Raytheon Company, Gurgaon V. ADIT, New Delhi

ITA 3073/DEL/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3779 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 11 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Assessment Year: 1999-2000
• Appeal Filed On: 02-07-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Gift; Business income; Depreciation; Double taxation relief; Opportunity of being heard; Deemed to accrue or arise in india; Permanent establishment; Advance ruling; Bad and doubtful debts; Competent authority; Reason to believe; Reassessment proceedings
• Section: 143(3); 5(2); 234B; 143(1); 147; 148; 154; 139

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F DELHI BEFORE SHRI R.P. TOLANI AND SHRI K.G. BANSAL ITA NO. 3073(DEL)/2009 ASSESSMENT YEAR: 1999-00 RAYTHEON COMPANY, DEPUTY DIRECTOR OF INCOME C/O S.R. BATLIBOI & CO, VS. TAX, CIRCLE 2(1), INTERNATIONAL 8 TH FLOOR, GOLF VIEW CORPORATE, T AXATION, NEW DELHI. TWER-B, SECTOR-42, SECTOR RD., GURGAON, HARYANA. (APPELLANT) (RESPONDENT) APPELLANT BY : S/SHRI A.J.MAJUMDAR, ADVOCAT E, K.GANESH RAJ, VIKRAM YADAV, VINAY MANGAL, & MS. GEETA KHANNA, CHARTERED ACCOUNTANTS. RESPONDENT BY: SHR I ASHWANI KUMAR MAHAJAN, CIT,DR ORDER PER K.G. BANSAL : AM THIS APPEAL EMANATES FROM THE ORDER OF CIT(APPE ALS)-XXIX, NEW DELHI, PASSED ON 30.03.2009 IN APPEAL NOS. 405/0 6-07, 216/06-07 AND 43/08-09. THE CORRESPONDING ASSESSMENT ORDER WAS FRAMED BY THE DEPUTY DIRECTOR OF INCOME-TAX, CIRCLE 2(1), INTERNATIONAL TAXATION, NEW DELHI (THE AO), ON 27.12.2006, UNDER THE PROVISIONS OF S ECTION 147 READ WITH SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (THE A CT FOR SHORT). THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS IN THE APPEAL:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XXIX, NEW DELH I:- ITA NO. 3073(DEL)/2009 2 VALIDITY OF REOPENING 1. ERRED IN HOLDING THAT THE REASONS AS RECORDED BY THE LD. DEPUTY DIRECTOR OR INCOME-TAX, CIRCLE 2(1), INTER NATIONAL TAXATION, NEW DELHI (ASSESSING OFFICER), WHILE INITIATING PROCEEDINGS UNDER SECTION 147 OF THE INCOME-TAX ACT, 1961 (ACT) CONSTITUTED SUFFICIENT REASONS FOR ARRI VING AT A BELIEF THAT INCOME OF THE APPELLANT HAS ESCAPED ASSESS MENT DURING THE ASSESSMENT YEAR UNDER CONSIDERATION. 2. ERRED IN HOLDING THAT THE ASSESSING OFFICER HA S RIGHTLY REJECTED THE OBJECTIONS FILED BY THE APPELLANT IN R ESPONSE TO THE NOTICE ISSUED UNDER SECTION 148 OF THE ACT. TREATING SEPARATE SUPPLY AND SERVICE CONTRACTS ON INDIVISIBLE ONE CONTRACT 3. ERRED IN HOLDING THAT THE TWO SEPARATE CONTRA CTS FOR SUPPLY OF EQUIPMENTS AND FOR INSTALLATION SERVICES AND TRAINING ENTERED INTO BY THE APPELLANT AND AIRPORT AUTHORI TY OF INDIA (AAI) REPRESENTS A SINGLE INDIVISIBLE TURNKEY C ONTRACT FOR SERVICES, INSTALLATION, COMMISSIONING AND SUPPLY. 4. ERRED IN HOLDING THAT THE ASSESSING OFFICER W AS CORRECT IN ARBITRARILY BIFURCATING REVENUE EARNED BY THE APPELLANT DURING THE PREVIOUS YEAR, BETWEEN INCOME FROM S UPPLY OF EQUIPMENT AND ROYALTY IN THE RATIO OF 30 PER CENT A ND 70 PER CENT, RESPECTIVELY. 5. ERRED IN HOLDING THAT THE ASSESSING OFFICER WAS CORRECT IN HOLDING THAT THE MAJOR PORTION (70 PER CENT) OF THE CONTRACT PRICE FOR OVERSEAS SUPPLY OF EQUIPMENTS CONSTIT UTED ROYALTY AND FEES FOR INCLUDED SERVICES, FOR GRANT OF RI GHT OF USE OF COPYRIGHT OF COMPUTER SOFTWARE AND SERVICES, WITH OUT APPRECIATING THAT THE CONTRACT WAS PREDOMINANTLY FOR SUPPLY OF EQUIPMENTS WITH EMBEDDED SOFTWARE AND NO SUCH SPLIT WAS PROVIDED IN THE CONTRACT. ITA NO. 3073(DEL)/2009 3 6. ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN ESTIMATING THAT 70 PER CENT OF THE CONTRACT RECE IPTS FROM SUPPLY OF EQUIPMENTS, CONSTITUTES ROYALTY AS WELL AS FEES FOR INCLUDED SERVICES TAXABLE UNDER ARTICLE 12 OF INDIA-US DTAA AND 50 PER CENT OF THE PROFIT FROM SUPPLY OF EQUIPMENTS CALCULATED WITH REFERENCE TO 30 PER C ENT OF THE CONTRACT RECEIPTS AS INCOME ATTRIBUTABLE TO THE PE OF APPELLANT IN INDIA. RELYING ON AAR RULING 7. WAS NOT JUSTIFIED IN PROCEEDING TO DECIDE THE APPEAL BY MISUNDERSTANDING THE FACT THAT THE APPELLANT (AN D NOT AAI) HAS OBTAINED ADVANCE RULINGS DATED 15 DECEMBER, 2004 (185 TAXATION 494) AND 28 FEBRUARY 2008 (299 ITR 102) FROM THE HONBLE AUTHORITY OF ADVANCE RULINGS (AA R). 8. ERRED IN SUPPORTING HIS DECISION BY OBSERVING THAT IT IS SUPPORTED FROM THREE RULINGS OF THE AAR THAT INC OME OF THE APPELLANT IN RESPECT OF SOFTWARE AND PROVISION OF S ERVICES OF INSTALLATION, TESTING AND TRAINING IS TAXABLE UND ER THE ACT, WHEN IN FACT ALL THE THREE RULINGS OF THE AAR WERE B ASED ON SUBSEQUENT SEPARATE AGREEMENTS BETWEEN APPELLAN T AND AAI FOR REPAIR OF EQUIPMENTS AND MODIFICATIONS AND A NOMALY RESOLUTION OF COMPUTER SOFTWARE SUPPLIED UNDER M ATS CONTRACTS AND FOR INDEPENDENT SUPPLY OF EQUIPMENTS ETC. FOR INDIAN AIR FORCE. 9. ERRED THAT THE FINDING IN THE RULINGS OF THE AAR DATED 28.7.2008 WAS CLEARLY APPLICABLE TO THE FACTS OF THE APPELLANTS CASE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION AND THE ESTIMATE OF TAXATION OF PAYMENTS OF SOFTWARE AS W ELL AS HARDWARE HAS TO BE CARRIED OUT AS INDICATED BY TH E AAR. PERMANENT ESTABLISHMENT IN INDIA. 10. ERRED IN CONFIRMING THAT THE APPELLANT HAD FIX ED PLACE PERMANENT ESTABLISHMENT (PE) IN INDIA AT THE PR EMISES OF AAI IN DELHI AND MUMBAI, AS IT HAD PROJECT OFFICE I N INDIA. ITA NO. 3073(DEL)/2009 4 11. ERRED IN HOLDING THAT THE APPELLANT CONSTITUT ES AN INSTALLATION PE AS WELL AS SERVICE PE IN INDI A IN TERMS OF ARTICLE 5(2)(K) AND 5(2)(L) OF THE INDIA-US DTA A, DURING THE PREVIOUS YEAR. 12. ERRED IN HOLDING THAT THE CONTRACT FOR OFFSHORE SUPPLY OF EQUIPMENT IS AN INTEGRAL PART OF THE ACTIVITIES C ARRIED OUT BY PE IN INDIA AND THE INCOME FROM SUPPLY OF EQUIPMEN T IS ATTRIBUTABLE TO THE SAID PE IN INDIA. TAXABILITY BASED ON COMPLETED CONTRACT 13. ERRED IN HOLDING THAT THE ACCRUAL OF INCOME IN THE CASE OF THE APPELLANT HAS TO BE DETERMINED ACCORDING T O COMPLETED CONTRACT METHOD, AND THE INCOME FROM THE CONTRACT DATED 19.3.1993 SHOULD BE ASSESSED AS THE CONTRACTS WE RE COMPLETED DURING THE PREVIOUS YEAR. 14. ERRED IN HOLDING SUCH LUMP SUM CONSIDERATION FOR SUPPLY OF EQUIPMENTS HAS ACCRUED TO THE APPELL ANT AFTER COMPLETION OF CONTRACT AND NOT AT THE TIME THE TITLE IN THE EQUIPMENTS ALONG WITH EMBEDDED SOFTWARE PASSED TO AAI ON DELIVERY ABROAD. 15. WAS NOT JUSTIFIED IN HOLDING THAT 100% OF TH E INSTALLATION REVENUES RELATABLE TO MUMBAI AND DELH I AIRPORT ARE ATTRIBUTABLE TO INSTALLATION PE IN INDIA, DURING T HE PREVIOUS YEAR, DISREGARDING THE FACT THAT BOTH SUPPLIES AND SERVICES UNDER THE ABOVE CONTRACTS WERE SUBSTANTIALLY COM PLETED PRIOR TO APRIL 1, 1998. ESTIMATION/WORKING OF PROFIT 16. WITHOUT PREJUDICE TO THE ABOVE, THE LD. COMMI SSIONER OF INCOME-TAX (APPEALS)-XXIX, NEW DELHI HAS ERRED ON FACTS AND IN LAW IN APPLYING THE RATE OF13.4% FROM GLO BAL ACCOUNTS OF YEAR ENDING DECEMBER 1998, WHEREAS HE OUGHT T O HAVE ITA NO. 3073(DEL)/2009 5 TAKEN WEIGHTED AVERAGE PROFIT MARGINS FOR DECEMBE R 1998 AND DECEMBER 1999. 17. ERRED IN UPHOLDING THE ACTION OF THE ASSESS ING OFFICER IN CONVERTING INCOMES AND TAXES BY APPLYING AN EXCHANGE RATE OF USD 1= RS. 42.50, I.E., THE EXCHANGE RAT E APPLICABLE AS ON 31 MARCH 1999 IGNORING THE FACT THAT RULE 115 IS NOT APPLICABLE IN THE CASE OF APPELLANT AND THAT REV ENUE WAS RECEIVED BY THE APPELLANT OVER THE PERIOD 1993-94 TO 1998-99. DISALLOWANCE OF R&D EXPENSES 18. ERRED IN UPHOLDING THE ACTION OF THE ASSESSIN G OFFICER TO DISALLOW RESEARCH AND DEVELOPMENT EXPENDITURE WHILE COMPUTING THE GLOBAL PROFIT MARGINS FOR ATTRIBU TING BUSINESS INCOME OF PE OF APPELLANT IN INDIA. LEVY OF INTEREST 19. ERRED IN UPHOLDING THE ACTION OF THE ASSESSIN G OFFICER IN LEVYING INTEREST UNDER SECTION 234B AND 234C OF THE ACT. 20. ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER TO LEVY INTEREST UNDER SECTION 220(2) OF THE ACT IN AS MUCH AS SUCH INTEREST CANNOT BE LEVIED BY PASSING AN OR DER UNDER SECTION 154 OF THE ACT. 2. THE FACTS OF THE CASE, AS MENTIONED IN THE ASSESSMENT ORDER, ARE THAT THE ASSESSEE IS A COMPANY INCORPORATED IN T HE USA AND IT IS ENGAGED IN VARIOUS BUSINESSES SUCH AS SUPPLY OF DEFENCE EQUIPMENTS, AIRCRAFT LANDING SYSTEMS, SATELLITE RELATED EQUI PMENTS ETC. M/S RAYTHEON INTERNATIONAL INC. (RII FOR SHORT) IS ONE OF THE DIVISIONS OF THE ASSESSEE COMPANY. ITS MAIN OBJECT IS TO REPRESENT THE ASSESSEE IN VARIOUS ITA NO. 3073(DEL)/2009 6 COUNTRIES THROUGH ITS OFFICES. IN PURSUANCE OF THIS OBJECTIVE, IT HAS MAINTAINED AN OFFICE (LO FOR SHORT) IN INDIA SI NCE 1995. FOR THIS YEAR, THE ASSESSEE HAD NOT FILED THE RETURN OF INCOME U NDER THE PROVISIONS OF SECTION 139(1) OF THE ACT. HOWEVER, THE AO HAD REASON TO BELIEVE THAT INCOME CHARGEABLE TO TAX ESCAPED ASSESSMENT DUE TO FAILURE ON THE PART OF THE ASSESSEE IN FILING THE RETURN. THEREFORE, R EASONS WERE RECORDED U/S 147 AND NOTICE WAS ISSUED U/S 148 OF THE ACT. IN RESPONSE TO THIS NOTICE, THE ASSESSEE FILED THE RETURN ON 31.08.2006, D ECLARING TOTAL INCOME OF RS. 45,91,740/-. THE ASSESSMENT PROCEEDINGS WERE INIT IATED BY ISSUING NOTICE U/S 143(2) ON 31.08.2006. THIS NOTICE WAS FOLLO WED BY OTHER NOTICES AND QUESTIONNAIRES. ON THE BASIS OF FACTS GATHERED IN THE COURSE OF THE PROCEEDINGS AND THE REPRESENTATIONS MADE BY THE A SSESSEE, THE TAX PAYABLE WAS DETERMINED AT RS. 33,98,99,441/- AS UNDER:- INCOME FROM SUPPLY OF HARDWARE THE CONTRACT PRICE AS STATED IN PARA 4.1 DESCRI BES IT AT ACCUMULATIVE OF USD 82.011 MILLION. IN THE DISCUSSION MADE ABOVE, IT HAS BEEN INTER-AL IA HELD THAT A. INCOME OF THE ASSESSEE ARISING FROM THE CONTRA CT IS TAXABLE IN THE ASSESSMENT YEAR UNDER CONSIDERATION. B. ROYALTIES AND FIS CONSTITUTE 70% OF TOTAL VAL UE OF CONTRACT AND REMAINING 30% IS TOWARDS SUPPLY OF EQUIPMENT. ITA NO. 3073(DEL)/2009 7 THEREFORE 70% OF THE TOTAL VALUE OF CONTRACT I. E., USD 82,011,600 IS HELD TAXABLE ON GROSS BASIS AT THE RATE OF 1 5%. TOTAL VALUE OF ROYALTIES/FIS = U SD 57,408,120 TAX @ 15% THEREOF AS PER DTAA = USD 86,11, 218 CONVERTED INTO INR @ 35.16 THE SAME COMES TO INR 31,12,95,530..A THE ASSESSEE DID NOT SUBMIT THE PROFIT MARGIN I N RESPECT OF EQUIPMENT SUPPLIED TO INDIA. BY THE GLOBAL ACCOU NTS SUBMITTED BY THE ASSESSEE, THE PROFIT ARISING FROM THE INDIAN TRANSACTIONS CANNOT BE DEFINITELY ASCERTAINED HENCE FOLLOWING THE P ROVISIONS OF RULE 10, THE FINANCIAL STATEMENT OF THE ASSESSEE HAS T O BE RECAST TO ARRIVE AT THE CORRECT PERCENTAGE OF PROFIT THAT IS LIKE LY TO ACCRUE TO THE ASSESSEE FROM ITS INDIAN PROFITS. FOR ARRIVING AT THE PROFIT FROM SUPPLY OF EQUIPMENT, THE ANNUAL REPORT OF THE ASS ESSEE FOR THE YEAR ENDING 1998 IS RESORTED TO. NET PROFIT IN THE GLOBAL ACCOUNTS FROM SALES HAS BEEN SHOWN AT 13.4% OF THE NET SALES. THIS IS EXCLUDING RESEARC H AND DEVELOPMENT EXPENSES. TOTAL VALUE OF EQUIPMENT SUPPLIED IS TAKEN AT 3 0% OF THE VALUE OF THE CONTACT WHICH IS USD 24,603,480 ( 30% USD 82, 011,600). CONVERTED INTO INR @ 36.15 THE SAME COMES TORS. 88,94,15,802/-. NET PROFIT ARISING OUT OF THE ABOVE SUPPLY SHALL BE RS. 11,91,81,717/-. 50% OF THE SAME IS BEING ATTRIBUT ED TO INDIAN OPERATIONS ON ACCOUNT OF THE FACT MANUFACTURING OP ERATIONS WERE CARRIED OUT OUTSIDE INDIA. SO NET TAXABLE PROFIT FROM SUPPLY OF EQUIPMENT COMES TO RS. 5,95,90,858/-. TAXABLE @ 48% AS BUSINESS PROFIT RS. 2,86,03,611..B TOTAL TAX = A+B= RS. 33,98,99,441/- ITA NO. 3073(DEL)/2009 8 3. AGGRIEVED BY THIS ORDER, THE ASSESSEE FILED APPEAL BEFORE THE LD. CIT(APPEALS), WHO DISPOSED IT OFF ON 30.3.2009. I N THIS ORDER, THE LD. CIT(A) ALSO DISPOSED OFF OTHER APPEALS OF THE ASSESSEE IN RESPECT OF ORDERS PASSED FOR THIS YEAR UNDER SECTIONS 154, 2 20(2) AND 143(1). ALL THE APPEALS WERE PARTLY ALLOWED. AGGRIEVED BY THI S ORDER, THE ASSESSEE IS IN APPEAL BEFORE US. WE ARE CONCERNED WITH THE MATTE RS ARISING IN THE ASSESSMENT ORDER PASSED ON 27.12.2006 U/S 147 R EAD WITH SECTION 143(3). 4. IN THE COURSE OF HEARING, IT WAS INFORMED THAT THE ASSESSEE HAD EARLIER MOVED AN APPLICATION DATED 31.1.2007 BEFO RE THE COMPETENT AUTHORITY FOR SETTLEMENT OF THE CASE UNDER MUTUA L AGREEMENT PROCEDURE (MAP). HOWEVER, NO CONSULTATION TOOK PLACE ON THI S APPLICATION. IN VIEW THEREOF, IT IS INSISTED BY THE LD. COUNSEL FOR TH E ASSESSEE THAT THE TAX-LIABILITY OF THE ASSESSEE MAY BE DETERMINED ON MERITS AND THE APPEAL MAY BE PROCEEDED WITH. 5. THE ASSESSEE HAS TAKEN OBJECTION REGARDING T HE VALIDITY OF MAKING ASSESSMENT U/S 147. IT IS MENTIONED IN GROUND NO S. 1 AND 2 THAT THE LD. CIT(A) ERRED IN UPHOLDING THE REASONS RECORD ED BY THE AO U/S 147 AND THAT HE HAD REASON TO BELIEVE THAT THE INCOME ES CAPED ASSESSMENT. IT IS FURTHER MENTIONED THAT HE ERRED IN HOLDING THAT TH E AO WAS RIGHT IN ITA NO. 3073(DEL)/2009 9 REJECTING THE OBJECTIONS FILED BY THE ASSESSEE TO THE ISSUANCE OF NOTICE U/S 148. IN THIS CONNECTION, THE LD. COUNSEL DREW OUR ATTENTION TOWARDS THE REASONS RECORDED BY THE AO AND PLACED IN THE PAPE R BOOK ON PAGE NOS. 230 AND 231, WHICH READ AS UNDER:- THE ASSESSEE IS A COMPANY INCORPORATED IN US A. THE ASSESSEE HAS ENTERED INTO A CONTRACT WITH AIRPORT AUTHORITY OF INDIA (AAI) ON 04.02.2003 ENTITLED CONTRACT FOR SOFTWARE MAINTENANCE SUPPORT. THE STIPULATES: WHEREAS RAYTHEON HAD SUPPLIED TO THE AAI THE MA TS-BD SYSTEM AND AAI IS IN POSSESSION OF THE SAID SYS TEMS SINCE MARCH 1998 FOR DELHI AND JUNE 1999 FOR MUMBAI AND WHEREAS THE AAI HAS BEEN OPERATING AND MAINTA INING THE SAID SYSTEM INDEPENDENTLY AND WHEREAS THE SOFTWARE SUPPLIED BY RAYTHEON UN DER THE SAID SYSTEM NEED ANOMALY RESOLUTION/MODIFICATION FR OM TIME TO TIME. AND WHEREAS RAYTHEON HAS PROPOSED TO RESOLVE THE ANOMALIES AND MODIFY THE SOFTWARE OUTSIDE INDIA. NOW THIS CONTRACT SETS FORTH THE TERMS AND COND ITIONS FOR RAYTHEON TO RESOLVE THE ANOMALY/MODIFY THE SOFTWAR E OF THE MATS-BD SYSTEMS OF THE AAI. FROM THE ABOVE, IT IS CLEAR THAT THE ASSESSEE WA S MAINTAINING AND OPERATING THE SYSTEM TILL JUNE 1999 AND THER EAFTER THIS WORK WAS UNDERTAKEN BY THE AAI. FURTHER, THE SYST EM NEED ANOMALY RESOLUTION/MODIFICATION FROM TIME TO TIME A ND THE FORMAL CONTRACT FOR THAT PURPOSE WAS ENTERED INTO ONLY ON 04.02.2003. HOWEVER, IT IS CLEAR THAT THE SYSTE M HAS BEEN CONSTANTLY HANDLED BY THE ASSESSEE FOR ANOMALY RESOLUTION/MODIFICATION FROM TIME TO TIME. THE S YSTEM IS THE ITA NO. 3073(DEL)/2009 10 PROPRIETARY OF THE ASSESSEE AND IT IS THE ASSESSE E ALONE WHO CAN RESOLVE ANOMALY IF ANY. THE CONTRACT PRICE OF THE ABOVE SAID CONTRACT IS MORE THAN USD 6 MILLION AND TH E AMOUNT SHALL NOT BE LESS THAN RS.1,00,000 IN THE RELE VANT ASSESSMENT YEAR. ON THE SAME DAY I.E., 04.02.2003, AAI HAS ENTER ED INTO A CONTRACT WITH GINTEX INDIA LTD. FOR IN-COUNTRY MA INTENANCE OF THE AFORESAID SYSTEMS. THIS AGREEMENT INFORMS THAT THERE IS ANOTHER AGREEMENT BETWEEN AAI AND RAYTHEON FO R HARDWARE REPAIR SUPPORT FOR THE SAID SYSTEMS. FURTHER, THE ASSESSEE HAS NOT BEEN FILING ITS RET URN OF INCOME IN INDIA AND THEREFORE, THE CASE OF THE ASSESSEE IS COVERED UNDER EXPLANATION 2 TO SECTION 147 OF THE INCOME-TAX ACT , 1961, WHICH IS REPRODUCED BELOW FOR READY REFERENCE:- EXPLANATION 2- FOR THE PURPOSES OF THIS SECTION, THE FOLLOWING SHALL ALSO BE DEEMED TO BE CASES WHER E INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT , NAMELY:- (A) WHERE NO RETURN OF INCOME HAS BEEN FURNISHED BY THE ASSESSEE ALTHOUGH HIS TOTAL INCOME OR THE TO TAL INCOME OF ANY OTHER PERSON IN RESPECT OF WHICH HE IS ASSESSABLE UNDER THIS ACT DURING THE PREVIOUS YE AR EXCEEDED THE MAXIMUM AMOUNT WHICH IS NOT CHARGEABL E TO INCOME-TAX; (B) WHERE A RETURN OF INCOME HAS BEEN FURNISHED BY THE ASSESSEE BUT NO ASSESSMENT HAS BEEN MADE AND IT I S NOTICED BY THE ASSESSING OFFICER THAT THE ASSES SEE HAS UNDERSTATED THE INCOME OR HAS CLAIMED EXCESSIVE LOSS, DEDUCTION, ALLOWANCE OR RELIEF IN THE RETURN; (C) WHERE AN ASSESSMENT HAS BEEN MADE, BUT:- ITA NO. 3073(DEL)/2009 11 (I) INCOME CHARGEABLE TO TAX HAS BEEN UNDER- ASSESSED; OR (II) SUCH INCOME HAS BEEN ASSESSED AT TOO LOW A R ATE; OR (III) SUCH INCOME HAS BEEN MADE THE SUBJECT OF EXCESSIVE RELIEF UNDER THIS ACT; OR (IV) EXCESSIVE LOSS OF DEPRECIATION ALLOWANCE OR A NY OTHER ALLOWANCE UNDER THIS ACT HAS BEEN COMPUTED. IN VIEW OF THE FOREGOING, I HAVE REASONS TO BELIE VE THAT INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT FOR THE R ELEVANT ASSESSMENT YEAR WITHIN THE MEANING OF SECTION 147 R.W.S. 148 OF THE INCOME-TAX ACT, 1961. 