION CONTRACT, THE SUPPLY CONTRACTS, IN SUBSTANCE, DO NO T ABSOLVE THE PETITIONERS-CONTRACTORS OF THEIR OBLIGATIONS OF ERE CTION AND INSTALLATION OF EQUIPMENT AFTER THE GOODS ARE SOLD BY THEM TO THE OWNER. THE PETITIONERS-CONTRACTORS' OBLIGATIONS, UN DER BOTH THE SUPPLY AND ERECTION CONTRACTS, CEASE ONLY AFTER THE TURN-KEY PROJECT BECOMES OPERATIONAL, AND AFTER FINAL PAYMENT IS MAD E BOTH FOR SUPPLY OF MATERIAL AND FOR ERECTION AND INSTALLATIO N OF EQUIPMENT. 5.6 SIMILARLY, THE HONBLE ANDHRA PRADESH HIGH COURT AGAIN QUOTED HONBLE SC IN THE CASE OF INDURE LTD. V. CTO (2010) [2010-TIOL-79-SC-CT] AND OBSERVED THAT 32. THE GOODS SUPPLIED TO THE OWNER, UNDER THE SUPPLY CONTRACTS, ARE TAILOR MADE GOODS, AND CANNOT BE BOUGHT OFF THE SHELF. SUCH GOO DS CANNOT, ORDINARILY, BE SOLD TO ANOTHER EXCEPT FOR ITS USE I N TURNKEY PROJECTS OF A SIMILAR NATURE. THE PETITIONERS HAVE BEEN ENTR USTED WITH THE WORK MAINLY FOR THEIR EXPERTISE IN ERECTION AND INS TALLATION OF PLANTS IN THE EXECUTION OF TURN-KEY PROJECTS. AS THEY WERE ENTRUSTED WITH THE WORK OF ERECTION AND INSTALLATION, THE PETITION ERS CONTRACTORS HAVE ALSO BEEN ENTRUSTED WITH THE TASK OF PROCURING MATERIAL THEREFOR. THE FUNCTIONS RELATING TO THE SUPPLY OF M ATERIAL, AND 35 ITA NO.1077/DEL/2014 VOITH PAPER GMBH RENDERING SERVICES OF ERECTION AND INSTALLATION, AR E INTEGRALLY CONNECTED AND ARE INTERDEPENDENT. ..WHILE THE FORM OF THE CONTRACTS INDICATE THAT THEY ARE TWO SEPARATE CONTR ACTS, IN SUBSTANCE THEY ARE ONE SINGLE INDIVISIBLE WORKS CON TRACT FOR SUPPLY OF MATERIAL AND FOR ERECTION AND INSTALLATION OF EQ UIPMENT. 5.7 IN THE INSTANT CASE ALSO, THE MACHINERY COMPONENTS HAVE BEEN IMPORTED IN INDIA TO COMMISSION A CUSTOM-MADE PLANT FOR THE BUYER AND THOSE IMPORTED GOODS MAY NOT BE USED FOR ANY OTHER CUSTOMER. THE ASSESSEE HAS BEEN ENTRUSTED THE WORK OF COMMISSIONING OF THE TPD PLANT IN VIEW OF THE EXPER TISE IN THIS FIELD. THUS, THE RATIO OF THE ABOVE DECISION SQUARE LY APPLIED OVER THE FACTS OF THE INSTANT CASE. 5.8 THE RATIO OF THE DECISION IN THE CASE OF DIT VS I SHIKAWAJMA- HARIMA HEAVY INDUSTRIES LTD (SUPRA) IS NOT APPLICAB LE OVER THE FACTS OF THE INSTANT CASE AS SUPPLY OBLIGATION AND SERVICE OBLIGATION ARE INTERLINKED AND COMPLEMENT TO EACH O THER . IN THE CASE OF ISHIKAWAJMA-HARIMA HEAVY INDUSTRIES LTD (SU PRA), THE PARTY WHO SUPPLIED THE GOODS AND ERECTED THE PLANT WERE DIFFERENT ENTITIES BUT IN THE INSTANT CASE THE PARTY WHO SUPP LIED THE GOODS AND SUPERVISED THE ERECTION ARE ONE AND SAME PARTY. FURTHER, IT WAS NOT POSSIBLE FOR THE BUYER TO ERECT THE PLANT W ITHOUT THE SUPERVISION OF THE ASSESSEE. IN THE CASE THE FIRST SHIPMENT OF GOODS WAS DISPATCHED FROM THE AUSTRIA FROM 14 TH SEP. 2009 AND LAST SHIPMENT IN THE YEAR UNDER CONSIDERATION WAS S HIPPED ON 9 TH DECEMBER, 2009. THE SHIPMENT OF THE GOODS HAVE BEEN SUPPLIED IN THE SUBSEQUENT YEAR ALSO. THE PERSONALS OF THE A SSESSEE COMPANY ARRIVED IN INDIA ON 14/12/2009 AND REMAINED TILL COMMISSIONING OF PLANT. AS MACHINERIES HAVE BEEN DI SPATCHED BY 36 ITA NO.1077/DEL/2014 VOITH PAPER GMBH SEA, ITS ARRIVAL IN INDIA TAKES A PERIOD OF 20 DAYS TO 30 DAYS. THUS, THE ARRIVAL OF THE GOODS AND ARRIVAL OF THE P ERSONAL OF THE ASSESSEE COINCIDE AND RUN CONCURRENTLY. 5.9 THE TRIBUNAL IN THE CASE OF SHANGHAI ELECTRIC GROU P CO. LTD. VS. DCIT IN ITA NO. 224 TO 227/DEL/2015 AND OTHERS HAS HELD THAT FOR TWO CONTRACTS TO BE COMPOSITE ONE, DOMINAN T NATURE OF AN AGREEMENT SHOULD BE SEEN. THE TRIBUNAL REFERRED TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF BHARAT SANCHAR NIGAM LTD. VS. UNION OF INDIA (2006) 3 STT 245 45. THE RELEVANT PARAGRAPH OF THE ORDER OF THE TRIBUNAL IS REPRODUCE D AS UNDER: 215. HON'BLE SUPREME COURT'S OBSERVATION IN THE CA SE OF BHARAT SANCHAR NIGAM LTD. V. UNION OF INDIA [2006] 3 STT 245 ARE RELEVANT SHANGHAI ELECTRIC GROUPS CO. LTD. VS. DCIT ITA NO. 224 TO 227/DEL/2015 ITA NO. 3552/DEL/2015 ITA NO. 58 & 59/ DEL/2017 TO UNDERSTAND THE 'DOMINANT NATURE OF AN AGREEMENT' . THE RELEVANT PORTIONS OF THE SAME HAS BEEN EXTRACTED HEREWITH: 'THE REASON WHY THESE SERVICES DO NOT INVOLVE A SAL E FOR THE PURPOSES OF ENTRY 54 OF LIST - II IS, AS WE SEE IT, FOR REASONS ULTIMATELY ATTRIBUTABLE TO THE PRINCIPLES ENUNCIATE D IN GANNON DUNKERLEY CASE, NAMELY, IF THERE IS AN INSTRUMENT O F CONTRACT WHICH MAY BE COMPOSITE IN FORM IN ANY CASE OTHER THAN THE EXCEPTIONS IN ARTICLE 366(29-A ), UNLESS THE TRANSACTION IN TRUTH REPRESENTS TWO DISTINCT AND SEPARATE CONTRACTS AND IS DISCERNIBLE AS SUCH, THEN THE STATE WOULD NOT HAVE THE POWER TO SEPARATE THE AGRE EMENT TO SELL FROM THE AGREEMENT TO RENDER SERVICE, AND IMPOSE TA X ON THE SALE. THE TEST THEREFORE FOR COMPOSITE CONTRACTS OTHER TH AN THOSE MENTIONED IN ARTICLE 366 (29-A) CONTINUES TO BE: DID THE PARTIES HAVE IN MIND OR INTEND SEPARATE RIGHTS ARISING OUT OF TH E SALE OF GOODS? IF THERE WAS NO SUCH INTENTION THERE IS NO SALE EVEN I F THE CONTRACT COULD BE DISINTEGRATED. THE TEST FOR DECIDING WHETH ER A CONTRACT FALLS INTO ONE CATEGORY OR THE OTHER IS TO AS WHAT IS 'TH E SUBSTANCE OF THE CONTRACT'. WE WILL, FOR THE WANT OF A BETTER PHRASE , CALL THIS THE DOMINANT NATURE TEST.' (EMPHASIS SUPPLIED) 37 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 5.10 THE TRIBUNAL ALSO CONSIDERED THE DECISION OF THE AU THORITY FOR ADVANCE RULING IN THE CASE OF RAXAR MAXIMUM RES ERVOIR PERFORMANCE WLL (SUPRA) AS UNDER: 217. WE DRAW OUR SUPPORT FROM THE DECISION OF AUTH ORITY OF ADVANCE RULING IN CASE OF ROXAR MAXIMUM RESERVOIR PERFORMANCE SHANGHAI ELECTRIC GROUPS CO. LTD. VS. D CIT ITA NO. 224 TO 227/DEL/2015 ITA NO. 3552/DEL/2015 ITA NO. 58 & 59/DEL/2017 WLL (SUPRA), HAD RELIED UPON THE JUDGME NT IN ISHIKAWAJMA HARIMA, AND HELD THAT:-- 'A CONTRACT HAS TO BE READ AS A WHOLE. THE PURPOSE FOR WHICH THE CONTRACT IS ENTERED INTO BY THE PARTIES IS TO BE AS CERTAINED FROM THE TERMS OF THE CONTRACT. IN THE CASE ON HAND, ONGC CL EARLY CALLED FOR A CONTRACT FOR 'SERVICES FOR SUPPLY, INSTALLATION AND COMMISSIONING OF 36 MANOMETER GAUGES'. THE PURPOSE OF THE CONTRACT I S THE INSTALLATION OF THE GAUGES AT SITE TO ENABLE ONGC T O CARRY OUT ITS OPERATIONS. I HAVE QUOTED EARLIER THE RELEVANT PORT ION OF THE CONTRACT. ON A READING OF THE SAME, THERE CANNOT BE ANY DOUBT THAT THAT THE CONTRACT IN QUESTION WAS FOR ERECTION AND COMMISSIO NING OF 36 MANOMETER GAUGES FOR THE USE OF ONGC. THE CONTRACT IS CLEARLY NOT ONE FOR SALE OF EQUIPMENT. NOR IS IT ONE FOR MERE E RECTION OF THE EQUIPMENT. IT IS A COMPOSITE CONTRACT FOR SUPPLY AN D ERECTION AT SITES WITHIN THE TERRITORY OF INDIA. WHAT IS PAID FOR BY ONGC IS FOR THE SUPPLY AND ERECTION DONE IN INDIA. THE PAYMENT IS R ECEIVED BY THE APPLICANT FOR THE PERFORMANCE OF THE CONTRACT AS A WHOLE IN INDIA. IT IS, THEREFORE, CLEAR THAT THE INCOME TO THE APPLICA NT ACCRUED IN INDIA.' 5.11 IN VIEW OF THE ABOVE, WE HOLD THAT THE SUPPLY & SER VICE CONTRACTS REPRESENT A SINGLE, COMPOSITE TURNKEY WOR K CONTRACT. INCOME DEEMED TO ACCRUE OR ARISE IN INDIA AS PER SE CTION 9(1)(I) OF THE ACT: 6. THE NEXT ISSUE IN THE CASE IS WHETHER THE INCOME F ROM SUPPLY AGREEMENT IS TAXABLE IN INDIA. AS PER SECTIO N 9(1) OF THE ACT INCOME ACCRUING OR ARISING FORM ANY BUSNESS CON NECTION IN 38 ITA NO.1077/DEL/2014 VOITH PAPER GMBH INDIA IS DEEMED TO ACCRUING OR ARISING IN INDIA. TH E RELEVANT PART OF THE SECTIONIS REPRODUCED AS UNDER : 9. (1) THE FOLLOWING INCOMES SHALL BE DEEMED TO ACCRU E OR ARISE IN INDIA : (I) ALL INCOME ACCRUING OR ARISING, WHETHER DIREC TLY OR INDIRECTLY, THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA, OR THROUGH OR FROM ANY PROPERTY IN INDIA, OR THROUGH O R FROM ANY ASSET OR SOURCE OF INCOME IN INDIA, OR THROUGH THE TRANSFER OF A CAPITAL ASSET SITUATE IN INDIA. 6.1 THE ASSESSEE HAS OBJECTED THE BUSINESS CONNECTION ON THE GROUND THAT SALE OF THE PROPERTY HAS BEEN MADE FROM OUTSIDE INDIA AND THUS OFFSHORE SUPPLY IS NOT TAXABLE IN IN DIA AS PER SECTION 9(1)(I) OF THE ACT. 6.2 NOW WE TAKE UP THE CONTENTION OF THE ASSESSEE THAT SUPPLY OF MACHINERY WAS ONLY OFFSHORE SUPPLY AND NOT LIABL E FOR TAX IN INDIA IN TERMS OF SECTION 9(1)(I) OF THE ACT IN VIE W OF NO BUSINESS CONNECTION IN INDIA. 6.3 THE LD. COUNSEL OF THE ASSESSEE IN RELATION TO THE ISSUE SUBMITTED THREE FACTUAL ASPECTS OF THE CONTRACT. FI RSTLY, HE SUBMITTED THAT THE TITLE OF GOODS IN DISPUTE WAS TR ANSFERRED BY THE ASSESSEE TO THE PURCHASER OUTSIDE INDIA. HE REFERRE D TO ARTICLE 7.1 OF THE APPENDIX-A (SPECIFIC TERMS AND CONDITIONS OF THE CONTRACT) TO THE OFFSHORE SUPPLY CONTRACT, AVAILABLE ON PAGE 166 OF THE PAPER BOOK. ACCORDING TO THE LD. COUNSEL, THE SAID APPENDIX SPECIFIES THAT THE OWNERSHIP AND RISK OF EQUIPMENT SUPPLIED UNDER THE LAWS OF SUPPLY CONTRACT WOULD BE TRANSFER RED IN FAVOUR OF THE BUYER OUTSIDE INDIA AT THE PORT OF SHIPMENT AFTER THE MACHINERY IS PUT ON BOARD OF THE SHIP ON CIF INCOTE RMS 2000 39 ITA NO.1077/DEL/2014 VOITH PAPER GMBH BASIS. FOR READY REFERENCE, CLAUSE 7.1 OF THE OFFSH ORE SUPPLY CONTRACT, REFERRED BY HIM IS REPRODUCED BELOW: 7. TRANSFER OF OWNERSHIP AND RISK 7.1 NOTWITHSTANDING ANYTHING CONTAINED ELSEWHERE IN THE CONTRACT IT IS AGREED THAT THE PROPERTY AND RISK OF THE MACH INERY WILL STAND TRANSFERRED TO THE PURCHASER FORM THE SUPPLIER OUTS IDE INDIA AT THE PORT OF SHIPMENT AFTER THE MACHINERY IS PUT ON BOARD OF THE SHIP ON CIF INCOTERMS 2000 BASIS. (EMPHASIS SUPPLIED) 6.4 SECONDLY, HE REFERRED TO ARTICLE 12 OF APPENDIX A ( SPECIFIC TERMS AND CONDITIONS OF THE CONTRACT ) TO THE OFFSH ORE SUPPLY CONTRACT , AVAILABLE ON PAGE 170 -171 OF THE PAPER BOOK AND SUBMITTED THAT IT SPECIFIES THAT ASSESSEE SHALL ARR ANGE THE TRANSIT INSURANCE ON ITS OWN COST AND THAT THE SHIPPING DOC UMENTS ARE TO BE PREPARED IN THE NAME OF CPPC. THE RELEVANT EXTRA CT OF THE ABOVE TERMS OF THE OFFSHORE SUPPLY CONTRACT IS REPR ODUCED BELOW: 12. SHIPMENT AND INSURANCE 12.2 THE DOCUMENTS SHOULD BE PREPARED IN THE NAME O F CENTURY PULP AND PAPER (PROP.: CENTURY TEXTILES & INDUSTRIE S LTD.) 12.4 THE SUPPLIER SHALL ARRANGE THE TRANSIT INSURAN CE AT HIS COST FROM THE SUPPLIERSS WAREHOUSE TO THE PURCHASERSS WAREHOUSE AT SITE AT LALKUA, (DISTT. NAINITAL), UTTARAKHAND, INDIA 6.5 THIRDLY, HE REFERRED TO ARTICLE 8 (EIGHT) AND 9 ( NINE) OF APPENDIX-A (SPECIFIC TERMS AND CONDITIONS OF THE CO NTRACT) TO THE OFFSHORE SUPPLY CONTRACT, AVAILABLE ON PAGE 166-168 OF THE PAPER BOOK AND SUBMITTED THAT IT SPECIFIES CONTRACT PRICE AMOUNTING TO EURO 68,498,800, WHICH WAS PAYABLE IN FOREIGN CURRE NCY. THE RELEVANT EXTRACT OF ARTICLE 8 OF THE OFFSHORE SUPPL Y CONTRACT REPRODUCED AS UNDER: 40 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 8. PRICE 8.1 PRICE FOR THE SUPPLY AS PER SCOPE OF SUPPLY AS PER ARTICLE 3 SHALL BE EURO 68,498,800/- COMPOSED AS FOLLOWS: A) MACHINERY AND EQUIPMENTS EURO6,17,22,800 B) SPARES EURO67,76,000 TOTAL EURO6,84,98,800 9. TERMS AND MODE OF PAYMENT . 9.6THE PAYMENT STATED UNDER ARTICLE 9.1.2 SHALL BE MADE THROUGH AN IRREVOCABLE LETTER OF CREDIT TO BE OPENED BY THE PU RCHASER IN FAVOUR OF THE SUPPLIER WITHIN 30 (THIRTY) DAYS AFTE R SIGNING OF THE CONTRACT, WHICH SHALL BE VALID UNTIL 1 (ONE) MONTH BEYOND THE CONTRACTUAL FOB DELIVERY TIME. THE LETTER OF CREDIT SHALL ALLOW FOR PARTIAL SHIPMENTS. IN GENERAL, TRANSSHIPMENT WILL N OT BE ALLOWED BUT BASED ON SPECIFIC REQUEST, DISCREPANCY IN LETTER OF CREDIT MAY BE ACCEPTED BY US. THE LETTER OF CREDIT SHALL BE PAYAB LE IN THE COUNTRY OF THE SUPPLIER AND CONFIRMED BY A INTERNATIONAL BA NK AND THE CONFIRMATION CHARGES WILL BE BORNE BY THE PURCHASER . 6.6 WITH REGARD TO THE CONTENTION THAT SALE OF EQUIPME NT EFFECTED OUTSIDE INDIA AND THUS NO INCOME ACCRUES OR ARISE I N INDIA ON SUPPLY OF GOODS, THE LD. COUNSEL RELIED ON THE DECI SION OF HONBLE SUPREME COURT IN THE CASE OF PUSHALAL MANSINGHKA (P) LTD VS CIT 66 ITR 159 (SC) AND THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MAHABIR COMMERCIAL CO. LTD. VS CIT 186 ITR 417 (SC). THE LD COUNSEL EMPHASIZED THAT SALE OF GOODS HAD TAKEN PLACE OUTSIDE INDIA DUE TO THE REASONS THAT (I) THE INTENTION OF THE PARTIES THAT TRANSFER OF TITLE SHALL TAKE PLACE OUTSIDE INDIA IS CLEAR FROM THE ARTICLE 7.1 OF THE APPENDIX TO THE OFFSHORE SUPPLY CONTRACT, WHICH HAS CLEARLY MENTIONED THAT OWNERSHIP OF THE EQUIPMENT S HALL BE TRANSFERRED TO CPP AT THE PORT OF SHIPMENT. (II) BILL OF LADING (BOL) NAMES CPP AS THE NOTIFYING PAR TY OF GOODS (III) THE COMMERCIAL INVOICE HAS BEEN DRAWN BY THE VOITH (THE ASSESSEE) ON CPP( BUYER) 41 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 6.7 THE LEARNED COUNSEL OF THE ASSESSEE REFERRED TO TH E SALE OF GOODS ACT, 1930 (IN SHORT THE SGA) AND SUBMITTED THAT PROPERTY IN GOODS WAS TRANSFERRED THE MOMENT THE ASSESSEE DI SPATCHED THE GOODS FOR TRANSMISSION TO THE CPPC. HE SUBMITTED TH AT IT WAS ALWAYS THE INTENTION OF THE PARTIES THAT THE PROPER TY IN EQUIPMENT SHALL BE VESTED IN THE CPPC AT THE PORT OF SHIPMENT . THE LD. COUNSEL REFERRED TO THE DECISION OF THE HONBLE DEL HI HIGH COURT IN THE CASE OF DIT VS ERRICTION AB 343 ITR 470 WHEREIN IT IS HELD THAT IF THE EQUIPMENT WAS MANUFACTURED OUTSIDE INDI A AND EVEN THE SALE TOOK PLACE OUTSIDE INDIA, THEN THE FACT TH AT EQUIPMENT WAS SUBJECT TO ACCEPTANCE TEST IN INDIA, DID NOT AL TER THE LEGAL POSITION THAT TITLE OF THE EQUIPMENT PASSED OUTSIDE INDIA. THE LD. COUNSEL ALSO RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF DIT VS ISHIKAWAJMA-HARIMA HEAVY INDUSTRIES LTD 288 ITR 408 (SC) TO SUPPORT HIS CONTENTION THAT SALE IN THE CASE OF THE ASSESSEE HAS BEEN CONCLUDED OUTSIDE INDIA. T HE ASSESSEE DRAWN COMPARISON WITH THE ABOVE CASE AS UNDER: PARTICULARS ISHIKAWAJIMAS CASE APPELLANTS CASE TITLE TRANSFERRED IN FAVOUR OF BUYER OUTSIDE INDIA AT THE PORT OF SHIPMENT OF EQUIPMENTS& MATERIALS YES YES CONSIDERATION FOR OFFSHORE SUPPLIES RECEIVABLES IN FOREIGN CURRENCY YES YES BUYER NAMED AS INSURED/CO-INSURED YES YES 6.8 THE LD. COUNSEL SUBMITTED THAT THE RATIO OF THE ABO VE DECISION APPLIES OVER THE FACT OF THE INSTANT CASE BECAUSE IN VIEW OF THE PROVISIONS OF THE SALES OF GOODS ACT, 1930 ( SG ACT) , THE PROPERTY IN EQUIPMENT SUPPLIED BY VOITH ( I.E. THE A SSESSEE) TO CPPC WAS TRANSFERRED IN FAVOUR OF CPPC, WHEN THE EQ UIPMENT 42 ITA NO.1077/DEL/2014 VOITH PAPER GMBH WAS UNCONDITIONALLY APPROPRIATED TO THE CONTRACT OR IN OTHER WORDS WHEN THE EQUIPMENT WAS DISPATCHED FOR TRANSMI SSION TO CPPC. THE LD. COUNSEL SUBMITTED THAT IN VIEW OF THE FACTS OF THE CASE, THE EQUIPMENT WAS SOLD BY THE VOITH OUTSIDE IN DIA AND THE ENTIRE ACTIVITIES ESSENTIAL FOR TRANSFER OF THE TIT LE OF THE EQUIPMENT TOOK PLACE OUTSIDE INDIA AND THEREFORE PROPERTY IN EQUIPMENT SHALL BE VESTED IN CPPC AT THE PORT OF SHIPMENT. HE FURTHER SUBMITTED THAT BILL OF LADING (BOL) CONSTITUTED A D OCUMENT OF TITLE OF THE EQUIPMENT AND THE SAME WAS DRAWN TO SHOWN CP PC AS THE CONSIGNEE WHICH FURTHER SUBSTANTIATED PROPERTY IN E QUIPMENT HAD BEEN INTENDED TO BE TRANSFERRED TO CPP AT THE POINT OF DISPATCH OF EQUIPMENT. HE ALSO REFERRED TO SECTION 1 OF INDIAN BILLS OF LADING ACT, 1856, ACCORDING TO WHICH CONSIGNEE OF GOODS NA MED IN THE BILL OF LEADING TO HAVE VESTED ALL RIGHTS OF SUIT A ND SUBJECT TO THE SAME LIABILITIES IN RESPECT OF SUCH GOODS, IF THE C ONTRACT CONTAINED IN THE BILL OF LEADING HAS BEEN MADE WITH HIMSELF. 6.9 FURTHER, THE LD. COUNSEL ELABORATED THAT NO INCOME DEEMED TO ACCRUE ARISE IN INDIA BECAUSE NO INCOME ACCRUED OR ARISEN TO THE ASSESSEE WHETHER DIRECTLY OR INDIRECTLY, THROUG H OR FROM ANY BUSINESS CONNECTION IN INDIA AS IT SPECIFIED IN SEC TION 9 OF THE ACT, DUE TO FOLLOWING REASONS: - THE SALES WERE INDEPENDENTLY MADE BY THE ASSESSEE T O CPP ON PRINCIPAL TO PRINCIPAL BASIS. - THE SALES ARE CONCLUDED OUTSIDE INDIA. - IN CONNECTION WITH THE CONTRACT IN QUESTION, NO BUS INESS OPERATIONS WERE CARRIED OUT BY THE ASSESSEE IN INDI A. 6.10 THE LEARNED COUNSEL ACCORDINGLY SUBMITTED THAT IN VIEW OF NO BUSINESS CONNECTION IN INDIA, NO PART OF INCOME CAN BE SAID TO 43 ITA NO.1077/DEL/2014 VOITH PAPER GMBH BE DEEMED TO ACCRUE ARISE IN INDIA. IN SUPPORT OF H IS CONTENTION HE RELIED ON THE DECISIONS OF THE (I) HONBLE DELHI HIGH COURT IN THE CASE OF DIT VS ERIC SON AB 343 ITR 470. WHEREIN IT IS HELD THAT THE FACT THAT SUPPLY CONTRACT WAS SIGNED IN INDIA OR THE EQUIPMEN T WERE SUBJECT TO ACCEPTANCE TEST BY THE INDIAN CUSTO MER WAS NOT RELEVANT AND INCOME FROM SUPPLY OF EQUIPMEN T WAS HELD TO BE NOT TAXABLE IN INDIA IF NO BUSINESS CONNECTION EXISTED WITHIN THE MEANING OF SECTION 9( 1)(I) OF THE ACT. (II) THE TRIBUNAL DELHI BENCHES IN THE CASE OF NOKIA NETWORKS OY (ITA NO. 1963 & 1964/DEL/2001) WHEREIN, INTER ALIA IT WAS HELD THAT MERE PROVISION OF MARKE TING ACTIVITIES DOES NOT LEAD TO CREATION OF A BUSINESS CONNECTION. 6.11 THE LD. COUNSEL SUBMITTED THAT ISSUE IN DISPUTE OF OFFSHORE SUPPLY OF GOODS NOT LIABLE TO TAX IN INDIA, IS COVE RED IN FAVOUR OF THE ASSESSEE IN VIEW OF THE RATIO OF THE FOLLOWING DECISIONS: (I) DIT VS ISHIKAWAJMA-HARIMA HEAVY INDUSTRIES LTD 288 ITR 408 (SC) (II) CIT AND ANR VS HYUNDAI HEAVY INDUSTRIES CO.LTD (200 7) 291 ITR 482 (SC) (III) DIT VS LG CABLE LTD (2011)237 CTR 438 (DELHI) (IV) HYOSUNG CORPORATION (AAR NO. 773 OF 2008) FURTHER AFFIRMED BY THE HONBLE DELHI HIGH COURT [WP(C) NO. 2765/2010 AND CM NO. 5515/2010] 6.12 ON THE OTHER HAND, THE LD DR SUBMITTED THAT AN ID ENTICAL ISSUE INVOLVING THE TRANSFER OF TITLE TO THE PROPER TY AND RISK WAS BEFORE THE ITAT IN THE CASE OF BAKER HUGHES ASIA PACIFIC LTD . [2014-TII-104-ITAT-DEL-INTL] WHERE THE ITAT HAD AN OCCASION 44 ITA NO.1077/DEL/2014 VOITH PAPER GMBH TO CONSIDER A GAMUT OF DECISIONS INCLUDING THE DECI SIONS OF HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES LTD . [SUPRA], DIT VS. L.G. CABLES LTD. (SC) [2011-TII-02-HC-DEL-INTL], CIT VS. HYUNDAI HEAVY INDUSTRIES (SC) [2007-TII-02-SC-INTL], DIT VS. M/S NOKIA NETWORKS OY [2012-TII-49-HC-DEL-INTL] AND SKODA EXPORT V. ADDL. CIT [2003-TII-34-HC-AP-INTL].THE ITAT AFTER C ONSIDERING THE ABOVE DECISIONS OF HONBLE SUPREME COURT & THAT OF HONBLE DELHI & AP HIGH COURTS AS WELL AS THAT BY THE SPEC IAL BENCH ,APPROVED BY HONBLE DELHI HIGH COURT IN THE CASE O F MOTOROLA INC. VS. DCIT [2005-TII-10-ITAT-DEL-SB-INTL] HELD AS UND ER 155. IN OUR OPINION, THIS ARGUMENT CANNOT BE ACCEP TED BECAUSE CIF AS UNDERSTOOD IN INCO TERMS, NO WHERE CONTEMPLATES PASSING OF TITLE SIMULTANEOUSLY WITH P ASSING OF RISK. CIF CHENNAI AIRPORT IMPLIES THAT UP TO CHE NNAI AIRPORT, THE SUPPLY IS TO BE ARRANGED BY SELLER. SEL LER HAS TOPAY COST, INSURANCE, FREIGHT AND RISK DURING THE CARRIAGE OF GOODS. HOWEVER, LOSS OR DAMAGE TO THE GOODS AND RISK IS TO BE BORNE BY THE PURCHASER. THIS DOES NOT IMPLY T HAT OWNERSHIP HAS ALSO PASSED TO PURCHASER. IT IS NOT C ORRECT TO SAY THAT RISK AND TITLE PASS SIMULTANEOUSLY. THE RE CAN BE AGREEMENT FOR PASSING OF RISK BEFORE PASSING OF TITLE PER SE. AS PER SEC. 19 OF THE SALE OF GOODS ACT, IT IS PRIMARILY THE INTENTION OF THE PARTIES WHEN THE TITLE TO THE GOODS IS TO PASS. THE TRUE TEST IS WHEN THE BUYER GETS THE RIGH T TO DISPOSE OFF THE GOODS I.E. WHEN THE BUYER ACQUIRES THE CONTROL OVER THE GOODS....... THEREFORE, THE INTENT ION IS TO BE GATHERED FROM THE DEED ITSELF. 6.13 HE SUBMITTED THAT IN THE LIGHT OF THE ABOVE, THE IT AT AFTER EXAMINING THE TERMS OF THE CONTRACT CONCLUDED THAT 161. THUS, ALL THE TERMS ARE SUMMARIZED AS UNDER: (I) THE AGREEMENT WAS SIGNED IN INDIA. (II) THE DELIVERY OF DOCUMENTS WAS TO BE IN INDIA. 45 ITA NO.1077/DEL/2014 VOITH PAPER GMBH (III) SUPPLY WAS AT CIF CHENNAI PORT. (IV) THE PAYMENT WAS TO BE MADE WITHIN 30 DAYS OF R ECEIPT OF GOODS IN INDIA. (V) THE RISK THOUGH PASSED AT THE PORT OF SHIPMENT BUT THAT WAS ALSO SUBJECT TO PACKING OF GOODS AS PER THE TERMS OF AGREEMENT. (VI) THE PASSING OF TITLE WAS AS PER THE TERMS OF D EED. (VII) THE DEED DOES NOT SPECIFY THAT THE TITLE PASS ED OUTSIDE INDIA AND THEREFORE, THE INTENTION IS TO BE GATHERED FROM THE ENTIRE TERMS O F AGREEMENT AS DISCUSSED ABOVE. 162. IT IS TRUE THAT ALL THESE ASPECTS WHEN CONSIDE RED INDEPENDENTLY, MAY OR MAY NOT LEAD TO THE CONCLUSIO N THAT THE TITLE PASSED IN INDIA BUT CUMULATIVE CONSIDERAT ION OF ALL THE TERMS LEADS TO INESCAPABLE CONCLUSION THAT THE ONLY INTENTION OF THE PARTY WAS TO APPROPRIATE THE GOODS IN INDIA. 6.14 THE LD. DR FURTHER SUBMITTED THAT THE CONTENTION OF REVENUE IS ALSO SUPPORTED BY HONBLE AP HIGH COURT S DECISION IN THE CASE OF L&T LTD . [2015-TIOL-3055-HC-AP-CT WHICH HAS FOLLOWED THE DECISION OF HONBLE SUPREME COURT IN T HE CASE OF USHA BELLTRON LTD. V. STATE OF PUNJAB (2005) 7 SCC 58 . 7. WE HAVE CONSIDERED THE RIVAL SUBMISSION OF THE PAR TIES ON THE ISSUE IN DISPUTE. WE FIND THAT HONBLE SUPREME COURT IN THE CASE OF DIT VS ISHIKAWAJMA-HARIMA HEAVY INDUSTRIES L TD (SUPRA) HAS HELD THAT SIGNING OF CONTRACT IN INDIA WAS OF N O MATERIAL CONSEQUENCES WHILE DETERMINING TAXABILITY OF OFFSHO RE SUPPLY OF EQUIPMENT SINCE ALL THE ACTIVITY IN CONNECTION WITH SUCH SUPPLY WERE UNDERTAKEN OUTSIDE INDIA AND COULD NOT, THEREF ORE, BE DEEMED TO ACCRUE OR ARISE IN INDIA. THE HONBLE DEL HI HIGH COURT IN THE CASE OF DIT VS. ERICSON AB (SUPRA) HAS HELD T HAT THE PLACE 46 ITA NO.1077/DEL/2014 VOITH PAPER GMBH OF NEGOTIATION, THE PLACE OF SIGNING OF AGREEMENT O R FORMAL ACCEPTANCE THEREOF OR OTHER RESPONSIBILITY OF THE A SSESSEE WERE IRRELEVANT CONSIDERATION FOR DETERMINING TAXABILITY OF OFFSHORE SUPPLY OF EQUIPMENT. THE RELEVANT EXTRACT OF THE DE CISION IS REPRODUCED AS UNDER: 44. THE AFORESAID ANALYSIS WILL BRING FORTH THE LE GAL POSITION THAT THE PLACE OF NEGOTIATION, THE PLACE OF SIGNING OF A GREEMENT, OR FORMAL ACCEPTANCE THEREOF OR OVERALL RESPONSIBILITY OF THE ASSESSEE ARE IRRELEVANT CIRCUMSTANCES. SINCE THE TRANSACTION REL ATES TO THE SALE OF GOODS, THE RELEVANT FACTOR AND DETERMINATIVE FACTOR WOULD BE AS TO WHERE THE PROPERTY IN THE GOODS PASSES. IN THE PRES ENT CASE, THE FINDING IS THAT PROPERTY PASSED ON THE HIGH SEAS. C ONCEDEDLY, IN THE PRESENT CASE, THE GOODS WERE MANUFACTURED OUTSIDE I NDIA AND EVEN THE SALE HAS TAKEN PLACE OUTSIDE INDIA. ONCE THAT F ACT IS ESTABLISHED, EVEN IN THOSE CASES WHERE IT IS ONE COMPOSITE CONTR ACT (THOUGH IT IS NOT FOUND TO BE SO IN THE PRESENT CASE) SUPPLY HAS TO BE SEGREGATED FROM THE INSTALLATION AND THE ONLY THEN WOULD QUEST ION OF APPORTIONMENT ARISE HAVING REGARD TO THE EXPRESSED LANGUAGE OF SECTION 9 (1) (I) OF THE ACT, WHICH MAKES THE INCOM E TAXABLE IN INDIA TO THE EXTENT IT ARISES IN INDIA. 7.1 IN THE INSTANT CASE ALSO, THE CONTRACT AGREEMENTS HAVE BEEN SIGNED IN INDIA, WHICH IN VIEW OF THE ABOVE DECISIO NS ARE NOT RELEVANT CONSIDERATION FOR DETERMINING THE TAXABILI TY OF OFFSHORE SUPPLY BY THE ASSESSEE. 7.2 IN THE CASE OF ISHIKAWAJMA-HARIMA HEAVY INDUSTRIES LTD. (SUPRA) , WHEREIN THE CONTRACTOR RETAINED CARE, CUSTODY AND CONTROL OF THE EQUIPMENT AND HAD TO EXERCISE DUE CARE THERE OF UNTIL (A) PROVISIONAL ACCEPTANCE OF THE WORK (B) TERMINATION OF THE CONTRACT, ALTHOUGH THE TITLE TO THE EQUIPMENT WAS TO PASSED O UTSIDE INDIA. THE HONBLE COURT HELD THAT SINCE ALL THE ACTIVITY IN CONNECTION WITH THE OFFSHORE SUPPLY WERE PERFORMED OUTSIDE IND IA, INCOME FROM ALSO SUPPLY WAS NOT LIABLE TO TAX IN INDIA. IN THE CASE OF THE DIT VS ERICSON AB (SUPRA) THE HONBLE COURT AFTER ANALYZING THE 47 ITA NO.1077/DEL/2014 VOITH PAPER GMBH CLAUSES OF THE AGREEMENTS HELD THAT CONDITIONS SUCH AS FORMAL ACCEPTANCE OF THE EQUIPMENT OR OVERALL RESPONSIBILI TY OF THE ASSESSEE FOR COMPLETION OF THE PROJECT ARE IRRELEVA NT FOR DETERMINING TAXABILITY OF OFFSHORE SUPPLY OF THE EQ UIPMENT. THE HONBLE COURT HELD THAT FOR NO TAXABILITY OF OFFSHO RE SUPPLY IN INDIA, THE PROPERTY AND RISK IN THE EQUIPMENT MUST BE PASSED OUTSIDE INDIA. THE HONBLE ANDHRA PRADESH HIGH COU RT IN THE CASE OF ADDL. CIT VS. SKODA EXPORTS (SUPRA) HELD THAT FOR DETERMINING TAXABILITY IN OFFSHORE SUPPLY ONE HAS T O APPLY THE TEST OF PREDOMINANCE AND DECIDE WHERE THE SALE TOOK PLAC E. IN THE CASE OF HYOSUNG CORP VS DIT 314 ITR 343, THE AUTHORITY FOR ADVANCE RULING HELD THAT RESPONSIBILITY OF THE SUPPLIER FOR QUALITY AND PERFORMANCE OF THE EQUIPMENT SHOULD NOT BE CONSTRUE D AS A CONDITION WHICH POSTPONE THE TRANSFER OF THE TITLE IN GOODS TILL THAT TIME. THE HONBLE DELHI HIGH COURT IN THE CASE OF DIT VS LG CABLE LTD., 237 CTR 438 HELD THAT BUYERS RIGHT TO EXAMINE AND REPUDIATE THE GOODS IN LAW DOES NOT INDICATE THE PR OPERTY IN GOODS HAS NOT PASSED. 