DCIT (IT) -4(3)(1), MUMBAI V. VITK0VICE MACHINERY A.S.(CRECH REPUBLIC), MUMBAI

ITA 1673/MUM/2015

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8915 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-10-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 08-06-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 20-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAMUEL DARSE SHRI JIGAR SAIYA
• Keywords: Residential status; Services rendered outside India; Deemed to accrue or arise in india; Permanent establishment; Advance ruling

Judgement Text

INCOME-TAX APPELLATE TRIBUNAL LBENCH M UMBAI , , BEFORE S/SH. RAJENDRA,ACCOUNTANT MEMBER & RAVISH SOOD, JUDICIAL MEMBER ./ITA./1673/MUM/2015, /ASSESSMENT YEAR: 2011-12 DCIT (INTL, TAXATION)-4(3)(1), ROOM NO.116, SCINDIA HOUSE, BALLARD PIER, N.M. ROAD MUMBAI-400 038. VS. M/S. VITKOVICE MACHINERY A.S. LEVEL-9, THE RUBY NORTHWEST WING SENAPATI BAPAT MARG, DADAR (W) MUMBAI-400 028. PAN:AADCV 2727 K ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI SAMUEL DARSE-CIT-DR ASSESSEE BY: SHRI JIGAR SAIYA / DATE OF HEARING: 06.09.2017 / DATE OF PRONOUNCEMENT: 27.10.2017 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) / PER RAJENDRA, AM - CHALLENGING THE DIRECTIONS,DATED 23/12/2014,OF THE DISPUTE RESOLUTION PANEL (DRP)-II, MUMBAI, THE ASSESSING OFFICER(AO)HAS FILED THE PRESENT APPE AL.ASSESSEE,A NON-RESIDENT FOREIGN COMPANY, FILED ITS RETURN OF INCOME ON 26/11/2011,DECLARING TOTAL INCOME OF RS. 55.15 LAKHS, THE AO COMPLETED THE ASSESSMENT U/S.144C(13) R.W.S.143(3)O F THE ACT,ON 21/01/2015,ASSESSED ITS INCOME AT RS. 55, 15, 418/-. 2. FIRST GROUND OF APPEAL IS ABOUT DIRECTING THE AO TO ASSESS THE ENTIRE INCOME OF THE ASSESSEE AND BEEKAY EGINEERING CORPORATION (BEC),BHILAI, AS INC OME OF AN ASSOCIATION OF PERSON (AOP). THE ASSESSEE IS INCORPORATED UNDER THE LAW OF CZECH REPUBLIC AND IS ENGAGED IN THE BUSINESS OF STEEL PRODUCTION AND SUPPLY OF HEAVY MACHINERY.IT F OCUSES ON SUPPLIES IN THE AREA OF HEAVY STEEL CASTING, FORGINGS, SHIP CRANKSHAFTS, EQUIPMENT OF S TEEL PLANTS AND ROLLING MILLS ETC. IT ENTERED INTO AN AGREEMENT WITH BEC, ON 27/09/2007,FOR PARTICIPAT ING IN THE TENDER FOR INSTALLATION OF COOLING BEDS, PLIERS AND OTHER EQUIPMENT IN THE PLATE MILL OF SAIL (SAIL) LOCATED AT BHILAI.IN 2008, SAIL AWARDED THE ABOVE-MENTIONED CONTRACT TO SET UP INSTALLATION OF COOLING PADS, PLIERS AND OTHER EQUIPMENTS TO THE CONSORTIUM OF THE ASSESSEE AND BEC.AN AGREEMENT, DATED 24/07/2008,WAS EXECUTED.DURING THE YEAR UNDER APPEA L THE ASSESSEE RECEIVED INCOME FROM THE BUSINESS FLOWING FROM THE MOU ENTERED INTO WITH SAI L DURING THE ASSESSMENT PROCEEDINGS,THE 1673/M/15 M/S.VITKOVICE HEAVY MACHINERY A.S. 2 AO HELD THAT THE CONSORTIUM BETWEEN THE ASSESSEE AN D BEC HAD TO BE TAXED AS AN AOP, THAT THE CONTRACT ENTERED BETWEEN THE CONSORTIUM AND STEEL A UTHORITY OF INDIA LTD WAS A COMPOSITE CONTRACT, THAT THE CONTRACT HAD BEEN ARTIFICIALLY D IVIDED INTO PARTS SO AS TO AVOID TAXABILITY, THAT INCOME FROM OFFSHORE SUPPLIES AND PROVISION OF OFFS HORE SERVICES WERE TAXABLE IN INDIA. HE RELIED UPON THE CASES OF LINDE AG (AAR 962/2010), ROXAR MA XIMUM RESERVOIR PERFORMANCE WLL (AAR) AND ALSTOM TRANSPORT SA (AAR 958 OF 2010).HE INVOKED THE PROVISIONS OF RULE 10 (I) READ WITH RULE (10) (III) OF THE INCOME TAX RULES, 1962 (RULES) TO ASSESS THE INCOME OF THE ASSESSEE. 