5.1 IT IS SUBMITTED THAT THE AO REFERRED TO SOFT WARE MAINTENANCE & SUPPORT CONTRACT DATED 4.2.2003 IN RESPECT OF M ATS- BD SYSTEM, WHICH WAS SET UP BY THE ASSESSEE FOR THE AIRPORT AUTHO RITY OF INDIA (AAI FOR SHORT) IN MARCH, 1998, IN DELHI AND JUNE, 1999, IN BOMBAY. ON THE BASIS OF THIS CONTRACT, HE WAS OF THE VIEW THAT AF TER SUPPLYING THE SYSTEM, THE ASSESSEE WAS CARRYING ON MAINTENANCE OPERATION, MORE SO BECAUSE THE SYSTEM REQUIRED ANOMALY RESOLUTION AND MODIFICAT IONS FROM TIME TO TIME. THEREFORE, ALTHOUGH THE CONTRACT WAS FORMALLY ENTE RED INTO ON 4.2.2003, THE SYSTEM HAS BEEN CONSISTENTLY HANDLED BY THE AS SESSEE. THE VALUE OF THE CONTRACT IS PLACED AT SIX MILLION US$ AND, THUS , THE AMOUNT RELATABLE TO THIS YEAR WILL NOT BE LESS THAN RS. 1 LAKH. IT IS FURTHER MENTIONED THAT ON THE ITA NO. 3073(DEL)/2009 12 SAME DAY, AAI ENTERED INTO ANOTHER CONTRACT WIT H GINTEX INDIA LTD. FOR IN-COUNTRY MAINTENANCE OF THE SYSTEM, WHICH TAK ES NOTE OF ANOTHER CONTRACT BETWEEN THE ASSESSEE AND THE AAI FOR HARDWARE REPAIR SUPPORT OF THE SYSTEM. THE CASE OF THE LD. COUNSEL IS T HAT THE RECORDED REASONS DO NOT HAVE INTELLIGIBLE NEXUS WITH THE BELIEF THA T THE INCOME CHARGEABLE TO TAX IN THIS YEAR HAD ESCAPED ASSESSMENT. THE REA SONS RECORDED BY THE AO DO NOT MENTION THAT THE INCOME ARISING TO THE ASSE SSEE FROM SUPPLY OF EQUIPMENT AND SOFTWARE TO THE AAI AT DELHI AND BOMBAY ON THE BASIS OF A CONTRACT (MATS-BD CONTRACT FOR SHORT) ESCAPED ASSESSMENT. THE REASON RECORDED BY HIM IS THAT A PART OF INCO ME FROM HARDWARE AND SOFTWARE MAINTENANCE CONTRACT DATED 04.02.2003 ESCAPED ASSESSMENT. WHILE FRAMING THE ASSESSMENT, NO INCOME WAS ASSE SSED FROM THIS CONTRACT. INSTEAD PROFITS FROM MATS-BD CONTRACT WERE BROU GHT TO TAX. THEREFORE, IT IS ARGUED THAT THE REASONS RECORDED BY HIM D O NOT SATISFY THE TEST LAID DOWN U/S 147 OF THE ACT. IN THIS SITUATION, THE ASSESSMENT IS REQUIRED TO BE CANCELLED AS JURISDICTION TO MAKE ASSESSMENT HAS NOT BEEN PROPERLY ASSUMED BY THE AO. IN THIS CONNECTION, RELIANCE HAS BEEN PLACED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF GANGA SARAN & SONS (P) LTD. VS. ITO & OTHERS, 130 ITR 1 AND ACIT VS . RAJESH JHAVERI STOCK BROKERS P. LTD. (2007) 291 ITR 500. ITA NO. 3073(DEL)/2009 13 5.2 IN REPLY, THE LD. DR SUBMITTED THAT THE ASS ESSEE DID NOT FILE THE RETURN OF INCOME U/S 139(1). THEREFORE, ON THE B ASIS OF INFORMATION AVAILABLE WITH THE AO, HE RECORDED THE REASONS AND ISSUED NOTICE U/S 148. IN RESPONSE TO THIS NOTICE, THE ASSESSEE F ILED THE RETURN DECLARING TOTAL INCOME OF RS. 45,91,740/-. THE ASSESSEE O BTAINED THE REASONS RECORDED BY THE AO AND FILED OBJECTIONS, WHICH WER E DULY DISPOSED OFF. THUS, THE PROCEDURE LAID DOWN IN THE STATUTE AN D BY THE HONBLE SUPREME COURT IN THE CASE OF GKN DRIVE SHAFT (INDIA) LTD . VS. ITO (2003) 215 ITR 19, REGARDING DISPOSAL OF OBJECTIONS, HAS BEE N DULY FOLLOWED IN THIS CASE. OUR ATTENTION IS DRAWN TO PAGE NO. 10 OF THE IMPUGNED ORDER, IN WHICH IT IS MENTIONED THAT THE REQUIREMENT OF T HE EXPRESSION REASON TO BELIEVE USED IN SECTION 147 IS THAT THE AO HAS SO ME MATERIAL ON RECORD ON THE BASIS OF WHICH A PRIMA FACIE BELIEF COULD B E ARRIVED AT THAT INCOME HAD ESCAPED ASSESSMENT. HE DOES NOT HAVE TO CONCLUSIVELY PROVE THE ESCAPEMENT OF INCOME AT THIS STAGE, AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF RAYMOND WOOLEN MILLS LTD. (1 999) 236 ITR 34. IT IS ARGUED THAT EVEN ON THE BASIS OF SOFTWARE MA INTENANCE SUPPORT CONTRACT DATED 4.2.2003, A MAN OF COMMON PRUD ENCE COULD HAVE COME TO THE CONCLUSION THAT THE ASSESSEE WOULD HAVE EARNED REVENUES FROM THE ITA NO. 3073(DEL)/2009 14 AAI IN RESPECT OF ANOMALY RESOLUTION, MODIFICATI ON AND MAINTENANCE OF THE MATS-BD SYSTEM, AS IT IS THE PROPRIETARY O F THE ASSESSEE AND IT IS THE ASSESSEE ALONE WHO COULD RENDER SUCH SERVICES. THEREFORE, IT IS STRONGLY CONTENDED THAT THE REASONS RECORDED BY THE AO HAVE DIRECT NEXUS WITH THE ESCAPEMENT OF INCOME. 5.3 WE HAVE CONSIDERED THE FACTS OF THE CASE AN D SUBMISSIONS MADE BEFORE US. FROM THE REASONS RECORDED BY THE AO, IT IS CLEAR THAT HE WAS OF THE VIEW THAT INCOME ARISING ON ACCOUNT OF SOF TWARE MAINTENANCE, ANOMALY RESOLUTION AND MODIFICATION OF THE SOFTWA RE PERTAINING TO MATS- BD SYSTEMS ESCAPED ASSESSMENT. IN THIS CONNECTION , HE REFERRED TO THE CONTRACT DATED 4.2.2003, WHICH ALSO INCLUDES A SHORT HISTORY OF SUPPLY OF MATS-BD SYSTEM TO THE AAI. IN PARTICULAR, IT IS MENTIONED THAT THE SYSTEM FOR DELHI WAS SUPPLIED IN MARCH, 1998, AN D FOR MUMBAI IN JUNE, 1999. IT IS FURTHER MENTIONED THAT THE SOFTWAR E REQUIRES ANOMALY RESOLUTION AND MODIFICATION FROM TIME TO TIME. IT IS ALSO MENTIONED THAT THE ASSESSEE MADE A PROPOSAL TO RESOLVE THE ANOMAL Y AND TO CARRY OUT MODIFICATION OUTSIDE INDIA FOR WHICH THE TERMS AN D CONDITIONS ARE SET FORTH IN THE CONTRACT. THE CASE OF THE LD. COUNS EL IS THAT THE AFORESAID CONTRACT WILL START YIELDING INCOME AT THE EARLI EST ON 4.2.2003, A DATE ITA NO. 3073(DEL)/2009 15 WHICH FALLS BEYOND THIS YEAR. THEREFORE, THE AO H AD NO REASON TO BELIEVE THAT ANY INCOME OF THIS YEAR ESCAPED ASSESSMENT . ON THE OTHER HAND, THE CASE OF THE LD. DR IS THAT THE SOFTWARE WAS THE PROPRIETARY OF THE ASSESSEE AND ONLY IT COULD CARRY OUT ANOMALY RESOLUTION AND MODIFICATION, WHICH ACCORDING TO THE AGREEMENT WERE REQUIRED FROM T IME TO TIME. THEREFORE, ON THE BASIS OF THIS AVERMENT IN THE RECITALS OF T HE AGREEMENT, ANY REASONABLE PERSON WILL COME TO A CONCLUSION THAT THE ANOMALY RESOLUTION AND MODIFICATION WERE REQUIRED IN PAST AND WERE CA RRIED OUT BY THE ASSESSEE. THEREFORE, THERE EXISTED LIVE LINK B ETWEEN THE RECITALS AND ESCAPEMENT OF INCOME. THE ASSESSEE HAD NOT FILED THE RETURN OF INCOME FOR THIS YEAR AND CONSEQUENTLY NO ASSESSMENT HAD BEEN MADE. FURTHER, ON THE BASIS OF CONTRACT-PRICE MENTIONED IN THE AGREEMEN T DATED 4.2.2003, THE AO CAME TO THE CONCLUSION THAT INCOME OF THIS YEAR WI LL NOT BE LESS THAN RS. 1.00 LAKH. THIS CONCLUSION IS ALSO REASONABLE LO OKING TO THE CONSIDERATION MENTIONED IN THE AGREEMENT DATED 4.2.2003. THEREF ORE, THERE WAS A REASON TO BELIEVE THAT THE INCOME ESCAPED ASSESSMENT. 5.4 WE MAY NOW BRIEFLY DISCUSS THE CASES CITED BY THE RIVAL PARTIES. IN THE CASE OF GANGA SARAN & SONS (P) LTD. (SUPRA), THE FACTS ARE THAT THE ASSESSEE OBTAINED REDUCTION IN HIS TAXABLE INCOME ON ACCOUNT OF SALARY ITA NO. 3073(DEL)/2009 16 PAID TO DEO DUTT AS ALSO ALL THE PERQUISITES G IVEN TO HIM FOR SEVERAL YEARS. THESE WERE ALLOWED. SUBSEQUENTLY, THE F ILES OF THE ASSESSEE AND DEO DUTT WERE BROUGHT TOGETHER AND UPON SCRUTIN Y IT WAS FOUND THAT (A) HE DID NOT DRAW HIS FULL SALARY AND MAJOR PORTIO N THEREOF REMAINED CREDITED WITH THE BOOKS OF THE COMPANY; (B) HE GR ANTED A LARGE LOAN TO THE MANAGING DIRECTOR, WHO WAS HIS SISTERS HUSBAND; (C) OUT OF THE LOAN HE MADE A GIFT OF RS. 1,01,101/- TO HIS SISTER; (D) HE MADE FURTHER GIFT S TO HIS NEPHEWS AND NIECES, AND (E) THE MAJOR PORTION OF HIS SALARY AND OTHER EMOLUMENTS, WHICH HAD NOT BEEN WITHDRAWN, WENT T O THE MANAGING DIRECTOR AND THE MEMBERS OF HIS FAMILY AS LOANS AND GIFTS. ON THESE FACTS, THE AO CAME TO THE CONCLUSION THAT EXCESS CLAIM OF SALARY AND PERQUISITES HAD BEEN MADE IN COMPUTATION OF THE IN COME MADE BY THE ASSESSEE. THEREFORE, THE ASSESSMENT WAS REOPENED U/S 147(A), AS IT THEN EXISTED. THIS PROVISION REQUIRES AS PRE-CONDITION FOR ASSUMING JURISDICTION THAT (I) THE AO HAS REASON TO BELIEVE THAT TH E INCOME HAD ESCAPED ASSESSMENT, AND (II) SUCH ESCAPEMENT IS BY THE REA SON OF OMISSION OR FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS NECESSARY FOR THE ASSESSMENT. THE HONBLE COURT HELD AS UNDER:- WE MAY POINT OUT THAT, IN FACT, THE STATEMENTS O F ACCOUNT OF DEO DUTT SHARMA WITH THE ASSESSEE FOR THE RELEVA NT ACCOUNTING YEAR AS ALSO THE PREVIOUS YEARS WE RE WITH THE ITO AT THE TIME OF ORIGINAL ASSESSMENT AND THESE STATEMENTS ITA NO. 3073(DEL)/2009 17 OF ACCOUNT CLEARLY SHOWED THAT OUT OF THE AMOU NT OF REMUNERATION CREDITED TO HIS ACCOUNT, HE HAD MA DE A GIFT OF RS. 12,550/- TO THE SON OF GANGA SARAN SHARMA ON 31 ST JULY, 1957, AND GIVEN A LOAN OF RS. 2,25,000/- TO GANGA SARAN SHARMA ON 25 TH AUGUST, 1958, AND THE ITO WAS FULLY AWARE THAT GANGA SARAN SHARMA WAS THE MANAGING DIRECTOR OF THE ASSESSEE. IT IS POSSIBLE AND WE MAY ASSUME IT I N FAVOUR OF THE REVENUE, THAT THE SUBSEQUENT GIFTS MADE BY DEO DUTT SHARMA TO THE WIFE AND DAUGHTERS-IN-LAW OF GANG A SARAN SHARMA WERE NOT DISCLOSED TO THE ITO AT THE TI ME OF THE ORIGINAL ASSESSMENT, BUT THESE GIFTS BEING SU BSEQUENT TO THE RELEVANT ACCOUNTING YEAR, THE ASSESSEE WAS NOT BOUND TO DISCLOSE THE SAME TO THE ITO. MOREOVER, IT IS DIFFICULT TO APPRECIATE HOW THE ASSESSEE COULD BE SAID TO BE UNDER AN OBLIGATION TO DISCLOSE TO THE ITO IN THE COURSE O F ITS ASSESSMENT AS TO HOW A DIRECTOR WHO WAS IN SOL E CHARGE OF THE MANAGEMENT OF THE BUSINESS OF THE ASSESSEE AN D WHO WAS BEING PAID REMUNERATION FOR THE SERVICES RENDER ED BY HIM TO THE ASSESSEE, HAD UTILIZED THE AMOUNT OF REMUNER ATION RECEIVED BY HIM. WE DO NOT THINK IT POSSIBLE TO SUSTAIN THE CONCLUSION THAT THE ASSESSEE OMITTED OR FAILED T O DISCLOSE FULLY AND TRULY ANY MATERIAL FACTS RELATING TO ITS ASSESSMENT. WE MUST, IN THE CIRCUMSTANCES, HOLD THAT NEITHER OF THE TWO CONDITIONS NECESSARY FOR ATTRACTING THE APPLICA BILITY OF S. 147(A) WAS SATISFIED IN THE PRESENT CASE AND THE NOTICE ISSUED BY THE ITO MUST BE HELD TO BE WITHOUT JURISDICT ION. 5.5 IN THE CASE OF RAJESH JHAVERI STOCK BROKERS ( P) LTD. (SUPRA), THE FACTS ARE THAT THE ASSESSEE IS A PRIVATE LIMIT ED COMPANY. IT FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2001-02 ON 30.10. 2001, DECLARING TOTAL LOSS OF RS. 2,70,85,105/- THIS RETURN WAS PROCES SED U/S 143(1). THEREAFTER, NOTICE U/S 148 WAS ISSUED ON THE GRO UND THAT THE CLAIM OF BAD DEBTS WAS NOT ACCEPTABLE. THE ASSESSEE FILED R ETURN U/S 148 ON ITA NO. 3073(DEL)/2009 18 12.5.2004, DECLARING THE SAME LOSS. A COPY OF THE REASONS RECORDED BY THE AO WAS FURNISHED TO THE ASSESSEE IN NOVEMBER, 2004. THE ASSESSEE RAISED VARIOUS OBJECTIONS REGARDING JURISDICTION AND MERITS OF THE REASONS. THESE OBJECTIONS WERE DISPOSED OFF ON 4.2.2005 HOLDING THAT INITIATION OF PROCEEDINGS WAS VALID. THE NOTICE WAS CHALLEN GED BEFORE THE APEX COURT IN WRIT PETITION. THE HONBLE COURT HELD AS UNDE R:- THE SCOPE AND EFFECT OF SECTION 147 AS SUBSTI TUTED WITH EFFECT FROM APRIL 1, 1989, AS ALSO SECTIONS 148 TO 152 ARE SUBSTANTIALLY DIFFERENT FROM THE PROVISIONS AS T HEY STOOD PRIOR TO SUCH SUBSTITUTION. UNDER THE OLD PROVISIONS OF SECTION 147, SEPARATE CLAUSES (A) AND (B) LAID DOWN THE CIRCUM STANCES UNDER WHICH INCOME ESCAPING ASSESSMENT FOR THE PAST AS SESSMENT YEARS COULD BE ASSESSED OR REASSESSED. TO CONFE R JURISDICTION UNDER SECTION 147(A) TWO CONDITIONS WERE REQU IRED TO BE SATISFIED: FIRSTLY THE ASSESSING OFFICER MUST HAVE REASON TO BELIEVE THAT INCOME, PROFITS OR GAINS CHARGEABL E TO INCOME TAX HAVE ESCAPED ASSESSMENT, AND SECONDLY HE MU ST ALSO HAVE REASON TO BELIEVE THAT SUCH ESCAPEMENT HAS OCCURRED BY REASON OF EITHER OMISSION OR FAILURE ON THE P ART OF THE ASSESSEE TO DISCLOSE FULLY OR TRULY ALL MATERIAL FACTS NECESSARY FOR HIS ASSESSMENT OF THAT YEAR. BOTH THESE C ONDITIONS WERE CONDITIONS PRECEDENT TO BE SATISFIED BEFORE TH E ASSESSING OFFICER COULD HAVE JURISDICTION TO ISSUE NOTICE UNDER SECTION 148 READ WITH SECTION 147(A). BUT UNDER THE SU BSTITUTED SECTION 147 EXISTENCE OF ONLY THE FIRST CONDIT ION SUFFICES. IN OTHER WORDS IF THE ASSESSING OFFICER FOR WHATEV ER REASON HAS REASON TO BELIEVE THAT INCOME HAS ESCAPED ASSESSMENT IT CONFERS JURISDICTION TO REOPEN THE ASSESSMENT. IT IS, HOWEVER, TO BE NOTED THAT BOTH THE CONDITIONS MUST BE FU LFILLED IF THE CASE FALLS WITHIN THE AMBIT OF THE PROVISO TO SE CTION 147. THE CASE AT HAND IS COVERED BY THE MAIN PROVISION AND N OT THE PROVISO. ITA NO. 3073(DEL)/2009 19 SO LONG AS THE INGREDIENTS OF SECTION 147 ARE F ULFILLED, THE ASSESSING OFFICER IS FREE TO INITIATE PROCEEDING UNDER SECTION 147 AND FAILURE TO TAKE STEPS UNDER SECTION 143(3) WILL NOT RENDER THE ASSESSING OFFICER POWERLESS TO INITIAT E REASSESSMENT PROCEEDINGS EVEN WHEN INTIMATION UND ER SECTION 143(1) HAD BEEN ISSUED. 5.6 IN THE CASE OF RAYMOND WOOLLEN MILLS LTD.(SUP RA), A CASE DECIDED U/S 147(A), THE DECISION OF THE COURT IS AS UND ER:- IN THIS CASE, WE DO NOT HAVE TO GIVE A FINAL D ECISION AS TO WHETHER THERE IS SUPPRESSION OF MATERIAL FACTS B Y THE ASSESSEE OR NOT. WE HAVE ONLY TO SEE WHETHER THERE WAS PRIMA FACIE SOME MATERIAL ON THE BASIS OF WHICH THE DEPARTMEN T COULD REOPEN THE CASE. THE SUFFICIENT OR CORRECTNESS OF THE MATERIAL IS NOT A THING TO BE CONSIDERED AT THIS STAGE. WE ARE OF THE VIEW THAT THE COURT CANNOT STRIKE DOWN THE REO PENING OF THE CASE IN THE FACTS OF THIS CASE. IT WILL BE OP EN TO THE ASSESSEE TO PROVE THAT THE ASSUMPTION OF FACTS MADE I N THE NOTICE WAS ERRONEOUS. THE ASSESSEE MAY ALSO PROVE THAT NO NEW FACTS CAME TO THE KNOWLEDGE OF THE INCOME-TAX OFFICER AFTER COMPLETION OF THE ASSESSMENT PROCEEDING. WE ARE N OT EXPRESSING ANY OPINION ON THE MERITS OF THE C ASE. THE QUESTIONS OF FACT AND LAW ARE LEFT OPEN TO BE IN VESTIGATED AND DECIDED BY THE ASSESSING AUTHORITY. THE APPELLAN T WILL BE ENTITLED TO TAKE ALL THE POINTS BEFORE THE ASSE SSING AUTHORITY. THE APPEALS ARE DISMISSED. THERE WILL BE NO ORDE R AS TO COSTS. 