7.3 THE CONTENTION OF THE ASSESSEE IS THAT SALE OF GOO DS HAS TAKEN PLACE OUTSIDE INDIA IN VIEW OF THE INTENTION OF PARTIES AS REFLECTED IN VARIOUS CLAUSES OF AGREEMENT PARTICULA RLY ARTICLE 7.1 OF THE APPENDIX -A, BILL OF LADING IN THE NAME OF THE PURCHASER AND COMMERCIAL INVOICE IN THE NAME OF THE PURCHASER. IN ALL THE DECISION, COMMON THREAD IS THAT TITLE IN PROPERTY A ND RISK TO BUYER IS PASSED AT A TIME WHEN PARTIES TO CONTRACT INTEND IT TO TRANSFER. 7.4 ACCORDING TO SECTION 19(1) OF THE SALE OF GOODS AC T, 1930 (SG ACT) THE PROPERTY IS TRANSFERRED TO THE BUYER AT SU CH TIME AS THE 48 ITA NO.1077/DEL/2014 VOITH PAPER GMBH PARTIES TO THE CONTRACT INTENDED TO BE TRANSFERRED. FURTHER THE SECTION 19(2) SPECIFIES THAT FOR THE PURPOSE OF ASC ERTAINING THE INTENTION OF THE PARTIES, REGARD SHALL BE GIVEN TO THE TERMS OF CONTRACT, CONDUCT OF THE PARTIES AND CIRCUMSTANCES OF THE CASE. FURTHER, SECTION 19(3) OF THE SG ACT SPECIFIES THAT UNLESS A DIFFERENT INTENTION APPEARS, RULES CONTAINED IN SEC TION 20 TO 24 RULES FOR ASCERTAINING THE INTENTION OF THE PARTIES AS TO THE TIME AT WHICH THE PROPERTY AND GOODS IS TO PASSED TO THE BU YER. THE RELEVANT SECTION OF THE SALE OF GOODS ACT, 1930 ARE REPRODUCED FOR READY REFERENCE: SECTION 2. DEFINITIONS : (4) ' DOCUMENT OF TITLE TO GOODS INCLUDES BILL O F LADING, DOCK WARRANT, WAREHOUSE KEEPERS CERTIFICATE, WHARFINGERS CERTIF ICATE, RAILWAY RECEIPT, [MULTIMODAL TRANSPORT DOCUMENT], WARRANT O R ORDER FOR THE DELIVERY OF GOODS AND ANY OTHER DOCUMENT USED IN TH E ORDINARY COURSE OF BUSINESS AS PROOF OF THE POSSESSION OR CO NTROL OF GOODS OR AUTHORIZING OR PURPORTING TO AUTHORIZE, EITHER BY E NDORSEMENT OR BY DELIVERY, THE POSSESSOR OF THE DOCUMENT TO TRANSFER OR RECEIVE GOODS THEREBY REPRESENTED. (6) FUTURE GOODS MEANS GOODS TO BE MANUFACTURED OR PRODUCED OR ACQUIRED BY THE SELLER AFTER MAKING OF THE CONTRACT OF SALE . SECTION 18: GOODS MUST BE ASCERTAINED : WHERE THERE IS A CONTRACT FOR THE SALE OF UNASCERT AINED GOODS, NO PROPERTY IN THE GOODS IS TRANSFERRED TO THE BUYER U NLESS AND UNTIL THE GOODS ARE ASCERTAINED. SECTION 19: PROPERTY PASSES WHEN INTENDED TO PASS: (1) WHERE THERE IS A CONTRACT FOR THE SALE OF SPECI FIC OR ASCERTAINED GOODS, THE PROPERTY IN THEM IS TRANSFERRED TO THE B UYER AT SUCH TIME AS THE PARTIES TO CONTRACT INTEND IT TO BE TRANSFER RED. (2) FOR THE PURPOSE OF ASCERTAINING THE INTENTION O F THE PARTIES, REGARD SHALL BE HAD TO THE TERMS OF THE CONTRACT, T HE CONDUCT OF THE PARTIES AND THE CIRCUMSTANCES OF THE CASE. 49 ITA NO.1077/DEL/2014 VOITH PAPER GMBH (3) UNLESS A DIFFERENT INTENTION APPEARS, THE RULES CONTAINED IN SECTIONS 20 TO 24 ARE RULES FOR ASCERTAINING THE IN TENTION OF THE PARTIES AS TO THE TIME AT WHICH THE PROPERTY IN GOO DS IS TO PASS TO THE BUYER. SECTION 23: SALE OF UNASCERTAINED GOODS AND APPROPRIA TION: (1) WHERE THERE IS A CONTRACT FOR THE SALE OF UNAS CERTAINED OR FUTURE GOODS BY DESCRIPTION AND GOODS OF THAT DESCRIPTION AND IN A DELIVERABLE STATE ARE UNCONDITIONALLY APPROPRIATED TO THE CONTRACT, EITHER BY THE SELLER WITH THE ASSENT OF THE BUYER O R BY THE BUYER WITH THE ASSENT OF THE SELLER, THE PROPERTY IN THE GOODS THEREUPON PASSES TO THE BUYER. SUCH ASSENT MAY BE EXPRESSED OR IMPLI ED, AND MAY BE GIVEN EITHER BEFORE OR AFTER THE APPROPRIATION IS M ADE. (2) DELIVERY TO CARRIER-WHERE, IN PURSUANCE OF THE CONTRACT, THE SELLER DELIVERS THE GOODS TO THE BUYER OR TO A CARR IER OR OTHER BAILEE (WHETHER NAMED BY THE BUYER OR NOT) FOR THE PURPOSE OF TRANSMISSION TO THE BUYER, AND DOES NOT RESERVE THE RIGHT OF DIS POSAL, HE IS DEEMED TO HAVE UNCONDITIONALLY APPROPRIATED THE GOO DS TO THE CONTRACT. SECTION 26: RISK PRIMA FACIE PASSES WITH PROPERTY: UNLESS OTHERWISE AGREED, THE GOODS REMAIN AT THE S ELLERS RISK UNTIL THE PROPERTY THEREIN IS TRANSFERRED TO THE BUYER, B UT WHEN THE PROPERTY THEREIN IS TRANSFERRED TO THE BUYER, THE G OODS ARE AT THE BUYERS RISK WHETHER DELIVERY HAS BEEN MADE OR NOT .. 7.5 WE FIND THAT THOUGH IN THE INSTANT CASE, THE ARTIC LE 7.1 (SUPRA) SPECIFIES THAT THE OWNERSHIP AND RISK OF TH E EQUIPMENT SUPPLIED UNDER THE OFFSHORE SUPPLY CONTRACT WOULD B E TRANSFERRED IN FAVOUR OF THE BUYER OUTSIDE INDIA AT THE PORT OF SHIPMENT. BUT WHEN WE EXAMINE THE INTENTION OF THE PARTIES FROM V ARIOUS CLAUSES OF THE AGREEMENTS, WE FIND THAT IN BOTH THE AGREEMENTS, THE INTENTION OF THE BUYER WAS TO INSTALL THE TPD P LANT IN CONNECTION WITH EXPANSION PROJECT, AND WHICH IS CLE AR FROM OPENING PARAGRAPHS OF THE AGREEMENT ON FIRST PAGE O F BOTH THE AGREEMENTS, AVAILABLE ON PAGE 157 AND 186 OF THE PA PER BOOK, WHICH READS AS UNDER: 50 ITA NO.1077/DEL/2014 VOITH PAPER GMBH SUPPLY CONTRACT WHEREAS THE PURCHASER DESIRES TO INSTALL A 620 TPD MULTILAYER PACKAGING COATED BOARD PLANT IN CONNECTI ON WITH PURCHASERS EXPANSION PROJECT. AND WHEREAS THE SUPLIER IS CAPABLE AND DESIROUS OF DESI GNING, ENGINEERING, MANUFACTURING AND SUPPLYING IMPORTED M ACHINERY FOR THE 620 TPD MULTILAYER PACKAGING COATED BOARD P LANT AS SET-FORTH IN THIS CONTRACT. SERVICE CONTRACT WHEREAS THE PURCHASER DESIRES TO INSTALL 620 TPD MU LTILAYER PACKAGING COATED BOARD PLANT IN CONNECTION WITH PURCHASERS EXPANSION PROJECT. AND WHEREAS THE SUPPLIER IS DESIROUS OF PROVIDING SERVI CES FOR SUPERVISION OF ERECTION, START-UP, TRAINING, COMMIS SIONING AND PERFORMANCE TEST(S) OF THE 620 TPD MULTILAYER PACKA GING COATED BOARD PLANT. 7.6 THE CLAUSE 3.2 OF THE AGREEMENT, WHICH IS AVAILABL E ON PAGE 163 OF THE PAPER BOOK, ALSO REFERS THAT AS FAR AS P URCHASERS SCOPE OF SUPPLY WAS CONCERNED, IT WAS THE PLANT. 7.7 UNDER THE SUPPLY AGREEMENT, THE SUPPLIER HAS WARRA NTED THE PERFORMANCE OF THE PLANT. THE TERMS OF GUARANTEED P ERFORMANCE, AVAILABLE ON PAGE 163 OF THE PAPER BOOK, READS AS U NDER: 4.2 DEMONSTRATION OF GUARANTEED PERFORMANCE: 4.2.1 FOR PURPOSE OF DEMONSTRATION OF WARRANTED PER FORMANCE, THE PLANT SHALL BE SUBJECT TO TEST RUN(S), WHICH SHALL BE ARRANGED AND CARRIED OUT WITHIN 6 (SIX) MONTHS AFTER COMMISSIONI NG OF THE PLANT. 4.2.2 THE PERFORMANCE WARRANTEES SHALL BE DEEMED TO HAVE BEEN FULFILLED IF IN THE TEST RUN(S) THE WARRANTED PERFO RMANCE PARAMETERS AS PER ANNEXURE-IH HAVE BEEN ACHIEVED. 51 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 4.2.3 IF THE FIRST TEST RUN(S) AS PER ARTICLE 4.2.1 ARE UNSUCCESSFUL WITHIN A PERIOD OF SIX MONTHS AFTER COMMISSIONING F OR REASONS FOR WHICH THE SUPPLIER IS RESPONSIBLE, THE TEST RUN(S) SHALL BE REPEATED WITHIN ANOTHER PERIOD OF 3 (THREE) MONTHS AFTER SUP PLIERS NECESSARY RECTIFICATIONS, REPLACEMENTS AND/OR ADDIT IONS TO BE CARRIED OUT IN A REASONABLE TIME. THE REPETITION OF SUCH TESTS RUN(S) SHALL BE CARRIED OUT WITH THE SAME PROCEDURE AS MEN TIONED IN THIS ARTICLE. EXPENSES FOR SUPPLIER'S PERSONNEL FOR THE SECOND TEST RUN(S) SHALL BE BORNE BY SUPPLIER. 4.2.4 IF THE SECOND TEST RUN(S) DURING THE SECOND P ERIOD OF 3 (THREE) MONTHS ARE ALSO UNSUCCESSFUL DUE TO SUPPLIERS FAUL T, BOTH PARTIES WILL MUTUALLY DECIDE WHICH FURTHER STEPS SHALL BE M ADE IN ORDER TO SOLVE THE PROBLEMS RELATED TO THE PERFORMANCE WARRA NTEE(S). 4.2.5 IN CASE THERE IS SOME DISRUPTION IN THE COURS E OF THE FIRST WARRANTEE TEST RUN(S) IN PROVISION OF ITEMS UNDER A RTICLE 4.2.6 HEREINAFTER BY PURCHASER FOR REASON BEYOND THEIR CO NTROL, PURCHASER SHALL BE GIVEN A MAXIMUM OF (6) SIX WEEKS TIME FROM THE DATE OF RECEIPT OF THE ABOVE MENTIONED NOTICE F OR WARRANTEE TESTS TO FULLY COMPLY WITH THE REQUIREMENT OF ARTICLE 4.2 .6 HEREINAFTER, IN THIS CASE, THE SECOND OR THIRD GUARANTEE TEST RUN(S ) WILL BE HELD ON A MUTUALLY AGREEABLE DATE, THE EXPENSES FOR THE SUPPL IERS PERSONNEL SHALL BE BORNE BY THE PURCHASER. 4.2.6 THE ABOVE PERFORMANCE WARRANTEES ARE SUBJECT TO THE CONDITIONS AND PRE-REQUISITES MENTIONED IN ANNEXURE -III 4.2.7 IF THESE TEST RUN(S) CANNOT BE SUCCESSFULLY C OMPLETED LATEST BY 18 (EIGHTEEN) MONTHS AFTER LAST MAJOR DELIVERY FOR REASONS FOR WHICH THE SUPPLIER IS NOT RESPONSIBLE, THE PERFORMANCE WA RRANTEES SHALL BE DEEMED TO HAVE BEEN FULFILLED AT SUCH DATE. 7.8 THE WARRANTY WAS PROVIDED BY THE SUPPLER W.R.T. TH E DATE OF COMMISSIONING. THE RELEVANT CLAUSE AVAILABLE ON PAG E 164 OF THE PAPER BOOK READS AS UNDER: 5.2 THE WARRANTY PERIOD OF MACHINERY SUPPLIED BY S UPPLIER SHALL BE 12 (TWELVE) MONTHS FROM THE DATE OF COMMIS SIONING BUT NOT MORE THAN 21 (TWENTY-ONE) MONTHS FROM THE DATE OF D ELIVERY AT PORT OF SHIPMENT OF LAST CONSIGNMENT OF MACHINERY EXCEPT ING MINOR ITEMS OR SPARES, WHICH DO NOT EFFECT THE ERECTION A ND COMMISSION SCHEDULE OF THE PLANT DURING THE WARRANTY PERIOD IF ANY PART OF THE MACHINERY REQUIRES REPAIR AND/OR REPLACEMENT, THE W ARRANTY PERIOD FOR THE NEWLY REPAIRED PART AND/OR THE REPLA CEMENT SHALL ALSO BE 12 (TWELVE) MONTHS FROM THE DATE ON WHICH THEY A RE PUT INTO 52 ITA NO.1077/DEL/2014 VOITH PAPER GMBH OPERATION, BUT NOT MORE THAN 21 (TWENTY-ONE) MONTHS AFTER THE DATE OF DELIVERY AT SITE OF EACH PART, IN CASE THE OPERA TION OF THE MACHINERY IS STOPPED FOR A PERIOD OF, OR OVER 14 (F OURTEEN) DAYS CAUSED BY THE REPAIR OR REPLACEMENT DUE TO SUPPLIER S RESPONSIBILITY, THEN THE WARRANTY PERIOD FOR THE MA CHINERY SHALL BE PROLONGED ACCORDING TO THE STOPPAGE CORRESPONDINGLY . 5.3 DURING THE WARRANTY PERIOD, IF ANY DEFECT OF MA CHINERY IS FOUND DUE TO SUPPLIERS RESPONSIBILITY (EXCEPT FOR NORMAL WEAR AND TEAR) THE PURCHASER SHALL INFORM THE SUPPLIER IN DE TAIL SPECIFYING THE NATURE OF THE DEFECT BY FAX/E-MAIL IMMEDIATELY. THE PURCHASERS NOTICE SHALL STILL BE VALID WITHIN 30 ( THIRTY) DAYS AFTER THE EXPIRATION OF THE WARRANTY PERIOD IF THE DEFECT OCCURRED WITHIN THE WARRANTY PERIOD. SUPPLIER SHALL WITHIN 15 (FIFT EEN) DAYS OF RECEIVING THE PURCHASERS NOTICE INFORM .THE PURCHA SER WHETHER IT WILL BE SENDING ITS PERSONNEL OVER TO THE PLANT SIDE OR REQUEST THE PURCHASER TO ENTRUST THE APPROPRIATE INDIAN AUTHORI TY TO INVESTIGATE THE CAUSE OF THE DEFECT. SHOULD THE DEF ECT BE ATTRIBUTABLE TO SUPPLIER'S RESPONSIBILITY, THE SUPPLIER SHALL DE PUTE ITS PERSONNEL TO REMOVE THE DEFECT OR REPLACE THE FAULT Y PARTS AT ITS OPTION. THE PURCHASER SHALL RENDER IT3 ASSISTANCE T O THE EXTENT POSSIBLE FREE OF CHARGE DURING THE COURSE OF THE RE PAIRS OR REPLACEMENT. IN CASE OF SLIGHT DEFECT, THE PURCHASE R WITH SUPPLIER'S AUTHORIZATION AND INSTRUCTION MAY ADJUST THE SAME. THE RELEVANT MATERIAL COST SHALL BE TO THE SUPPLIER'S A CCOUNT AND THE RELEVANT LABOUR COST IN INDIA SHALL BE TO THE PURCH ASER'S ACCOUNT MATERIALS REQUIRED TO MEET THE PERFORMANCE GUARANTE ES AND CONTRACTUAL OBLIGATIONS DURING WARRANTY PERIOD - IF ATTRIBUTABLE TO THE SUPPLIER, SHALL BE ARRANGED BY THE SUPPLIER FREE OF COST, ALL FREIGHT AND DUTY PAID. 7.9 THE FINAL ACCEPTANCE OF THE MACHINERY WAS SUBJECTE D TO THE FINAL ACCEPTANCE TEST ONLY. THE RELEVANT CLAUSE OF THE AGREEMENT AVAILABLE ON PAGE 166 READS AS UNDER: FINAL ACCEPTANCE 6.1 DURING THE PERFORMANCE GUARANTEE TEST AS STIPUL ATED IN THIS CONTRACT, THE 620 TPD MULTILAYER PACKAGING COATED BOARD PLANT WILL BE OPERATED BY AND UNDER THE SUPER VISION OF PURCHASER ACCORDING TO THE OPERATING INSTRUCTIONS I SSUED BY SUPPLIER. THE MACHINERY WILL NOT BE DEEMED TO HAVE BEEN FORMALLY FINALLYACCEPTED BY THE PURCHASER UNTIL PER FORMANCE GUARANTEES ARE ACHIEVED, THE LIQUIDATED DAMAGES HAV E BEEN PAID OR WAIVED, OR THE PERFORMANCE GUARANTEES HAVE BEEN DEE MED FULFILLED AS SET OUT BELOW. 53 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 6.2 AFTER FULFILLMENT OF THE PERFORMANCE GUARANTEES AS PER ANNEXURE-III OR IF THE PERFORMANCE GUARANTEES ARE D EEMED TO BE FULFILLED AS STIPULATED IN ARTICLE 4.2.7 THE PURCHA SER WIN ISSUE TO THE SUPPLIER A FINAL ACCEPTANCE CERTIFICATE. 6.3IN CASE TEE MULTILAYER PACKAGING COATED BOARD PL ANT HAS NOT ACHIEVED THE REQUIRED PERFORMANCE PARAMETER S BUT COME TO LEVEL OF MINIMUM ACCEPTABLE LEVEL AS PER ANNEXURE I II AND THE RELEVANT LIQUIDATED DAMAGES HAVE BEEN PAID BY THE S UPPLIER OR IF THE PURCHASER HAS DECIDED TO WAIVE OFF SUCH LIQUIDA TED DAMAGES, THEN THE MULTILA V ER PACKAGING COATED BOARD PLANT WILL BE DEEMED TO BE FINALLY ACCEPTED BY THE PURCHASER. ' 7.10 THE ANNEXURE-B OF THE SUPPLY AGREEMENT CONTAINS TERMINATION CLAUSE. IN THE EVENT OF TERMINATION, SU PPLIER WAS BOUND TO RETURN THE PRICE ALREADY PAID AGAINST THE MACHINERY. THE RELEVANT CLAUSE IS REPRODUCED AS UNDER: 7.5 IN THE EVENT OF TERMINATION ACCORDING TO ARTIC LE 7.2 FOR REASONS ATTRIBUTABLE TO THE SUPPLIER THE EXCLUSIVE CONSEQUE NCE FOR BOTH PARTIES SHALL BE THE SUPPLIER'S WAIVER FOR PAYMENT OF THE UNEXECUTED PART OF THE CONTRACT AND THE PURCHASERS WAIVER FOR DELIVERY OF THE UNEXECUTED PART OF THE CONTRACT . IN THE EVENT OF TERMINATION ACCORDING TO ARTICLE 7.3 FOR REASONS AT TRIBUTABLE TO THE SUPPLIER THE EXCLUSIVE CONSEQUENCE FOR BOTH PARTIES SHALL BE THE RE-EXCHANGE OF THE EXECUTED PARTS OF THE CONTRACT, I.E. REPAYMENT OF THE PRICE ALREADY PAID BY THE PURCHASER AGAINST RETURNING OF MACHINERY ALREADY DELIVERED. 7.11 THE SAID REPAYMENT FOR RETURN OF MACHINERY WAS ALSO PROVIDED IN THE SERVICE CONTRACT, WHICH READ AS UND ER: 6.4 IN THE EVENT OF TERMINATION ACCORDING TO ARTIC LE 6.2 FOR REASONS ATTRIBUTABLE TO THE SUPPLIER THE EXCLUSIVE CONSEQUE NCE FOR BOTH PARTIES SHALL BE THE RE-EXCHANGE OF THE EXECUTED PA RTS OF THE CONTRACT, I.E. REPAYMENT OF THE PRICE ALREADY PAID BY THE PURCHASER AGAINST RETURNING OF MACHINERY ALREADY DE LIVERED. 7.12 IF DUE TO TERMINATION OF SERVICE CONTRACT, IF THE C ONTRACT OF SUPPLYING OF MACHINERY ALSO GETS EFFECTED ,THAT SHO WS THAT BOTH 54 ITA NO.1077/DEL/2014 VOITH PAPER GMBH THE CONTRACT ARE INTERCONNECTED AND COMPOSITE. 7.13 THE LD. COUNSEL OF THE ASSESSEE HAS RELIED ON THE D ECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MAHABIR CO MMERCIAL CO. LTD (SUPRA), WHEREIN IT IS HELD AS UNDER: 'AS PER THE PROVISIONS OF SECTION 5 OF THE ACT, THE TOTAL INCOME OF A NONRESIDENT INCLUDES INCOME WHICH IS RECEIVED OR DE EMED TO BE RECEIVED IN INDIA OR WHICH ACCRUES OR ARISES, OR IS DEEMED TO ACCRUE OR ARISE TO THE NONRESIDENT IN INDIA. ARGUABLY, A S ALE UNDERTAKEN BY A NON-RESIDENT TO A RESIDENT OUTSIDE INDIA SHOULD N OT BE SUBJECT TO TAX IN INDIA. HOWEVER, THE ACT DOES NOT DEFINE WHAT CONSTITUTES SALE MADE OUTSIDE INDIA OR IN INDIA. THEREFORE, GUIDANCE COULD BE SOUGHT FROM JUDICIAL PRONOUNCEMENTS. THE SUPREME COURT HAS HELD THAT WHETHER A SALE HAS BEEN MADE IN INDIA OR OUTSIDE IN DIA WOULD DEPEND UPON THE FACTS OF THE CASE. FOR INSTANCE, TH E APEX COURT HAS HELD THAT IN CASE THE BILL OF LADING ACCOMPANYING T HE GOODS IS IN THE NAME OF THE OF THE INDIAN BUYER, THEN THE TRANSACTI ON IS COMPLETE IN THE SELLERS' COUNT', AND THE DELIVERY OF GOODS, AND THE SALE, IS DEEMED TO HAVE TAKEN PLACE OUTSIDE INDIA. HOWEVER, IF THE SELLER RETAINS CONTROL OVER THE GOODS BY TAKING THE BILL O F LADING IN HIS OWN NAME, THE DELIVERY AND SALE COULD BE SAID TO HAVE T AKEN PLACE IN INDIA. '...SALE OF GOODS ON A CIF BASIS DOES NOT NECESSARI LY IMPLY THAT SALE AS CONCLUDED IN INDIA. 7.13 THUS, WE FIND THAT THE HONBLE SUPREME COURT HAS HE LD THAT SALE HAS BEEN MADE IN INDIA OR OUTSIDE INDIA WOULD DEPEND UPON THE FACTS OF THE CASE, THOUGH INSTANCE OF BILL OF L ADING HAS BEEN GIVEN AS ONE OF CRITERIA OF DECIDING SALE INSIDE OR OUTSIDE INDIA. 7.14 IN THE INSTANT CASE, THE LEARNED COUNSEL CLAIMED TH AT THE EQUIPMENT TO BE SUPPLIED BY THE ASSESSEE TO CPPC FA LLS UNDER THE DEFINITION OF FUTURE GOODS AS DEFINED IN SECTION 23 OF THE SALE OF GOODS ACT, 1930, SINCE THE EQUIPMENT IS TO BE APPRO PRIATED BY THE ASSESSEE AFTER ENTERING INTO THE CONTRACT OF SA LE. THE LD COUNSEL AGREE THAT AS PER THE PROVISIONS OF SECTION 23(1) OF THE SG ACT, PROPERTY IN FUTURE GOODS IS TRANSFERRED TO THE BUYER WHEN THE GOODS ARE ASCERTAINED AND WHEN THE GOOD BEING IN A DELIVERABLE 55 ITA NO.1077/DEL/2014 VOITH PAPER GMBH STATE ARE UNCONDITIONALLY APPROPRIATED TO THE CONTR ACT BY THE SELLER WITH THE ASCENT OF THE BUYER. BUT, WE FIND THAT AO HAS MADE ANALYSIS OF THE PROVISIONS OF THE SALE OF GOOD S ACT AND REFERRED TO VARIOUS SECTIONS TO HOLD THAT TITLE OF GOODS PASSED IN INDIA. FOR READY REFERENCE, THE FINDINGS OF THE AO ARE REPRODUCED AS UNDER: SECTION 19(1) OF THE SALE OF GOODS ACT PROVIDES IN A CONTRACT FOR THE SALE OF GOODS, THE PROPERTY IS TRANSFERRED TO A BUY ER AT SUCH TIME AS THE PARTIES TO THE CONTRACT INTEND IT TO BE TRANSFE RRED. HOWEVER SECTION 19(2) OF THE ACT PROVIDES THAT FOR THE PURP OSE OF ASCERTAINING THE INTENTION OF THE PARTIES, REGARD SHALL BE HAD T O: A. THE TERMS OF THE CONTRACT; B. THE CONDUCT OF THE PARTIES; AND C. THE CIRCUMSTANCES OF THE CASE B. THE CONTRACT HAS TO BE READ AS A WHOLE TO ASCERT AIN THE INTENTION OF THE PARTIES. C. THE DEFINITION OF THESE TERMS CLEARLY INDICATES THAT THE ENTIRE RISK IS BORNE BY THE SUPPLIER AND CARRIAGE AND INSU RANCE CHARGES PAID TILL THEIR DELIVERY AT AIRPORT/ SEAPORT IN IND IA. THE REPEATED REFERENCE BY THE ASSESSEE TO INCOTERMS 2000 DOES NO T ALTER THE SITUATION BECAUSE THE EXPRESSION BY ITS VERY DEFINI TION IN THE AGREEMENT MEANS THE OBLIGATION TO BEAR THE CARRIAGE AND INSURANCE CHARGES UPTO AIRPORT/ SEAPORT IN INDIA. IT WOULD BE ILLOGICAL TO READ THAT THE PARTIES PARTICULARLY CENTURY PULP AND PAPE R COMPANY IN INDIA, CAN AGREE TO THE DELIVERY AT ANY AIRPORT/ SE APORT OUTSIDE INDIA. 19.2 IN VIEW OF ALL THE ABOVE REFERRED CLAUSES, IF THE AGREEMENT IS READ AS A WHOLE, THE INTENT OF THE PARTIES IS CLEAR THAT THE TITLE TO THE EQUIPMENT PASSES IN INDIA AT THE SITE WHERE THE DEL IVERIES ARE MADE OR IN A WORST SCENARIO AT THE AIRPORTS/SEAPORTS IN INDIA. 19.3 UNDER NORMAL CIRCUMSTANCES, THE RISK AND TITLE WOULD GO TOGETHER. IN THE PRESENT CASE, THE TERMS OF THE AGR EEMENT READ AS WHOLE AND THE CONDUCT OF THE PARTIES GO TO INDICATE THAT THE DOCUMENTS SUBMITTED BY ASSESSEE DURING THE COURSE O F ASSESSMENT LIKE BILL OF LADING, INVOICES, IMPORT DOCUMENTS ETC . DO NOT DEMONSTRATE THE TRUE INTENT OF THE PARTIES. THIS CO NDITION OF THE SUPPLY CANNOT BE MET IT THE GOODS ARE DELIVERED ON HIGH SEAS THE FULL SATISFACTION CAN BE REACHED ONLY IN INDIA AF TER THE PROVISIONAL ACCEPTANCE. ONE CANNOT PICK UP ONE PART OF SUPPLY O BLIGATION AND 56 ITA NO.1077/DEL/2014 VOITH PAPER GMBH CONTEND THAT THE TITLE HAS PASSED WITH THE DISCHARG E OF THAT OBLIGATION. INCOTERMS 2000 ONLY REFER TO THE TERMS OF THE AGREEMENT GENERALLY ACCEPTABLE BETWEEN THE CONTRACTING PARTIE S WITH REGARD TO OBLIGATION TO BEAR THE COST OF TRANSPORTATION, INSU RANCE TILL THE POINT OF DELIVERY. THUS, IF THE AGREEMENT IS VIEWED AS A WHOLE, IT DEMONSTRATES THAT THE SUPPLIER HAS THE OBLIGATION T O DELIVER THE GOODS AT THE RELEVANT SITE IN INDIA AND THE DOCUMEN TS SHOWING THAT THE TITLE PASSES IN HIGH SEAS DOES NOT REFLECT THE ACTUAL MODE AND DELIVERY OF THE SUPPLY NOR THE TRUE INTENT OF THE P ARTIES. SECTION 19(2) OF SALES OF GOODS ACT PROVIDES FOR THE FACTORS TO D ETERMINE THE INTENT OF THE PARTIES AND IF DESPITE THE DECLARATION TO TH E CONTRARY UNDER THE SECTION 19(1), IF IT IS FOUND AS A MATTER OF FACT T HAT THE DELIVERIES HAD BEEN MADE IN INDIA IT WOULD BE OPEN TO REVENUE TO A SSERT THAT TITLE TO THE GOODS HAD PASSED IN INDIA. 19.4 SECTION 21 OF THE SALES OF GOODS ACT PROVIDES THAT WHERE THERE IS CONTRACT FOR SALE OF SPECIFIC GOODS AND SELLER I S BOUND TO DO SOMETHING TO GOODS FOR THE PURPOSE OF PUTTING THEM IN A DELIVERABLE STATE THE PROPERTY DOES NOT PASS UNTIL SUCH THING I S DONE AND THE BUYER HAS NOTICE THEREOF. IN THE PRESENT CASE, THE SALE IS NOT OF STANDARD GOODS BUT OF COMPONENTS OF PASSENGER BOARD ING BRIDGES, UNLESS THESE COMPONENTS ARE ASSEMBLED, INSTALLED, C OMMISSIONED AND TESTED, THESE SUPPLIES WOULD BE WORTHLESS. THES E COMPONENTS AND EQUIPMENTS REACHED THE DELIVERABLE STATE ONLY W HEN THEIR INSTALLATION IS COMPLETED AND PERFORMANCE ESTABLISH ED THROUGH THE PROVISIONAL OR FINAL TESTING. THE ASSESSEE HAS DEFI NITE OBLIGATION TO ACHIEVE THIS MILESTONE AND UNLESS THIS IS DONE THE PROPERTY CANNOT PASS. UNLIKE OTHER KINDS OF OVERSEAS SUPPLIES WHERE THE SUPPLIER HAS NO OTHER OBLIGATION BEYOND THE POINT OF SHIPMEN T, IN THE PRESENT CASE, THE OBLIGATION OF THE SUPPLIER EXTENDS TO THE GEOGRAPHICAL LIMITS OF INDIA WHERE HE HAS TO PUT THE SUPPLY INTO A DELI VERABLE STATE. IN THE EQUIPMENTS BEING DISCUSSED IN THE PRESENT CASE, THE VARIOUS COMPONENTS ARE INTEGRAL PART OF THE WHOLESOME TECHN OLOGY AND THESE CANNOT BE VIEWED INDEPENDENTLY. 19.5 IN VIEW OF THE ABOVE, THERE IS NO ROOM FOR ANY DOUBT THAT THE TITLE TO THE GOODS JN&S PASSED IN INDIA DESPITE THE DECLARATION IN VARIOUS DOCUMENTS, TO THE CONTRARY. REF IS INVITED TO THE SALE OF GOODS ACT, SECTION 19 (2) AND SECTION 20- 24. SECTION 21: SPECIFIC GOODS TO BE PUT INTO A DEL IVERABLE STATE - WHERE THERE IS A CONTRACT FOR THE SALE OF SPECIFIC GOODS AND THE SELLER IS BOUND TO DO SOMETHING TO THE GOODS FOR THE PURPO SE OF PUTTING THEM INTO A DELIVERABLE STATE, THE PROPERTY DOES NO T PASS UNTIL SUCH THING IS DONE AND THE BUYER HAS NOTICE THEREOF. FURTHER REGARDING ACCEPTANCE OF GOODS BY BUYER - CO NTRACT OF SALE IS COMPLETED NOT BY MERE DELIVERY OF GOODS BUT BY ACCE PTANCE OF GOODS 57 ITA NO.1077/DEL/2014 VOITH PAPER GMBH BY BUYER. ACCEPTANCE DOES NOT MEAN MERE RECEIPT O F GOODS. IT MEANS CHECKING THE GOODS TO ASCERTAIN WHETHER THEY ARE AS PER CONTRACT. - WHERE GOODS ARE DELIVERED TO THE BUYER WHICH HE HAS NOT PREVIOUSLY EXAMINED, HE IS NOT DEEMED TO HAVE ACCEP TED THEM UNLESS AND UNTIL HE HAS HAD A REASONABLE OPPORTUNIT Y OF EXAMINING THEM FOR THE PURPOSE OF ASCERTAINING WHETHER THEY A RE IN CONFORMITY WITH THE CONTRACT. [SECTION 41(1)] 19.6 UNLESS OTHERWISE AGREED, WHEN THE SELLER TENDE RS DELIVERY OF GOODS TO THE BUYER, HE IS BOUND, ON REQUEST, TO AFF ORD THE BUYER A REASONABLE OPPORTUNITY OF EXAMINING THE GOODS FOR T HE PURPOSE OF ASCERTAINING WHETHER THEY ARE IN CONFORMITY WITH TH E CONTRACT. [SECTION 41(2)] 19.7 IT IS NECESSARY TO DECIDE WHETHER PROPERTY IN GOODS HAS BEEN TRANSFERRED TO BUYER TO DETERMINE RIGHTS AND LIABIL ITIES OF BUYER AND SELLER. GENERALLY, RISK ACCOMPANIES PROPERTY IN GOO DS I.E. WHEN PROPERTY IN GOODS PASSES, RISK ALSO PASSES. 19.8 IT IS SEEN THAT TITLE OF ALL EQUIPMENT SOLD WA S TO PASS FROM SUPPLIERS IN HIGH SEAS BEFORE ARRIVAL IN INDIA BUT THE RISK OF LOSS SHALL PASS ONLY UPON PROVISIONAL ACCEPTANCE BY BUYER. HOW EVER, WHEN WE EXAMINE THE TERMS OF THE CONTRACT, THE CONDUCT OF T HE PARTIES AND THE CIRCUMSTANCES OF THE CASE. [SECTION 19(2)] IT IS SE EN THAT THIS IS A COMPOSITE CONTRACT OF DESIGN, MANUFACTURE, SUPPLY, INSTALLATION, TESTING AND COMMISSIONING OF 620 TPD PLANT. THEREFO RE THE INTENTION OF THE CONTRACTING PARTIES CAN NEVER BE PASS THE TI TLE IN HIGH SEAS. 20. A READING OF THE AFORESAID SECTIONS OF THE SALE OF GOODS ACT WILL SHOW THAT WHERE THERE IS A CONTRACT FOR THE SALE OF SPECIFIC GOODS AND THE SELLER IS BOUND TO DO SOMETHING TO THE GOODS FO R THE PURPOSE OF PUTTING THEM INTO A DELIVERABLE STATE, THE PROPERTY DOES NOT PASS UNTIL SUCH THING IS DONE AND THE BUYER HAS NOTICE T HEREOF. THIS CLEARLY SHOWS THAT OPERATIONALISATION AND FULL AND GUARANTEED WORKING CONDITION IN ACCORDANCE WITH TECHNICAL SPEC IFICATIONS ARE THE REQUIREMENTS FOR THE CONTRACTED GOODS TO BE PUT INT O A DELIVERABLE STATE AND THE PROPERTY DOES NOT PASS UNTIL SUCH THI NG IS DONE IE WORKING CONDITION AS PER TECHNICAL SPECIFICATIONS AND THE BUYER HAS NOTICE THEREOF THOUGH THE PROVISIONAL ACCEPTANCE .E ST. AS PER TERMS AND CONDITIONS OF ABOVE REFERRED AGREEMENTS AND THE DISCUSSION IN THE PARA ABOVE IT IS AMPLY CLEAR THAT ASSESSEE WAS RESPONSIBLE FOR PROCUREMENT, TRANSPORT, RECEIVING., UPLOADING AND S AFE KEEPING OF ALL THE EQUIPMENT REQUIRED IN THE COMPLETION OF WORK WH ICH INCLUDE THE SUPPLY OF 620 TPD PLANT FROM AUSTRIA. IN TERM AND C ONDITION OF THE AGREEMENT, THE OFFSHORE SUPPLIES BECOME THE PROPERT Y OF THE EMPLOYER ONLY WHEN THE SAME WAS DELIVERED AT SITE E VEN THEREAFTER THE CONTRACTOR I.E. ASSESSEE CONTINUED TO BEAR THE RISK IN RESPECT OF 58 ITA NO.1077/DEL/2014 VOITH PAPER GMBH SUCH ITEM AS THE SAME I IN ITS CUSTODY TILL INSTALL ATION, COMMISSIONING AND TESTING. 