3. AGGRIEVED BY THE ADDITIONS PROPOSED IN THE DRAFT AS SESSMENT ORDER, THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP AND MADE DETAILED SUBMISSIONS. AFTER CONSIDERING THE DRAFT ASSESSMENT ORDER AND THE OBJECTIONS OF THE ASSESSEE,THE DRP DELIBERATED UPON THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF LINDE AG AND REFERRED TO THE I NSTRUCTION NUMBER 1829, DATED 21/09/1989, ISSUED BY THE CBDT.WITH REGARD TO TAXABILITY OF INC OME IN INDIA,IT HELD THAT PRINCIPLE OF APPORTIONMENT OF INCOME ON THE BASIS OF TERRITORIAL NEXUS WAS A WELL ACCEPTED PRINCIPLE, THAT EXPLANATION 1 (A) TO SECTION 9 (1) (I) OF THE ACT S PECIFIED THAT ONLY THAT PART OF INCOME WHICH WAS ATTRIBUTABLE TO OPERATIONS IN INDIA WOULD BE DEEMED TO ACCRUE OR ARISE IN INDIA WHICH HAD TERRITORIAL NEXUS, THAT THE ASSESSEES COULD NOT BE LIABLE FOR THE PART OF THEIR INCOME THAT WOULD ARISE FROM OPERATIONS CONDUCTED OUTSIDE INDIA, THAT IN SUCH CASES THE INCOME FROM THE VENTURE WOULD HAVE TO BE APPROPRIATELY APPORTIONED,THAT MER ELY BECAUSE A PROJECT WAS A TURNKEY PROJECT WOULD NOT NECESSARILY IMPLY THAT FOR PURPOSE OF TAX ABILITY THE ENTIRE CONTRACT HAD TO BE CONSIDERED AS AN INTEGRATED ONE,THAT WHERE THE EQUIPMENT AND M ATERIAL WAS MANUFACTURED AND PROCURED OUTSIDE INDIA THE INCOME ATTRIBUTABLE TO SUPPLY THE REOF WOULD NOT BE BROUGHT TO TAX IF IT WAS FOUND THAT THE SAID INCOME THEREFROM AROSE THROUGH OR FROM A BUSINESS CONNECTION IN INDIA, THAT IT COULD NOT BE CONCLUDED THAT CONTRACT PROVIDED A BUS INESS CONNECTION IN INDIA, THAT THE OFFSHORE SUPPLIES COULD NOT BE BROUGHT TO TAX UNDER THE PROV ISIONS OF THE ACT. THE DRP REFERRED TO THE CASES OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES (288 ITR 408) AND HYUNDAI HEAVY INDUSTRIES (291 ITR 482) OF THE HONBLE SUPREME COURT AND STAT ED THAT FACTS OF THE CASE OF CONSIDERATION WERE SIMILAR TO THE FACTS ISHIKAWAJIMA (SUPRA) WHER EIN THE HONBLE APEX COURT HAD HELD THAT OFFSHORE SUPPLIES WERE NOT TAXABLE IN INDIA,THAT IT WAS NOT HAVING A BUSINESS CONNECTION IN INDIA, THAT THE OFFSHORE SUPPLIES COULD NOT BE TAXABLE IN INDIA. 1673/M/15 M/S.VITKOVICE HEAVY MACHINERY A.S. 3 4 .BEFORE US, THE DEPARTMENTAL REPRESENTATIVE (DR) ST ATED THAT THE MATTER COULD BE DECIDED ON MERITS.THE AUTHORISED REPRESENTATIVE(AR)CONTENDED T HAT THE ASSESSEE AND BEC HAD AGREED TO COOPERATE ON EXCLUSIVE BASIS AS THE CONSORTIUM FOR BIDDING,THAT THE AIM WAS TO PROCURE THE CONTRACT FOR THE PROJECT, THAT EACH PARTY WAS FULLY RESPONSIBLE AND LIABLE FOR ITS RESPECTIVE SCOPE OF WORK INCLUDING THE NECESSARY TECHNICAL AND PERFORMA NCE GUARANTEES(ARTICLE2(F) OF THE MEMORAN - DUM),THAT SEPARATE SCOPE OF WORK WAS IDENTIFIED BY THE ASSESSEE AND BEC, THAT BOTH THE MEMBERS