5.7 IT MAY BE MENTIONED HERE THAT SECTION 147, AS APPLICABLE TO THE CASE IN SO FAR AS WE ARE CONCERNED, READS AS U NDER:- IF THE ASSESSING OFFICER HAS REASON TO BELIEVE T HAT ANY INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT FOR ANY ASSESSMENT YEAR, HE MAY, SUBJECT TO THE PROVISIONS OF SECTIONS 148 TO 153, ITA NO. 3073(DEL)/2009 20 ASSESS OR REASSESS SUCH INCOME AND ALSO ANY OTHER INCOME CHARGEABLE TO TAX WHICH HAS ESCAPED ASSESSMENT A ND WHICH COMES TO HIS NOTICE SUBSEQUENTLY IN THE COURSE OF THE PROCEEDINGS UNDER THIS SECTION, OR RE-COMPUTE THE LOSS OR THE DEPRECIATION ALLOWANCE OR ANY OTHER ALLOWANCE, AS T HE CASE MAY BE, FOR THE ASSESSMENT YEAR CONCERNED (HEREAFTER IN THIS SECTION AND IN SECTIONS 148 TO 153 REFERRED TO AS THE RELEVANT ASSESSMENT YEAR): PROVIDED THAT WHERE AN ASSESSMENT UNDER SUB-SE CTION (3) OF SECTION 143 OR THIS SECTION HAS BEEN MADE FOR THE RELEVANT ASSESSMENT YEAR, NO ACTION SHALL BE TAKEN UNDER THIS SECTION AFTER THE EXPIRY OF FOUR YEARS FROM THE END OF T HE RELEVANT ASSESSMENT YEAR, UNLESS ANY INCOME CHARGEABLE TO T AX HAS ESCAPED ASSESSMENT FOR SUCH ASSESSMENT YEAR BY REASON OF THE FAILURE ON THE PART OF THE ASSESSEE TO MAKE A RETURN UNDER SECTION 139 OR IN RESPONSE TO A NOTICE I SSUED UNDER SUB-SECTION (1) OF SECTION 142 OR SECTION 148 OR TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS NECESSARY FOR HIS ASSESSMENT, FOR THAT ASSESSMENT YEAR. 5.8 THE PROVISION CONTAINED IN THIS SECTION IS MA TERIALLY DIFFERENT FROM THE PROVISION CONTAINED IN SECTION 147(A) AS IT EX ISTED PRIOR TO THE AMENDMENT OF SECTION 147 BY TAXATION LAWS (AMENDME NT) ACT, 1987, COMING INTO FORCE FROM ASSESSMENT YEAR 1989-90. THIS CHANGE HAS BEEN TAKEN NOTE OF BY THE HONBLE SUPREME COURT IN THE CASE OF RAJESH JHAVERI STOCK BROKERS (P) LTD. 5.9 COMING TO THE RELEVANT FACTS, THE ASSESSEE HAD NOT FILED THE RETURN OF INCOME U/S 139(1). THEREFORE, THE PROVISION CONTAINED IN CLAUSE (A) OF ITA NO. 3073(DEL)/2009 21 EXPLANATION 2, REFERRED TO BY THE AO, IS APPLICA BLE PROVIDED THE INCOME OF THE PREVIOUS YEAR EXCEEDS THE MAXIMUM AMOUNT NOT CHARGEABLE TO INCOME-TAX. THE ASSESSEE IS A COMPANY AND, THEREF ORE, IT IS LIABLE TO PAY TAX ON ANY INCOME AND THE PROVISION REGARDING MAXIMUM AMOUNT WHICH IS NOT CHARGEABLE TO INCOME-TAX IS NOT APPLICAB LE. SINCE THE ASSESSEE HAS NOT FILED THE RETURN U/S 139(1) AND NO ASSESS MENT HAS BEEN MADE PRIOR TO THIS ASSESSMENT, THE PROVISION CONTAINED IN FIRS T PROVISO TO THIS SECTION IS ALSO NOT APPLICABLE. THEREFORE, THE ONLY CONDITION TO BE SEEN IS WHETHER THE AO HAD REASON TO BELIEVE THAT ANY INCOME CHARGEABL E TO TAX ESCAPED ASSESSMENT. IN THIS CONNECTION, THE AO BASED HIS REASON TO BELIEVE ON THE CONTRACT DATED 4.2.2003, WHICH INTER-ALI A MENTIONS THAT THE SYSTEMS SUPPLIED TO AAI IN MARCH, 1998, AND JUNE, 1999, REQ UIRE ANOMALY RESOLUTION AND MODIFICATION FROM TIME TO TIME. FROM THIS, TH E AO CONCLUDED THAT SUCH SERVICES WERE REQUIRED FROM THE DATE OF SUPPLY OF THE SYSTEMS UP TO THE DATE OF THIS AGREEMENT. LOOKING TO THE CONSIDER ATION MENTIONED IN THE AGREEMENT, HE ALSO CAME TO THE CONCLUSION THAT INC OME OF THE ASSESSEE FROM SUCH SERVICES WILL NOT BE LESS THAN RS. 1.00 LAK H. WE ARE OF THE VIEW THAT THESE ARE REASONABLE CONCLUSIONS WHICH A MAN OF NORMAL PRUDENCE CAN DRAW FROM THE RECITALS OF THE AGREEMENT DATED 4 .2.2003. IT MAY BE MENTIONED THAT THE RECITAL ALSO CONTAINS AVERME NT TO THE EFFECT THAT THE ITA NO. 3073(DEL)/2009 22 AAI HAS BEEN OPERATING AND MAINTAINING THE SAID S YSTEMS INDEPENDENTLY. HOWEVER, THIS RECITAL IS ONLY IN RESPECT OF OPERA TION AND MAINTENANCE AND NOT IN RESPECT OF ANOMALY RESOLUTIONS AND MODIFIC ATIONS WHICH ARE OSTENSIBLY REQUIRED FROM TIME TO TIME. THEREFORE, THIS RECITAL REGARDING OPERATION AND MAINTENANCE DOES NOT COME IN CONFLI CT WITH THE RECITAL REGARDING ANOMALY RESOLUTION AND MODIFICATION OF THE SYSTEMS. IN THE CASE OF RAYMOND WOOLLEN MILLS, THE HONBLE SUPREME COURT HELD THAT IT IS NOT FOR THE AO TO PROVE CONCLUSIVELY THAT INCOME HAD ESCAPED ASSESSMENT AT THIS STAGE. WHAT IS REQUIRED IS TO BE SEEN IS WHETHER THERE ARE ON A PRIMA- FACIE BASIS REASONS TO BELIEVE THAT THE INCOME ESCAPED ASSESSMENT. THEREFORE, SUBSEQUENT NON-TAXATION OF SERVICE CH ARGES FROM SERVICE RENDERED IN RESPECT OF ANOMALY RESOLUTION AND MODI FICATION OF SYSTEMS NEED NOT BE CONSIDERED HERE, AS THE SAME IS NOT REL EVANT AT THIS STAGE OF THE PROCEEDINGS. THE FACTS OF THE CASE OF GANGA SAR AN & SONS (P) LTD. (SUPRA) ARE CLEARLY DISTINGUISHABLE FOR THE REAS ON THAT THE ASSESSEE HAD DECLARED ALL THE FACTS KNOWN TILL THE CLOSE OF T HE PREVIOUS YEAR AND HE WAS NOT BOUND TO DISCLOSE SUBSEQUENT GIFTS OR LOANS. MOREOVER, THE ASSESSEE WAS A REGULAR ASSESSEE AND SIMILAR FACTS HAD BE EN DISCLOSED IN THE RETURNS OVER A PERIOD OF TIME. IN THE INSTANT CASE, THE ASSESSMENT HAS BEEN MADE FOR THE FIRST TIME IN THIS YEAR ON THE BASIS OF NOTICE ISSUED U/S 148. THERE ITA NO. 3073(DEL)/2009 23 IS NO QUESTION OF DISCLOSURE OF INFORMATION IN S UCH A SITUATION. FURTHER, THE VALIDITY OF ISSUANCE OF NOTICE U/S 148 DOES NOT DEPEND UPON DISCLOSURE OF ALL MATERIAL FACTS AS IT HAS BEEN HELD EARLIER TH AT THE ONLY CONDITION TO BE SEEN IS WHETHER THE AO HAD THE REASON TO BELIEVE . IN THE CASE OF RAJESH JHAVERI STOCK BROKERS (P) LTD., THE COURT DISTINGU ISHED BETWEEN THE PROVISION CONTAINED IN SECTION 147 AS APPLICABLE N OW AND THE PROVISION CONTAINED IN THE OMITTED SECTION 147(A). IT HAS B EEN HELD THAT SO LONG AS INGREDIENTS OF SECTION 147 ARE FULFILLED, THE A O IS FREE TO INITIATE PROCEEDINGS U/S 147. IN THAT CASE, THE RETURN F ILED BY THE ASSESSEE HAD BEEN PROCESSED U/S 143(1) BEFORE RECORDING OF R EASONS U/S 147 AND, THEREFORE, IT WAS HELD THAT SINCE NO OPINION IS F ORMED WHILE PROCESSING THE RETURN U/S 143(1), THERE IS NO QUESTION OF CHANGE IN OPINION. IN THIS CASE, NO RETURN OF INCOME HAD BEEN FILED BY THE ASSESSEE PRIOR TO RECORDING OF REASONS AND ISSUANCE OF NOTICE U/S 148. THEREFOR E, THE CASE OF THE REVENUE STANDS ON STRONGER FOOTING THAN THE CASE OF AFOR ESAID RAJESH JHAVERI. WE HAVE ALREADY HELD THAT RECITALS TO AGREEMENT DA TED 4.2.2003 WILL LEAD ANY MAN OF COMMON PRUDENCE TO COME TO A CONCLUSION THAT THE ASSESSEE HAD EARNED INCOME FROM ANOMALY RESOLUTION AND MODIFICATION OF SYSTEMS IN THIS YEAR. THEREFORE, WE ARE OF THE VIEW T HAT THE AO WAS WELL WITHIN ITA NO. 3073(DEL)/2009 24 HIS RIGHT TO ISSUE NOTICE U/S 148 FOR MAKING A SSESSMENT FOR THE FIRST TIME IN THIS CASE. 6. GROUND NO. 3 IS IN RESPECT OF THE ISSUE AS TO W HETHER THE TWO CONTRACTS REGARDING SUPPLY OF EQUIPMENT AND SOFT WARE AND SUPPLY OF SERVICES FOR INSTALLATION, TRAINING ETC. CONSTITU TE TWO SEPARATE AND DISTINCT CONTRACTS OR PART OF ONE CONTRACT. IT IS MENTI ONED THAT THE LD. CIT(A) ERRED IN HOLDING THAT THE TWO SEPARATE CONTRACTS FORM A SINGLE INDIVISIBLE TURN-KEY CONTRACT FOR SUPPLY, INSTALLATION AND C OMMISSIONING OF THE AIR TRAFFIC SYSTEM (ATS FOR SHORT). 6.1 IN THIS CONNECTION, THE LD. COUNSEL REFERRED TO THE TWO CONTRACTS PLACED IN THE PAPER BOOK FROM PAGE NOS. 1 TO 155 AND 156 TO 194. BOTH THESE AGREEMENTS HAVE BEEN ENTERED INTO WITH THE A AI ON 19.03.1993. THE RECITAL TO THE FIRST AGREEMENT INTER-ALIA STATES THAT THE NAA INVITED OFFERS FOR THE SUPPLY AND INSTALLATION OF ATS AT BOMBAY AND DELHI TOGETHER WITH TRANSFER OF TECHNOLOGY UNDER ITS NOTICE NO. BB/DP /MOD/1/91-NAA DATED MARCH 19, 1991. THE ASSESSEE HAD OFFERED TO SUPP LY THE EQUIPMENTS AND SERVICES FOR THE ATS IN ACCORDANCE WITH PRICE AD JUSTMENT BID REK: 5876:92:294 DATED 7.7.1992 AND THE NAA HAS ACC EPTED ITS OFFER. ITA NO. 3073(DEL)/2009 25 THEREAFTER, ARTICLE 1 FURNISHES DEFINITION OF 19 TERMS FOR THE PURPOSE OF THE AGREEMENT. 6.2 ARTICLE 2 DEALS WITH THE SCOPE OF THE AGREEME NT. IT IS MENTIONED THAT THE ATS TO BE PROVIDED UNDER THE AGREEMENT IS SP ECIFIED IN EXHIBIT-A, STATEMENT OF WORK, ATTACHED HERETO AND INCORPORATE D HEREIN BY REFERENCE. IT IS FURTHER MENTIONED THAT UNDER A SEPARATE CONTRACT, THE ASSESSEE SHALL BE RESPONSIBLE FOR INSTALLATION AND TRAINING IN S UPPORT OF THE ATS. IT IS ALSO MENTIONED THAT THE WORK COVERED BY THE CONTRACT S HALL COMMENCE IMMEDIATELY UPON THE EFFECTIVE DATE OF THIS CONT RACT AND SHALL BE COMPLETED IN STAGES ON OR BEFORE THE DATES MENTIO NED IN TIME SCHEDULE OF COMPLETION OF WORK. THE ASSESSEE SHALL BEAR IN MIND THAT TIME IS THE ESSENCE OF THE CONTRACT AND TIME SCHEDULE INCLUDI NG PROGRESS TIME SCHEDULE AS PROVIDED FOR IN THIS CONTRACT OR SUCH EXTENDED TIME SCHEDULE, AS IS MUTUALLY AGREED, SHALL BE STRICTLY ADHERED TO. IT IS ALSO MENTIONED THAT IN CASE THE ASSESSEE DELAYS SYSTEM SITE ACCEPTANCE TEST (SAT FOR SHORT) AS SPECIFIED IN TERMS OF THIS CONTRACT BEYOND 30 DAYS AFTER ITS SPECIFIED COMPLETION DATE, THE NAA SHALL BE ENTITLED TO R ECOVER FROM THE ASSESSEE OR DEDUCT FROM THE PAYMENT DUE TO THE ASSESSEE AS LIQUIDATED DAMAGES AN AMOUNT EQUAL TO 1% OF THE CONTRACT PRICE FOR EACH WEEK OF DELAY BEYOND ITA NO. 3073(DEL)/2009 26 THE AFORESAID 30 DAYS SPECIFIED FOR COMPLETION OF THE WORK, UP TO A MAXIMUM OF 7.5% OF THE CONTRACT PRICE. IT IS ALS O MENTIONED THAT THE ASSESSEE AGREES TO PROVIDE THE NECESSARY INFORMA TION TO OPERATE, MAINTAIN AND REPAIR THE EQUIPMENT DELIVERED UNDER THE CONT RACT. THE DOCUMENTS FURNISHED BY THE ASSESSEE TO THE NAA WHICH ARE IN THE POSSESSION OF THE ASSESSEE PRIOR TO THE DATE OF THIS CONTRACT, OR W HICH ARE DEPLOYED MAINLY ON THE BASIS OF PROPRIETARY CONCEPT CONTAINED IN THESE DOCUMENTS, SHALL BE THE PROPERTY OF THE ASSESSEE. THE NAA SHALL BE ENTITLED ONLY TO USE SUCH DOCUMENTS AND COPIES IN CONNECTION WITH OPERATION, REPAIR AND MAINTENANCE OF THE ATS. ALL OTHER DOCUMENTS AND COPIES THEREOF DEVELOPED INDEPENDENTLY BY THE ASSESSEE IN CONNECTION WITH THE WORK SHALL BE THE PROPERTY OF THE ASSESSEE. THE NAA MAY HOWEVER USE SUCH DOCUMENTS AND COPIES FOR ANY PURPOSE FOR THE USE OF THE ATS . IN RESPECT OF COMPUTER SOFTWARE TECHNICAL DOCUMENTATION REQUIRED TO OPE RATE THE EQUIPMENTS TO BE SOLD TO THE NAA UNDER THIS CONTRACT, THE ASSESS EE SHALL GRANT TO THE NAA A LICENSE TO USE COMPUTER SOFTWARE AND TECHNICAL DOCUMENTATION FOR USE OF THE ATS. THE LICENSE SHALL PROVIDE THAT SUC H COMPUTER SOFTWARE AND DOCUMENTATION : (I) INCLUDES PROPERTY OF HER MAJE STY THE QUEEN IN RIGHT OF CANADA AND ARE TO BE USED OR COPIED ONLY FOR T HE PURPOSE OF OPERATING THE ARTICLE OR THING IN WHICH THEY ARE CONTAINED. THE ASSESSEE SHALL MARK ITA NO. 3073(DEL)/2009 27 THE ARTICLE OR THING CONTAINING THE COMPUTER SOF TWARE AND TECHNICAL DOCUMENTATION WITH THE LEGEND . THE ASSESSEE A GREES THAT TECHNICAL DATA REFERRED TO ABOVE SHALL ONLY BE USED, REPROD UCED, ADAPTED OR MODIFIED BY THE NAA FOR THE PURPOSE OF BOMBAY & DELHI ATS . THE LICENSE AGREEMENT SHALL BE ENTERED INTO WITH THE ASSES SEE OR OTHER PROPRIETORS OF SUCH RIGHTS FOR USE AT OTHER LOCATIONS OF THE NAA. THE ASSESSEE SHALL NOT UNREASONABLY WITHHOLD HIS AGREEMENT FOR SU CH LICENSE AND SHALL ENSURE THAT OTHER PROPRIETORS OF SUCH RIGHTS SHA LL NOT UNREASONABLY WITHHOLD THEIR AGREEMENTS FOR SUCH LICENSE. S UCH AGREEMENT SHALL BE SUBJECT TO A LICENSE FEES WHICH SHALL BE FAIR A ND REASONABLE. IT IS ALSO PROVIDED THAT ROYALITIES AND FEES FOR PATENTS COVERING MATERIALS, ARTICLES, APPARATUS, DEVICES, EQUIPMENTS OR PRO CESSES USED IN THE WORKS SHALL BE DEEMED TO HAVE BEEN INCLUDED IN THE CONTR ACT PRICE. THE ASSESSEE SHALL SATISFY ALL DEMANDS THAT MAY BE MADE AT A NY TIME FOR SUCH ROYALITIES OR FEES AND HE ALONE SHALL BE LIABLE FOR ANY DAMA GES OR CLAIMS FOR PATENT INFRINGEMENTS AND SHALL KEEP THE NAA INDEMNIFIED IN THIS REGARD. THE ASSESSEE SHALL AT HIS OWN COST AND EXPENSE DEFEND ALL SUITS AND PROCEEDINGS THAT MAY BE INSTITUTED FOR ALLEGED INFRINGEMENT FOR ANY PATENTS INVOLVED IN THE WORKS AND IN CASE OF AN AWARD OF DAMAGES, HE SHALL PAY FOR SUCH AWARD. IN THE EVENT OF ANY SUIT OR OTHER PROCEEDINGS ITA NO. 3073(DEL)/2009 28 INSTITUTED AGAINST NAA, THE SAME SHALL BE DEFE NDED AT THE COST AND EXPENSE OF THE ASSESSEE, WHO SHALL ALSO SATISFY ANY DECREE OR ORDER OF AWARD MADE AGAINST NAA. BUT IT SHALL BE UNDER STOOD THAT NO SUCH EQUIPMENT, SUB-SYSTEM, WORK, MATERIAL OR THING H AS BEEN USED BY NAA FOR ANY PURPOSE OR IN ANY MANNER OTHER THAN THAT FOR WHICH THEY HAVE BEEN FURNISHED AND INSTALLED BY THE ASSESSEE. IT IS ALSO MENTIONED THAT THE ASSESSEE SHALL IMPLEMENT A PLAN FOR TRANSFERR ING SOFTWARE TECHNOLOGY FOR THE RADAR DATA PROCESSING SYSTEM (RDPS FOR SH ORT) AND THE FLIGHT DATA PROCESSING SYSTEM (FDPS FOR SHORT). THE PLAN S HALL INCLUDE A TRANSFER OF TECHNOLOGY TO THE NAA STAFF AND TO INDIAN IN DUSTRY. THE CONTRACTOR SHALL TRAIN SIX NAA SYSTEM SOFTWARE ENGINEERS AT ITS FACILITIES IN THE UNITED STATES FOR A PERIOD OF SIX MONTHS. THESE ENGINEERS SHALL PARTICIPATE IN A SERIES OF SOFTWARE COURSES COV ERING COMPUTER LANGUAGES, UNIX, AND SOFTWARE DEVELOPMENT METHODOLOGY. NAA ENGINEERS WILL WORK DIRECTLY WITH THE CONTRACTORS PERSONNEL ON THE SOFTWARE DEVELOPMENT AND TESTING. IN ADDITION, THE TRAIN ING PROGRAMME INCLUDES A THREE WEEK COURSE OF INSTRUCTION, WHICH IS TO BE GIVEN IN INDIA. THIS COURSE INCLUDES A DISCUSSION ON THE SYSTEM ARCHITECTU RE, DESIGN AND IMPLEMENTATION. TOPICS RELATING TO ASPECTS OF SO FTWARE MAINTENANCE SHALL BE INCLUDED. A TEAM OF FOUR ENGINEERS DRAWN FRO M INDIAN INDUSTRY WILL ITA NO. 3073(DEL)/2009 29 ALSO RECEIVE SIMILAR TRAINING. IN RESPECT OF SOFTW ARE SOURCE CODE, IT IS AGREED THAT AS A PART OF TRANSFER OF TECHNOLOGY, THE ASSESSEE SHALL DELIVER THE COMPUTER SOURCE CODE FOR THE RDPS AND FDPS S OFTWARE. USAGE OF SOFTWARE SOURCE AND ANY RESULTING EXECUTABLE I MAGES IS LIMITED TO SYSTEMS DELIVERED UNDER THIS CONTRACT TO THE NA A FOR THE MATS-BD PROGRAM (BOMBAY AND DELHI) BY THE ASSESSEE. THE ASSESSEE WILL ALSO ENTER INTO AN AGREEMENT WITH THE NAA AND AN ORGA NISATION OR COMPANY REPRESENTING INDIAN INDUSTRY CONCERNING SOFTWARE TRAINING AND USE OF SOFTWARE SOURCE CODE PRIOR TO 30 DAYS BEFOR E CRITICAL DESIGN REVIEW (CDR FOR SHORT). 6.3 ARTICLE 3 OF THE AGREEMENT INTER-ALIA PROVID ES FOR THE DELIVERY POINT OF ALL THE EQUIPMENTS, SPARES, TOOLS AND TEST EQUIPMENTS TO BE CIP (AS PER INCOTERMS) BOMBAY AND DELHI AIRPORTS. FOR TH E EQUIPMENTS TO BE INSTALLED OUTSIDE BOMBAY AND DELHI AIRPORTS, DELIVE RY SHALL BE TO THE DESIGNATED POINT OF INSTALLATION. IT IS ALSO PRO VIDED THAT RESPONSIBILITY FOR CUSTOMS CLEARANCE AND SECURING OTHER APPROVALS FOR SHIPMENT OF EQUIPMENTS, MATERIALS AND SUPPLIES INTO INDIA SHALL BE THAT OF THE NAA. ITA NO. 3073(DEL)/2009 30 6.4 ARTICLE 4 DEALS WITH THE CONSIDERATION AND I TS PAYMENTS FOR THE CONTRACT. THE SAME IS DEPICTED IN THE TABLE GIVE N BELOW:- COUNTRY PROGRAM PRICE CREDIT AGENCY FEES TOTAL PRICE UNITED STATES $52,027,100 $1,087,100 $53,114,200 CANADA $15,303,000 $1,294,600 $16,597,600 SPAIN $6,093,200 $169,000 $6,262,200 UNITED KINGDOM $5,431,600 $606,000 $6,037,600 TOTAL CONTRACT $78,854,900 $3,156,700 $82,011,600 THE AFORESAID PAYMENT IS TO BE MADE ON 10 DIFFERE NT DATES BETWEEN 30.11.1993 AND 30.9.1995, UPON COMPLETION OF A PARTICULAR ACTIVITY STARTING FROM COMPLETION OF PRELIMINARY DESIGN R EVIEW (PDR FOR SHORT) AND ENDING WITH SYSTEM SITE ACCEPTANCE TEST CO MPLETION. 6.5 ARTICLE 5 INTER-ALIA PROVIDES THAT THE ASSESS EE SHALL AT HIS COST ARRANGE, SECURE AND MAINTAIN INSURANCE AS MAY BE NECESSA RY AND FOR ALL SUCH AMOUNTS TO PROTECT HIS INTEREST AND THE INTEREST OF NAA AGAINST ALL RISKS DURING THE PERIOD OF CONTACT. IT WILL BE HIS RESPONSIBILITY ALONE. ANY LOSS ITA NO. 3073(DEL)/2009 31 OR DAMAGE TO THE EQUIPMENT DURING CLEARANCE, HANDLING, TRANSPORTATION, INSTALLATION AND TESTING, TILL SUCH TIME THE TOTAL SYSTEM IS TAKEN OVER BY THE NAA SHALL BE TO THE ACCOUNT OF THE ASSESSEE. TH E TRANSFER OF TITLE SHALL NOT IN ANY WAY RELIEVE THE CONTRACTOR OF THIS RE SPONSIBILITY DURING THE PERIOD OF THE CONTRACT. ALL COSTS ON ACCOUNT OF INSURANCE LIABILITIES WILL BE ON CONTRACTORS ACCOUNT AND WILL BE INCLUDED IN T HE CONTRACT PRICE. 