Outotec GmbH, Kolkata V. THE DCIT, IT - 2(1), KOLKATA, Kolkata

ITA 160/KOL/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 1552 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-09-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 25-04-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 04-02-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: G MALLIKARJUNA
• Assessee Lawyers: SUBHABRATA MUKHERJEE; SOUMYADIP ROY CHOUDHURY
• Keywords: Business income; Double taxation relief; Initiation of penalty proceedings
• Section: 143(3); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C, BENCH KOLKATA BEFORE SHRI N. C. VASUDEVAN, JM & DR. A.L.SAINI, AM ./ ITA NO.160/KOL/2016 ( / ASSESSMENT YEAR: 2012-13 OUTOTEC GMBH C/O OUTOTEC INDIA PRIVATE LTD., 12 TH FLOOR, SOUTH CITY PINNACLE, PLOT- XI, BLOCK-EP, SECTOR-V, SALT LAKE, KOLKATA 700 091. VS. D.C.I.T., INTERNATIONAL TAXATION-2(1), KOLKATA AAYAKAR BHAWAN POORVA,110 SHANTI PALLY, KOLKATA-700107 ./ ./PAN/GIR NO. : AAACO 8228 K ( APPELLANT/ASSESSEE ) .. ( RESPONDENT/DEPARTMENT ) ./ ITA NO.193/KOL/2016 ( / ASSESSMENT YEAR: 2012-13 D.C.I.T., INTERNATIONAL TAXATION-2(1), KOLKATA AAYAKAR BHAWAN POORVA,110 SHANTI PALLY, KOLKATA-700107 VS. OUTOTEC GMBH C/O OUTOTEC INDIA PRIVATE LTD., 12 TH FLOOR, SOUTH CITY PINNACLE, PLOT-XI, BLOCK-EP, SECTOR-V, SALT LAKE, KOLKATA 700 091. ./ ./PAN/GIR NO. : AAACO 8228 K (APPELLANT/DEPARTMENT) .. ( RESPONDENT/ASSESSEE ) DEPARTMENT BY : SHRI G. MALLIKARJUNA, CIT DR. ASSESSEE BY : SUBHABRATA MUKHERJEE, AR & SOUMYADIP ROY CHOUDHURY, AR / DATE OF HEARING : 10/07/2017 /DATE OF PRONOUNCEMENT : 08/09/2017 OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 2 / O R D E R PER DR. ARJUN LAL SAINI, AM: THESE CAPTIONED CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE PERTAINING TO ASSESSMENT YEAR 2012-13, IS DIRECTED AGAINST THE FAIR ORDER OF ASSESSMENT DATED 12.12.2015 OF DCIT, CIRCLE-2,(1), KOLKATA, (AO) PASSED U/S.143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) READ WITH SECTION144C (13) OF THE INCOME TAX ACT. 2. SINCE THESE TWO CROSS-APPEALS PERTAIN TO THE SAME ASSESSEE, SAME ASSESSMENT YEAR, IDENTICAL ISSUES ARE INVOLVED, THEREFORE, THESE HAVE BEEN CLUBBED AND HEARD TOGETHER AND A CONSOLIDATED ORDER IS BEING PASSED FOR THE SAKE OF CONVENIENCE AND BREVITY. 3. THE BRIEF FACTS QUA THE ASSESSEE ARE THAT THE ASSESSEE COMPANY IS A TAX RESIDENT OF GERMANY AND IS ENGAGED INTER ALIA IN THE BUSINESS OF PROVIDING INNOVATIVE AND ENVIRONMENTALLY SOUND SOLUTIONS OF A WIDE VARIETY OF CUSTOMERS IN METAL PROCESSING INDUSTRIES. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE EARNED REVENUE FROM: (I) SALE OF EQUIPMENT INCLUDING SPARES,(II) REVENUE FROM SUPERVISORY SERVICES, (III) SALE OF DESIGN AND DRAWING, (IV) MANPOWER AND OTHER SERVICES ETC. THE ASSESSEE HAS ELECTRONICALLY FILED A RETURN OF 28.03.2014 FOR ASSESSMENT YEAR 2012- 13 DECLARING A TOTAL INCOME OF RS.5,27,43,560/-. THE ASSESSES CASE WAS SELECTED FOR SCRUTINY U/S 143(2) OF THE ACT. THE AO AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE MADE A DRAFT ORDER DATED 27.03.2015 WHICH WAS SERVED ON THE ASSESSEE. IN RESPONSE, THE ASSESSEE FILED OBJECTIONS BEFORE THE HON`BLE DISPUTE RESOLUTION OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 3 PANEL(DRP)-2 UNDER SECTION 144C (2) OF THE ACT. AFTER CONSIDERING THE OBJECTIONS SUBMITTED BY THE ASSESSEE, THE HON`BLE DRP GAVE DIRECTIONS VIDE ORDER DATED 04.11.2015. 4. FIRST, WE TAKE ASSESSEES APPEAL IN ITA NO.160/KOL/2016 WHEREIN THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1.THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ORDER PASSED BY THE LD. DEPUTY COMMISSIONER OF INCOME TAX (ASSESSING OFFICER) UNDER SECTION 144C READ WITH SECTION 143(3) OF THE ACT IS BAD IN LAW. INCOME FROM SUPERVISORY SERVICES 2.THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, LD. AO/ DRP ERRED IN INCREASING THE NET PROFIT RATE TO 27.5% ON THE GROSS REVENUE FROM SUPERVISORY SERVICES AGAINST THE NET PROFIT RATE OF 15.10% APPLIED BY THE APPELLANT. TAXABILITY OF INCOME FROM SUPPLY OF DESIGN AND DRAWINGS 3.(A)THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, LD.AO/ DRP ERRED IN HOLDING THAT THE SALE OF DESIGNS AND DRAWINGS BY THE APPELLANT IS NOT IN THE NATURE OF SALE OF PRODUCT AND THE INCOME EARNED FROM SUCH SALE IS TAXABLE UNDER ARTICLE 12 OF INDIA-GERMANY DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA). B).THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, LD. DRP ERRED IN HOLDING THAT THE INCOME EARNED BY THE APPELLANT FROM SALE OF DESIGNS AND DRAWINGS IS TAXABLE AS FEES FOR TECHNICAL SERVICES AS PER ARTICLE 12 OF THE DTAA, IGNORING THE DECISION OF HON'BLE ITAT, KOLKATA IN APPELLANT'S OWN CASE FOR EARLIER YEARS WHEREIN IT WAS HELD THAT SALE OF DESIGNS AND DRAWINGS BY THE APPELLANT IS IN THE NATURE OF SALE OF PRODUCT. LEVY OF INTEREST U/S 234A OF THE ACT 4. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD.AO ERRED IN COMPUTING THE INTEREST UNDER SECTION 234A OF THE ACT WHICH IS CONSEQUENTIAL IN NATURE. LEVY OF INTEREST U/S 234B OF THE ACT 5. THAT ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE AND IN LAW, LD. AO / DRP ERRED IN IMPOSING INTEREST UNDER SECTION 234B OF THE ACT ON THE APPELLANT, FOR DEFAULT IN PAYMENT OF ADVANCE TAX, WITHOUT APPRECIATING THE FACT THAT THE APPELLANT, BEING A NON-RESIDENT, WAS NOT LIABLE TO PAY ADVANCE TAX UNDER SECTION 209(I)(D) OF THE ACT SINCE THE ENTIRE INCOME WAS LIABLE FOR TAX OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 4 DEDUCTION AT SOURCE AT THE APPROPRIATE RATES BY THE INDIAN CUSTOMERS UNDER SECTION 195 OF THE ACT. INITIATION OF PENALTY PROCEEDINGS 6.THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. AO ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. 