OF THE CONSORTIUM WERE INDIVIDUALLY RESPONSIBLE FOR THEIR SCOPE OF WORK, THAT SEPARATE CONTRACT FEE WAS IDENTIFIED FOR EACH PARTY, THAT IN THE EVEN T OF ANY DEFAULT LIQUIDATED DAMAGES WAS TO BE DEDUCTED FROM THE CONTRACT PRICE OF DEFAULTING PART Y ONLY AND NOT FROM THE TOTAL CONTRACT PRICE, THAT THE MAN AND MATERIAL USED FOR ANY WORK WERE UN DER THE RISK AND CONTROL OF THE RESPECTIVE CONSORTIUM MEMBER, THAT THE CONTROL AND MANAGEMENT OF THE CONSORTIUM WAS NOT UNIFIED, THAT THE COMMON MANAGEMENT WAS ONLY FOR THE INTERSECT COORDI NATION BETWEEN THE MEMBERS FOR ADMINISTRATIVE CONVENIENCE, THAT THE SALE OF GOODS WAS ON FOB BASIS, THAT THE PROPERTY AND RISK IN THE GOODS WAS TRANSFERRED AT A PLACE OUTSIDE IND IA, THAT SAME COULD NOT BE TAXED IN INDIA. 5 .WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL BEFORE US.WE FIND THAT THE AO HAD HELD THAT THE ACTUAL TAXABLE ENTITY IN THE CASE UNDER CONSIDERATION WAS AN AOP COMPRISING OF THE ASSESSEE AND BEC-A RESIDENT OF INDIA,THAT NO BE NEFIT OF INDIA CZECH REPUBLIC COULD BE ALLOWED TO THE AOP,THAT SERVICE AND SUPPLY CONTRACT S WERE INDIVISIBLE,THAT THE REVENUES EMANATING FROM THE OFFSHORE SUPPLY CONTRACT WERE LI ABLE TO TAXED IN INDIA IN THE HANDS OF THE AOP,THAT HE HAD RELIED UPON THE RULINGS OF THE AUTH ORITY FOR ADVANCE RULINGS, THAT THE DRP FOUND THAT THE HONBLE DELHI HIGH COURT HAD REVERSE D THE RULING OF THE AAR IN THE CASE OF LINDE AG (SUPRA). WE FIND THAT THERE WAS A CLEAR DEMARCATION IN THE W ORK AND COST BETWEEN THE CONSORTIUM MEMBERS, THAT THE ASSESSEE WAS RESPONSIBLE FOR DESI GN, ENGINEERING, SUPPLY,COMMISSIONING,GUAR - ANTEES,SUPERVISION SERVICES OF ALL THE MAIN AND CRI TICAL OF EQUIPMENTS, THAT BEC WAS RESPONSIBLE FOR SUPPLY OF ALL INDIGENOUS EQUIPMENT AND AUXILIAR IES,EDUCATION OF SITE, CIVIL AND ERECTION WORK AND PROVIDING ASSISTANCE DURING COMMISSIONING AND P ERFORMANCE TESTS THAT SITE,THAT EACH MEMBER WAS INCURRING EXPENDITURE ONLY IN ITS SPECIFIED ARE A OF WORK,THAT BOTH THE MEMBERS OF CONSORTIUM HAD TO PROVIDE BANK GUARANTEE TO STEEL AUTHORITY OF INDIA LTD IN THE SAME CURRENCY OR CURRENCIES 1673/M/15 M/S.VITKOVICE HEAVY MACHINERY A.S. 4 FOR A PERIOD OF TWELVE MONTHS FROM THE DATE OF RELE ASE OF THE PAYMENT AGAINST COMMISSIONING CHARGES,THAT THE ASSESSEE AND BEC WERE RAISING SEPA RATE INVOICES FOR THE PIECE OF WORK DONE BY THEM (CLAUSE 1.3 OF APPENDIX-3, PAGE 204 OF THE PB) ,THAT STEEL AUTHORITY OF INDIA LTD WAS MAKING SEPARATE PAYMENTS DIRECTLY TO THE ASSESSEE AND BEC (PAGE 318 OF THE PB), THAT BOTH THE MEMBERS OF THE CONSORTIUM WERE EARNING PROFITS AND WERE INC URRING LOSSES BASED ON PERFORMANCE OF THE CONTRACT FALLING WITHIN THEIR RESPECTIVE SCOPE OF WORK. 5.1. WITH REGARD TO OFFSHORE SUPPLY OF DESIGN AND ENGINE ERING AND OFFSHORE SUPPLY OF PLANT AND EQUIPMENT,WE WOULD LIKE TO STATE THAT THE EQUIPMENT AND MATERIAL WAS MANUFACTURED AND PROCURED OUTSIDE INDIA AND THEREFORE THE INCOME ATT RIBUTABLE TO THE SUPPLY THEREOF COULD ONLY BE BROUGHT TO TAX IF IT WAS FOUND THAT THE SAID INCOME THEREFROM AROSE THROUGH OR FROM A BUSINESS CONNECTION IN INDIA. 5.2. HERE,WE WOULD LIKE TO REFER TO THE JUDGMENT OF ISHI KAWAJIMA(SUPRA) OF THE HONBLE APEX COURT.FACT OF THE MATTER WERE THAT THE ASSESSEE, A NON-RESIDENT COMPANY INCORPORATED IN JAPAN, ALONG WITH FIVE OTHER ENTERPRISES FORMED A CONSORTI UM.THE CONSORTIUM WAS AWARDED BY PETRONET A TURNKEY PROJECT FOR SETTING UP A LIQUEFIED NATURA L GAS (LNG) RECEIVING, STORAGE AND REGASIFICA - TION FACILITY IN GUJARAT.THE CONTRACT SPECIFIED THE ROLE AND RESPONSIBILITY OF EACH MEMBER OF THE CONSORTIUM AND THE CONSIDERATION TO BE PAID SEPARAT ELY FOR THE RESPECTIVE WORK OF EACH MEMBER. THE APPELLANT WAS TO DEVELOP,DESIGN,ENGINEER, PROCU RE EQUIPMENT, MATERIALS AND SUPPLIES TO ERECT AND CONSTRUCT STORAGE TANKS INCLUDING MARINE FACILI TY (JETTY AND ISLAND BREAKWATER) FOR TRANSMIT - SSION AND SUPPLY OF LNG TO PURCHASERS, TO TEST AND COMMISSION THE FACILITIES, ETC. THE CONTRACT INVOLVED : (I) OFFSHORE SUPPLY, (II) OFFSHORE SERVI CES, (III) ONSHORE SUPPLY, (IV) ONSHORE SERVICES AND (V) CONSTRUCTION AND ERECTION. THE PRICE FOR OF FSHORE SUPPLY AND OFFSHORE SERVICES WAS PAYABLE IN US DOLLARS, THAT FOR ONSHORE SUPPLY AND ONSHORE SERVICES AND CONSTRUCTION AND ERECTION PARTLY IN US DOLLARS AND PARTLY IN INDIAN RUPEES. THE PAYMENT FOR OFFSHORE SUPPLY OF EQUIPMENT AND MATERIALS SUPPLIED FROM OUTSIDE INDIA WAS RECEIVED BY THE APPELLANT BY CREDIT TO A BANK ACCOUNT IN TOKYO AND THE PROPERTY IN THE GOODS PASSED TO PETRONET ON THE HIGH SEAS OUTSIDE INDIA.THOUGH THE APPELLANT UNLOADED THE GOODS, CLEA RED THEM FROM CUSTOMS AND TRANSPORTED THEM TO THE SITE, IT WAS FOR AND ON BEHALF OF PETRO NET AND THE EXPENDITURE INCLUDING THE CUSTOMS DUTY WAS REIMBURSED TO IT. THE PRICE OF OFFSHORE SE RVICES FOR DESIGN AND ENGINEERING INCLUDING DETAILED ENGINEERING IN RELATION TO THE SUPPLIES, S ERVICES AND CONSTRUCTION AND ERECTION AND THE COST OF ANY OTHER SERVICES TO BE RENDERED FROM OUTS IDE INDIA, WAS ALSO PAID IN US DOLLARS IN 1673/M/15 M/S.VITKOVICE HEAVY MACHINERY A.S. 5 TOKYO. ON THESE FACTS THE APPELLANT APPLIED TO THE AUTHORITY FOR ADVANCE RULINGS (INCOME-TAX) FOR A RULING ON THE FOLLOWING POINTS : (A) WHETHER THE AMOUNTS RECEIVED/RECEIVABLE BY THE APPELLANT FROM PETRONET FOR OFFSHORE SUPPLY OF EQUI PMENT, MATERIALS, ETC., WERE LIABLE TO TAX IN INDIA UNDER THE PROVISIONS OF THE ACT AND THE DOUBL E TAXATION AVOIDANCE CONVENTION BETWEEN INDIA AND JAPAN ;(B) WHETHER THE AMOUNTS RECEIVED/R ECEIVABLE FROM PETRONET FOR OFFSHORE SERVICES WERE CHARGEABLE TO TAX IN INDIA UNDER THE ACT AND T HE CONVENTION ; AND (C) WOULD THE APPELLANT BE ABLE TO CLAIM DEDUCTION FOR EXPENSES INCURRED IN COMPUTING THE INCOME FROM OFFSHORE SERVICES.THE AUTHORITY RULED (I) THAT, THOUGH PROPE RTY IN THE GOODS PASSED TO PETRONET WHILE THE GOODS WERE ON THE HIGH SEAS, AND IN SO FAR AS THE A CTIVITIES OF THE APPELLANT FOR TAKING DELIVERY OF THE GOODS FROM THE SHIP, PAYMENT OF CUSTOMS DUTY AN D TRANSPORTATION OF THE GOODS TO THE SITE WERE CONCERNED, THE APPLICANT COULD BE SAID TO BE A CTING AS AN AGENT OF PETRONET, THESE FACTS DID NOT MILITATE AGAINST THE PROPERTY IN THE GOODS PASS ING TO THE APPELLANT.IN CONNECTION WITH THE OFFSHORE SUPPLY, CERTAIN OPERATIONS WERE INEXTRICAB LY INTERLINKED IN INDIA, SUCH AS, SIGNING OF THE CONTRACT IN INDIA WHICH IMPOSED LIABILITY ON THE AP PELLANT TO PROCURE EQUIPMENT AND MACHINERY IN INDIA AND RECEIVING, UNLOADING, STORING AND TRANSPO RTING, PAYING DEMURRAGE AND OTHER INCIDENTAL CHARGES ON ACCOUNT OF DELAY IN CLEARANCE.THE PRICE OF THE GOODS COVERED NOT ONLY THEIR PRICE BUT ALSO OF ALL THESE OPERATIONS WHICH WERE CARRIED OUT IN INDIA AND FROM WHICH INCOME ACCRUED TO THE APPELLANT.THEREFORE, INCOME ACCRUED TO THE APPE LLANT FROM THE OFFSHORE SUPPLY THROUGH BUSINESS CONNECTION IN INDIA AND SOME OPERATIONS OF THE BUSINESS WERE CARRIED OUT IN INDIA. PROFITS WERE DEEMED TO ACCRUE/ ARISE TO THE APPLICA NT IN INDIA FROM OFFSHORE SUPPLY OF EQUIPMENT/MACHINERY BUT THE PROFITS DEEMED TO ACCRU E/ARISE IN INDIA WOULD BE ONLY SUCH PART OF THE PROFITS AS WAS REASONABLY ATTRIBUTABLE TO THE O PERATIONS CARRIED OUT IN INDIA. (II) THAT HAVING REGARD TO ARTICLE 7(1) OF THE CONVENTION FOR AVOIDA NCE OF DOUBLE TAXATION AND FISCAL EVASION WITH RESPECT TO TAXES ON INCOME BETWEEN INDIA AND J APAN READ WITH PARAGRAPH 6 OF THE PROTOCOL SUPPLY OF EQUIPMENT OR MACHINERY (SALE OF WHICH WAS COMPLETED ABROAD, THE ORDER HAVING BEEN PLACED DIRECTLY BY THE OVERSEAS OFFICE OF THE ENTER PRISE) WOULD BE WITHIN THE MEANING OF THE PHRASE DIRECTLY OR INDIRECTLY ATTRIBUTABLE TO THAT PERMANENT ESTABLISHMENT AND, THEREFORE, SO MUCH OF THE AMOUNT RECEIVED OR RECEIVABLE BY THE AP PELLANT AS WAS DIRECTLY OR INDIRECTLY ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT AS POST ULATED IN PARAGRAPH 6 OF THE PROTOCOL WOULD BE TAXABLE IN INDIA. THE PRICE OF THE OFFSHORE SERVICE S WOULD BE DEEMED TO ACCRUE OR ARISE U/S. 9(1) (VII)OF THE ACT AND INASMUCH AS FEES FOR TECHNICAL SERVICES WERE SPECIFICALLY PROVIDED IN ARTICLE 1673/M/15 M/S.VITKOVICE HEAVY MACHINERY A.S. 6 12 OF THE CONVENTION, THEY WOULD NOT FALL UNDER ART ICLE 7. THEREFORE, THE PRICE OF THE OFFSHORE SERVICES WAS TAXABLE IN INDIA UNDER THE ACT AS WELL AS THE CONVENTION. (III) THAT, HOWEVER, IN VIEW OF SECTION 115A(1)(B)(B) OF THE ACT AND ARTICL E 12(2) OF THE CONVENTION, TAX WAS PAYABLE AT THE FIXED RATE OF 20% OF THE GROSS AMOUNT OF FEES F OR TECHNICAL SERVICES AND THE APPLICANT WOULD NOT BE ABLE TO CLAIM ANY DEDUCTION FROM THE GROSS A MOUNT. THE APPELLANT PREFERRED AN APPEAL BY WAY OF SPECIAL LEAVE TO THE SUPREME COURT.DECIDING THE MATTER THE HONBLE COURT HELD AS UNDER : ..SECTION 9 OF THE INCOME-TAX ACT, 1961, RAISES A LEGAL FICTION ; BUT, HAVING REGARD TO THE CONTEXTUAL INTERPRETATION AND IN VIEW OF THE FACT T HAT THE COURT IS DEALING WITH A TAXATION STATUTE, THE LEGAL FICTION MUST BE CONSTRUED HAVING REGARD T O THE OBJECT IT SEEKS TO ACHIEVE. THE LEGAL FICTION CREATED UNDER SECTION 9 MUST ALSO BE READ H AVING REGARD TO THE OTHER PROVISIONS THEREOF. (II) THAT SINCE THE APPELLANT CARRIED ON BUSINESS IN INDIA THROUGH A PERMANENT ESTABLISHMENT IT WOULD CLEARLY FALL OUT OF THE APPLICABILITY OF ARTI CLE 12(5) OF THE CONVENTION AND FALL WITHIN THE AMBIT OF ARTICLE 7. IN THE PROTOCOL TO THE CONVENTI ON IT WAS STATED THAT THE TERM DIRECTLY OR INDIRECTLY ATTRIBUTABLE INDICATED THE INCOME THAT SHOULD BE REGARDED ON THE BASIS OF THE EXTENT APPROPRIATE TO THE PART PLAYED BY THE PERMANENT EST ABLISHMENT IN THOSE TRANSACTIONS. THE PERMANENT ESTABLISHMENT IN THIS CASE HAD NO ROLE TO PLAY IN THE TRANSACTION OF OFFSHORE SUPPLY, SOUGHT TO BE TAXED, SINCE THE TRANSACTION TOOK PLAC E ABROAD. (III) THAT THE SECOND SENTENCE OF ARTICLE 7(1) WHIC H ALLOWED THE STATE OF THE PERMANENT ESTABLISHMENT TO TAX BUSINESS PROFITS, BUT ONLY SO MUCH OF THEM AS WAS ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT EXCLUDED THE APPLICABILITY OF THE PRINCIPLE THAT WHERE THERE WAS A PERMANENT ESTABLISHMENT, THE STATE OF THE PERMANENT ESTABLISHMENT SHOULD BE ALLOWED TO TAX ALL INCOME DERIVED BY THE ENTERPRISE FROM SOURCES IN TH E STATE IRRESPECTIVE OF WHETHER OR NOT SUCH INCOME WAS ECONOMICALLY CONNECTED WITH THE PERMANEN T ESTABLISHMENT. THE STATE OF THE PERMANENT ESTABLISHMENT WAS ALLOWED TO TAX ONLY THO SE PROFITS WHICH WERE ECONOMICALLY ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT, I.E., THOSE WHICH RESULTED FROM THE PERMANENT ESTABLISHMENTS ACTIVITIES, WHICH WERE ECONOMICALLY FROM THE BUSINESS CARRIED ON BY THE PERMANENT ESTABLISHMENT. IN THIS CASE, THE PERMANEN T ESTABLISHMENTS NON-INVOLVEMENT IN THE TRANSACTION OF OFFSHORE SUPPLY, EXCLUDED IT FROM BE ING A PART OF THE CAUSE OF THE INCOME ITSELF AND THUS THERE WAS NO BUSINESS CONNECTION. (IV) THAT FOR ATTRACTING THE TAX THERE HAD TO BE SO ME ACTIVITIES THROUGH THE PERMANENT ESTABLISHMENT. IF INCOME AROSE WITHOUT ANY ACTIVITY OF THE PERMANENT ESTABLISHMENT, EVEN UNDER THE CONVENTION THE TAXATION LIABILITY IN RESPECT OF OVERSEAS SERVICES WOULD NOT ARISE IN INDIA. SECTION 9 SPELLED OUT THE EXTENT TO WHICH THE INCOM E OF A NON-RESIDENT WOULD BE LIABLE TO TAX IN INDIA. SECTION 9 HAD A DIRECT TERRITORIAL NEXUS. RE LIEF UNDER A DOUBLE TAXATION AVOIDANCE TREATY, HAVING REGARD TO THE PROVISIONS CONTAINED IN SECTIO N 90(2), WOULD ARISE ONLY IN THE EVENT TAXABLE INCOME OF THE ASSESSEE AROSE IN ONE CONTRACTING STA TE ON THE BASIS OF ACCRUAL OF INCOME IN ANOTHER CONTRACTING STATE ON THE BASIS OF RESIDENCE . SO FAR AS ACCRUAL OF INCOME IN INDIA WAS CONCERNED TAXABILITY MUST BE READ IN TERMS OF SECTI ON 4(2) READ WITH SECTION 9, WHERE-UPON THE QUESTION OF SEEKING ASSESSMENT OF SUCH INCOME IN IN DIA ON THE BASIS OF THE DOUBLE TAXATION TREATY WOULD ARISE. PARAGRAPH 6 OF THE PROTOCOL TO THE CONVENTION WAS NOT APPLICABLE, BECAUSE, FOR THE PROFITS TO BE ATTRIBUTABLE DIRECTLY OR IND IRECTLY, THE PERMANENT ESTABLISHMENT MUST BE INVOLVED IN THE ACTIVITY GIVING RISE TO THE PROFITS . (V) THAT THE FACT THAT THE CONTRACT WAS SIGNED IN I NDIA WAS OF NO MATERIAL CONSEQUENCE, SINCE ALL ACTIVITIES IN CONNECTION WITH THE OFFSHORE SUPPLY W ERE OUTSIDE INDIA, AND THEREFORE INCOME COULD NOT BE DEEMED TO ACCRUE OR ARISE IN THE COUNTRY. 1673/M/15 M/S.VITKOVICE HEAVY MACHINERY A.S. 7 (VI) THAT WHERE DIFFERENT SEVERABLE PARTS OF A COMP OSITE CONTRACT WERE PERFORMED IN DIFFERENT PLACES, AS IN THIS CASE, THE PRINCIPLE OF APPORTION MENT COULD BE APPLIED TO DETERMINE WHICH FISCAL JURISDICTION COULD TAX THAT PARTICULAR PART OF THE TRANSACTION. THIS PRINCIPLE HELPED DETERMINE WHERE THE TERRITORIAL JURISDICTION OF A PARTICULAR STATE LAY AND TO DETERMINE ITS CAPACITY TO TAX AN EVENT. APPLYING IT TO COMPOSITE TRANSACTIONS WHICH HAD SOME OPERATIONS IN ONE TERRITORY AND SOME IN THE OTHER, WAS ESSENTIAL TO DETERMINE THE TAX-AB ILITY OF VARIOUS OPERATIONS. THEREFORE, THE CONCEPTS OF PROFITS OF BUSINESS CONNECTION AND PERM ANENT ESTABLISHMENT SHOULD NOT BE MIXED UP. WHEREAS BUSINESS CONNECTION WAS RELEVANT FOR THE PU RPOSE OF APPLICATION OF SECTION 9, THE CONCEPT OF PERMANENT ESTABLISHMENT WAS RELEVANT FOR ASSESSI NG THE INCOME OF A NON-RESIDENT UNDER THE CONVENTION. (VII) THAT IN THIS CASE THE ENTIRE TRANSACTION WAS COMPLETED ON THE HIGH SEAS AND, THEREFORE, THE PROFITS ON SALE DID NOT ARISE IN INDIA. ONCE EXCLUD ED FROM THE SCOPE OF TAXATION UNDER THE INCOME- TAX ACT APPLICATION OF THE DOUBLE TAXATION AVOIDANC E TREATY WOULD NOT ARISE. (VIII) THAT, IN RELATION TO OFFSHORE SERVICES, SECT ION 9(1)(VII)(C) REQUIRED TWO CONDITIONS TO BE MET : TO BE TAXABLE IN INDIA THE SERVICES WHICH WERE THE SOURCE OF THE INCOME SOUGHT TO BE TAXED HAD TO BE RENDERED IN INDIA AS WELL AS UTILIZED IN INDIA. IN THIS CASE, BOTH THESE CONDITIONS WERE NOT SATISFIED SIMULTANEOUSLY, THEREBY EXCLUDING THE INC OME FROM THE AMBIT OF TAXATION IN INDIA. THUS FOR A NON-RESIDENT TO BE TAXED ON INCOME FOR SERVIC ES, SUCH A SERVICE HAD TO BE RENDERED WITHIN INDIA, AND HAD TO BE PART OF A BUSINESS OR PROFESSI ON CARRIED ON BY SUCH PERSON IN INDIA. THE APPELLANTS HAD PROVIDED SERVICES TO PERSONS RESIDEN T IN INDIA, AND THOUGH THEY HAD BEEN USED HERE, THEY HAD NOT BEEN RENDERED IN INDIA. (IX) THAT WHATEVER WAS PAYABLE BY A RESIDENT TO A N ON-RESIDENT BY WAY OF TECHNICAL FEES WOULD NOT ALWAYS COME WITHIN THE PURVIEW OF SECTION 9(1)(VII) . IT MUST HAVE SUFFICIENT TERRITORIAL NEXUS WITH INDIA SO AS TO FURNISH A BASIS FOR IMPOSITION OF TA X. (X) THAT EVEN IN RELATION TO SUCH INCOME, VIZ., INC OME FROM OFFSHORE SERVICES, THE PROVISIONS OF ARTICLE 7 OF THE CONVENTION WOULD BE APPLICABLE, AS SERVICES RENDERED OUTSIDE INDIA WOULD HAVE NOTHING TO DO WITH THE PERMANENT ESTABLISHMENT IN I NDIA. THUS, IF ANY SERVICES HAD BEEN RENDERED BY THE HEAD OFFICE OF THE APPELLANT OUTSIDE INDIA, ONLY BECAUSE THEY WERE CONNECTED WITH THE PERMANENT ESTABLISHMENT, EVEN IN RELATION THERETO T HE PRINCIPLE OF APPORTIONMENT WOULD APPLY. (XI) THERE EXISTS A DISTINCTION BETWEEN A BUSINESS CONNECTION AND A PERMANENT ESTABLISHMENT. THE PERMANENT ESTABLISHMENT CANNOT BE EQUATED TO A BUSI NESS CONNECTION, SINCE THE FORMER IS FOR THE PURPOSE OF ASSESSMENT OF INCOME OF A NON-RESIDENT U NDER A DOUBLE TAXATION AVOIDANCE AGREEMENT, AND THE LATTER IS FOR THE APPLICATION OF SECTION 9 OF THE INCOME-TAX ACT. CLAUSE (A) OF EXPLANATION 1 TO SECTION 9(1)(I) STAT ES THAT ONLY SUCH PART OF THE INCOME AS IS ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT IN INDIA , ARE TAXABLE IN INDIA. THE EXISTENCE OF A PERMANENT ESTABLISHMENT WOULD NOT CONSTITUTE SUFFIC IENT BUSINESS CONNECTION, AND THE PERMANENT ESTABLISHMENT WOULD BE THE TAXABLE ENTITY . THE FISCAL JURISDICTION OF A COUNTRY WOULD NOT EXTEND TO TAXING THE ENTIRE INCOME ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT. THERE EXISTS A DIFFERENCE BETWEEN THE EXISTENCE OF A BUSINESS CONNECTION AND THE INCOME ACCRUING OR ARISING OUT OF SUCH BUSINESS CONNECTION. IN CONSTRUING A CONTRACT, THE TERMS AND CONDITIONS THEREOF ARE TO BE READ AS A WHOLE. A CONTRACT MUST BE CONSTRUED KEEPING IN VIEW THE INTENTION OF THE PARTIES. NO DOUBT, THE APPLICABILITY OF THE TAX LAWS WOULD DEPEND UPON THE NATURE OF THE CONTRA CT, BUT THE SAME SHOULD NOT BE CONSTRUED KEEPING IN VIEW THE TAXING PROVISIONS. THE CONCEPTS OF PROFITS OF BUSINESS CONNECTION AND PERMANENT ESTABLISHMENT SHOULD NOT BE MIXED UP. WHEREAS BUSINESS CONNECTION IS RELEVANT FOR THE PURPOSE OF APPLICATION OF SECTION 9, THE 1673/M/15 M/S.VITKOVICE HEAVY MACHINERY A.S. 8 CONCEPT OF PERMANENT ESTABLISHMENT IS RELEVANT FOR ASSESSING THE INCOME OF A NON-RESIDENT UNDER THE DOUBLE TAXATION AVOIDANCE AGREEMENT. 5.3. WE WOULD ALSO LIKE TO DISCUSS THE INDIVISIBILITY OF THE CONTRACT.THE CONTRACT ENTERED INTO BY THE CONSORTIUM WITH THE SAIL PROVIDED FOR CONSIDERA TION TO BE PAID MEMBER WISE AS WELL AS COMPONENT WISE, THAT THE SEGREGATION OF THE CONTRAC T REVENUE BETWEEN THE MEMBERS OF THE CONSORTIUM AND INTO OFFSHORE AND ONSHORE ACTIVITIES WAS MADE AN AGREED-UPON BETWEEN THE ASSESSEE BEC AND SAIL AT THE STAYS OF AWARDING THE CONTRACT AND NOT AFTER AWARDING THE CONTRACT. THEREFORE,IN OUR OPINION THE CONTRACT WAS CLEARLY D IVISIBLE.THE CONTRACTORS HAD TO SUBMIT COMPLETE AND CORRECT SEPARATE INVOICES AND DOCUMENT S FOR SUPPLIES AND SERVICES BOTH FOR PAYMENTS TO BE MADE IN FOREIGN CURRENCY AND INDIAN CURRENCIES.THUS,THE FACTS OF THE CASE UNDER APPEAL AND OF ISHIKAWAJIMA(SUPRA)ARE ALMOST SIMILAR AS OBSERVED BY THE DRP. WE HAVE TAKEN NOTE OF THE FACT THAT THE BACKBONE OF THE ORDER OF THE AO WAS THE RULING OF AAR IN THE CASE OF LINDE AG(SUPRA).AS THE HONBLE DELHI HIGH COURT HAS REVERSED THE RULING,SO, THE BASIS OF THE ORDER WOULD NOT SURVIVE.ON THE OTHER H AND BOTH THE CASES,HUNDAI AND ISHIKAWAJIMA (SUPRA),RELIED UPON BY THE DRP ARE IN FAVOUR OF THE ASSESSEE. CONSIDERING THE ABOVE,WE ARE OF THE OPINION THAT TH E ORDER OF THE DRP DOES NOT SUFFER FROM ANY LEGAL OR FACTUAL INFIRMITY.SO,UPHOLDING THE SAME,WE DISMISS ALL THE GROUNDS RAISED BY THE AO. AS A RESULT,APPEAL FILED BY THE AO STANDS DISMISSED. . PRONOUNCED IN OPEN COURT ON 27 TH OCTOBER, 2017 . 27 TH , 2017 SD/- SD/- /RAVISH SOOD) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 27.10.2017. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 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.