6.6 ARTICLE 9 INTER-ALIA DEALS WITH THE TRANSFER OF PROPERTY, AND IT IS PROVIDED THAT THE PROPERTY IN EQUIPMENTS, SUB-SYSTE MS, SYSTEMS TO BE APPLIED TO THE NAA SHALL PASS TO IT WHEN THE SAME ARE DISPATCHED FOR DELIVERY. THEREAFTER, THE ASSESSEE SHALL BE IN POSSESSION OF AND WILL HAVE THE CUSTODY OF EQUIPMENTS, SUB-SYSTEMS AND SYSTEM S FOR THE PURPOSE OF TRANSPORTATION TO SITE, ITS INSTALLATION AND SITE ACCEPTANCE TEST. IT SHALL HOLD THE SAME ON BEHALF OF NAA AND SHALL NOT DEAL WITH THE SAME IN ANY MANNER EXCEPT FOR THE PURPOSE OF THIS CONTRACT. THE ASSESSEE SHALL HOLD THE EQUIPMENTS ETC. HANDED OVER TO HIM BY NAA AS TRUSTEE ON BEHALF OF IT WITHOUT HAVING ANY LIEN OR CHARGE AGAINST THE EQUIPMENT AT ANY STAGE. IT IS ALSO PROVIDED THAT NOTWITHSTANDING THE TRANSF ER OF PROPERTY IN THE EQUIPMENTS, THE SYSTEMS ETC., THE ASSESSEE SHA LL NOT BE ABSOLVED FROM ITA NO. 3073(DEL)/2009 32 RESPONSIBILITY TO EXECUTE THE WORKS IN ITS ENTI RETY AS IF THE CONTRACT WAS AN ENTIRE AND INDIVISIBLE TURN-KEY BASIS WORK C ONTRACT. 6.7 AS MENTIONED EARLIER, ANOTHER AGREEMENT, TER MED AS SERVICE CONTRACT BY THE ASSESSEE, WAS ENTERED INTO B ETWEEN THE ASSESSEE AND THE AAI ON THE SAME DAY, I.E. 19.3.1993. RECITAL TO THIS CONTRACT IS THE SAME AS IN SUPPLY CONTRACT. ARTICLE 1 OF THIS CONTRACT FU RNISHES DEFINITIONS OF 19 TERMS. ARTICLE 2 IS IN CONNECTION WITH THE S COPE OF THE CONTRACT. IT IS INTER-ALIA MENTIONED THAT INSTALLATION SERVICE AND TRAINING TO BE PERFORMED IN INDIA BY THE ASSESSEE UNDER THIS CONTRACT ARE SP ECIFIED IN EXHIBIT-A, STATEMENT OF WORK, SECTIONS 8, 9.1.3., 9.1.4., 9. 1.7, 9.1.8, (IN INDIA PORTION), 9.1.9 AND 9.1.10, WHICH IS ATTACHED WIT H THE AGREEMENT. THE CONSIDERATION OF THE CONTRACT IS PLACED AT US$ 2 3,04,400. THE PAYMENTS ARE TO BE MADE IN EIGHT INSTALLMENTS STARTING F ROM 30.09.1994 AND ENDING ON 30.9.1995 DEPENDING UPON THE MILESTONE STARTING WITH MOBILIZATION AND ENDING WITH BOMBAY SAT. THE OT HER TERMS ARE THE SAME AS IN THE FIRST SUPPLY CONTRACT. 6.8 THE LD. CIT(APPEALS) DEALT WITH THIS ISSUE ON PAGE NOS. 22 TO 35 OF HIS ORDER. INITIALLY, HE SUMMARIZED THE FINDINGS OF THE AO WHICH ARE THAT ITA NO. 3073(DEL)/2009 33 THE CONTRACTS ARE FOR MODERNIZATION OF THE ATS AT DELHI AND BOMBAY. THE ATS INCLUDES FLIGHT INFORMATION SERVICE, AIR TR AFFIC CONTROL SERVICE, AIR CONTROL SERVICE, APPROACH CONTROL SERVICE, ALTERIN G SERVICE, AIR TRAFFIC ADVISORY SERVICE AND AIRPORT CONTROL SERVICE. TH E TENDER DOCUMENT IS A DETAILED ONE IN FOUR VOLUMES, WHICH INCLUDES PRE- QUALIFICATION, TECHNICAL, COMMERCIAL AND FINANCIAL IN NATURE. THE BIDDERS ARE DEEMED TO HAVE VISITED THE SITE AND EXAMINED THE TENDER DOCUMENT S THOROUGHLY, AND OBTAINED ALL INFORMATION FOR THE EXECUTION OF THE WORK. THE PROJECT IS AWARDED ON A TURN-KEY BASIS AS MENTIONED IN THE DO CUMENT. IT REQUIRES DESIGNING, MANUFACTURING, SUPPLYING, INSTALLING, I NTEGRATING, TESTING AND COMMISSIONING OF MODERN, EFFICIENT AND AUTOMATED ATS. IT ALSO PROVIDES FOR TRAINING OF AIR TRAFFIC CONTROLLERS AND ENGINEERS FOR OPERATING AND MAINTAINING THE SYSTEM. THUS, FULLY WORKING SYSTEM, MEETING THE REQUIREMENTS HAS TO BE HANDED OVER TO THE NAA. THEREAFTER, HE CONSIDERED THE ARGUMENTS OF THE LD. COUNSEL AND MENTIONED THA T THE QUESTION IS ONE OF FACT AND THE CASES RELIED UPON BY THE ASSESSEE MAY NOT BE OF ANY HELP UNLESS IT IS FULLY ESTABLISHED THAT THE FACTS ARE IN PARI-MATERIA. HE REFERRED TO THE RULINGS OF AUTHORITY FOR ADVANCE RULING IN RESPECT OF SUBSEQUENT CONTRACTS BETWEEN THE ASSESSEE AND T HE AAI. IT HAS BEEN MENTIONED THAT ALTHOUGH THESE RULINGS ARE IN RESP ECT OF SUBSEQUENT ITA NO. 3073(DEL)/2009 34 CONTRACTS, THEY THROW IMPORTANT LIGHT ON THE NA TURE OF WORK DONE BY THE ASSESSEE. IT HAS BEEN HELD THAT THE PAYMENTS MAD E TO THE ASSESSEE- COMPANY IN RESPECT OF SOFTWARE AND PROVIDING S ERVICES OF INSTALLATION, TESTING AND TRAINING ARE TAXABLE IN INDIA BOTH UNDER THE ACT AND THE DTAA. THESE RULINGS WERE FURNISHED ON 4.3.2003, 26.4.2006 AND 20.2.2007. IT IS CLARIFIED BY THE LD. CIT(A) T HAT THE FINDING OF NON- EXISTENCE OF THE PE IS ONLY IN RESPECT OF THESE AGREEMENTS ONLY. FINALLY, IT HAS BEEN HELD THAT THE TWO AGREEMENTS CONSTITU TE ONE AGREEMENT IN THE NATURE OF A WORKS CONTRACT FOR HADING OVER FUNCT IONING ATS AT DELHI AND BOMBAY TO THE AAI. THE PAYMENTS RECEIVED BY TH E ASSESSEE ARE, THUS, TO BE CONSIDERED FOR TAXATION IN INDIA ON THE B ASIS OF AFORESAID FINDING. 6.9 BEFORE US, THE LD. COUNSEL SUBMITTED THAT THE ASSESSEE ENTERED INTO TWO CONTRACTS WITH THE AAI ON 19.3.1993. THE FI RST CONTRACT IS FOR SUPPLY OF EQUIPMENTS, MATERIALS AND SOFTWARE FOR THE A TS. ALL THE SUPPLIES WERE TO BE MADE FROM ABROAD FOR A CONSIDERATION OF US $82 MILLIONS. THE CONSIDERATION WAS ALSO PAYABLE OUTSIDE INDIA. THE SECOND CONTRACT IS FOR THE PURPOSE OF INSTALLATION OF THE ATS AND TRAININ G OF THE PERSONNEL. THE CONSIDERATION OF THIS CONTACT WAS ABOUT US$ 2.3 M ILLIONS. THE AO AND THE ITA NO. 3073(DEL)/2009 35 LD. CIT(APPEALS) ARE OF THE VIEW THAT THESE TWO CONTRACTS CONSTITUTE ONE COMPOSITE TURN-KEY WORKS CONTRACT. 6.10 IT IS FURTHER SUBMITTED THAT THE TAXATION OF BUSINESS INCOME OF A NON-RESIDENT PERSON IS GOVERNED UNDER THE INCOME- TAX ACT AND THE DTAA. THE RELEVANT SECTIONS OF THE ACT ARE 5(2) AND 9(1)(I). UNDER THE FORMER PROVISION, THE INCOME RECEIVED OR DEEMED TO BE RECEIVED, ACCRUING OR ARISING OR DEEMED TO ACCRUE OR ARISE IN INDIA I S BROUGHT TO TAX. SECTION 9 DEALS WITH THE INCOME WHICH IS DEEMED TO ACCRUE OR ARISE IN INDIA. THEREFORE, IT HAS TO BE SEEN WHETHER THERE EXIS TED IN INDIA A BUSINESS CONNECTION OF THE ASSESSEE THROUGH WHICH ITS BUS INESS WAS CARRIED ON. THIS HAS TO BE EXAMINED IN THE LIGHT OF THE DECIS ION OF HONBLE SUPREME COURT IN THE CASE OF R.D.AGARWAL, 56 ITR 20. FU RTHER, IF SUCH A BUSINESS CONNECTION EXISTS, ONLY THAT PORTION OF INCOME CA N BE BROUGHT TO TAX UNDER THE ACT AS IS REASONABLY ATTRIBUTABLE TO THE OPER ATIONS CARRIED OUT IN INDIA. UNDER ARTICLE 7 OF THE DTAA, THE PROFITS OF AN ENTERPRISE CAN BE BROUGHT TO TAX ONLY IF ITS BUSINESS IS CARRIED OUT WHOLLY OR PARTLY THROUGH A PE. AGAIN ONLY SO MUCH OF THE PROFITS CAN BE BROUGH T TO TAX WHICH ARE ATTRIBUTABLE TO THE PE. THUS, IT WILL BE SEEN THA T BOTH UNDER THE INCOME- TAX ACT AND THE TREATY, THE PROFIT IS TO BE APPO RTIONED BETWEEN THE TAXABLE ITA NO. 3073(DEL)/2009 36 TERRITORIES. IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES LTD. VS. DIRECTOR OF INCOME-TAX, MUMBAI (2007) 288 ITR 408 (SC), IT HAS BEEN HELD THAT WHERE DIFFERENT SEVERABLE PARTS OF A COM POSITE CONTRACT ARE PERFORMED IN DIFFERENT JURISDICTIONS, THE PRINCIP AL OF APPORTIONMENT CAN BE APPLIED TO DETERMINE HOW MUCH PROFIT WILL BE TAX ABLE IN ONE OR THE OTHER JURISDICTION. IN SUCH A COMPOSITE CONTRACT, IT IS NECESSARY TO FIND OUT THE TAXABILITY OF DIFFERENT AND DISTINCT OPERATIONS C ARRIED OUT UNDER IT. IN THE CASE OF THE ASSESSEE THERE ARE TWO SEPARATE CO NTRACTS, ONE DEALING WITH THE SUPPLIES AND THE OTHER WITH INSTALLATION E TC. AND TRAINING. SEPARATE CONSIDERATIONS HAVE BEEN FIXED FOR THE TWO CONTRA CTS. THEREFORE, EVEN IF IT IS CONSTRUED THAT THERE IS ONLY ONE TURN-KEY CO NTRACT, THE INCOME WILL HAVE TO BE DETERMINED IN DIFFERENT YEARS ON THE BASIS O F DISTINCT AND SEPARATE ACTIVITIES, TAKING INTO ACCOUNT THE SYSTEM OF A CCOUNTING FOLLOWED BY THE ASSESSEE. 6.11 IN REPLY, THE LD. DR REFERRED TO THE DECIS ION OF HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY I NDUSTRIES LTD. (SUPRA), IN WHICH THERE WAS A COMPOSITE TURN-KEY PROJECT FOR SETTING UP A LIQUEFIED NATURAL GAS RECEIVING, STORAGE AND R EGASIFICATION FACILITY IN GUJARAT TO BE CARRIED OUT BY A CONSORTIUM. THE RESPONSIBILITY OF EACH ITA NO. 3073(DEL)/2009 37 MEMBER OF THE CONSORTIUM WAS FIXED AND SEPARATE CONSIDERATION WAS ALSO FIXED FOR EACH ONE OF THEM. COMING TO THE CASE A T HAND, IT IS SUBMITTED THAT UNDER THE TWO CONTRACTS, THE ASSESSEE WAS TO MODERNIZE THE EXISTING ATS. THE ASSESSEE WAS ASSIGNED THIS WORK AND TH E PARAMETERS WERE MENTIONED IN THE TENDER FLOATED BY THE AAI. THER E WAS AN EXISTING ATS WHICH WAS TO BE MODERNIZED TO MEET THE PRESENT REQUIREMENTS OF THE AAI. UNDER ARTICLE 4, THE ASSESSEE WAS RESPONSIBLE F OR PROVIDING EQUIPMENTS, INSTALLATION, TESTING AND SUPPORT TO THE COMMIS SIONING OF MATS-BD SYSTEM. FOR THIS PURPOSE, IT WAS RESPONSIBLE F OR ESTABLISHING, IMPLEMENTING AND MAINTAINING A PROJECT MANAGEMEN T PLAN. FURTHER, IT WAS RESPONSIBLE FOR PROVIDING A MONTHLY PROJEC T STATUS REPORT TO THE AAI. IT WAS ALSO RESPONSIBLE TO ATTEND A QUARTERLY P ROGRESS REVIEW MEETING FOR PRESENTING A PROJECT STATUS REPORT. IT WAS AL SO RESPONSIBLE FOR CONDUCTING TECHNICAL SYSTEM REVIEWS AND MEETINGS WITH THE N AA, WHICH INTER-ALIA INCLUDED SYSTEM SPECIFICATION REVIEW, PDR AND C DR. ON THE COMPLETION OF THE CDR, THE REQUIREMENTS OF HARDWARE AND SOF TWARE WERE TO BE FROZEN AND PLACED UNDER CONFIGURATION CONTROL. THIS CLEARLY SHOWS THAT THE CONTRACT WAS NOT MERELY A SUPPLY CONTRACT BUT A JOB CONTRACT GRANTED AND UNDERTAKEN TO UPGRADE THE EXISTING ATS. FURTHER, THE SCHEDULE OF PAYMENTS SHOWS THAT IT IS NOT CONNECT ED WITH THE SUPPLIES BUT ITA NO. 3073(DEL)/2009 38 WITH CERTAIN EVENTS SUCH AS COMPLETION OF REVIEW , FAT COMPLETION, INSTALLATION OR SITE ACCEPTANCE TEST. THEREFOR E, THE CONSIDERATION IS NOT ATTACHED TO THE SUPPLY OF GOODS, SOFTWARE ETC. TH US, IT IS NOTHING BUT A WORKS CONTRACT, THE INCOME FROM WHICH ACCRUES A T THE TIME OF ACCEPTANCE OF THE ATS BY THE AAI. IT IS ALSO SUBMITTED TH AT THE DECISION UNDER THE SALES-TAX ACT DISTINGUISHING BETWEEN SALE AND WO RKS CONTACT IS ADMITTEDLY NOT ACCEPTABLE UNDER THE INCOME-TAX A CT, WHICH IS GOVERNED UNDER THE PROVISIONS OF THE ACT AND THE TREATY. 6.12 WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE US. WE ARE NOT AT THE MOMENT DEALING WI TH THE TAXATION OF THE CONSIDERATION RECEIVED BY THE ASSESSEE IN RESPEC T OF THE SUPPLY AND INSTALLATION ETC. CONTRACTS. THE QUESTION IS- WHE THER, THE TWO AGREEMENTS CONSTITUTE ONE AGREEMENT. THE QUESTION MAY BE ONLY OF ACADEMIC INTEREST BECAUSE IT IS THE ACCEPTED POSITION OF BOTH THE PARTIES THAT THE TAXATION ASPECT HAS TO BE SEEN UNDER THE ACT AND THE TREAT Y. NONETHELESS, SINCE THIS QUESTION HAS BEEN RAISED BY THE ASSESSEE, IT NE EDS TO BE ANSWERED BY US. ON PERUSAL OF THE TWO CONTRACTS, IT IS SEEN THAT THE BASIC PURPOSE OF THE CONTRACTS WAS TO MODERNIZE THE ATS AT BOMBAY A ND DELHI. FOR THIS PURPOSE, THE ASSESSEE WAS REQUIRED TO SUPPLY EQUIPMENTS AND SOFTWARE. ITA NO. 3073(DEL)/2009 39 IT WAS ALSO REQUIRED TO INSTALL THE AGREED EQ UIPMENT AND SOFTWARE AT DELHI AND BOMBAY AND CONDUCT SITE ACCEPTANCE TEST. ON CARRYING OUT THIS TEST, THE AAI WAS TO TAKE OVER THE ATS AND O PERATE THEM. THE CONTRACT REGARDING SUPPLY OF EQUIPMENTS AND SOFTW ARE WOULD HAVE BEEN OF NO CONSEQUENCE WITHOUT INSTALLATION AND PERFORMAN CE OF SAT AS THESE PROCESSES ARE COMPLICATED, WHICH COULD BE UNDERT AKEN ONLY BY THE ASSESSEE. FURTHER, THE DATES OF PAYMENT MENTION ED IN THE SUPPLY CONTRACT WERE CONNECTED BOTH WITH CARRYING OUT CERTAIN WO RK, NAMELY, COMPLETION OF PRELIMINARY DESIGN REVIEW ETC., FACTORY ACC EPTANCE TEST COMPLETION, INSTALLATION AND SITE ACCEPTANCE TEST. THEREFORE , IT WILL BE DIFFICULT TO SEGREGATE THIS CONTRACT FROM INSTALLATION/SERVIC E CONTRACT. IT IS ANOTHER MATTER THAT TWO SEPARATE CONTRACTS WERE EXECUTE D FOR THE SAKE OF SOME CONVENIENCE OF BOTH THE PARTIES. HOWEVER, THE E SSENTIAL PURPOSE WAS TO SET UP THE ATS AT DELHI AND BOMBAY, FOR WHICH H ARDWARE AND SOFTWARE WAS SUPPLIED BY THE ASSESSEE, INSTALLATION WAS C ARRIED OUT LEADING TO SITE ACCEPTANCE TEST. THE TRAINING FOR THE PERSONNEL O F THE AAI AS WELL AS INDIAN INDUSTRY WAS ALSO TO BE CARRIED OUT FOR PREP ARING THEM TO HANDLE THE ATS. ACCORDINGLY, WE ARE OF THE VIEW THAT THE TW O CONTRACTS CONSTITUTE ONE CONTRACT. HAVING COME TO THE AFORESAID CON CLUSION, WE MAY POINT OUT THAT THE CONTACT IS A COMPLEX ONE WHICH RE QUIRES DESIGNING, SUPPLY ITA NO. 3073(DEL)/2009 40 OF HARDWARE AND SOFTWARE, INSTALLATION AND TRAI NING. THEREFORE, THE FOLLOWING ANALYSIS MENTIONED IN THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY INDUSTR IES LTD. (SUPRA) WILL HAVE TO BE KEPT IN MIND WHILE COMING TO THE CONCLU SION ABOUT THE TAXABILITY OF THE CONSIDERATION RECEIVED BY THE ASSESSEE:- FOR THE PURPOSE OF TAXATION, THE AUTHORITY HAD PROCEEDED ON THE BASIS THAT THE ELEMENT OF TAX CONSISTED OF : (I) ONSHORE SUPPLY AND ONSHORE SERVICES; AND (II) CONSTRUCTIO N OF OFFSHORE SUPPLY AND OFFSHORE SERVICES. IT IS NOT DENIED O R DISPUTED, AS INDICATED HEREINBEFORE, THAT IN RESPECT OF THE FI RST ELEMENT OF ONSHORE SUPPLY AND ONSHORE SERVICE, AND CONSTRUCTI ON TAX WOULD BE PAYABLE IN INDIA. TWO BASIC ISSUES WHICH, THUS, ARISE FOR OUR CONSIDE RATION ARE: (A) THE TAXATION OF THE PRICE OF GOODS SUPPLIED , BY WAY OF OFFSHORE SUPPLY PRICE OF WHICH IS SPECIFIED IN EXHIBIT D, CLAUSE 2.1; AND (B) THE TAXATION OF CONSIDERAT ION PAID FOR RENDITION OF SERVICES DESCRIBED IN THE CONTRACT AS OFFSHORE SERVICES AT EXHIBIT D. THE CONTRACT IS A COMPLEX ARRANGEMENT. PETRONET AND THE APPELLANT ARE NOT THE ONLY PARTIES THERETO, T HERE ARE OTHER MEMBERS OF THE CONSORTIUM WHO ARE REQUIRED TO CAR RY OUT DIFFERENT PARTS OF THE CONTRACT. THE CONSORTIUM I NCLUDED AN INDIAN COMPANY. THE FACT THAT IT HAS BEEN FASHIO NED AS A TURNKEY CONTACT BY ITSELF MAY NOT BE OF MUCH SI GNIFICANCE. THE PROJECT IS A TURNKEY PROJECT. THE CONTACT M AY ALSO BE A TURNKEY CONTACT, BUT THE SAME BY ITSELF WOULD N OT MEAN THAT EVEN FOR THE PURPOSE OF TAXABILITY THE ENTIRE CONTRACT MUST BE CONSIDERED TO BE AN INTEGRATED ONE SO AS TO MAKE THE APPELLANT TO PAY TAX IN INDIA. THE TAXABLE EVE NTS IN EXECUTION OF A CONTRACT MAY ARISE AT SEVERAL STAGES IN SEVERAL YEARS. THE LIABILITY OF THE PARTIES MAY ALSO ARISE A T SEVERAL STAGES. THE OBLIGATIONS UNDER THE CONTRACT ARE DISTINCT ONES. THE OH SUPPLY OBLIGATION IS DISTINCT AND SEPARATE FROM THE SERVICE ITA NO. 3073(DEL)/2009 41 OBLIGATION. THE PRICE FOR EACH OF THE COMPONENT OF THE CONTACT IS SEPARATE. SIMILARLY OFFSHORE SUPP LY AND OFFSHORE SERVICES HAVE SEPARATELY BEEN DEALT WITH. THE P RICES IN EACH OF THE SEGMENT ARE ALSO DIFFERENT. THE VERY FACT THAT IN THE CONTRACT, THE SUPPLY SEGMENT AND SERVICE SEGMENT HAVE BEEN SPECIFIED IN DIFFERENT P ARTS OF THE CONTRACT IS A POINTER TO SHOW THAT THE LIABI LITY OF THE APPELLANT THEREUNDER WOULD ALSO BE DIFFERENT. THE CONTRACT INDISPUTABLY WAS EXECUTED IN INDIA . BY ENTERING INTO A CONTACT IN INDIA, ALTHOUGH PA RTS THEREOF WILL HAVE TO BE CARRIED OUT OUTSIDE INDIA WOULD NOT M AKE THE ENTIRE INCOME DERIVED BY THE CONTRACTOR TO BE TAXABLE IN INDIA. WE WOULD, HOWEVER, DEAL WITH THIS ASPECT OF THE MATTER A LITTLE LATER. THE SCOPE OF WORK IS CONTAINED IN CLAUSE 2.1 OF EX HIBIT A APPENDED TO THE CONTRACT WHICH INCLUDES SUPPLY O F EQUIPMENT, MATERIALS AND FACILITIES. THE SAID EXH IBIT SPELLS OUT DIFFERENT SYSTEMS TO BE SET IN PLACE. IT IMPOSES AN OBLIGATION ON THE CONTRACTOR TO SUPPLY EQUIPMENT REQUIRED T HEREFOR. IT WAS TO ARRANGE FOR THE ENGINEERING SERVICES IN RELATION THERETO. IT WAS ALSO REQUIRED TO RENDER VAR IOUS OTHER SERVICES WITHIN INDIA. EXHIBIT D, HOWEVER, PROV IDES FOR THE PRICES TO BE PAID IN RESPECT OF OFFSHORE SUPPLIES AND OFFSHORE SERVICES, ONSHORE SUPPLY AND ONSHORE SERVICES, CO NSTRUCTION AND ERECTION. THE PAYMENT SCHEDULE HAS ALSO BEE N SEPARATELY SPECIFIED IN RESPECT OF EACH OF THE COMPONENTS SEPARATELY. IT IS NOT IN DISPUTE THAT TITLE IN THE EQUIPM ENT SUPPLIED WAS TO STAND TRANSFERRED UPON DELIVERY THEREOF O UTSIDE INDIA ON HIGH-SEAS BASIS AS PROVIDED FOR IN ARTICLE 2 2.1. SIMILARLY, ARTICLE 13.1 PROVIDES FOR A LUMP SUM CONTRACT PRICE, WHEREAS ARTICLE 13.3.2 SPECIFICALLY REFERS TO TH E COST OF OFFSHORE SUPPLIES. THE PROVISIONS WITH REGARD TO OFFSHORE SUPPLIES AND OFFSHORE SERVICES WERE TO BE READ W ITH THE PROVISIONS CONTAINED IN EXHIBIT D WHICH FORMED THE BASIS OF CUSTOMS DUTY. CLAUSE 13.4 REFERS TO EXHIBIT D A S THE BASIS FOR PRICE ESCALATION. ITA NO. 3073(DEL)/2009 42 THE QUESTION OF IMPOSITION OF TAX ON INCOME ARISIN G FROM A BUSINESS CONNECTION MAY, THUS, HAVE TO BE CONSID ERED KEEPING IN VIEW THE AFOREMENTIONED FACTUAL BACKDROP. 