7.15 ON PERUSAL OF THE LIST OF MACHINERY MENTIONED IN TH E CLAUSE 3.1 OF THE AGREEMENT AS COMPARED TO THE MACHINERIES IMPORTED THROUGH VARIOUS INVOICES, WE FIND THAT IN THE AGREE MENT VARIOUS SECTION OF THE PLANT HAVE BEEN MENTIONED AS MACHIN ERY. FOR READY REFERENCE, THE VARIOUS MACHINERY MENTIONED IN CLAUSE 3.1 OF THE AGREEMENT, AS AVAILABLE ON PAGE 162 OF THE PAPE R BOOK IS REPRODUCED AS UNDER: 3.1 SCOPE OF SUPPLY: 3.1.1 SUPPLIER SHALL SUPPLY TO PURCHASER THE MACHIN ERY BRIEFLY DESCRIBED AS BELOW AND MORE FULLY DESCRIBED IN THE ANNEXURE I, - HEAD BOXES AND FORMING SECTION - PRESS SECTION - DRYING SECTION - SURFACE SIZING AND ON-LINE COATING STATIONS - AIR DRYING SYSTEM - HARD AND SOFT NIP CALENDARING - POPE REEL - MACHINE CONTROL SYSTEM - AUTOMATION AND CONTROLS - AUXILIARIES AND ACCESSORIES - SPARES 3.1.2 THE SUPPLIERS SCOPE OF SUPPLY SHALL BE AS SP ECIFIED IN ANNEXURE I, MACHINERY SHALL BE COMPLETE WITHIN THE DELIVERY LIMITS OF SUPPLIERS SCOPE OF SUPPLY IN ORDER TO ACHIEVE T HE PERFORMANCE GUARANTEES SUBJECT TO THE CONDITIONS AS PER ANNEXUR E III IN EVERY RESPECT WITH ALL MOUNTINGS, FITTINGS, FIXTURES AND STANDARD ACCESSORIES NORMALLY PROVIDED WITH SUCH MACHINERY A ND / OR NEEDED FOR COMPLETION AND SAFE OPERATION OF THE MAC HINERY INCLUDING SUPPORTS, EMBEDMENT ETC, AS REQUIRED BY T HE APPLICABLE CODES, THOUGH' THEY MAY NOT HAVE BEEN SPECIALLY DET AILED IN THE RESPECTIVE SPECIFICATIONS UNLESS INCLUDED IN THE LI ST OF EXCLUSION. ALL SIMILAR STANDARD COMPONENTS/PARTS OF SIMILAR STANDA RD EQUIPMENT PROVIDED SHALL BE INTERCHANGEABLE WITH ONE ANOTHER TO THE EXTENT APPLICABLE. 59 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 3.1.3 THE SUPPLIER SHALL PROVIDE DRAWING AND OTHER DATA INCLUDING OPERATION AND MAINTENANCE MANUALS AS SPECIFIED IN A NNEXURE- I & IV. 7.16 THE ITEMS MENTIONED IN VARIOUS INVOICES RAISED BY T HE ASSESSEE ON CPPC ARE AVAILABLE FROM PAGES 14 TO 66 OF THE PAPER BOOK. ACCORDING TO THE INVOICES, VARIOUS COMPONENTS OF THESE MACHINERIES HAVE BEEN IMPORTED. THE SECTIONS OF THE PLANTS AS MENTIONED IN THE SUPPLY AGREEMENT HAVE BEEN ASSEMBL ED IN INDIA. FOR EXAMPLE; THE INVOICE NO 401400 DATED 09/ 12/2009 AVAILABLE ON PAGE 14 OF PAPER BOOK CONTAINS VARIOUS PARTS OF PRESS SECTION IN 30 BOXES, MACHINE ROLLS IN 5 BOXES. THE INVOICE NO. 401399 DATED 02/12/2009 AVAILABLE ON PAGE 19 OF THE PAPER- BOOK CONTAINS VARIOUS PARTS OF SECTION ALONG WITH S PARES PACKED IN 133 WOODEN BOXES. THE INVOICE NO. 401391 DATED 1 9/11/2009 AVAILABLE ON PAGE 24 OF THE PAPER BOOK CONTAINS PAR TS OF DRYER CYLINDER PACKED IN 24 BOXES. OTHER INVOICES ALSO CO NTAINS COMPONENTS OF HEAD BOX, DYER CYLINDER, WIRE SECTION , PRESS SECTION, MECHANICAL DEVICES, MCS WITH POWER SUPPLY, MG-DRYER, PARTS OF MASTER REEL, COATING SECTION, CONTROL CABI NETS, STRIPS FOR DEWATERING SYSTEM, AIR DRYING SYSTEM, MG-HOOD, HOOD AND VENTILATION SYSTEM, HYDRAULIC SYSTEM, LUBRICATION S YSTEM, APPROACH FLOW SYSTEM ETC. IT IS EVIDENT THAT ITEMS WHICH HAVE BEEN IMPORTED THROUGH DIFFERENT INVOICES ARE NOT TH E MACHINERIES, WHICH HAVE BEEN MENTIONED IN THE SUPPLY AGREEMENT B UT THESE ARE VARIOUS COMPONENTS PACKED IN WOODEN BOXES, WHIC H HAVE BEEN BROUGHT INTO SHAPE OF DIFFERENT SECTION OF THE PLANT AS LISTED IN AGREEMENT, ONLY AFTER ASSEMBLING AT THE SITE OF THE BUYER. AFTER PERUSAL OF THESE INVOICES, IT CLEAR THAT THE GOODS SUPPLIED BY THE 60 ITA NO.1077/DEL/2014 VOITH PAPER GMBH ASSESSEE THROUGH VARIOUS INVOICES ARE NOT IN DELIVE RABLE STATE. 7.17 THE LEARNED COUNSEL OF THE ASSESSEE HAS RELIED ON T HE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CAS E OF DIT VS. ERICSON AB (SUPRA) TO SUPPORT THAT ACCEPTANCE TEST BY THE INDIAN CUSTOMER WAS NOT RELEVANT TO HOLD THAT THE SALE EFF ECTED OUTSIDE INDIA. THE TRIBUNAL IN THE CASE OF SHANGHAI ELECTRI C GROUP CO. LTD. HAS SUMMARIZED THE FACTS OF THE DIT VS. ERRICTI ON AB, (2017)- TII-119-ITAT-DEL-INTL UNDER: IN THE CASE OF DIT VS. ERICSON AB (SUPRA), FACTS B EFORE HON'BLE DELHI HIGH COURT WERE AS UNDER: 228. THE ASSESSEE, A SWEDISH COMPANY, ENTERED INTO CONTRACTS WITH TEN CELLULAR OPERATORS FOR THE SUPPLY OF HARDWARE E QUIPMENT AND SOFTWARE. THE CONTRACTS WERE SIGNED IN INDIA. THE S UPPLY OF THE EQUIPMENT WAS ON CIF BASIS AND THE ASSESSEE TOOK RE SPONSIBILITY THEREOF TILL THE GOODS REACHED INDIA. THE EQUIPMENT WAS NOT TO BE ACCEPTED BY THE CUSTOMER TILL THE ACCEPTANCE TEST W AS COMPLETED (IN INDIA). THE ASSESSEE CLAIMED THAT THE INCOME ARISIN G FROM THE SAID ACTIVITY WAS NOT CHARGEABLE TO TAX IN INDIA. THE AO & CIT (A) HELD THAT THE ASSESSEE HAD A 'BUSINESS CONNECTION' IN IN DIA U/S 9(1)(I) & A 'PERMANENT ESTABLISHMENT' UNDER ARTICLE 5 OF THE DTAA. IT WAS ALSO HELD THAT THE INCOME FROM SUPPLY OF SOFTWARE W AS ASSESSABLE AS 'ROYALTY' U/S 9(1)(VI) & ARTICLE 13. ON APPEAL, THE SPECIAL BENCH OF THE TRIBUNAL (MOTOROLA INC 95 ITD 269 (DEL)) HELD T HAT AS THE EQUIPMENT HAD BEEN TRANSFERRED BY THE ASSESSEE OFFS HORE, THE PROFITS THERE FROM WERE NOT CHARGEABLE TO TAX. IT W AS ALSO HELD THAT THE PROFITS FROM THE SUPPLY OF SOFTWARE WAS NOT ASS ESSABLE TO TAX AS 'ROYALTY'. 229. ON APPEAL TO THE HIGH COURT, HON'BLE COURT DIS MISSED REVENUE'S APPEAL BY OBSERVING AS UNDER: (I) THE PROFITS FROM THE SUPPLY OF EQUIPMENT WERE N OT CHARGEABLE TO TAX IN INDIA BECAUSE THE PROPERTY AND RISK IN GOODS PASSED TO THE BUYER OUTSIDE INDIA. THE ASSESSEE HAD NOT PERFORMED INSTALLATION SERVICE IN INDIA. THE FACT THAT THE CONTRACTS WERE SIGNED IN INDIA COULD NOT BY ITSELF CREATE A TAX LIABILITY. THE NOM ENCLATURE OF A 'TURNKEY PROJECT' OR 'WORKS CONTRACT' WAS NOT RELEV ANT. THE FACT THAT THE ASSESSEE TOOK 'OVERALL RESPONSIBILITY' WAS ALSO NOT MATERIAL. THOUGH SUPPLY OF EQUIPMENT WAS SUBJECT TO THE 'ACCE PTANCE TEST' 61 ITA NO.1077/DEL/2014 VOITH PAPER GMBH PERFORMED IN INDIA, THIS WAS NOT MATERIAL BECAUSE T HE CONTRACT MADE IT CLEAR THAT THE 'ACCEPTANCE TEST' WAS NOT A MATER IAL EVENT FOR PASSING OF THE TITLE AND RISK IN THE EQUIPMENT SUPP LIED. IF THE SYSTEM DID NOT CONFORM TO THE SPECIFICATIONS, THE ONLY CON SEQUENCE WAS THAT THE ASSESSEE HAD TO CURE THE DEFECT. THE POSITION MIGHT HAVE BEEN DIFFERENT IF THE BUYER HAD THE RIGHT TO REJECT THE EQUIPMENT ON THE FAILURE OF THE ACCEPTANCE TEST CARR IED OUT IN INDIA. CONSEQUENTLY, THE ASSESSEE DID NOT HAVE A 'BUSINES S CONNECTION' IN INDIA. THE QUESTION WHETHER THE ASSE SSEE HAD A 'PERMANENT ESTABLISHMENT' WAS NOT REQUIRED TO BE GO NE INTO. 7.18 HOWEVER, THE FACTS OF THE ASSESSEE BEFORE US IS NOT THE SAME AS IN THE CASE OF DIT VS. ERICSON AB (SUPRA).IN THE CASE OF ERICSON (SUPRA), THE ASSESSEE, A NON-RESIDENT COMPANY, SUPP LIED THE EQUIPMENTS TO THE OPERATORS, WHILE THE OTHER TWO CO MPANIES (EFC AND ECL) WERE IN THE BUSINESS OF INSTALLATIONS OF E QUIPMENTS AND GRANTING MARKETING SUPPORT TO THE ASSESSEE. ALL THE ENTITIES WERE ASSESSED IN RESPECT OF THE INCOME THAT ACCRUED TO T HEM AND IT WAS NOT THE CASE THAT ONLY ONE ASSESSMENT HAD TO MADE T REATING THE TRANSACTION AS ONE WORKS CONTRACT. AS AGAINST THE A BOVE FACTS IN THE CASE OF ERICSON (SUPRA), IN THE CASE OF THE ASS ESSEE, THE ASSESSEE ALONE IS RESPONSIBLE FOR SUPPLY OF EQUIPME NTS AND SUPERVISION OF INSTALLATION OF EQUIPMENT. IN THE CA SE OF ERICSON (SUPRA), IT IS HELD THAT OVERALL AGREEMENT DOES NOT RESULT IN INCOME ACCRUING IN INDIA AND EXECUTION OF THE OVERALL AGRE EMENT WAS PROMPTED BY PURELY COMMERCIAL CONSIDERATIONS. AS OP POSED TO THE CASE OF ERICSON (SUPRA), THERE WAS NO NEED FOR EXECUTION OF THE OVERALL AGREEMENT IN THE CASE OF THE ASSESSEE, BECA USE IN THE CASE OF THE ASSESSEE BOTH THE PROCESS OF SUPPLY AND SUPE RVISION OF INSTALLATION ARE INTERCONNECTED AS EVIDENT FROM FO LLOWINGS: SUPPLY AND INSTALLATION ARE THE RESPONSIBILITIES OF ONE PARTY I.E. ASSESSEE; 62 ITA NO.1077/DEL/2014 VOITH PAPER GMBH DESCRIPTION OF GOODS SUPPLIED AS PER INVOICE [P. 13 TO 66 OF PAPER BOOK FOR A Y. 2010-11 AND P.143 TO 146 OF PAPER BOOK FOR A Y 2011-12] REVEL THAT THEY ARE ONLY PARTS OF THE MACHINERY WHICH NEE D TO BE ASSEMBLED, ERECTED AND INSTALLED. THIS IS CONSISTENT WITH CL. 13.1 & 13.5 OF THE SUPPLY CONTRACT WHICH STATE THAT MACHINERIES TO BE DELIVERED IN PART SHIPMENTS AND THE DATE OF COMPLETION OF DELIVERY IS THE DATE OF DELIVERY OF THE LAST CONSIGNMENT; THE SUPPLY AND INSTALLATION PROCESS OVERLAP WITH EA CH OTHER. THE SUPPLY OF SUCH MACHINE PARTS CONTINUED THROUGH BOTH THE RE LEVANT ASSESSMENT YEARS ALONGSIDE INSTALLATION SERVICES. THUS, WHEREA S IT IS CLAIMED BY THE ASSESSEE THAT INSTALLATION SERVICES COMMENCED FROM 14-12-2009 WITH THE ARRIVAL OF MR. A.C.SCHWAB ON 14.12.2009 AND CON TINUED TILL A.Y. 2012-13, THE SUPPLY OF MACHINE PARTS CONTINUED TILL AT LEAST 6.5.2010 [P.143 OF PAPER BOOK FOR 2011-12. IN FACT, THE VALU E OF SUPPLIES DURING A.Y.2011-12 WAS RS. 6,30,75,828. IN OTHER WORDS, SI NCE AS PER CL. 13.5 OF THE SUPPLY CONTRACT, THE DATE OF COMPLETION OF DELIVERY IS THE DATE OF DELIVERY OF THE LAST CONSIGNMENT' IT CAN BE CONCLUD ED THAT THE DELIVERY OF SUPPLY WAS NOT COMPLETED DURING A.Y. 2010-11 I.E TH E YEAR IN WHICH INSTALLATION ACTIVITIES COMMENCED. MOREOVER, THE ASSESSEE ITSELF HAS SHOWN THE REVENUE FROM INSTALLATION ACTIVITIES ARE DEPENDENT UPON AND INTRINSICALLY CON NECTED WITH THE SUPPLY OF MACHINERY BY OFFERING THE INCOME FROM INS TALLATION ON 'PROJECT COMPLETION' BASIS I.E. AFTER THE FINAL 'DELIVERY OF THE LAST CONSIGNMENT' OF THE MACHINERY ALTHOUGH, AS PER THE SERVICE CONTRACT , THERE WAS NO SUCH OBLIGATION ON PART OF THE ASSESSEE. AS PER CL.3 OF THE SERVICE AGREEMENT, THE REMUNERATION WAS PAYABLE AT A FIXED RATE ON A P ER PERSON PER MAN- DAY BASIS. THE ASSESSEE RAISED ITS MONTHLY INVOICES ON THE ABOVE BASIS AND WAS ACCORDINGLY REMUNERATED BY THE CLIENT. YET, THE ASSESSEE SHOWN SUCH RECEIPTS AS 'ADVANCES' AND NOT RECOGNIZE D AS REVENUE. THIS IS ANOTHER FACT WHICH DISTINGUISHES THE CASE OF THE ASSESSEE FROM THAT OF, ISHIKAWAJIMA HARIMA AND ERICSSON. 7.19 WE FIND THAT THE HONBLE HIGH COURT IN THE CASES OF ERRICTION (SUPRA) HELD THAT ACCEPTANCE TEST' WAS NOT A MATERIAL EVENT FOR PASSI NG OF THE TITLE AND RISK IN THE EQUIPMENT SUPPLIED AND IF THE SYSTEM DID NOT CONFORM TO THE SPECIFICATIONS, THE ONLY CONSEQUENCE WAS THA T THE ASSESSEE HAD TO CURE THE DEFECT. BUT THERE IS A CAVEAT ATTACHED TO THE FINDING THAT THE POSITION MIGHT HAVE BEEN DIFFERENT IF THE BUYER HAD THE RIGH T TO REJECT THE EQUIPMENT ON THE FAILURE OF THE ACCEPTANCE TEST CAR RIED OUT IN INDIA. IN THE INSTANT CASE, THE SAID CLAUSE OF REPA YMENT ON RETURN 63 ITA NO.1077/DEL/2014 VOITH PAPER GMBH OF MACHINERY ON FAILURE OF ACCEPTANCE TEST IS AVAIL ABLE AND REPRODUCED ABOVE BY US .THUS , THE DECISION OF THE HONBLE HIGH COURT IN THE CASE OF DIT VS ERRICTION IN A WAY SUPPO RT THE CONTENTION OF THE REVENUE. 7.20 IN THE INSTANT CASE, THE TRANSIT INSURANCE OF GOODS HAS BEEN ARRANGED BY THE ASSESSEE AT ITS OWN COST FROM THE W ARE HOUSE OF SUPPLIER TO THE WAREHOUSE OF THE PURCHASER, WHICH M EANS THE RISK IN CASE OF DAMAGE OF GOODS DURING TRANSIT REMAINED WITH THE SUPPLIER. IN SUCH A SCENARIO, THE ARTICLE 7.1 THAT OWNERSHIP AND RISK WOULD BE TRANSFERRED TO THE PURCHASER, REMAINE D ONLY ON PAPER AND NOT ACTED UPON. 7.21 IN THE INSTANT CASE THE PARTS OF THE MACHINERIES HA VE BEEN MANUFACTURED OUTSIDE INDIA BUT THEY HAVE NOT BEEN B ROUGHT IN DELIVERABLE STATE IN INDIA AS PER SUPPLY AGREEMENT AND THUS SALE CANNOT BE SAID AS EFFECTED OUTSIDE INDIA. IN THE CA SE OF ERICSON AB (SUPRA) THE CONTRACT OF ERECTION WAS EXECUTED BY SU BSIDIARY COMPANY AND THUS THE HONBLE COURT HELD THAT BOTH T HE ENTITY PERFORM THEIR OWN INDEPENDENT OBLIGATION, RECEIVE A PPROPRIATE SEPARATE REMUNERATION AND ARE TECHNICALLY NOT DEPEN DENT ON EACH OTHER. BUT IN THE INSTANT CASE, BOTH THE CONTRACT O F SUPPLY AND SUPERVISION OF INSTALLATION OR COMMISSIONING OF PLA NT HAS BEEN EXECUTED/SUPERVISED BY THE ONE PARTY, I.E., THE ASS ESSEE. 7.22 THE LEARNED COUNSEL HAS REFERRED TO THE DECISION OF NOKIA NETWORKS OY (SUPRA), WHERE IN THE TRIBUNAL HAS HELD THAT MERE PROVISIONING OF MARKETING ACTIVITIES DOES NOT LEAD TO CREATION OF A BUSINESS CONNECTION. THE RELEVANT EXTRACT IS REPROD UCES AS UNDER: 53 ...... THEPROVISIONS OFSECTION 9(L)(I) OF THE A CT CLEARLY PROVIDE THAT INCOME ACCRUING OR ARISING, WHETHER DIRECTLY OR IND IRECTLY, THROUGH OR 64 ITA NO.1077/DEL/2014 VOITH PAPER GMBH FROM ANY BUSINESS CONNECTION IN INDIA, OR THROUGH O R FROM ANY PROPERTY IN INDIA, OR THROUGH OR FROM ANY ASSET OR SOURCE OF INCOME IN INDIA, OR THROUGH THE TRANSFER OF A CAPITAL ASSET S ITUATED IN INDIA SHALL BE TAXABLE IN INDIA IF THEY COME WITHIN THE MEANING OF INCOME DEEMED TO ACCRUE OR ARISE IN INDIA AS EXPLAINED IN SECTION 9 OF THE ACT. THUS, WHERE ANY INCOME ACCRUES OR ARISES TO A NON-RESIDENT THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA WHERE ALL THE OPERATIONS ARE NOT CARRIED OUT IN INDIA ONLY SUCH I NCOME WILL BE CHARGEABLE TO TAX IN INDIA AS CAN BE ATTRIBUTED TO THE OPERATIONS CARRIED OUT IN INDIA. IN LIGHT OF THESE PROVISIONS AND FACTS OF THE CASE, WE WILL ANALYSE THE RIVAL CONTENTIONS OF THE PARTIE S AND THE JUDICIAL PROPOSITION HIGHLIGHTED BEFORE US IN THIS REGARD. 7.23 IN THE INSTANT CASE, THE ASSESSEE HAS NOT PROVIDED THE DETAILS OF MARKETING ACTIVITIES OR NEGOTIATION OF T HE CONTRACT TO THE ASSESSING OFFICER DESPITE REPEATED REQUESTS AND THU S, THE DECISION RELIED UPON IS ANY WAY NOT ASSISTANCE TO THE ASSESS EE. 7.24 THE HONBLE ANDHRA PRADESH HIGH COURT IN THE CASE O F L & T LTD. (SUPRA) HAS RELIED UPON THE DECISION OF THE HO NBLE SUPREME COURT IN THE CASE OF USHA BELTRON LTD. (SUPRA) WHER EIN VARIOUS PROVISIONS OF THE SALE OF GOODS ACT, 1930 HAVE BEEN ANALYZED AND HELD THAT WHEREVER THE SUPPLY CONTRACTS CONTAIN AND INSPECTION OR A CERTIFICATION CLAUSE , THE TITLE IN THE GOODS DOE S NOT PASS TILL THE INSPECTION AND CERTIFICATION ARE SUCCESSFUL AND THE BUYER /OWNER HAS INDICATED HIS APPROVAL. THE RELEVANT PARTS OF H ONBLE HIGH COURT AS APPLICABLE TO THE PRESENT CASE ARE REPRODU CED HEREUNDER: 6. AFTER EXTRACTING SECTIONS 3(B) AND 5(2) OF THE C ST ACT, THE ASSESSING AUTHORITY HELD THAT THESE PROVISIONS REFE R TO A 'SALE' WHICH IS EFFECTED BY TRANSFER OF DOCUMENTS OF TITLE WHILE THE GOODS ARE UNDER MOVEMENT FROM ONE STATE TO ANOTHER (SECTION 3 (B)) STATE OF GUJARAT V. CHEM-DYES CORPORATION (1991) 83 STC 488 (GUJARAT HIGH COURT) (DB), THE GUJARAT HIGH COURT HAD HELD T HAT DURING THE PERIOD, I.E AT THE TIME OF ENDORSEMENT OF DOCUMENTS OF TITLE TO THE GOODS, WHAT WAS INEXISTENCE WAS AN 'AGREEMENT TO SE LL', AND SECTION 3(B) DID NOT APPLY. 45. FOR A SALE TO FALL UNDER SECTION 3(B), THE SALE MUST BE EFFECTED BY 65 ITA NO.1077/DEL/2014 VOITH PAPER GMBH THE TRANSFER OF DOCUMENTS OF TITLE TO THE GOODS. TH E TRANSFER OF DOCUMENTS, CONTEMPLATED BY SECTION 3(B), IS A TRANS FER WHICH, IN LAW, AMOUNTS TO DELIVERY OF THE GOODS. TRANSFER OF DOCUMENTS EITHER BY ENDORSEMENT OR DELIVERY COMPLETES THE TRANSFER O F TITLE BUT, IN THE ABSENCE OF AN INDICATION TO THAT EFFECT IN THE STAT UTE, THE PLACE WHERE THE DOCUMENTS ARE TRANSFERRED IS NOT NECESSARILY TH E PLACE OF THE SALE. (S.R. SARKAR106). TRANSFER OF DOCUMENTS OF TI TLE MAY BE EFFECTED BY HANDING THEM OVER. AN ENDORSEMENT TO TH AT EFFECT ON THE DOCUMENTS IS ONE MODE OF PROVING THE FACT. (THE DY. COMMISSIONER OF COMMERCIAL TAX, MADURAI DIVISION, MADURAI V. A.R.S. THIRUMENINATHANADAR FIRM, TUTICORIN (1968) 21 STC 1 84) (MADRAS HC) (DB)). 94. ...IN ADDITION TO POST-DESPATCH INSPECTION , THE SUPPLY CONTRACTS (AS OPPOSED TO THE ERECTION CONTRACTS) ALSO CONTEMP LATE A CERTIFICATION AFTER ERECTION; BY VIRTUE OF THE SAID CLAUSE, THE O WNER CERTIFIES AS TO THE SUCCESSFUL OPERATION OF THE FACILITY; THE SAID CERTIFICATION IS GIVEN AFTER THE OWNER INSPECTS THE FACILITY, AND FINDS TH AT ALL THE UNITS AND COMPONENTS, WHICH HAVE BEEN SUPPLIED, ARE WORKING; THE SCOPE OF CERTIFICATION EXTENDS NOT ONLY TO THE CIVIL WORK, B UT ALSO TO THE GOODS SUPPLIED UNDER THE SUPPLY CONTRACT; IN ALL THE CONT RACTS, THE SUPPLIER BECOMES ENTITLED TO FULL PAYMENT ONLY UPON RECEIPT OF SUCH CERTIFICATION; THE PAYMENT IS LINKED TO SUCCESSFUL INSPECTION AND CERTIFICATION; IF THE CONTRACT HAS AN INSPECTION OR A CERTIFICATION CLAUSE, TITLE DOES NOT PASS TILL THE INSPECTION AND CERTIFICATION ARE SUCCESSFUL, AND THE BUYER / OWNER HAS INDICATED HIS APPROVAL; THE SUPREME COURT, IN USHA BELLTRON LTD. V. STATE OF PUN JAB (2005) 7 SCC 58, HELD THAT TITLE PASSES ONLY UPON CERTIFIC ATION; AND THE PETITIONERS CONTENTION THAT THE TAKING OVER CERTIFI CATE WAS MERELY FOR ENSURING PROPER QUALITY OF GOODS SUPPLIED, AND DOES NOT RELATE TO PASSING OF PROPERTY IN THE GOODS, IS NOT TENABLE. 96. IN USHABELTRON LTD., THE PETITIONER CONTENDED T HAT THE PROPERTY IN THE GOODS HAD PASSED TO THE GOVERNMENT OF INDIA BEF ORE IT ENTERED THE MUNICIPAL LIMITS; THIS WAS A CONTRACT FOR SALE OF SPECIFIC GOODS IN A DELIVERABLE STATE; THE PROPERTY IN THE GOODS PASS ED TO THE BUYER WHEN THE CONTRACT WAS MADE; AND IT WAS IMMATERIAL A S TO WHAT WAS THE TIME OF DELIVERY OF THE GOODS. CLAUSE 5.5, OF T HE BID DOCUMENT THEREIN, PROVIDED FOR THE ISSUE A TAKING OVER CERTI FICATE WHEN THE PERFORMANCE TESTS HAD BEEN SUCCESSFULLY CARRIED OUT ; AND, WHILE ISSUANCE OF SUCH A CERTIFICATE WOULD CERTIFY RECEIP T OF GOODS IN A SAFE AND SOUND CONDITION, IT WOULD NOT DISCHARGE THE SUP PLIER OF THEIR WARRANTY OBLIGATIONS. CLAUSE 6.1 OF THE BID DOCUMEN T STIPULATED THAT DELIVERY OF THE GOODS SHALL BE MADE BY THE SUPPLIER IN ACCORDANCE WITH THE TERMS OF THE CONTRACT; AND THE GOODS WERE TO REMAIN AT THE RISK OF THE SUPPLIER UNTIL DELIVERY WAS COMPLETED. THE SUPREME COURT HELD THAT CLAUSE 5.5 AND 6.1 OF THE BID DOCUMENT CL EARLY INDICATED THAT THE PROPERTY IN THE GOODS REMAINED AT THE RISK OF THE APPELLANT TILL DELIVERY WAS COMPLETED; IT SHOWED THAT DELIVER Y WOULD BE COMPLETED ONLY AFTER THE TAKE-OVER CERTIFICATE WAS ISSUED; AS PER 66 ITA NO.1077/DEL/2014 VOITH PAPER GMBH SECTION 19 OF THE SALE OF GOODS ACT, THE PROPERTY I N THE GOODS PASSES WHEN THE PARTIES INTENDED IT TO PASS; IN THIS CASE THE CONTRACT PROVIDED THAT PROPERTY IN THE GOODS DOES NOT PASS T ILL AFTER DELIVERY, AND AFTER SUCCESSFUL TESTING AND ISSUANCE OF THE TA KE-OVER CERTIFICATE; AND THE HIGH COURT WAS RIGHT IN CONCLUDING THAT THE PROPERTY IN THE GOODS HAD NOT PASSED AT THE TIME THE GOODS ENTERED THE MUNICIPAL LIMITS. 98. SECTION 23 OF THE 1930 ACT STIPULATES THAT TITL E, IN A SALE OF FUTURE GOODS, PASSES ONLY WHEN THE GOODS ARE IN A DELIVERA BLE STATE, THEY ARE UNCONDITIONALLY APPROPRIATED TO THE CONTRACT, A ND THERE IS ASSENT OF THE BUYER. IF THE CONTRACT HAS A POST-DELIVERY I NSPECTION OR A CERTIFICATION CLAUSE, THE UNCONDITIONAL APPROPRIATI ON, ORDINARILY, TAKES PLACE, AND THE ASSENT OF THE BUYER IS ALSO GI VEN, ONLY UPON INSPECTION AND CERTIFICATION. UNDER SECTION 24 OF T HE 1930 ACT TITLE PASSES UPON APPROVAL WHICH, IN THE SUBJECT CONTRACT S, IS ONLY AFTER INSPECTION. THE POST-DELIVERY INSPECTION CLAUSES IN THE SUBJECT CONTRACTS WOULD FALL WITHIN THE AMBIT OF THE PHRASE 'ON APPROVAL' IN SECTION 24 AS DELIVERY OF THE GOODS IS TAKEN ONLY A FTER INSPECTION. THE 'TAKING OVER' CERTIFICATE ALSO SHOWS THAT THE B UYER INDICATES HIS APPROVAL ONLY AFTER CERTIFICATION. THE INSPECTION A ND CERTIFICATION CLAUSES IN THE CONTRACT WOULD FALL WITHIN THE AMBIT OF THE PHRASE 'OTHER SIMILAR TERMS' IN SECTION 24. THE PRESENCE OF AN INSPECTION AND CERTIFICATION CLAUSE IN THE SUPPLY CONTRACT DEF ERS PASSING OF TITLE TILL THE OWNER HAS EXPRESSED ITS ASSENT. SU CH ASSENT IS GIVEN ONLY AFTER INSPECTION AND CERTIFICATION. 99. SECTION 26 STIPULATES THAT RISK, PRIMA-FACIE, P ASSES WITH THE PROPERTY AND, THEREUNDER, UNLESS OTHERWISE AGREED, THE GOODS REMAIN AT THE SELLERS RISK UNTIL THE PROPERTY THERE IN IS TRANSFERRED TO THE BUYER, BUT WHEN THE PROPERTY THEREIN IS TRANSFE RRED TO THE BUYER, THE GOODS ARE AT THE BUYER'S RISK WHETHER DELIVERY HAS BEEN MADE OR NOT. SECTION 26 IS NOT ATTRACTED WHERE THE CONTRACT PROVIDES OTHERWISE. WHILE THE QUESTION, AS TO WHEN TITLE TO THE GOODS IS TRANSFERRED FROM THE SELLER TO THE BUYER, MUST BE D ETERMINED FROM THE CONDITIONS STIPULATED IN THE SUBJECT CONTRACTS, IF THE PARTIES HAVE AGREED THAT THE RESPONSIBILITY FOR RISK OF LOSS AND DAMAGE TO THE GOODS WOULD BE THAT OF THE SUPPLIER TILL ERECTION O F THE PLANT IS COMPLETED, IT IS EVIDENT THAT TRANSFER OF TITLE TO THE GOODS WAS INTENDED TO PASS ONLY ON ERECTION, AND NOT PRIOR TH ERETO. 100. SECTION 41(2) OF THE 1930 ACT STIPULATES THAT, UNLESS OTHERWISE AGREED, WHEN THE SELLER TENDERS DELIVERY OF THE GOO DS TO THE BUYER HE IS BOUND, ON REQUEST, TO AFFORD THE BUYER A REASONA BLE OPPORTUNITY OF EXAMINING THE GOODS FOR THE PURPOSE OF ASCERTAINING WHETHER THEY ARE IN CONFORMITY WITH THE CONTRACT. SECTION 42 REL ATES TO ACCEPTANCE AND, THEREUNDER, THE BUYER IS DEEMED TO HAVE ACCEPT ED THE GOODS WHEN HE INTIMATES TO THE SELLER THAT HE HAS ACCEPTE D THEM, OR WHEN THE GOODS HAVE BEEN DELIVERED TO HIM AND HE DOES AN Y ACT IN RELATION TO THEM WHICH IS INCONSISTENT WITH THE OWNERSHIP OF THE SELLER. THE POST-DELIVERY INSPECTION CLAUSES, IN THE SUPPLY CON TRACTS, ARE IN 67 ITA NO.1077/DEL/2014 VOITH PAPER GMBH CONFORMITY WITH SECTION 41(2), AND THE CERTIFICATIO N CLAUSES THEREIN ACCORD WITH THE REQUIREMENT OF SECTION 42 OF THE 19 30 ACT. 7.25 THE LD. COUNSEL OF THE ASSESSEE TRIED TO DISTINGUIS H THE DECISIONS OF HONBLE SUPREME COURT IN THE CASE OF U SHA BELLTRON LTD. [SUPRA] AND THAT OF HONBLE AP HIGH COURT IN T HE CASE OF L&T LTD. [SUPRA] ON THE GROUND THAT THE SAID DECISIONS WERE DELIVERED IN THE CONTEXT OF OCTROI AND HENCE NOT APPLICABLE T O THE PRESENT CASE. HOWEVER, THE ABOVE CONTENTIONS OF THE LEARNED COUNSEL ARE NOT ACCEPTABLE SINCE IN BOTH THE ABOVE CASES AS IN THE CASE OF THE ASSESSEE, THE ISSUE INVOLVED IS IDENTICAL I.E. PLAC E WHERE THE TITLE AND RISK TO THE PROPERTY PASSED FOR THE PURPOSE OF TAX LIABILITY. THE ONLY SUPERFICIAL DIFFERENCE IF ANY] BEING THAT WHILE IN THE CASE OF USHA BELLTRON THE BOUNDARY BETWEEN THE TAXING JU RISDICTIONS WAS THE MUNICIPAL LIMIT , IN THE CASE OF L&T LTD INVOLVED THE BOUNDARY BETWEEN TWO STATES WHILE THE PRESENT CAS E INVOLVES THE BOUNDARY BETWEEN TWO COUNTRIES. 7.26 THE REVENUE ALSO PLACES RELIANCE ON THE DECISION OF THE ITAT, DELHI IN THE CASE OF SHANGAHAI ELECTRONICS GROUP COMPANY LTD . [2017-TII-119-ITAT-DEL-INTL] WHERE THE ITAT HELD THE INCOME FROM OVERSEAS SUPPLY TO BE TAXABLE IN INDIA. 7.27 IN VIEW OF THE DISCUSSION, WE ARE OF THE VIEW THAT THE ASSESSEE HAS SUPPLIED PARTS OF GOODS BY WAY OF INVO ICES RAISED,WHICH HAVE FURTHER BEEN ASSEMBLED IN INDIA T O BRING THEM IN DELIVERABLE STATE AS AGREED IN THE SUPPLY AGREEM ENT BETWEEN THE ASSESSEE AND BUYER , AND THUS PROPERTY IN GOODS HAVE BEEN PASSED IN INDIA AND THUS PART OF THE CONSIDERATION OF SUPPLY AGREEMENT FOR OFFSHORE SUPPLY IS TAXABLE IN INDIA. WE NOTE THAT NO INFORMATION HAS BEEN PROVIDED BY THE ASSESSEE IN RE SPECT OF THE 68 ITA NO.1077/DEL/2014 VOITH PAPER GMBH ACTIVITY CARRIED OUT IN INDIA SUBSEQUENT TO AWARD O F THE TENDER TO THE ASSESSEE FOR COLLECTION OF DRAWING OF THE FACTO RIES OF THE BUYER AND OTHER INPUT INFORMATION IN RELATION TO ERECTION OF PLANT AND CUSTOMIZED MANUFACTURING OF THE PARTS OF VARIOUS SE CTION OF THE PLANT. (B) BUSINESS CONNECTION IN INDIA 8. THE CONCEPT OF BUSINESS CONNECTION BASICALLY ENV ISAGES A RELATIONSHIP BETWEEN THE BUSINESS CARRIED ON BY A N ON-RESIDENT YIELDING PROFITS OR GAINS, ON THE ONE HAND AND SOME ACTIVITY IN INDIAN WHICH CONTRIBUTES TO EARNING OF SUCH PROFIT AND GAINS ON THE OTHER. 