TATA STEEL LTD, MUMBAI V. ITO (IT) 4(1)(2), MUMBAI

ITA 1086/MUM/2017

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 0102 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-03-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2016-2017
• Appeal Filed On: 16-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M V RAJGURUDR
• Assessee Lawyers: DEVANG SHETH; PRAVEEN SOODRAJ KAPADIA
• Keywords: Business income; Double taxation relief; Cost of acquisition

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUM BAI , , BEFORE S/SHRI RAJENDRA, A.M. AND SANDEEP GOSAIN,J.M . ./ITA NO.1086/MUM/2017 , / ASSESSMENT YEAR: 2016-17 TATA STEEL LIMITED BOMBAY HOUSE, 24, HOMI MODY STREET FORT, MUMBAI-400 018. PAN: AAACT 2803 M VS. INCOME TAX OFFICER (INTL TAXN.)-4(1)(2) ROOM NO.1722, 17TH FLOOR, AIR INDIA BUILDING NARIMAN POINT, MUMBAI-400 021. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI M.V RAJGURU-DR ASSESSEE BY: S/SHRI PRAVEEN SOOD/RAJ KAPADIA AND DEVANG SHETH / DATE OF HEARING: 07/12/2017 / DATE OF PRONOUNCEMENT: 01.03.2018 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) , -PER RAJENDRA,AM: CHALLENGING THE ORDER,DATED 07/11/2016 OF THE CIT(A )-55, MUMBAI,PASSED U/S.248 OF THE ACT,THE ASSESSEE HAS FILED THE PRESENT APPEAL.ASSES SEE,A PUBLIC LIMITED COMPANY,IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF STEEL.E FFECTIVE GROUND OF APPEAL IS ABOUT LIABILITY OF DEDUCTING TAX AT SOURCE. 2. DURING THE YEAR UNDER CONSIDERATION,THE ASSESSEE WA S ENGAGED IN THE EXPANSION OF ITS STEEL BUSINESS, BY WAY OF ESTABLISHING AN INTEGRATED STEE L PLANT AT KALINGANAGAR,ODISHA,FOR MANUFACTURE OF STEEL PRODUCTS.FOR THAT PURPOSE IT W AS REQUIRED TO OPERATE A COKE DRY QUENCHING (CDQ)PLANT FOR COKE OVEN BATTERIES, WHICH ARE A SUB-SET OF THE INTEGRATED STEEL PLANT.IT IDENTIFIED NIPPON STEEL & SUMIKIN ENGINEER ING CO LTD, (NIPPON), A TAX RESIDENT OF JAPAN,AS HAVING THE REQUISITE EXPERTISE IN THE FIEL D OF CDQ PLANTS. IT ENTERED INTO FOUR AGREEMENTS WITH NIPPON,NAMELY IMPORTED PLANT & MAC HINERY SUPPLY AGREEMENT,DTD.1/3/ 2014(CONTRACT PRICE,US$ 2,70,00,000 ON FOB/FCA BASI S)DESIGNS & DRAWINGS AGREEMENT FOR PLANT & MACHINERY,DTD.1/3/2014(CONTRACT PRICE- US$22,00,000)TECHNICIANS' SUPERVISION AGREEMENT,DATED 1/03/2014 AND IN-PLANT TRAINING A GREEMENT,DTD.1/32014. PURSUANT TO THE IMPORTED PLANT & MACHINERY SUPPLY A GREEMENT IT IMPORTED PLANT,MACHINERY AND EQUIPMENT WITH AUXILIARIES FOR THE CDQ PLANT, W ORTH US$ 2,70,00,000 FROM NIPPON,ON FOB BASIS.IN TERMS OF THE DESIGNS & DRAWINGS AGREEM ENT FOR PLANT AND MACHINERY IT ALSO IMPORTED DESIGNS & DRAWINGS(D&D) FOR THE CDQ PLANT FOR (US$ TWENTY TWO LAKHS) BY DOWNLOAD OF THE SOFT COPIES OF THE D & D FROM NIPPO N'S FTP SERVER.THE INDIGENOUS PORTION OF THE CDQ PLANT WAS ASSIGNED TO ESSAR PROJECTS (IN DIA) LIMITED (EPL),AN INDIAN COMPANY. 