7. BEFORE PROCEEDING WITH GROUND NOS. 4, 5 AND 6 REGARDING TAXATION OF INCOME FROM THE SUPPLY CONTRACT IN INDIA, WE MAY TAKE UP GROUND NOS. 10, 11 AND 12 REGARDING THE PE IN INDIA. IT I S MENTIONED THAT THE LD. CIT(APPEALS) ERRED IN CONFIRMING THAT THE ASSESS EE HAD PE IN INDIA WITH THE PREMISES OF AAI IN DELHI AND MUMBAI, AND I TS OWN PROJECT OFFICE. IT IS FURTHER MENTIONED THAT HE ERRED IN HOLDING THAT THE ASSESSEE HAS INSTALLATION AS WELL AS SERVICE PE IN INDIA UND ER ARTICLES 5(2)(K) AND 5(2)(L) OF THE DTAA. IT IS ALSO MENTIONED TH AT HE ERRED THAT THE CONTRACT FOR OFFSHORE SUPPLY OF EQUIPMENT IS AN INTEGRAL PART OF ACTIVITIES CARRIED OUT THROUGH PE IN INDIA AND, THUS, THE I NCOME IS ATTRIBUTABLE TO THE PE. 7.1 THE AO HAS DEALT WITH THIS ISSUE ON PAGE NO S. 18 TO 21 OF HIS ORDER. IT IS MENTIONED THAT THE ESSENCE OF THE CONTRACT IS TO UPGRADE THE EXISTING ATS SO AS TO MEET THE REQUISITE PERFORMANCE C RITERIA. FOR DOING THE WORK UNDER THE CONTRACT, THE ASSESSEE HAD TO CARRY OUT DETAILED FEASIBILITY ASSESSMENT AND THEREAFTER NEGOTIATE THE CONTRAC T WITH AAI. IT ALSO INVOLVED THE INSTALLATION OF THE SYSTEM. THESE ACTIVITIES INVOLVED ITA NO. 3073(DEL)/2009 43 CONTINUOUS PRESENCE OF ASSESSEES TECHNICAL MAN POWER EVEN PRIOR TO THE MAKING OF THE CONTRACT. SUCH PRESENCE WAS REQ UIRED AFTER SUPPLY OF THE EQUIPMENT ALSO AS ITS POSSESSION WAS TAKEN UP BY THE ASSESSEE FOR THE PURPOSE OF INSTALLATION. THEREAFTER, THE EQUIP MENT WAS INSTALLED AND THE SYSTEM WAS TESTED IN INDIA. THE ASSESSEE HAS ALSO UNDERTAKEN THE SUPPLY OF SPARES FOR THE NEXT 15 YEARS. THE CONTRACT WAS NEGOTIATED AND SIGNED IN INDIA. IT WAS SUBJECT TO JURISDICTION OF INDIAN COURTS. THE PROPERTY IN THE SYSTEMS GOT TRANSFERRED TO THE AAI ONLY A FTER ITS ACCEPTANCE. THE LIAISON OFFICE OF ONE OF THE GROUP COMPANIES EXISTE D IN INDIA WHICH WAS INVOLVED IN EXECUTION OF THE CONTRACT AND ITS F OLLOW-UP. IN ANY CASE, IT HAS BEEN ADMITTED BY THE ASSESSEE THAT IT HAS AN INSTALLATION PE BUT THIS PE HAD NOTHING TO DO WITH THE SUPPLY CONTRACT. IN THE CONTEXT OF THESE FACTS, IT HAS BEEN HELD THAT THE ASSESSEE HAS A BUSI NESS CONNECTION IN INDIA U/S 9(1)(I). LOOKING TO THE MAGNITUDE OF THE ACTIVI TIES INVOLVED EVEN FROM PREPARATION OF TENDER ONWARDS, THE ASSESSEE HAD SUBSTANTIAL PRESENCE IN INDIA. THE MARKET AND SUPPORT SERVICES WERE PRO VIDED BY THE LIAISON OFFICE OF THE GROUP COMPANY. THE INSTALLATION WORK CONT INUED FOR MORE THAN 120 DAYS. THE PERSONNEL OF THE ASSESSEE STAYED IN INDIA FOR MORE THAN 90 DAYS. THEREFORE, IT HAS BEEN HELD THAT THE AS SESSEE HAD PE IN INDIA UNDER ARTICLE 5(2) OF THE DTAA. ITA NO. 3073(DEL)/2009 44 7.2 THE LD. CIT(A) HAS DEALT WITH THIS ISSUE ON PAGE NOS. 35 TO 53 OF THE IMPUGNED ORDER. HE REFERRED TO THE FINDI NGS OF THE AO AND THE PROVISION CONTAINED IN ARTICLE 5 OF THE DTAA. THEREAFTER, HE EXAMINED THE ISSUE IN THE LIGHT OF PROVISION CONTAINED IN PARAGRAPH NOS. (1), 2(A), 2(K) AND 2(L) OF THE DTAA. IT IS MENTIONED THA T THE ASSESSEE WAS ENGAGED IN THE ACTIVITIES OF SUPPLY OF EQUIPMEN T AND SOFTWARE, INSTALLATION AND COMMISSIONING THEREOF FOR MODERN IZING THE ATS IN DELHI AND MUMBAI. ACCORDING TO THE AO, THESE ACTIVI TIES HAVE BEEN CARRIED ON FROM THE ATS AT DELHI AND MUMBAI, WHICH ARE FIXED PLACES. THESE PLACES MAY NOT BELONG TO THE ASSESSEE OR MAY N OT BE RENTED BY THE ASSESSEE BUT WHAT IS REQUIRED IS THAT THE AS SESSEE SHOULD HAVE A FIXED PLACE OF BUSINESS SO THAT ITS PERSONNEL HAVE ACC ESS TO CARRY OUT ACTIVITIES OF THE BUSINESS. THE PLACE MAY INCLUDE THE PLACE OF MANAGEMENT UNDER PARAGRAPH 2(A) INSTALLATION OR ASSEMBLY PROJECT UNDER PARAGRAPH 2(K) IF ACTIVITIES CONTINUED FOR MORE THAN 120 DA YS IN A 12 MONTHS PERIOD OR PLACE FROM THERE SERVICES ARE RENDERED WHIC H CONTINUED FOR MORE THAN 90 DAYS UNDER PARAGRAPH 2(L). THE ATS FORMED FIXED PLACE OF BUSINESS UNDER PARAGRAPH 1. THEREFORE, IT HAS BEEN HELD T HAT THE ASSESSEE HAD A PE UNDER ARTICLE 5(1), 5(2)(A), 5(2)(K) AND 5(2)( L). ITA NO. 3073(DEL)/2009 45 7.3 AFTER REFERRING TO THE DECISION IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES CO. LTD. (SUPRA), HYUNDAI HEA VY INDUSTRIES, 291 ITR 482 (SC) AND MOTOROLA INC., 95 ITD 269, IT HAS BEEN MENTIONED THAT THE SUPPLY CONTRACT IN THOSE CASES WAS NOT RELATED T O THE PE IN INDIA. IN THIS CASE, THE ESSENCE OF THE CONTRACT IS TO COMPLETE LY RENOVATE THE EXISTING ATS, WHICH CONSTITUTES THE PE OF THE ASSESSEE. THE CONTRACT WAS NOT A STAND-ALONE SUPPLY CONTRACT. THEREFORE, IT HAS BEEN HELD THAT PROFITS FROM THE SUPPLY CONTRACT ARE TAXABLE IN INDIA. 7.4 BEFORE US, THE LD. COUNSEL SUBMITTED THAT PRIO R TO MANUFACTURING OF THE EQUIPMENTS, THE ASSESSEE HAD VERY FEW RESPONSI BILITIES TO BE DISCHARGED IN INDIA. THE MAJOR WORK OF PREPARATION OF PROJE CT MANAGEMENT PLAN, SUBMISSION OF MONTHLY PROJECT STATUS REPORT, DEV ELOPMENT OF PRELIMINARY DESIGN AND DEVELOPMENT OF CRITICAL DESIGN WERE CARRIED OUT ABROAD. THE EMPLOYEES OF THE ASSESSEE-COMPANY HAD TO VISIT INDIA AND IN PARTICULAR THE ATS IN DELHI AND MUMBAI OR THE OFFICE OF AA I FOR THREE TO FOUR DAYS AT A TIME FOR CONDUCTING QUARTERLY PROGRESS R EVIEW MEETINGS, SYSTEM SPECIFICATION REVIEW, MEETINGS WITH PERSONNEL OF NAA, PDR AND CDR MEETINGS. RAYTHEON INTERNATIONAL INC., A GROUP C OMPANY, HAD A LIAISON OFFICE IN INDIA SINCE 1995. HOWEVER, EVEN THE LD. CIT(APPEALS) CAME ITA NO. 3073(DEL)/2009 46 TO THE CONCLUSION THAT THE AO HAS NOT BEEN ABLE TO SUBSTANTIATE THAT ANY BUSINESS OF THE ASSESSEE WAS CONDUCTED FROM TH IS OFFICE. THE PROJECT OFFICE OR THE SITE OFFICE WAS NOT OPENED BY THE ASSESSEE IN INDIA. THEREFORE, IT IS ARGUED THAT THE SHORT VISITS O F THE EMPLOYEES IN INDIA FOR THE PURPOSES MENTIONED ABOVE DO NOT LEAD TO INF ERENCE THAT THE ASSESSEE HAD A PE IN INDIA. 7.5 IN REPLY, THE LD. DR SUBMITTED THAT THE ASS ESSEE ENTERED INTO A CONTRACT WITH AAI FOR MODERNIZATION OF ATS AT DELHI AND MUMBAI. THESE STATIONS HAD PRE-EXISTING ATS AT THE A IRPORTS, WHICH WERE TO BE SUBSTANTIALLY UPGRADED. FOR THIS WORK, THE ASSES SEE WAS REQUIRED TO CARRY OUT THE WORKS OF DESIGNING, MANUFACTURING, SUPPL YING, INSTALLING, TESTING AND COMMISSIONING OF THE EQUIPMENT. IT WAS ALSO T O PROVIDE TRAINING TO THE PERSONNEL OF AAI AND PRIVATE COMPANIES FOR HAN DING THE ATS. THUS, THE FIRST STAGE OF THE WORK WAS THE DESIGNING OF THE CONFUGRATION OF THE UPGRADED ATS AS PER REQUIREMENT OF THE AAI. AFTE R DECIDING THIS MATTER, THE REQUIREMENT OF EQUIPMENT HAD TO BE ASCERT AINED. THIS REQUIRED VARIOUS REVIEWS MENTIONED IN EXHIBIT A OF THE SU PPLY CONTRACT, I.E., CONDUCTING TECHNICAL SYSTEMS REVIEWS AND MEETIN G WITH THE NAA FOR SYSTEM SPECIFICATION REVIEW, PDR AND CDR. THE ASSESSEE WAS REQUIRED ITA NO. 3073(DEL)/2009 47 TO ATTEND A QUARTERLY PROGRESS REVIEW MEETING A LSO FOR THE PURPOSE OF PRESENTING PROJECT STATUS REPORT. FOR THIS PUR POSE, THE NAA WAS TO PROVIDE ASSISTANCE TO THE ASSESSEE. THE CASE O F THE LD. DR IS THAT VARIOUS REVIEWS WERE TO BE CONDUCTED SO AS TO COLLECT P RELIMINARY DATA ABOUT THE REQUIREMENT OF THE EQUIPMENT AND SOFTWARE. SUCH REVIEWS COULD BE DONE AT THE ATS LOCATED IN DELHI AND MUMBAI AIRPOR TS. IN THIS SITUATION, THE PRE-EXISTING ATS AT THE AIRPORTS BECAME THE FIXE D PLACE AVAILABLE TO THE ASSESSEE, WHICH CONSTITUTED THE PE UNDER ARTICLE 5(1). IT IS CLARIFIED THAT THE FIXED PLACE NEED NOT BE OWNED BY THE ASSES SEE AND THE ONLY REQUIREMENT IS THAT A FIXED PLACE SHOULD BE AV AILABLE TO THE ASSESSEE FOR CARRYING OUT ITS BUSINESS OPERATIONS. IT IS FU RTHER SUBMITTED THAT THE ASSESSEE WAS HAVING A PROJECT OFFICE IN INDIA. IT WAS REQUIRED TO ATTEND SEVERAL MEETINGS WITH THE AAI, AS MENTIONED AB OVE, AND THESE MEETINGS WERE CONDUCTED IN INDIA EITHER AT THE PROJECT OF FICE OR AT ATS. THEREFORE, EVEN IF PROJECT OFFICE IS NOT LINKED WITH THE S UPPLY OF EQUIPMENT, IT DOES CONSTITUTE A PLACE OF MANAGEMENT, BEING THE PE U NDER ARTICLE 5(2)(A). IT IS ALSO SUBMITTED THAT THE ASSESSEE WAS REQUIRED TO UNDERTAKE INSTALLATION OF THE EQUIPMENT, TESTING AND COMMISSIONING THEREOF, WHICH WILL CONSTITUTE PE UNDER ARTICLE 5(2)(K) AS IT CONTINUED FOR MORE THAN 120 DAYS. THE ASSESSEE WAS ALSO REQUIRED TO PROVIDE TRAINING TO THE PERSONNEL OF AAI ITA NO. 3073(DEL)/2009 48 AND PRIVATE COMPANIES AND THESE ACTIVITIES CONT INUED FOR A PERIOD OF MORE THAN 90 DAYS. THEREFORE, THERE WAS A PE IN TERMS OF ARTICLE 5(2)(L) OF THE DTAA. IT IS CLARIFIED THAT SINC E THE REVIEWS HAD TO BE CONDUCTED RIGHT FROM THE BEGINNING FOR WHICH AT S WAS MADE AVAILABLE TO THE ASSESSEE, THE PE EXISTED UNDER ARTICLE 5(1) FROM THE DAY WHEN SYSTEM SPECIFICATION REVIEW STARTED. 7.6 WE HAVE CONSIDERED THE FACTS OF THE CASE AN D SUBMISSIONS MADE BEFORE US. THE FACTS ARE THAT AAI HAD ATS IN DELHI AND MUMBAI AIRPORTS. DUE TO INCREASE IN TRAFFIC, THESE BECAM E INADEQUATE AND REQUIRED SUBSTANTIAL UPGRADATION. FOR THIS PURPOSE, THE F IRST ACTIVITY WAS TO CONDUCT SYSTEM SPECIFICATION REVIEW. ONCE THE SYSTEM HAD BEEN DEFINED, IT HAD TO BE DESIGNED AND, THEREFORE, A PRELIMINARY DESIGN REVIEW HAD TO BE MADE. THIS DESIGN HAD TO BE DISCUSSED W ITH THE AAI FOR FREEZING THE DESIGN, NECESSITATING CRITICAL DESIGN REVIEW . ONCE THE SYSTEM WAS FROZEN, HARDWARE AND SOFTWARE REQUIREMENTS ALS O GOT FROZEN, LEADING TO SUPPLY OF EQUIPMENT, SOFTWARE, INSTALLATION, TES TING ETC. THE ADMITTED POSITION IS THAT SYSTEM SPECIFICATION REVIEW WAS CONDUCTED IN INDIA AND FOR THIS PURPOSE, THE PERSONNEL OF THE ASSESSEE HAD ACCESS TO THE EXISTING ATS. ON EXAMINING THE EXISTING SYSTEM AND TH E SYSTEM TO BE INSTALLED, ITA NO. 3073(DEL)/2009 49 VARIOUS DESIGN REVIEWS HAD TO BE UNDERTAKEN. I T IS THE CASE OF THE ASSESSEE THAT THE WORK OF SYSTEM SPECIFICATION REVIEW, PDR AND CDR REQUIRED OCCASIONAL VISITS OF THE PERSONNEL OF TH E ASSESSEE, BUT ALL THE WORK IN RELATION THERETO, AFTER INITIAL INSPECT ION, WAS CONDUCTED OUTSIDE INDIA. ON THE OTHER HAND, THE CASE OF THE LD. DR IS THAT SINCE ATS WERE AVAILABLE TO THE ASSESSEE, THE SAME CONSTITUTED T HE PE UNDER ARTICLE 5(1) FROM THE DAY SYSTEM SPECIFICATION REVIEW STARTED . WE ARE OF THE VIEW THAT SYSTEM SPECIFICATION REVIEW, PDR AND CDR DO NOT REQUIRE ANY PROLONGED STAY OF THE EMPLOYEES OF THE ASSESSEE I N INDIA. THE SYSTEM SPECIFICATION REVIEW REQUIRES DATA FROM THE AAI REGARDING THE CAPACITY TO BE INSTALLED. THE DESIGN REVIEWS CAN BE CARRI ED OUT OUTSIDE INDIA WHICH MAY REQUIRE SUBSEQUENTLY APPROVAL OF THE AAI. THE RE IS NO EVIDENCE ON RECORD THAT APART FROM INSPECTION, THE ATS WERE MADE FREELY AVAILABLE TO THE ASSESSEE TO BE OCCUPIED BY ITS PERSONNEL FOR SYSTEM SPECIFICATION REVIEW, PDR OR CDR. THEREFORE, IN SUCH A SITUATIO N IT CANNOT BE SAID THAT THE ASSESSEE HAD A PE IN INDIA FROM THE DATE OF FIRST MEETING HELD FOR SYSTEM SPECIFICATION REVIEW, BEING THE ATS AT DELHI AND MUMBAI AIRPORTS. ITA NO. 3073(DEL)/2009 50 7.7 IT IS ALSO THE ADMITTED FACT THAT THE GOOD S WERE SHIPPED FROM OUTSIDE INDIA TO THE AAI. THE PROPERTY IN THE G OODS, AS PER AGREED TERMS, PASSED TO THE ASSESSEE AT THE PORT OF SHIPMENT, I .E., OUTSIDE INDIA. THE AAI WAS RESPONSIBLE FOR CLEARANCE OF GOODS IN INDIA. T HEREAFTER, THE POSSESSION WAS HANDED OVER TO THE ASSESSEE FOR SAFE CUSTODY, INSTALLATION ETC. OF THE EQUIPMENT IN WHICH THE SOFTWARE HAD BEEN LOADED. FURTHER FACTS ARE THAT THE ASSESSEE INSURED THE GOODS AT THE PORT OF S HIPMENT. IT ALSO INSURED GOODS AFTER TAKING CUSTODY IN INDIA AS IT WAS M ADE RESPONSIBLE FOR ANY DAMAGE TO THE GOODS TILL THE STAGE OF PERFORMANC E TEST. HOWEVER, THE COST OF INSURANCE IS STATED TO BE PART OF THE CONSIDERATION OF THE CONTRACT. THIS MEANS THAT THE COST OF INSURANCE HAD ALREAD Y BEEN ADDED TO THE COST OF EQUIPMENT AND SOFTWARE. THUS, IN REALITY THE INSURANCE COST WAS BORNE BY THE AAI. HOWEVER, IT ALSO EMERGES CLEAR LY THAT AFTER CLEARANCE OF GOODS IN INDIA, THE POSSESSION WAS HANDED OVER TO THE ASSESSEE AND IT BECAME RESPONSIBLE FOR ANY DAMAGE TO THE GOODS. IN OTHER WORDS, THE EQUIPMENT AND THE SOFTWARE EMBEDDED THEREIN WER E HANDLED BY THE ASSESSEE ONCE THESE WERE CLEARED IN INDIA. OBVI OUSLY STORAGE WOULD REQUIRE SPACE AND ALSO OVERALL SUPERVISION OF THE EQUIPMENT TO ENSURE THAT NO DAMAGE OCCURRED TO IT BY NEGLIGENCE OR OTHERWIS E. THE STORAGE AS WELL AS SUPERVISION WAS THE RESPONSIBILITY OF THE AS SESSEE AND AS MENTIONED ITA NO. 3073(DEL)/2009 51 EARLIER, THE STORAGE SPACE WAS AVAILABLE TO THE ASSESSEE IN INDIA. THESE ACTIVITIES CANNOT BE SAID TO BE PRELIMINARY OR AUXILIARY IN NATURE AS THE EQUIPMENTS WERE REQUIRED TO BE INSTALLED. THEREF ORE, IT IS HELD THAT ONCE THE GOODS WERE CLEARED IN INDIA, THE PE CAME INT O EXISTENCE. IN VIEW OF THIS FINDING, IT IS NOT NECESSARY FOR US TO GO TO THE MATTERS REGARDING INSTALLATION PE ETC. ACCORDINGLY, IT IS HELD TH AT THE PE OF THE ASSESSEE CAME INTO EXISTENCE FROM THE DATE THE EQUIPMENT WAS RECEIVED IN INDIA BY THE AAI, CLEARED BY IT AND HANDED OVER TO THE AS SESSEE FOR THE PURPOSE OF INSTALLATION. GROUND NOS. 10, 11 AND 12 ARE DIS POSED OFF ACCORDINGLY. 8. GROUND NOS. 4 TO 9 ARE IN RESPECT OF BIFURCA TING THE REVENUES OF THE ASSESSEE EARNED FROM THE SUPPLY CONTRACT WITH A AI BETWEEN SUPPLY OF EQUIPMENT AND SOFTWARE. IT IS MENTIONED THAT TH E LD. CIT(A) ERRED IN UPHOLDING THE FINDING OF THE AO THAT THE REVENUE CAN BE BIFURCATED IN TERMS OF SUPPLY OF EQUIPMENT AND SOFTWARE IN THE RATIO OF 30:70. IT IS FURTHER MENTIONED THAT HE ERRED IN HOLDING THE F INDING OF THE AO THAT 70% OF THE CONTRACT PRICE CONSTITUTED ROYALTY OR F EES FOR INCLUDED SERVICES, REPRESENTING THE RIGHT TO USE COPYRIGHT OF COMP UTER SOFTWARE AND SERVICES, WITHOUT APPRECIATING THAT THE CONTRACT WAS PREDOMINANTLY FOR SUPPLY OF EQUIPMENT IN WHICH THE SOFTWARE WAS EM BEDDED. IT IS ALSO ITA NO. 3073(DEL)/2009 52 MENTIONED THAT HE ERRED IN UPHOLDING THE FINDING TH AT ROYALTY ETC., AS AFORESAID, WAS TAXABLE UNDER ARTICLE 12 OF THE D TAA AND 50% OF THE BALANCE AMOUNT REPRESENTING PROFIT FROM SUPPLY OF EQUIPMENT WAS TAXABLE IN INDIA. IT IS ALSO MENTIONED THAT HE MISUNDERS TOOD THE FACT THAT THE ASSESSEE (AND NOT THE AAI) HAD OBTAINED RULING I N THE MATTER FROM THE AUTHORITY FOR ADVANCE RULING. IT IS ALSO MENTIONE D THAT HE ERRED IN SUPPORTING HIS DECISION FROM THREE OTHER RULINGS OF AAR BASED UPON SUBSEQUENT AGREEMENTS BETWEEN THE ASSESSEE AND THE AAI. IT IS ALSO MENTIONED THAT HE ERRED ON RELYING ON THE RULING O F AAR DATED 28.07.2008. 