8.1 THE WORD BUSINESS CONNECTION HAS BEEN JUDICIOUSL Y EXAMINED IN DETAIL BY VARIOUS COURTS IN THE FOLLOWI NG CASES: CIT VS. R.D. AGGARWAL & CO., 56 ITR (SC) CIT VS. HINDUSTAN SHIPYARD LTD., 109 ITR 158 (AP) CIT VS. ATLAS STEEL COMPANY LTD., 164 ITR 401 (CAL. ) COMMISSIONER OF INCOME-TAX VS. GULF OIL (GREAT BRIT AIN) LTD., 108 ITR 874 (BOMBAY) 8.2 THE RATIO DECIDENCI EMANATING FROM THE AFORESAID D ECISION IS THAT THE FOLLOWING CONDITIONS SHOULD EXIST TO CONST ITUTE BUSINESS CONNECTION IN INDIA: A REAL AND INTIMATE RELATION MUST EXIST BETWEEN THE TRADING ACTIVITIES CARRIED ON OUTSIDE INDIA BY A NON-RESIDE NT AND THE ACTIVITIES IN INDIA; 69 ITA NO.1077/DEL/2014 VOITH PAPER GMBH THE RELATION CONTRIBUTES DIRECTLY AND INDIRECTLY TO THE EARNINGS OF INCOME BY THE NON-RESIDENT IN HIS BUSIN ESS; THERE SHOULD BE AN ELEMENT OF CONTINUITY BETWEEN TH E BUSINESS OF THE NON-RESIDENT AND THE ACTIVITY IN IN DIA. TO PUT IT APPARENTLY, STRAY OR ISOLATED TRANSACTION IS NOT NORMALLY REGARDED AS A BUSINESS CONNECTION. 8.3 THE LEARNED COUNSEL OF THE ASSESSEE HAS SUBMITTED THAT IN SUPPORT ALL THE AFORESAID CONDITIONS ARE CONSPICUOU S BY THEIR ABSENCE IN THE CASE OF THE ASSESSEE AND THEREFORE, NO BUSINESS CONNECTION OF THE APPELLANT COULD BE DEEMED TO EXI ST IN INDIA. IN SUPPORT OF THE SAME, HE INVITED OUR ATTENTIONS TO T HE FOLLOWING SUBMISSIONS: THE SALES WERE INDEPENDENTLY MADE BY THE APPELLANT TO CPP ON PRINCIPAL TO PRINCIPAL BASIS; THE SALES WERE CONCLUDED OUTSIDE INDIA; IN CONNECTION WITH THE CONTRACT IN QUESTION, NO BUS INESS OPERATIONS WERE CARRIED OUT BY THE APPELLANT IN IND IA. 8.4 IN VIEW OF THE LEARNED COUNSEL OF THE ASSESSEE, IN COME FLOWING FROM THE CONTRACT IN QUESTION IS NOT LIABLE TO TAX IN INDIA SINCE THE APPELLANT DOES NOT HAVE ANY BUSINESS CONN ECTION IN INDIA, AND THUS NO PART OF THE INCOME CAN BE SAID T O BE DEEMED TO ACCRUE OR ARISE IN INDIA. 8.5 IN CIT V. R.D. AGGARWAL & CO. (1965) 56 ITR 20, HO N'BLE SUPREME COURT HAD CONSIDERED THE SCOPE OF THE EXPRE SSION 'BUSINESS CONNECTION', AND IT WAS OBSERVED AS FOLLO WS (PP. 24 & 28): 70 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 'THE EXPRESSION 'BUSINESS' IS DEFINED IN THE ACT AS ANY TRADE, COMMERCE, MANUFACTURE OR ANY ADVENTURE OR CONCERN I N THE NATURE OF TRADE, COMMERCE OR MANUFACTURE, BUT THE ACT CONTAIN S NO DEFINITION OF THE EXPRESSION 'BUSINESS CONNECTION' AND ITS PRE CISE CONNOTATION IS VAGUE AND INDEFINITE. THE EXPRESSION 'BUSINESS CONN ECTION' UNDOUBTEDLY MEANS SOMETHING MORE THAN 'BUSINESS'. A BUSINESS CONNECTION IN SECTION 42 INVOLVES A RELATION BETWEEN A BUSINESS CARRIED ON BY A NON-RESIDENT WHICH YIELDS PROFITS O R GAINS AND SOME ACTIVITY IN THE TAXABLE TERRITORIES WHICH CONTRIBUT ES DIRECTLY OR INDIRECTLY TO THE EARNING OF THOSE PROFITS OR GAINS . IT PREDICATES AN ELEMENT OF CONTINUITY BETWEEN THE BUSINESS OF THE N ON- RESIDENT AND THE ACTIVITY IN THE TAXABLE TERRITORIE S : A STRAY OR ISOLATED TRANSACTION IS NORMALLY NOT TO BE REGARDED AS A BUSINESS CONNECTION. BUSINESS CONNECTION MAY TAKE SEVERAL FO RMS: IT MAY INCLUDE CARRYING ON A PART OF THE MAIN BUSINESS OR ACTIVITY INCIDENTAL TO THE MAIN BUSINESS OF THE NON-RESIDENT THROUGH AN AGENT, OR IT MAY MERELY BE A RELATION BETWEEN THE BUSINESS OF THE NO N-RESIDENT AND THE ACTIVITY IN THE TAXABLE TERRITORIES, WHICH FACI LITATES OR ASSISTS THE CARRYING ON OF THAT BUSINESS. IN EACH CASE, THE QUE STION WHETHER THERE IS A BUSINESS CONNECTION FROM OR THROUGH WHIC H INCOME, PROFITS OR GAINS ARISE OR ACCRUE TO A NON-RESIDENT MUST BE DETERMINED UPON THE FACTS AND CIRCUMSTANCES OF THE CASE. A RELATION TO BE A 'BUSINESS CONNECTION' MUST BE RE AL AND INTIMATE, AND THROUGH OR FROM WHICH INCOME MUST ACCRUE OR ARI SE WHETHER DIRECTLY OR INDIRECTLY TO THE NON-RESIDENT. BUT IT MUST IN ALL CASES BE REMEMBERED THAT BY SECTION 42 INCOME, PROFIT OR GAIN WHICH ACCRUES OR ARISES TO A NON RESIDENT OUTSIDE THE TAXABLE TE RRITORIES IS SOUGHT TO BE BROUGHT WITHIN THE NET OF THE INCOME-TAX LAW, AN D NOT INCOME, PROFIT OR GAIN WHICH ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE WITHIN THE TAXABLE TERRITORIES. INCOME RECEIVED OR DEEMED TO BE RECEIVED, OR ACCRUING OR ARISING OR DEEMED TO BE AC CRUING OR ARISING WITHIN THE TAXABLE TERRITORIES IN THE PREVIOUS YEAR IS TAXABLE BY SECTION 4(1)(A) AND (C) OF THE ACT, WHETHER THE PERSON EARNING IS A RESIDENT OR NON-RESIDENT. IF THE AGENT OF A NON-RES IDENT RECEIVES THAT INCOME OR IS ENTITLED TO RECEIVE THAT INCOME, IT MA Y BE TAXED IN THE HANDS OF THE AGENT BY THE MACHINERY PROVISION ENACT ED IN SECTION 40(2) . INCOME NOT TAXABLE UNDER SECTION 4 OF THE ACT OF A NON-RESIDENT BECOMES TAXABLE UNDER SECTION 42(1) IF THERE SUBSISTS A CONNECTION BETWEEN THE ACTIVITY IN THE TAXABLE TERRITORIES AND THE BUSINESS OF THE NON-RESIDENT, AND IF THROUGH OR FROM THAT CONNECTIO N INCOME DIRECTLY OR INDIRECTLY ARISES.................. THE EXPRESSION 'BUSINESS CONNECTION' POSTULATES A R EAL AND INTIMATE RELATION BETWEEN TRADING ACTIVITY CARRIED ON OUTSID E THE TAXABLE TERRITORIES AND TRADING ACTIVITY WITHIN THE TERRITO RIES, THE RELATION BETWEEN THE TWO CONTRIBUTING TO THE EARNING OF INCO ME BY THE NON- RESIDENT IN HIS TRADING ACTIVITY'. 71 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 8.6 IN CIT V. HINDUSTAN SHIPYARD LTD. [1977] 109 ITR 1 58 (AP) A DIVISION BENCH OF THIS COURT HAD CONSTRUED THE WORD 'BUSINESS CONNECTION'. THE FACTS IN THIS CASE WERE THAT;- THE NON- RESIDENT COMPANY SUPPLIED DIESEL ENGINES WITH ACCES SORIES. THE TERMS OF THE SALE WERE THAT 90% OF THE VALUE MUST B E PAID AGAINST ORIGINAL SET OF DOCUMENTS, TO BE SUBMITTED DULY TO THE STATE BANK OF INDIA WITHIN FIFTEEN DAYS AND THE BALANCE WITHIN SIX MONTHS. THE NET PRICE INCLUDED 5% COMMISSION PAYABLE TO THE NON- RESIDENT COMPANY AT BOMBAY. THE PROPERTY WAS TO PAS S TO THE PURCHASER ON DELIVERY ON BOARD. THE ENGINE WAS AGRE ED TO BE ERECTED BY THE STAFF OF THE PURCHASER UNDER THE SUP ERVISION OF THE ERECTOR AND A SUPERVISING ENGINEER WAS PLACED AT TH E DISPOSAL OF THE PURCHASER BY THE NON- RESIDENT COMPANY. 8.7 IT WAS HELD THAT; 'BUSINESS CONNECTION' CAN BE SAI D TO BE ESTABLISHED WHEN 'THE THREAD OF MUTUAL INTEREST RUN S THROUGH THE FABRIC OF THE TRADING ACTIVITIES CARRIED ON OUTSIDE AND INSIDE THE TAXABLE TERRITORY AND THERE MUST BE REAL AND INTIMA TE CONNECTION BETWEEN THE TWO. THE COMMONNESS OF INTEREST MAY BE BY WAY OF MANAGEMENT CONTROL OR FINANCIAL CONTROL OR BY WAY O F SHARING PROFITS'. 8.8 HAVING REGARD TO THE FACTS OF THE SAID CASE, THE H ON'BLE COURT HELD THAT THERE WAS NO BUSINESS CONNECTION BE TWEEN THE ASSESSEE AND NON-RESIDENT COMPANY, AS THE SERVICES RENDERED BY NON- RESIDENT COMPANY WERE CONNECTED WITH THE EFFEC TIVE FULFILLMENT OF THE CONTRACT OF SALE AND WERE MERELY INCIDENTAL TO THE CONTRACT. 72 ITA NO.1077/DEL/2014 VOITH PAPER GMBH THE RATIO DECIDENDI EMANATING FROM THE AFORESAID D ECISIONS IS THAT THE FOLLOWING CONDITIONS SHOULD EXIST TO CONSTITUTE BUSINESS CONNECTION IN INDIA: A REAL AND INTIMATE RELATION MUST EXIST BETWEEN THE TRADING ACTIVITIES CARRIED ON OUTSIDE INDIA BY A NON-RESIDE NT AND THE ACTIVITIES IN INDIA; THE RELATION CONTRIBUTES DIRECTLY AND INDIRECTLY TO THE EARNINGS OF INCOME BY THE NONRESIDENT IN HIS BUSINESS; THERE SHOULD BE AN ELEMENT OF CONTINUITY BETWEEN TH E BUSINESS OF THE NON-RESIDENT AND THE ACTIVITY IN IN DIA. TO PUT IT APPARENTLY, STRAY OR ISOLATED TRANSACTION IS NOT NO RMALLY REGARDED AS A BUSINESS CONNECTION. 8.9 WE NOTE THAT THE GENERAL PROVISION BRINGING INCOME FROM ANY BUSINESS CONNECTION IN INDIA WITHIN THE SCOPE OF SE CTION 9 (1) (I), HAS BEEN EXPLAINED BY WAY OF EXPLANATION 1 (A) OF T HE ACT THAT, IN THE CASE OF A BUSINESS OF WHICH ALL THE OPERATIONS ARE NOT CARRIED OUT IN INDIA, THE INCOME OF BUSINESS DEEMED UNDER T HIS CLAUSE TO ACCRUE OR ARISE IN INDIA. IT SHALL BE ONLY SUCH PAR T OF INCOME AS IS REASONABLY ATTRIBUTABLE TO THE OPERATIONS CARRIED O UT IN INDIA. A CAREFUL READING OF SECTION 9, TOGETHER WITH THE EXP LANATIONS THERETO, MAKES IT CLEAR THAT THE STATUTORY TEST FOR DETERMINING THE PLACE OF ACCRUAL OF INCOME IS NOT THE PLACE WHERE T HESE SERVICES ARE RENDERED BUT WHERE THOSE SERVICES ARE UTILIZED' . 8.10 SINCE, IN THE INSTANT CASE, THE PART OF THE OPERATI ONS OF THE SUPPLY AGREEMENT HAVE BEEN CARRIED OUT IN INDIA AND SALE OF GOODS IS IN CONTINUATION OF THE PROCESS OF ERECTION OF THE PLANT , THE CONDITIONS OF THE BUSINESS CONNECTION EXITS. WE HAVE OBSERVED AN ELEMENT OF CONTINUITY BETWEEN THE BUSINESS OF TH E ASSESSEE FROM SUPPLY TO SUCCESSFUL SUPERVISION OF THE COMMIS SION OF PLANT. 73 ITA NO.1077/DEL/2014 VOITH PAPER GMBH IT IS NOT THE CASE OF ISOLATED SALE OF THE OFF THE SELF GOODS OR STRAY TRANSACTION, IN VIEW OF THE FACT THAT THE ASSESSEE HAS RENDERED SUPERVISION OF ERECTION/COMMISSION OF TPD PLANT. TH US, THE ASSESS IS DOING BUSINESS ACTIVITIES IN INDIA WHICH ARE NOT ISOLATED INSTANCES BUT REPRESENT REAL AND INTIMATE RELATIONS HIP BETWEEN ACTIVITIES OF ASSESSEE DONE OUTSIDE INDIA AND THOSE DONE INSIDE INDIA. THE BUSINESS OPERATION BEING DONE IN INDIA B Y THE ASSESSEE ARE REVENUE GENERATING AS THESE OPERATIONS ARE REQU IRED TO EARN THE CONTRACT AND TO MEET THE CONTRACTUAL OBLIGATION S. THEREFORE, ALL PARAMETERS OF BUSINESS CONNECTION AS PRESCRIBED BY ABOVE JUDICIAL AUTHORITIES ARE SATISFIED IN THE CASE OF T HE ASSESSEE.ACCORDINGLY, THE INCOME IS DEEMED TO ACCRU E OR ARISE IN INDIA IN TERMS OF SECTION 9(1)(I) OF THE ACT FROM T HE OFFSHORE SUPPLY OF GOODS. EXISTENCE OF PE IN INDIA 9. THE ARTICLE-5(1) OF THE DTAA BETWEEN INDIA AND AUST RIA HAS DEFINED THE PERMANENT ESTABLISHMENT MEANS A FIXED P LACE OF THROUGH WHICH THE BUSINESS OF AN ENTERPRISE IS WHOL LY OR PARTLY CARRIED ON. THE ARTICLE 5(2) FURTHER INCLUDE FOLLOW ING PLACES AS PERMANENT ESTABLISHMENT: ARTICLE 5 : PERMANENT ESTABLISHMENT - 1. 2. THE TERM PERMANENT ESTABLISHMENT INCLUDES ESPE CIALLY: (A) A PLACE OF MANAGEMENT; (B) A BRANCH; (C) AN OFFICE; (D) A FACTORY; (E) A WORKSHOP; (F) A MINE, AN OIL OR GAS WELL, A QUARRY OR ANY OTH ER PLACE OF EXTRACTION OF NATURAL RESOURCES; (G) A SALES OUTLET; (H) A WAREHOUSE IN RELATION TO A PERSON PROVIDING S TORAGE FACILITIES FOR OTHERS; 74 ITA NO.1077/DEL/2014 VOITH PAPER GMBH (I) A BUILDING SITE OR CONSTRUCTION, INSTALLATION O R ASSEMBLY PROJECT OR SUPERVISORY ACTIVITIES IN CONNECTION THEREWITH, WHE RE SUCH SITE, PROJECT OR ACTIVITIES (FOR THE SAME OR CONNECTED PR OJECT, SITE OR ACTIVITIES) CONTINUE FOR A PERIOD OF MORE THAN SIX MONTHS. 9.1 THE ARTICLE 7(1) OF THE DTAA HAS FURTHER PRESCRIBE D THAT PROFIT OF ENTERPRISE IN AUSTRIA SHALL BE TAXABLE IN INDIA IF THE AUSTRIAN ENTERPRISE CARRIES ON BUSINESS IN INDIA TH ROUGH PE SITUATED IN INDIA AND SO MUCH OF THE PROFIT OF THE ENTERPRISE WOULD BE TAXABLE THAT IS ATTRIBUTABLE TO THE PE . 9.2 THE ASSESSEE HAS ADMITTED EXISTENCE OF SERVICE PE IN INDIA AS FAR AS SUPERVISORY ACTIVITY UNDER SERVICE AGREEM ENT IN VIEW OF THE FACT THAT EMPLOYEES OF THE ASSESSEE WERE STATIO NED AT THE CPPC TPD PLANT IN THE YEAR UNDER CONSIDERATION TO S UPERVISE THE ERECTION AND COMMISSIONING OF THE PLANT. 9.3 THE ASSESSING OFFICER FOUND THAT IN TAX AUDIT REPOR T FURNISHED IN FORM NO. 3CB AND 3CD RELATED TO PE IN INDIA FOR THE CONTRACT WITH M/S FORD INDIA PVT. LTD., THE ADDRESS OF THE PE WAS MENTIONED AS MOHINDER PURI& CO. VANADANA BUILDING, TOLSTOY MARG, NEW DELHI. HE FURTHER OBSERVED THAT IN THE RE TURN OF INCOME FILED BY THE ASSESSEE SAME ADDRESS HAS BEEN MENTION ED AS THE ADDRESS OF THE ASSESSEE. THE ASSESSING OFFICER ALSO OBSERVED THAT IN CASE OF THE OTHER GROUP COMPANIES OF THE ASSESSE E (M/STHYSSENKRUPP ELEVATOR AUSTRIA PVT. LTD. AND M/S THYSSENKRUPP AIRPORT SYSTEM SA), THE BRANCH/PROJECT OFFICE HAS BEEN SHOWN AT THE SAME ADDRESS. ACCORDING TO THE AS SESSING OFFICER THIS PLACE WAS AT THE DISPOSAL OF THE ASSES SEE. IN VIEW OF THE ASSESSING OFFICER BOOKS OF ACCOUNTS BEING MAINT AINED ON COMPUTERS SYSTEMS WERE LOCATED AT THAR PLACE AND RE TURN OF 75 ITA NO.1077/DEL/2014 VOITH PAPER GMBH INCOME HAVE BEEN FILED FOR THE LAST MANY YEARS. THE ASSESSING OFFICER REJECTED THE CONTENTION OF THE ASSESSEE THA T PE CAME INTO EXISTENCE AFTER THE SUPPLY UNDER THE IMPUGNED CONTR ACT COMPLETED. ACCORDING TO HIM THE PLACE OF THE BUSINE SS WAS AT THE DISPOSAL OF THE ASSESSEE FOR SUFFICIENTLY LONG DURA TION AND IN FACT PE WAS VERY MUCH INVOLVED IN THE MARKETING AND PRE- CONTRACT NEGOTIATION DONE BY THE ASSESSEE. IN VIEW OF THE AB OVE OBSERVATIONS, THE LEARNEDASSESSING OFFICER CONCLUDE D THAT THE ASSESSEE HAD CARRIED OUT BUSINESS, SUPPLY AND SUPER VISION OF INSTALLATION, TESTING AND COMMISSIONING OF MACHINER Y FOR TPD PLANT FROM THE PE OF THE ASSESSEE IN INDIA. 9.4 THE LD. COUNSEL OF THE ASSESSEE BEFORE THE ASSESSI NG OFFICER SUBMITTED THAT THE ACTIVITIES RELATING TO DESIGN AN D MANUFACTURING WERE CARRIED OUT OUTSIDE INDIA AND THE INDIAN PE OF THE ASSESSEE HAD NO ROLE WHATSOEVER IN DESIGN, BUILD AND MANUFAC TURING OF THE MACHINERY, WHICH IS EVIDENT FROM THE FACT THAT THE ASSESSEE COMPANY HAS NO OFFICE OR MANUFACTURING FACILITIES I N INDIA. THE LEARNED ASSESSING OFFICER REJECTED THE CONTENTION O F THE ASSESSEE, OBSERVING AS UNDER: 18.4THE CLAIM OF ASSESSEE THAT MACHINERY FOR TPD P LANTS WERE DELIVERED OUTSIDE INDIA IN AUSTRIA, ACCORDINGLY NO PROFIT FROM OFFSHORE SUPPLY COULD BE ATTRIBUTED TO THE PE OF ASSESSEE IN INDIA. I HAVE CAREFULLY EXAMINED THE TERM AND CONDITION OF AGREEM ENT AND HAVE NOTED THAT THE CLAIM OF ASSESSEE IS FACTUALLY INCOR RECT. AS PER THE TERMS AND CONDITIONS OF THE AGREEMENT ASSESSEE HAS TO DELIVER MACHINERY FOR TPD PLANT IN RUNNING CONDITION AFTER COMPLETING SUPERVISION OF THE INSTALLATION COMMISSIONING AND T ESTING. IN SUCH A CONDITION ASSESSEES CONTENTION THAT EQUIPMENTS ARE SOLD TO CPPC IN HIGH SEAS CANNOT BE ANYTHING BUT A TAX AVOIDANCE SC HEME. WHEN ASSESSEE IS REQUIRED TO HAVE POSSESSION OF THE GOOD S AT THE WORK SITE FOR SUPERVISION OF INSTALLATION, THE PASSING OF POS SESSION IN HIGH SEAS TO CPPC AND AGAIN TAKING IT BACK AT THE SITE IS HIG HLY ILLOGICAL. NO PURPOSE OTHER THAN TAX EVASION CAN BE SERVED FROM T HIS TRANSACTION. FURTHER THERE IS NO DOCUMENTARY EVIDENCE ALSO OF TH E RECEIPT OF THESE 76 ITA NO.1077/DEL/2014 VOITH PAPER GMBH GOODS BY THE ASSESSEE OR ITS AGENT AT THE WORK SITE . EVEN AS PER SECTION 19 (1) OF SALES OF GOODS ACT THE TITLE OF G OODS PASSES WHEN THE CONTRACTING PARTIES INTEND IT TO PASS. IN THIS CASE , WHEN THE INTENTION OF ONE OF THE CONTRACTING PARTIES (CPPC) IS TO RECE IVE THE GOODS IN WORKING CONDITION, THE MERE DOCUMENTS STATING THAT THE TITLE HAS PASSED OVERSEAS HAVE NO VALUE AS THE NATURE OF GOOD S IN THIS CASE IS SUCH WHICH CANNOT BE IMAGINED TO BE IN WORKING COND ITION HIGH SEAS. BOTH THESE FACTS ARE CONTRADICTING EACH OTHER THERE FORE ONLY ONE OF THEM CAN BE FACT. SINCE THE OTHER CLAUSES OF THE IM PUGNED CONTRACT ARE IN OPERATION, THE TITLE OVER THE GOODS CANNOT P ASS OVERSEAS. 9.5 THE LD. COUNSEL SUBMITTED THAT THE SUPERVISORY PE CAME INTO EXISTENCE UNDER THE DTAA, SINCE THE PERIOD OF STAY OF EMPLOYEES CARRYING OUT SUPERVISION ACTIVITIES EXCEE DED THE THRESHOLD PERIOD OF SIX MONTHS. IT WAS DEEMED PE IN INDIA AND IT DOES NOT HAVE ANY PERMANENT OFFICE OR COMMONPLACE A S PRESUMED BY THE ASSESSING OFFICER. ACCORDING TO THE LD. COUN SEL, THE ACTIVITIES RELATING TO OFFSHORE SUPPLY WERE COMPLET ED BY THE ASSESSEE COMPANY MUCH BEFORE THE DEEMED PE CAME INT O EXISTENCE. ACCORDING TO HIM, THE ASSESSING OFFICER GROSSLY ERRED IN STATING THAT THAT TRANSACTION INCLUDING OFFSHORE SU PPLY OF EQUIPMENT WAS DONE WITH THE INVOLVEMENT OF THE INDI AN PE. 9.6 AS REGARD THE ADDRESS OF THE MOHINDER PURI & CO. CHARTERED ACCOUNTANTS, THE LEARNED COUNSEL SUBMITTED THAT SAI D ADDRESS WAS FOR COMMUNICATION PURPOSE SINCE THE SAID FIRM W AS ENGAGED BY THE ASSESSEE FOR PROVIDING PROFESSIONAL SERVICES RELATED TO ACCOUNTING AND TAXATION AND SAID FIRM HAD NO ROLE I N THE BUSINESS OF THE ASSESSEE COMPANY. THE LEARNED COUNS EL ALSO SUBMITTED THAT THE CLAIM OF THE ASSESSING OFFICER T HAT RETURN OF INCOME WAS BEING FILED IN INDIA BY THE ASSESSEE FOR LAST MANY YEARS WAS FACTUALLY INCORRECT AND THE ASSESSEE HAD FILED RETURN OF INCOME FOR THE FIRST TIME FOR THE SUBJECT ASSESSMEN T YEAR 2010-11. 77 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 9.7 ON THE CONTRARY, ON THE ISSUE OF EXISTENCE OF FIXE D PLACE PE, THE LD. DR FIRST SUBMITTED THAT REQUISITE DETAILS W ERE NOT PROVIDED BEFORE THE LOWER AUTHORITIES. THE SUBMISSIONS OF TH E LD DR IN THIS REGARD ARE REPRODUCED AS UNDER: I. NO DETAILS REGARDING PRE-CONTRACT ACTIVITIES AND THE PERSONNEL INVOLVED IN SUCH ACTIVITIES WERE FURNISHED DESPITE R EPEATED REQUESTS BY AO. THE AO VIDE LETTER DT. 22/2/13 ASKED THE AS SESSEE TO EXPLAIN PRE-CONTRACT DETAILS I.E. HOW YOU ARE CHOSEN FOR THE REFERRED WORK WITH REFERENCE TO THE TENDER MODALITI ES. IN RESPONSE, THE ASSESSEE VIDE ITS REPLY DT. 13/3/13 [P.83 OF PA PER BOOK] STATED THAT REGARDING PRE-CONTRACT DETAILS, WE ARE AWAITI NG THE SAME FROM THE ASSESSEE. AS AND WHEN THE DOCUMENTS ARE RECEIVE D, WE SHALL SUBMIT THE SAME WITH YOUR GOODSELF. THE ASSESSEE A GAIN VIDE ITS LETTER DT. REPLY DT. 19/3/13 SOUGHT TIME ON THE GRO UND THAT IN RESPECT OF PRE-CONTRACT DOCUMENTS, WE WOULD LIKE TO INFORM YOU THAT THE ASSESSEE IS IN THE PROCESS OF COLLECTING THE SA ME. HOWEVER, THESE ARE OLD RECORDS, THE ASSESSEE MAY TAKE SOME MORE TI ME TO ORGANIZE THE RELEVANT DOCUMENTS AND INFORMATION. THEREFORE, WE REQUEST YOUR GOODSELF TO GIVE SOME MORE TIME TO THE ASSESSEE FOR SUBMITTING THESE DETAILS/DOCUMENTS. THE ASSESSEE, ONCE MORE VIDE IT S REPLY DT. 25/3/13 [P.91 OF PB] CONTENDED THAT REGARDING THE INFORMATION OF THE EXPATRIATES OF THE ASSESSEE WHO VISITED INDIA I N RESPECT OF THE CONTRACT WITH CENTURY PULP & PAPER MILLS LTD., WE W OULD LIKE TO INFORM YOUR GOODSELF THAT DUE TO EASTER HOLIDAYS IN AUSTRIA, THE NON- RESIDENT ASSESSEE HAS NOT BEEN ABLE TO PROVIDE THE RELEVANT INFORMATION, AS DESIRED BY YOU. HOWEVER, WE EXPECT TO RECEIVE SUCH INFORMATION DURING THIS WEEK AND WE HOPE TO FILE TH E INFORMATION WITH YOUR GOODSELF BY THE END OF THIS WEEK. IT IS NOT THE CONTENTION OF THE ASSESSEE THAT NO PERSONNEL HAD CAM E TO INDIA OR INVOLVED IN THE PRE-CONTRACT AND NEGOTIATIO N ACTIVITIES. IT ACCEPTS THAT ITS EMPLOYEES WERE PRESEN T IN INDIA FOR PRE-CONTRACT ACTIVITIES AND CONTRACT NEGOTIATION S, BUT IT DID NOT PRODUCE THESE DETAILS. NO SUCH DETAILS WERE ALSO FILED BEFORE THE LD. DRP AND THE FINAL ASSESSMENT ORDER W AS PASSED ON 2/1/14 AS PER DRP DIRECTIONS DT. 27/12/13. ON THE CONTENTION OF THE LD. AR THAT NO PE EXIST FO R SUPPLY CONTRACT HE SUBMITTED THAT ASSESSEE CONSISTENTLY CLAIMS THA T IT HAS NO FIXED PLACE PE UNDER ART-5(1) IN INDIA AND THE SUPERVISOR Y PE/SERVICE PE CAME INTO EXISTENCE ONLY AFTER THE ARRIVAL OF MR. A NDREAS CHRISTIAN SCHWAB, SITE REPRESENTATIVE ON 14/12/2009. THE ENTI RE ATTEMPT BY THE ASSESSEE IS TO ESTABLISH THAT THE SUPERVISORY P E BEING COMING INTO EXISTENCE AFTER THE SUPPLIES ARE MADE, HAS NO ROLE IN THE SUPPLY OF EQUIPMENTS AND HENCE THE REVENUE FROM SUPPLIES C ANNOT BE HELD 78 ITA NO.1077/DEL/2014 VOITH PAPER GMBH AS CONNECTED TO IT. DESPITE SEVERAL OPPORTUNITIES, THE ASSESSEE PREFERRED NOT TO PROVIDE THE DETAILS OF ITS PRE-CON TRACT ACTIVITIES IN INDIA. MOREOVER, NO OTHER EVIDENCES IN THE FORM OF COPIES OF THEIR PASSPORT ETC. WERE FILED IN SUPPORT OF THE CLAIM TH AT ANDREAS CHRISTIAN SCHWAB, SITE REPRESENTATIVE & HUBERT GROS SMAN, SUPERVISOR STAYED IN INDIA ONLY BETWEEN 14/12/09 & 31/3/10. AS HAS ALREADY BEEN DISCUSSED IN PART-B OF THIS SUBMIS SION ABOVE, IT IS NOT THE CONTENTION OF THE ASSESSEE THAT NO PERSONNEL HAD CAME TO INDIA OR INVOLVED IN THE PRE-CONTRACT AND NE GOTIATION ACTIVITIES. IT ACCEPTS THAT ITS EMPLOYEES WERE PRESEN T IN INDIA FOR PRE-CONTRACT ACTIVITIES AND CONTRACT NEGOTIATION S, BUT IT DID NOT PRODUCE THE DETAILS REGARDING THEIR STAY AND THE FUNCTIONS THEY CARRIED OUT IN INDIA. ON THE FACE OF IT, IT CANT BE ACCEPTED THAT CENTURY ENTERED INTO A HIGH VALUE CON TRACT WITH THE ASSESSEE WITHOUT ANY TENDER, BIDDING, NEGO TIATIONS ETC. IT IS NOT THE CLAIM OF THE ASSESSEE THAT THERE IS A LO TO TAKE CARE OF PART OF SUCH ACTIVITIES. THE ASSESSEE IN ITS RETURN OF INCOME AS WELL AS IN ITS TDS RETURNS/CERTIFICATES GIVEN ITS ADDRESS AS 1A-D, VANDHANA BUILDING, 11 TOLSTOY MARG, NEW DELHI IT MAY BE NOTED THAT THIS ADDRESS IS DIFFERENT FROM THE SITE OFFICE AT LALKUA, NAINITAL, UP [P.94] WHICH CONSTITUTES THE SUPERVISORY PE. IT CANNOT BE SAID THAT THE ABOVE ADDRESS AT NEW DEL HI IS NOT A GEOGRAPHICALLY FIXED PLACE . SINCE, AS PER THE TAX AUDIT REPORT, [P.34, PB 2011-12] IT HAS BEEN CERTIFIED THAT THE BOOKS OF ACCOUNTS OF THE ASSESSEE ARE BEING MAINTAINED AT THIS PREMISES, IT CANT BE SAID THAT THE PREMISES ARE NOT AT THE DISPOSAL OF THE ASSESSEE . IT MAY NOT BE OUT OF CONTEXT TO STATE THAT HONBLE DEL HI HIGH COURT IN THE CASE OF GALILEO INTERNATIONAL INC. & TRAVELPORT [19SOT 257] HAVE UPHELD FIXED PLACE PE ON THE BASIS OF EXISTENCE OF COMPUTER TERMINALS. ACCORDINGLY, MAINTENANCE OF BOOKS OF ACC OUNTS AT A FIXED GEOGRAPHICAL LOCATION SATISFIES THE DISPOSAL, LOCAT ION AND BUSINESS TESTS FOR THE EXISTENCE OF A FIXED PLACE PE. THE TE MPORAL ASPECT OF THE PE OR PERMANENCY TEST IS ALSO SATISFIED AS THE AO IN PARA-18.2 IN PAGE 24 OF HIS ORDER HAS GIVEN A FINDING THAT THE RETURNS OF THE ASSESSEE ARE BEING FILED IN INDIA SINCE LAST MANY Y EARS AND IN ALL THE RETURNS THE ADDRESS OF THE ASSESSEE REMAINS THE SAME. FURTHERMORE, FORM NO. 27A IN SUPPORT OF DEDUCTION & DEPOSIT OF TDS [P.13 & 14 OF THE SUBMISSIONS OF REVENUE] SHOWS MR. C.S. MATHUR AS THE PERSON RESPONSIBLE FOR DEDUCTION AND DEPOSIT OF TDS. SINCE THE SAID FUNCTION I.E. DEDUCTION AND DEPOSIT OF TDS CAN ONLY BE CARRIED ON BY AN EMPLOYEE OF THE ASSESSEE PAY EE, IT CAN BE CONCLUDED THAT MR. MATHUR IS THE EMPLOYEE OF THE ASSESSEE WHO HAS BEEN OPERATING FROM THE ABOVE FIXED PLACE OF BUSINESS . ACCORDINGLY, THE CLAIM OF THE ASSESSEE THAT THE O NLY 79 ITA NO.1077/DEL/2014 VOITH PAPER GMBH EMPLOYEES IT HAVE IN INDIA ARE MR. ANDREAS CHRISTIA N SCHWAB & HUBERT GROSSMAN IS FACTUALLY INCORRECT. BOTH THESE EMPLOYEES MAY BE THE ONLY EXPAT EMPLOYEES PRESENT IN INDIA, HOWEV ER, ON THE FACTS OF THE CASE, THEY ARE NOT THE ONLY EMPLOYEES PRESEN T IN INDIA. THUS, THE PREMISES AT 1A-D, VANDHANA BUILDING, 11 TOLSTOY MARG, NEW DELHI CONSTITUTES A FIXED PLACE PE OF THE ASSESSEE FROM WHICH IT CARRIES ON ITS BUSINESS. FURTHERMORE, IN THE FACE OF NON- COMPLIANCE BY THE ASSESSEE AND IN THE ABSENCE OF ANY MATERIAL TO THE CONTRARY, THE AO IS JUSTIFIED IN TR EATING THE SAME AS THE FIXED PLACE OF BUSINESS OF THE ASSESSEE FROM WHICH ALL ACTIVITIES FOR THE SUPPLY OF EQUIPMENTS TAK ING PLACE. 