1086/M/17 TATA STEEL LTD. 2 IN TERMS OF FOUR SEPARATE AGREEMENTS ENTERED INTO B Y THE ASSESSEE WITH EPL WITH THE PARTICIPA -TION,CONSENT AND INVOLVEMENT OF NIPPON,EPL WAS APP OINTED AS AN ASSOCIATE OF NIPPON FOR ASSISTING IN PROVIDING INDIGENOUS DESIGNS AND DRAWI NGS, SUPPLYING IDENTIFIED INDIGENOUS EQUIPMENT, UNDERTAKING CIVIL AND STRUCTURAL STEELWO RK INCLUDING ALL SUPPLIES AND EXECUTING ALL SITE WORK INVOLVING RECEIVING OF MATERIALS, UNLOADI NG,STORAGE,REQUIRED ENABLING WORK AT SITE, ERECTION,TESTING, START-UP AND COMMISSIONING OF THE CDQ PLANT.NIPPON RAISED AN INVOICE FOR VALUE US$ 2,20,000, REPRESENTING 10% OF CONTRACT PR ICE FOR SUPPLY OF ENGINEERING DRAWINGS. AS PER THE ASSESSEE, OUT OF ABUNDANT CAUTION AND CO NSERVATISM, IT PAID AND BORE THE TAX DEDUCTIBLE AT SOURCE (TDS)OF RS.15,36,333 REPRESENT ING THE AMOUNT OF TDS OF 10% GROSSED UP IN TERMS OF SECTION 195-A.FOR THIS PURPOSE,IT OB TAINED A CERTIFICATE IN THE PRESCRIBED FORM NO 15CB FROM AN INDEPENDENT CHARTERED ACCOUNTANT. AS PER THE ASSESSEE,IT WAS OF THE OPINION THAT NO T AX WAS REQUIRED TO BE DEDUCTED ON SUCH INCOME,SO,IT FILED AN APPEALED U/S. 248 OF THE ACT BEFORE THE FIRST APPELLATE AUTHORITY(FAA) FOR A DECLARATION THAT NO TAX WAS DEDUCTIBLE ON SUC H INCOME.AFTER CONSIDERING THE SUBMI- SSIONS OF THE ASSESSEE,THE FAA HELD THAT THE PAYMEN T MADE BY THE ASSESSEE TO THE NON- RESIDENT SUPPLIER CONSTITUTED 'FEES FOR TECHNICAL S ERVICES'(FTS) IN TERMS OF ARTICLE 12 OF THE INDIA-JAPAN DTAA AND HENCE WAS LIABLE TO TAX IN IND IA,THAT THERE WAS NO DISPUTE OVER THE RESIDENT STATUS OF THE NON-RESIDENT, TAXES U/S. 195 WOULD BE DEDUCTIBLE AT RATES SPECIFIED IN ARTICLE 12 OF THE INDIA-JAPAN DTAA,THAT THE ASSESSE E'S REQUEST FOR DECLARATION U/S 248 THAT NO TAX WAS DEDUCTIBLE ON THE CONTRACT AMOUNT WAS NOT A CCEPTABLE.HE RELIED UPON THE CASE OF SARGENT & LUNDY LLC(145 ITD 85); TOYO ENGINEERING C ORPORATION (ITA/8192/ MUM/ 2004, DTD.28/3/13) AND SERVALL ENGINEERING WORKS P. LTD. (ITA/1250/MUM/2012 DTD.12/9/16). 3. BEFORE US,THE AUTHORISED REPRESENTATIVE(AR)ARGUED T HAT ASSESSEE HAD ENTERED IN TO D &D AGREEMENT ONLY FOR THE PURPOSE OF COMPLETING,OPERAT ING AND MAINTAINING THE PLANT,THAT IT COULD NOT HAVE COMMERCIALLY EXPLOITED SUCH D & D,TH AT THEY WERE NOT CAPABLE OF BEING USED EXCEPT FOR COMPLETING, OPERATING AND MAINTAINING TH E CDQ PLANT,THAT THE D & D AGREEMENT DID NOT PERMIT THE ASSESSEE TO DEPLOY THE D & D EXC EPT FOR THE SAID PURPOSES,THAT NIPPON'S SUPPLY OF D & D CONSTITUTED TRANSACTION OF TRANSFER OF GOODS AND NOT RENDERING OF ANY SERVICE, THAT THE ASSESEE WAS BEING REFERRED TO AS THE PURCH ASER IN THE D & D AGREEMENT,THAT THE IMPORT OF THE D & D CONSTITUTED AN ACQUISITION OF G OODS BY THE ASSESSEE AND NOT THE RENDERING OF ANY SERVICE BY