8.1 AT THIS JUNCTURE, IT IS ESSENTIAL TO DESCRIB E THE FINDINGS OF THE LOWER AUTHORITIES. THE LD. CIT(APPEALS) REFERRED TO THE TWO CONTRACTS ENTERED INTO BY THE ASSESSEE WITH THE AAI ON 19.03.1993. THE IMPORTANT POINTS REGARDING THESE CONTRACTS HAVE BEEN MENTIONED O N PAGE NOS. 14 TO 22 OF THE IMPUGNED ORDER. THEREAFTER, HE SUMMARIZED TH E FINDINGS OF THE AO THAT THE CONTRACT WAS FOR MODERNIZATION OF ATS AT DELHI AND MUMBAI. THE ATS INCLUDES FLIGHT INFORMATION SERVICE, AIR TRAFFIC CONTROL SERVICE, AREA CONTROL SERVICE, APPROACH CONTROL SERVICE, AIR TRAFFIC ADVISORY SERVICE, AIRPORT CONTROL SERVICE ETC. THE TENDER DOCUMENT IS A DETAILED ONE AND CONSISTS OF FOUR VOLUMES. THE BIDDERS WERE REQU IRED TO VISIT THE SITE AND ITA NO. 3073(DEL)/2009 53 EXAMINE THE TENDER DOCUMENT THOROUGHLY SO THAT THEY BECAME FULLY CONVERSANT WITH THE NATURE AND LEGAL CONDITIONS E TC. OF THE WORK TO BE EXECUTED IN THE BUILDING AND EQUIPMENT PROVIDED BY THE NAA. THE CONTRACT WAS AWARDED ON A TURN-KEY BASIS, WHIC H IS MENTIONED IN THE TENDER DOCUMENT AS WELL AS IN THE CONTRACT. THE CONTRACT REQUIRED DESIGNING, MANUFACTURING, SUPPLYING, INSTALLING, INTEGRATING, TESTING AND COMMISSIONING OF A MODERN, EFFICIENT AND AUTOMATI C ATS. IT ALSO PROVIDES FOR TRAINING OF THE EMPLOYEES OF THE A AI AND PRIVATE COMPANIES FOR THE USE OF THE ATS. THE AO CAME TO THE CONC LUSION THAT IT WAS AN INTEGRATED CONTRACT. THE ASSESSEE HAD FILED APP LICATIONS BEFORE THE AAR ON WHICH RULINGS WERE FURNISHED ON 15.12.2004 A ND 28.2.2008. ALTHOUGH THESE RULINGS ARE IN RESPECT OF SUBSEQ UENT AGREEMENTS BUT THEY THROW IMPORTANT LIGHT ON THE NATURE OF WORK DONE BY THE ASSESSEE. THERE IS ALSO ONE MORE RULING FROM THE AUTHORITY REPORTE D IN 304 ITR 216, WHICH IS IN LINE WITH THE EARLIER RULINGS THAT WH ILE NO PROFIT ACCRUES TO THE ASSESSEE IN RESPECT OF SALE OF EQUIPMENT, THE PAYM ENT RECEIVED IN RESPECT OF SOFTWARE AND SERVICES OF INSTALLATION, TESTING AND TRAINING ARE CHARGEABLE AS ROYALTY AND FEES FOR TECHNICAL SERVICES. THESE RULINGS ARE BASED ON THE FINDING THAT THERE IS NO PE IN RESPE CT OF THESE AGREEMENTS. HOWEVER, THE FACTS OF INSTANT CONTRACT ARE SOMEWH AT DIFFERENT. THE ITA NO. 3073(DEL)/2009 54 AGREEMENT BEFORE THE AAR WAS IN RESPECT OF REPA IR, MODIFICATION, AND ANOMALY RESOLUTION OF SOFTWARE ETC. THERE WAS NO SUPPLY OF ANY HARDWARE. THE FINDING OF THE AO IN RESPECT OF TH IS CONTRACT IS THAT THE SAME HAS BEEN UNDERTAKEN FOR MODERNIZATION OF PR E-EXISTING ATS. THE DOMINANT INTENTION IS TO PROVIDE SERVICES AND T HE SUPPLY OF EQUIPMENT IS ONLY INCIDENTAL TO SUCH SERVICES. THE EQUIPMEN T AND TECHNOLOGY ARE THE PROPRIETARY OF THE ASSESSEE FOR WHICH IT HOLDS PATENTS AND THE AAI HAS ONLY BEEN PROVIDED LIMITED RIGHT TO USE SUCH T ECHNOLOGY AND EQUIPMENT. COMING TO THE SPLITTING OF THE REVENUE, THE AO H AS RELIED ON THE RULING OF THE AAR IN THE CASE OF MITSUBISHI CORPORATION, (2005) 279 ITR 165. 8.2 ON CONSIDERATION OF THE FINDINGS OF THE AO AND THE SUBMISSIONS OF THE ASSESSEE, IT IS MENTIONED THAT THE RULINGS OF THE AAR THROW IMPORTANT LIGHT ON THE FACTS OF THE CASE AND THE LEGAL POSITION EXCEPT IN REGARD TO THE EXISTENCE OF PE. THE FINDING OF THE AAR IS THAT SINCE THE PERSONNEL OF THE ASSESSEE STAYED IN INDIA FOR LESS THAN 40 DAYS, THE PE WILL NOT COME INTO EXISTENCE. THIS IS A FINDING UNDER AR TICLE 5(2)(K) OF THE DTAA. THE AUTHORITY ALSO RULED OUT THE EXISTE NCE OF PE IN RESPECT OF SUPPLY OF HARDWARE. HOWEVER, THE INSTANT CONTRA CT IS FOR SUPPLY OF EQUIPMENT AND SOFTWARE AS WELL AS FOR INSTALLAT ION THEREOF. IT ALSO ITA NO. 3073(DEL)/2009 55 PROVIDES FOR SUPPORT SERVICES. THE REMUNERATI ON FOR PATENT RIGHTS AND ROYALTIES ETC. COVERING THE MATERIAL AND PROCES SES HAS BEEN INCLUDED IN THE CONTRACT PRICE. THEREFORE, IT IS HELD THAT THE AO CORRECTLY PROCEEDED TO DETERMINE THE TAXATION OF REVENUES RECEIVE D IN RESPECT OF SUPPLY OF HARDWARE AND SOFTWARE. HE WAS ALSO JUSTIFIED I N BIFURCATING THE REVENUES IN TERMS OF HARDWARE AND SOFTWARE. THE ASSESSE E RELIED ON A NUMBER OF DECISIONS THAT REVENUE FOR SOFTWARE WAS NOT TAXA BLE AS ROYALTIES ETC. HOWEVER, THESE DECISIONS WERE RENDERED PRIOR TO THE RULING OF THE AAR IN THE CASE OF THE ASSESSEE, RENDERED ON 28.07.2008 . THEREFORE, THE TAXATION OF REVENUES IN RESPECT OF SOFTWARE AS ROYALTY HA S BEEN UPHELD. COMING TO TAXATION OF REVENUE FROM SUPPLY OF HARDWARE, THE LD. CIT(APPEALS) CONSIDERED THE FACTS OF THE CASE, PROVISION CONT AINED IN ARTICLE 5 AND THE RIVAL SUBMISSIONS. IT IS MENTIONED THAT THERE I S NO EVIDENCE ON RECORD THAT LIAISON OFFICE OF THE GROUP COMPANY CONSTITU TED FIXED PLACE OF BUSINESS OF THE ASSESSEE IN INDIA. HOWEVER, THE ASSE SSEE HAS BEEN ENGAGED IN A HOST OF ACTIVITIES FOR MODERNIZATION OF THE ATS AT DELHI AND MUMBAI. THESE ACTIVITIES WERE CARRIED OUT FROM FIXED PL ACE, BEING AREA TRAFFIC CONTROL TOWER AND AIRPORT AREA IN DELHI AND MUMBA I. ALTHOUGH THESE PLACES DO NOT BELONG TO THE ASSESSEE, BUT TH AT IS NOT THE REQUIREMENT OF THE DTAA. WHAT IS REQUIRED IS THAT THE ASSESS EE SHOULD HAVE ACCESS TO ITA NO. 3073(DEL)/2009 56 A FIXED PLACE FROM WHICH THE BUSINESS IS CARRIED OUT. THE FINDING OF THE AO IS THAT THE ASSESSEE HAS A PROJECT OFFICE I N INDIA WHICH IS LINKED WITH THE SUPPLY OF EQUIPMENT. UNDER THE DTAA, A PLACE OF MANAGEMENT IS INCLUDED IN THE PE. FURTHER, AN INSTALLATION OR ASSEMBLY PROJECT OR PROVIDING SERVICES IN CONNECTION THEREWITH ALSO CONSTITUTE A PE UNDER ARTICLE 5(2)(K) IF SUCH ACTIVITY CONTINUES FOR A PERIOD OF MORE THAN 120 DAYS IN 12 MONTH PERIOD. THE ACTIVITIES IN DEL HI AND MUMBAI AIRPORTS CONTINUED FOR MORE THAN 120 DAYS. THEREFORE, T HE ASSESSEE HAD A PE IN INDIA. APART FROM THE ABOVE, IF THE PERSONNEL OF AN ASSESSEE STAY IN INDIA FOR MORE THAN 90 DAYS WITHIN ANY 12 MONTH PERIO D FOR IMPARTING SERVICES, SUCH STAY BY ITSELF CONSTITUTES THE PE UNDER ARTICLE 5(2)(L). SINCE THE ASSESSEE HAD A PE IN INDIA AND THE ACTIVITIES WERE CARRIED OUT FROM THE PE, WHICH ARE NOT PREPARATORY AND AU XILIARY IN NATURE, IT HAS BEEN HELD THAT PROFITS FROM SUPPLY CONTRACT ARE TAXABLE. 8.3 COMING TO ATTRIBUTATION OF INCOME, IT HAS BEE N MENTIONED THAT THE INCOME HAS TO BE ATTRIBUTED TO THE PE IN CONSONANC E WITH THE DOMESTIC LAW. THE INCOME ACCRUED TO THE ASSESSEE ON COMPLET ION OF BOTH THE ATS IN DELHI AND MUMBAI. THE ACCEPTANCE TEST IN MUMB AI WAS PERFORMED IN MAY, 1998, IN WHICH CERTAIN DEFECTS WERE FOUND, WHICH WERE RECTIFIED IN ITA NO. 3073(DEL)/2009 57 JUNE, 1999. THEREFORE, THE ACTIVITIES IN RESPECT OF THE AGREEMENTS WERE CONCLUDED IN FINANCIAL YEAR 1998-99 AND PROFIT TH EREFROM IS LIABLE TO BE TAXED IN ASSESSMENT YEAR 1999-00. SUCH PROFITS ARE TO BE TAXED UNDER ARTICLE 7 OF THE DTAA IN TERMS OF COMPLETED PR OJECT BASIS. THE ASSESSEE HAS NOT FOLLOWED ANY REGULAR SYSTEM OF ACCOUNTING IN RESPECT OF INDIAN OPERATION. IN VIEW THEREOF, THE FINDING OF THE AO REGARDING TAXATION OF PROFIT ON PROJECT COMPLETION BASIS HA S BEEN UPHELD. 8.4 BEFORE US, THE LD. COUNSEL SUBMITTED THAT I N ORDER TO DECIDE THESE GROUNDS IT IS NECESSARY TO REFER TO THE CONTENTS OF THE TWO CONTRACTS. IN SO FAR AS SUPPLY CONTRACT IS CONCERNED, THE TERMS ARE SIMILAR TO THE CASE OF MOTOROLLA INC. VS. DY. CIT, (2005) 95 ITD 269 (DEL) (SB). THE TITLE OF THE CONTRACT, NAMELY, MODERNIZATION OF AIR TRAF FIC CONTROL SYSTEM. IS NOT CONCLUSIVE OF THE FACT THAT IT IS PURELY A WO RKS CONTRACT. A MODERNIZATION PROJECT LIKE THIS WILL NECESSARILY INVOLVE SUPPLY OF MACHINERY AND EQUIPMENT FORMING PART OF THE S YSTEM, INSTALLATION, COMMISSIONING AND TESTING OF THE SYSTEM AS A WHO LE. THE MACHINERY MAY INCLUDE FLIGHT MONITORING RADAR ETC. WHEN W E LOOK TO THE CONTRACT, IT IS FOUND THAT THE STATEMENT OF WORK DEFINES THE EQUIPMENT TO BE SUPPLIED AND THE SERVICES TO BE PERFORMED. IT INCLUDES THE RESPONSIBILITIES OF THE ITA NO. 3073(DEL)/2009 58 ASSESSEE TO MAINTAIN A PROJECT PLAN, SUBMISSION OF MONTHLY PROJECT REPORT, ATTENDING QUARTERLY PROJECT REVIEW MEETING, CON DUCTING TECHNICAL SYSTEM REVIEW AND ATTENDING MEETING WITH THE NAA IN RESP ECT OF THESE WORKS. AFTER FINALIZATION OF CDR, THE REQUIREMENT OF HARD WARE AND SOFTWARE DESIGNS WERE FROZEN. THE ASSESSEE HAD TO MANUF ACTURE EQUIPMENT AS FROZEN UNDER CDR AND LOAD IT WITH THE SOFTWARE SP ECIFIED IN THE CRITICAL DESIGN REVIEW. THE EQUIPMENT WAS MANUFACTURED O UTSIDE INDIA AND IT WAS LOADED WITH SOFTWARE OUTSIDE INDIA. THEREAFT ER, IT WAS EXAMINED BY AAI OUTSIDE INDIA TO ENSURE THAT IT IS IN CONFO RMITY WITH THE SPECIFICATION UNDER CDR. THE EQUIPMENT WAS SUPPLIED OUTSIDE INDIA ON CIP INCOTERMS. AS PER THE AGREEMENT, THE PROPERTY IN THE EQUIPMENT PASSED ON TO AAI ON SHIPPING. THE PAYMENT WAS ALSO RECEIVED OUTSIDE INDIA AS PER AGREED TERMS. THEREFORE, EVEN IF THE WORK IS A TURN-KEY PROJECT, THE ACCOUNTING OF THE PROFITS IN RESPECT OF VARIOUS IDENTIFIABLE ACTIVITIES (TO BE CALLED LANDMARKS) CANNOT BE PO STPONED TILL CONDUCTING OF THE PERFORMANCE TEST AT THE TWO AIRPORTS. THE FACT THAT THE AAI ENTRUSTED THE EQUIPMENT TO THE ASSESSEE AFTER CLEARING TH E GOODS IN INDIA DOES NOT ALTER THIS POSITION IN ANY MANNER AS THE POS SESSION OF THE ASSESSEE IN INDIA WAS ONLY FOR THE PURPOSE OF SAFE KEEPING OF THE EQUIPMENT OWNED BY THE AAI. THE FACT THAT INSURANCE COSTS WERE PAID BY THE ASSESSEE ALSO ITA NO. 3073(DEL)/2009 59 DOES NOT MAKE ANY DIFFERENCE TO THE SITUATION AS ADMITTEDLY SUCH COSTS FORMED PART OF THE OVERALL CONTRACT PRICE. THE LD. COUNSEL DELVED ON THIS POINT FURTHER BY MENTIONING THAT IF THE INSURANCE HAD BEEN PAID BY THE AAI, THE COST OF THE EQUIPMENT AND SOFTWARE WOULD HAVE BEEN REDUCED BY AN EQUIVALENT AMOUNT. THEREFORE, IT WAS ONLY A MA TTER OF FIXING THE OVERALL PRICE OF THE GOODS AND IT DID NOT IN ANY MANNER L EAD TO THE CONCLUSION THAT THE PROPERTY IN GOODS REMAINED OR GOT RE-VESTED I N THE ASSESSEE AFTER SHIPPING THE GOODS OUTSIDE INDIA. THE ASSESSE E DID NOT HAVE ANY PE IN INDIA. ALL ACTIVITIES IN RESPECT OF MANUFACTURI NG OF EQUIPMENT, LOADING IT WITH SOFTWARE AND SHIPPING WERE CARRIED OUT SIDE INDIA. THEREFORE, EVEN IF THE ATS IS TAKEN TO BE THE PE OF THE ASSES SEE IN INDIA, AS HELD BY THE LD. CIT(A), NO ACTIVITY CAN BE ATTRIBUTED TO T HE PE TILL THIS STAGE. THEREFORE, NO PROFIT CAN BE ATTRIBUTED TO THE PE, BEING THE ATS OR FOR THAT MATTER ANY OTHER PE ENVISAGED BY THE LD. CIT(APPEALS). 8.5 COMING TO THE BIFURCATION OF THE CONSIDERATION TOWARDS THE SUPPLY OF EQUIPMENT AND ROYALTY ON SOFTWARE, IT IS SUBMITTED THAT THE CONTRACT DOES NOT CONTAIN ANY STIPULATION REGARDING SEPARATE PRI CES OF THE EQUIPMENT AND THE SOFTWARE. THEREFORE, NO SUCH ALLOCATION CAN B E MADE. THE SOFTWARE WAS LOADED ON TO THE EQUIPMENT AND IT FORMED PAR T AND PARCEL OF THE ITA NO. 3073(DEL)/2009 60 EQUIPMENT. THEREFORE, THE WHOLE OF THE SUPPLY CONT RACT WAS AN INTEGRATED CONTRACT OF SUPPLY OF EQUIPMENT WITH SOFTWARE. IN S UCH A SITUATION, NO PRICE CAN BE ALLOCATED TO THE SOFTWARE. FURTHER, THE ASSESSEE HAD NOT PARTED WITH THE RIGHT IN SOFTWARE AS AAI IS ENTITL ED TO USE THE SOFTWARE, COPY IT, MODIFY IT ETC. ONLY FOR THE PURPOSE OF ATS, I.E., WORKING THE EQUIPMENT. THE AAI IS NOT ENTITLED TO SELL ANY RIGHT IN THE SOFTWARE TO ANY ONE ELSE AND CAN ALSO NOT USE IT FOR ANY PURPOSE OTHER THAN WOR KING THE ATS. THEREFORE, EVEN IF THE BIFURCATION COULD BE MADE, THE PRICE RECEIVED FOR THE USE OF SOFTWARE, AS ALLOCATED BY THE LD. CIT(A), DOES N OT AMOUNT TO ROYALTY. AGAIN, SINCE THE ASSESSEE DID NOT HAVE ANY PE T ILL THE TIME OF SHIPPING THE GOODS, THE PROFIT ATTRIBUTED AS ROYALTY IS NOT TA XABLE IN INDIA AS IT IS ONLY PAID IN RESPECT OF THE USER OF SOFTWARE. 8.6 IN THE COURSE OF HEARING, THE ASSESSEE WAS Q UESTIONED AS TO WHETHER THE ASSESSEE HAD BIFURCATED THE VALUE OF THE SU PPLY CONTRACT IN TERMS OF EQUIPMENT AND SOFTWARE FOR ITS OWN PURPOSE OR ANY OTHER PURPOSE. IT WAS SUBMITTED THAT THE SAME HAD NOT BEEN DONE. SOME KI ND OF BIFURCATION WAS FURNISHED, WHICH COULD NOT BE SUPPORTED IN ANY MANN ER WITH REFERENCE TO ANY RECORD. THE ASSESSEE WAS NOT ABLE TO FILE AN Y EVIDENCE REGARDING THE BIFURCATION MADE BY THE CUSTOMS AUTHORITIES ALSO F OR THE PURPOSE OF THE LEVY ITA NO. 3073(DEL)/2009 61 OF CUSTOMS DUTY. THUS, THE ASSESSEE IS NOT I N A POSITION TO SAY ANYTHING OBJECTIVELY ABOUT THE VALUES OF EQUIPMENT AND SO FTWARE SEPARATELY SUPPLIED UNDER THIS CONTRACT. 9. IN REPLY, THE LD. DR SUBMITTED THAT THE SUPPL Y AND SERVICE CONTRACT HAVE BEEN MADE ON THE SAME DATE, I.E., 19.3.199 3. THE SUPPLY CONTRACT MAKES A REFERENCE TO THE CONTRACT FOR INSTALLATIO N AND TRAINING. THEREFORE, THE ASSESSEE WAS FULLY AWARE THAT NOT ONLY THE EQUIPMENT AND SOFTWARE ARE TO BE SUPPLIED BUT ALSO TO BE INSTALLED BY I T. THE CONTRACT ALSO STATES IN EXPRESS TERMS THAT IT IS AN INDIVISIBLE TURN-KEY WORKS CONTRACT. THEREFORE, IT IS OBVIOUS THAT ONE CONTRACT HAS BEEN ARTIFICI ALLY DIVIDED INTO TWO CONTRACTS. IN OTHER WORDS, IF THE CONTRACTS AR E READ AS A WHOLE, THEY CONSTITUTE ONE CONTRACT FOR MODERNIZATION OF PR E-EXISTING ATS AT DELHI AND MUMBAI. 9.1 COMING TO TRANSFER OF PROPERTY IN GOODS, REFERE NCES WERE MADE TO THE PROVISIONS CONTAINED IN SALE OF GOODS ACT, 1930. THE GENERAL RULE IS THAT UNLESS A DIFFERENT INTENTION APPEARS, THE PROPERT Y IN GOODS PASSES AT THE TIME WHEN IT IS SO INTENDED BY THE PARTIES. HOW EVER, IN CASE OF SPECIFIC GOODS, IF THE SELLER IS BOUND TO DO SOMETHING T O THE GOODS FOR THE PURPOSE ITA NO. 3073(DEL)/2009 62 OF PUTTING THEM IN A DELIVERABLE STATE, THE PROP ERTY DOES NOT PASS UNTIL SUCH THING IS DONE AND NOTICE THEREOF IS GIVEN TO THE BUYER. FURTHER, IN THE CASE OF SALE OF SPECIFIC GOODS IN A DELIVERABLE ST ATE, THE PROPERTY DOES NOT PASS UNTIL THE SELLER WEIGHS, MEASURES, TESTS OR DOES SOME OTHER ACT WITH REFERENCE TO THE GOODS FOR THE PURPOSE OF ASCERT AINING THE PRICE WHEN HE IS BOUND TO DO SO. THE CASE UNDER CONSIDERATION NOT O NLY INVOLVES THE SUPPLY OF GOODS AND SOFTWARE BUT ALSO ITS INSTALLATION, TESTING AND COMMISSIONING. THE MERE SUPPLY OF GOODS IS MEANINGLESS UNTIL THE LATTER ACTIVITIES ARE ALSO PERFORMED. THEREFORE, THE PROPERTY IN GOODS PAS SES ONLY WHEN ALL THESE ACTIVITIES HAVE BEEN COMPLETED. THESE ACTIVITI ES WERE COMPLETED IN INDIA AND NOT OUTSIDE INDIA. FURTHER, THE SU PPLY WAS MADE UNDER CIP (AS PER INCOTERMS) AT DELHI AND MUMBAI AIRPORTS. ACCORDING TO THE CONTRACT, THE PROPERTY IN EQUIPMENT ETC., PASSE S TO THE NAA AT THE TIME OF SHIPMENT OF THE GOODS. THEREAFTER, THE POSSE SSION OF THE GOODS WAS GIVEN TO THE ASSESSEE AGAIN TO BE HELD FOR AND O N BEHALF OF THE NAA. IN THESE CIRCUMSTANCES, IT IS NOT CORRECT TO SAY THAT THE PROPERTY IN GOODS PASSED OUTSIDE INDIA. THE REASON IS THAT EVE N AFTER DISPATCH OF GOODS, RISKS AND RESPONSIBILITIES CONTINUED TO VEST I N THE ASSESSEE. THE ASSESSEE WAS UNDER OBLIGATION TO MAINTAIN INSURANCE TO PROTECT ITS INTEREST AND THE INTEREST OF NAA AGAINST ALL RISKS. T HE ASSESSEE WAS TO BEAR ITA NO. 3073(DEL)/2009 63 ANY LOSS OR DAMAGE TO THE EQUIPMENT DURING CLEARA NCE, TRANSPORTATION, INSTALLATION, TESTING ETC. TILL SUCH TIME THE SYSTEM WAS TAKEN OVER BY THE NAA. THE TRANSFER OF THE TITLE DID NOT RELIEVE THE ASSESSEE OF ITS RESPONSIBILITIES. THEREFORE, THE ASSESSEE CONTINU ED TO BEAR SUBSTANTIAL RISKS EVEN AFTER SHIPPING THE GOODS. UNDER THE S ALE OF GOODS ACT, UNLESS OTHERWISE AGREED, THE GOODS REMAIN AT SELLER S RISK UNTIL PROPERTY THEREIN IS TRANSFERRED TO THE BUYER, BUT WHEN T HE PROPERTY THEREIN IS TRANSFERRED TO THE BUYER, THE GOODS ARE AT TH E BUYERS RISK, WHETHER DELIVERY HAS BEEN MADE OR NOT. IN THIS CASE, THE RISK REMAINS VESTED IN THE ASSESSEE AND, THEREFORE, IT CANNOT BE SAID THAT TH E PROPERTY HAS BEEN TRANSFERRED TO THE BUYER AT THE TIME OF SHIPPING. 