9.8 IN THE REJOINDER, THE LEARNED COUNSEL SUBMITTED TH AT PRE- CONTRACT ACTIVITIES ARE NOT RELEVANT TO CONSTITUTE FIXED PLACE PE. THE SUBMISSION OF THE LEARNED COUNSEL REPRODUCED AS UNDER: RE: CONSTITUTION OF FIXED PLACE PE ON ACCOUNT OF NO N- AVAILABILITY OF DETAILS OF PRE-CONTRACT ACTIVITIES A ND EMPLOYEE VISITS PARA B (IV) AND C.1, PANES 1-2 OF THE LD. CI T(DR) S SUBMISSION] THE LD. CIT(DR) HAS ALLEGED THAT THE APPELLANT FAIL ED TO FURNISH THE DETAILS OF PRE-CONTRACT ACTIVITIES DESPITE THE SAME BEING SPECIFICALLY CALLED FOR BY THE ASSESSING OFFICER AND THAT NO EVI DENCES HAVE BEEN FURNISHED IN SUPPORT OF THE APPELLANTS CLAIM THAT THE EMPLOYEES, I.E. MR. ANDREAS CHRISTIAN SCHWAB AND MR. HUBERT GROSSMA N STAYED IN INDIA FROM 14.12.2009 AND 31.03.2009 FOR UNDERTAKIN G SUPERVISORY ACTIVITIES. IT HAS BEEN ALLEGED THAT THE SUBJECT CO NTRACT FOR SUPPLY OF EQUIPMENT, BEING A HIGH VALUE CONTRACT, COULD NOT H AVE BEEN CARRIED OUT WITHOUT ANY TENDERS, BIDDING, NEGOTIATIONS, ETC . FURTHER, THE LD. CIT(DR) HAS REITERATED THE ALLEGAT ION OF THE ASSESSING OFFICER THAT SINCE THE APPELLANT HAS BEEN MAINTAINING ITS BOOKS OF ACCOUNT AND FILING ITS INCOME TAX RETURN I N INDIA FOR THE PAST MANY YEARS, WITH THE ADDRESS STATED AS 1A-D, VANDH ANA BUILDING, 11 TOLSTOY MARG, NEW DELHI, THE AFOREMENTIONED ADD RESS CONSTITUTES FIXED PLACE OF BUSINESS FROM WHERE ACTI VITIES OF SUPPLY OF EQUIPMENT TOOK PLACE. RE: PRE-CONTRACT ACTIVITIES NOT RELEVANT TO CONSTIT UTE FIXED PLACE PE AS REGARDS THE ALLEGATION OF THE LD. CIT(DR) WITH R ESPECT TO NON- FURNISHING OF PRE-CONTRACT ACTIVITIES BEFORE THE LO WER AUTHORITIES, IT IS RESPECTFULLY SUBMITTED AS UNDER: 80 ITA NO.1077/DEL/2014 VOITH PAPER GMBH THE APPELLANT, BEING A COMPANY RESIDENT IN AUSTRIA, IS ENTITLED TO THE TREATY BENEFITS UNDER THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN AUSTRIA AND INDIA (THE TREATY). ARTICLE 7 OF THE TREATY DEALING WITH TAXATION OF BUSINESS PROFITS, READS AS UNDER: ARTICLE 7 BUSINESS PROFITS 1. THE PROFITS OF AN ENTERPRISE OF A CONTRACTING ST ATE SHALL BE TAXABLE ONLY IN THAT STATE UNLESS THE ENTERPRISE CA RRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A P ERMANENT ESTABLISHMENT SITUATED THEREIN. IF THE ENTERPRISE C ARRIES ON BUSINESS AS AFORESAID, THE PROFITS OF THE ENTERPRIS E MAY BE TAXED IN THE OTHER STATE BUT ONLY SO MUCH OF THEM A S IS ATTRIBUTABLE TO THAT PERMANENT ESTABLISHMENT. 2. SUBJECT TO THE PROVISIONS OF PARAGRAPH 3, WHERE AN ENTERPRISE OF A CONTRACTING STATE CARRIES ON BUSINE SS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLI SHMENT SITUATED THEREIN, THERE SHALL IN EACH CONTRACTING S TATE BE ATTRIBUTED TO THAT PERMANENT ESTABLISHMENT THE PROF ITS WHICH IT MIGHT BE EXPECTED TO MAKE IF IT WERE A DISTINCT AND SEPARATE ENTERPRISE ENGAGED IN THE SAME OR SIMILAR ACTIVITIE S UNDER THE SAME OR SIMILAR CONDITIONS AND DEALING WHOLLY INDEP ENDENTLY WITH THE ENTERPRISE OF WHICH IT IS A PERMANENT ESTA BLISHMENT. 3. IN DETERMINING THE PROFITS OF A PERMANENT ESTABL ISHMENT, THERE SHALL BE ALLOWED AS DEDUCTIONS EXPENSES WHICH ARE INCURRED FOR THE PURPOSES OF THE PERMANENT ESTABLIS HMENT, INCLUDING EXECUTIVE AND GENERAL ADMINISTRATIVE EXPE NSES SO INCURRED, WHETHER IN THE STATE IN WHICH THE PERMANE NT ESTABLISHMENT IS SITUATED OR ELSEWHERE, AND ACCORDI NG TO THE DOMESTIC LAW OF THE CONTRACTING STATE IN WHICH THE PERMANENT ESTABLISHMENT IS SITUATED. HOWEVER, NO SUCH DEDUCTI ON SHALL BE ALLOWED IN RESPECT OF AMOUNTS, IF ANY PAID (OTHE RWISE THAN TOWARDS REIMBURSEMENT OF ACTUAL EXPENSES) BY THE PE RMANENT ESTABLISHMENT TO THE HEAD OFFICE OF THE ENTERPRISE OR ANY OF ITS OTHER OFFICES, BY WAY OF ROYALTIES, FEES OR OTHER S IMILAR PAYMENTS IN RETURN FOR THE USE OF PATENTS, KNOW-HOW OR OTHER RIGHTS, OR BY WAY OF COMMISSION OR OTHER CHARGES, F OR SPECIFIC SERVICES PERFORMED OR FOR MANAGEMENT, OR, EXCEPT IN THE CASE OF A BANKING ENTERPRISE, BY WAY OF INTEREST ON MONE YS LENT TO THE PERMANENT ESTABLISHMENT. LIKEWISE, NO ACCOUNT S HALL BE TAKEN, IN THE DETERMINATION OF THE PROFITS OF A PER MANENT ESTABLISHMENT, FOR AMOUNTS CHARGED (OTHERWISE THAN TOWARDS REIMBURSEMENT OF ACTUAL EXPENSES), BY THE PERMANENT ESTABLISHMENT TO THE HEAD OFFICE OF THE ENTERPRISE OR ANY OF ITS OTHER OFFICES, BY WAY OF ROYALTIES, FEES OR OTHER S IMILAR PAYMENTS IN RETURN FOR THE USE OF PATENTS, KNOW-HOW OR OTHER 81 ITA NO.1077/DEL/2014 VOITH PAPER GMBH RIGHTS, OR BY WAY OF COMMISSION OR OTHER CHARGES, F OR SPECIFIC SERVICES PERFORMED OR FOR MANAGEMENT, OR, EXCEPT IN THE CASE OF A BANKING ENTERPRISE BY WAY OF INTEREST ON MONEY S LENT TO THE HEAD OFFICE OF THE ENTERPRISE OR ANY OF ITS OTH ER OFFICES. 4. NO PROFITS SHALL BE ATTRIBUTED TO A PERMANENT ES TABLISHMENT BY REASON OF THE MERE PURCHASE BY THAT PERMANENT ESTABLISHMENT OF GOODS OR MERCHANDISE FOR THE ENTER PRISE. 5. FOR THE PURPOSES OF THE PRECEDING PARAGRAPHS, TH E PROFITS TO BE ATTRIBUTED TO THE PERMANENT ESTABLISHMENT SHALL BE DETERMINED BY THE SAME METHOD YEAR-BY-YEAR UNLESS T HERE IS GOOD AND SUFFICIENT REASON TO THE CONTRARY. 6. WHERE PROFITS INCLUDE ITEMS OF INCOME WHICH ARE DEALT WITH SEPARATELY IN OTHER ARTICLES OF THIS CONVENTION, TH EN THE PROVISIONS OF THOSE ARTICLES SHALL NOT BE AFFECTED BY THE PROVISIONS OF THIS ARTICLE. IN TERMS OF PARAGRAPH 1 OF ARTICLE 7 OF THE TREATY, BUSINESS PROFITS ARISING TO A FRENCH ENTERPRISE SHALL BE TAXABLE IN INDIA, ONLY IF THE AUSTRIAN ENTERPRISE HAS A PE IN INDIA. IN OTHER WOR DS, IN THE ABSENCE OF A PE IN INDIA, NO PART OF THE BUSINESS PROFITS A RISING TO FRENCH ENTERPRISE IS TAXABLE IN INDIA. ARTICLE 5 OF THE TREATY DEFINES PE AS UNDER: ARTICLE 5 PERMANENT ESTABLISHMENT 1. FOR THE PURPOSES OF THIS CONVENTION, THE TERM 'P ERMANENT ESTABLISHMENT' MEANS A FIXED PLACE OF BUSINESS THRO UGH WHICH THE BUSINESS OF AN ENTERPRISE IS WHOLLY OR PARTLY C ARRIED ON. 2. THE TERM 'PERMANENT ESTABLISHMENT' INCLUDES ESPE CIALLY: (A) A PLACE OF MANAGEMENT; (B) A BRANCH; (C) AN OFFICE; (D) A FACTORY; (E) A WORKSHOP; (F) AMINE, AN OIL OR GAS WELL, A QUARRY OR ANY OTH ER PLACE OF EXTRACTION OF NATURAL RESOURCES; (G) A SALES OUTLET; (H) A WAREHOUSE IN RELATION TO A PERSON PROVIDING S TORAGE FACILITIES FOR OTHERS; (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 82 ITA NO.1077/DEL/2014 VOITH PAPER GMBH OR ACTIVITIES) CONTINUE FOR A PERIOD OF MORE THANSIX MONTHS . 3. AN ENTERPRISE SHALL BE DEEMED TO HAVE A PERMANE NT ESTABLISHMENT IN A CONTRACTING STATE AND TO CARRY O N BUSINESS THROUGH THAT PERMANENT ESTABLISHMENT IF IT PROVIDES SERVICES OR FACILITIES IN CONNECTION WITH, OR SUPPLIES PLANT AND MACHINERY ON HIRE USED FOR OR TO BE USED IN THE PRO SPECTING FOR, OR EXTRACTION OR EXPLOITATION OF MINERAL OILS IN THAT STATE. 4. NOTWITHSTANDING THE PRECEDING PROVISIONS OF THI S ARTICLE, THE TERM 'PERMANENT ESTABLISHMENT' SHALL BE DEEMED NOT TO INCLUDE : (A) THE USE OFF FACILITIES SOLELY FOR THE PURPOSE OF STORAGE, DISPLAY OR DELIVERY OF GOODS OR MERCHANDISE BELONGI NG TO THE ENTERPRISE; (B) THE MAINTENANCE OF A STOCK OF GOODS OR MERCHAND ISE BELONGING TO THE ENTERPRISE SOLELY FOR THE PURPOSE OF STORAGE, DISPLAY OR DELIVERY; (C) THE MAINTENANCE OFA STOCK OF GOODS OR MERCHANDI SE BELONGING TO THE ENTERPRISE SOLELY FOR THE PURPOSE OF PROCESSING BY ANOTHER ENTERPRISE; (D) THE MAINTENANCE OF A FIXED PLACE OF BUSINESS S OLELY FOR THE PURPOSE OF PURCHASING GOODS OR MERCHANDISE OR O F COLLECTING INFORMATION, FOR THE ENTERPRISE; (E) THE MAINTENANCE OF A FIXED PLACE OF BUSINESS S OLELY FOR THE PURPOSE OF CARRYING ON, FOR THE ENTERPRISE, ANY OTHER ACTIVITY OF A PREPARATORY OR AUXILIARY CHARACTER; (F) THE MAINTENANCE OF A FIXED PLACE OF BUSINESS SOLELY FOR ANY COMBINATION OF ACTIVITIES MENTIONED IN SUB-PARAGRAPHS (A) TO (E). PROVIDED THAT THE OVERALL ACTIVITY OF THE FIXED PLACE OF BUSINESS RESULTING FROM THIS COMBINATION IS OF A PREPARATORY OR AUXILIARY CHARACTER. PARAGRAPH 1 OF ARTICLE 5 OF THE TREATY, WHICH DEFIN ES THE TERM PE TO MEAN A FIXED PLACE OF BUSINESS THROUGH WHICH THE B USINESS OF AN ENTERPRISE IS WHOLLY OR PARTLY CARRIED ON, IS SIMI LARLY WORDED AS PARAGRAPH 1 OF ARTICLE 5 OF THE OECD MODEL CONVENTI ON. THE OECD COMMENTARY ON ARTICLE 5 OF THE OECD MODEL CONVENTION, STATES THAT THE FOLLOWING CONDITIONS SHOULD EXIST I N ORDER TO CONSTITUTE FIXED PLACE OF BUSINESS FOR THE PURPOSE OF PARAGR APH 1 OF THAT ARTICLE: THE EXISTENCE OF A PLACE OF BUSINESS, I.E., A FACILITY SUCH AS PREMISES OR, IN CERTAIN INSTANCES, MACHINERY OR EQU IPMENT. 83 ITA NO.1077/DEL/2014 VOITH PAPER GMBH THIS PLACE OF BUSINESS MUST BE FIXED, I.E., IT MUST BE ESTABLISHED AT A DISTINCT PLACE WITH A CERTAIN DEGR EE OF PERMANENCE. THE CARRYING ON OF THE BUSINESS OF THE ENTERPRIS E THROUGH THIS FIXED PLACE OF BUSINESS. THIS USUALLY MEANS THAT PE RSONS WHO, IN ONE WAY OR ANOTHER, ARE DEPENDENT ON THE ENTERPRISE(PERSONNEL) CONDUCT THE BUSINESS OF THE E NTERPRISE IN THE STATE IN WHICH THE FIXED PLACE IS SITUATED. IT IS FURTHER SUBMITTED THAT THE DTAAS CHARACTERIZE A FIXED PLACE OF BUSINESS AS PE ONLY IF THE ENTERPRISE UNDERTAKES A BUSINESS ACTIVITY THROUGH THE PLACE OF BUSINESS. THIS IS REFERRED TO AS THE BUSINESS ACTIVITY TEST. THE CORE BUSINESS OF THE FOREIGN ENTERPRISE SHOULD BE CONDUCTED THROUGH THE PLACE OF BUSINESS. THUS, THER E SHOULD BE A NEXUS BETWEEN THE PLACE OF BUSINESS AND CARRYING ON OF BUSINESS. IN ORDER THAT THE FOREIGN ENTERPRISE RESIDENT OF A CONTRACTING STATE CAN BE SAID TO HAVE A FIXED PLACE PE IN THE OTHER C ONTRACTING STATE, IT IS ESSENTIAL TO DEMONSTRATE THAT THE FOREIGN ENTERP RISE HAS A FIXED PLACE AVAILABLE AT ITS DISPOSAL IN THE OTHER CONTRA CTING STATE, WHICH IS USED FOR PURPOSES OF UNDERTAKING CORE BUSINESS A CTIVITIES OF THAT FOREIGN ENTERPRISE IN THAT OTHER CONTRACTING STATE. IN THIS REGARD, REFERENCE IS MADE TO THE DECISION O F THE SUPREME COURT IN THE CASE OF FORMULA ONE WORLD CHAMPIONSHIP LTD. VS. CIT: 394 ITR 80 (SC) WHEREIN THE COURT AFTER REFERRING T O THE OECD MODEL TAX CONVENTION, COMMENTARIES BY PROFESSOR PHILIP BA KER AND PROFESSOR KLAUS VOGEL, INTERNATIONAL TAX JURISPRUDE NCE OBSERVED THAT IN TERMS OF ARTICLE 5(1) OF THE INDIA- UK TAX TREAT Y, A FIXED PLACE PE IS CONSTITUTED IN INDIA, IF TWIN CONDITIONS ARE SAT ISFIED VIZ, (I) EXISTENCE OF A FIXED PLACE OF BUSINESS AT THE DISPO SAL OF THE FOREIGN ENTERPRISE IN INDIA; (II) THROUGH WHICH THE BUSINES S OF THE FOREIGN ENTERPRISE IS WHOLLY OR PARTLY CARRIED ON. IN OTHER WORDS, THE FIXED PLACE OF BUSINESS SHOULD BE AT THE DISPOSAL OF THE FOREIGN ENTERPRISE THROUGH WHICH ITS BUSINESS IS CARRIED ON IN INDIA. CONVERSELY, PE OF THE FOREIGN COMPANY WILL NOT BE CONSTITUTED IN INDI A WHERE THE FOREIGN ENTERPRISE IS PROVIDED ACCESS TO ITS CUSTOM ER'S PREMISES IN ORDER TO PERFORM SERVICES UNDER THE CONTRACT WITH S UCH CUSTOMER AND NOT FOR UNDERTAKING OTHER BUSINESS ACTIVITIES OF TH E FOREIGN COMPANY IN INDIA. RELEVANT EXTRACTS OF THE DECISION ARE AS UNDER: 32..SOME OF THE INSTANCES GIVEN BY VOGEL IN THIS BEHALF, OF RELATIVE STANDARDS OFCONTR OL, ARE AS UNDER: BY CONTRAST, IN THE CASE OF A SELF-EMPLOYED ENGINEER WHO HAD FREE ACCESS TO HIS CUSTOMER'S PREMISES TO PERFORM THE SERVICES REQUIRED BY HIS CONTRACT, THE CANADIAN 84 ITA NO.1077/DEL/2014 VOITH PAPER GMBH FEDERAL COURT OF APPEAL RULED THAT THE ENGINEER HAD NO CONTROL BECAUSE HE HAD ACCESS ONLY DURING THE CUSTOMERS REGULAR OFFICE HOURS AND WAS NOT ENTITLE D TO CARRY ON BUSINESS OF HIS OWN ON THE PREMISES. 66. AS PER ARTICLE 5 OF THE DTAA, THE PE HAS TO BE A FIXED PLACE OF BUSINESS 'THROUGH' WHICH BUSINESS OF AN ENTERPRI SE IS WHOLLY OR PARTLY CARRIED ON. SOME EXAMPLES OFFIXED PLACE ARE GIVEN IN ARTICLE 5(2), BY WAY OF AN INCLUSION. ARTI CLE 5(3), ON THE OTHER HAND, EXCLUDES CERTAIN PLACES WHICH WOULD NOT BE TREATED AS PE, I.E. WHAT IS MENTIONED IN CLAUSES (A ) TO(F) AS THE 'NEGATIVE LIST'. A COMBINED READING OF SUB-ARTICLES (1), (2) AND (3) OF ARTICLE 5 WOULD CLEARLY SHOW THAT ONLY CERTA IN FORMS OF ESTABLISHMENT ARE EXCLUDED AS MENTIONED IN ARTICLE 5(3), WHICH WOULD NOT BE PES. OTHERWISE, SUB-ARTICLE (2) USES THE WORD 'INCLUDE' WHICH MEANS THAT NOT ONLY THE PLACES SPECIFIED THEREIN ARE TO BE TREATED AS PES, THE LIST OF SUCH PES IS NOT EXHAUSTIVE. IN ORDER TO BRING ANY OTHER ESTABLISHME NT WHICH IS NOT SPECIFICALLY MENTIONED, THE REQUIREMENTS LAID D OWN IN SUB- ARTICLE (1) ARE TO BE SATISFIED. TWIN CONDITIONS WH ICH NEED TO BE SATISFIED ARE: (I) EXISTENCE OF A FIXED PLACE OF BU SINESS; AND (B) THROUGH THAT PLACE BUSINESS OF AN ENTERPRISE IS WHO LLY OR PARTLY CARRIED OUT. IT MAY ALSO BE POINTED OUT THAT THE DELHI HIGH COUR T IN THE CASE OF CIT VS. EFUNDS IT SOLUTION AND ORS.: 364 ITR 256 WH ILE DECIDING THE ISSUE AS TO WHETHER OUTSOURCING OF SERVICES TO AN I NDIAN AFFILIATE RESULTS IN A PE IN INDIA FOR THE FOREIGN COMPANY UN DER THE PROVISIONS OF THE INDIA-US TAX TREATY HELD THAT FOR THE PURPOS ES OF EXISTENCE OF FIXED PLACE PE UNDER ARTICLE 5, THERE MUST BE A FIX ED PLACE OF BUSINESS AT THE DISPOSAL OF THE ENTERPRISE THROUGH WHICH THE CORE BUSINESS ACTIVITIES OF SUCH ENTERPRISE ARE CARRIED OUT IN INDIA. RELEVANT EXTRACTS OF THE DECISION ARE AS UNDER: 56..THE FACT THAT BUSINESS HAS BEEN TRANSFERRED OR SUB- CONTRACTED OR ASSIGNED TO E-FUND INDIA IS NOT RELEV ANT AND MATERIAL, UNLESS WE ARE DETERMINING APPLICABILITY O F PARAGRAPH 3 TO PARAGRAPH 5 AND THE QUESTION IS WHETHER THE IN DIAN COMPANY IS PERFORMING CORE OR AUXILIARY AND PRELIMI NARY ACTIVITIES. THE FACT, THE REPORT REFERS TO AND GIVE DETAILS OF OR NUMBER OF EMPLOYEES OF E-FUND INDIA WHICH ARE PART OF THE E- FUND GROUP IS NOT RELEVANT. NEITHER INCOME EARNED B Y E-FUND INDIA NOR ACTIVITIES IN INDIA BY THE INDIAN SUBSIDI ARY BY ITSELF, RELEVANT IN DETERMINING WHETHER OR NOT PE EXISTS UN DER PARAGRAPHS 1, 2, 4 AND 5 OF ARTICLE 5. THUS AND THE REFORE, THE FACT THAT 40% OF THE EMPLOYEES OF THE ENTIRE GROUP WERE IN INDIA I.E. WERE EMPLOYEES OF E-FUND INDIA, WILL NOT MAKE THE SAID COMPANY AGENCY SUBSIDIARY PE OR FIXED PLACE PE OF THE 85 ITA NO.1077/DEL/2014 VOITH PAPER GMBH ASSESSEE. NEITHER PROVISION OF ANY SOFTWARE, INTANG IBLE DATA ETC. WHETHER FREE OF COST OR OTHERWISE, MAKE E-FUND INDIA AN AGENCY OR FIXED PLACE PE OF THE TWO FOREIGN ASSESSE ES. WHETHER OR NOT AND ON WHAT BASIS E-FUND INDIA WAS REIMBURSED EXPENSES OF XEROX, COURIER CHARGES ETC. WILL NOT MAKE E-FUND INDIA AS PE OF THE ASSESSEE UNDER ARTIC LES 5(1), 5(4) OR 5(5). CONDITIONS AND STIPULATES UNDER ARTIC LES 5(1), 5(4) OR 5(5) WILL CREATE A PE AND NOT THE SAID FACTS AS HIGHLIGHTED IN THE IMPUGNED ORDERS. THEREFORE, WE WILL NOW EXAMINE THE FACTS FOUND AND REFER TO ARTICLES 5(4) AND 5(5) OF DTAA. THE AFORESAID DECISION HAS BEEN UPHELD BY THE SUPRE ME COURT AND IS REPORTED IN 399 ITR 34. TO REITERATE, FIXED PLACE PE WOULD BE CONSTITUTED I F THE FOREIGN ENTERPRISE HAS A FIXED PLACE AVAILABLE AT ITS DISPO SAL IN THE OTHER CONTRACTING STATE, THROUGH WHICH CORE BUSINESS ACTI VITIES OF SUCH ENTERPRISE ARE CARRIED OUT. THIS PROPOSITION IS REI NFORCED BY VIRTUE OF THE EXCEPTION CARVED OUT IN ARTICLE 5(4) OF THE TRE ATY TO EXCLUDE THE USE OF FACILITIES SOLELY FOR THE PURPOSE OF COLLECT ING INFORMATION FOR THE ENTERPRISE OR FOR OTHER ACTIVITIES WHICH HAVE A PRE PARATORY OR AUXILIARY CHARACTER. THE PROVISIONS OF ARTICLE 5(4) OF THE TREATY ARE DE SIGNED TO PREVENT AN ENTERPRISE OF ONE CONTRACTING STATE FROM BEING T AXED IN THE OTHER CONTRACTING STATE, IF IT USES FACILITIES SOLELY FOR THE PURPOSE OF COLLECTING INFORMATION FOR THE ENTERPRISE OR CARRIE S ON IN THAT OTHER STATE, ACTIVITIES OF A PURELY PREPARATORY OR AUXILI ARY CHARACTER. IT IS RECOGNIZED THAT THE SERVICES PERFORMED BY SUCH A PL ACE OF BUSINESS ARE SO REMOTE FROM THE ACTUAL REALIZATION OF PROFIT S, THAT IT IS DIFFICULT TO ALLOCATE ANY PROFIT TO THE FIXED PLACE OF BUSINE SS. THE FACILITIES AND ACTIVITIES ENUMERATED IN THE LIS T OF EXCEPTIONS TO PE CONCEPT DO NOT CONSTITUTE PE, EVEN IF ALL THE REQUI REMENTS FOR CONSTITUTING FIXED PLACE PE AS PROVIDED IN ARTICLE 5(1) AREOTHERWISE SATISFIED. THE LIST REFERS TO ACTIVITIES OF A PREPA RATORY OR AUXILIARY CHARACTER, SUCH ACTIVITIES BEING EXEMPTED FROM PE T AXATION. THIS AUTHORITY FOR ADVANCE RULINGS, IN THE CASE OF UAE EXCHANGE CENTRE: 268 ITR 9,FURTHER AFFIRMED BY DELHI HIGH CO URT IN 313 ITR 94 (DEL.)] HELD AS FOLLOWS: '... THE WORD AUXILIARY IN COMMON ENGLISH MEANS H ELPING, ASSISTING OR SUPPORTING THE MAIN ACTIVITY. WE HAVE, THEREFORE, TO ASCERTAIN WHETHER THE ACTIVITIES CARRIED ON IN T HE LIAISON OFFICES IN INDIA, ARE ONLY SUPPORTIVE OF THE MAIN B USINESS OR FORM ONE OF THE MAIN FUNCTIONS OF THE BUSINESS. 86 ITA NO.1077/DEL/2014 VOITH PAPER GMBH FURTHER, REFERENCE IS MADE TO THE DECISION OF THE H ONBLE DELHI HIGH COURT IN THE CASE OF NATIONAL PETROLEUM CONSTRUCTIO N V. DIT: 383 ITR 648 (DELHI) WHEREIN THE COURT HELD THAT A BUILDING SITE OR AN ASSEMBLY PROJECT COULD BE CONSTRUED AS A FIXED PLAC E OF BUSINESS ONLY WHEN AN ENTERPRISE COMMENCES ITS ACTIVITY AT T HE PROJECT SITE. AN ACTIVITY WHICH MAY BE RELATED OR INCIDENTAL TO T HE PROJECT BUT WHICH IS NOT CARRIED OUT AT THE SITE IN THE SOURCE COUNTRY WOULD CLEARLY NOT BE CONSTRUED AS PE AS IT WOULD NOT COMP LY WITH THE ESSENTIAL CONDITIONS AS STATED IN PARAGRAPH1 OF ART ICLE 5 OF THE DTAA. RELEVANT EXTRACTS OF THE DECISION ARE REPRODU CED BELOW: 33. IN TERMS OF CLAUSE (H) OF PARAGRAPH 2 OF ARTIC LE 5 OF THE DTAA, 'A BUILDING SITE OR CONSTRUCTION OR ASSEMBLY PROJECT OR SUPERVISORY ACTIVITIES IN CONNECTION THEREWITH 'WOU LD ALSO CONSTITUTE A PE OF AN ENTERPRISE SUBJECT TO THAT SI TE, PROJECT OR ACTIVITY CONTINUING FOR A PERIOD OF AT LEAST NINE M ONTHS. CLEARLY, THE PURPOSE OF THE SAID CLAUSE IS ALSO TO INCLUDE A BUILDING SITE OR A CONSTRUCTION OR AN ASSEMBLY PROJ ECT AS A PE BY ITSELF. ON A PLAIN READING, A PE CONSTITUTED BY A BUILDING SITE OR A CONSTRUCTION OR AN ASSEMBLY PROJECT, WOUL D COMMENCE ON THE COMMENCEMENT OF ACTIVITIES RELATING TO THE P ROJECT OR SITE. THE SAID CLAUSE IS ALSO TO BE READ HARMONIOUS LY WITH PARAGRAPH 1 OF ARTICLE 5 OF THE DTAA WHICH NECESSAR ILY ENTAILS A FIXED PLACE OF BUSINESS FROM WHICH THE BUSINESS O F AN ENTERPRISE IS CARRIED ON. THUS, A BUILDING SITE OR AN ASSEMBLY PROJECT COULD BE CONSTRUED AS A FIXED PLACE OF BUSI NESS ONLY WHEN AN ENTERPRISE COMMENCES ITS ACTIVITY AT THE PR OJECT SITE. AN ACTIVITY WHICH MAY BE RELATED OR INCIDENTAL TO T HE PROJECT BUT WHICH IS NOT CARRIED OUT AT THE SITE IN THE SOU RCE COUNTRY WOULD CLEARLY NOT BE CONSTRUED AS A PE AS IT WOULD NOT COMPLY WITH THE ESSENTIAL CONDITIONS AS STATED IN PARAGRAP H 1 OF ARTICLE 5 OF THE DT.AA IT IS NECESSARY TO UNDERSTAN D THAT A BUILDING SITE OR A CONSTRUCTION ASSEMBLY PROJECT DO E S NOT NECESSARILY REQUIRE AN ATTENDANT OFFICE; THE SITE O R THE ATTENDANT OFFICE IN RESPECT OF THE SITE/PROJECT ITS ELF WOULD CONSTITUTE A FIXED PLACE OF BUSINESS ONCE AN ASSESS EE COMMENCES ITS WORK AT SITE. THUS, FOR CLAUSE (H) OF PARAGRAPH 2 OF ARTICLE 5 TO BE APPLICABLE, IT IS ESSENTIAL TH AT THE WORK AT SITE OR THE PROJECT COMMENCES - IT IS NOT RELEVANT WHETHER THE WORK RELATES TO PLANNING OR ACTUAL EXECUTION OF CON STRUCTION WORKS OR ASSEMBLY ACTIVITIES. 37. IN THE PRESENT CASE, THE ASSESSEE CLAIMS THAT T HE SURVEY WAS CONDUCTED BY AN INDEPENDENT THIRD PARTY ENGAGED BY THE ASSESSEE AND THAT TOO FOR A PERIOD OF 9 DAYS IN ONE INSTANCE AND 27 DAYS IN ANOTHER (FROM 27.02.2006 TO 07.03.20 06 AND 25.04.2006 TO 21.05.2006). THE ASSESSEE COMMENCED I TS ACTIVITIES AT SITE WHEN THE BARGES ENTERED INTO THE INDIAN 87 ITA NO.1077/DEL/2014 VOITH PAPER GMBH TERRITORY ON 19.11.2006 AND SUCH ACTIVITIES RELATIN G TO THE INSTALLATION, TESTING AND COMMISSIONING OF THE PLAT FORMS CONTINUED TILL 27.04.2007. THUS, THE ASSESSEE'S ACT IVITY AT SITE WOULD INDISPUTABLY COMMENCE ON 19.11.2006 AND CONTI NUE TILL 20.04.2007, THAT IS, FOR A PERIOD OF LESS THAN NINE MONTHS. REFERENCE IS FURTHER MADE TO THE DECISION OF THE DE LHI TRIBUNAL IN THE CASE OF BELLSEA LTD VS. ADIT: 98 TAXMANN.COM 489 (D EL. ITAT) WHEREIN THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF DREDGING AND PIPELINE RELATED SERVICES TO OIL AND GAS INSTALLATI ONS. DURING THE YEAR, ASSESSEE WAS AWARDED CONTRACT FOR LAYING OF GAS PIP ELINES AT KRISHNA GODAVARI BASIN. THE SCOPE OF WORK, INTER-AL IA, REQUIRED THE ASSESSEE TO UNDERTAKE PRE-ENGINEERING AND PRE-CONST RUCTION SURVEYS, SEABED PREPARATION ETC. THE ASSESSEE HAD T HE SINGLE POINT RESPONSIBILITY TOWARDS PROJECT MANAGEMENT. THE ITAT HELD THAT PREPARATORY WORK FOR TENDERING PURPOSE BEFORE ENTER ING INTO CONTRACT COULD NOT BE INCLUDED FOR DETERMINING WHETHER PE EX ISTED IN INDIA OR NOT. RELEVANT EXTRACTS OF THE DECISION ARE REPRODUC ED BELOW: 10. FROM THE MATERIAL PLACED ON RECORD, WE FIND TH AT PRIOR TO THE ENTERING OF THE CONTRACT, ONE OF THE EMPLOYEES OF THE ASSESSEE COMPANY. MR HARRY BELIAARS HAD VISITED IND IA SOMETIME IN SEPTEMBER, 2007 FOR THE PURPOSE OF COLL ECTING DATA AND INFORMATION NECESSARY FOR TENDERING PURPOS E AND TO BID FOR THE CONTRACT. BEFORE ENTERING INTO CONTRACT WITH AMC SUCH PREPARATORY WORK LIKE PRE-SURVEY ENGINEERING, INVESTIGATION OF SITE, ETC.. FOR TENDERING PURPOSE WITHOUT ACTUALLY ENTERING INTO THE CONTRACT AND INSTALLATIO N OF PROJECT CANNOT BE HELD THAT THE ACTIVITY QUA THE INSTALLATI ON PROJECT HAS STARTED. HERE ONE IMPORTANT FACT TO ESTABLISH THE T HRESHOLD PERIOD PRIOR TO EFFECTIVE DATE PROVIDED IN THE CONT RACT, HAS NEITHER BEEN BROUGHT BY THE REVENUE NOR IS BORNE OU T FROM THE RECORDS, THAT THE ASSESSEE HAS INSTALLED ANY KIND O F PROJECT OFFICE OR DEVELOPED A SITE BEFORE ENTERING INTO THE CONTRACT WITH THE AMC FOR CARRYING OUT ANY PREPARATORY WORK. AUXI LIARY AND PREPARATORY ACTIVITY. PURELY FOR TENDERING PURPOSE BEFORE ENTERING OF THE CONTRACT AND WITHOUT CARRYING OUT A NY ACTIVITY OF ECONOMIC SUBSTANCE OR ACTIVE WORK QUA THAT PROJE CT CANNOT BE CONSTRUED AS CARRYING OUT ANY ACTIVITY OF INSTAL LATION OR CONSTRUCTION. CLAUSE (G) OF ARTICLE 5(2) OSTENSIBLY REFERS TO ACTIVITY BASED PE, BECAUSE THE MAIN EMPHASIS IS ON 'WHERE SUCH SITE PROJECT OR ACTIVITY CONTINUES FOR A PERIO D OF MORE THAN 12 MONTHS.' THE DURATION OF 12 MONTHS PER SE IS ACT IVITY SPECIFIC QUA THE SITE, CONSTRUCTION, ASSEMBLY OR IN STALLATION PROJECT. IF THE CONTRACT WOULD NOT HAVE BEEN AWARDE D, THEN ANY KIND OF PREPARATORY WORK FOR TENDERING OF CONTR ACT CANNOT BE RECKONED FOR CARRYING OUT ANY ACTIVITY AS STIPUL ATED IN THIS CLAUSE. HENCE, IN THIS CASE ALL SUCH PREPARATORY WO RK FOR 88 ITA NO.1077/DEL/2014 VOITH PAPER GMBH TENDERING PURPOSE BEFORE ENTERING INTO CONTRACT CAN NOT BE COUNTED WHILE CALCULATING THE THRESHOLD PERIOD. SIT UATION WOULD BE DIFFERENT IF AFTER THE CONTRACT/WORK HAS B EEN AWARDED/ASSIGNED AND THEN IF ANY KIND OF ACTIVE WOR K OF PREPARATORY OR AUXILIARY NATURE IS CARRIED OUT, IT COULD BE COUNTED FOR DETERMINING THE TIME PERIOD. REFERENCE IS FURTHER MADE TO THE DECISION OF THE SP ECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MOTOROLA VS. DCIT: 95 ITD 2 69 (DEL.) WHEREIN THE TRIBUNAL HELD THAT THE BASIC OPERATIONS TO BE C ARRIED OUT BEFORE THE BUSINESS ACTUALLY STARTS SUCH AS MARKET SURVEY, INDUSTRY ANALYSIS, ECONOMY EVALUATION, FURNISHING OF PRODUCT INFORMATION, ENSURING DISTRIBUTORSHIP AND THEIR WARRANTY OBLIGAT ION, ENSURING TECHNICAL PRESENTATIONS TO POTENTIAL USERS, DEVELOP MENT OF MARKET OPPORTUNITIES, PROVIDING SERVICES AND SUPPORT INFOR MATION, PROCUREMENT OF RAW MATERIALS AND ACCOUNTING AND FIN ANCE SERVICES ETC. ARE ACTIVITIES OF PREPARATORY OR AUXILIARY CHA RACTER BEFORE THE COMMENCEMENT OF ACTUAL BUSINESS IN INDIA. SUCH ACTI VITIES CANNOT BE CONSIDERED AS ACTIVITIES IN THE COURSE OF THE CARRY ING ON OF THE BUSINESS BY A FOREIGN COMPANY IN INDIA AND THE SAME ARE ANTERIOR THERETO. RELEVANT EXTRACTS OF THE DECISION ARE REPR ODUCED BELOW: 223. THE ALTERNATIVE ARGUMENT OF THE LEARNED COUNS EL FOR THE ASSESSEE WAS THAT EVEN IF WE WERE TO HOLD THAT THER E IS A FIXED PLACE PE WITHIN THE MEANING OF ARTICLE 5.1, THE MAI NTENANCE OF SUCH A FIXED PLACE OF BUSINESS WAS ONLY FOR 'OTHER ACTIVITIES WHICH HAVE A PREPARATORY OR AUXILIARY CHARACTER, FO R THE ENTERPRISE' WITHIN THE MEANING OF ARTICLE 5.3(E) OF THE DTAA AND, THEREFORE, UNDER THE NEGATIVE DEEMING PROVISIO NS THEREOF THE OFFICE OF MINL CANNOT BE DEEMED TO BE A FIXED P LACE OF ASSESSEES BUSINESS. ARTICLE 5.3 SAYS THAT 'NOTWITH STANDING THE PRECEDING PROVISIONS OF THIS ARTICLE, THE TERM PERMANENT ESTABLISHMENT SHALL BE DEEMED NOT TO INCLUDE ' TH E MAINTENANCE OF A FIXED PLACE OF BUSINESS SOLELY FOR THE PURPOSE OF ADVERTISING, FOR THE SUPPLY OF INFORMATI ON, FOR SCIENTIFIC RESEARCH OR FOR OTHER ACTIVITIES WHICH H AVE A PREPARATORY OR AUXILIARY