NIPPON TO IT,THAT THE CONSIDERATI ON PAID BY IT TO NIPPON FOR THE D & D CONSTITUTED PART OF THE COST OF ACQUISITION OF THE CDQ PLANT AND NOT FTS,THAT THE CDQ WAS A COMPLEX PLANT,THAT IT COULD NOT HAVE BEEN INSTALLED THE PLANT WITHOUT THE D & D,THAT THE D & 1086/M/17 TATA STEEL LTD. 3 D WERE INEXTRICABLY INTERTWINED WITH AND LINKED TO THE CDQ PLANT,THAT THEY CONSTITUTED PART OF THE PLANT ITSELF,THAT CONSIDERATION PAID FOR TEC HNICAL DOCUMENTATION AND KNOWHOW REQUIRED FOR THE PROPER INSTALLATION OF PLANT AND MACHINERY (P & M) CONSTITUTED PART OF THE COST OF ACQUISITION OF SUCH MACHINERY AND NOT FTS.HE RELIED UPON THE CASES OF OUTOTEC GMBH ( 172 TTJ 337) ;MODERN THREADS (INDIA) LTD.(69 ITD 115) ( TM) ; HINDUSTAN AERONAUTICS LTD. (123 ITD 575) ; MAHINDRA FORGINGS LTD. (153 ITD 388); EM FG & CO , (262 ITR 110) ; NISSO IWAI CORPN., JAPAN [88 CCH 0046 (APHC)]; GUJARAT PIPAVAV PORT LTD. (158 ITD 687).HE REFERRED TO PAGES 69 TO 123, 77, 110, 204, 205, 206, 206A, 2 07, 209 TO 215OF THE PAPER BOOK. HE FURTHER STATED THAT THE FAA HAD RELIED UPON THE CAS ES THAT WERE NOT APPLICABLE TO THE FACTS OF THE CASE UNDER CONSIDERATION.THE DEPARTMENTAL REPRE SENTATIVE(DR)STRONGLY RELIED UPON THE ORDER OF THE FAAAND STATED THAT PAYMENT MADE BY THE ASSESSEE WAS FTS. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE WANTED TO COMMISSION A CDQ PLANT,THAT IT E NTERED INTO FOUR AGREEMENTS WITH NIPPON,THAT THE PLANT WAS A SOPHISTICATED PLANT WHI CH CONSTITUTED OF A NUMBER OF INTEGRALLY CONNECTED AND LINKED SMALLER MACHINERIES AND EQUIPM ENT,THAT IT NEEDED TO BE SET UP BY INSTALLING SEVERAL SMALLER MACHINES,EQUIPMENT AND P ARTS,THAT THE MAJORITY OF WHICH WERE IMPORTED WHEREAS OTHERS WERE EITHER PROCURED LOCALL Y OR WERE MANUFACTURED,THAT THE PROCURED MACHINES AND / OR EQUIPMENT NEEDED TO BE ASSEMBLED FOR WHICH A PLANT DESIGN WAS REQUIRED, THAT IN TERMS OF THE AGREEMENTS ENTERED IN TO BE TWEEN BOTH THE PARTIES THE SUPPLY OF THE IMPORTED PLANT & MACHINERY ALONG WITH D &D(BOTH ENG INEERING AND CIVIL),UTILITIES,SERVICES FOR ERECTION,START-UP,COMMISSIONING AND WARRANTIES BY WAY OF DEMONSTRATION OF PERFORMANCE TESTS ETC. WAS THE RESPONSIBILITY OF NIPPON,THAT IT MADE PAYME NT TO NIPPON FOR SUPPLY OF ENGINEERING DRAWINGS,THAT IT DEDUCTED TAX BEFORE MA KING PAYMENT TO THE NON -RESIDENT SUPPLIER, THAT IT OBTAINED A CERTIFICATE IN THE PRE SCRIBED FORM NO 15CB,THAT IT APPROACHED THE FAA AND REQUESTED HIM TO DECLARE THAT TAX WAS NOT D EDUCTIBLE FOR THE PAYMENTS MADE TO NIPPON FOR SUPPLY OF D&D,THAT THE FAA HELD THAT PAY MENT MADE BY THE ASSESSEE TO NIPPON CONSTITUTED FTS IN TERMS OF ARTICLE 12 OF THE INDO- JAPANESE TAX TREATY AND THAT SAME WAS LIABLE TO TAX IN INDIA. 