9.2 COMING TO THE BIFURCATION OF THE CONSIDERAT ION TOWARDS EQUIPMENT AND SOFTWARE, IT IS SUBMITTED THAT AS PER THE CONTRACT, THE ASSESSEE WAS TO PROVIDE VARIOUS DOCUMENTS AND INFORMATION TO THE AAI TO OPERATE, MAINTAIN AND REPAIR THE EQUIPMENT AND THE DOCU MENTS WERE TO REMAIN THE PROPERTY OF THE ASSESSEE. THE NAA WAS GRA NTED A LICENSE TO USE THE SOFTWARE AND TECHNICAL DOCUMENTS FOR OPERATING TH E ATS BUT PROPERTY THEREIN REMAINED VESTED IN HER MAJESTY QUEEN IN RIGHT OF CANADA. THE AGREEMENT ALSO PROVIDES THAT THE ROYALTY, AND FEE FOR PATENT COVERING ITA NO. 3073(DEL)/2009 64 MATERIALS, ARTICLES, APPARATUS, DEVISES, EQUIPMEN TS OR PROCESSES ARE DEEMED TO BE INCLUDED IN THE CONTRACT PRICE. TH E ASSESSEE WAS UNDER OBLIGATION TO PROVIDE SOURCE CODE IN RESPECT OF R ADAR DATA PROCESSING SERVICES (RDPS) AND FLIGHT DATA PROCESSING SERVICES (FDPS) SOFTWARE TO THE AAI. THE ASSESSEE HAS NOT PROVIDED ANY BI FURCATION OF THE CONTRACT PRICE IN TERMS OF HARDWARE AND SOFTWARE DESPITE A SPECIFIC REQUEST BY THE BENCH. SUCH BIFURCATION WAS NOT FURNISHED EVEN TO THE LOWER AUTHORITIES. THE AO, IN ABSENCE OF ANY DETAIL, TREATED 70% OF THE CONTRACT PRICE TOWARDS THE SOFTWARE AND TAXED IT AS ROYALTY. A REFERENCE HAS ALSO BEEN MADE TO THE DECISION IN THE CASE OF MICROSOFT CORPORATION DEALING WITH SUPPLY OF SOFTWARE OFF THE SHELF, IN WHICH THE CON SIDERATION HAS BEEN HELD TO BE ROYALTY. IT IS ARGUED THAT THE CASE OF THE REVENUE IN THE CASE OF THE ASSESSEE STANDS ON A BETTER FOOTING AS A HIG HLY CUSTOMIZED SOFTWARE AND NOT OFF THE SHELF SOFTWARE HAS BEEN SUPPLIED. THEREFORE, IT IS ARGUED THAT THE AO RIGHTLY BIFURCATED THE CONSIDERATION . HE ALSO RIGHTLY BROUGHT TO TAX PROFITS FROM SUPPLY OF EQUIPMENT AS ACCRUI NG IN INDIA AND THE AMOUNT RECEIVED IN LIEU OF SOFTWARE AS ROYALTY . 10. WE HAVE CONSIDERED THE FACTS OF THE CASE AN D SUBMISSIONS MADE BEFORE US. THE FACTS ARE THAT AFTER EXAMINING THE TENDER DOCUMENTS AND ITA NO. 3073(DEL)/2009 65 THE STATE OF THE EXISTING ATS, THE ASSESSEE EN TERED INTO A CONTRACT WITH THE AAI FOR SUPPLY, INSTALLATION, COMMISSIONING OF THE ATS AS PER THE REQUIREMENTS OF TENDER DOCUMENT. THE PROCESS INVOLVED ESTABLISHING THE PDR SO AS TO ASCERTAIN THE REQUIREMENT OF HARDWA RE AND SOFTWARE. THIS WAS TO BE DISCUSSED WITH AAI TO COME TO THE FINAL REQUIREMENT OF SOFTWARE AND HARDWARE DESIGNS, I.E., ESTABLISHING CDR. ONCE THE CDR WAS AGREED UPON, THE REQUIREMENT OF HARDWARE AND SOFTWARE WAS FROZEN. THE HARDWARE WAS MANUFACTURED OUTSIDE INDIA. THE ASSESSEE WAS ALSO IN POSSESSION OF REQUISITE SOFTWARE BEING ITS OWN PR OPERTY OR OBTAINED UNDER LICENSE FROM OTHERS. THE SOFTWARE WAS LOADED ON TO THE EQUIPMENT. THE WHOLE SYSTEM WAS EXAMINED BY THE AAI OUTSIDE INDIA FOR ITS APPROVAL. THEREAFTER, THE EQUIPMENT LOADED WITH SOFTWARE WAS SHIPPED TO INDIA UNDER CIP (INCOTERM). THE AAI CLEARED THE GOODS IN INDIA AND HANDED IT OVER TO THE ASSESSEE FOR INSTALLATION AND COMMISSIONING. UNDER THE CONTRACT, THE ASSESSEE HAD TO BEAR INSURANCE COSTS NOT ONLY AT THE TIME OF SHIPMENT BUT ALSO AFTER CLEARANCE OF GOODS IN IN DIA TILL THE COMMISSIONING AND HANDING OVER THE ATS TO THE AAI AFTER CONDUCT ING PERFORMANCE TEST. THE INSURANCE COST FORMED PART OF OVERALL CONTRA CT. HOWEVER, THE ASSESSEE WAS RESPONSIBLE FOR DAMAGE TO GOODS AT THE TIME OF CLEARANCE OR TRANSPORTATION TO THE SITE, ITS INSTALLATION AND COMMISSIONING. THE QUESTION ITA NO. 3073(DEL)/2009 66 IS,-WHETHER THE ASSESSEE IS LIABLE TO PAY TAX I N RESPECT OF PROFIT ACCRUING FROM THE SUPPLY CONTRACT, AND IF YES, IN WHAT MAN NER? 11. WE HAVE CONSIDERED THE FACTS OF THE CASE A ND SUBMISSIONS MADE BEFORE US CAREFULLY. A NUMBER OF QUESTIONS AR ISE FOR DETERMINATION BY US. THE FIRST QUESTION IS-WHETHER, THE CONSIDERAT ION IN RESPECT OF EQUIPMENT AND SOFTWARE COULD BE SEGREGATED FOR DETERMININ G THEIR TAXABILITY? THE ADMITTED FACTS IN THIS REGARD ARE THAT THE EQ UIPMENT ASCERTAINED AFTER CDR WAS FABRICATED OUTSIDE INDIA. THE SOFTWARE REQUIRED TO WORK THE EQUIPMENT WAS ALSO DESIGNED OUTSIDE INDIA. THE SOFTWARE WAS LOADED ON THE EQUIPMENT. THEREAFTER, THE EQUIPMENT AND THE SOFTWARE WERE SHIPPED TO INDIA CIP INCOTERMS. THE CASE OF THE ASSESSEE IS THAT INSTALLATION OF THE ATS REQUIRED UNDERTAKING OF A NUMBER OF S TEPS STARTING FROM ASCERTAINMENT OF EQUIPMENT AND SOFTWARE AND EN DING WITH THE INSTALLATION AT THE AIRPORTS. THERE WERE VARIOUS MILESTONES IN EXECUTING THE WHOLE OF THE CONTRACT, WHICH COULD BE SEPARATELY IDENTIFI ED. THE ASSESSEE HAS BEEN FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. THEREF ORE, PROFIT, IF ANY, HAS TO BE ASCERTAINED ON COMPLETION OF EACH MILESTONE . EVEN IF THE CONTRACT IS TAKEN TO BE FOR EXECUTING A TURN-KEY PROJECT, T HE RECOGNITION OF PROFIT AND ITS TAXATION CANNOT BE POSTPONED TILL SUCC ESSFUL TESTING OF THE ATS ITA NO. 3073(DEL)/2009 67 INSTALLED BY THE ASSESSEE. THE SUPPLY OF EQUIPM ENT AND SOFTWARE CONSTITUTES ONE MILESTONE AS BOTH WERE SUPPLI ED TOGETHER AND PROPERTY THEREIN PASSED TO THE AAI AT THE PORT OF SHIPMENT AS PER COMMON INTENTION OF THE PARTIES. FURTHER, SINCE THE SOFTWAR E WAS INSTALLED IN THE EQUIPMENT AND SHIPPED AS SUCH, THE CONSIDERATIO N FOR EQUIPMENT AND SOFTWARE COULD NOT BE SEGREGATED. THE CONTRACT ALSO DID NOT PROVIDE FOR SEPARATE CONSIDERATIONS. ON THE OTHER HAND, THE C ASE OF THE LD. DR IS THAT THE PROJECT IS IN THE NATURE OF WORKS CONTRACT UNDERTAKEN ON A TURN-KEY BASIS. THE SUPPLY OF EQUIPMENT AND SOFTWARE BY THEMSELVES WERE OF NO CONSEQUENCE TO THE AAI AS IT WAS INTERESTED IN THE FUNCTIONING ATS OF REQUISITE CAPACITY, WHICH THE ASSESSEE UND ERTOOK TO INSTALL. THEREFORE, THE PROFITS ACCRUED ON COMPLETION OF THE CONTRA CT WHEN THE FUNCTIONING ATS WAS HANDED OVER TO THE AAI. IN THE ALTER NATIVE, IT HAS BEEN SUBMITTED THAT IF PROFITS ARE TO BE ASCERTAINED ON THE BASIS OF MILESTONES IN EXECUTION OF THE CONTRACT, THEN THE CONSIDERAT ION IN RESPECT OF EQUIPMENT AND SOFTWARE WILL HAVE TO BE SEGREGATED BECAUSE THEY ARE QUITE DISTINCT ASSETS IN NATURE AND THEIR TAXABILITY HAS TO BE DECIDED ON DIFFERENT CONSIDERATIONS. WE MAY ADD HERE THAT IN THE COU RSE OF HEARING, THE ASSESSEE WAS ASKED AS TO WHETHER SEGREGATION AS AFORESAID HAS BEEN MADE BY THE ASSESSEE FOR ITS OWN INTERNAL PURPOSE OR FOR THE PURPOSE OF PAYMENT ITA NO. 3073(DEL)/2009 68 OF CUSTOMS DUTY OR ANY OTHER PURPOSE. IT WAS S UBMITTED THAT NO SUCH EXERCISE WAS UNDERTAKEN. THE ASSESSEE WAS ALSO NOT ABLE TO PRODUCE ANY ORDER FROM CUSTOMS AUTHORITIES PASSED AT THE TI ME OF CLEARANCE OF THE EQUIPMENT AND THE SOFTWARE AT THE CUSTOMS PO RT IN INDIA FROM WHICH WE COULD HAVE AN IDEA WHETHER THAT AUTHORITY HAD SEGREGATED THE CONSIDERATION IN TERMS OF EQUIPMENT AND SOFTWA RE DUE TO DIFFERENTIAL RATE OF DUTY. 11.1 IN THE CASE OF ROTEM COMPANY (2005) 279 IT R 165 (AAR), RELIED UPON BY THE LD. DR, THE FACTS ARE THAT A CONSOR TIUM, OF WHICH MITSUBISHI CORPORATION IS THE LEADER, FILED A TENDER FOR MANUFACTURE, SUPPLY, TESTING AND COMMISSIONING OF PASSENGER ROLLING STOCK FOR DELHI METRO RAIL CORPORATION (DMRC) IN PURSUANCE OF AN INTERNATIO NAL TENDER FLOATED BY THE LATTER. THE TENDER WAS ACCEPTED. THEREAF TER, THE CONSORTIUM AND THE DMRC ENTERED INTO A CONTRACT IN RESPECT OF TH E SAID WORK ON 22 ND MAY, 2001. THE CONSIDERATION FOR THE TOTAL CONTRACT WAS PLACED AT INDIAN RUPEES 311,04,39,836/- AND US$ 26,09,97,269, WHIC H IS APPORTIONED AMONGST VARIOUS COST CENTRES (A TO J), AND FUR THER APPORTIONED AMONGST VARIOUS MILESTONES. THE INSTRUCTIONS TO THE TEN DERERS CONTAINED INSTRUCTIONS FOR APPORTIONMENT OF FIXED LUMP SUM PRICE TO THE COST CENTRE ITA NO. 3073(DEL)/2009 69 AND MILESTONES UNDER EACH COST CENTRE. THE MEM BERS OF THE CONSORTIUM WERE ENTITLED TO RECEIVE INTERIM PAYMENT ON A CHIEVING ONE OR MORE OF MILESTONES. THE APPLICANTS STATE THAT IT IS A COMP OSITE CONTRACT FOR MANUFACTURE, SUPPLY AND COMMISSIONING OF HIGH SPEED TRAINS FOR DMRC WHICH INVOLVES ALL STAGES FROM DESIGNING AND COMMI SSIONING AND THAT IT IS NOT FOR RENDERING ANY SERVICES. NO LICENSE OR PATENT CONCERNING THE MACHINERY OR COPYRIGHT OF ITS DESIGN IS GRANTE D TO THE DMRC. THE SUPPLY OF DESIGNS AND DRAWINGS TO THE DMRC IS TO ENSURE THAT THE TRAINS SUPPLIED ARE OF THE AGREED SPECIFICATIONS. IT FURTHER SUBMITS THAT THE CONTRACT IS FOR SALE AND SUPPLY AND NOT FOR REN DERING SERVICES AND NO PART OF THE FIXED LUMP SUM PRICE CAN BE REGARDED AS FEE FOR TECHNICAL SERVICES (FTS). THE LD. AAR CONSIDERED THE FACTS OF THE CASE, VARIOUS DECIDED CASES AND CAME TO THE CONCLUSION, INTER-ALIA, TH AT THE LUMP SUM CONSIDERATION FOR WORKS OF DESIGN, MANUFACTURE, S UPPLY, TESTING AND COMMISSIONING OF PASSENGER ROLLING STOCK TO THE DMRC INCLUDES ELEMENT OF FEE FOR TECHNICAL SERVICES AND, THUS, IT WOUL D BE CORRECT TO DISINTEGRATE THE CONTRACT FOR THE PURPOSE OF TAXATION OF EA CH COMPONENT. INCIDENTALLY, WE ALSO FIND FROM THE RULING IN THE CASE OF A IRPORTS AUTHORITY OF INDIA, (2008) 304 ITR 216 (AAR), RELIED UPON BY THE L D. COUNSEL IN SOME OTHER CONTEXT, THAT THE APPLICANT ENTERED INTO A CON TRACT ON 20.2.2007 FOR ITA NO. 3073(DEL)/2009 70 SUPPLY OF S-SDD ON BEHALF OF THE INDIAN AIRPOR TS. THE CONTRACT INCLUDES TRANSFER AND DELIVERY OF S-SDD, WHICH INCLUDES SOFTWARE DOCUMENTATION, SOFTWARE, HARDWARE, INSTALLATION, TESTING AND TRAINING AT THE TOTAL COST OF US$ 2348120, OUT OF WHICH US$ 169102 WILL BE TOW ARDS HARDWARE AND US$ 2149018 WILL BE TOWARDS THE COST OF SOFTW ARE AND A FEE OF US$ 30000 FOR INSTALLATION, TESTING AND TRAINING. T HIS CONTRACT IS ALSO IN THE NATURE OF A TURN-KEY CONTRACT ALTHOUGH OF A SMA LLER AMOUNT. THE CONTRACT TRIFURCATES THE CONSIDERATION TOWARDS HARDWARE, S OFTWARE AND INSTALLATION ETC. THIS SHOWS THAT IN A CONTRACT OF THE KIND UNDERTAKEN BY THE ASSESSEE, IF THERE IS A COMPOSITE CONSIDERATION, THE SAME CAN BE CONVENIENTLY SEGREGATED IN DIFFERENT COMPONENTS. THEREFORE, O N THE FACTS OF THE CASE AND SUBSEQUENT CONTRACTS OF THE ASSESSEE WITH TH E AAI, WE DO NOT FIND ANY DIFFICULTY IN COMING TO A CONCLUSION THAT T HE CONSIDERATION FOR EQUIPMENT AND SOFTWARE COULD HAVE BEEN SEGREGATED. SINCE AS PER ARGUMENTS MADE BEFORE US, IF PROFITS FROM SUPPL Y CONTRACT ARE HELD TO BE TAXABLE SEPARATELY, AS THE SUPPLY IS A MILESTO NE IN THE WHOLE CONTRACT, THEN THE TREATMENT METED OUT TO PROFITS ON SALE OF EQUIPMENT AND CONSIDERATION RECEIVED FOR SUPPLY OF SOFTWARE WILL HAVE TO BE DIFFERENT, AS THE TWO ASSETS ARE OF DIFFERENT NATURE INVOLVIN G DIFFERENT PROFITABILITIES. THIS NECESSITATES THE SEGREGATION OF CONSIDERA TION INTO EQUIPMENT AND ITA NO. 3073(DEL)/2009 71 SOFTWARE. ACCORDINGLY, WE ARE UNABLE TO AGREE WITH THE LD. COUNSEL THAT THE CONSIDERATION FOR EQUIPMENT AND SOFTWARE CAN NOT BE SEGREGATED IN A CONTRACT WHERE A COMPOSITE PRICE IS PLACED ON THE SE TWO COMPONENTS. WHAT IS BAFFLING IS THAT THE ASSESSEE IS UNWILLIN G TO PRODUCE THE ASSESSMENT MADE BY CUSTOMS AUTHORITIES AT THE TIME OF CLE ARANCE, WHO WOULD HAVE NECESSARILY SEGREGATED THE CONSIDERATION AS ABOVE FOR THE REASON THAT RATES OF CUSTOMS DUTY WILL BE DIFFERENT IN RESPECT OF EQUIPMENT AND SOFTWARE. THE STATED REASON IS THAT SUCH DOCUMENTS ARE NO T AVAILABLE BECAUSE IT WAS THE RESPONSIBILITY OF THE AAI TO CLEAR THE GOODS/S OFTWARE UNDER THE CONTRACT. NONETHELESS, IT IS ALSO A FACT UNDER THE AGREE MENT THE TAX LIABILITY DEVOLVES UPON THE AAI AND IN VIEW THEREOF, IT WOU LD NOT HAVE BEEN DIFFICULT FOR THE ASSESSEE TO OBTAIN THE ORDERS OF CUSTOMS AUTHORITIES FOR PRODUCTION BEFORE THE INCOME-TAX AUTHORITIES, AS IT WOULD BE IN THE INTEREST OF AAI ALSO. THUS, AS MENTIONED ABOVE, THE C ONSIDERATION CAN BE SEGREGATED AND THE CONSEQUENCE OF INABILITY TO P RODUCE THE ORDERS OF CUSTOMS AUTHORITIES OR ANY OTHER RELIABLE EVIDEN CE WILL LEAD TO THE CONCLUSION THAT SUCH SEGREGATED AMOUNTS WILL HAVE TO BE ESTIMATED IN ABSENCE OF ANY OBJECTIVE FACTS ON RECORD PLACED BY THE ASSESSEE. AS WILL BE SEEN LATER, THE FACTS IN THIS REGARD ARE DI STINGUISHABLE FROM THE FACTS OF MOTOROLA INC., RELIED UPON BY THE LD. COUNSE L. ITA NO. 3073(DEL)/2009 72 11.2 THIS BRINGS US TO THE QUESTION OF ALLOCATION O F THE CONSIDERATION BY THE LOWER AUTHORITIES AT 30% IN CASE OF EQUIPMENT AND 70% IN CASE OF SOFTWARE. AS MENTIONED EARLIER, THE ASSESSEE H AS NOT PRODUCED ANY EVIDENCE IN RESPECT OF THE SEGREGATION OF THE CON SIDERATION. WE HAVE MENTIONED ABOUT THE RULING IN THE CASE OF AAI IN R.C. NO. AAR/755/2007. IN THAT CONTRACT THE CONSIDERATION FOR HARDWARE W AS US$ 169102 AND FOR SOFTWARE IT WAS US$ 2348120. IN OTHER WORDS, THE CONSIDERATION FOR SOFTWARE WAS ABOUT 13.9 TIMES THE CONSIDERATION FOR HARDWARE. IN THIS CASE, THE AO HAS COMPUTED THE CONSIDERATION FOR SOFTWARE AT ABOUT 2.3 TIMES THE CONSIDERATION FOR THE EQUIPMENT. WHILE I T IS ADMITTED THAT THE COMPOSITION OF HARDWARE AND SOFTWARE IN THE TWO C ONTRACTS MAY BE DIFFERENT, NONETHELESS THE FIGURES MENTIONED AB OVE SHOW THAT THE VALUES PLACED BY THE LD. CIT(APPEALS) ARE NOT ARBITRA RY OR HIGHLY EXCESSIVE. IN ABSENCE OF ANY EVIDENCE FILED BY THE ASSESSEE BE FORE ANY OF THE AUTHORITIES, WE HAVE NO REASON TO INTERFERE WIT H THE ALLOCATION MADE BY THE LD. CIT(APPEALS). 12. THE SECOND QUESTION IS-WHETHER, IN A TURN-KEY CONTRACT, IN WHICH THE ASSESSEE IS UNDER OBLIGATION TO SUPPLY THE EQUIPM ENT AND THE SOFTWARE AND ALSO INSTALL THEM, THE PROFIT SHOULD BE TAXED O N COMPLETION OF EACH ITA NO. 3073(DEL)/2009 73 MILESTONE OR AT THE TIME OF HANDING OVER THE FUNC TIONING SYSTEM TO THE CONTRACTING PARTY? WE HAVE ALREADY FURNISHED TH E SUMMARY OF THE CONTRACT IN VARIOUS SUB-PARAGRAPHS OF PARAGRAPH NO. 6. THE DETAILS OF PAYMENT TO BE MADE TO THE ASSESSEE IN DIFFERENT COUNTRIES HAVE ALSO BEEN FURNISHED IN PARAGRAPH NO. 6.4. IT HAS ALSO BEEN MENTIONED TH AT THE PAYMENTS ARE TO BE MADE ON 10 DIFFERENT DATES BETWEEN 30.11.1993 A ND 30.09.1995, UPON COMPLETION OF A PARTICULAR ACTIVITY STARTING F ROM COMPLETION OF PDR AND ENDING WITH PERFORMANCE OF SITE ACCEPTANCE TEST. THE ATS AT DELHI WAS TESTED IN MARCH, 1998 AND THE ATS AT MUMBAI WA S TESTED IN JUNE, 1998. THE PREVIOUS YEAR FOR THIS ASSESSMENT YEAR COMP RISES THE PERIOD 1.4.1998 TO 31.3.1999. THEREFORE, THE WORK REGARDING MUMB AI ATS ONLY WAS PARTLY CARRIED OUT IN THIS YEAR. THE WORK REGARDING DELHI ATS HAD BEEN COMPLETED IN THE IMMEDIATELY PRECEDING YEAR. THE ASSESSEE HAS NOT MAINTAINED SEPARATE INDIA SPECIFIC ACCOUNTS. IN OTHER WORDS, ONLY WORLDWIDE ACCOUNTS HAVE BEEN MAINTAINED IN WHICH THE RESULTS OF INDIA OPERATIONS HAVE BEEN MERGED. THE POLICY FOR RECOGNIZING REVENUE IS STATED TO BE ON THE BASIS OF THE MILESTONE ACHIEVE D AND, THUS, THE REVENUE IS RECOGNIZED IN RESPECT OF A MILESTONE WHEN RIGHT TO RECEIVE THE CONSIDERATION HAS ACCRUED. THE CASE OF THE LD. COUNSEL IS THAT EVEN IF THE CONTRACT IS HELD TO BE A TURN-KEY PROJECT, THE R ECOGNITION OF THE REVENUE ITA NO. 3073(DEL)/2009 74 CANNOT BE POSTPONED TILL THE SITE ACCEPTANCE T EST, IN VIEW OF VARIOUS MILESTONES ACHIEVED IN THE INTERVENING PERIOD. O N THE OTHER HAND, THE CASE OF THE LD. DR IS THAT THE INSTANT CONTRACT IS A WORKS CONTRACT FOR UPGRADING THE EXISTING ATS. MERE SUPPLY OF EQUIPMENT AN D SOFTWARE WILL BE OF NO CONSEQUENCE TO THE AAI TILL IT HAS BEEN INS TALLED AND ACCEPTANCE TEST HAS BEEN PERFORMED. 