CHARACTER, FOR THE ENTERPR ISE. THE CONTENTION OF THE ASSESSEE IS THAT THE ACTIVITIES C ARRIED ON BY MINL FOR MOTOROLA ARE OF PREPARATORY OR AUXILIARY C HARACTER. RELIANCE IS PLACED ON CLAUSES (1) TO (5) OF ARTICLE 1.1 OF THE SERVICES AGREEMENT ENTERED INTO ON 1-4-1996 BETWEEN THE ASSESSEE AND MINL. THE NATURE OF THE OBLIGATIONS OF MINL HAVE BEEN ELABORATED IN THESE CLAUSES AS UNDER: 'ARTICLE 1 DUTIES OF MINL 1.1 MINL UNDERTAKES THE OBLIGATION TO PERFORM THE FOLLOWING SERVICES (THE 'SERVICES')IN INDIA TO MINC AND ITS AFFILIATED COMPANIES (HEREINAFTER REFERRED TO J OINTLY AS 89 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 'MOTOROLA'): (1)ENGAGE IN MARKET SURVEY, INDUSTRY ANALYSIS, ECONOMY EVALUATION, DEVELOPMENT OF BUSINESS OPPORTUNITY, INVESTMENT, JOINT VENTURE AND TECHNOLO GY CO-OPERATION AND INTERFACE WITH POTENTIAL BUSINESS PARTNERS AND WITH LOCAL GOVERNMENT AGENCIES ON INDUSTRIAL POLICY AND REGULATIONS. (2)PROVIDE PRODUCT INFORMATION AND TRAINING TO DISTRIBUTORS AND OEMS, ASSIST DISTRIBUTORS, TO PROV IDE POTENTIAL EQUIPMENT USERS WITH TECHNICAL AND PRICE INFORMATION, ENSURE THAT DISTRIBUTORS MEET WARRANTY OBLIGATIONS, AND MAINTAIN TECHNICAL STANDARDS CONSISTENT WITH THE HIGH QUALITY, RELIABILITY AND S TATE OF ART TECHNOLOGY OF MOTOROLA EQUIPMENT, ASSIST DISTRI BUTORS TO MAKE TECHNICAL PRESENTATIONS TO POTENTIAL USERS, ACT AS AN INTERFACE BETWEEN MOTOROLA AND ENDUSERS IN DEALING WITH ISSUES OF TECHNICAL PERFORMANCE OF EQUIPMENT, SELECTION OF EQUIPMENT OR PRICE OF EQUIP MENT. (3)DEVELOP MARKET OPPORTUNITIES FOR MOTOROLA PRODUC TS AND SERVICES BY INTRODUCING MOTOROLA PRODUCTS AND SERVICES AND BY PROVIDING PRODUCT AND SERVICE INFORMATION TO POTENTIAL CUSTOMERS AND PARTNERS IN LIAISON AND SUPPORT OF MOTOROLA AND PROVIDE WARRANT Y AND AFTER SALES SERVICES IN CONNECTION WITH THE PRO DUCTS SOLD. (4)ENGAGE IN SOURCING AND PROCUREMENT ACTIVITY ON BEHALF OF MOTOROLA FOR RAW MATERIALS OR COMPONENTS TO BE INCORPORATED OR USED IN CONJUNCTION WITH PRODUCT S MANUFACTURED ON A WORLDWIDE BASIS. (5)CORPORATE FINANCE AND ACCOUNTING SERVICES. ' ON THE BASIS OF ABOVE CLAUSES IN THE SERVICES AGREE MENT, IT IS CONTENDED THAT THE ACTIVITIES OF MINC ARE ONLY PREP ARATORY OR AUXILIARY IN CHARACTER AND, THEREFORE, THE OFFICE O F MINI IN INDIA CANNOT BE DEEMED TO BE A FIXED PLACE PE OF THE ASSE SSEE. 224. WE SEE FORCE IN THE CONTENTION, TAKEN IN THE A LTERNATIVE. THE ACTIVITIES DESCRIBED IN THE CLAUSES OF THE SERV ICES AGREEMENT DO SHOW THAT THEY ARE BASIC OPERATIONS TO BE CARRIED OUT BY MINL BEFORE THE BUSINESS ACTUALLY ST ARTS SUCH AS MARKET SURVEY, INDUSTRY ANALYSIS, ECONOMY EVALUA TION. FURNISHING OF PRODUCT INFORMATION, ENSURING DISTRIB UTORSHIP AND THEIR WARRANTY OBLIGATION, ENSURING TECHNICAL PRESENTATIONS TO POTENTIAL USERS, DEVELOPMENT OF MA RKET OPPORTUNITIES, PROVIDING SERVICES AND SUPPORT INFOR MATION, PROCUREMENT OF RAW MATERIALS FOR MOTOROLA AND ACCOU NTINGS AND FINANCE SERVICES ETC. THESE ARE BY ALL MEANS ON LY 90 ITA NO.1077/DEL/2014 VOITH PAPER GMBH ACTIVITIES OF PREPARATORY OR AUXILIARY CHARACTER BE FORE THE COMMENCEMENT OF ACTUAL BUSINESS OF MOTOROLA IN INDI A. THESE ACTIVITIES CANNOT BE CONSIDERED AS ACTIVITIES IN TH E COURSE OF THE CARRYING ON OF THE BUSINESS BY MOTOROLA IN INDI A. BUT THEY ARE ANTERIOR THERETO ACCORDINGLY, PRE-CONTRACT ACTIVITIES SUCH AS PRE-EN GINEERING SURVEY FOR THE PURPOSE OF BIDDING/TENDERING ARE NECESSARY FOR SUBMITTING THE BID. AT THAT STAGE, THE BIDDER IS NOT EVEN CERT AIN THAT THE BID WOULD BE ACCEPTED AND THE CONTRACT WOULD BE AWARDED IN ITS FAVOUR. FURTHER SUCH ACTIVITIES DO NOT PER SE GENERATE ANY PROFITS PARTICULARLY SINCE NO CONSIDERATION IS PAID BY THE PROJECT OWNER FOR SUCH ACTIVITIES TO THE APPLICANT. ACCORDINGLY, SUCH ACTIVITIES WOUL D AT BEST AMOUNT TO PREPARATORY OR AUXILIARY ACTIVITIES AND THE SAME CA NNOT GIVE RISE TO PE OF THE APPELLANT IN INDIA, EVEN IF THE CONTRACT IS AWARDED IN ITS FAVOUR SINCE COSTS FOR SUCH ACTIVITIES ARE TO BE BO RNE BY THE APPELLANT WITHOUT ANY REIMBURSEMENT AND HENCE, SUCH SURVEYS D O NOT TANTAMOUNT TO ANY REVENUE GENERATING ACTIVITY. 9.9 ON THE ISSUE WHETHER, PREMISES OF CHARTERED ACCOUN TANTS CAN BE CONSTRUED AS FIXED PLACE PE, THE LEARNED COU NSEL IN HIS REJOINDER SUBMITTED AS UNDER: RE: PREMISES OF CHARTERED ACCOUNTANT CANNOT BE CONS TRUED AS FIXED PLACE PE. IN THIS REGARD, IT IS RESPECTFULLY SUBMITTED THAT T HE AFORESAID OBSERVATION OF THE ASSESSING OFFICER AS WELL AS OF THE LD. CIT(DR) THAT SINCE THE APPELLANT HAS BEEN FILING ITS RETURN OF I NCOME FOR THE PAST MANY YEARS FROM THE AFOREMENTIONED ADDRESS (PREMISE S OF CHARTERED ACCOUNTANT), THE SAME WOULD CONSTITUTE FI XED PLACE PE, IS GROSSLY INCORRECT INASMUCH AS THE YEAR UNDER CONSID ERATION I.E., ASSESSMENT YEAR 2010-11 WAS THE FIRST YEAR FOR WHIC H RETURN OF INCOME WAS FILED BY THE APPELLANT. AS REGARDS THE A DDRESS MENTIONED IN THE RETURN OF INCOME AND FORM 27A FILE D BY THE APPELLANT, IT IS RESPECTFULLY SUBMITTED THAT THE SA ME BELONGS TO M/S. MOHINDER PURI & CO., CHARTERED ACCOUNTANTS (MPCO) WHO WERE ENGAGED BY THE APPELLANT FOR PREPARING THE BOOKS OF ACCOUNTS AND FOR UNDERTAKING TAX COMPLIANCES IN RESPECT OF ONSHO RE ACTIVITIES (SUPERVISORY ACTIVITIES) UNDERTAKEN BY THE APPELLAN T IN INDIA. THE ADDRESS OF THE CHARTERED ACCOUNTANT WAS MENTIONED I N THE RETURN OF INCOME AND FORM 27A MERELY FOR ADMINISTRATIVE CONVE NIENCE AND TO COMMUNICATE WITH INDIAN TAX AUTHORITIES AND THE CHA RTERED ACCOUNTANT FIRM HAS NO ROLE IN THE BUSINESS OF THE APPELLANT COMPANY. IT IS RESPECTFULLY REITERATED THAT THE ALL ACTIVITIES INVOLVED 91 ITA NO.1077/DEL/2014 VOITH PAPER GMBH IN SUPPLY OF EQUIPMENT VIZ. DESIGNING, MANUFACTURIN G ETC. WERE CARRIED OUT OUTSIDE INDIA AND THE SAME WERE NOT CAR RIED OUT IN INDIA IN ANY MANNER, MUCH LESS FROM THE PREMISES OF MPCO. THE AFORESAID PREMISES OF MPCO CAN, BY NO STRETCH O F IMAGINATION, BE CONSTRUED AS A FIXED PLACE OF BUSINESS OF THE AP PELLANT IN TERMS OF ARTICLE 5(1) OF THE INDIA-AUSTRIA DOUBLE TAXATION A VOIDANCE AGREEMENT (THE TREATY) WHICH DEFINES THE TERM PER MANENT ESTABLISHMENT (PE) TO MEAN A FIXED PLACE OF BUSINE SS THROUGH WHICH THE BUSINESS OF AN ENTERPRISE IS WHOLLY OR PARTLY C ARRIED ON. AS EXPLAINED EARLIER, A FIXED PLACE OF BUSINESS/PE IS CONSTITUTED ONLY IF THE ENTERPRISE UNDERTAKES A BUSINESS ACTIVITY TH ROUGH THE PLACE OF BUSINESS. THIS IS REFERRED TO AS THE BUSINESS ACTI VITY TEST. THE CORE BUSINESS OF THE FOREIGN ENTERPRISE SHOULD BE COND UCTED THROUGH THE PLACE OF BUSINESS. [FORMULA ONE WORLD CHAMPIONSHIP LTD. VS. CIT (SUPRA) AND CIT VS. EFUNDS IT SOLUTIONS AND ORS. (S UPRA)] FURTHER, REFERENCE IS MADE TO THE DECISION OF THE K OLKATA ITAT IN THE CASE OF VAN OORD ATLANTA B.V. VS. ADIT: 112 TTJ 229 (KOL) WHEREIN THE ITAT INTER-ALIA HELD THAT MAINTENANCE OF BOOKS OF ACCOUNTS OR BANK ACCOUNT IS IRRELEVANT FOR DETERMINING WHETHER A NON-RESIDENT HAS A FIXED PLACE OF BUSINESS PE IN INDIA. RELEVANT EXTRACTS OF THE DECISION REPRODUCED BELOW: 9. AS REGARDS THE MERITS OF THE CASE, WE FIND SUFFI CIENT FORCE IN THE ARGUMENTS OF THE LEARNED COUNSEL FOR THE APPELL ANT. THE BASIC INGREDIENTS OF A PE, AS INDICATED IN ARTICLE 5 OF THE DTAA ARE (I) A FIXED PLACE OF BUSINESS AND (II) CARRYING ON OF A BUSINESS FROM THAT FIXED PLACE. FROM THE FACTS AVAI LABLE ON RECORD IT TRANSPIRES THAT THE APPELLANT DID NOT HAV E ANY FIXED PLACE OF BUSINESS AFTER 28-7-1999 WHEN THE DREDGER LEFT THE HALDIA PORT. AFTER THE DREDGER LEFT THE PORT THERE WAS NO ACTIVITY WHICH COULD BE TERMED AS 'BUSINESS CARRIED ON' FROM THE FIXED PLACE OF BUSINESS'. MAINTENANCE OF BOOKS OF ACCOUNT OR BANK ACCOUNT CANNOT BE A FACTOR FOR DETERMINES A FIXED PLACE OF BUSINESS AS PE. AT BEST, THESE CAN BE TERM ED AS ACTIVITIES OF AUXILIARY CHARACTER, WHICH HAVE BEEN SPECIALLY EXEMPTED FROM THE DEFINITION OF PE IN CLAUSE 4(E) O F ARTICLE 5 IN THE INSTANT CASE, IT IS TRITE THAT THE ADDRESS O F THE CHARTERED ACCOUNTANT WAS MENTIONED IN THE RETURN OF INCOME AN D FORM 27A MERELY FOR ADMINISTRATIVE CONVENIENCE AND TO COMMUN ICATE WITH INDIAN TAX AUTHORITIES AND THE SAID CHARTERED ACCOU NTANT FIRM DID NOT PLAY ANY ROLE IN ANY BUSINESS ACTIVITY OF THE A PPELLANT COMPANY. FURTHERMORE, THE APPELLANT STATES WITH FULL EMPHASI S AT ITS COMMAND THAT THE PREMISES OF THE CHARTERED ACCOUNTANT WERE NEVER AT THE DISPOSAL OF THE EMPLOYEES OF THE APPELLANT THROUGH WHICH THE 92 ITA NO.1077/DEL/2014 VOITH PAPER GMBH BUSINESS OF THE APPELLANT WAS CARRIED ON IN INDIA. EVEN OTHERWISE, IT IS RESPECTFULLY SUBMITTED THAT MAINTENANCE OF BOOKS OF ACCOUNTS AND FILING THE INCOME TAX RETURN IS A PREPARATORY AND A UXILIARY ACTIVITY AND CANNOT, IN OUR RESPECTFUL SUBMISSION, CONSTITUT E PE OF THE APPELLANT IN INDIA. BE THAT AS IT MAY, AS PER TERMS OF EQUIPMENT SUPPLY CONTRACT, I.E., ARTICLE 7.1 AND THE IMPORT DOCUMENTS SUCH AS BILL O F LADING, ETC., IT IS ABUNDANTLY CLEAR THAT THE OWNERSHIP IN THE GOODS PA SSED OUTSIDE INDIA. IT IS FURTHER SUBMITTED THAT THE ACTIVITIES RELATING TO DESIGN AND MANUFACTURING WERE CARRIED OUT OUTSIDE INDIA AND TH E SUPERVISORY PE OF THE APPELLANT, WHICH CAME INTO EXISTENCE ON A CCOUNT OF NUMBER OF DAYS FOR WHICH APPELLANTS EMPLOYEES STAYED IN I NDIA, HAD NO ROLE WHATSOEVER IN THE DESIGN, FABRICATION AND MANUFACTU RE OF THE EQUIPMENT, WHICH IS SUBSTANTIATED BY THE FACT THAT THE APPLICANT HAS NO OFFICE OR MANUFACTURING FACILITIES IN INDIA. NO EVIDENCE HAS BEEN SUBMITTED BY THE LD. CIT(DR) IN SUPPORT OF THIS UNS UBSTANTIATED, BALD ALLEGATION WHICH IS BASED WHOLLY ON CONJECTURE S AND SURMISES. FURTHER, IT NEEDS TO BE APPRECIATED THAT SINCE THE ACTIVITIES RELATING TO OFFSHORE SUPPLY WERE COMPLETED BY THE APPELLANT MUC H BEFORE THE SUPERVISORY PE CAME INTO EXISTENCE, THE LD. CIT(DR) HAS GROSSLY ERRED IN STATING THAT ALL THE TRANSACTIONS INCLUDIN G OFFSHORE SUPPLY OF EQUIPMENT WERE UNDERTAKEN IN INDIA. IN THIS REGARD, REFERENCE IS MADE TO THE DECISION O F THE SUPREME COURT IN THE CASE OF CIT VS. HYUNDAI HEAVY INDUSTRI ES CO. LTD: 291 ITR 482 CSC) WHEREIN THE ASSESSEE FOREIGN COMPANY H AD ENTERED INTO AN AGREEMENT WITH OIL AND NATURAL GAS COMPANY FOR DESIGNING, FABRICATION, HOOK-UP AND COMMISSIONING OF SOUTH BAS SEIN FIELD CENTRAL COMPLEX FACILITIES IN BOMBAY HIGH. THE SUPR EME COURT OBSERVED THAT THE ACT OF SETTING UP OF PE TRIGGERS THE TAXABILITY OF TRANSACTIONS IN THE SOURCE STATE; UNLESS THE PE IS SET UP, THE QUESTION OF TAXABILITY DOES NOT ARISE; IN CASE OF A TURNKEY PROJECT, THE PE IS SET UP AT THE INSTALLATION STAGE WHILE THE EN TIRE TURNKEY PROJECT, INCLUDING THE SALE OF EQUIPMENT, IS FINALIZED BEFOR E THE INSTALLATION STAGE; SINCE SETTING UP OF PE IS A STAGE SUBSEQUENT TO THE SUPPLY OF EQUIPMENT FROM OUTSIDE INDIA, INCOME IN RESPECT OF SUCH SUPPLY COULD NOT BE ATTRIBUTED TO TAX IN THE HANDS OF THE PE IN INDIA. RELEVANT EXTRACTS OF THE DECISION ARE REPRODUCED BE LOW: 11. ON READING ARTICLE 7 OF THE CADT, IT IS CLEAR THAT THE SAID ARTICLE IS BASED ON OECD MODEL CONVENTION. PARA (1) OF ARTICLE 7 STATES THE GENERAL RULE THAT BUSINESS PROFITS OF AN ENTERPRISE OF ONE CONTRACTING STATE MAY NOT BE TAXED BY THE OT HER CONTRACTING STATE UNLESS THE ENTERPRISE CARRIES ON ITS BUSINESS IN THE OTHER CONTRACTING STATE THROUGH ITS PE. THE SAID PARA (1) FURTHER LAYS DOWN THAT ONLY SO MUCH OF THE PROF ITS 93 ITA NO.1077/DEL/2014 VOITH PAPER GMBH ATTRIBUTABLE TO THE PE IS TAXABLE. PARA (1) OF ARTI CLE 7 FURTHER LAYS DOWN THAT THE ATTRIBUTABLE PROFIT CAN BE DETER MINED BY THE APPORTIONMENT OF THE TOTAL PROFITS OF THE ASSES SEE TO ITS VARIOUS PARTS OR ON THE BASIS OF AN ASSUMPTION THAT THE PE IS A DISTINCT AND SEPARATE ENTERPRISE HAVING ITS OWN PRO FITS AND DISTINCT FROM GE. APPLYING THE ABOVE TEST TO THE FA CTS OF THE PRESENT CASE, WE FIND THAT PROFITS EARNED BY THE KO REAN GE ON SUPPLIES OF FABRICATED PLATFORMS CANNOT BE MADE ATT RIBUTABLE TO ITS INDIAN PE AS THE INSTALLATION PE CAME INTO E XISTENCE ONLY AFTER THE TRANSACTION STOOD MATERIALIZED. THE INSTA LLATION PE CAME INTO EXISTENCE ONLY ON CONCLUSION OF THE TRANS ACTION GIVING RISE TO THE SUPPLIES OF THE FABRICATED PLATF ORMS. THE INSTALLATION PE EMERGED ONLY AFTER THE CONTRACT WIT H ONGC STOOD CONCLUDED. IT EMERGEDONLY AFTER THE FABRICATE D PLATFORM WAS DELIVERED IN KOREA TO THE AGENTS OF ONGC. THERE FORE, THE PROFITS ON SUCH SUPPLIES OF FABRICATED PLATFORMS CA NNOT BE SAID TO BE ATTRIBUTABLE TO THE PE. THERE IS ONE MORE REA SON FOR COMING TO THE AFORESTATED CONCLUSION. IN TERMS OFPA RA (I) OF ARTICLE 7, THE PROFITS TO BE TAXED IN THE SOURCE CO UNTRY WERE NOT THE REAL PROFITS BUT HYPOTHETICAL PROFITS WHICH THE PE WOULD HAVE EARNED IF IT WAS WHOLLY INDEPENDENT OF THE GE. THEREFORE, EVEN IF WE ASSUME THAT THE SUPPLIES WERE NECESSARY FOR THE PURPOSES OF INSTALLATION (ACTIVIT Y OF THE PE IN INDIA) AND EVEN IF WE ASSUME THAT THE SUPPLIES WERE AN INTEGRAL PART, STILL NO PART OF PROFITS ON SUCH SUP PLIES CAN BE ATTRIBUTED TO THE INDEPENDENT PE UNLESS IT IS ESTAB LISHED BY THE DEPARTMENT THAT THE SUPPLIES WERE NOT AT ARM'S LENGTH PRICE. NO SUCH TAXABILITY CAN ARISE IN THE PRESENT CASE AS THE SALES WERE DIRECTLY BILLED TO THE INDIAN CUSTOMER ( ONGC). NO SUCH TAXABILITY CAN ALSO ARISE IN THE PRESENT CASE AS THERE WAS NO ALLEGATION MADE BY THE DEPARTMENT THAT THE PRICE AT WHICH BILLING WAS DONE FOR THE SUPPLIES INCLUDED ANY ELEM ENT FOR SERVICES RENDERED BY THE PE. IN THE LIGHT OF OUR AB OVE DISCUSSION, WE ARE OF THE VIEW THAT THE PROFITS THA T ACCRUED TO THE KOREAN GE FOR THE KOREAN OPERATIONS WERE NOT TA XABLE IN INDIA. 12. THERE IS ONE MORE ASPECT TO BE DISCUSSED. THE A TTRACTION RULE IMPLIES THAT WHEN AN ENTERPRISE (GE) SETS UP A PE IN ANOTHER COUNTRY, IT BRINGS ITSELF WITHIN THE FISCAL JURISDICTION OF THAT ANOTHER COUNTRY TO SUCH A DEGREE THAT SUCH ANO THER COUNTRY CAN TAX ALL PROFITS THAT THE GE DERIVES FRO M THE SOURCES COUNTRY - WHETHER THROUGH PE OR NOT. IT IS THE ACT OF SETTING OUT A PE WHICH TRISSERS THE TAXABILITY OF TRANSACTIONS IN THE SOURCE STATE. THEREFORE, UNLESS THE PE IS SET UP, THE QUES TION OF TAXABILITY DOES NOT ARISE - WHETHER THE TRANSACTION S ARE DIRECT OR THEY ARE THROUGH THE PE. IN THE CASE OF A TURNKE Y PROJECT, THE PE IS SET UP AT THE INSTALLATION STAGE WHILE TH E ENTIRE TURNKEY PROJECT, INCLUDING THE SALE OF EQUIPMENT, I S FINALIZED 94 ITA NO.1077/DEL/2014 VOITH PAPER GMBH BEFORE THE INSTALLATION STAGE. THE SETTING UP OF PE , IN SUCH A CASE, IS A STAGE SUBSEQUENT TO THE CONCLUSION OF TH E CONTRACT. IT IS AS A RESULT OF THE SALE OF EQUIPMENT THAT THE IN STALLATION PE COMES INTO EXISTENCE REFERENCE IS FURTHER MADE TO THE DECISION OF AUTHOR ITY FOR ADVANCE RULINGS IN THE CASE OF LS CABLE LTD, IN RE [2011] 3 37 ITR 35 (AAR) WHEREIN IT WAS HELD THAT EXISTENCE OF PE FOR THE PU RPOSE OF CARRYING OUT THE CONTRACT FOR ONSHORE SUPPLIES AND SERVICES ETC. HAD NO ROLE TO PLAY IN OFFSHORE SUPPLIES; EVEN IF THE PE WAS INVOL VED IN CARRYING ON SOME INCIDENTAL ACTIVITIES SUCH AS CLEARANCE FROM T HE PORT AND TRANSPORTATION, IT COULD NOT BE SAID THAT THE PE WA S IN CONNECTION WITH THE OFFSHORE SUPPLIES. THE SAID DECISION OF TH E AAR HAS BEEN AFFIRMED BY THE DELHI HIGH COURT IN 243 TAXMAN 427. 9.10 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES ON THE ISSUE IN DISPUTE. WE HAVE CONSIDERED THE CONTENTION OF TH E LEARNED COUNSEL THAT PRE-CONTACT ACTIVITIES SUCH AS RE-ENGI NEERING SURVEY FOR THE PURPOSE OF THE BIDDING/TENDERING CANNOT GIV E RISE TO PE BEING ACTIVITIES IN THE NATURE OF PREPARATORY OR OF JEWELLERY ACTIVITIES. WE HAVE ALSO GONE THROUGH THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF GE ENERGY PARTS (20 19-TII-01-HC- DEL-INTL) CITED BY THE LD DR. IN THE SAID DECISION THE HONBLE COURT HAS APPRECIATED CONTRIBUTION OF THE PRESALE A CTIVITIES I.E. PROCESS OF MARKETING THE PRODUCT, UNDERSTANDING NEE D OF CLIENT, GIVING THEM OPTIONS ABOUT AVAILABLE TECHNOLOGY, ADD RESS QUERIES ETC. BY AN ASSESSEE. THE RELEVANT FINDING OF THE HO NBLE HIGH COURT IS REPRODUCED AS UNDER: 57. THIS COURT IS OF THE OPINION THAT THE PROCESS OF SALES AND MARKETING OF GE'S PRODUCT THROUGH ITS VARIOUS GROUP COMPANIES, IN SEVERAL SEGMENTS OF THE ECONOMY (GAS AND ENERGY, RA ILWAYS, POWER, ETC.) WAS NOT SIMPLE. AS NOTICED BY THE TRIBUNAL, E NTERING INTO CONTRACT WITH STAKEHOLDERS (MAINLY SERVICE PROVIDER S IN THESE SEGMENTS) INVOLVED A COMPLEX MATRIX OF TECHNICAL SP ECIFICATIONS, COMMERCIAL TERMS, FINANCIAL TERMS AND OTHER POLICIE S OF GE. TO ADDRESS THESE, GE HAD STATIONED SEVERAL EMPLOYEES A ND OFFICIALS: 95 ITA NO.1077/DEL/2014 VOITH PAPER GMBH HIGH RANKING, AND IN MIDDLE LEVEL. AT ONE END OF TH E SPECTRUM OF THEIR ACTIVITIES WAS INFORMATION GATHERING AND ANALYSIS- WHICH HELPED DEVELOP BUSINESS AND COMMERCIAL OPPORTUNITIES. AT T HE OTHER END WAS INTENSIVE NEGOTIATIONS WITH RESPECT TO CHANGE O F TECHNICAL PARAMETERS OF SPECIFIC GOODS AND PRODUCTS, WHICH HA D TO BE MADE TO SUIT THE CUSTOMERS. STANDARD 'OFF THE SHELF' GOODS - OR EVEN STANDARD TERMS OF CONTRACT, WERE INAPPLICABLE. IN THIS SETTI NG, A POTENTIAL SELLER OF EQUIPMENT - LIKE GE, HAD TO CREATE INTRICATE AND NUANCED PLATFORMS TO ADDRESS THE NEEDS OF CUSTOMERS IDENTIF IED BY IT, IN THE FIRST INSTANCE. AFTER THE FIRST STEP, OF GATHERING INFORMATION, GE HAD TO COMMENCE THE PROCESS OF MARKETING ITS PRODUCT, UNDE RSTANDING THE NEEDS OF INDIAN CLIENTS, GIVING THEM OPTIONS ABOUT AVAILABLE TECHNOLOGY, ADDRESS QUERIES AND CONCERNS WITH RESPE CT TO TECHNICAL VIABILITY AND COST EFFICACY OF THE PRODUCTS CONCERN ED AND- WHEREVER NECESSARY INDICATE HOW AND TO WHAT EXTENT IT COULD ADAPT ITS KNOWN PRODUCTS, OR DESIGN PARAMETERS, TO SUIT INDIAN COND ITIONS AS WELL AS INDIAN LOCAL REGULATIONS. THIS PROCESS WAS TIME CON SUMING AND INVOLVED A SERIES OF CONSULTATIONS BETWEEN THE CLIE NT, ITS TECHNICAL AND FINANCIAL EXPERTS AND ALSO ITS HEADQUARTERS. OF TENTIMES THE HEADQUARTERS TOO HAD TO BE CONSULTED ON TECHNICAL M ATTERS. AFTER THIS CONSULTATIVE PROCESS ENDED AND THE TERMS OF SUPPLY WERE AGREED TO, THE FINAL AFFIRMATIVE TO THE OFFER, TO BE MADE BY T HE INDIAN CUSTOMER, WOULD BE INDICATED BY GE'S HEADQUARTERS.' 9.11 IN INSTANT CASE, WE FIND THAT THE BUYER HAS NOT OR DERED OFF THE SHELF MACHINERY, WHICH COULD BE USED BY THE BUY ER JUST BY PLUGGING OF POWER CORDS. IN THIS CASE, THE BUYER HA S DESIRED TO INSTALL A 620 TPD MULTILAYER PACKAGING QUOTED BOAR D PLANT. THE BUYER HAS AWARDED THE CONTRACT TO THE ASSESSEE IN V IEW OF THE EXPERTISE OF THE ASSESSEE IN COMMISSIONING OF SUCH PLANT. IN ADDITION TO THE EXPERTISE IN COMMISSIONING OF THE P LANT, THE ASSESSEE IS ALSO MANUFACTURE OF ALL THOSE COMPONENT S OF THE MACHINERY, WHICH AFTER ASSEMBLING AT SITE RESULT IN TO A PLANT WHICH BECOMES USEFUL FOR THE BUYER. MERELY SUPPLYIN G COMPONENTS OF MACHINERY MAY NOT BE OF ANY USE FOR T HE BUYER UNTIL ALL THOSE PARTS ARE ASSEMBLED AND COMMISSIONE D IN THE FORM OF A PLANT FOR MANUFACTURING OF THE PRODUCT OF THE BUYER. FOR THE PURPOSE OF COMMISSIONING OF THE PLANT, EVEN AFTER A WARD OF TENDER 96 ITA NO.1077/DEL/2014 VOITH PAPER GMBH TO THE ASSESSEE, FOR MAKING CUSTOMIZED MACHINES FOR THE BUYER CERTAIN DATA, INFORMATION OR LAYOUT PLANS OF PREMIS ES OF THE BUYER ETC. MAY BE REQUIRED AND THEN TO MAKE DESIGNS OF TH E PLANT. IT IS UNBELIEVABLE THAT AFTER AWARDING THE CONTRACT I.E. 19/06/2008 TO THE ASSESSEE ,NONE HAS VISITED SITE OF THE BUYER PR IOR TO DISPATCH OF THE GOODS TO THE BUYER. IN THE CASE, THE ASSESSE E HAS NOT PROVIDED ANY DETAIL OF EITHER PRE-ENGINEERING SURVE Y/PRE-CONTRACT ACTIVITIES OR ANY POST ENGINEERING SURVEY/POST CONT RACT ACTIVITIES, THEREFORE, WE ARE NOT COMMENTING ON THE DECISIONS R ELIED UPON BY THE ASSESSEE. 9.12 WE DO AGREE WITH THE OBSERVATION OF THE ASSESSING O FFICER THAT THERE WAS CLOSE PROXIMITY OR CONNECTION BETWEE N THE PE AND THE ASSESSEE. THE LEARNED ASSESSING OFFICER IS CORR ECT IN OBSERVING THAT SUBSTANTIAL PART OF THE BUSINESS ACT IVITY OF THE ASSESSEE OF MANUFACTURING AND COMMISSIONING OF TPD PLANT WAS CARRIED OUT IN TAXABLE TERRITORY OF THE INDIA AND S UPPLY OF PARTS OF MACHINERY FOR PLANT WAS INCIDENTAL TO SERVICE CONTR ACT AND FOR THIS REASON A PART OF THE PROFIT IS DIRECTLY ATTRIBUTABL E TO THE PE IN INDIA. IN THE FACTS OF THE CASE THE SUPERVISION SER VICES ARE NOT INCIDENTAL TO SALE OF THE PLANT AND MACHINERY AND I T IS OTHERWISE THAT FOR COMMISSIONING OF THE PLANT, ASSESSEE HAS B ROUGHT COMPONENT OF THE MACHINERY TO INDIA UNDER SUPPLY AG REEMENT. IT IS NOT THE CASE THAT THE ASSESSEE IS A PURE TRADER OR SELLER OF THE PART OF THE MACHINERIES TO BE UTILIZED FOR COMMISSI ONING OF THE TPD PLANT, BUT THE ASSESSEE IS HAVING DOMAIN EXPERT ISE OF COMMISSIONING OF SUCH PLANTS. 9.13 THE EXISTENCE OF SERVICE PE HAS NOT BE DENIED BY TH E ASSESSEE. IN THE CASE OF THE ASSESSEE, THE EMPLOYEE S OF THE 97 ITA NO.1077/DEL/2014 VOITH PAPER GMBH ASSESSEE WERE IN INDIA AT THE TIME OF ENTRY OF THE PART OF THE MACHINERY ON THE INDIAN SOIL. THOSE EMPLOYEES WERE INSTRUMENTAL IN SUPERVISING THE ENTIRE ACTIVITY OF INSPECTION OF PART OF THE MACHINERY IMPORTED INTO INDIA AND ASSEMBLING OF THO SE MACHINERY TO BRING INTO THE DELIVERABLE STATE MENTI ONED IN THE SUPPLY AGREEMENT. THE SERVICE PE HAS ALSO PLAYED TH E ROLE IN COMPLETING THE SUPPLY AGREEMENT BETWEEN THE ASSESSE E AND THE BUYER. THE PART OF THE EQUIPMENT OR THE MACHINERY N EEDED FOR ERECTION OR COMMISSIONING OF THE TPD PLANT THOUGH H AS BEEN MANUFACTURED IN AUSTRIA BUT SAME HAVE BEEN UTILIZED FOR CREATION OF TPD PLANT IN INDIA. THE PART OF THE OPERATIONS O F SUPPLY AGREEMENT HAVE DEFINITELY BEEN CARRIED OUT IN INDIA BY THE PERMANENT ESTABLISHMENT OF THE ASSESSEE AND FOR WHI CH PART OF THE PROFIT FROM THE SUPPLY AGREEMENT ALSO NEED TO B E TAXED IN INDIA IN TERMS OF THE TREATY BETWEEN INDIA AND THE AUSTRIA AS THE ASSESSEE RELIED ON THE TREATY PROVISIONS FOR CONSID ERING TAXATION OF THE SUPPLY AGREEMENT. ATTRIBUTION OF PROFIT TO PERMANENT ESTABLISHMENT 10. IN VIEW OF THE ASSESSING OFFICER, THE PE HAS PLAYE D ROLE IN MARKETING AND RELATED ACTIVITIES AND SUPERVISION OF ERECTION AND COMMISSIONING, THUS, HE FOLLOWING THE DECISION OF T HE HONBLE DELHI HIGH COURT IN THE CASE OF ROLLS ROYACE PLC VS DIT 339 ITR 146 (DELHI) ASSIGNED 35% OF THE PROFIT ACCRUING FRO M THE OFFSHORE SUPPLIES TO THE INDIAN OPERATIONS. THE ASSESSING OF FICER REJECTED THE GLOBAL CONSOLIDATED ANNUAL ACCOUNT AS ACCORDING TO THE HIM WHICH INCLUDED SUBSIDIARY COMPANIES ACCOUNTS ALSO. IN ABSENCE OF A STANDALONE ANNUAL ACCOUNTS, THE ASSESSING OFFI CER ADOPTED 98 ITA NO.1077/DEL/2014 VOITH PAPER GMBH PROFIT MARGIN OF THE COMPANY AT 9.75 % AS WAS PROPO SED BY HIM IN THE SHOW CAUSE NOTICE, AND 35% OF SUCH PROFIT WA S ATTRIBUTED TO THE PE. THE WORKING OF THE PROFIT ATTRIBUTED TO OFFSHORE SUPPLY, COMPUTED BY THE ASSESSING OFFICER IS EXTRACTED AS U NDER: ` PARTICULARS FY 2009-10 GROSS OFFSHORE SUPPLY REVENUES (INR) =EXCHANGE RATE @70.09 RS.472,97,97,680/ - PROFIT ON THE BAIS OF 9.75% RS.46,11,55,274/ - ATTRIBUTION IN INDIA (%) 35% TOTAL TAXABLE INCOME RS.16,14,04,346/- 10.1 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE SU BMITTED THAT AS PER GLOBAL ACCOUNTS THERE WAS A NET LOSS OF 7.96% WHEREAS THE ASSESSING OFFICER HAS ARBITRARILY APPLIED FAR A NALYSIS AND BENCHMARKING COMPANIES WHILE COMPUTING THE PROFIT A TTRIBUTABLE. HE FURTHER SUBMITTED THAT NO BASIS HAS BEEN GIVEN B Y THE ASSESSING OFFICER TO ALLOCATE PROFIT OF THE COMPANY ASSIGNED TO THE INDIAN PE AND THE PERCENTAGE OF 35% ADOPTED BY THE ASSESSING OFFICER IS ARBITRARY WITHOUT ANY RATIONAL. HE SUBMI TTED THAT IN THE CASE OF ROLLS ROYCE PLC (SUPRA), SALE OF GOODS WAS THROUGH THE LIAISON OFFICER I.E. RRIL AND IT WAS REMUNERATED FO R IT. HE SUBMITTED THAT RRIL CARRIED OUT MARKETING ACTIVITIE S IN INDIA ON BEHALF OF THE ROLLS-ROYCE PLC. ACCORDING TO THE LD. COUNSEL, HOWEVER, IN THE INSTANT CASE, TWO SEPARATE CONTRACT S HAVE BEEN AWARDED TO THE ASSESSEE COMPANY BY THE CPPC AND THE RE WAS NO PE AT THE TIME OF SIGNING OF THE CONTRACT. ACCORDIN G TO HIM THE DEEMED PE CAME INTO EXISTENCE BY VIRTUE OF RENDIT ION OF THE SUPERVISION SERVICES AND THEREFORE ATTRIBUTION OF 3 5% OF THE PROFIT 99 ITA NO.1077/DEL/2014 VOITH PAPER GMBH FROM SUPPLY OF THE EQUIPMENT BASED ON THE DECISION IN THE ROLLS- ROYCE PIC(SUPRA) WAS NOT JUSTIFIED AS THE COMPANY D ID NOT CARRY OUT ANY LICENSING OR MARKETING ACTIVITIES IN RELATI ON TO SUPPLY OF THE EQUIPMENT INDIA. 