4.1. IN OUR OPINION,THE SHORT ISSUE TO BE DECIDED IS AS TO WHETHER THE PAYMENTS MADE BY THE ASSESSEE TO NIPPON FOR SUPPLY OF D&D,AS PER THE AGR EEMENT,CONSTITUTED FTS.THE TERM FTS HAS PECULIAR MEANING AS PER THE PROVISIONS OF EXPL . 2 TO SECTION 9(1)(VII) OF THE ACT.THE SECTION STIPULATES THAT FOR THE PURPOSES OF CLAUSE (VII),FTS MEANS ANY CONSIDERATION FOR THE RENDERING OF MANAGERIAL,TECHNICAL OR CONSULTANCY SE RVICES,BUT DOES NOT INCLUDE CONSIDERATION 1086/M/17 TATA STEEL LTD. 4 FOR ANY CONSTRUCTION,ASSEMBLY,MINING OR LIKE PROJEC T UNDERTAKEN BY THE RECIPIENT, OR CONSIDERA -TION WHICH WOULD BE INCOME OF THE RECIPIENT CHARGE ABLE UNDER THE HEAD SALARIES. 4.2. THE SETTLED LAW,GOVERNING THE CONTRACTS DEALING WIT H SUPPLY OF PLANT AND MACHINERY,D & D/KNOW-HOW,STIPULATES THAT IF SERVICES ARE INTRINSI CALLY CONNECTED TO THE SALE OF GOODS,SAME CANNOT BE TREATED AS FIS OR FTS.THE HON'BLE APEX CO URT IN THE CASE OF ISHIKAWAJMA HARIMA HEAVY INDUSTRIES LTD (288 ITR 408) HAS UPHELD THE A BOVE PRINCIPLE. THE HON'BLE CALCUTTA HIGH COURT IN THE MATTER ANDREW YULE & CO.(207ITR89 9)HAS DEALT WITH THE IDENTICAL ISSUE.IN THAT MATTER, A GERMAN COMPANY HAD SUPPLIED CERTAIN MACHINERY TO THE INDIAN ASSESSEE AND HAD RENDERED CERTAIN SERVICES IN SETTING UP OF THE MACH INERY.CONSIDERING THOSE FACTS, THE HON'BLE COURT HELD THAT SERVICES RENDERED IN SETTING UP OF MACHINE COULD NOT BE TREATED AS PERSONAL SERVICE,EVEN IF THE AGREEMENT FOR RENDERING THE SER VICES WAS EMBODIED IN A SEPARATE AGREE - MENT,THAT THE GERMAN COMPANY HAD NO PE IN INDIA, TH AT IN VIEW OF THE INDO-GERMAN DTAA, NO INCOME HAD ACCRUED IN INDIA, THAT THERE WAS NO LIAB ILITY TO DEDUCT TAX AT SOURCE. 4.3. THE ORDER OF THE SPECIAL BENCH OF THE CHENNAI TRIBU NAL,DELIVERED IN THE CASE OF PRASAD PRODUCTION LIMITED(125 LTD 263)ALSO SUPPORTS THIS V IEW.IN THAT MATTER, THE ASSESSEE HAD PURCHASED THEATRE EQUIPMENT, THE CONSIDERATION FOR WHICH WAS CONSTITUTED OF THE PURCHASE PRICE OF THE EQUIPMENT AND A TECHNOLOGY TRANSFER FEE. PAY MENT OF THE TECHNOLOGY TRANSFER FEE MADE BY ASSESSEE TO THE FOREIGN COMPANY TOWARDS THE SERVICE S OF INSTALATION OF EQUIPMENT AND TRAINING OF PERSONNEL UNDER THE AGREEMENT FOR SUPPLY, MAINTENAN CE AND INSTALLATION OF THEATRE EQUIPMENT WAS HELD TO BE A PART OF THE PRICE OF EQUIPMENT AND , THEREFORE, THE SAID PAYMENT WAS HELD NOT CHARGEABLE TO TAX IN INDIA. CONSIDERING THE ABOVE, THE TRIBUNAL HELD THAT THE CIT(A) WAS NOT JUSTIFIED IN HOLDING THAT SERVICES RENDERED IN PURS UANCE OF THE PURCHASE AGREEMENT COULD BE TAXED AS FIS/FTS. 4.4. HERE,WE WOULD LIKE TO REFER TO CASE OF OUTOTECH GMB H (SUPRA).IN THE SAID CASE THE ASSESSEE A NON RESIDENT,HAD PROVIDED D&D AND ENGINE ERING DOCUMENTS TO ITS CUSTOMERS ENGAGED IN THE STEEL INDUSTRY IN INDIA FOR THE INST ALLATION OPERATION AND MAINTENANCE OF PLANT AND MACHINERY SOLD BY THE ASSESSEE TO ITS CUSTOMERS . IT RAISED INVOICES ON ITS INDIA CUSTOMERS TO THE TUNE OF RS.79.42 CRORES. THE DEPARTMENTAL AU THORITIES HELD THAT THE INVOICE AMOUNTS DID NOT REPRESENT PART OF CONSIDERATION FOR SALE OF PLA NT AND MACHINERY AND THAT THE INCOME EARNED FROM D&D WAS TAXABLE IN INDIA.HOWEVER,THE TRIBUNAL REVERSED THE ORDER OF THE DRP AND HELD THAT THE BASIC ENGINEERING PACKAGE SOLD BY THE ASSESSEE TO THE INDIA CUSTOMERS HAD BEEN LARGELY DESIGNED ON THE BASIS OF STANDARD TECHNOLOG Y AVAILABLE WITH IT, THAT THE CONSIDERATION WAS FOR THE SALE OF PRODUCT WHICH WAS EMBEDDED IN T HE PLAN SET UP BY THE INDIA CUSTOMERS, 1086/M/17 TATA STEEL LTD. 5 THAT THE INCOME ARISING OUT OF THE TRANSACTION WAS TO BE ASSESSED AS BUSINESS INCOME,THAT THE SALE HAD TAKEN PLACE OUTSIDE INDIA,THAT THE INCOME WAS NOT TAXABLE AS PER THE PROVISIONS OF THE ACT/DTAA,THAT RESTRICTION ON USE OF IPR OF D&D WOUL D NOT CHANGE THE CHARACTER OF TRANSACTION FROM SALE OF PRODUCT TO THE USE OF LICE NCE/KNOW HOW. 4.5. WE FIND THAT THE ASSESSEE HAS BEEN REFERRED TO AS P URCHASER IN THE D&D AGREEMENT,THAT THE D&D WAS SUPPLIED TO THE ASSESSEE ONLY FOR THE PURPO SE OF COMPLETING OPERATING AND MAINTAINING THE PLANT.AFTER GOING THROUGH THE AGREE MENT ENTERED INTO BY THE ASSESSEE WITH NIPPON,WE HOD THAT D & D WERE CRITICALLY ESSENTIAL FOR SETTING UP THE PLANT AND IN THEIR ABSENCE THE PLANT COULD NOT HAVE BEEN INSTALLED.IN OTHER WORDS,THE D & D WERE NOT MERELY INEXTRICABLY LINKED WITH THE PLANT BUT THE PLANT WO ULD NOT HAVE BEEN INSTALLED AND COMMISSION -ED WITHOUT D&D.SO,IT CAN SAFELY BE SAID THAT D&D WOULD CONSTITUTE PART OF COST OF ACQUISITION OF THE PLANT.IN THE CASE UNDER CONSIDER ATION,IT IS ALSO CLEAR THAT THE ASSESSEE WAS NOT EXPLOITING THE D&D FOR BUSINESS PURPOSES,THAT I PR OF THE D&D WERE RETAINED BY THE NON RESIDENT SUPPLIER.CONSIDERING THE ABOVE,WE HOLD THA T THE FAA WAS NOT JUSTIFIED IN HOLDING THAT DISPUTED AMOUNT WAS FTS. WE HAVE GONE THROUGH THE CASES RELIED UPON BY THE F AA. IN NONE OF THE CASES,REFERRED TO BY HIM,THE ISSUE WAS NOT DELIBERATED UPON AS TO WHETHE R THE CONSIDERATION,RECEIVED BY A MANUFACTURER OF PLANT AND MACHINERY FOR SUPPLYING TO ITS CUSTOMER,WHEREIN D&D WAS ESSENTIAL FOR INSTALLATION OF PLANT AND MACHINERY,C ONSTITUTED PART OF COST OF ACQUISITION OF PLANT. SO,REVERSING THE ORDER OF THE FAA,WE DECIDE THE EFF ECTIVE GROUND OF APPEAL IN FAVOUR OF THE ASSESSEE. AS A RESULT,APPEAL FILED BY THE ASSESSE E STANDS ALLOWED. ! . ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST MARCH,2018. ' # $ 1 % ,2018 SD/- SD/- ( /SANDEEP GOSAIN) ( &'' / RAJENDRA) ' () / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 01.03.2018. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 1086/M/17 TATA STEEL LTD. 6 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR L BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.