12.1 WE HAVE ALREADY HELD THAT THE PROPERTY IN GO ODS AND SOFTWARE HAS PASSED TO THE AAI ON SHIPMENT THEREOF OUTSIDE IN DIA. THE PAYMENT SCHEDULE ALSO SHOWS THAT ALL PAYMENTS HAVE BEEN MADE OUTSIDE INDIA. WE HAVE ALSO REFERRED TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES LTD. AND EXTRACTED A PORTION OF THE JUDGMENT IN PARAGRAPH NO. 6.12. IN BRIEF, THE HONBLE COURT MENTIONED THAT THE CONTRACT IS A COMPLEX ARRANG EMENT AND THERE ARE OTHER MEMBERS OF THE CONSORTIUM ALSO WHO ARE REQUIRED TO CARRY OUT DIFFERENT PARTS OF THE CONTRACT. TERMING THE CONTRACT AS TURN-KEY CONTRACT WOULD NOT MEAN MUCH FOR THE PURPOSE OF TAXABILITY. THE TAXABLE EVENTS IN THE EXECUTION OF A CONTRACT MAY ARISE IN SEVERAL ST AGES IN SEVERAL YEARS. THE OBLIGATIONS UNDER THE CONTRACT ARE DISTINCT ONE S. THE SUPPLY OBLIGATION IS DISTINCT AND SEPARATE FROM SERVICE OBLIGATION AND THE PRICE FOR EACH ITA NO. 3073(DEL)/2009 75 COMPONENT OF THE CONTRACT IS SEPARATE. THE FACT T HAT SUPPLY SEGMENT AND SERVICE SEGMENT FIND PLACE IN DIFFERENT PARTS OF THE CONTACT IS A POINTER TO SHOW THAT THE LIABILITY OF THE ASSESSEE THEREUND ER WOULD BE DIFFERENT. IT IS NOT IN DISPUTE THAT THE TITLE IN THE EQUIPMENT S TANDS TRANSFERRED UPON DELIVERY OUTSIDE INDIA. THEREFORE, THE QUESTION OF IMPOSITION OF TAX ON INCOME MAY HAVE TO BE CONSIDERED KEEPING IN VIEW THE AFORESAID FACTUAL BACKDROP. ACCORDINGLY, IT WAS HELD THAT SINCE ALL PARTS OF THE TRANSACTION IN RESPECT OF OFF-SHORE SUPPLY, I.E., THE TRAN SFER OF PROPERTY IN GOODS AS WELL AS THE PAYMENTS, WERE CARRIED ON OUTSIDE INDIA, THE TRANSACTION COULD NOT HAVE BEEN TAXED IN INDIA. THE ONLY DIFFEREN CE POINTED OUT BY THE LD. DR IN THE FACTS IS THAT THERE WERE A NUMBER OF OTHER PARTIES IN THE CONSORTIUM WHO PERFORMED DIFFERENT PARTS OF THE CO NTRACT, WHILE IN THE CASE AT HAND THE RESPONSIBILITY VESTS SOLELY IN THE ASSESSEE TO CARRY OUT ALL PARTS OF THE TRANSACTION. ACCORDING TO US, THIS DISTI NCTION DOES NOT MAKE ANY DIFFERENCE TO THE TAXABILITY OF AMOUNTS RECEIVED AS CONSIDERATION FOR DIFFERENT IDENTIFIABLE ACTIVITIES FOR WHICH CONSIDE RATION IS PAYABLE SEPARATELY. SINCE THE ACTIVITIES ARE DISTINCT AND CONSIDERATION FOR SUPPLY OF EQUIPMENT AND THE SOFTWARE HAS BEEN SEPARATELY MENTIONED, THE RATIO OF THE AFORESAID DECISION WILL BE APPLICABLE TO T HE FACTS OF THIS CASE. IN THAT CASE, THERE WERE TWO PARTS IN THE SAME CON TRACT REGARDING SUPPLY AND ITA NO. 3073(DEL)/2009 76 SERVICES, WHEREAS THERE ARE TWO SEPARATE CONTRACT S IN THIS CASE REGARDING SUPPLY AND SERVICES. HOWEVER, WE HAVE ALREADY CONCLUDED THAT THE TWO CONTRACTS ARE INEXTRICABLY LINKED SO AS TO FO RM A SINGLE CONTRACT. NONETHELESS, IN THIS SINGLE CONTRACT SEPARATE CONS IDERATIONS HAVE BEEN FIXED FOR SUPPLY AND SERVICES AT TWO DIFFERENT PLACES . SUCH WAS ALSO THE SITUATION IN THE CASE OF ISHIKAWAJIMA HARIMA HEA VY INDUSTRIES LTD. ACCORDINGLY, IT IS HELD THAT THE PROFITS WILL BECO ME TAXABLE ON COMPLETION OF A MILESTONE WHEN THE RIGHT TO RECEIVE THE CONSI DERATION ACCRUES TO THE ASSESSEE. INCIDENTALLY, THIS IS ALSO STATED TO BE THE METHOD FOLLOWED BY THE ASSESSEE FOR RECOGNITION OF THE REVENUE. 13. THE THIRD QUESTION IS-WHETHER, VARIOUS RULINGS OF THE AAR COULD HAVE BEEN RELIED UPON BY THE LD. CIT(APPEALS)? I N THIS CONNECTION, IT WOULD BE WORTHWHILE TO REFER TO SOME OF THE RULI NGS OBTAINED BY THE AAI IN CONNECTION WITH VARIOUS CONTRACTS WITH THE AS SESSEE. IN RULING NO. 624/2003, (2005) 273 ITR 437 (AAR), IT HAS BEEN HELD THAT SINCE HARDWARE AND OTHER EQUIPMENTS WERE SUBJECT MATTE R OF OUTRIGHT SALE IN FAVOUR OF THE AAI, THE CONSIDERATION RECEIVED BY THE ASSESSEE DOES NOT FALL WITHIN THE MEANING OF INCOME FROM THE FURNIS HING OF SERVICES. THE PAYMENT WOULD BE THE BUSINESS PROFITS WITHIN THE M EANING OF ARTICLE 7. ITA NO. 3073(DEL)/2009 77 ADMITTEDLY, THE RAYTHEON COMPANY DOES NOT HAVE A PE IN INDIA AND, THEREFORE, THE CONSIDERATION WILL NOT BE TAXABLE IN INDIA. IT HAS BEEN FURTHER HELD THAT THE CONSIDERATION RECEIVED FOR REPAIR OF SOFTWARE ANSWER THE DESCRIPTION OF FEES FOR INCLUDED SERVICES W ITHIN THE MEANING OF ARTICLE 12(4)(A) AND, THEREFORE, IT WILL BE TAXABLE IN INDIA. THE RULING AS AFORESAID WAS MORE OR LESS ADOPTED IN AAR NO. 7 54/2007 IN RESPECT OF SOFTWARE AND IT WAS ALSO MENTIONED THAT THE RAT E APPLICABLE WILL BE 10% OF THE CONSIDERATION. THE RULING IN RESPECT OF N ON-TAXABILITY WAS ALSO REPEATED IN AAR NO. 753/2007 AS THE REVENUE WAS NOT IN A POSITION TO PROVE THAT THE ASSESSEE HAD PE IN INDIA. THES E RULINGS ARE REPORTED IN (2008) 299 ITR 102 (AAR). IN AAR 755/2007 REP ORTED IN (2008) 304 ITR 216 (AAR), IT HAS BEEN HELD THAT CONSIDERATION FOR SOFTWARE AND TECHNICAL SERVICES RENDERED IN CONNECTION WITH I NSTALLATION, TESTING AND TRAINING IN RELATION TO THE SUPPLY OF SOFTWARE WO ULD AMOUNT TO FEES FOR INCLUDED SERVICES UNDER ARTICLE 12(4)(A), ATTRACT ING TAX @ 15%. IN RULING AAR NO. 819/2009 DATED 18.3.2010, THE EARLIER R ULINGS WERE REPEATED IN RESPECT OF SOFTWARE AND EQUIPMENT. THE RULING I N RESPECT OF SOFTWARE CONSIDERATION READS AS UNDER:- 8.2 THE FACT THAT THE APPLICANT-AAI ITSELF HAS N OT BEEN PROVIDED WITH THE TECHNOLOGY FOR DEVELOPING THE SOFTWARE AS SUCH DOES NOT REALLY MAKE A DIFFERENCE. THE EX PRESSION USED IS: MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIE NCE OR ITA NO. 3073(DEL)/2009 78 SKILLS. THE SUBSTANCE OF THE TRANSACTION, IN OUR VIEW, IS RENDERING OF TECHNICAL AND CONSULTANCY SERVICES WHICH MAKE AVAILABLE TO AAI THE TECHNICAL KNOWLEDGE, EXPE RIENCE AND SKILLS POSSESSED BY RAYTHEON IN THE FIELD AND THE PROVISION OF SOFTWARE SYSTEM IS ONLY PART OF THAT EXERCISE. THE DELIVERY OF SOFTWARE AND THE SPECIFICATION OF THE COST OF SOF TWARE CANNOT BE VIEWED IN ISOLATION. SOFTWARE IS A PART OF THE PACKAGE OF SETTING UP UPGRADED AUTOMATION SYSTEM AND AS STA TED EARLIER, IT HAS NO VALUE UNLESS THE SUPPLIER SHARES THE TECHNICAL KNOWLEDGE, INFORMATIONS AND EXPERIENCE WITH THE USER AND SUITABLY EQUIP THE PERSONNEL OF AAI TO HANDLE T HE SYSTEM BY THEMSELVES. IT NEEDS TRAINING AND IMPARTING OF VALUABLE INFORMATIONS AND INSTRUCTIONS. VIEWED IN THIS BACKGROUND, WE ARE OF THE VIEW THAT THE PAYMENT MADE TOWARDS SOFTWARE CAN BE LEGITIMATELY BROUGHT WITHIN THE FOLD OF A RT. 12(4)(B) OF THE TAX TREATY, IF NOT ART. 12(3). AS REGARDS INSTALLATION SERVICES, THERE IS NO DISPUTE ABOUT ITS TAXABILI TY. 13.1 HOWEVER, IN RULING AAR 821/2009 DATED 29. 01.2010 IN THE CASE OF DASSAULT SYSTEMS K.K., THE LD. AAR MENTIONED THAT THE REPRODUCTION AND ADAPTATION ENVISAGED UNDER THE AGREEMENT C AN CONTEXTUALLY MEAN ONLY REPRODUCTION AND ADAPTATION FOR THE PURPOSE OF COMMERCIAL EXPLOITATION. THE COPYRIGHT BEING A NEGATIVE R IGHT, IT WOULD ONLY BE APPROPRIATE AND PROPER TO TEST IT IN TERMS OF I NFRINGEMENT. WHAT HAS BEEN EXCLUDED UNDER SECTION 52(AA) IS NOT COMMERCIAL E XPLOITATION, BUT ONLY UTILIZING THE COPYRIGHTED PRODUCT FOR ONES OWN USE. THE EXCLUSION SHOULD BE GIVEN DUE MEANING AND EFFECT OTHERWISE THE PROVISION WILL BE PRACTICALLY REDUNDANT. IN FACT, AS THE LAW STA NDS NOW, THE OWNER NEED NOT NECESSARILY GRANT LICENSE FOR MERE REPRODUCT ION OR ADAPTATION OF WORK ITA NO. 3073(DEL)/2009 79 FOR ONES OWN USE. EVEN WITHOUT SUCH LICENSE, THE BUYER OF THE PRODUCT CANNOT BE SAID TO HAVE INFRINGED THE OWNERS C OPYRIGHT. WHEN THE INFRINGEMENT IS RULED OUT, IT WOULD BE DIFFICULT TO REACH THE CONCLUSION THAT THE BUYER/LICENSEE OF PRODUCT HAS ACQUIRED A CO PYRIGHT THEREIN. 13.2 THE LD. COUNSEL ALSO REFERRED TO THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MOTOROLA INC. VS. DY. CIT, (2005) 95 ITD 269 AND DREW OUR ATTENTION TO PARAGRAPH NO. 162, WH ICH READS AS UNDER:- 162. A CONJOINT READING OF THE TERMS OF THE SU PPLY CONTRACT AND THE PROVISIONS OF THE COPYRIGHT ACT, 1957 CLEA RLY SHOWS THAT THE CELLULAR OPERATOR CANNOT EXPLOIT THE COMPU TER SOFTWARE COMMERCIALLY WHICH IS THE VERY ESSENCE OF A COPY RIGHT. IN OTHER WORDS, A HOLDER OF A COPYRIGHT IS PERMI TTED TO EXPLOIT THE COPYRIGHT COMMERCIALLY AND IF HE IS NOT PERMI TTED TO DO SO THEN WHAT HE HAS ACQUIRED CANNOT BE CONSIDERED AS A COPYRIGHT. IN THAT CASE, IT CAN ONLY BE SAID T HAT HE HAS ACQUIRED A COPYRIGHTED ARTICLE. A SMALL EXAMPL E MAY CLARIFY THE POSITION. THE PURCHASER OF A BOOK ON INCOME- TAX ACQUIRES ONLY A COPYRIGHTED ARTICLE. ON THE OTHER HAND, A RECORDING COMPANY WHICH HAS RECORDED A VOCALIST HAS ACQ UIRED THE COPYRIGHT IN THE MUSIC RENDERED AND IS, THEREFOR E, PERMITTED TO EXPLOIT THE RECORDING COMMERCIALLY. IN THIS CA SE THE MUSIC RECORDING COMPANY HAS NOT MERELY ACQUIRED A COPY RIGHTED ARTICLE IN THE FORM OF A RECORDING, BUT HAS A CTUALLY ACQUIRED A COPYRIGHT TO REPRODUCE THE MUSIC AND EXPLOIT THE SAME COMMERCIALLY. IN THE PRESENT CASE WHAT JTM OR ANY OTHER CELLULAR OPERATOR HAS ACQUIRED UNDER THE SUPPLY CONTRACT IS ONLY THE COPYRIGHTED SOFTWARE, WHICH IS AN ARTI CLE BY ITSELF AND NOT ANY COPYRIGHT THEREIN. ITA NO. 3073(DEL)/2009 80 13.3 IN THE COURSE OF HEARING, THE BENCH ALSO REF ERRED TO THE DECISION OF H BENCH OF DELHI TRIBUNAL IN THE CASE OF GRAC E MAC CORPORATION, MICROSOFT CORPORATION AND MICROSOFT REGIONAL SALES CORPORATION VS. ACIT, (2011) 8 ITR (TRIB.) 522. IN THIS CASE, IT HAS BEEN HELD THAT A COMPUTER PROGRAMME IS A LITERARY WORK UNDER COPYRIGHT ACT , 1957, AND IF ANY OR ALL RIGHTS (INCLUDING GRANTING OF A LICENSE) ARE TRA NSFERRED FOR A CONSIDERATION, THE AMOUNT RECEIVED WILL BE IN THE NATURE OF R OYALTIES. IT IS ALSO MENTIONED THAT A PROGRAMME IS IN THE NATURE OF A PROCESS WHICH EXECUTES INSTRUCTION IN THE GIVEN ORDER. THEREFORE, ANY C ONSIDERATION RECEIVED WOULD AMOUNT TO ROYALTY UNDER THE ACT AND THE DTAA. THE CASE OF THE LD. DR IS THAT THE AFORESAID DECISION SUPPORTS T HE CASE OF THE REVENUE. THE DECISION DEALS WITH THE LICENSE GRANTED IN RESPECT OF SHRIMP WRAPPED SOFTWARE, WHICH IS SOLD ACROSS THE COU NTER. THE SOFTWARE IN THIS CASE IS HIGHLY SPECIALIZED ONE AND, THEREFORE, THE FACTS OF THIS CASE STAND IN A STRONGER FOOTING. ON THE OTHER HAND, THE L D. COUNSEL FOR THE ASSESSEE DISTINGUISHED THE CASE BY STATING THAT THE RATI O OF THE DECISION IS NOT APPLICABLE TO THE FACTS OF THIS CASE BECAUSE THE SOFTWARE IS PECULIAR TO THE EQUIPMENT SUPPLIED BY THE ASSESSEE AND, THUS, IT CANNOT BE SOLD OFF THE SHELF. ITA NO. 3073(DEL)/2009 81 13.4 WITH THE AFORESAID DISCUSSION, WE NOW PROC EED TO DECIDE VARIOUS GROUNDS. GROUND NOS. 7, 8 AND 9 ARE TO THE EFFE CT THAT THE LD. CIT(APPEALS) WAS NOT JUSTIFIED IN RELYING ON THE RULINGS OBTAINED BY THE AAI IN RESPECT OF ASSESSEES SUBSEQUENT CO NTRACTS WITH IT. IN THIS CONNECTION, TWO THINGS ARE TO BE NOTED. FIRSTL Y, THE RULING WAS OBTAINED BY THE AAI AND NOT BY THE ASSESSEE ALTHOUGH THE RULING COVERED SIMILAR MATTERS IN RESPECT OF CONTRACTS BETWEEN SAME PARTIES. SECONDLY, SECTION 254-S INTER-ALIA PROVIDES THAT THE ADVANCE R ULING PRONOUNCED BY THE AUTHORITY SHALL BE BINDING ONLY ON THE APPLICANT W HO SOUGHT IT AND ON THE COMMISSIONER AND INCOME-TAX AUTHORITIES SUBORDIN ATE TO HIM IN RESPECT OF THE APPLICANT. FURTHER, THE RULING IS BINDING ONLY IN RESPECT OF THE TRANSACTION IN RELATION TO WHICH THE RULING HAS BEE N SOUGHT. ON THE BASIS OF THIS PROVISION, THE LD. COUNSEL CAN VERY WELL ARGUE THAT THE TRANSACTION IN THE RULING PRONOUNCED BY THE AUTHORITY IS DIF FERENT FROM THE TRANSACTION IN THIS CASE. FURTHER, THE RULING HAS BEEN OBTAINED BY THE AAI AND NOT THE ASSESSEE. THEREFORE, THE RULING IS NO T BINDING ON THE ASSESSEE. HOWEVER, IF THE TRANSACTIONS ARE SAME OR SIMILA R WITH NO DISTINGUISHING FEATURE AND THE APPELLATE AUTHORITY FINDS THE RE ASONING GIVEN BY THE AUTHORITY IS CONVINCING, THEN THE RULING CAN CE RTAINLY BE USED AS AN AID ITA NO. 3073(DEL)/2009 82 TO COME TO THE DECISION ALTHOUGH IT MAY NOT HA VE ANY BINDING EFFECT. GROUND NOS. 7, 8 AND 9 ARE DISPOSED OFF ACCORDING LY. 14. THIS BRING US TO GROUND NO. 6 REGARDING QUAN TIFICATION OF INCOME IN RESPECT OF SUPPLY OF EQUIPMENT AND SOFTWARE. W E HAVE ALREADY HELD THAT PROPERTY IN GOODS PASSED OUTSIDE INDIA WHEN THESE WERE SHIPPED ON CIP INCOTERM. THE SHIPMENT TOOK PLACE PRIOR T O THIS YEAR. THUS, THE PROPERTY IN THE GOODS PASSED BEFORE THE BEGINNING OF THIS YEAR. THE PAYMENT WAS ALSO MADE IN AN EARLIER YEAR OUTSID E INDIA. THE POSITION IN REGARD TO SUPPLY OF SOFTWARE IS ALSO THE SAME. THE SUPPLY OF EQUIPMENT AND SOFTWARE CONSTITUTE A MILESTONE IN THE CONT RACT. THEREFORE, EVEN WITHOUT GOING INTO THE MERITS OF THE CLAIM OF TAX ABILITY OF PROFIT EMBEDDED IN SUPPLY OF EQUIPMENT AND SOFTWARE, IT IS C LEAR THAT THE INCOME DOES NOT ACCRUE OR ARISE IN THE YEAR UNDER CONSIDERATION. ACCORDINGLY, IT IS HELD THAT PROFITS ON SUPPLY OF EQUIPMENT AND SOFTWARE ARE NOT TAXABLE IN THIS YEAR. GROUND NO.6 IS DECIDED ACCORDINGLY. 14.1 WE HAVE ALSO HELD THAT THE PE OF THE ASSES SEE CAME INTO EXISTENCE WHEN THE EQUIPMENT WAS HANDED OVER TO IT BY THE AAI AFTER CLEARANCE FOR THE PURPOSE OF INSTALLATION. THE ATS IN DELHI WAS HANDED OVER TO THE ITA NO. 3073(DEL)/2009 83 AAI IN MARCH, 1998 AFTER CONDUCTING SITE ACCEPTANC E TEST. THIS IS PRIOR TO THE RELEVANT PREVIOUS YEAR. HOWEVER, THE ATS I N MUMBAI WAS HANDED OVER IN JUNE, 1998. THEREFORE, THE PROFITS IN RESPECT OF THE INSTALLATION CONTRACT AND SERVICES RENDERED IN THIS CONNECTI ON IN MUMBAI ARE TAXABLE IN THIS YEAR. GROUND NOS. 13, 14 AND 15 ARE DECIDED ACCORDINGLY. 14.2 THUS, THE MATTER REGARDING THE COMPUTATION OF PROFIT IN RESPECT OF INSTALLATION CONTRACT HAS TO BE DECIDED DE-NOVO BY THE AO AND GROUND NOS. 16, 17 AND 18 ARE DECIDED ACCORDINGLY. 14.3 AS THE MATTER HAS BEEN RESTORED TO THE FIL E OF THE AO, THERE IS NO NEED AT PRESENT TO DECIDE GROUND NOS. 19 AND 20 REGARDING CHARGING OF INTEREST UNDER SECTIONS 234B, 234C AND 220(2) O F THE ACT. THE AO SHALL DECIDE THESE MATTERS AFRESH WHILE COMPUTING THE I NCOME, AFTER GIVING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD. 15. IN THE RESULT, THE APPEAL IS TREATED AS PARTL Y ALLOWED AS INDICATED ABOVE. THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 17TH JUNE, 2011. SD/- SD/- (R.P. TOLANI) (K.G.BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE OF ORDER: 17TH JUNE, 2011. SP SATIA ITA NO. 3073(DEL)/2009 84 COPY OF THE ORDER FORWARDED TO:- RAYTHEON COMPANY, C/O S.R.BATLIBOI &CO., GURGAON. DY. DIRECTOR OF INCOME-TAX, CIR. 2(1), INTL. TAXAT ION, NEW DELHI. CIT(A) CIT THE DR, ITAT, NEW DELHI. ASSISTANT REGISTRAR.