7.THAT THE APPELLANT CRAVES LEAVE TO ADD TO AND TO ALTER, AMEND, RESCIND OR MODIFY THE GROUNDS RAISED HEREINABOVE BEFORE OR AT THE TIME OF HEARING OF THE APPEAL. 5. ALTHOUGH, IN THIS APPEAL, THE ASSESSEE HAS RAISED A MULTIPLE GROUNDS OF APPEAL, BUT AT THE TIME OF HEARING THE MAIN GRIEVANCE OF THE ASSESSEE HAS BEEN CONFINED TO GROUND NO.2 AND GROUND NO.3 AND OTHER GROUNDS RAISED BY THE ASSESSEE, IN THIS APPEAL, ARE GENERAL AND CONSEQUENTIAL IN NATURE. 6. THE GROUND NO.2 RAISED BY THE ASSESSEE RELATES TO INCREASING THE NET PROFIT RATE TO 27.5% ON THE GROSS REVENUE FROM SUPERVISORY SERVICES AGAINST THE NET PROFIT RATE OF 15.10% APPLIED BY THE ASSESSEE. 6.1 THE BRIEF FACTS QUA THE ISSUE ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS ADMITTED A SUPERVISORY PE IN INDIA BUT HAS NOT PREPARED ANY SEPARATE BOOKS OF ACCOUNTS FOR SUPERVISORY SERVICES DURING THE YEAR AS THE CONTENTION OF THE ASSESSEE IS THAT IT HAD A BELIEF THAT THE SUPERVISORY SERVICES PER SE RENDERED ON STANDALONE BASIS WOULD NOT CREATE A PE IN INDIA. FOR THE PURPOSE OF COMPUTATION OF PROFITS, THE ASSESSEE HAS THEREFORE COMPUTED THE AVERAGE NET PROFIT PERCENTAGE ON SALES EARNED BY THE COMPARABLE INDIAN COMPANIES AND SUCH MARGINS AS PER ASSESSEE'S COMPUTATION WORKS OUT TO L5.10% ON SALES. THE ASSESSEE HAS ALSO FURNISHED THE DETAILS OF INDIAN COMPARABLE COMPANIES RELIED UPON BY IT FOR THE PURPOSE OF COMPUTATION OF MARGINS. BASED ON THE SIMILAR FACTS FOR FINANCIAL YEARS OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 5 2007-08 AND 2008-09, THE SETTLEMENT COMMISSION HAS HELD THAT THE REASONABLE NET PROFIT PERCENTAGE WOULD BE 27.5% OF GROSS REVENUE. SINCE THIS IS PURELY A FACTUAL MATTER AND THE FACTS UNDER THE YEAR UNDER CONSIDERATION ARE ALSO SAME, THEREFORE IT WAS HELD BY AO THAT IT WOULD BE REASONABLE TO APPLY A NET PROFIT PERCENTAGE OF 27 5% ON THE GROSS REVENUE FOR THE CURRENT YEAR. THUS BY, APPLYING THE REVISED NET PROFIT RATE OF 27.5% THE TAXABLE INCOME FROM RENDERING OF SUPERVISORY SERVICES WAS COMPUTED BY AO, AS FOLLOWS: PARTICULAR REVENUE FROM SUPERVISORY SERVICE RS. 5,47,53,435/- PROFIT @ 27.5% RS. 1,50,57,195/- LESS: ALREADY OFFERED IN ROI FILED (@ 15.10%) RS. 82,67,769/- NET INCOME ADDED ON SUPERVISORY SERVICES RS. 67,89,426/- 6.2 THE ASSESSEE COMPANY FILED THE OBJECTION BEFORE THE HON`BLE DRP AGAINST THE PROPOSED ADDITION OF RS.67,89,426/- ON ACCOUNT OF SUPERVISORY SERVICES. BUT THE HON`BLE DRP DISMISSED THE ASSESSEE`S OBJECTION STATING THAT THE ASSESSEE ADMITTED A SUPERVISORY PE IN INDIA. THE MATTER WAS BEFORE ITSC FOR AY 2007-08 AND 2008-09 AND THE PROFIT RATE WAS SET AT 27.5% BY THE ITSC. THE AO HAD FOLLOWED THE SAME. THEREFORE, THE HONBLE DRP DID NOT INTERFERE IN THIS RESPECT IN VIEW OF THE ORDER WITH A BINDING PROPOSITION, PASSED BY THE ITSC. 6.3 NOT BEING SATISFIED WITH THE ORDER OF DRP/AO, THE ASSESSEE IS IN APPEAL BEFORE US AND STATED THAT PROFIT RATE SHOULD BE 15.10% AGAINST THE PROFIT RATE OF 27.5% SET BY THE INCOME TAX SETTLEMENT COMMISSION ( ITSC) ON REVENUE FROM SUPERVISORY SERVICES. THE LD COUNSEL FOR THE ASSESSEE HAS FAIRLY AGREED WITH US THAT FOR THE AYS 2008-09 & 2009-10 BEFORE THE ITSC AND FOR AY 2010-11 BEFORE THE AO, THE OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 6 ASSESSEE ADMITTED TO HAVE PE IN INDIA TO WHICH THE IMPUGNED SUPERVISORY SERVICES WERE EFFECTIVELY CONNECTED. THE LD DR FOR THE REVENUE ALSO AGREED THAT THE SAID ISSUE HAD BEEN DECIDED BY HON`BLE TRIBUNAL AGAINST THE ASSESSEE IN THE ASSESSMENT YEARS 2008-09,2009-10 AND 2010-11. THE RELEVANT PARA OF THE KOLKATA TRIBUNAL`S ORDER IN ASSESSEE`S OWN CASE IN BOTH THE YEARS ARE REPRODUCED BELOW: (I).IN ASSESSEES OWN CASE ITA NO.431/432/KOL/2014 A.Y 2010-11 & ITA NO.283/KOL/2015 OUTOTEC GAMBH A.Y 2011-12 24. SH. VIJAY KUMAR LD. CIT-DR STATED FACTS AND MADE ARGUMENT THAT THE ASSESSEE REPORTED TO HAVE EARNED GROSS REVENUE FROM SUPERVISORY SERVICES AMOUNTING TO RS.10,35,15,673/- OUT OF WHICH RS.1,85,60,360/-, BEING 17.93% OF THE GROSS REVENUE, WAS ALLOCATED TO THE INDIAN PE. IN ASSESSMENT, AO HAD ENHANCED THIS ALLOCATION TO 27.50% WHICH WORKS OUT TO RS.2,84,66,810/-. THE DRP ALSO CONFIRMED THE ACTION OF THE AO FOR THE REASON THAT ON IDENTICAL FACTS AND CIRCUMSTANCES, THE ITSC ATTRIBUTED PROFITS @ 27.50% IN THE ASSESSEES OWN CASE FOR A.YS 2008-09 AND 2009-10 RESPECTIVELY. FOR THE AYS 2008-09 & 2009-10 BEFORE THE ITSC AND NOW FOR AY 2010-11 BEFORE THE AO, THE ASSESSEE ADMITTED TO HAVE PE IN INDIA TO WHICH THE IMPUGNED SUPERVISORY SERVICES WERE EFFECTIVELY CONNECTED, BUT NO BOOKS OF ACCOUNTS WERE MAINTAINED FOR THE SAME. THIS WAS IN CLEAR VIOLATION OF PROVISIONS OF SECTION 40AD OF THE ACT. IN SUCH CIRCUMSTANCES, THE FACTUAL FINDING OF THE ITSC TOWARDS ATTRIBUTION OF PROFITS TO THE EXTENT OF 27.50% ON THE REVENUE EARNED FROM SUPERVISORY ACTIVITIES IN INDIA CANNOT BE FAULTED WITH AND FOR THE VERY SAME REASON, THE ACTION OF THE AO IN ATTRIBUTING PROFITS @27.50% WAS RIGHTLY CONFIRMED BY DRP. WE ALSO HOLD SO. THIS ISSUE OF ASSESSEES APPEAL IS DISMISSED. (II).IN ASSESSEES OWN CASE ITA NO.331,332,334/KOL/2015 A.Y 2004-05 TO 2007-08 & ITA NO.328,329,330/KOL/2015 OUTOTEC GAMBH A.Y 20005-06 TO 2007-08 & ITA NO.274,275,276,277: 8.THE DRP ALSO CONFIRMED THE ACTION OF THE AO FOR THE REASON THAT ON IDENTICAL FACTS AND CIRCUMSTANCES, THE ITSC ATTRIBUTED PROFITS @27.50% IN THE ASSESSEES OWN CASE FOR AYS 2008-09 AND 2009-10 RESPECTIVELY. FOR THE AYS 2008-09 & 2009-10 BEFORE THE ITSC AND NOW FOR AY 2010-11 BEFORE THE AO, THE ASSESSEE ADMITTED TO HAVE PE IN INDIA TO WHICH THE IMPUGNED SUPERVISORY SERVICES WERE EFFECTIVELY CONNECTED, BUT NOW BOOKS OF ACCOUNTS WERE MAINTAINED / OR THE SAME. THIS WAS IN CLEAR VIOLATION OF PROVISIONS OF SECTION 40AD OF THE ACT. IN SUCH CIRCUMSTANCES, THE FACTUAL FINDING OF THE ITSC TOWARDS ATTRIBUTION OF PROFITS TO THE EXTENT OF 27.50% ON THE REVENUE EARNED FROM SUPERVISORY ACTIVITIES IN INDIA CANNOT BE FAULTED WITH AND FOR THE VERY SAME REASON, THE ACTION OF THE AO IN ATTRIBUTING PROFITS @27.50% WAS RIGHTLY CONFIRMED BY DRP. WE ALSO HOLD SO. THIS ISSUE OF ASSESSEES APPEAL IS DISMISSED. OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 7 WE FIND THAT THIS ISSUE IS COVERED BY THE ORDER OF THE ITAT IN THE ASSESSEES OWN CASE FOR THE A.Y.2010-11 AND A.Y.2011-12. THE TRIBUNAL UPHELD THE NET PROFIT RATE OF 27.5% AS DETERMINED BY THE HONBLE ITSC. RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDINATE BENCH OF THE ITAT, WE DISMISS THE GROUND NO.2 OF THE ASSESSEE. 6.4 IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE ( GROUND NO.2), IS DISMISSED. 7. GROUND NO. 3 (A) AND (B) RAISED BY THE ASSESSEE RELATES TO ADDITION MADE BY AO/DRP HOLDING THAT THE SALE OF DESIGNS AND DRAWINGS BY THE APPELLANT IS NOT IN THE NATURE OF SALE OF PRODUCT AND THE INCOME EARNED FROM SUCH SALE IS TAXABLE UNDER ARTICLE 12 OF INDIA-GERMANY DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) AND THE INCOME EARNED BY THE APPELLANT FROM SALE OF DESIGNS AND DRAWINGS IS TAXABLE AS FEES FOR TECHNICAL SERVICES AS PER ARTICLE 12 OF THE DTAA. 7.1 THE BRIEF FACTS QUA THE ISSUE ARE THAT THE ASSESSEE HAS PROVIDED DESIGN AND DRAWING TO INDIAN CUSTOMERS DURING THE YEAR UNDER CONSIDERATION RELATING TO STEEL INDUSTRY. IN THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS RAISED INVOICES FOR SALE OF DESIGN AND DRAWING AMOUNTING TO EURO 55,28,921 (EQUIVALENT TO RS 37,28,70,465/- BY APPLYING THE TT BUYING RATE ON THE PAYMENTS OF 31.03,2012). DURING THE ASSESSMENT PROCEEDINGS THE ASSESSEE SUBMITTED THE COPIES OF CONTRACTS FOR SALE. ON PERUSAL OF THE COPIES OF CONTRACTS FOR SALE, THE AO OBSERVED THAT THE INCOME ARISING FROM THE SAID TRANSACTIONS SHOULD BE CONSIDERED TAXABLE AS ROYALTY UNDER THE PROVISIONS OF THE ACT READ WITH THE PROVISIONS OF THE DTAA. IN RESPONSE TO THE QUESTION ASKED BY THE AO, THE ASSESSEE COMPANY SUBMITTED THE FACTUAL AND LEGAL POSITION WITH REGARD TO SALE OF DESIGN AND DRAWINGS STATING THE FOLLOWINGS: OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 8 (I) UNDER THE CONTRACTS, THE SCOPE OF THE ASSESSEE WAS LIMITED TO DESIGNS AND DRAWINGS BEING IN THE NATURE OF BASIC ENGINEERING FOR WHICH WORK WAS DONE PRIMARILY OUTSIDE THE TERRITORY OF INDIA. BASIC ENGINEERING INCLUDES SALE OF DESIGNS AND DRAWINGS TO THE CUSTOMERS THAT PERTAIN TO THE LOCATION PLOT PLAN, LAYOUT DRAWINGS, PLACEMENT OF VARIOUS EQUIPMENT, TYPES OF EQUIPMENT TO BE INSTALLED, PROCESS DESCRIPTION, MANUFACTURING OF INDIGENOUS EQUIPMENT IN INDIA ETC. THAT ARE NEEDED AS PER SPECIFICATIONS BY THE CUSTOMERS TO ERECT THE PLANT; (II) THE ASSESSEE HAS ACCESS TO A WIDE RANGE OF TECHNOLOGIES SUCH AS SINTER PLANT TECHNOLOGY, PELLET PLANT TECHNOLOGY ETC THAT ARE REQUIRED FOR THE PURPOSE OF SETTING UP/ERECTION OF PLANTS. SUCH TECHNOLOGIES ARE DEVELOPED AFTER UNDERTAKING VARIOUS RESEARCH AND DEVELOPMENT ACTIVITIES; (III) THE DESIGNS AND DRAWINGS ARE LARGELY THE PRODUCTS OF THE AFORESAID TECHNOLOGIES THAT ARE SOLD TO ITS INDIAN CUSTOMERS AFTER BEING MODIFIED, TO MEET THEIR REQUIREMENTS. THE MODIFICATION ACTIVITIES HAVE BEEN PERFORMED BY THE ASSESSEE IN ITS OWN COUNTRY I.E. THE ENTIRE WORK HAS BEEN UNDERTAKEN / PERFORMED OUTSIDE INDIA; (IV) THE DESIGNS AND DRAWINGS SOLD BY THE ASSESSEE WERE USED BY THE INDIAN CUSTOMERS FOR INTERNAL BUSINESS PURPOSE OF SETTING UP OF THEIR PLANTS AND NOT FOR ANY COMMERCIAL EXPLOITATION; (V) SALE OF DESIGNS AND DRAWINGS HAS ALSO BEEN AFFECTED OUTSIDE INDIA. COPY OF THE SAMPLE AIRWAY BILL EVIDENCING THAT THE DELIVERY OF DESIGNS AND DRAWINGS FOR VARIOUS PROJECTS HAS TAKEN PLACE OUTSIDE INDIA HAS BEEN ALREADY ENCLOSED WITH THE SUBMISSION; (VI) CONSIDERATION /PAYMENTS FOR THE BASIC ENGINEERING WORK WERE RECEIVED BY THE ASSESSEE OUTSIDE THE TERRITORY OF INDIA IN FOREIGN CURRENCY. THE ASSESSEE HAD FURTHER SUBMITTED TO AO THAT THE BASIC ENGINEERING PACKAGES SOLD BY THE ASSESSEE COMPANY TO THE INDIAN CUSTOMERS HAVE BEEN DESIGNED OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 9 LARGELY ON THE BASIS OF STANDARD TECHNOLOGIES AVAILABLE WITH IT. THE CONSIDERATION RECEIVED BY THE ASSESSEE WAS THEREFORE FOR THE SALE OF A PRODUCT WHICH IS EMBEDDED IN THE PLANT SET UP BY THE INDIAN CUSTOMERS. ACCORDINGLY, THE INCOME EARNED FROM THE SALE OF DESIGNS AND DRAWINGS IS IN THE NATURE OF BUSINESS INCOME BEING THE CONSIDERATION RECEIVED FROM THE SALE OF A PRODUCT. THE ASSESSEE HAD ALSO SUBMITTED THAT THE RESTRICTION IMPOSED BY IT ON THE INTELLECTUAL PROPERTY IN DESIGNS AND DRAWINGS SOLD BY THE ASSESSEE FOR THE PURPOSE OF SETTING UP A PLANT IN INDIA DOES NOT CHANGE THE CHARACTER OF THE TRANSACTION FROM THE SALE OF THE PRODUCT TO THE USE OF LICENSE/KNOW HOW AND THE MERE FACT THAT THE WORD LICENSE HAS BEEN USED IN THE AGREEMENT WOULD NOT MAKE ANY DIFFERENCE. IT WAS ALSO SUBMITTED BY THE ASSESSEE THAT THE DESIGNS AND DRAWINGS SOLD BY IT WERE USED BY THE INDIAN CUSTOMERS FOR INTERNAL BUSINESS PURPOSE OF SETTING UP OF THEIR PLANTS AND NOT FOR ANY COMMERCIAL EXPLOITATION. ACCORDINGLY, THE DESIGNS AND DRAWINGS SOLD BY THE ASSESSEE TANTAMOUNT TO THE USE OF A COPYRIGHTED ARTICLE RATHER THAN USE OF A COPYRIGHT. THE ASSESSEE ALSO PLACED RELIANCE UPON VARIOUS JUDICIAL PRONOUNCEMENTS, NAMELY OF SCIENTIFIC ENGINEERING HOUSE P. LTD. VS. CIT (SC) [157 ITR 86], MODERN THREADS (INDIA) LIMITED VS DCIT (JAIPUR ITAT) [69 ITD 115], DIT VS INFRASOFT LTD. [39 TAXMANN.COM 88]. IN SUPPORT OF ITS CONTENTION, THE ASSESSEE HAD ALSO RELIED UPON CERTAIN CLAUSES OF CONTRACTS OF SUPPLY OF IMPORTED DESIGNS AND DRAWINGS FOR BHUSHAN POWER AND STEEL PLANT PELLET PLANT]. HOWEVER, THE LD AO REJECTED THE ASSESSEE`S SUBMISSIONS AND NOTED THAT BY THE TRANSFER OF DRAWINGS, DESIGNS, ENGINEERING INFORMATION, ETC., THE RECIPIENT WAS ENABLED TO ENSURE THE OPERATION AND MAINTENANCE OF THE PLANT SET UP AND THE MANUFACTURING PROCESS OF THE PLANT. THE RECIPIENT WAS ENABLED TO USE OR WAS IMPARTED WITH THE INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE THROUGH THE SAID TRANSFER. THIS WOULD NECESSARILY BEING THE PAYMENT WITHIN THE AMBIT OF ROYALTY IN TERMS OF CLAUSE (IV) OF EXPLANATION 2 TO SECTION 9(1)(VI) OF THE ACT AS WELL AS ARTICLE 12(3) OF THE INDIA-GERMAN DTAA. IN THE OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 10 CASE OF CIT VS. KLAYMAN PORCELAINS LTD. [1998] 96 TAXMAN 221 (AP), THE HONBLE ANDHRA PRADESH HIGH COURT HELD THAT: ...IF THE AMOUNT IN QUESTION HAD BEEN PAID BY THE INDIAN COMPANY TO THE NON- RESIDENT COMPANY FOR IMPARTING OF ANY INFORMATION CONCERNING THE WORKING OF OR USE OF PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY OR IF IT WAS PAID FOR IMPARTING OF ANY INFORMATION CONCERNING TECHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXPERIENCE OR SKILL, THE AMOUNT WOULD FALL WITHIN THE MEANING OF ROYALTY , AS DEFINED IN EXPLANATION 2 OF SECTION 9(1). THIS IS A QUESTION OF FACT TO BE DETERMINED ON THE FACTS AND CIRCUMSTANCES OF EACH CASE AND THE TERMS OF AGREEMENT UNDER WHICH THERE HAS BEEN A TRANSFER. THE AO NOTED THAT IN THE PRESENT CASE, THE SUPPLY OF DRAWINGS, DESIGNS, ENGINEERING DOCUMENTS, ETC. CLEARLY FALL WITHIN THE AMBIT OF EXPRESSION FOR IMPARTING OF ANY INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE WHICH IS CLEARLY STIPULATED IN CLAUSE (IV) OF EXPLANATION 2 OF SECTION 9(1)(VI) OF THE ACT AS WELL AS IN ARTICLE 12(3) OF THE INDIA-GERMANY DTAA. FURTHER THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF SCIENTIFIC ENGINEERING RELIED UPON BY THE ASSESSEE DEALS WITH THE CAPITALIZATION OF ASSETS IN THE BOOKS OF PURCHASER AND HAS NO APPLICABILITY IN THE CASE OF THE ASSESSEE. SIMILARLY, OTHER JUDGMENTS RELIED UPON BY THE ASSESSEE ARE BASED ON THEIR OWN FACTS AND ARE NOT APPLICABLE IN ASSESSEES CASE. THEREFORE, THE INCOME FROM DESIGNS AND DRAWINGS IS HELD TO BE TAXABLE AS ROYALTY @ 10% ON GROSS BASIS. THE TOTAL INCOME OF THE ASSESSEE WITH REGARD TO DESIGNS AND DRAWINGS IS THEREFORE COMPUTED AS UNDER: PARTICULAR AMOUNT INCOME FROM DESIGNS AND DRAWINGS (TAXABLE AS ROYALTY @ 10% ON GROSS BASIS) RS.37,28,70,465/- 7.2 AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE COMPANY FILED OBJECTION BEFORE THE HONBLE DRP AGAINST PROPOSED ITEM OF ADDITION ON ACCOUNT OF SALE OF DESIGNS AND DRAWINGS VIDE THE DRAFT ASSESSMENT ORDER DATED 26.03.2015, ON THE ABOVE ISSUE. THE HONBLE DRP UPHELD THE CONTENTION OF THE ASSESSING OFFICER BUT DIRECTED OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 11 THAT SAID TRANSACTION BE CATEGORIZED AS FTS (FEES FOR TECHNICAL SERVICES). THE HONBLE DRP REACHED THIS CONCLUSION AFTER RELYING ON ARTICLE 12(4) OF THE INDO- GERMAN DTAA WHEREIN IT IS STIPULATED THAT THE TERM FEES FOR TECHNICAL SERVICES AS USED IN THIS ARTICLE MEANS PAYMENTS OF ANY AMOUNT IN CONSIDERATION FOR THE SERVICES OF MANAGERIAL, TECHNICAL OR CONSULTANCY NATURE, INCLUDING THE PROVISION OF SERVICES BY TECHNICAL OR OTHER PERSONNEL BUT DOES NOT INCLUDE PAYMENTS FOR SERVICES MENTIONED IN ARTICLE 15 OF THIS AGREEMENT. THE HONBLE DRP HELD THAT THE SAID TRANSACTION IS IN THE NATURE OF FTS SINCE (I) THE ASSESSEE HAS ACCESS TO A WIDE RANGE OF TECHNOLOGIES FOR THE PURPOSES OF SETTING UP/ERECTION OF PLANTS (II) WHICH WERE DEVELOPED AFTER RESEARCH AND AFTER NECESSARY MODIFICATION AND THEREAFTER (III) THESE DESIGNS AND DRAWINGS WERE SOLD TO INDIAN CUSTOMER WHO USED THE SAME FOR INTERNAL BUSINESS PURPOSE OF SETTING UP OF THEIR PLANTS. THE LD. COUNSEL OF THE ASSESSEE COULD NOT REBUT QUERY IN RESPECT OF CATEGORIZATION OF THE TRANSACTIONS AS FTS. THEREFORE, IN VIEW OF THE ABOVE MENTIONED DIRECTION OF THE HONBLE DRP, THE ADDITION MADE IN THE DRAFT ASSESSMENT ORDER ON ACCOUNT OF ROYALTY FROM SALE OF DESIGNS WAS CATEGORIZED AS FEES FOR TECHNICAL SERVICES AND ASSESSED AS SUCH BY AO. 7.3 NOT BEING SATISFIED WITH THE ORDER OF DRP/AO, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD COUNSEL FOR THE ASSESSEE HAS STATED BEFORE US THAT SAID ISSUE IS FULLY COVERED BY THE JUDGMENT OF HON`BLE ITAT KOLKATA, IN ASSESSEE`S OWN CASE FOR ASSESSMENT YEARS 2005-06 TO 2007- 08, & 2010-11 AND 2011-12, WHICH ARE REPRODUCED BELOW: (I).IN ASSESSEES OWN CASE ITA NO.431/432/KOL/2014 A.Y 2010-11 & ITA NO.283/KOL/2015 OUTOTEC GAMBH A.Y 2011-12 37.FROM THE ABOVE FACTS AND LEGAL POSITION, IT IS CLEAR THAT THE BASIC ENGINEERING PACKAGES SOLD BY THE ASSESSEE TO THE INDIAN CUSTOMERS HAVE BEEN LARGELY DESIGNED ON THE BASIS OF STANDARD TECHNOLOGIES AVAILABLE WITH IT. THE CONSIDERATION WAS, THEREFORE, FOR THE SALE OF THE PRODUCT, WHICH IS EMBEDDED IN THE PLANT SET UP BY THE INDIAN CUSTOMERS AND DOES NOT CONSTITUTE ROYALTY AND IS IN THE NATURE OF BUSINESS INCOME. SINCE THE WORK WAS DONE OUTSIDE INDIA AND SALE WAS TAKEN PLACE OUTSIDE INDIA, SUCH INCOME IS NOT TAXABLE UNDER THE PROVISIONS OF THE ACT AND DTAA. RETAINING INTELLECTUAL PROPERTY IN DESIGNS AND DRAWINGS IS SIMILAR IN THE NATURE TO THE RETAINING OF PATENTED RIGHTS IN ANY GOODS/MACHINERY. RESTRICTION ON THE INTELLECTUAL PROPERTY IN DESIGNS AND DRAWINGS SOLD BY THE ASSESSEE FOR THE PURPOSE OF SETTING UP A PLANT IN INDIA DOES NOT CHANGE THE CHARACTER OF THE TRANSACTION FROM THE SALE OF OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 12 THE PRODUCT TO THE USE OF LICENCE/KNOW-HOW. NORMALLY, DESIGNS AND DRAWINGS SOLD BY FOREIGN CUSTOMERS WERE USED BY INDIAN CUSTOMERS FOR INTERNAL BUSINESS PURPOSES FOR SETTING UP OF THEIR PLANTS AND NOT FOR ANY COMMERCIAL EXPLOITATION. ACCORDINGLY, THE DESIGNS AND DRAWINGS SOLD BY THE ASSESSEE TANTAMOUNTS TO THE USE OF COPYRIGHTED ARTICLE RATHER THAN USE OF A COPYRIGHT AND IS, THEREFORE, IN THE NATURE OF BUSINESS INCOME. THIS ISSUE OF ASSESSEES APPEAL IS ALLOWED. (II).IN ASSESSEES OWN CASE ITA NO.331,332,334/KOL/2015 A.Y 2004-05 TO 2007-08 & ITA NO.328,329,330/KOL/2015 OUTOTEC GAMBH A.Y 2005-06 TO 2007-08 & ITA NO.274,275,276,277. 16.RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL WE HOLD THAT THE SALE OF DESIGNS AND DRAWINGS IS SALE OF A COPYRIGHTED ARTICLE AND THEREFORE, INCOME EARNED THERE FROM IS IN THE NATURE OF BUSINESS INCOME. HENCE, THIS GROUND OF THE ASSESSEE IS ALLOWED. THUS, RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEE COMPANY`S OWN CASE IN ASSESSMENT YEARS 2007-08 TO 2011-12, WHEREBY THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE COMPNY AS SET OUT ABOVE, THEREFORE WE HOLD THAT THE SALE OF DESIGNS AND DRAWINGS IS SALE OF A COPYRIGHTED ARTICLE AND THEREFORE, INCOME EARNED THERE FROM IS IN THE NATURE OF BUSINESS INCOME. HENCE, THIS GROUND OF THE ASSESSEE IS ALLOWED. 7.4 IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE (GROUND NO.3(A) & (B) ), IS ALLOWED. 8. GROUND NO. 4 AND 5 RAISED BY THE ASSESSEE RELATES TO CHARGING OF INTEREST UNDER SECTIONS 234A AND 234B OF THE ACT, WHICH IS CONSEQUENTIAL IN NATURE AND AO WILL RE- COMPUTE THE SAME ACCORDINGLY, THEREFORE, IT DOES NOT REQUIRE ADJUDICATION. 9. GROUND NO. 6 AND 7 RAISED BY THE ASSESSEE RELATES TO PENALTY PROCEEDINGS UNDER SECTION 271 (1) ( C ) OF THE ACT, WHICH IS CONSEQUENTIAL IN NATURE AND THEREFORE, IT DOES NOT REQUIRE ADJUDICATION. 10.NOW WE SHALL TAKE THE APPEAL FILED BY THE REVENUE IN ITA NO. 193/KOL/2016 FOR A.Y. 2012-13. THE GROUNDS OF APPEAL TAKEN BY THE REVENUE IN THIS APPEAL, READS AS UNDER:- OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 13 I) ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. DRP ERRED IN IGNORING ITS OWN FINDING GIVEN IN THE PRECEDING YEAR IN THE ASSESSEES OWN CASE FOR THE A.Y. 2004-05. AND FAILED TO RETURN A CORRECT FINDING OF THE FACTS THAT THE SALE CONSIDERATION WAS NOT SALE SIMPLICITOR FOR OVERSEAS SUPPLY OF EQUIPMENT AND INCLUDED CONSIDERATION FOR VARIOUS TESTS AND WARRANTY PROVISIONS AND THEREFORE INCOME ATTRIBUTABLE TO SUCH SERVICES RENDERED IN INDIA IS TAXABLE IN INDIA AS DECISION OF THE COORDINATE BENCH IN POSCO ENGINEERING AND CONSTRUCTION LIMITED V. ADIT (2014) 148 ITD 527 ( DELHI TRIBUNAL). II).EVEN IF THE AO FAILS TO NOTICE THE RELEVANT FACTS AND FAILS TO CAUSE PROPER ENQUIRY, IT WAS INCUMBENT UPON DRP TO RETURN A CORRECT FINDING OF FACTS BY MAKING APPROPRIATE ENQUIRY OR GETTING SUCH INQUIRY CONDUCTED IN VIEW OF THE LAW LAID DOWN BY HONBLE DELHI COURT IN CIT V. JANASAMPARK ADVERTISING AND MARKETING (2015) 231 TAXMAN 384 (DEL)/375 ITR 373 (DEL) AND HAVING NOT DONE SO, THE DIRECTION OF DRP IS BAD IN LAW AND SHOULD BE SET ASIDE. III).THE DEPARTMENT CRAVES LEAVE TO RAISE ANY ADDITIONAL GROUND AT THE TIME OF HEARING. 10.1 THE BRIEF FACTS QUA THE ISSUE ARE THAT THE ASSESSEE HAS SUPPLIED EQUIPMENTS TO SEVERAL INDIAN CUSTOMERS DURING THE YEAR UNDER CONSIDERATION RELATING TO STEEL INDUSTRY. IN THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS RAISED INVOICES FOR SALE OF EQUIPMENT AMOUNTING TO EURO 1,52,31,564 (EQUIVALENT TO RS.10,272,16,659/- BY APPLYING THE TT BUYING RATE AS ON 31.03.2012. THE COPIES OF CONTRACTS FOR SALE WERE CALLED FOR AND SUBMITTED BY THE ASSESSEE. DURING THE ASSESSMENT PROCEEDINGS, THE AO ASKED THE ASSESSEE THAT WHY THE INCOME ARISING FROM THE SAID TRANSACTIONS SHOULD NOT BE CONSIDERED TAXABLE IN INDIA. IN RESPONSE TO THAT THE ASSESSEE SUBMITTED BEFORE THE AO THAT THE CONTRACTS RELATING TO SALE OF EQUIPMENT WERE BROADLY UNDERTAKEN IN THE FOLLOWING MANNER: (I) THE DESIGNING, PROCUREMENT OF MATERIAL, FABRICATION AND MANUFACTURING OF EQUIPMENT WAS UNDERTAKEN OUTSIDE INDIA. THE COMPANY IS NOT INVOLVED IN THE MANUFACTURING OF EQUIPMENT AND SUCH EQUIPMENT WERE SOURCED FROM THIRD PARTY VENDORS BASED OUTSIDE INDIA (II) THE EQUIPMENT WAS DIRECTLY SOLD BY THE ASSESSEE ON EXPORT SALE BASIS AND THE TITLE / OWNERSHIP IN THE EQUIPMENT WAS TRANSFERRED OUTSIDE INDIA I.E. BEFORE THE EQUIPMENT REACHED INDIA. OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 14 (III) CONSIDERATION / PAYMENT FOR SALE OF EQUIPMENT WAS RECEIVED OUTSIDE INDIA IN FOREIGN CURRENCY. (IV) MAJORITY OF THE PAYMENT (85% - 95% INCLUDING ADVANCE) FOR EACH AND EVERY PART OF SHIPMENT BECOMES PAYABLE UPON DELIVERY OF EQUIPMENT ON FOB FOREIGN PORT OF SHIPMENT ONCE SHIPPING AND OTHER DOCUMENTS ARE SENT TO THE CUSTOMER. SUCH PAYMENTS ARE MADE THROUGH IRREVOCABLE LETTER OF CREDIT. (V) THE BUYERS WERE THE INDIAN CUSTOMERS WHO WERE INDEPENDENT AND UNRELATED PARTIES AND PURCHASED THE EQUIPMENT FROM THE ASSESSEE ON THEIR OWN ACCOUNT AND HENCE THE PRICE WAS AT ARMS LENGTH; (VI) THE ASSESSEE WAS NOT LEGALLY OR ECONOMICALLY DEPENDENT UPON THE INDIAN CUSTOMERS; (VII) THE CONTRACTS FOR THE SALE OF EQUIPMENT WERE CONCLUDED ON A PRINCIPAL TO PRINCIPAL BASIS; (VIII) UNDER THE CONTRACTS, CUSTOMER INSPECTION OF THE EQUIPMENT WAS TO BE TAKEN PLACE OUTSIDE INDIA; AND (IX) THE ASSESSEE DID NOT HAVE ANY OFFICE OR PLACE OF BUSINESS IN INDIA. IN RESPONSE TO THE SHOW CAUSE NOTICE ISSUED TO THE ASSESSEE, THE ASSESSEE SUBMITTED BEFORE THE AO VARIOUS CLAUSES OF CONTRACT I.E. DELIVERY ON FOB BASIS, TERMS OF PAYMENT, INSPECTION ETC, FOR TATA KPO PROJECT. THE ASSESSEE HAS ALSO FURNISHED AN ANNEXURE HIGHLIGHTING THE SIMILAR CLAUSES IN OTHER CONTRACTS FOR SALE OF EQUIPMENT FOR OTHER PROJECTS AS WELL. BASED ON THE FACTS STATED BY THE ASSESSEE, IT HAS CONTENDED THAT ALL THE ACTIVITIES RELATING TO DESIGNING, FABRICATION AND MANUFACTURING TOOK PLACE OUTSIDE INDIA, THE SALE OF EQUIPMENT ALSO TOOK PLACE OUTSIDE INDIA ON PRINCIPAL TO PRINCIPAL BASIS AT ARM'S LENGTH AND CONSIDERATION WAS ALSO RECEIVED OUTSIDE INDIA IN FOREIGN CURRENCY. THE ASSESSEE HAS ALSO SUBMITTED THAT THE CLAUSES RELATING TO ACCEPTANCE TESTS MENTIONED UNDER THE VARIOUS CONTRACTS FOR SALE OF EQUIPMENT ARE MERELY IN THE NATURE OF WARRANTY PROVISIONS AND WOULD NOT HAVE ANY IMPACT ON TRANSFER OF TITLE, PROPERTY IN OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 15 THE SALE OF EQUIPMENT. ACCORDINGLY, THE ASSESSEE HAS SUBMITTED THAT IT HAS NOT CARRIED OUT ANY OPERATIONS IN INDIA WITH REGARD TO SALE OF EQUIPMENT AND HENCE THE PROFITS ARISING TO IT FROM SALE OF EQUIPMENT IS NOT TAXABLE IN INDIA IN TERMS OF SECTION 5 READ WITH SECTION 9(1)(I) OF THE ACT SINCE EXPLANATION 1(A) TO SECTION 9(1)(I) OF THE INCOME TAX ACT 1961 ('THE ACT') PROVIDES THAT ONLY THE INCOME TO THE EXTENT OF THE OPERATIONS CARRIED OUT IN INDIA CAN BE TAXED IN INDIA. THE ASSESSEE HAD ALSO SUBMITTED BEFORE THE AO THAT IT IS A TAX RESIDENT OF GERMANY AND IS ENTITLED TO BENEFICIAL PROVISIONS OF THE DTAA. THE ASSESSEE HAS SUBMITTED THAT IT WAS MERELY ENGAGED BY ITS CUSTOMERS FOR SUPERVISING THE DETAILED ENGINEERING, INSTALLATION AND COMMISSIONING ACTIVITIES ETC THAT WERE UNDERTAKEN BY THE CUSTOMERS / THIRD PARTY APPOINTED BY THE CUSTOMERS. SINCE THE COMPANY HAS MERELY RENDERED SUPERVISORY SERVICES TO ITS CUSTOMERS AND HAS NOT UNDERTAKEN CONSTRUCTION, INSTALLATION OR ASSEMBLY ACTIVITIES, IT BELIEVED THAT MERE RENDERING OF SUPERVISORY SERVICES ON STANDALONE BASIS CANNOT CREATE PE IN INDIA IN TERMS OF ARTICLE 5(2)(I) OF THE DTAA. LN SUPPORT OF ITS ARGUMENT THE ASSESSEE HAS RELIED ON THE PARA 15 OF THE COMMENTARY ON UN MODEL CONVENTION 2001 ON ARTICLE 5. ASSESSEE HAS FURTHER SUBMITTED THAT IN ORDER TO BUY PEACE OF MIND AND TO AVOID LITIGATION, AND WITHOUT PREJUDICE TO ITS LEGAL RIGHTS AGAINST OTHER CONSEQUENCES, IT HAS ADMITTED A PE IN INDIA UNDER ARTICLE 5(2)(I) OF THE DTAA FOR THE SUPERVISORY SERVICES RENDERED TO THE INDIAN CUSTOMERS WHEREIN THE DURATION OF PROJECT HAS EXCEEDED SIX MONTHS. IT WAS FURTHER SUBMITTED BY THE ASSESSEE THAT NO PE OF THE ASSESSEE IS CONSTITUTED IN INDIA WITH REGARD TO SALE OF EQUIPMENT AND HENCE PROFITS ARISING TO IT FROM SALE OF EQUIPMENT ARE NOT TAXABLE IN INDIA UNDER ARTICLE 5 READ WITH ARTICLE 7 OF THE INDIA- GERMANY DOUBLE TAXATION AVOIDANCE AGREEMENT ('DTAA). LT WAS ALSO SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION OUT OF THE TOTAL 3 PROJECTS, SUPERVISORY PE EXISTS ONLY FOR 1 PROJECTS AND IN OTHER PROJECTS THERE IS NO QUESTION OF SUPERVISORY PE AS THE SUPERVISORY SERVICE CONTRACT HAS BEEN AWARDED BY THE CUSTOMER DIRECTLY TO OUTOTEC (INDIA) PRIVATE LIMITED OR SUPERVISORY SERVICES HAS NOT BEEN COMMENCED TILL THE END OF THE YEAR UNDER CONSIDERATION ETC AND HENCE THE QUESTION OF ANY ATTRIBUTION ON ACCOUNT OF SALE OF EQUIPMENT FOR SUCH PROJECTS WOULD NOT ARISE AT ALL. THE ASSESSEE ALSO RELIED ON LTEM-1(A) OF THE PROTOCOL OF THE DTAA, WHICH MENTIONS, WITH REFERENCE TO ARTICLE 7 OF THE DTAA, THAT IF MACHINERY OR EQUIPMENT IS DELIVERED FROM HEAD OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 16 OFFICE ETC, THEN THEIR VALUE SHOULD NOT BE ATTRIBUTED TO THE PROFITS OF THE BUILDING SITE OF CONSTRUCTION, ASSEMBLY OR INSTALLATION PROJECT. IN ADDITION TO THE ABOVE, THE ASSESSEE HAS ALSO SUBMITTED THAT THE SUPERVISORY PE HAS NO ROLE TO PLAY IN OFFSHORE SUPPLIES AS ALL THE WORK RELATING TO DESIGNING, FABRICATION AND MANUFACTURING OF EQUIPMENT WAS DONE OUTSIDE INDIA AND SALE HAS ALSO TAKEN PLACE OUTSIDE INDIA. BASED ON THE ABOVE MENTIONED CONTENTIONS THE ASSESSEE HAS CLAIMED THAT THE PROFITS ARISING FROM SALE OF EQUIPMENT IS NOT TAXABLE UNDER THE PROVISIONS OF DTAA. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE ALSO PLACED RELIANCE UPON VARIOUS JUDICIAL PRONOUNCEMENTS, NAMELY ISHIKAWAJMA-HARIMA HEAVY INDUSTRIES LTD US DIT [288 LTR 408], CIT AND ANR. VS HYUNDAI HEAVY INDUSTRIES CO. LTD. (SC) 291 ITR 482}, DIT VS. ERICSSON A.B., NEW DELHI (343 ITR 470 AND DIRECTOR OF INCOME TAX VS M/S NOKIA NETWORKS OY (253 CTR 417), DIT VS. LG CABLE LTD. (DEL HC) [237 CTR 438] ETC. THE ASSESSEE HAD CONTENDED THAT THE TITLE / PROPERTY IN EQUIPMENT WAS TRANSFERRED OUTSIDE INDIA AND HENCE SALE HAS TAKEN PLACE OUTSIDE INDIA. HOWEVER, THE AO HAD REJECTED THE CONTENTIONS OF THE ASSESSEE AND HELD THAT A PROFIT PERCENTAGE OF 10%, WOULD BE A REASONABLE PERCENTAGE, AND HENCE, THE TOTAL INCOME OF THE ASSESSEE WITH REGARD TO THE SALE OF EQUIPMENT, THAT NEEDS TO BE ATTRIBUTED TO THE PE IN INDIA, AND THUS WAS COMPUTED AS UNDER: PARTICULAR AMOUNT REVENUE ATTRIBUTABLE TO INDIAN PE FROM SALE OF EQUIPMENT RS.6,46,50,460/- (9,58,637 @ 67.44) PROFIT FROM SALE OF EQUIPMENT (MARGIN 10%) RS.64,65,046/- NET INCOME CHARGEABLE TO TAX FROM SALE OF EQUIPMENT RS.64,65,046/- 10.2 AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE COMPANY FILED OBJECTION BEFORE THE HON'BLE DRP AGAINST PROPOSED ITEM OF ADDITION TO THE TOTAL INCOME VIDE THE DRAFT ASSESSMENT ORDER DATED 26.03.2015, ON THE ABOVE ISSUE. THE HON'BLE DRP DIRECTED THAT THIS ADDITION BE DELETED IN VIEW OF THE DECISION OF THE HON'BLE ITAT, KOLKATA, VIDE ITA NOS. 431-432/KOL/2014 AND 283/K/2015, WHICH WAS IN FAVOR OF THE ASSESSEE ON THE SAME ISSUE. THIS WAY, THE HON`BLE DRP DELETED THE ADDITION. OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 17 10.3 NOT BEING SATISFIED WITH THE ORDER OF DRP/AO, THE REVENUE IS IN APPEAL BEFORE US. THE LD DR FOR THE REVENUE HAS PRIMARILY REITERATED THE STAND TAKEN BY THE ASSESSING OFFICER, WHICH WE HAVE ALREADY NOTED IN OUR EARLIER PARA AND IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. 10.4 ON THE OTHER HAND, LD COUNSEL FOR THE ASSESSEE HAS SUBMITTED BEFORE US THAT THE SAID ISSUE IS SQUARELY COVERED BY THE JUDGMENT OF HON`BLE ITAT KOLKATA, IN ASSESSES OWN CASE, WHICH ARE REPRODUCED BELOW: (I).IN ASSESSEES OWN CASE ITA NO.431/432/KOL/2014 A.Y 2010-11 & ITA NO.283/KOL/2015 OUTOTEC GAMBH A.Y 2011-12 GROUND NO.1 19.IN VIEW OF THE ABOVE FACTS AND LEGAL POSITION, WE ARE OF THE VIEW THAT THE SALE OF EQUIPMENT IS CONCLUDED OUTSIDE INDIA BECAUSE ALL WORK RELATING TO MANUFACTURING, DESIGNING, FABRICATION ETC. OF EQUIPMENT IS DONE OUTSIDE INDIA AND SOLD TO THE ASSESSEE DIRECTLY ON EXPORT SALE BASIS. THE CONTRACT PROVIDES FOR DELIVERY OF EQUIPMENT ON FOB FOREIGN PORT OF SHIPMENT MAJORITY OF PAYMENTS I.E. 80-85% FOR EACH AND EVERY PART EQUIPMENT BECOMES PAYABLE UPON DELIVERY OF EQUIPMENT ON FOB FOREIGN PORT OF SHIPMENT THE ABOVE PAYMENTS ARE THROUGH IRREVOCABLE LETTER OF CREDIT WHICH MAKES IT CLEAR THAT EVEN IF THE SHIP DOES NOT SAIL OR DELIVER THE GOODS TO THE DESTINATION, THE ASSESSEE RECEIVES PAYMENT OUT OF LETTER OF CREDIT GUARANTEED BY BANK UPON FOB DELIVERY. EVEN THE CUSTOMER'S INSPECTION FOR EQUIPMENT IS OUTSIDE INDIA. THE BUYERS WERE INDIAN CUSTOMERS AND UNRELATED PARTIES AND PURCHASED EQUIPMENT FROM ASSESSEE ON THEIR OWN ACCOUNT. MOREOVER, SALE WAS ON PRINCIPAL TO PRINCIPAL BASIS AND AT ARMS LENGTH. THE ASSESSEE ENTERED INTO EITHER SEPARATE CONTRACTS EACH WITH ITS OWN SCOPE OF SUPPLY OR SERVICE WITH SEPARATE CONSIDERATION OR SINGLE CONTRACT WITH SEPARATE SCOPE OF SUPPLY AND SERVICES AS WELL AS SEPARATE CONSIDERATION. THE FINDINGS OF DRP AND THAT OF THE AO THAT THE CONTRACTS ARE SINGLE CONTRACT SPLIT INTO SEPARATE PARTS IS NOT CORRECT. EVEN IF THE CONTRACT IS CONSIDERED TO BE INTEGRATED ONE, THEN ALSO THE TAXABILITY OF EACH OF THE COMPONENT HAS TO BE DETERMINED SEPARATELY BASED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF ISHIKAWAJMA-HARIMA HEAVY INDUSTRIES LTD., SUPRA. FURTHER, THE RELIANCE PLACED BY DRP ON THE CASE OF AAR OF ALSTOM TRANSPORT SA, SUPRA TO HOLD THAT THE CONTRACT FOR INSTALLATION AND COMMISSIONING OF A PROJECT CANNOT BE SPLIT UP INTO SEPARATE PARTS AS CONSISTING OF INDEPENDENT SUPPLY OF GOODS AND FOR INSTALLATION AT THE WORK SITE. FOR REACHING TO THE ABOVE CONCLUSION AAR RELIED ON THE DECISION OF LINDE AG OF AAR BUT THE DECISION OF AAR IN THE CASE OF LINDE AG WAS OVERRULED BY HON'BLE DELHI HIGH COURT, WHICH IS CITED SUPRA. THE ACCEPTANCE TESTS ARE MERELY IN THE NATURE OF WARRANTY PROVISIONS FOR THE REASON THAT ONLY 15% OF THE PAYMENT IS RECEIVABLE BY THE ASSESSEE ON COMPLETION OF VARIOUS TESTS, IN CASE THESE TESTS ARE UNSUCCESSFUL TATA STEEL OR THE PARTY CONCERNED CAN CLAIM OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 18 LIQUIDATED DAMAGES NOT EXCEEDING 35% OF THE CONTRACT PRICE. ACCORDINGLY, THE CLAUSE OF ACCEPTANCE TESTS IS MERELY IN THE NATURE OF WARRANTY PROVISIONS. EVEN THE RELIANCE PLACED BY AO ON VARIOUS CLAUSES OF SALES OF GOODS ACT IS MISPLACED. SINCE THE HON'BLE DELHI HIGH COURT IN THE CASE OF LG CABLES LTD., SUPRA AFTER CONSIDERING THE PROVISIONS OF SALES OF GOODS ACT HELD THAT SUCH ACCEPTANCE TESTS ARE MERELY IN THE NATURE OF WARRANTY PROVISIONS. EVEN THERE IS NO PE FOR SALE OF EQUIPMENT IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF HYUNDAI HEAVY INDUSTRIES, SUPRA AND IN ADDITION TO THIS, THERE IS NO CONCEPT CALLED SALE PE UNDER DTAA. IN LIGHT OF THE FACTS AND LEGAL POSITION, WE HOLD THAT THE PROFIT ARISING TO THE ASSESSEE FROM SALE OF EQUIPMENT IS NOT TAXABLE IN INDIA. THIS ISSUE OF ASSESSEES APPEAL IS ALLOWED. (II).IN ASSESSEES OWN CASE ITA NO.331,332,334/KOL/2015 A.Y 2004-05 TO 2007-08 & ITA NO.328,329,330/KOL/2015 OUTOTEC GAMBH A.Y 20005-06 TO 2007-08 & ITA NO.274,275,276,277 21. AFTER HEARING RIVAL SUBMISSIONS AND CONSIDERING PAPERS ON RECORD, WE SEE NO REASON TO DEVIATE FROM THE CONSIDERED DECISION TAKEN BY THE CO-ORDINATE BENCH OF THE TRIBUNAL ON THE VERY SAME ISSUE IN THE ASSESSEE'S OWN CASE ON THE VERY SAME FACTS. THE TRIBUNAL AT PARA 19 HELD AS FOLLOWS: 19. IN VIEW OF THE ABOVE FACTS AND LEGAL POSITION, WE ARE OF THE VIEW THAT THE SALE OF EQUIPMENT IS CONCLUDED OUTSIDE INDIA BECAUSE ALL WORK RELATING TO MANUFACTURING, DESIGNING, FABRICATION ETC. OF EQUIPMENT IS DONE OUTSIDE INDIA AND SOLD TO THE ASSESSEE DIRECTLY ON EXPORT SALE BASIS. THE CONTRACT PROVIDES FOR DELIVERY OF EQUIPMENT ON FOB FOREIGN PORT OF SHIPMENT MAJORITY OF PAYMENTS I.E. 80-85% FOR EACH AND EVERY PART OF SHIPMENT BECOMES PAYABLE UPON DELIVERY OF EQUIPMENT ON FOB FOREIGN PORT OF SHIPMENT THE ABOVE PAYMENTS ARE THROUGH IRREVOCABLE LETTER OF CREDIT WHICH MAKES IT CLEAR THAT EVEN IF THE SHIP DOES NOT SAIL OR DELIVER THE GOODS TO THE DESTINATION, THE ASSESSEE RECEIVES PAYMENT OUT OF LETTER OF CREDIT GUARANTEED BY BANK UPON FOB DELIVERY. EVEN THE CUSTOMER'S INSPECTION FOR EQUIPMENT IS OUTSIDE INDIA. THE BUYERS WERE INDIAN CUSTOMERS AND UNRELATED PARTIES AND PURCHASED EQUIPMENT FROM ASSESSEE ON THEIR OWN ACCOUNT. MOREOVER, SALE WAS ON PRINCIPAL TO PRINCIPAL BASIS AND AT ARMS LENGTH. THE ASSESSEE ENTERED INTO EITHER SEPARATE CONTRACTS EACH WITH HIS OWN SCOPE OF SUPPLY OR SERVICE WITH SEPARATE CONSIDERATION OR SINGLE CONTRACT WITH SEPARATE SCOPE OF SUPPLY AND SERVICES AS WELL AS SEPARATE CONSIDERATION. THE FINDINGS OF DRP AND THAT OF THE AO THAT THE CONTRACTS ARE SINGLE CONTRACT SPLIT INTO SEPARATE PARTS IS NOT CORRECT. EVEN IF THE CONTRACT IS CONSIDERED TO BE INTEGRATED ONE, THEN ALSO THE TAXABILITY OF EACH OF THE COMPONENT HAS TO BE DETERMINED SEPARATELY BASED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJMA-HARIMA HEAVY INDUSTRIES LT., SUPRA. FURTHER, THE RELIANCE PLACED BUT D.R.P ON THE CASE OF AAR OF ALSTOM TRANSPORT SA, SUPRA TO HOLD THAT THE CONTRACT FOR INSTALLATION AND COMMISSIONING OF A PROJECT CANNOT BE SPLIT UP INTO SEPARATE PARTS AS CONSISTING OF INDEPENDENT SUPPORT OF GOODS AND FOR INSTALLATION AT THE WORK SITE. FOR REACHING TO THE ABOVE CONCLUSION AAR RELIED ON THE DECISION OF OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 19 LINDE AG OF AAR BUT THE DECISION OF AAR IN THE CASE OF LINDE AG WAS OVERRULED BUT HONBLE DELHI HIGH COURT, WHICH IS CITED SUPRA. THE ACCEPTANCE TESTS ARE MERELY IN THE NATURE OF WARRANTY PROVISIONS FOR THE REASON THAT ONLY 15% OF THE PAYMENT IS RECEIVABLE BY TATA STEELS OR THE PARTY CONCERNED CAN CLAIM LIQUIDATED DAMAGES NOT EXCEEDING 35% OF THE CONTRACT PRICE. ACCORDINGLY, THE CLAUSE OF ACCEPTANCE TESTS IS MERELY IN THE NATURE OF WARRANTY PROVISIONS. EVEN THE RELIANCE PLACED BY AO ON VARIOUS CLAUSES OF SALES OF GOODS ACT IS MISPLACED. SINCE THE HONBLE DELHI HIGH COURT IN THE CASE OF LG CABLES LTD., SUPRA AFTER CONSIDERING THE PROVISIONS OF SALES OF GOODS ACT HELD THAT SUCH ACCEPTANCE TESTS ARE MERELY IN THE NATURE OF WARRANTY PROVISIONS. EVEN THERE IS NO PE FOR SALE OF EQUIPMENT IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF HYUNDAI HEAVY INDUSTRIES, SUPRA AND IN ADDITION TO THIS, THERE IS NO CONCEPT CALLED SALE PE UNDER DTAA. IN LIGHT OF THE FACTS AND LEGAL POSITION, WE HOLD THAT THE PROFIT ARISING TO THE ASSESSEE FROM SALE OF EQUIPMENT IS NOT TAXABLE IN INDIA. THIS ISSUE OF ASSESSEES APPEAL IS ALLOWED. 10.5 THUS, RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEE COMPANY`S OWN CASE IN ASSESSMENT YEARS 2007-08 TO 2011-12, WHEREBY THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE COMPANY AS SET OUT ABOVE. THEREFORE, WE DISMISS THE APPEAL FILED BY THE REVENUE. 10.6 IN THE RESULT, THE APPEAL FILED BY THE REVENUE ( IN ITA NO.193/KOL/2016), IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 08/09/2017 . SD/ - (N. V. VASUDEVAN) SD/ - (DR. A.L.SAINI) / JUDICIAL MEMBER / ACCOUNTANT MEMBER /KOLKATA; DATED 08/09/2017 [RS, SR. PS] / COPY OF THE ORDER FORWARDED TO : 1. THE ASSESSEE- OUTOTEC GMBH, C/O. OUTOTEC INDIA PVT. LTD., 12 TH FLOOR, SOUTH CITY PINNACLE, PLOT NO.XI, BLOCK-EP, SECTOR-V, SALT LAKE. 2. THE REVENUE/DEPARTMENT- DCIT, INTERNATIONAL TAXATION-2(1), KOLKATA. 3. ( ) / THE CIT(A), :KOLKATA. 4. / CIT 5. , , / DR, ITAT, KOLKATA OUTOTEC GMBH I.T.A NO.160 & 193/KOL/2016 A.Y. 2012-13 20 TRUE COPY BY ORDER SENIOR PRIVATE SECRETARY, HEAD OF OFFICE/D.D.O, I.T.A.T, KOLKATA BENCHES, KOLKATA . 6. / GUARD FILE.