10.2 ALTERNATIVELY, IN SUPPORT OF THE GROUND NO. 3(O), THE LEARNED COUNSEL SUBMITTED THAT ONLY 10% OF THE GLOBAL PROFI T IS APPLIED TO INDIA SALES COULD BE BEST ATTRIBUTED AS PROFIT TO T HE ALLEGED PE. THE RELEVANT SUBMISSIONS IN SUPPORT OF GROUND ARE R EPRODUCED AS UNDER: RE: GROUNDS OF APPEAL NO. 11 AND 12: ATTRIBUTION OF PROFITS WITHOUT PREJUDICE TO THE AFORESAID, ONLY A SMALL PA RT OF THE GLOBAL PROFITS OF THE APPELLANT COMPANY COULD, IF AT ALL, BE ATTRIBUTED TO THE PE OF THE APPELLANT IN INDIA AND CAN BE BROUGHT TO TAX IN INDIA AS SUBSTANTIAL AND SUBSTANTIVE PART OF THE APPELLANTS ACTIVITIES ARE CARRIED OUTSIDE INDIA. THE PRINCIPLE OF ATTRIBUTION HAS BEEN UPHELD BY THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF CIT VS. AHMEDBHAI UMA RBHAI& CO.: 18 ITR 472. THE COURT OBSERVED THAT WHERE A PERSON IS CARRYING ON MANUFACTURE AND SALE, THE PROFITS RECEIVED RELATE F IRSTLY TO HIS BUSINESS AS MANUFACTURER AND SECONDLY, TO HIS TRADI NG OPERATIONS. PROFIT OR LOSS HAS TO BE APPORTIONED IN A BUSINESS- LIKE MANNER AND ACCORDING TO WELL ESTABLISHED PRINCIPLES OF ACCOUNT ANCY. IN SUCH CASES, THE COURT HELD THAT IT WILL BE DOING NO VIOL ENCE TO THE MEANING OF THE WORDS ACCRUE OR ARISE IF THE PROFITS ATTRI BUTABLE TO THE MANUFACTURING BUSINESS ARE SAID TO ARISE OR ACCRUE AT THE PLACE WHERE THE MANUFACTURE IS BEING DONE AND THE PROFITS WHICH ARISE BY REASON OF SALE ARE SAID TO ARISE AT THE PLACE WHERE THE SALES ARE MADE. THE AFORESAID VIEW WAS REITERATED BY THE HONBLE SU PREME COURT IN THE CASE OF THE ANGLO-FRENCH TEXTILE CO LTD. V. CIT : 25 ITR 27. IT WAS OBSERVED IN THE AFORESAID CASE THAT THOUGH PROFITS MAY NOT BE REALIZED UNTIL THE MANUFACTURED ARTICLE IS SOLD, PR OFITS ARE NOT WHOLLY MADE BY THE ACT OF SALE AND DO NOT NECESSARILY ACCR UE AT THE PLACE OF SALE. IT WAS FURTHER OBSERVED THAT TO THE EXTENT PR OFITS ARE ATTRIBUTABLE TO THE MANUFACTURING OPERATIONS, PROFI TS ACCRUE AT THE PLACE WHERE THE BUSINESS OPERATIONS ARE CARRIED ON. THE QUESTION WHETHER A PARTICULAR PART OF INCOME, PROFIT OR GAIN AROSE OR ACCRUED 100 ITA NO.1077/DEL/2014 VOITH PAPER GMBH WITHIN THE TAXABLE TERRITORIES OR WITHOUT THE TAXAB LE TERRITORIES WOULD HAVE TO BE DECIDED HAVING REGARD TO THE GENERAL PRI NCIPLES AS TO WHERE THE INCOME, PROFIT OR GAIN COULD BE SAID TO A ROSE OR ACCRUE, THE COURT HELD. IN THE AFORESAID CASE, THE ASSESSEE COMPANY INCORPO RATED IN THE UNITED KINGDOM AND HAVING ITS REGISTERED OFFICE IN LONDON MANUFACTURED YARN AND CLOTH IN THEIR MILL AT PONDIC HERRY. THE ASSESSEE HAD APPOINTED A COMPANY IN MADRAS AT THEIR AGENTS. THE MANUFACTURED GOODS WERE SOLD MOSTLY IN BRITISH INDI A AND PARTLY OUTSIDE BRITISH INDIA. ALL THE CONTRACTS IN RESPECT OF THE SALES IN BRITISH INDIA WERE ENTERED INTO IN BRITISH INDIA AN D DELIVERIES WERE MADE AND PAYMENTS WERE RECEIVED IN BRITISH INDIA. I N REGARD TO SALES OUTSIDE BRITISH INDIA ALSO, PAYMENTS IN RESPE CT OF SUCH SALES WERE RECEIVED IN MADRAS THROUGH THE AGENTS. THE ASSESSEE HAD SHOWN THE TOTAL WORLD INCOME FOR T HE YEAR ENDED 30.12.1941 AT RS.10,23,807. PROFIT AT 10 PER CENT O N BRITISH INDIAN SALES WHICH AGGREGATED TO RS.57,07,431 WAS SHOWN AT RS.5,70,743 AND AFTER DEDUCTION OF THE PROPORTIONATE EXPENSES R ELATING TO SALES IN BRITISH INDIA AND SUNDRY CHARGES WAS PUT DOWN AT TH E NET FIGURE OF RS.4,58,026 WHICH WAS SHOWN AS THE BRITISH INDIAN I NCOME. IT WAS, THUS CONTENDED THAT THE INCOME ARISING IN BRITISH I NDIA IN THE YEAR OF ACCOUNT DID NOT EXCEED ITS INCOME ARISING WITHOUT B RITISH INDIA AND THAT THEREFORE THE ASSESSEE WAS NON-RESIDENT IN BRI TISH INDIA. THIS CALCULATION OF PROFITS, AT THE RATE OF 10 PER CENT ON BRITISH INDIAN SALES DID NOT MAKE ANY ALLOCATION BETWEEN MANUFACTU RING PROFITS AND MERCHANTING PROFITS AND ALL THE PROFITS ARISING OUT OF BRITISH INDIAN SALES WERE SHOWN IN ONE LUMP SUM. IT WAS HELD ON THE AFORESAID FACTS, THAT THE INCOME RECEIVED IN BRITISH INDIA COULD NOT BE SAID TO WHOLLY ARISE IN BRITISH INDIA AND THAT THERE SHOULD BE ALLOCATION OF INCOME BETWEEN THE VARIOUS BUSINESS OPERATIONS OF THE ASSESSEE DEMARCATING THE INCOME A RISING IN THE TAXABLE TERRITORIES INTHE PARTICULAR YEAR FROM THE INCOME ARISING WITHOUT THE TAXABLE TERRITORIES IN THAT YEAR. THE MADRAS HIGH COURT IN THE EASE OF ANNAMALAIS TIM BER TRUST AND CO. VS CIT: 41 ITR 781, HELD THAT THE APPORTIONMENT OF PROFITS UNDER THE ABOVE PROVISIONS SHOULD NOT BE ARBITRARY BUT ON A RATIONAL BASIS. WHERE THE ONLY OPERATION WITHIN THE TAXABLE TERRITO RY WAS THE NEGOTIATION AND CONCLUSION OF THE CONTRACT, THERE W AS NO JUSTIFICATION FOR APPORTIONING 50% OF THE PROFITS TO THE OPERATIO N CARRIED OUT WITHIN THE TAXABLE TERRITORY. THE COURT HELD THAT THERE WA S JUSTIFICATION ONLY FOR APPORTIONING 10% OF THE ASSESSEES SHARE OF THE PROFITS TO THE TRADING OPERATIONS CARRIED OUT IN THE TAXABLE TERRI TORY. 101 ITA NO.1077/DEL/2014 VOITH PAPER GMBH THE DECISION OF THE CALCUTTA HIGH COURT IN THE CASE OF CIT VS BERTRAMS SCOTTS LTD.: 31 TAXMAN 444, WHERE THE COUR T UPHELD THE ORDER OF THE TRIBUNAL IS DIRECTLY TO THE POINT UNDE R CONSIDERATION. IN THAT CASE THE TRIBUNAL HAD NOTED THAT A LARGE NUMBE R OF SERVICES WERE TO BE PERFORMED OUTSIDE INDIA AS COMPARED TO T HE COMPARATIVELY FEWER SERVICES RENDERED IN INDIA. THE COURT UPHELD THE ESTIMATED 10% OF THE NET PROFITS AS INCOME ACCR UING OR ARISING IN INDIA. YOUR HONOURS KIND ATTENTION IN THIS REGARD IS FURT HER INVITED TO DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN TH E CASE OF MOTOROLA INC. VS. DCIT: [2005] 95 ITD 269 (DELHI)(SB), WHERE IN THE TRIBUNAL ELABORATED THE MANNER IN WHICH THE PROFIT ATTRIBUTA BLE TO THE PE, ARE TO BE COMPUTED. IN THAT CASE, THE ASSESSEE ENGAGED IN THE BUSINESS OF TELECOM EQUIPMENT SUPPLY AND ERECTION, WAS HELD TO HAVE A P E IN INDIA, THROUGH WHICH THE ACTIVITIES RELATING TO TELECOM NE TWORK PLANNING, NEGOTIATIONS RELATING TO SALE OF EQUIPMENT AND SIGN ING OF SUPPLY AND INSTALLATION CONTRACTS WITH INDIAN CUSTOMERS, WERE CARRIED OUT IN INDIA. THE ISSUE BEFORE THE SPECIAL BENCH WAS, AS T O WHAT WAS THE INCOME ATTRIBUTABLE TO THE PE OF THE ASSESSEE IN IN DIA. THE SPECIAL BENCH FOUND THAT THE ASSESSEE MADE GLOBAL NET PROFI T OF 10.8%. THE AFORESAID PERCENTAGE WAS APPLIED TO THE SALES MADE TO THE INDIAN CUSTOMER, AND THE RESULTANT FIGURE WAS HELD TO BE N ET PROFIT ARISING IN RESPECT OF THE INDIAN SALE. HAVING REGARD TO THE AC TIVITIES OF THE PE IN INDIA, 20% OF THE NET PROFIT IN RESPECT OF THE INDI AN SALE W'AS HELD TO BE INCOME ATTRIBUTABLE TO THE PE IN INDIA. RELIANCE IS FURTHER PLACED ON THE RECENT DECISION O F THE UTTARAKHAND HIGH COURT IN THE CASE OF SAMSUNG HEAVY INDUSTRIES CO. LTD. VS. DIT: 265 CTR 109 IN JUDGMENT DATED 27.12.2013. THE OBSERVATION OF THE COURT ON THE ISSUE OF ATTRIBUTION OF INCOME REA DS AS 4. IN PARAGRAPH 1 OF ARTICLE 7 OF THE SAID AGREEME NT, IT HAS BEEN PROVIDED THAT PROFITS OF AN ENTERPRISE OF A CO NTRACTING STATE SHALL BE TAXABLE ONLY IN THAT STATE UNLESS TH E ENTERPRISE CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN. IT, THERE FORE, RECOGNIZES TWO TAX IDENTITIES OF AN ENTERPRISE. THE SAID PARAGRAPH MAKES IT CLEAR THAT THE PROFITS OF THE EN TERPRISE MAY BE TAXED IN THE OTHER STATE ONLY SO MUCH OF THE SAM E WHICH IS ATTRIBUTABLE TO THAT PERMANENT ESTABLISHMENT. 5. PARAGRAPH 2 OF ARTICLE 7 IS AS FOLLOWS: SUBJECT TO THE PROVISIONS OF PARAGRAPH (3), WHERE AN ENTERPRISE OF A CONTRACTING STATE CARRIES ON BUSINE SS IN THE 102 ITA NO.1077/DEL/2014 VOITH PAPER GMBH OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLI SHMENT SITUATED THEREIN, THERE SHALL IN EACH CONTRACTING S TATE BE ATTRIBUTED TO THAT PERMANENT ESTABLISHMENT THE PROF ITS WHICH IT MIGHT BE EXPECTED TO MAKE IF IT WERE A DISTINCT AND SEPARATE ENTERPRISE ENGAGED IN THE SAME OR SIMILAR ACTIVITIE S UNDER THE SAME OR SIMILAR CONDITIONS AND DEALING WHOLLY INDEP ENDENTLY WITH THE ENTERPRISE OF WHICH IT IS A PERMANENT ESTA BLISHMENT. 6. IN THE EVENT, AN ENTERPRISE HAVING A TAX IDENTIT Y IN ONE CONTRACTING STATE FOR HAVING A PERMANENT ESTABLISHM ENT THERE, AND DEALING WHOLLY INDEPENDENTLY WITH ITS OTHER TAX ENTITY SITUATE IN THE OTHER CONTRACTING STATE, THE PROFIT ATTRIBUTABLE TO THE FIRST TAX IDENTITY WILL BE PROFIT WHICH MIGHT B E EXPECTED TO BE MADE. 7. THEREFORE, THE SAID AGREEMENT DOES NOT GIVE ANY GUIDANCE TO ASCERTAIN WHAT INCOME IS ATTRIBUTABLE TO WHICH T AX ENTITY UNLESS PROFIT IS GENERATED BY ONE TAX ENTITY DEALIN G WITH THE OTHER TAX ENTITY. 8. IN THE INSTANT CASE, ASSESSEE HELD OUT THAT A PA RT OF THE MONEY RECEIVED BY IT WAS ATTRIBUTABLE TO WITHIN IND IA ACTIVITIES AND THE REMAINING ON ACCOUNT OF OUT OF INDIA ACTIVI TIES. ASSESSEE WAS NOT GENERATING ANY REVENUE BY DEALING WITH EITHER ITS INDIAN TAX IDENTITY, OR ITS KOREAN TAX I DENTITY. IT WAS GENERATING REVENUE BY DEALING WITH O.N.G.C. UNDER T HE SAID CONTRACT. IT CONFESSED THAT A PART OF SUCH REVENUE WAS EARNED BY IT FOR HAVING HAD CARRIED OUT WITHIN INDIA ACTIV ITIES. IT ASSERTED AND CONTINUES TO ASSERT THAT THE REMAINING REVENUE WAS GENERATED BY CARRYING OUT OF INDIA ACTIVITIES. THERE IS NO FINDING ANYWHERE THAT THE REVENUE EARNED AND SAID T O HAVE BEEN ON ACCOUNT OF OUT OF INDIA ACTIVITY WAS EARNED , IN FACT, ON ACCOUNT OF WITHIN INDIA ACTIVITY. 9. BEING A RESIDENT OF KOREA, ASSESSEE IS GOVERNED BY THE INCOME-TAX LAWS APPLICABLE TO THE CLASS OF ASSESSEE S AS THAT OF THE ASSESSEE AS PREVALENT IN KOREA. THEREFORE, I T HAS A TAX IDENTITY IN KOREA. IN ADDITION THERETO, ASSESSEE HA S SUBMITTED TO THE JURISDICTION OF INDIAN TAXING AUTHORITIES BY FURNISHING RETURN OF INCOME AND, THEREBY, ACKNOWLEDGED THAT IT HAS ALSO A TAX IDENTITY IN INDIA. THE QUESTION IS, THIS IDEN TITY IS COVERED BY WHICH PROVISION OF THE AGREEMENT. IN TERMS OF PA RAGRAPH 1 OF ARTICLE 7, ASSESSEE WILL ACQUIRE ITS TAX IDENTIT Y IN INDIA ONLY WHEN IT CARRIES ON BUSINESS IN INDIA THROUGH A PERM ANENT ESTABLISHMENT SITUATED IN INDIA. BY SUBMITTING THE RETURN, ASSESSEE HAS HELD OUT THAT IT IS CARRYING ON BUSINE SS IN INDIA THROUGH A PERMANENT ESTABLISHMENT SITUATED IN INDIA . IN THE CIRCUMSTANCES, THE CONTENTION OF THE ASSESSEE, WHET HER THE 103 ITA NO.1077/DEL/2014 VOITH PAPER GMBH PROJECT OFFICE OF THE ASSESSEE OPENED AT MUMBAI CAN BE, OR CANNOT BE SAID TO BE A PERMANENT ESTABLISHMENT WITH IN THEMEANING OF THE SAID AGREEMENT IS OF NO CONSEQUEN CE. IN TERMS OF THE SAID AGREEMENT, AS IT APPEARS TO US. I F AN ENTERPRISE DOES NOT HAVE A TAX IDENTITY IN INDIA IN THE FORM OF A PERMANENT ESTABLISHMENT, IT HAS NO OBLISATION TO EI THER SUBMIT ANY TAX RETURN WITH, OR PAYANY TAX TO INDIA. THE QU ESTION STILL REMAINS, WHETHER IT WAS RIGHT ON THE PART OF THE TA XING AUTHORITY TO ASSESS INCOME-TAX LIABILITY OF THE ASS ESSEE AS WAS ASSESSED IN THE INSTANT CASE. IN OTHER WORDS, C AN IT BE SAID THAT THE AGREEMENT PERMITTED THE INDIAN TAXING AUTHORITY TO ARBITRARILY FIX A PART OF THE REVENUE TO THE PER MANENT ESTABLISHMENT OF THE ASSESSEE IN INDIA? AS AFORESAI D, ASSESSEE HELD OUT THAT A PART OF THE REVENUE WAS RE CEIVED BY IT FOR DOING CERTAIN WORK IN INDIA. IT DID NOT CONT END THAT EVEN THOSE WORKS WERE DONE BY OR THROUGH ITS PROJECT OFF ICE AT MUMBAI. ON THE OTHER HAND, THERE IS NOT EVEN A FIND ING THAT 25 PER CENT OF THE GROSS REVENUE OF THE ASSESSEE WAS A TTRIBUTABLE TO THE BUSINESS CARRIED OUT BY THE PROJECT OFFICE O F THE ASSESSEE. ONE HAS TO READ ARTICLE 5 OF THE AGREEMEN T IN ORDER TO UNDERSTAND WHAT A PERMANENT ESTABLISHMENT IS, IN TERMS WHEREOF PERMANENT ESTABLISHMENT MEANS A FIXED PLA CE OF BUSINESS THROUGH WHICH BUSINESS OF AN ENTERPRISE IS WHOLLY OR PARTLY CARRIED ON. IN THE INSTANT CASE, ACCORDING T O THE REVENUE, THE PROJECT OFFICE OF THE ASSESSEE IN MUMB AI IS THE PERMANENT ESTABLISHMENT OF THE ASSESSEE IN INDIA THROUGH WHICH IT CARRIED ON BUSINESS DURING THE RELEVANT AS SESSMENT YEAR AND 25 PER CENT OF THE GROSS RECEIPT IS ATTRIB UTABLE TO THE SAID BUSINESS. NEITHER THE ASSESSING OFFICER, NOR T HE TRIBUNAL HAS MADE ANY EFFORT TO BRING ON RECORD ANY EVIDENCE TO JUSTIFY THE SAME. 10. THAT BEING THE SITUATION, WE ALLOW THE APPEAL, SET ASIDE THE IUDGMENT AND ORDER UNDER APPEAL AS WELL AS THE ASSESSMENT ORDER IN SO FAR AS THE SAME RELATES TO I MPOSITION OF TAX LIABILITY ON THE 25 PER CENT OF THE GROSS RE CEIPT UPON THE ASSESSEE IN THE CIRCUMSTANCES MENTIONED ABOVE, AND OBSERVE THAT THE QUESTIONS OF LAW FORMULATED BY US, WHILE A DMITTING THE APPEAL, HAVE NOT, IN FACT, ARISEN ON THE FACTS AND CIRCUMSTANCES OF THE CASE, BUT THE REAL QUESTION WA S, WHETHER THE TAX LIABILITY COULD BE FASTENED WITHOUT ESTABLI SHES THAT THE SAME IS ATTRIBUTABLE TO THE TAX IDENTITY OR PERMANE NT ESTABLISHMENT OF THE ENTERPRISE SITUATE IN INDIA AN D THE SAME, WE THINK, IS ANSWERED IN THE NEGATIVE AND IN FAVOUR OF THE ASSESSEE. (EMPHASIS SUPPLIED). RELIANCE IN THIS REGARD IS PLACED ON THE DECISION O F THE DELHI BENCH OF THE TRIBUNAL IN THE RECENT CASE OF CONVERGYS CUS TOMER 104 ITA NO.1077/DEL/2014 VOITH PAPER GMBH MANAGEMENT GROUP INC. VS. ADIT: ITA NOS.1443/DEL/20 12 & 5243/DEL/2011. IN THAT CASE, THE ASSESSEE WAS AN AM ERICAN COMPANY ENGAGED IN PROVIDING IT ENABLED CUSTOMER MA NAGEMENT SERVICES. THE ASSESSEE HAD ESTABLISHED A SUBSIDIARY IN INDIA WHICH PROVIDED BACK OFFICE/CALL CENTRE SERVICES TO THE AS SESSEE TO SERVICES ITS CUSTOMERS IN INDIA. THE TRIBUNAL HELD THAT THE INDIAN COMPANY CONSTITUTED PE OF THE ASSESSEE IN INDIA SINCE THE A SSESSEE EXERCISED SUBSTANTIAL CONTROL AND INFLUENCE IN THE FUNCTIONAL MATTERS AS IS EVIDENT FROM THE FREQUENT AND EXTENSIVE VISITS OF A SSESSEES EMPLOYEES TO INDIA, SECONDMENT OF ASSESSEES EMPLOY EES TO THE KEY POSITION IN THE INDIAN COMPANY AND CONSIDERING THAT THE INDIAN COMPANY DID NOT BEAR ANY SUBSTANTIAL RISK IN RELATI ON TO THE FUNCTIONS CARRIED OUT BY IN INDIA. THE HONBLE TRIB UNAL WHILE EXPLAINING THE APPROACH OF COMPUTING PROFITS ATTRIB UTABLE TO SUCH PERMANENT ESTABLISHMENT, HELD AS UNDER: 11.17. IN VIEW OF THE ABOVE FACTS, CIRCUMSTANCES, CASE LAW, CBDT CIRCULARS AND VARIOUS ARTICLES OF INDIA-USA DT AA, FOLLOWING CONCLUSIONS ARE ARRIVED AT: A. XXX XXX XXX F. IN OUR CONSIDERED OPINION. THE CORRECT APPROACH TO ARRIVE AT THE PROFITS ATTRIBUTABLE TO THE PE SHOULD BE AS UNDER: STEP 1: COMPUTE GLOBAL OPERATING INCOME PERCENTAGE OF THE CUSTOMER CARE BUSINESS AS PER ANNUAL REPORT/1 OK OF THE COMPANY. STEP 2: THIS PERCENTAGE SHOULD BE APPLIED TO THE EN D-CUSTOMER REVENUE WITH REGARD TO CONTRACTS/PROJECTS WHERE SER VICES WERE PROCURED FROM CIS. THE AMOUNT ARRIVED AT IS THE OPE RATING INCOME FROM INDIAN OPERATIONS. STEP 3: THE OPERATING INCOME FROM INDIA OPERATIONS IS TO BE REDUCED BY THE PROFIT BEFORE TAX OF CIS. THIS RESID UAL IS NOW ATTRIBUTABLE BETWEEN US AND INDIA STEP 4: THE PROFIT ATTRIBUTABLE TO THE PE SHOULD BE ESTIMATED ON RESIDUAL PROFITS AS DETERMINED UNDER STEP 3 ABOV E. THE ATTRIBUTION OF INDIA PROFIT SHALL BE WORKED OUT AS UNDER, MENTIONED AFTER THE TABLE: 11.18. IN THE COMPUTATION BASED ON THE ABOVE APPROA CH FOR THE ASSESSMENT YEAR 2006-07, THE PROFITS ATTRIB UTABLE TO INDIA COMES AS UNDER: PARTICULARS AMOUNT (IN USD) TOTAL REVENUE OF CMG AS PER THE ANNUAL REPORT (A) 1,663,600,000 OPERATING INCOME OF CMG AS PER THE ANNUAL REPORT 175,500,000 105 ITA NO.1077/DEL/2014 VOITH PAPER GMBH (B) OPERATING INCOME AS A PERCENTAGE OF REVENUE EARNED (C = B/A) 10.55% END- CUSTOMER REVENUE FROM INDIAN OPERATIONS (D) 138,900,000 OPERATING INCOME FROM INDIAN OPERATIONS (E = C * D) 14,653,950 OPERATING INCOME OF CIS (PROFIT BEFORE TAX OF CIS) (F) 13,800,000 PROFIT RETAINED BY CMG IN THE US (G = E - F) PLACITUM X 853,950 11.19. AS PER THIS WORKING, THE WORLDWIDE PROFIT EA RNED BY CMG FOR A.Y. 2006-07 COMES TO USD 853950. THIS BY AND LARGE TALLIES WITH THE SUBMISSION OF THE ASSESSEE DATED 26- 12-2010 TO THE ASSESSING OFFICER IN WHICH IT HAS BEEN SUBMITTED THAT THE APP ROXIMATE OPERATING PROFITS OF CMG IN USD COME TO 0.8 MILLION . NOW THE IMPORTANT QUESTION THAT ARISES IS AS TO HOW MUCH OF THE PROFITS SHALL BE ATTRIBUTABLE TO CMGS INDIAN PE OVER AND ABOVE T HE PROFITS DECLARED BY ITS SUBSIDIARY CIS. 11.20. APROPOS TPOS ESTIMATION, WE ARE OF THE VIEW THAT THE SAME IS NOT JUSTIFIED AS IT INVOLVES A VERY UNREALISTIC METHOD OF COUNTING THE WORLDWIDE NUMBER OF EMPLOYEES AND DIVIDING IT W ITH CMGS GLOBAL REVENUE WITHOUT CONSIDERING THE RELEVANT ASP ECTS. THEFINER AND MATERIAL ASPECTS ABOUT THE STATUS, CAPACITY OF THE EMPLOYEES ARE OVER LOOKED AND RESULT BECOME VERY VAGUE AND DI STORTED. THEREFORE, THE METHOD ADOPTED BY ASSESSING OFFICER CANNOT BE RELIED ON AS MOST APPROPRIATE METHOD. 11.21. APROPOS CIT(A)S ESTIMATE ABOUT ATTRIBUTION, THOUGH HE ACCEPTED THE PROPOSITION THAT THERE CANNOT BE NOTIO NAL ADDITION TO INDIA REVENUE, HOWEVER, CIT(A) S METHOD ALSO DOES NOT BECOME A RATIONAL INASMUCH AS THE VARIOUS EXPENDITURES INCUR RED BY CMG I.E. RESEARCH & DEVELOPMENT, DEPRECIATION, AMORTIZATION ETC. HAVE NOT BEEN CONSIDERED AND 50% OF SELLING, GENERAL AND ADM INISTRATIVE EXPENSES HAVE BEEN IGNORED ALONG WITH OTHER EXPENSE S INCURRED BY CMG OUTSIDE INDIA FOR EARNING THE REVENUE FROM END CUSTOMERS. IN OUR CONSIDERED VIEW, THIS APPROACH IS ALSO NOT VIAB LE AND APPROPRIATE. 11.22. AS THE METHODS FOR CALCULATING THE ATTRIBUTI ON PROFIT AS ADOPTED BY TPO AND CIT(A) ARE NOT RELIABLE. LD. COU NSEL HAS FURTHER DEMONSTRATED THAT IF BOTH THE METHODS ARE HARMONIOU SLY APPLIED, 106 ITA NO.1077/DEL/2014 VOITH PAPER GMBH THIS LEADS TO A SITUATION WHERE NO FURTHER ATTRIBUT ION TO THE ASSESSEES INCOME CAN BE MADE. THUS A HARMONIOUS IN TERMIXED RATIONALIZATION OF TPO AND CIT(A) METHOD RESULTS IN TO NO FURTHER ATTRIBUTION OF PROFITS TO INDIAN PE. 11.23. IN THIS BACKDROP WE ARE REMINDED OF TWO CASE LAWS DECIDED BY HONBLE SUPREME COURT WHICH HAVE DEALT WITH ATTR IBUTION OF THE PROFITS TO THE INDIAN PES: (I) ANGLO FRENCH TEXTILE COMPANY LTD. VS CIT 23 ITR 101 (SC), IN WHICH 10% ATTRIBUTION HAS BEEN HELD TO BE REASONABL E. (II) HUKUM CHAND MILLS LTD. VS. CIT 103 ITR 548 (SC ), IN WHICH 15% ATTRIBUTION HASBEEN HELD TO BE REASONABLE. 11.24. THESE CASES DECIDED BY THE APEX COURT THOUGH ARE OLD. BUT THEY STILL HOLD THE FIELD AS THEY HAVE NOT BEEN TIN KERED WITH. IN OUR CONSIDERED VIEW. THE ADOPTION OF HIGHER FIGURE OF 1 5% AS HELD BY HONBLE SUPREME COURT IN THE HUKUM CHAND MILLS LTD. (SUPRA). TOR ATTRIBUTION OF ASSESSEES INDIAN PE OPERATIONS WILL MEET THE ENDS OF JUSTICE. THUS, THE ATTRIBUTION OF INDIAN PE INCOME SHOULD BE MADE AT 15% OF PROFIT RETAINED BY CMG IN THE US. 11.25. IN OTHER WORDS 15% OF THE PLACITUM X (RESUL T OF G=E-F) IN THE CHART AT PARA11.18,AS MENTIONED ABOVE AS A REASONAB LE ATTRIBUTION OFPROFIT OF INDIA PE, WILL MEET THE ENDS OF JUSTICE . THUS, ASSESSING OFFICER WILL WORK OUT THE PROFITS ATTRIBUTABLE TO I NDIAN PE ON THIS METHOD FOR A. Y. 2006-07. (EMPHASIS SUPPLIED) ON A ROUGH AND READY BASIS, IN THE PRESENT CASE, SI NCE THE ALLEGED PE IS INVOLVED IN LESSER NUMBER OF ACTIVITIES, ONLY 10% OF GLOBAL PROFIT PERCENTAGE AS APPLIED TO INDIA SALES COULD AT BEST BE ATTRIBUTED AS PROFIT ATTRIBUTABLE TO THE ALLEGED PE, AS HELD IN T HE FOLLOWING CASES: ANGLO FRENCH TEXTILE COMPANY LTD. VS. CIT, 23 ITR 1 01 (SC) CIT VS. BERTRAMS SCOTTS LTD., 31 TAXMAN 444 (CAL. H C) IN THE PRESENT CASE, IT MAY BE POINTED OUT THAT SIN CE THE APPELLANT HAS INCURRED AS LOSS AT THE GLOBAL/HEAD OFFICE LEVE L, THEREFORE, NO PORTION OF ITS GLOBAL RECEIPTS CAN BE ATTRIBUTED TO TAX IN INDIA. 10.3 WE HAVE HEARD SUBMISSION OF THE PARTIES ON THE IS SUE IN DISPUTE. WE FIND THAT ASSESSEE HAS NOT PROVIDED ANY DETAIL IN RESPECT OF THE MARKETING OR PRE-TENDERING ACTIVITIE S OR EVEN POST TENDERING ACTIVITY. IN ABSENCE OF ANY SUCH DETAILS, IT WAS DIFFICULT FOR THE ASSESSING OFFICER TO QUANTIFY THE ROLE RELA TED TO MARKETING 107 ITA NO.1077/DEL/2014 VOITH PAPER GMBH ACTIVITY PLAYED BY THE PERMANENT ESTABLISHMENT. BUT AS FAR AS ASSEMBLY OF FABRICATIONS OF THE MACHINES THE SERVIC E PE HAS PLAYED A SIGNIFICANT ROLE AND NO PART OF THE PROFIT OUT OF THE SUPPLY AGREEMENT HAS BEEN ASSIGNED BY THE ASSESSEE TOWARDS THE SERVICE PE. IN THE SUPPLY AGREEMENT, THE ASSESSEE HAS SUPPL IED MAINLY PARTS OR THE COMPONENTS OF THE MACHINES AND THOSE M ACHINES OR SECTIONS OF THE PLANTS HAVE BEEN ASSEMBLED IN INDIA . AS WE HAVE ALREADY CONCLUDED THAT FOR ALL PRACTICAL PURPOSES T HE PROPERTY IN GOODS TRANSFERRED IN INDIA AND THUS PE HAS PLAYED R OLE IN SUPPLY AGREEMENT OTHER THAN DESIGN, BUILD AND MANUFACTURIN G OF THE COMPONENTS OF THE MACHINES. THEREFORE, THE SIGNIFIC ANT PART OF THE PROFIT ON OFFSHORE SUPPLY OF EQUIPMENT UNDER SUPPLY AGREEMENT NEED TO BE ATTRIBUTED TO PE IN INDIA. IN THE CASE O F THE ROLLS-ROYCE PLC (SUPRA), HONBLE HIGH COURT TAKEN INTO CONSIDER ATION THE ROLE 50% TOWARD MANUFACTURING ACTIVITY AND 15 % TOWARDS THE RESEARCH AND DEVELOPMENT ACTIVITY AND BALANCE 35% W AS CONSIDERED TO THE MARKETING ACTIVITY. THE RELEVANT FINDING OF THE HONBLE HIGH COURT IS REPRODUCED AS UNDER: IN THE ROLLS ROYCE CASE, THE ASSESSEE WAS A BRITIS H COMPANY. IT SUPPLIED CERTAIN PARTS AND EQUIPMENTS TO INDIAN CUS TOMERS. ROLLS ROYCE INDIA LIMITED (RRIL) WAS 100 PER CENT SUBSI DIARY OF ASSESSEE SET UP IN INDIA, WHICH RENDERED LIAISON SE RVICES AND WAS REMUNERATED ON A COST PLUS BASIS. THE ASSESSING OFF ICER, AFTER HOLDING THAT RRIL WAS PE OF THE ASSESSEE AND THERE WAS BUSINESS CONNECTION BETWEEN THE TWO AS THE MARKETING AND SAL E OF GOODS TO INDIAN CUSTOMERS WERE CARRIED OUT BY THE ASSESSEE T HROUGH RRIL, HELD THAT PROFITS ATTRIBUTABLE TO PE WERE LIABLE TO TAX IN INDIA IN TERMS OF ARTICLE 7 OF THE DTAA BETWEEN INDIA. THE ASSESSI NG OFFICER, ACCORDINGLY, INVOKED RULE 10 OF THE INCOME-TAX RULE S, 1962 AND ATTRIBUTED 100 PER CENT OF PROFITS EARNED FROM SALE OF GOODS TO INDIAN CUSTOMER IN THE ASSESSMENT YEARS 1997-98 TO 2000-01 AND 75 PER CENT OF PROFITS IN THE ASSESSMENT YEARS 2002-03 AND 2003-04. ON APPEAL, THE COMMISSIONER (APPEALS) UPHELD THE ORDER OF THE 108 ITA NO.1077/DEL/2014 VOITH PAPER GMBH ASSESSING OFFICER FOR THE ASSESSMENT YEARS 1997-98 TO 2000-01 AND HELD THAT THE OFFICES OF THE RRIL IN INDIA CONSTITU TED PERMANENT ESTABLISHMENT OF THE ASSESSEE IN INDIA UNDER ARTICL E 5 OF THE DTAA. HOWEVER, HE MODIFIED THE ORDER OF THE ASSESSING OFF ICER TO THE EXTENT THAT THE PROFITS ATTRIBUTABLE TO THE ACTIVITIES CAR RIED ON IN INDIA WERE DEEMED TO BE 75 PER CENT INSTEAD OF 100 PER CENT OF THE ESTIMATED PROFITS AS HELD BY THE ASSESSING OFFICER. ON SECOND APPEAL, THE TRIBUNAL MODIFIED THE ORDER O F THE COMMISSIONER (APPEALS) TO THE EXTENT THAT THE PROFI TS ATTRIBUTABLE TO THE ACTIVITIES CARRIED ON IN INDIA WERE ESTIMATED A T 35 PER CENT INSTEAD OF 75 PER CENT AS HELD BY THE COMMISSIONER (APPEALS). THE TRIBUNAL HELD THAT OUT OF THE TOTAL PROFITS ON GLOB AL BASIS, 50 PER CENT OF THE PROFIT WAS TO BE ATTRIBUTED TO THE MANUFACTU RING ACTIVITY, 15 PER CENT TO RESEARCH AND DEVELOPMENT ACTIVITIES AND BALANCE TO MARKETING ACTIVITIES AND SINCE MARKETING ACTIVITIES WERE CARRIED OUT IN INDIA, TO THE EXTENT OF SALES IN INDIA PROPORTIO NATE PROFIT WAS TO BE ATTRIBUTED TO THE GLOBAL PROFITS. THE CONTENTION OF THE ASSESSEE THAT NET RESEARCH AND DEVELOPMENT EXPENSES SHOULD ALSO B E REDUCED WHILE COMPUTING OPERATING PROFITS WAS REJECTED BY T HE TRIBUNAL ON THE GROUND THAT NO PART OF RESEARCH AND DEVELOPMENT ACTIVITIES WAS CARRIED OUT IN INDIA. HONBLE DELHI HIGH COURT DISM ISSED THE ASSESSEES APPEAL AGAINST THE PERCENTAGE OF ATTRIBU TION. IN CAN BE SEEN FROM THE ABOVE CASE THAT THERE WAS S ALE OF GOODS THROUGH THE LIASON OFFICE I.E. RRIL AND IT WAS REMU NERATED FOR IT. FURTHER, RRIL CARRIED OUT MARKETING ACTIVITIES IN I NDIA ON BEHALF OF ROLLS ROYCE PLC. HOWEVER, IN THE INSTANT CASE, TWO SEPARATE CONTRACTS HAVE BEEN AWARDED TO THE APPELLANT COMPAN Y BY CPP AND THERE WAS NO PE AT THE TIME OF SIGNING OF THE CONTR ACTS. THE DEEMED PE CAME INTO EXISTENCE BY VIRTUE OF RENDITION OF SU PERVISION SERVICES. ACCORDINGLY, ATTRIBUTION OF 35% OF THE PROFITS FROM THE SUPPLY OF EQUIPMENT BASED ON THE DECISION IN ROLLS ROYCE PLC (SUPRA) IS UNJUSTIFIED AS THE APPELLANT COMPANY DID NOT CARRY OUT ANY LIASONING OR MARKETING ACTIVITIES IN RELATION TO THE SUPPLY O F EQUIPMENT IN INDIA. 10.4 IN THE INSTANT CASE, IN ADDITION TO THE MARKETING ACTIVITIES OR ENGINEERING SURVEY PRE OR POST AWARDING OF CONTRACT (FOR WHICH NO INFORMATION HAS BEEN FILED BY THE ASSESSEE), THE SE RVICE PE HAS PLAYED ROLE IN ASSEMBLING AND BRINGING THE EQUIPMEN T TO DELIVERABLE STATE AS AGREED UNDER THE SUPPLY AGREEM ENT. IN SUCH 109 ITA NO.1077/DEL/2014 VOITH PAPER GMBH FACTS AND CIRCUMSTANCES, IN OUR OPINION, THE 35% OF THE PROFIT ATTRIBUTED TO THE PE IS JUSTIFIED. ACCORDINGLY, WE UPHOLD THE SAME. 11. THE GROUND NO. 4 OF THE APPEAL RELATES TO INTEREST AS UNDER SECTION 234A/234B/234D OF THE ACT. THE LEARNED COUN SEL OF THE ASSESSEE HAS SUBMITTED AS UNDER: RE: GROUND OF APPEAL NO. 13 - NO INTEREST CHARGEABLE UNDER SECTION 234B OF THE ACT: AT THE OUTSET, IT IS SUBMITTED THAT SINCE THE REVEN UES RECEIVABLE BY THE APPELLANT ARE SUBJECT TO DEDUCTION OF TAX AT SO URCE, THE QUESTION OF PAYMENT OF ADVANCE TAX AND SUBSEQUENT LEVY OF IN TEREST UNDER SECTION 234B OF THE ACT DOES NOT ARISE AT ALL, AS E LABORATED HEREUNDER: AS PER THE PROVISIONS OF SECTION 234B OF THE ACT, A N ASSESSEE WHO IS LIABLE TO PAY ADVANCE TAX UNDER SECTION 208 WILL BE LIABLE TO INTEREST UNDER THE SAID SECTION, IF HE FAILS TO PAY SUCH TAX , OR THE ADVANCE TAX PAID BY HIM FALLS SHORT OF 90 PERCENT OF THE ASSESS ED TAX. ACCORDINGLY, BEFORE LEVYING INTEREST UNDER SECTION 234B, IT MUST BE FIRST DETERMINED WHETHER THE ASSESSEE WAS LIABLE TO PAY ADVANCE TAX UNDER THE PROVISIONS OF SECTION 208 OF THE ACT. IN TERMS OF SECTION 208 READ WITH SECTION 209(L)(D) OF THE ACT AS APPLICABLE AT THE RELEVANT TIME, ADVANCE TAX PAYABL E HAS TO BE COMPUTED AFTER REDUCING FROM THE ESTIMATED TAX LIAB ILITY, THE AMOUNT OF TAX DEDUCTIBLE/ COLLECTIBLE AT SOURCE ON INCOME WHICH IS INCLUDED IN COMPUTING THE ESTIMATED TAX LIABILITY. SUCH BALA NCE TAX LIABILITY IS THE ADVANCE TAX PAYABLE UNDER SECTION 208 OF THE AC T. IT SHOULD BE NOTED THAT THE WORDS USED IN SECTION 209(1 )(D) OF THE ACT ARE 'TAX DEDUCTIBLE AT SOURCE' AND NOT 'TAX DEDUCTED AT SOUR CE'. UNDER SECTION 195 OF THE ACT, TAX IS DEDUCTIBLE AT SOURCE FROM PAYMENTS MADE TO NON-RESIDENTS. THE APPELLANT BEING A NON- RESIDENT, TAX IS DEDUCTIBLE AT SOURCE UNDER SECTION 195 OF THE ACT FROM THE PAYMENTS MADE TO THE APPELLANT. SINCE TAX WAS DEDUCTIBLE AT SOURCE ON ALL THE PAYMENTS MADE TO APPELLANT, NO ADVANCE TAX WAS PAYABLE AS PER THE PROVISIONS OF SECTION 208 RE AD WITH SECTION 209(1 )(D) OF THE ACT. IN THE ABSENCE OF ANY LIABIL ITY FOR PAYMENT OF ADVANCE TAX, THE PROVISIONS OF SECTION 234B OF THE ACT FOR ALLEGED SHORT PAYMENT OF ADVANCE TAX CANNOT APPLY AND THE L EVY OF INTEREST HEREUNDER SHOULD BE DELETED. 110 ITA NO.1077/DEL/2014 VOITH PAPER GMBH RELIANCE IS PLACED ON THE RECENT DECISION OF THE DE LHI HIGH COURT IN THE CASE OF DIT V. GE PACKAGED POWER INC.: ITA NO. 352-353 OF 2014, WHEREIN THE HIGH COURT HELD THAT NO INTEREST UNDER SECTION 234B OF THE ACT COULD BE LEVIED ON THE ASSESSEE-PAYEE ON TH E GROUND OF NON- PAYMENT OF ADVANCE TAX BECAUSE THE OBLIGATION WAS U PON THE PAYER TO DEDUCT THE TAX AT SOURCE BEFORE MAKING REMITTANC ES TO THE NON- RESIDENT ASSESSEE. THE RELEVANT EXTRACTS OF THE DEC ISION ARE REPRODUCED HEREUNDER: '22. THIS COURT, THEREFORE, HOLDS THAT JACABS (SUPR A) APPLIES IN SUCH SITUATIONS; ALCATEL LUCENT (SUPRA) CAN BE EXPL AINED AS A DECISION TURNING UPON ITS FACTS; ITS SEEMINGLY WIDE OBSERVATIONS, LIMITED TO THE CIRCUMSTANCES OF THE C ASE. THIS COURT, THEREFORE, HOLDS THAT THE VIEW TAKEN BY ITAT WAS CORRECT; THE PRIMARY LIABILITY OF DEDUCTING TAX FOR THE PERIOD CONCERNED, SINCE THE LAW HAS UNDERGONE A CHANGE AFT ER THE FINANCE ACT, 2012) IS THAT OF THE PAYER. THE PAYER WILL BE AN ASSESSEE IN DEFAULT, ON FAILURE TO DISCHARGE THE OB LIGATION TO DEDUCT TAX, UNDER SECTION 201 OF THE ACT. 23. FOR THE ABOVE REASONS, THIS COURT FINDS THAT NO INTEREST IS LEVIABLE ON THE RESPONDENT ASSESSEES UNDER SECTION 234B, EVEN THOUGH THEY FILED RETURNS DECLARING NIL INCOME AT THE STAGE OF REASSESSMENT. THE PAYERS WERE OBLIGED TO D ETERMINE WHETHER THE ASSESSEES WERE LIABLE TO TAX UNDER SECT ION 195(1), AND TO WHAT EXTENT, BY TAKING RECOURSE TO T HE MECHANISM PROVIDED IN SECTION 195(2) OF THE ACT. TH E FAILURE OF THE PAYERS TO DO SO DOES NOT LEAVE THE REVENUE WITH OUT REMEDY; THE PAYER MAY BE REGARDED AN ASSESSEE-IN-DE FAULT UNDER SECTION 201, AND THE CONSEQUENCES DELINEATED IN THAT PROVISION WILL VISIT THE PAYER. THE APPEAL OF THE R EVENUE IS ACCORDINGLY DISMISSED WITHOUT ANY ORDER AS TO COSTS . FURTHER, RELIANCE IS PLACED ON THE FOLLOWING DECISI ONS OF THE COURTS/ TRIBUNALS, WHEREIN IT HAS BEEN HELD THAT INTEREST U NDER SECTION 234B OF THE ACT FOR NON-PAYMENT OF ADVANCE TAX COULD NOT BE LEVIED ON THE NON-RESIDENT ASSESSEE, SINCE SUCH ASSESSEE WAS NOT LIABLE TO PAY ANY ADVANCE TAX CONSIDERING THAT ALL PAYMENTS MADE TO THE ASSESSEE WERE SUBJECT TO TAX DEDUCTION AT SOURCE EV EN IF THE PAYER HAD NOT ACTUALLY DEDUCTED TAX AT SOURCE: DIT V. MAERSK CO. LTD.: 334 ITR 79 (UTTRAKHAND H C) DIT VS. JACABS CIVIL INCORPORATED: 330 ITR 578 SEDCO FOREX INTERNATIONAL V. DCIT, DELHI (72 ITD 415)/L 86 CTR 144 (DEL.) ASIA SATELLITE TELECOMMUNICATIONS CO. LTD. (238 C TR 233) 111 ITA NO.1077/DEL/2014 VOITH PAPER GMBH RHEINBRAUN ENGINEERING & WASSER GMBH (1915/BOM/96) IT MAY BE POINTED OUT THAT THE FINANCE ACT, 2012, W .E.F. 1.4.2012 ADDED PROVISO BELOW SECTION 209(1) F THE APT-TO THE FOLLOWING EFFECT: PROVIDED THAT FOR COMPUTING LIABILITY FOR ADVANCE TAX, INCOME- TAX CALCULATED UNDER CLAUSE (A) OR CLAUSE (B) OR CL AUSE (C) SHALL NOT, IN EACH CASE, BE REDUCED BY THE AFORESAID AMOU NT OF INCOME-TAX WHICH WOULD BE DEDUCTIBLE OR COLLECTIBLE AT SOURCE DURING THE SAID FINANCIAL YEAR UNDER ANY PROVISION OF THIS ACT FROM ANY INCOME, IF THE PERSON RESPONSIBLE FOR DEDU CTING TAX HAS PAID OR CREDITED SUCH INCOME WITHOUT DEDUCTION OF TAX OR IT HAS BEEN RECEIVED OR DEBITED BY THE PERSON RESPONSI BLE FOR COLLECTING TAX WITHOUT COLLECTION OF SUCH TAX. THE SAID PROVISO IS APPLICABLE FROM ASSESSMENT YEAR 2013-14 AND IS, THEREFORE, PROSPECTIVE IN OPERATION. THE INSERT ION OF THE PROVISO CANNOT BE CONSTRUED TO HAVE RETROSPECTIVE EFFECT SO TO EXPOSE A NON- RESIDENT COMPANY TO LEVY OF INTEREST UNDER SECTION 234B OF THE ACT FOR ASSESSMENT YEARS PRIOR TO ASSESSMENT YEAR 2013- 14, WHERE TAX WAS DEDUCTIBLE AT SOURCE ON THE INCOME PAYABLE TO T HE NON-RESIDENT, IF SUCH INCOME IS HELD TO BE CHARGEABLE TO TAX IN I NDIA. 11.1 THE LEARNED DR, ON THE OTHER HAND, SUBMITTED THAT IT WAS THE RESPONSIBILITY OF THE ASSESSEE TO PAY THE ADVAN CE TAX ON THE ITS INCOME, IF TAX WAS NOT DEDUCTED BY THE DEDUCTOR, AN D ACCORDINGLY, THE ASSESSING OFFICER IS JUSTIFIED IN LEVY OF INTER EST UNDER SECTION 234B OF THE ACT . 11.2 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES ON TH E ISSUE IN DISPUTE. THE LEARNED COUNSEL HAS SUBMITTED THAT PROVISO BELOW THE SECTION 209(1)(D) OF THE ACT IS PROSPECTIVE IN NATURE. THE LEARNED COUNSEL HAS ALSO RELIED ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF DIT VS GE PACKAGED P OWER INC.(SUPRA). THE HONBLE HIGH COURT HAS OBSERVED TH AT IN VIEW OF THE CHANGE AFTER THE FINANCE ACT, 2012 IT WAS PRIMA RY LIABILITY OF THE PAYER TO DEDUCT TAX AND HE WOULD BE AN ASSESSEE -IN-DEFAULT, ON FAILURE TO DISCHARGE THE OBLIGATION TO DEDUCT TA X UNDER SECTION 112 ITA NO.1077/DEL/2014 VOITH PAPER GMBH 201 OF THE ACT. BUT THE INSTANT CASE IS PRIOR TO TH E AMENDMENT OR CHANGE BROUGHT BY THE FINANCE ACT, 2012. IN THE CAS E OF ALCATEL LUCENT WORLD SERVICES (ITA NO. 326/2012, 329/2012 A ND 336/2012), THE HONBLE DELHI HIGH COURT HAS REPRODU CED FACTS OF THE CASE AS UNDER: 5. THE ASSESSING OFFICER HOWEVER DID NOT ACCEPT TH E ASSESSEE'S STAND AND IN THE ASSESSMENT ORDER PASSED ON 23.03.2 010 ATTRIBUTED 2.5% OF THE SALE PROCEEDS OF THE HARDWARE AS PROFIT ATTRIBUTABLE TO THE PE IN INDIA, WHICH CAME TO `21,02,58,238/- FOR THE ASSESSMENT YEAR 2007-08. SIMILAR RE-ASSESSMENTS WERE MADE IN A LL THE YEARS IN RESPECT OF BOTH THE ASSESSEES. IN THE RE-ASSESSMENT ORDER, IN ADDITION TO THE AFORESAID INCOME, THE ASSESSING OFF ICER ALSO DIRECTED THAT INTEREST UNDER SECTIONS 234A, 234B AND 234C SH ALL BE CHARGED. DEMAND NOTICES WERE ACCORDINGLY ISSUED. HTTP://WWW. ITATONLINE.ORG ITA NOS.327-330 & 336-340/2012 PAGE 6 OF 33 6. APPE ALS WERE TAKEN BY THE ASSESSEE IN RESPECT OF ALL THE ASSESSM ENT YEARS BEFORE THE CIT (APPEALS). THREE GROUNDS WERE TAKEN IN THE APPEALS. THE FIRST GROUND WAS THAT THE ASSESSING OFFICER ERRED I N COMPUTING THE INCOME OF THE ASSESSEE AS WAS DONE IN THE RE-ASSESS MENT ORDERS; THE SECOND GROUND WAS THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ASSESSING OFFICER ERRED IN LEVYING INTEREST UNDER SECTION 234B 'IN VIEW OF THE FACT THAT THE EN TIRE CONSIDERATION IN THE HANDS OF APPELLANT WAS SUBJECT TO DEDUCTION OF TAX AT SOURCE UNDER SECTION 195 OF THE ACT'; THE THIRD GROUND WAS AGAINST THE INITIATION OF PENALTY PROCEEDINGS FOR ALLEGED CONCE ALMENT OF INCOME. 7. BEFORE THE CIT (APPEALS), THE ASSESSEE DID NOT P RESS THE APPEALS IN RESPECT OF THE FIRST GROUND, I.E. THE GROUND AGA INST THE COMPUTATION OF THE INCOME ATTRIBUTABLE TO THE PE IN INDIA. ONLY GROUND NO.2 WHICH WAS DIRECTED AGAINST THE LEVY OF INTEREST UNDER SEC TION 234B OF THE ACT WAS PRESSED, THE CONTENTION BEING THAT IT WAS T HE LIABILITY OF THE PURCHASERS OF THE TELECOM EQUIPMENT IN INDIA TO DED UCT INCOME TAX AT THE APPLICABLE RATES FROM THE REMITTANCE MADE TO TH E ASSESSEE UNDER SECTION 195 OF THE ACT, THAT IN VIEW OF THE LANGUAG E EMPLOYED IN SECTION 209(1)(D) THE ASSESSEE WAS ENTITLED TO TAKE CREDIT FOR THE TAX WHICH WAS 'DEDUCTIBLE' AT HTTP://WWW.ITATONLINE.ORG ITA NOS.327- 330 & 336-340/2012 PAGE 7 OF 33 SOURCE WHILE COMPUT ING ITS LIABILITY FOR PAYING ADVANCE TAX AND IF THE AMOUNT OF TAX SO 'DEDUCTIBLE' BY THE PAYER IN INDIA IS GIVEN CREDIT, THERE WAS NO AMOUNT OF ADVANCE TAX PAYABLE BY THE ASSESSEE, AND IF THAT IS SO THERE WAS NO QUESTION OF THE ASSESSEE BEING LIABLE TO PAY ANY INTEREST UNDER SECTION 234B. SEVERAL AUTHORITIES WE RE CITED BEFORE THE CIT (APPEALS) IN SUPPORT OF THE ABOVE CONTENTIO N INCLUDING THE JUDGMENT OF A DIVISION BENCH OF THIS COURT IN DIREC TOR OF INCOME TAX 113 ITA NO.1077/DEL/2014 VOITH PAPER GMBH VS. JACABS CIVIL INCORPORATED AND MITSUBISHI CORPOR ATION : (2010) 330 ITR 578. IT WAS SUBMITTED BEFORE THE CIT (APPEA LS) THAT IN THIS JUDGMENT, THIS COURT HELD THAT SECTION 195 PLACES A N OBLIGATION ON THE PAYER TO DEDUCT TAX AT SOURCE AT THE RATES IN F ORCE FROM THE PAYMENTS MADE AND IF THE PAYER HAS DEFAULTED IN DED UCTING THE TAX, IT WAS OPEN TO THE INCOME TAX DEPARTMENT TO TAKE AC TION AGAINST THE PAYER UNDER SECTION 201 OF THE ACT, BUT NO ACTION C AN BE TAKEN FOR RECOVERY OF THE INTEREST UNDER SECTION 234B FROM TH E NON-RESIDENT ASSESSEE. IT WAS FURTHER HELD IN THIS DECISION THAT THE NON-RESIDENT WILL, NO DOUBT, BE LIABLE TO PAY THE INCOME TAX ON THE INCOME ASSESSED UPON IT, BUT IT CANNOT BE HELD LIABLE FOR PAYMENT OF ANY ADVANCE TAX THEREON IF THE TAX DEDUCTIBLE BY THE PA YER IN INDIA EXCEEDS THE AMOUNT OF ADVANCE TAX PAYABLE ON THE ES TIMATED INCOME. IT WAS FURTHER HELD THAT THE POSITION WOULD BE SO EVEN IF THE INCOME TAX HTTP://WWW.ITATONLINE.ORG ITA NOS.327-33 0 & 336- 340/2012 PAGE 8 OF 33 WAS NOT IN FACT DEDUCTED FROM THE REMITTANCE BECAUSE SECTION 209 (1)(D) OF THE ACT PERMITTED THE NON-RESIDENT ASSESSEE TO TAKE CREDIT, WHILE COMPUTING ITS ADVANC E TAX LIABILITY, FOR THE AMOUNT OF INCOME TAX THAT WAS 'DEDUCTIBLE' FROM THE REMITTANCE, THOUGH NOT ACTUALLY DEDUCTED. IT WAS FURTHERMORE HE LD IN THE JUDGMENT THAT ONCE IT WAS FOUND THAT THE LIABILITY WAS THAT OF THE PAYER UNDER SECTION 201 OF THE INCOME TAX ACT, WHIC H PERMITTED RECOVERY OF THE TAX FROM THE PAYER BY TREATING HIM AS AN ASSESSEE IN DEFAULT AND ALSO RECOVERY OF INTEREST UNDER SECTION 201 (1A) FOR THE DEFAULT IN NOT DEDUCTING THE TAX, THERE CAN BE NO L IABILITY FASTENED UPON THE NON-RESIDENT ASSESSEE TO PAY INTEREST UNDE R SECTION 234B. 11.3 IN VIEW OF THE FACTS OF THE CASE, THE HONBLE CO URT HELD THAT THE ASSESSEE WAS LIABLE FOR INTERESTS U/S 234B, OB SERVING AS UNDER: .24. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITT ED IN THE COURSE OF HIS ARGUMENTS THAT THE ASSESSEE AND THE INDIAN T ELECOM EQUIPMENT DEALERS CANNOT CONTRACT OUT OF THE STATUT E AND, THEREFORE, EVEN IF SUCH AN ARRANGEMENT HAD BEEN MADE BETWEEN T HEM, IT CANNOT BE GIVEN EFFECT TO AND THE LIABILITY OF THE INDIAN PAYER UNDER SECTION 195(1) HAS TO BE STRICTLY ENFORCED. IN OTHE R WORDS, IT WAS HIS CONTENTION THAT THE INDIAN PAYERS OUGHT NOT TO HAVE PAID ANY HEED, AND SHOULD HAVE ACTED STRICTLY IN ACCORDANCE WITH S ECTIONS 195(1), EVEN ASSUMING, BUT NOT ADMITTING THAT THERE WAS SUC H A REQUEST FROM THE ASSESSEE. TAKING A PRACTICAL VIEW OF THE M ATTER, IT IS DIFFICULT TO SEE HOW THE INDIAN PAYERS COULD HAVE R ESISTED THE REQUEST WHICH, ACCORDING TO OUR INFERENCE, WAS MADE BY THE ASSESSEE TO THEM NOT TO DEDUCT TAX FROM THE REMITTA NCES. THE INDIAN PAYERS HAVE TO KEEP IN MIND THE FUTURE BUSINESS PRO SPECTS AND IT 114 ITA NO.1077/DEL/2014 VOITH PAPER GMBH WAS NECESSARY FOR THEM TO KEEP THE ASSESSEE IN GOOD HUMOUR SO THAT THE BUSINESS RELATIONSHIP REMAINS PROFITABLE F OR THEM. THEY WOULD HAVE BEEN IN NO POSITION TO RESIST THE REQUES T. MOREOVER, SINCE THE SALES WERE CLAIMED TO HAVE BEEN CONCLUDED OUTSI DE INDIA, AGAIN IT WOULD BE A FAIR AND REASONABLE INFERENCE TO BE D RAWN THAT THE INDIAN DEALERS WOULD HAVE HAD AN INTERFACE WITH THE ASSESSEE IN USA WHILE CONCLUDING THE SALE CONTRACTS AND ON SUCH AN OCCASION IT IS NORMAL FOR THE PARTIES TO FINALIZE ALL ASPECTS T OUCHING ON THEIR RELATIONSHIP INCLUDING THE TAX COMPLIANCES. IT SHOU LD ALSO BE REMEMBERED THAT NO REASON WHATSOEVER HAS BEEN GIVEN BY THE ASSESSEE AS TO WHY IT DID NOT PRESS ITS APPEALS BEF ORE THE CIT (APPEALS) ON THE QUESTION OF LIABILITY TO TAX ON IT S INDIAN INCOME. 25. IN THE LIGHT OF THE VIEW TAKEN BY US ON THE FACTS O F THE PRESENT CASE, WE DO NOT CONSIDER IT NECESSARY TO DISCUSS THE PLET HORA OF AUTHORITIES CITED BY BOTH THE SIDES. IT IS, HOWEVER, NECESSARY TO JUST HIGHLIGHT ONE ASPECT OF THE MATTER. THIS WAS IN FACT POINTED OUT ON BEHALF OF THE REVENUE ALSO. IT IS OPEN TO THE ASSESSEE TO DEN Y ITS LIABILITY TO TAX IN INDIA ON WHATEVER GROUNDS IT THINKS FIT AND PROP ER. HAVING DENIED ITS TAX LIABILITY, IT SEEMS UNFAIR ON THE PART OF T HE ASSESSEE TO EXPECT THE INDIAN PAYERS TO DEDUCT TAX FROM THE REMITTANCE S. IT IS ALSO OPEN TO THE ASSESSEE TO CHANGE ITS STAND AT THE FIRST AP PELLATE STAGE AND SUBMIT TO THE ASSESSMENT OF THE INCOME. WHEN IT DOE S SO, ALL CONSEQUENCES UNDER THE ACT FOLLOW, INCLUDING ITS LI ABILITY TO PAY INTEREST UNDER SECTION 234B SINCE IT WOULD NOT HAVE PAID ANY ADVANCE TAX. SUCH LIABILITIES WOULD ARISE RIGHT FRO M THE TIME WHEN THE INCOME WAS EARNED. ADVANCE TAX WAS INTRODUCED A S A PAYE SCHEME PAY AS YOU EARN. IT IS NOT OPEN TO THE A SSESSEE, AFTER ACCEPTING THE ASSESSMENT AT THE FIRST APPELLATE STA GE TO CLAIM THAT THE INDIAN PAYERS OUGHT TO HAVE DEDUCTED THE TAX IR RESPECTIVE OF THE FACT THAT THE ASSESSEE ITSELF CLAIMED THE INDIAN IN COME TO BE NOT TAXABLE. WE CAN UNDERSTAND AN ASSESSEE WHO ADMITS I TS TAX LIABILITY RIGHT FROM THE BEGINNING TO CONTEND THAT IT WAS THE RESPONSIBILITY OF THE PAYERS TO DEDUCT THE TAX AND IF THEY DID NOT, E VEN THEN THE TAX WHICH OUGHT TO HAVE BEEN DEDUCTED BY THEM SHOULD BE SET OFF AGAINST THE ASSESSEE'S ADVANCE TAX LIABILITIES. THA T IS THE TYPE OF CASE DEALT WITH IN THE DECISION OF THIS COURT IN JA CABS (SUPRA). WE WERE NOT REFERRED TO A SINGLE CASE WHERE ON FACTS S IMILAR TO THE CASE OF THE ASSESSEE BEFORE US, THE COURT TOOK THE VIEW THAT NO INTEREST UNDER SECTION 234B WAS CHARGEABLE. THE CASE OF MITS UBISHI CORPORATION DECIDED ALONG WITH THE CASE OF JACABS, WAS ON FACTS SIMILAR TO THE ASSESSEE'S CASE. HOWEVER, AS POINTED OUT BY US EARLIER, THIS COURT IN JACABS CASE PROCEEDED ON THE ASSUMPTION THAT THE FACTS IN MITSUBISHI CORPORATION WERE SIMILAR TO THOSE IN JACABS. THAT ASSUMPTION, AS WE HAVE EARLIER DEMONSTRATED, W ITH RESPECT, IS NOT BORNE OUT BY THE FACTS. 26. IT FURTHER SEEMS TO US INEQUITABLE THAT THE ASSESSEE, WHO ACCEPTED THE TAX LIABILITY AFTER INITIALLY DENYING IT, SHOULD BE PERMITTED TO SHIFT THE RESPONSIBILITY TO THE INDIAN PAYERS FOR NOT DEDUCTING THE TAX AT SOURCE FROM THE REMITT ANCES, AFTER 115 ITA NO.1077/DEL/2014 VOITH PAPER GMBH LEADING THEM TO BELIEVE THAT NO TAX WAS DEDUCTIBLE. THE ASSESSEE MUST TAKE RESPONSIBILITY FOR ITS VOLTE FACE. ONCE L IABILITY TO TAX IS ACCEPTED, ALL CONSEQUENCES FOLLOW; THEY CANNOT BE A VOIDED. AFTER HAVING ACCEPTED THE LIABILITY TO TAX AT THE FIRST A PPELLATE STAGE, IT IS UNFAIR ON THE PART OF THE ASSESSEE TO INVOKE SECTIO N 201 AND POINT FINGERS AT THE INDIAN PAYERS. THE ARGUMENT ADVANCED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE INDIAN PAYERS FAI LED TO DEDUCT TAX AT THEIR OWN RISK SEEMS TO US TO BE ONLY AN ARGUMEN T OF CONVENIENCE OR DESPAIR. AS WE HAVE POINTED OUT EARLIER, IT IS D IFFICULT TO IMAGINE THAT THE INDIAN TELECOM EQUIPMENT DEALERS OF THE AS SESSEE WOULD HAVE FAILED TO DEDUCT TAX AT SOURCE EXCEPT ON BEING PROMPTED BY THE ASSESSEE. IT MAY BE TRUE THAT THE GENERAL RULE IS T HAT EQUITY HAS NO PLACE IN THE INTERPRETATION OF TAX LAWS. BUT WE ARE OF THE VIEW THAT WHEN THE FACTS OF A PARTICULAR CASE JUSTIFY IT, IT IS OPEN TO THE COURT TO INVOKE THE PRINCIPLES OF EQUITY EVEN IN THE INTERPR ETATION OF TAX LAWS. TAX LAWS AND EQUITY NEED NOT BE SWORN ENEMIES AT AL L TIMES. THE RULE OF STRICT INTERPRETATION MAY BE RELAXED WHERE MISCHIEF CAN RESULT BECAUSE OF THE INCONSISTENT OR CONTRADICTORY STANDS TAKEN BY THE ASSESSEE OR EVEN THE REVENUE. MOREOVER, INTEREST IS , INTER ALIA, COMPENSATION FOR THE USE OF THE MONEY. THE ASSESSEE HAS HAD THE USE OF THE MONEY, WHICH WOULD OTHERWISE HAVE BEEN P AID AS ADVANCE TAX, UNTIL IT ACCEPTED THE ASSESSMENTS AT T HE FIRST APPELLATE STAGE. WHERE THE REVENUE HAS BEEN DEPRIVED OF THE U SE OF THE MONIES AND THEREBY PUT TO LOSS FOR NO FAULT ON ITS PART AN D WHERE THE LOSS AROSE AS A RESULT OF VACILLATING STANDS TAKEN BY TH E ASSESSEE, IT IS NOT EXPECTED OF THE ASSESSEE TO SHIFT THE RESPONSIB ILITY TO THE INDIAN PAYERS. WE ARE NOT TO BE UNDERSTOOD AS PASSING A VA LUE-JUDGMENT ON THE ASSESSEES CONDUCT. WE ARE ONLY SAYING THAT THE ASSESSEE SHOULD TAKE RESPONSIBILITY FOR ITS ACTIONS. 27. IT IS NOT UNUSUAL FOR THE COURTS TO INVOKE EQUITABLE CONSIDERATIONS EVEN WHIL E INTERPRETING TAX LAWS. IN JODHA MAL KUTHIALA V. CIT : (1971) 82 ITR 570 (SC), HEGDE, J., OPINED THUS: IT IS TRUE THAT EQUITABLE CONSIDE RATIONS ARE IRRELEVANT IN INTERPRETING TAX LAWS. BUT, THOSE LAW S, LIKE ALL OTHER LAWS, HAVE TO BE INTERPRETED REASONABLY AND IN CONS ONANCE WITH JUSTICE. IN CIT V. J.H. GOTLA : (1985) 156 ITR 323 (SC), IT WAS HELD BY THE SUPREME COURT THAT THOUGH EQUITY AND TAXATIO N ARE OFTEN STRANGERS, ATTEMPTS SHOULD BE MADE (TO ENSURE) THAT THEY DO NOT ALWAYS REMAIN SO AND IF A CONSTRUCTION RESULTS IN E QUITY RATHER THAN INJUSTICE, THAT SHOULD BE PREFERRED TO THE LITERAL OR STRICT CONSTRUCTION. IN CALCUTTA JUTE MANUFACTURING CO. V. COMMERCIAL TA X OFFICER : (AIR 1997 SC 2920) THE SUPREME COURT HELD THAT IF THERE IS A PROVISION IN A TAXING STATUTE TO COMPENSATE THE STATE BY CHARGIN G INTEREST, THAT PROVISION NEED NOT BE STRICTLY CONSTRUED BUT MAY BE SO CONSTRUED AS TO EFFECTUATE ITS PURPOSE. THE COURT HELD: 10. THE STATE IS EMPOWERED BY THE LEGISLATURE TO RAISE REVENUE THROU GH THE MODE PRESCRIBED IN THE ACT SO THE STATE SHOULD NOT BE TH E SUFFERER ON ACCOUNT OF THE DELAY CAUSED BY THE TAXPAYER IN PAYM ENT OF THE TAX DUE. THE PROVISION FOR CHARGING INTEREST WOULD HAVE BEEN INTRODUCED 116 ITA NO.1077/DEL/2014 VOITH PAPER GMBH IN ORDER TO COMPENSATE THE STATE (OR THE REVENUE) F OR THE LOSS OCCASIONED DUE TO DELAY IN PAYING THE TAX (VIDE COM MR. OF INCOME- TAX A.P. V. M. CHANDRA SEKHAR : 1985 (1) SCC 283 : (AIR 1985 SC 114) AND CENTRAL PROVINCES MANGANESE ORE CO. LTD. V . COMMR. OF INCOME-TAX : 1986 (3) SCC 461 : (AIR 1987 SC 438). WHEN INTERPRETING SUCH A PROVISION IN A TAXING STATUTE A CONSTRUCTION WHICH WOULD PRESERVE THE PURPOSE OF THE PROVISION MUST BE ADOPTED. IT IS WELL-SETTLED THAT IN INTERPRETING A TAXING STATUTE NORMALLY, THERE IS NO SCOPE FOR CONSIDERATION OF PRINCIPLES OF EQUITY. IT WAS SO SAID BY ROWLATT J. IN CAPE BRANDY SYNDICATE V. INLAND REVEN UE COMMISSIONERS : (1921) 1 KB 64 AT PAGE 71: 'IN A TA XING ACT ONE HAS TO LOOK MERELY AT WHAT IS CLEARLY SAID. THERE IS NO ROOM FOR ANY INTENDMENT. THERE IS NO EQUITY ABOUT A TAX. THERE I S NO PRESUMPTION AS TO A TAX. NOTHING IS TO BE READ IN, NOTHING IS T O BE IMPLIED. ONE CAN ONLY LOOK FAIRLY AT THE LANGUAGE USED.' THE ABO VE OBSERVATION HAS BEEN QUOTED WITH APPROVAL BY A BENCH OF THREE J UDGES OF THIS COURT IN COMMISSIONER OF INCOME-TAX MADRAS V. AJAX PRODUCTS LTD. : 55 ITR 741: (AIR 1965 SC 1358). IN ANOTHER DECISION RENDERED BY A BENCH OF THREE JUDGES OF THIS COURT IN STATE OF TAM IL NADU V. M. K. KANDASWAMI : 36 STC 191 : (AIR 1975 SC 1871) IT HAS BEEN OBSERVED THUS: 'IN INTERPRETING SUCH A PROVISION, A CONSTRUCTION WHICH WOULD DEFEAT ITS PURPOSE AND, IN EFFECT, OBLI TERATE IT FROM THE STATUTE BOOK SHOULD BE ESCHEWED. IF MORE THAN ONE C ONSTRUCTION IS POSSIBLE, THAT WHICH PRESERVES ITS WORKABILITY AND EFFICACY IS TO BE PREFERRED TO THE ONE WHICH WOULD RENDER IT OTIOSE O R STERILE.' 11. WE ARE, THEREFORE, NOT ADOPTING A CONSTRUCTION WHICH W OULD UPSET OR EVEN IMPAIR THE PURPOSE IN INTRODUCING SECTION 10A IN THE ACT. THE RETURN TO BE FILED BY THE DEALER IS THE FULL AND CO RRECT RETURN AS REFERRED TO IN SECTION 10 AND ON FAILURE TO FURNISH SUCH A RETURN THE LIABILITY TO PAY INTEREST FROM THE PRESCRIBED DATE WOULD ARISE WHEN ASSESSMENT IS COMPLETED. 28. WE THINK THAT THE PRE SENT CASE IS ONE WHERE SUCH CONSIDERATIONS SHOULD PREVAIL IN THE INT ERPRETATION OF SECTION 234B; OTHERWISE, IT WILL NOT MERELY RESULT IN INJUSTICE BUT THE PURPOSE OF THE PROVISION WOULD NOT HAVE BEEN ACHIEV ED. IN ANY CASE, THE FACTS OF THE PRESENT CASE ARE DIFFERENT, AS WE HAVE EARLIER POINTED OUT, FROM THE FACTS OBTAINING IN JACABS (SUPRA) AND THEREFORE THE SAID DECISION CANNOT BE APPLIED. 11.4 IN THE INSTANT CASE ALSO, THE ASSESSEE HAS ACCEPT ED THE EXISTENCE OF THE PE BEFORE THE AO AND IN THAT CIRCU MSTANCES, IT CANNOT TAKE BENEFIT THAT IT WAS THE RESPONSIBILITY OF THE DEDUCTOR TO DEDUCT TAX AT SOURCE. IN VIEW OF FACTS OF THE CA SE BEING IDENTICAL TO THE FACTS OF THE ABOVE CASE, WE DONT FIND ANY E RROR IN THE ORDER 117 ITA NO.1077/DEL/2014 VOITH PAPER GMBH OF THE ASSESSING OFFICER ON THE ISSUE IN DISPUTE. A CCORDINGLY, THE GROUND NO. 4 OF THE APPEAL OF THE ASSESSEE IS DISMI SSED. 12. THE GROUND NO. 5 RELATING TO INITIATION OF PENALTY BEING PREMATURE AT THIS STAGE IS DISMISSED AS INFRUCTUOUS . 13. IN THE RESULT, APPEAL OF THE ASSESSEE IS DISMISSED . ORDER IS PRONOUNCED IN THE OPEN COURT ON 21 ST FEBRUARY, 2020. SD/- SD/- (K.N. CHARY) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 21 ST FEBRUARY, 2020. RK/- (D.T.D.S.) COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI