Posco Engineering & Construction Company Ltd., Gurgaon V. Addl. DIT, New Delhi

ITA 5787/DEL/2013

• Counselvise Citation: 578720114 RSA 2013
• Duration Of Justice: 3 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-02-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 14-02-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 29-10-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: ARZOO BATTA
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Residential status; Double taxation relief; Opportunity of being heard; International transaction; Deemed to accrue or arise in india; Permanent establishment; Advance ruling; Revised return
• Section: 92C; 143(3); 5(2); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SHRI R. S. SYAL, ACCOUNTANT MEMBER AND SHRI I. C. SUDHIR, JUDICIAL MEMBER ITA NO. 5787/DEL/2013 (ASSESSMENT YEAR-2008-09) POSCO ENGINEERING & CONSTRUCTION COMPANY LIMITED, 6 TH FLOOR, PARK CENTRA BUILDING, TOWER-B, SECTOR 30, NH-8, GURGAON, HARYANA- 122002 VS ADDL. DIRECTOR OF INCOME TAX, RANGE-3, INTERNATIONAL TAXATION, CIVIC CENTRE, NEW DELHI-110002 (APPELLANT) (RESPONDENT) PAN NO. AAECP2664A ASSESSEE BY: SHRI PAWAN KUMAR, SHRI VISHAL ANAND, SHRI NITIN VAID & SHRI ARZOO BATTA REVENUE BY: SHRI SANJEEV SHARMA, SHRI YOGESH KUMAR VERMA & SHRI VIVEK KUMAR DATE OF HEARING 14.2.2014 DATE OF PRONOUNCEMENT 26.2.2014 ORDER PER R. S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE ASSESSING OFFICER U/S 144C(1) R.W.S. 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER ALSO CALLED `THE ACT) ON 27.9.2013 IN RELATION TO THE ASSESSMENT YEAR 2008-0 9. 2. THE FIRST TWO GROUNDS ARE GENERAL WHICH WERE NEI THER SPECIFICALLY ARGUED NOR REQUIRE ANY ADJUDICATION. T HE LD. AR ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 2 SUBMITTED THAT THERE WERE BASICALLY TWO ISSUES IN T HE PRESENT APPEAL VIZ., A. INCOME FROM CONTRACT WITH STEEL AUTHORITY OF INDIA LTD.; B. TRANSFER PRICING ADJUSTMENT. 3. THE FACTUAL SCENARIO IS THAT THE ASSESSEE ORI GINALLY FILED TWO RETURNS SEPARATELY FOR ITS PROJECT OFFICE AND LIAIS ON OFFICE WITH DIFFERENT PERMANENT ACCOUNT NUMBERS. SUCH RETURNS W ERE REVISED FOR A NUMBER OF TIMES. THE ASSESSEE ADMITTED THAT I T WAS EARLIER UNDER A BONA FIDE BELIEF THAT SEPARATE RETURNS WERE REQUIRED TO BE FILED IN RESPECT OF LIAISON OFFICE AND PROJECT OFFI CE. THE ASSESSEE GAVE ITS NOD TO COMMON ASSESSMENT IN RESPECT OF BOT H THE SEGMENTS. A DRAFT ASSESSMENT ORDER U/S 144C(1) WAS PASSED ON 30.11.2012. THE ASSESSEE FILED ITS OBJECTION BEFORE THE DISPUTE RESOLUTION PANEL (DRP). UPON THE RECEIPT OF DIRECTI ONS FROM THE DRP, THE ASSESSING OFFICER PASSED THE FINAL CONFIR MATORY ORDER WHICH IS IMPUGNED IN THE PRESENT APPEAL. A. INCOME FROM CONTRACT WITH STEEL AUTHORITY 4.1. WE ARE FIRST ESPOUSING THE ISSUE OF INCOME F ROM CONTRACT WITH STEEL AUTHORITY OF INDIA LTD. THE FACTS APROPOS TH IS ISSUE ARE THAT THE ASSESSEE IS A NON-RESIDENT COMPANY INCORPORATED IN AND ALSO TAX RESIDENT OF KOREA. IT IS MAINLY ENGAGED IN ENGI NEERING AND CONSTRUCTION FOR IRON, ENERGY AND PUBLIC WORKS ETC. IT ENTERED INTO A ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 3 CONTRACT AGREEMENT DATED 16.10.2007 READ WITH THE A MENDMENT AGREEMENT DATED 17.12.2008, AS A CONSORTIUM CONSIST ING OF THE ASSESSEE (AS ITS LEADER) AND ANOTHER PARTNER, NAGAR JUNA CONSTRUCTION COMPANY (NCC) ON ONE HAND AND STEEL AU THORITY OF INDIA (HEREINAFTER CALLED `THE SAIL) ON THE OTHER, FOR SETTING UP A BLAST FURNACE COMPLEX AT IISCO BURNPUR, WEST BENGAL . THE ASSESSEE CLAIMED DEDUCTION FOR SOME EXPENSES INCURR ED ON THIS PROJECT WITHOUT OFFERING ANY REVENUE. THE ASSESSEE STATED DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT IT RECEIV ED 5% MOBILIZATION ADVANCE FROM SAIL AS UNDER : - SL NO. PARTICULARS AS AT 31.03.2008 1. OFFSHORE SUPPLY OF EQUIPMENTS EURO 38,00,033 2. FEE FOR TECHNICAL SERVICES DESIGN & ENGINEERING EURO 1,50,900 3. FOREIGN SUPERVISION CHARGES (ONSHORE SERVICES) EURO 2,22,000 4. ONSHORE SUPPLY OF EQUIPMENTS INR 15,03,47,944 4.2. THE ABOVE AMOUNTS WERE NOT OFFERED FOR TAXA TION ON THE PREMISE THAT THESE WERE SIMPLY IN THE NATURE OF ADV ANCE AND CONTAINED NO ELEMENT OF INCOME. IT WAS SUBMITTED TH AT THE LIABILITY TO TAX WOULD ARISE IN SUBSEQUENT YEARS ON THE ACTUA L SUPPLY OF ONSHORE EQUIPMENTS AND RENDERING OF ONSHORE SERVICE S (FOREIGN SUPERVISION CHARGES). IN SO FAR AS THE AMOUNT TOWAR DS OFFSHORE ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 4 SUPPLY OF EQUIPMENTS AND DESIGN & ENGINEERING WAS C ONCERNED, IT WAS CLAIMED THAT NO INCOME WAS CHARGEABLE TO TAX IN ANY YEAR AS THESE ACTIVITIES WERE COMPLETED OUTSIDE INDIA WITHO UT ANY INVOLVEMENT OF ITS INDIAN OFFICE. A DETAILED EXPLA NATION WAS SEPARATELY FILED BEFORE THE AO SUBMITTING REASONS F OR ITS CONCLUSIONS IN RESPECT OF THE ABOVE FOUR COMPONENTS OF THE RECEIPTS. AS REGARDS THE NON-TAXABILITY OF INCOME FROM OFFSHORE SUPPLY IN INDIA, THE ASSESSEE SUBMITTED THAT SAIL R EMITTED EURO 38,00,033 AS MOBILIZATION ADVANCE TOWARDS OFFSHORE SUPPLY OF EQUIPMENTS PORTION, FOR WHICH THE TITLE OF GOODS WA S TRANSFERRED FROM THE ORIGIN OF SUPPLY OF GOODS, THAT IS, HIGH S EA. NOT ONLY THAT, THE AMOUNT WAS ALSO RECEIVED OUTSIDE INDIA. APART F ROM THAT, IMPORT DUTY ON SUCH GOODS WAS DIRECTLY PAID BY SAIL TO CUSTOMS AUTHORITIES AND MARINE FREIGHT AS WELL AS INLAND FR EIGHT FOR MOVEMENT OF SUCH EQUIPMENTS FROM FOREIGN PORTS TO T HE SITE OF SAIL WAS ALSO PAID BY SAIL THROUGH NCC. INSURANCE P OLICY AGAINST TRANSIT RISK WAS ALSO TAKEN BY SAIL THROUGH NCC. IN THE LIGHT OF THE ABOVE FACTS, IT WAS CLAIMED THAT NO IN COME FROM OFFSHORE SUPPLY OF EQUIPMENTS WAS AT ALL CHARGEABLE TO TAX IN INDIA IN ANY YEAR. AS REGARDS THE RECEIPT ON ACCOUNT OF D ESIGN & ENGINEERING SERVICES, THE ASSESSEE STATED THAT THE SAID AMOUNT WAS ALSO NOT CHARGEABLE TO TAX IN ANY YEAR BECAUSE SUCH DESIGNS WERE ALSO SUPPLIED OFFSHORE WHICH WERE PART AND PARCEL O F THE OFFSHORE SUPPLY OF EQUIPMENTS. THE ASSESSEE ACCEPTED BEFORE THE A.O THAT ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 5 IT HAS A SUPERVISORY P.E IN INDIA AS PER ARTICLE 5( 3) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND KORE A (HEREINAFTER CALLED `THE DTAA). THE ASSESSEE CLAIM ED THAT ITS PERMANENT ESTABLISHMENT (PE) HAD NO ROLE IN MAKING SUCH OFFSHORE SUPPLIES AND DESIGN & ENGINEERING SERVICES . THE ASSESSEE AGREED THAT FOREIGN SUPERVISION CHARGES WERE IN THE NATURE OF ONSHORE SERVICES AND HENCE EXIGIBLE TO TAX. SIMILAR LY, IT WAS ALSO CONCEDED THAT ONSHORE SUPPLY OF EQUIPMENTS WAS ALSO LIABLE FOR TAXATION IN INDIA. HOWEVER, THESE TWO ITEMS WERE CL AIMED TO BE NOT CHARGEABLE TO TAX DURING THE YEAR BECAUSE NEITHER A NY ONSHORE SERVICES WERE RENDERED NOR ANY ONSHORE SUPPLY OF EQ UIPMENTS WAS MADE DURING THE RELEVANT FINANCIAL YEAR. AMOUNT REC EIVED @ 5% OF THE CONTRACT PRICE TOWARDS FOREIGN SUPERVISION CHAR GES AND ONSHORE SUPPLY OF EQUIPMENTS WAS CLAIMED TO BE IN T HE NATURE OF ADVANCE. 4.3. THE ASSESSING OFFICER HELD THAT THE ASSESSEE HAD A FIXED PLACE P.E/SUPERVISORY P.E/SERVICES P.E IN TERMS OF ARTICLE 5 OF THE DTAA AND WAS ALSO HAVING BUSINESS CONNECTION IN IND IA IN TERMS OF SEC. 9(1)(I) OF THE ACT. THEREAFTER, HE PROCEEDE D TO VET VARIOUS CLAUSES OF THE CONTRACT AGREEMENT. AFTER ENTERTAINI NG OBJECTIONS FROM THE ASSESSEE, THE ASSESSING OFFICER CAME TO IN ITIALLY HOLD THAT IT WAS A CASE OF COMPOSITE CONTRACT WITH SAIL AND T HE BIFURCATION OF CONSIDERATION INTO VARIOUS SEGMENTS. AS DONE BY THE ASSESSEE, ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 6 WAS NOT APPROPRIATE. HE HELD THAT 5% OF MOBILIZATI ON CHARGES RECEIVED DURING THE YEAR IN RESPECT OF ONSHORE SUPP LY OF EQUIPMENTS AMOUNTING TO RS. 15,03,47,944/- WERE LIA BLE TO BE INCLUDED IN THE TOTAL INCOME FOR THE YEAR. HE FURTH ER HELD THAT 5% OF MOBILIZATION CHARGES RECEIVED DURING THE YEAR IN RESPECT OF FOREIGN SUPERVISION CHARGES AMOUNTING TO RS. 1,37,7 7,320/- (EQUIVALENT OF EURO 2,22,000) WERE ALSO LIABLE TO B E INCLUDED IN THE TOTAL INCOME. IT WAS STILL FURTHER HELD THAT 5% OF MOBILIZATION CHARGES RECEIVED DURING THE YEAR IN RESPECT OF OFFS HORE SUPPLY OF EQUIPMENT AT EURO 38,00,033 WAS TO BE CONSIDERED FO R THE DETERMINATION OF BUSINESS INCOME OF THE ASSESSEE AS PER ARTICLE 7 OF THE DTAA AND ALSO SEC. 9(1)(I) OF THE ACT. HE HO WEVER, RESTRICTED THE INCOME TO 90% OF SUCH AMOUNT AS ATTR IBUTABLE TO PERMANENT ESTABLISHMENT IN INDIA AND THE PROFIT MAR GIN OF 30.65% WAS APPLIED THEREON. AS REGARDS 5% OF MOBILIZATION CHARGES RECEIVED DURING THE YEAR IN RESPECT OF DESIGN & ENG INEERING, THE AO INITIALLY HELD IT TO BE ROYALTY WITHIN THE MEAN ING OF SEC. 9(1)(VI) OF THE ACT (AS PER PARA 8 OF THE ORDER) A ND THEN ALSO AS FEES FOR TECHNICAL SERVICES WITHIN THE MEANING OF SEC. 9(1)(VII) OF THE ACT (AS PER PARA 9 OF THE ASSESSMENT ORDER). HOWEVER, WHILE COMPUTING THE TOTAL INCOME, HE INCLUDED 90% OF THIS AMOUNT AS ATTRIBUTABLE TO THE P.E. BY APPLYING PROFIT MARGIN OF 30.65%, HE CLUBBED THIS AMOUNT ALONG WITH THAT OF OFFSHORE SUP PLY AND MADE ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 7 TOTAL ADDITION ON THESE TWO COUNTS AT RS. 6,76,37,0 14/-. THAT IS HOW THE AO COMPUTED TOTAL INCOME OF THE ASSESSEE AS UND ER: - SL NO. PARTICULARS AMOUNT (RS) AMOUNT (RS) 1. LOSS AS PER REVISED RETURN DATED 21.05.2009 (-) RS. 84,04,207.00 2. ADDITIONS ON ACCOUNT OF ADJUSTMENT MADE BY TPO 2,15,27,090 3. ADDITIONS ON ACCOUNT OF 5% RECEIPT AGAINST 1 ST MILESTONE (ONSHORE ACTIVITIES) 15,03,47,944 4. ADDITIONS ON ACCOUNT OF FOREIGN SUPERVISION CHARGES 1,37,77,320 5. ADDITIONS ON ACCOUNT OF OFFSHORE DESIGN & ENGINEERING AND OFFSHORE SUPPLY 6,76,37,014 25,32,89,368.00 TOTAL INCOME 24,48,85,161 4.4. THE ASSESSEE IS AGGRIEVED AGAINST SUCH COMPU TATION OF TOTAL INCOME ON ACCOUNT OF OFFSHORE SUPPLY, ONSHORE SUPPL Y, ONSHORE SERVICES AND DESIGN & ENGINEERING SERVICES. 4.5.1. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PE RUSED THE RELEVANT MATERIAL ON RECORD. THE FIRST QUESTION WHI CH REQUIRES TO BE DECIDED AND WHICH HAS BEEN STRENUOUSLY ARGUED BY TH E LD. DR IS WHETHER IT IS A CASE OF COMPOSITE CONTRACT? WE NOT E THAT THE ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 8 ASSESSING OFFICER PROCEEDED WITH THE PRESUMPTION IN THE EARLIER PART OF THE ASSESSMENT ORDER THAT IT IS A CASE OF A COMPOSITE CONTRACT WITH TOTAL CONSIDERATION AS ONE UNIT. HE, THEREFORE , INITIALLY HELD THAT THE ENTIRE CONTRACT AGREEMENT WAS TO BE CONSID ERED AS COMPOSITE CONTRACT WITHOUT ANY FURTHER BIFURCATION INTO OFFSHORE AND ONSHORE SUPPLY OF EQUIPMENTS AS WELL AS SERVICE S. HOWEVER, WHILE COMPUTING THE TOTAL INCOME ON THE PENULTIMATE PAGE OF THE ASSESSMENT ORDER, HE BIFURCATED THE INCOME IN RESP ECT OF THREE BROAD CATEGORIES, VIZ., ONSHORE ACTIVITIES, FOREIGN SUPERVISION CHARGES (THAT IS, ONSHORE SERVICES) AND OFFSHORE SU PPLY CLUBBED WITH OFFSHORE DESIGN & ENGINEERING. 4.5.2. THERE IS NO DISPUTE THAT THE ASSESSEE EN TERED INTO ONE CONTRACT AGREEMENT WITH SAIL, A COPY OF WHICH IS AV AILABLE ON PAGES 1008 TO 1193 OF THE PAPER BOOK. THE PREAMBLE OF THE CONTRACT AGREEMENT INDICATES THAT IT HAS BEEN ENTER ED INTO FOR SETTING UP A BLAST FURNACE COMPLEX. ARTICLE 2 OF T HE CONTRACT AGREEMENT HAS BEEN CAPTIONED AS CONTRACT PRICES AN D TERMS OF PAYMENT. THE CONTRACT PRICE HAS BEEN MENTIONED AS THE AGGREGATE OF EURO 8,34,58,671 AND INDIAN RUPEES 1088,67,81,00 0. PARA 2.1 OF ARTICLE 2 TALKS OF : `CONTRACT PRICE (REFERENCE GCC CLAUSE 11 & APPENDIX 1). APPENDIX 1 IS ON PAGES 1021 TO1040 PAG ES OF THE PAPER BOOK. PAGE 1021 IS `PRICE SCHEDULE WHICH SP ELLS OUT CONTRACT PRICE BREAK-UP WITH VARIOUS TABLES. TABLE 1B IS ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 9 `SUMMARY OF PRICES, WHICH IS AVAILABLE ON PAGE 10 23 OF THE PAPER BOOK. THIS TABLE CONTAINS THE BREAK-UP OF THE AFORE MENTIONED CONTRACT PRICE OF EURO 8,34,58,671 AND INDIAN RUPEE S 1088,67,81,000. FIRST ITEM IN THIS TABLE IS THE PRI CE OF DESIGN & ENGINEERING (IMP.) AT SR. NO. 1, FOR WHICH CONSIDER ATION OF EURO 30,18,000 HAS BEEN GIVEN. ITEM AT SR. NO. 3 OF TABL E 1B IS CONSIDERATION FOR `SUPPLY OF PLANT (IMP) FOR WHICH CONSIDERATION HAS BEEN GIVEN AS EURO 61161860. SERIAL NO. 5 OF TA BLE 1B IS `SUPPLY OF REFECTORY (IMP) WITH CONSIDERATION OF E URO 14599951. AT SERIAL NO. 7 OF TABLE 1B IS `SUPPLY OF COMMISSIO NING SPARES (IMP) WHOSE CONSIDERATION IS EURO 238860. IN THE LIKE MANNER, ITEM AT SERIAL NO. 12 OF TABLE 1B IS `FOREIGN SUPER VISION CHARGES, WHOSE CONSIDERATION IS EURO 440000. THE ABOVE DESCR IPTION OF THE DETAIL OF THE PRICE FOR VARIOUS COMPONENTS SHOWS TH AT ALBEIT A COMPOSITE PRICE HAS BEEN GIVEN AS PER ARTICLE 2 OF THE CONTRACT AGREEMENT AS CONTRACT PRICE, BUT IT IS A SUM TOTAL OF THE CLEARLY DEMARCATED PRICES FOR ONSHORE SUPPLIES AND SERVICES AND OFFSHORE SUPPLIES AND DESIGNS. IN OUR CONSIDERED OPINION, TH E ASSESSING OFFICER WAS INITIALLY NOT CORRECT IN HOLDING THAT T HE CONTRACT WAS A COMPOSITE ONE DEVOID OF ANY BIFURCATION TOWARDS ONS HORE AND OFFSHORE SUPPLIES AND SERVICES, WHICH STAND WAS SUB SEQUENTLY ALTERED TO THE CORRECT POSITION. WE, THEREFORE, HOL D THAT IT IS WIDE OFF THE MARK TO CATEGORIZE THE PRESENT CONTRACT AGR EEMENT AS A ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 10 COMPOSITE ONE SINCE ALL ITS MAJOR FOUR COMPONENTS A RE DISTINCTLY IDENTIFIABLE WITH SEPARATE CONSIDERATION FOR EACH. 4.5.3. IN THIS CONNECTION, IT IS OF PARAMOUNT I MPORTANCE TO CONSIDER THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF ISHIKAWAJMA -HARIMA HEAVY INDUSTRIES LTD. VS. DIRE CTOR OF IT (2007) 288 ITR 408 (SC) , WHICH HAS BEEN HEAVILY RELIED ON BEHALF OF THE ASSESSEE. IN THAT CASE, THE ASSESSEE WAS A RESIDENT OF JAPAN. IT WAS TO DEVELOP, DESIGN, ENGINEER AND PROCURE EQU IPMENTS AND MATERIAL SUPPLIES, ETC. TO ERECT AND CONSTRUCT STOR AGE TANKS OF 5 MMTPA CAPACITY. THE PROJECT WAS TO BE COMPLETED IN 41 MONTHS. THE CONTRACT INVOLVED (I) OFFSHORE SUPPLY; (II) OF FSHORE SERVICES; (III) ONSHORE SUPPLY; (IV) ONSHORE SERVICES; AND ( V) CONSTRUCTION AND ERECTION. THE PRICE WAS PAYABLE FOR OFFSHORE SU PPLY AND OFFSHORE SERVICES IN US DOLLARS AND FOR ONSHORE SU PPLY AND ONSHORE SERVICES AND CONSTRUCTION AND ERECTION PART LY IN US DOLLARS AND PARTLY IN INDIAN RUPEES. IT FILED AN AP PLICATION BEFORE THE AUTHORITY FOR ADVANCE RULINGS FOR DETERMINATION OF ITS TAX LIABILITY WITH REFERENCE TO 'OFFSHORE SUPPLY AND OF FSHORE SERVICES'. NO ISSUE WAS RAISED AS REGARDS THE LIABILITY TO PAY INCOME-TAX ON ONSHORE SUPPLY, ONSHORE SERVICES AND ITS ACTIVITY R ELATING TO CONSTRUCTION AND ERECTION. IT WAS CONTENDED BEFORE THE AUTHORITY THAT THE CONTRACT WAS A DIVISIBLE ONE AND HENCE THE RE WAS NO LIABILITY TO PAY TAX ON OFFSHORE SUPPLY AND OFFSHOR E SERVICES. THE ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 11 AUTHORITY, AFTER CONSIDERING THE PROVISIONS OF SECT ION 5 R/W S. 9 AS WELL AS DTAA, OPINED THAT THE ASSESSEE WAS LIABLE TO PAY TAXES. IN FURTHER APPEAL, THE HONBLE COURT HELD THAT THE CON TRACT WAS A COMPOSITE ARRANGEMENT. IT NOTED THAT PRICE WAS GIVE N SEPARATELY FOR EACH OF THESE SEGMENTS. IT WAS ALSO NOTICED THAT TH E ONSHORE SUPPLY, ONSHORE SERVICES AND CONSTRUCTION DID CONTAIN ELEME NT OF INCOME AND HENCE TAX WAS PAYABLE IN INDIA, WHICH PROPOSITI ON WAS NOT DISPUTED BY THE ASSESSEE AS WELL. HOWEVER, AS REGAR DS THE TAXATION OF INCOME FROM OFFSHORE SUPPLY AND OFFSHORE SERVICE S, EVEN THOUGH IT WAS A COMPOSITE CONTRACT, THE HONBLE SUPREME CO URT HELD THAT INCOME FROM SUCH OFFSHORE SUPPLY OF EQUIPMENTS AND THE OFFSHORE SERVICES DID NOT FALL WITHIN THE PURVIEW OF S. 9(1) (VII) SINCE THE ENTIRE SERVICES WERE RENDERED OUTSIDE INDIA AND THE PE OF THE ASSESSEE HAD NO ROLE TO PLAY IN THE TRANSACTION. 4.5.4. COMING BACK TO THE FACTS OF THE INSTANT CASE, WE FIND THAT HERE ALSO A COMPOSITE CONTRACT WAS ENTERED INTO BET WEEN THE ASSESSEE TOGETHER WITH NCC AND SAIL. THERE IS A SEP ARATE MENTION OF CONSIDERATION FOR SUPPLY OF EQUIPMENTS AND FOR R ENDITION OF SERVICES. SIMPLY BECAUSE THE SUPPLY OF EQUIPMENT AND THE RENDITION OF SERVICES IS TO ONE PARTY AND FOR A CO MMON PURPOSE, WE ARE UNABLE TO FIND ANY LOGIC IN TREATING THE ENTIRE AMOUNT AS ONE COMPOSITE PAYMENT ATTRIBUTABLE COMMONLY BOTH TO THE SUPPLY OF EQUIPMENT AND RENDERING OF SERVICES, MORE SO WHEN T HERE IS A ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 12 SPECIFIC IDENTIFIABLE AMOUNT RELATABLE TO THESE SEG MENTS. THERE IS NO QUALITATIVE DIFFERENCE BETWEEN TWO SITUATIONS, V IZ., FIRST, WHEN ONE CONTRACT IS MADE FOR TWO OR MORE WORKS SPECIFYI NG THE CONSIDERATION FOR EACH WORK SEPARATELY; AND SECOND , WHEN TWO OR MORE CONTRACTS ARE MADE FOR EACH SUCH WORK. BE THAT AS IT MAY, IT IS OBSERVED THAT THE AO HAS ULTIMATELY COMPLETED THE A SSESSMENT BY SEPARATELY INCLUDING THE ABOVE REFERRED FOUR COMPO NENTS IN THE TOTAL INCOME OF THE ASSESSEE. IT SHOWS THAT HE IMP LIEDLY ACCEPTED THE BREAK-UP OF THE CONTRACT PRICE INTO FOUR BROAD DIVISIONS AS CORRECT. 4.6. APART FROM THE ASSESSEES CONTENTION THAT THE AMOUNT RECEIVED DURING THE YEAR WAS IN THE NATURE OF ADVAN CE AND NOT INCOME, BOTH THE SIDES HAVE EXTENSIVELY ARGUED ON T HE TAXABILITY OR OTHERWISE OF SUCH AMOUNTS AS HAS ALSO BEEN ADJUDICA TED BY THE ASSESSING OFFICER IN FAVOR OF THE REVENUE. AS SUCH, IT HAS BECOME IMPERATIVE TO CONSIDER AND DECIDE THE PRINCIPLES FO R DETERMINING THE TAXABILITY, IF ANY, OF SUCH FOUR COMPONENTS OF INCOME INCLUDED BY THE AO IN THE TOTAL INCOME OF THE ASSESSEE, AS U NDER :- I. INCOME FROM OFFSHORE SUPPLY OF EQUIPMENTS II. INCOME FROM ONSHORE SUPPLY OF EQUIPMENTS. III. INCOME FROM ONSHORE SERVICES. IV. INCOME FROM DESIGN & ENGINEERING SERVICES ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 13 I. INCOME FROM OFFSHORE SUPPLY OF EQUIPMENT 4.7.1. THE CASE OF THE ASSESSEE IS THAT THE RECE IPT OF EURO 38,00,033 DURING THE YEAR RELATED TO THE OFFSHORE S UPPLY OF EQUIPMENTS AND HENCE THE PROFIT ELEMENT CONTAINED IN SUCH AN AMOUNT COULD NOT BE CHARGED TO TAX. PER CONTRA, THE LD. STRONGLY REFUTED THIS ARGUMENT BY SUBMITTING THAT THERE WAS NO OFFSHORE SUPPLY AND THE TITLE TO SUCH GOODS PASSED IN INDIA AND HENCE THE ENTIRE AMOUNT HAS BEEN RIGHTLY CHARGED TO TAX. IN T HE ALTERNATIVE AND WITHOUT PREJUDICE TO HIS MAIN ARGUMENT, IT WAS PUT FORTH BY THE LD. DR THAT THE SAID SALE CONSIDERATION INCLUDES CO MPENSATION TOWARDS RENDERING SOME SERVICES IN CONNECTION WITH INSTALLATION AND COMMISSIONING OF EQUIPMENTS IN INDIA AND TO THA T EXTENT, THE INCOME BE CHARGED TO TAX IN INDIA. 4.7.2. WE WILL EXAMINE AND EVALUATE THESE CONTEN TIONS, ONE BY ONE, UNDER THE FOLLOWING SUB-HEADS:- 1. WHERE TITLE TO THE GOODS PASSED ? 2. WHETHER SALE PRICE INCLUDES ANY CONSIDERATION FOR S ERVICES RENDERED OR TO BE RENDERED IN INDIA ? 3. TAXABILITY OF PRICE FOR OFFSHORE SUPPLY OF EQUIPMEN T AND COMPENSATION FOR SERVICES RENDERED IN INDIA 4. ATTRIBUTION OF INCOME TO SERVICES RENDERED IN INDIA . 1. WHERE TITLE TO THE GOODS PASSED ? ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 14 1.A. THE ASSESSEE STATED BEFORE THE AO THAT THAT THE INVOICES FOR OFFSHORE SUPPLY WERE ISSUED DIRECTLY BY POSCO-E&C K OREA IN THE NAME OF SAIL AND THE TITLE OF GOODS WAS TRANSFERRED BY VIRTUE OF TRANSFER OF RISK TO SAIL FROM THE ORIGIN OF SUPPLY OF GOODS, THAT IS, HIGH SEA. THE PAYMENT AGAINST SUCH OFFSHORE SUPPLY WAS REMITTED TO THE ASSESSEE ABROAD DIRECTLY BY SAIL IN FOREIGN CURRENCY AND NO AMOUNT ON THIS COUNT WAS RECEIVED IN INDIA. IT WAS ALSO STATED THAT IMPORT DUTY AGAINST OFFSHORE SUPPLY WAS PAID BY SAI L IN INDIA. THE MARINE FREIGHT AS WELL AS INLAND FREIGHT FOR MO VEMENT OF OFFSHORE EQUIPMENTS SUPPLY FROM FOREIGN PORTS TO TH E SITE OF SAIL WAS ALSO PAID BY SAIL THROUGH NCC. THE INSURANCE PO LICY AGAINST THE TRANSIT RISK OF SAID OFFSHORE EQUIPMENT SUPPLY WAS TAKEN BY SAIL THROUGH NCC. THE POSITION AS ENUMERATED ABOVE HAS NOT BEEN CONTROVERTED BY THE ASSESSING OFFICER. FURTHER , WHEN THE ASSESSEE CHALLENGED THE ADDITION PROPOSED BY THE A. O ON THIS ISSUE BEFORE THE DISPUTE RESOLUTION PANEL (DRP), IT WAS R EITERATED THAT THE TITLE OF GOODS PASSED OUTSIDE INDIA. THE DRP AC CEPTED THIS ARGUMENT VIDE PARA 4.2.5 OF ITS DIRECTION U/S 144C( 5). HOWEVER, IT WAS OBSERVED THAT EVEN THOUGH THE TITLE OF GOODS PA SSED OUTSIDE INDIA, BUT IT WAS THE PERFORMANCE GUARANTEE WHICH W AS IMPORTANT AND DECISIVE OF THE TAXABILITY OF INCOME. THAT IS H OW THE ASSESSEES CONTENTION CAME TO BE REJECTED BY THE DRP. ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 15 1.B. IN THE OPPUGNATION, THE LD. DR FORCEFULLY ARGUED THAT THE PERMANENT ESTABLISHMENT OF THE ASSESSEE PLAYED AN A CTIVE ROLE IN THE SUPPLY OF OFFSHORE EQUIPMENT. ON A SPECIFIC QUE RY TO INDICATE THE PRECISE ROLE OF THE PE IN THE OFFSHORE SUPPLY O F EQUIPMENTS, THE LD. DR FAILED TO SUBSTANTIATE HIS POINT OF VIEW. HE KEPT ON HARPING ON THE GENERAL SUBMISSIONS THAT THE CONSTRUCTION OF PLANT, WHICH ALSO INCLUDES OFFSHORE ACQUISITION OF EQUIPMENT, CO ULD NOT HAVE BECOME POSSIBLE WITHOUT THE ROLE OF THE PE AND IT W AS FOR THE PE TO DECIDE AS TO WHEN THE EQUIPMENT WAS TO BE ACQUIRED FROM ABROAD. IN OUR CONSIDERED OPINION, THESE SUBMISSIONS ARE TO TALLY IRRELEVANT IN SO FAR AS THE QUESTION OF PASSING OF TITLE OF GO ODS IS CONCERNED. 1.C. THE LD. DR THEN INVITED OUR ATTENTION TOWARD S VARIOUS CLAUSES OF THE CONTRACT AGREEMENT TO DEMONSTRATE THAT IT WA S THE RESPONSIBILITY OF THE ASSESSEE TO PROVIDE TRAINING, TESTING AND COMMISSIONING OF SUCH EQUIPMENTS IN INDIA, WHICH SH OWED THAT THE ASSESSEE WAS REQUIRED TO PUT THE EQUIPMENT IN A DEL IVERABLE STATE IN INDIA. REFERRING TO SECTION 19 OF THE SALE OF GOODS ACT, 1930, IT WAS STATED THAT PROPERTY IN THE GOODS PASSES ONLY W HEN THE PARTIES INTEND IT TO PASS. HE FURTHER INVITED OUR ATTENTION TOWARDS SECTION 21 OF THE SALE OF GOODS ACT WHICH PROVIDES THAT : `WHERE THERE IS A CONTRACT FOR THE SALE OF SPECIFIC GOODS AND THE SEL LER IS BOUND TO DO SOMETHING TO THE GOODS FOR THE PURPOSE OF PUTTING T HEM INTO A DELIVERABLE STATE, THE PROPERTY DOES NOT PASS UNTIL SUCH THING IS ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 16 DONE AND THE BUYER HAS NOTICE THEREOF. ACCENTUATING ON THESE PROVISIONS OF THE SALE OF GOODS ACT, IT WAS ARGUED THAT SINCE SO MANY ACTIVITIES WERE TO BE DONE IN INDIA IN CONNECT ION WITH THE TRAINING, INSTALLATION AND COMMISSIONING OF THE EQU IPMENTS ALLEGED TO BE SOLD OFFSHORE, THE PROPERTY IN THE EQUIPMENT WILL PASS IN INDIA ONLY ON COMPLETING SUCH ACTIVITIES IN INDIA. HE SUM MED UP HIS ARGUMENTS BY STATING THAT THE PROPERTY IN GOODS PAS SED IN INDIA ON DOING OF SUCH ACTIVITIES AND PUTTING THEM INTO A DE LIVERABLE STATE IN INDIA. 1.D. HAVING HEARD BOTH THE SIDES AND PERUSED THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THERE IS MATERIAL ON RECORD TO INDICATE, WHICH WE WILL ADVERT TO IN DETAIL INFRA , THAT APART FROM IMPARTING TRAINING TO EMPLOYEES OF SAIL IN INDIA, T HE ASSESSEE WAS OBLIGED TO CARRY OUT CERTAIN ACTIVITIES ASSOCIATED WITH THE INSTALLATION AND COMMISSIONING OF SUCH EQUIPMENT IN INDIA. THE QUESTION IS WHETHER CARRYING ON OF SUCH ACTIVITIES IN INDIA IS DECISIVE OF THE QUESTION THAT THE TITLE TO GOODS PA SSED IN INDIA? THOUGH THE CONTENTION OF THE LD. DR LOOKS ATTRACTIV E AT FIRST FLUSH, BUT LOSES ITS SHINE WHEN THE PROVISIONS OF THE SALE S OF GOODS ACT ARE CONSIDERED IN ENTIRETY. IT IS NOTICED THAT THE CONTENTION SIMILAR TO THE ONE NOW RAISED BY THE LD. DR BEFORE US, WAS EARLIER ALSO ATTEMPTED BEFORE THE SPECIAL BENCH TRIBUNAL IN MOTOROLA INC. VS. DCIT (2005) 95 ITD 269 (DEL)(SB). IT CAN BE SEEN FROM PARA 231 ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 17 OF THE SPECIAL BENCH ORDER THAT THE LD. DR THEREI N ALSO PRESSED INTO SERVICE THE APPLICABILITY OF SECTIONS 19 AND 21 OF THE SALE OF GOODS ACT TO CANVASS VIEW THAT THE TITLE OF GOODS PASSED IN INDIA. SUCH CONTENTION MET WITH THE FATE OF DISMISSAL. THE SPEC IAL BENCH, AFTER CONSIDERING SECTIONS 26 AND 40 OF THE AFORESAID ACT , NOTICED THAT : `S. 40 FURTHER SAYS THAT IT IS OPEN TO THE PARTIES TO AGREE THAT EVEN WHERE THE PROPERTY IN THE GOODS HAS PASSED, THE SEL LER MAY UNDERTAKE THE RISK OF DETERIORATION IN THE GOODS NE CESSARILY INCIDENT TO THE COURSE OF TRANSIT. THIS IS WHAT THE PARTIES IN THE PRESENT CASE HAVE UNDERTAKEN IN THE SENSE THAT THOUGH THE TITLE TO THE GSM EQUIPMENT PASSED IN USA, THE RISK CONTINUED TO REMA IN WITH THE ASSESSEE (SELLER) AND THE RISK PASSED TO THE CELLUL AR OPERATOR ONLY ON DELIVERY IN INDIA. THEREFORE, THE RESULT IS THAT MERELY BECAUSE THE RISK PASSED IN INDIA, IT CANNOT BE SAID THAT THE SA LE TOOK PLACE IN INDIA. THEREFORE, NO INCOME CAN BE SAID TO HAVE ARI SEN IN INDIA. THUS, THE CONTENTION OF THE LD. DR THAT SINCE RISK PASSED IN INDIA AND HENCE THE TITLE OF THE GOODS SHOULD ALSO BE CON SIDERED AS PASSING IN INDIA, IS NOT TENABLE. WE FURTHER FIND THAT THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE ARE MUTATIS MUTANDIS SIMILAR TO THOSE AS WERE PREVAILING IN THE CASE OF ISHIKAWAJMA HARIMA (SUPRA) . AS, BOTH THE HONBLE SUPREME COURT AND THE SPECI AL BENCH OF THE TRIBUNAL HAVE HELD THAT TITLE TO GOOD S SHALL BE CONSIDERED TO HAVE PASSED OUTSIDE INDIA WHEN DELIVE RY WAS MADE ON HIGH SEA AND THE PAYMENT WAS ALSO RECEIVED OUTSI DE INDIA, WE ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 18 CANNOT DEVIATE FROM THE SETTLED POSITION. IN OUR C ASE TOO, THE AUTHORITIES BELOW HAVE NOT CONTROVERTED THIS ARGUME NT OF THE ASSESSEE THAT THE DELIVERY OF GOODS WAS MADE OUTSID E INDIA AND ALSO THE PAYMENT WAS RECEIVED OUTSIDE INDIA. WE, TH EREFORE, HOLD THAT THE TITLE OF GOODS IN RESPECT OF SAID OFFSHORE SUPPLY OF EQUIPMENTS WAS TRANSFERRED OUTSIDE INDIA. 2. WHETHER SALE PRICE INCLUDES ANY CONSIDERATION FO R SERVICES RENDERED OR TO BE RENDERED IN INDIA ? 2.A. HAVING HELD THAT SUPPLY OF SUCH EQUIPMENTS W AS OFFSHORE, NOW WE ESPOUSE THE NEXT ARGUMENT OF THE LD. DR THAT THE SALE PRICE ALSO INCLUDES SOME CONSIDERATION FOR SERVICES RENDE RED OR TO BE RENDERED IN INDIA. THE LD. DR VEHEMENTLY ARGUED TH AT CERTAIN COSTS FOR DOING OF SOME ACTIVITIES IN INDIA IN RELATION T O OFFSHORE SUPPLY OF EQUIPMENTS WERE NOT SPECIFICALLY CHARGED AND HEN CE WERE IN- BUILT IN THE PRICE SO CHARGED. THIS WAS CONTRADICTE D BY THE LD. AR BY STATING THAT CONSIDERATION FOR THE SUPPLY OF EQU IPMENTS AND REFRACTORY WAS EXCLUSIVELY TOWARDS THE PRICE OF GOO DS AND NO PART OF IT WAS TOWARDS RENDERING OF ANY SERVICES IN INDI A. IT WAS SHOWN THAT THERE WAS A DISTINCT CHARGE OF `FOREIGN SUPERV ISION CHARGES IN THE SUMMARY OF PRICES AT EURO 4440000, WHICH THE AS SESSEE ALSO CONSIDERED AS CHARGEABLE TO TAX IN INDIA. THIS AMO UNT WAS CLAIMED TO BE TOWARDS RENDERING OF ALL SERVICES IN INDIA IN CONNECTION WITH THE SUPPLY OF OFFSHORE EQUIPMENTS. ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 19 2.B. WE FIND FROM TABLE 1B, WHOSE COPY IS AVAIL ABLE ON PAGE 1023 OF THE PAPER BOOK, WHICH IS AN INTEGRAL PART OF THE CONTRACT AGREEMENT AND HAS BEEN CAPTIONED AS `SUMMARY OF PRI CES THAT THERE IS A CHARGE FOR SUPPLY OF OFFSHORE EQUIPMENT AND ALSO THERE IS A SEPARATE CHARGE TOWARDS `FOREIGN SUPERVISION CHAR GES TO THE TUNE OF EURO 444000. THE DESCRIPTION OF SUCH FOREIGN SUP ERVISION CHARGES HAS BEEN GIVEN IN TABLE 13B, A COPY OF WHIC H IS AVAILABLE ON PAGE 1036 OF THE PAPER BOOK. WHEN WE TURN TO SUC H TABLE, THE DESCRIPTION OF `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`NOT QUOTED. THEN THERE IS R EFERENCE OF TABLE 14B TO GIVE THE PORTRAYAL OF `TRAINING ON PA GE 1037 OF THE PAPER BOOK. UNDER THE DESCRIPTION COLUMN IT HAS BEE N MENTIONED AS : PROVIDING TRAINING TO EMPLOYERS TECHNICAL PE RSONNEL IN PLANT OPERATION AND MAINTENANCE IN SIMILAR OPERATING PLAN TS, ETC. UNDER THE NEXT COLUMN OF PRICE FOR TRAINING IN INDIA , IT HAS BEEN MENTIONED AS INCLUDED. 2.D. WHEN WE CONSIDER TABLE 1B (SUMMARY OF PRICES) IN JUXTAPOSITION TO TABLE NO. 13B (FOREIGN SUPERVISION CHARGES) ON ONE HAND AND TABLE NO. 14B (TRAINING CHARGES) ON TH E OTHER, THE FOLLOWING THREE POINTS EMERGE. FIRST IS THAT THE TR AINING IS EXCLUSIVELY IN INDIA. IT CAN BE SEEN FROM TABLE 14B THAT AFTER THE DESCRIPTION COLUMN, THE NEXT COLUMN IS `ESTIMATED M AN DAYS FOR EMPLOYERS PERSONNEL FOR TRAINING IN INDIA . THEN THE NEXT COLUMN IS `PRICE FOR TRAINING IN INDIA . FROM THESE COLUMNS, IT IS PROVED BEYOND ANY SHADOW OF DOUBT THAT THE TRAINING WAS TO BE GIVEN IN INDIA. SECOND POINT IS THAT CHARGES FOR `FOREIGN SU PERVISION CHARGES ARE CERTAINLY DISTINCT FROM `TRAINING CHAR GES IN THEIR CONNOTATION AS WELL AS AMBIT. WHEREAS THE FORMER A RE TOWARDS FOREIGN SUPERVISION CHARGES IN INDIA DURING ERECTIO N, START UP, COMMISSIONING AND PERFORMANCE GUARANTEE TESTS, THE LATER ARE TOWARDS PROVIDING TRAINING TO EMPLOYERS TECHNICAL PERSONNEL IN PLANT OPERATION AND MAINTENANCE IN SIMILAR OPERATIN G PLANTS, ETC. ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 21 THESE TWO THINGS ARE DISTINCT FROM EACH OTHER ALSO BECOMES OBVIOUS FROM THE WORKING CONSORTIUM AGREEMENT DATED 25.1.2008 WHICH DIVIDES THE WORKS/ACTIVITIES BETWEEN THE ASSE SSEE AND NCC. AS PER THIS CHART, WHICH HAS BEEN REPRODUCED ON PAG E 15 OF THE ASSESSMENT ORDER, THERE IS BROADER HEADING OF `SERV ICES UNDER WHICH TWO SEPARATE CATEGORIES, VIZ., `SUPERVISION O F ERECTION AND TRAINING HAVE BEEN MENTIONED. WHEN WE PROCEED TO THE NEXT COLUMN OF THIS TABLE, IT EMERGES THAT BOTH THESE SE RVICES ARE THE RESPONSIBILITY OF THE ASSESSEE ALONE AND NCC IS NOT LIABLE TO RENDER SUCH SERVICES. THUS IT IS CLEAR THAT `TRAINING IS DISTINCT FROM `FOREIGN SUPERVISION. THIRD POINT, WHICH ASSUMES G REAT SIGNIFICANCE, IS THAT WHEREAS THERE IS A SEPARATE CHARGE FOR THE `FOREIGN SUPERVISION CHARGES, THE CONSIDERATION FO R THE `TRAINING CHARGES IS `NOT QUOTED AND THE SAME IS `INCLUDED , OBVIOUSLY IN THE PRICE OF EQUIPMENT. THE REASON FOR OUR CONCLUS ION THAT THE TRAINING CHARGES ARE INCLUDED IN THE `PRICE OF THE EQUIPMENT IS THAT THE ONLY OTHER CHARGE AS PER THE SUMMARY OF PRICE F OR THE ONSHORE SERVICES IS `FOREIGN SUPERVISION CHARGES. WHEN WE CONSIDER THE DETAIL OF SUCH CHARGES ON PAGE 1036 OF THE PAPER BO OK, IT TRANSPIRES THAT THERE IS NO AD HOC CONSIDERATION. IN FACT, IT HAS BEEN CALCULATED BY ESTIMATING 7400 MAN DAYS FOR RENDERING SUCH FORE IGN SUPERVISION AND THERE IS A SPECIFIC RATE PER MAN DA Y, CULMINATING INTO THE CALCULATION OF TOTAL CHARGE ON THIS ACCOUN T AT EURO 4440000. ON HAVING A GLANCE AT THE DETAIL OF `TRAI NING CHARGES ON ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 22 PAGE 1037, IT COMES OUT THAT AGAINST THE COLUMN `ES TIMATED MAN DAYS FOR EMPLOYERS PERSONNEL FOR TRAINING IN INDIA , IT HAS BEEN MENTIONED AS `INCLUDED. SIMILARLY AGAINST THE NEXT COLUMN OF `PRICE FOR TRAINING IN INDIA, AGAIN IT HAS BEEN ME NTIONED AS `INCLUDED. ONCE THE FOREIGN SUPERVISION IS FOUND T O HAVE BEEN EXCLUSIVELY CHARGED AND OUR ATTENTION HAS NOT BEEN DRAWN TOWARDS ANY MATERIAL TO INDICATE THAT THE CHARGE FOR TRAINI NG WAS EMBEDDED IN ANY OTHER COMPONENT OF PRICE CHARGED, THE NATURA L COROLLARY WHICH FOLLOWS IS THAT THE TRAINING CHARGES ARE `IN CLUDED IN THE SALE PRICE OF EQUIPMENTS. IT IS SIMPLE AND PLAIN TH AT IF A SELLER HAS TO INCUR TRAINING EXPENSES OR REPAIR COST DURING THE W ARRANTY PERIOD, THEN EITHER THERE IS A SPECIFIC CONSIDERATION FOR T HE SAME AND IF IT IS NOT THERE, THEN SUCH COSTS ARE TO BE CONSIDERED AS IN-BUILT IN THE PRICE OF EQUIPMENT. ORDINARILY, WHEN ANY PRODUCT I S SOLD WITH WARRANTY, THE PRICE CHARGED BY THE SELLER ALWAYS IN CLUDES COMPENSATION FOR THE REPAIRS COST TO BE INCURRED DU RING THE WARRANTY PERIOD. IN CONTRAST TO THAT, IF THERE IS NO WARRANTY CLAUSE AND SIMILAR PRODUCT IS SOLD BY ANOTHER SELLER, THE SALE PRICE IS BOUND TO BE AT A LOWER LEVEL VIS-A-VIS THE SELLER WHO SELLS ITS PRODUCTS WITH WARRANTY. THIS LEADS US TO THE IRRESI STIBLE CONCLUSION THAT WHEN THE ASSESSEE HAS UNDERTAKEN TO BEAR TRAIN ING COSTS AT ITS OWN AND THERE IS NO SEPARATE COMPENSATION FOR THAT, WHICH IS `INCLUDED, THEN SUCH COMPENSATION IS INCLUDED IN T HE SALE PRICE CHARGED FOR OFFSHORE SUPPLY OF EQUIPMENTS. IN SUCH A CASE, THE SALE ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 23 PRICE SO CHARGED IS REQUIRED TO BE SPLIT TOWARDS TH E PRICE OF GOODS SIMPLICITOR AND COMPENSATION FOR TRAINING AND OTHER CHARGES WHICH THE SELLER HAS UNDERTAKEN TO BEAR. 2.E. APART FROM TRAINING CHARGES, THERE ARE ALSO OT HER COSTS INCURRED BY THE ASSESSEE IN CONNECTION WITH SUPPLY OF SUCH OFFSHORE EQUIPMENTS. `GENERAL CONDITIONS OF CONTRACT WHICH IS PART OF THE CONTRACT AGREEMENT CONTAINS CLAUSE NO. 30 WHICH HAS BEEN REFERRED TO AS DEFECT LIABILITY CLAUSE ON PAGE 1145 OF THE PAPER BOOK. FIRST PARA OF CLAUSE CLAUSE 30.2 STATES THAT THE DEFECT LIABILITY PERIOD SHALL BE TWELVE (12) MONTHS FROM THE DATE OF COMMISSIONING MENTIONED IN THE COMMISSIONING CERTIFICATE. SECOND PARA OF THIS CLAUSE READS AS UNDER : IF DURING THE DEFECT LIABILITY PERIOD ANY DEFECT I S FOUND IN THE DESIGN, ENGINEERING, MATERIALS AND WORKMANSHIP OF THE PLANT AND EQUIPMENT ---------THE CONTRACTOR SHALL PROMPTLY IN CONSULTATION WITH AND AGREEMENT WITH THE EMPLOYER AND AT ITS COST, REPAIR , REPLACE OR OTHERWISE, MAKE GOOD SUCH DEFECT SALES A NY DAMAGE TO THE FACILITIES CAUSED BY SUCH DEFECT. 2.F. AGAIN, CLAUSE NO.23 OF THE GENERAL CONDITION S OF CONTRACT ON PAGE 1135 OF THE PAPER BOOK HAS BEEN NAMED AS `T EST AND INSPECTION. PARA 1 OF THIS CLAUSE READS AS UNDER : - THE CONTRACTOR SHALL AT ITS OWN EXPENSE CARRY OUT AT THE PLACE OF MANUFACTURE AND/OR ON THE SITE OF SUCH ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 24 TESTS AND/OR INSPECTIONS OF THE PLANT AND EQUIPMENT AND IN PART OF THE FACILITIES AS ARE SPECIFIED IN THE C ONTRACT. 2.G. THERE ARE CERTAIN OTHER CLAUSES ALSO WHICH S HOW THAT THE ASSESSEE HAS UNDERTAKEN TO BEAR EXPENSES IN CONNECT ION WITH THE SUPPLY OF GOODS. 2.H. THE ABOVE DISCUSSED CLAUSES INDICATE THAT THE ASSESSEE UNDERTOOK TO INCUR SOME EXPENSES TOWARDS TEST AND I NSPECTION AT SITE THAT IS IN INDIA; CONDUCT REPAIR DURING DEFECT LIABILITY PERIOD AGAIN IN INDIA ETC. THESE EXPENSES ARE TO BE BORNE BY THE ASSESSEE. THOUGH THE MENTION OF WORDS AT ITS OWN EXPENSE FO R TEST AND INSPECTION IN CLAUSE 23.1 AND THE WORDS AT ITS COS T FOR DEFECT LIABILITY PRIMA FACIE INDICATE THAT COMPENSATION FOR SUCH LIABILITY IS INCLUDED IN THE SALE PRICE OF THE OFFSHORE SUPPLY O F EQUIPMENT, BUT IT CANNOT BE SO CONCLUDED OUTRIGHTLY. THE POSSIBILI TY OF COMPENSATION FOR SUCH THINGS BEING INCLUDED IN FORE IGN SUPERVISION CHARGES CANNOT BE RULED OUT WITHOUT VER IFICATION. IN FACT, OUR ATTENTION HAS NOT BEEN DRAWN TOWARDS THE FURTHER BREAK-UP OF TOTAL MAN DAYS UNDER `FOREIGN SUPERVISION CHARGE S FOR REACHING A POSITIVE CONCLUSION AS TO WHETHER OR NOT THE COMP ENSATION FOR SUCH CHARGES IS INCLUDED THEREIN. WITH THIS TRUNCAT ED INFORMATION, WE CANNOT REACH A SURE CONCLUSION. IT IS PALPABLE THAT IF THE CHARGES FOR SUCH THINGS ARE NOT INCLUDED IN ANY OTHER COMPO NENT OF PRICE, THEN THESE HAVE TO BE CONSIDERED AS PART AND PARCE L OF THE SALE PRICE, WHICH WOULD REQUIRE ITS SPLITTING UP TO DET ERMINE THE AMOUNT ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 25 ATTRIBUTABLE TO SUCH TESTING CHARGES ETC. IN INDIA . AS SUCH DETAILS ARE NOT READILY AVAILABLE, WE ARE OF THE CONSIDERED OPINION THAT IT WOULD BE IN THE FITNESS OF THINGS IF THE IMPUGNED O RDER ON THIS ISSUE IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF THE ASSESSING OFFICER. HE WILL EXAMINE AS TO WHETHER THE COSTS FO R TESTS AND INSPECTION, LIQUIDATED DAMAGES AND DEFECT LIABILITY ALONG WITH ANY SUCH OTHER COSTS ARE SPECIFICALLY CHARGED DISTINCT FROM THE SALE CONSIDERATION OF OFFSHORE SUPPLY OF EQUIPMENT. IF O N SUCH AN ANALYSIS, HE COMES TO THE CONCLUSION THAT THERE IS NO SEPARATE CHARGE IN RESPECT OF ALL OR ANY OF THESE ITEMS, THE N, A PORTION OF SALE PRICE OF OFFSHORE SUPPLY OF EQUIPMENT NEEDS TO BE A TTRIBUTED TO SUCH ACTIVITIES PERFORMED IN INDIA. 2.I. IT IS, THEREFORE, HELD THAT THE SALE PRIC E OF OFFSHORE SUPPLY OF EQUIPMENT ALSO INCLUDES SOME CONSIDERATION FOR SERV ICES RENDERED OR TO BE RENDERED BY THE ASSESSEE IN INDIA. IN SO F AR AS TRAINING CHARGES ARE CONCERNED, THESE ARE SURELY INCLUDED IN THE SALE PRICE, BUT THE QUESTION OF CONSIDERATION FOR OTHER FACTORS , SUCH AS TESTS AND INSPECTION, LIQUIDATED DAMAGES AND DEFECT LIABILITY , REQUIRES EXAMINATION AT THE END OF THE ASSESSING OFFICER. 3. TAXABILITY OF PRICE FOR OFFSHORE SUPPLY OF EQUIP MENT AND COMPENSATION FOR SERVICES RENDERED IN INDIA ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 26 3.A. THE LD. AR STUCK TO HIS STAND THAT NO PART OF THE PRICE OF OFFSHORE SUPPLY INCLUDED ANY CONSIDERATION FOR SERV ICES RENDERED IN INDIA AND HENCE INCOME ON ACCOUNT OF SUCH OFFSHORE SUPPLY OF EQUIPMENTS WAS NOT CHARGEABLE TO TAX IN THE HANDS O F THE NON- RESIDENT ASSESSEE. WITHOUT PREJUDICE TO HIS MAIN AR GUMENTS FOR THE TAXABILITY OF THE ENTIRE CONSIDERATION FOR THE OFFS HORE SUPPLY OF EQUIPMENTS IN INDIA, THE LD. DEPARTMENTAL REPRESENT ATIVE ALSO VEHEMENTLY CONTENDED THAT THE INCOME ARISING OUT OF SUCH OFFSHORE SUPPLIES IS PARTLY ATTRIBUTABLE TO ACTIVITIES CARRI ED OUT IN INDIA AND HENCE A PART OF SUCH PROFITS SHOULD BE CHARGED TO T AX. WE HAVE HELD ABOVE THAT THE PRICE SHOWN TOWARDS OFFSHORE SUPPLY OF EQUIPMENTS HAS TWO COMPONENTS, VIZ., ONE IS THE PRICE FOR OFFS HORE SUPPLY OF EQUIPMENT SIMPLICITOR (POINT 1 ABOVE); AND SECOND IS THE CONSIDERATION FOR SOME SERVICES RENDERED IN INDIA ( POINT 2 ABOVE). 3.B. NOW COMES THE QUESTION OF TAXABILITY OF PRIC E FOR OFFSHORE SUPPLY OF EQUIPMENT SIMPLICITOR AND COMPENSATION FOR SERVICES RENDERED IN INDIA. THE ASSESSEE IS A NON-RESIDENT. SEC. 4 OF THE ACT, WHICH IS A CHARGING SECTION, PROVIDES THAT WHERE AN Y CENTRAL ACT ENACTS THAT INCOME-TAX SHALL BE CHARGED FOR ANY ASS ESSMENT YEAR AT ANY RATE OR RATES, INCOME-TAX AT THAT RATE OR THOSE RATES SHALL BE CHARGED FOR THAT YEAR IN ACCORDANCE WITH, AND SUBJE CT TO THE PROVISIONS OF THIS ACT IN RESPECT OF THE TOTAL INCO ME OF THE PREVIOUS YEAR OF EVERY PERSON. SEC. 5(2) OF THE ACT DEALS WI TH THE SCOPE OF ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 27 TOTAL INCOME OF NON-RESIDENTS AND PROVIDES THAT SUB JECT TO THE PROVISIONS OF THE ACT, THE TOTAL INCOME OF NON-RESI DENT INCLUDES INCOME FROM WHATEVER SOURCES WHICH IS RECEIVED OR I S DEEMED TO BE RECEIVED IN INDIA OR ACCRUES OR ARISES OR IS DEE MED TO ACCRUE OR ARISE IN INDIA DURING SUCH YEAR. CLAUSE (A) OF THIS SUB-SECTION TALKS OF THE INCOME WHICH IS RECEIVED OR IS DEEMED TO BE RECEIVED IN INDIA. IT IS NOT THE CASE OF THE REVENUE THAT THE INCOME FROM OFFSHORE SUPPLY WAS RECEIVED BY THE ASSESSEE IN IND IA. THE EXPRESSION INCOME DEEMED TO BE RECEIVED IN INDIA HAS BEEN DEFINED UNDER S. 7 OF THE ACT, WHICH REFERS TO THE ANNUAL ACCRETION IN THE PREVIOUS YEAR TO THE BALANCE AT THE CREDIT O F AN EMPLOYEE PARTICIPATING IN A RECOGNIZED PROVIDENT FUND, ETC. IT IS APPARENT THAT THE NATURE OF AMOUNT UNDER CONSIDERATION IS QUITE D ISTINCT FROM THE ITEMS SPECIFIED IN THIS SECTION. THEN CL. (B) OF SE CTION 5(2) TALKS OF INCOME WHICH ACCRUES OR ARISES OR IS DEEMED TO ACCR UE OR ARISE IN INDIA. THERE CAN BE NO DISPUTE AS REGARDS THE SCOPE OF INCOME WHICH ACCRUES OR ARISES IN INDIA. SEC. 9 OF THE ACT ENLISTS CERTAIN INCOMES WHICH ARE `DEEMED TO ACCRUE OR ARISE IN IND IA. INCOME FROM SUPPLY OF OFFSHORE EQUIPMENTS CANNOT BE IN THE NATURE OF SALARIES, `DIVIDEND, `INTEREST, `ROYALTY OR `F EES FOR TECHNICAL SERVICES, WHICH ITEMS OF INCOME HAVE BEEN SPECIFIC ALLY DEALT WITH IN CLS. (II) TO (VII) OF S. 9(1). ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 28 3.C. THEN COMES CL. (I) OF SECTION 9(1), WHICH MANDATES THAT ALL INCOME ACCRUING OR ARISING, WHETHER DIRECTLY OR IND IRECTLY, THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA, OR THROUG H OR FROM ANY PROPERTY IN INDIA OR THROUGH OR FROM ANY ASSET OR S OURCE OF INCOME IN INDIA OR THROUGH THE TRANSFER OF A CAPITAL ASSET SITUATED IN INDIA SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA. THE H ONBLE SUPREME COURT IN CIT VS. R.D. AGGARWAL & CO. (1965) 56 ITR 20 (SC) HAS HELD THAT MERE SALE DOES NOT RESULT INTO BUSINESS C ONNECTION ATTRACTING THE DEEMING PROVISIONS OF S. 9(1)(I). IT IS TRITE LAW THAT INCOME ACCRUES AT THE PLACE WHERE THE TITLE TO GOOD S PASSES TO THE BUYERS ON THE PAYMENT OF PRICE. THE HONBLE SUPREME COURT IN SETH PUSHALAL MANSINGHKA (P) LTD. VS. CIT (1967) 66 ITR 159 (SC) HAS HELD THAT INCOME ACCRUES AT THE PLACE WHERE THE TITLE TO GOODS PASSES TO THE BUYERS ON THE PAYMENT OF PRICE TO THE BANKERS OF THE ASSESSEE. IN SO FAR AS THE PRICE FOR OFFSHORE SUPP LY OF EQUIPMENT SIMPLICITOR (POINT 1 ABOVE) IS CONCERNED, PROFIT FR OM THE SAME CANNOT BE CHARGED TO TAX AS THE ASSESSEE IS A NON-R ESIDENT AND THERE IS ABSENCE OF TERRITORIAL NEXUS OF SUCH INCOME WITH INDIA. RESPECTFULLY FOLLOWING THE VERDICT OF THE HONBLE S UPREME COURT IN ABOVE CASES AND ALSO ISHIKAWAJMA HARIMA (SUPRA) , WE HOLD THAT SINCE THE TITLE OF SUCH GOODS PASSED OUTSIDE I NDIA AND THE PAYMENT WAS ALSO RECEIVED BY THE ASSESSEE OUTSIDE I NDIA, NO INCOME CAN BE SAID TO HAVE EITHER ACCRUED OR DEEMED TO HAVE ACCRUED IN INDIA. ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 29 3.D. AT THIS JUNCTURE, IT IS RELEVANT TO MENTIO N THAT THE GENERAL PROVISION BRINGING INCOME FROM ANY BUSINESS CONNECT ION IN INDIA WITHIN THE SWEEP OF SECTION 9(1)(I) FURTHER EXPLAI NS BY WAY OF EXPLANATION 1 (A) THAT : ` IN THE CASE OF A BUSINESS OF WHICH ALL THE OPERATIONS ARE NOT CARRIED OUT IN INDIA, THE INCOME OF THE BUSINESS DEEMED UNDER THIS CLAUSE TO ACCRUE OR ARISE IN INDI A SHALL BE ONLY SUCH PART OF THE INCOME AS IS REASONABLY ATTRIBUTAB LE TO THE OPERATIONS CARRIED OUT IN INDIA . THE CRUX OF THE ABOVE PROVISION, IN SO FAR AS IT IS RELEVANT FOR OUR PURPOSE, IS TH AT A NON-RESIDENT IS LIABLE TO TAX IF HE EARNS BUSINESS INCOME FROM THE OPERATIONS CARRIED OUT IN INDIA. 3.E. AS BOTH THE SIDES HAVE EXTENSIVELY ARGUED ON THE POSITION OF THE ASSESSEE QUA THE `BUSINESS PROFITS UNDER THE DTAA, IT WOULD BE APPOSITE TO APPRECIATE SUCH POSITION AS WELL. A RTICLE 5 DISCUSSES ABOUT THE EXISTENCE OF A PERMANENT ESTABLISHMENT (P E). THEN ARTICLE 7 OF THE DTAA DEALS WITH THE BUSINESS PROFI TS. IT WOULD BE IN ORDER TO NOTE DOWN THE PRESCRIPTION OF PARAS 1 A ND 2 OF ARTICLE 7 OF THE DTAA AS UNDER : - ARTICLE 7 BUSINESS PROFITS 1. THE PROFITS OF AN ENTERPRISE OF A CONTRACTING ST ATE SHALL BE TAXABLE ONLY IN THAT STATE UNLESS THE ENTE RPRISE CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN. IF THE ENTERPRISE CARRIES ON BUSINESS AS AFORESAID, TH E ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 30 PROFITS OF THE ENTERPRISE MAY BE TAXED IN THE OTHER STATE BUT ONLY SO MUCH OF THEM AS IS ATTRIBUTABLE T O THAT PERMANENT ESTABLISHMENT. 2. SUBJECT TO THE PROVISIONS OF PARAGRAPH (3), WHER E AN ENTERPRISE OF A CONTRACTING STATE CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH PERMANENT ESTABLISHMENT SITUATED THEREIN, THERE SHA LL BE IN EACH CONTRACTING STATE BE ATTRIBUTED TO THAT PERMANENT ESTABLISHMENT THE PROFITS WHICH IT MIGHT BE EXPECTED TO MAKE IF IT WERE A DISTINCT AND SEPARATE ENTERPRISE ENGAGED IN THE SAME OR SIMILAR ACTIVITIE S UNDER THE SAME OR SIMILAR CONDITIONS AND DEALING WHOLLY INDEPENDENTLY WITH THE ENTERPRISE OF WHICH I T IS A PERMANENT ESTABLISHMENT. .. 3.F. THE LD. AR HAS CANDIDLY ADMITTED THE ASSES SEE OF HAVING A PE IN INDIA AS PER ARTICLE 5 OF THE DTAA DURING THE YEAR IN QUESTION. ART. 7(1) OF THE DTAA STATES THAT THE PRO FITS CAN BE TAXED IN INDIA ONLY TO SUCH EXTENT WHICH ARE ATTRIBUTABLE TO THE PE IN THE OTHER CONTRACTING STATE. TO PUT IT SIMPLY, THE BUSI NESS PROFITS OF A RESIDENT OF KOREA CAN BE TAXED IN INDIA TO THE EXTE NT WHICH ARE ATTRIBUTABLE TO ITS PE IN INDIA. IN OTHER WORDS, I F THERE IS NO PE THEN THE BUSINESS PROFITS OF THE NON-RESIDENT CANNO T BE TAXED IN INDIA. EVEN IF THERE IS A PE, BUT NO PART OF THE B USINESS PROFITS IS ATTRIBUTABLE TO SUCH PE, THEN ALSO THERE DOES NOT A RISE A QUESTION OF TAXABILITY AS PER ART. 7. BUT IF PE PLAYS SOME ROLE IN THE EARNING OF ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 31 THE INCOME BY THE NON-RESIDENT, THEN SUCH PROPORTIO NATE AMOUNT OF PROFIT IS CHARGEABLE TO TAX AS BUSINESS PROFIT. 3.G. IT CAN BE SEEN THAT THE POSITION UNDER THE DTAA IS ALMOST ANALOGOUS TO THE POSITION AS STIPULATED BY EXPLANAT ION (1)(A) TO SECTION 9(1)(I). CRUX OF BOTH THE PROVISIONS IS THA T ONLY THAT PART OF THE BUSINESS INCOME OF THE NON-RESIDENT CAN BE CHAR GED TO TAX IN INDIA, WHICH IS ATTRIBUTABLE TO OPERATIONS CARRIED OUT IN INDIA DUE TO BUSINESS OPERATIONS AS PER SECTION 9(1) OF THE ACT OR IS ATTRIBUTABLE TO THE PE AS PER ARTICLE 7 OF THE DTAA. THUS IT IS VIVID THAT THE PRINCIPLE OF APPORTIONMENT OF INCOME WITH REFERENC E TO THE TERRITORIAL NEXUS IS NOT ONLY EXPLICIT BUT ALSO FORMS AN INTEGRAL PART OF BOTH SECTION 9(1) OF THE ACT READ WITH EXPL ANATION (1)(A) AS WELL AS ARTICLE 7 OF THE DTAA. IF A PARTICULAR INC OME IS NOT ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT IN INDIA AND THUS HAS NO TERRITORIAL NEXUS WITH INDIA, THEN A NON-RESIDENT CANNOT BE CHARGED TO TAX FOR THAT INCOME. PER CONTRA, IF A PARTICULAR INCOME IS ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT IN INDIA AND THUS HAS TERRITORIAL NEXUS WITH INDIA, THEN THERE CAN BE NO ESCAPE FROM CHARGE OF SUCH INCOME TO TAX. IN CASE OF A COMPOSIT E INCOME, WHICH IS PARTLY RELATABLE TO THE OPERATIONS CARRIED OUT IN INDIA AND PARTLY TO OUTSIDE INDIA, A PROPORTIONATE PART OF IN COME WHICH IS SO RELATABLE TO THE OPERATIONS CARRIED OUT IN INDIA, HAS TO BE CHARGED TO TAX. THIS POSITION HAS BEEN ACCEPTED BY THE HONBLE SUMMIT COURT ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 32 IN ISHIKAWAJMA HARIMA (SUPRA) WHEN IT SUMMED UP ITS CONCLUSION ON OFFSHORE SUPPLY IN PARA 73 OF THE JUD GMENT, THE RELEVANT PART OF WHICH IS AS UNDER : - 73. WE, THEREFORE, HOLD AS UNDER : RE : OFFSHORE SUPPLY : (1) THAT ONLY SUCH PART OF THE INCOME, AS IS ATTRIB UTABLE TO THE OPERATIONS CARRIED OUT IN INDIA CAN BE TAXED IN IND IA. (2) SINCE ALL PARTS OF THE TRANSACTION IN QUESTION, I.E. THE TRANSFER OF PROPERTY IN GOODS AS WELL AS THE PAYMEN T, WERE CARRIED ON OUTSIDE THE INDIAN SOIL, THE TRANSACTION COULD NOT HAVE BEEN TAXED IN INDIA. (3) THE PRINCIPLE OF APPORTIONMENT, WHEREIN THE TER RITORIAL JURISDICTION OF A PARTICULAR STATE DETERMINES ITS C APACITY TO TAX AN EVENT, HAS TO BE FOLLOWED. (4) THE FACT THAT THE CONTRACT WAS SIGNED IN INDIA IS OF NO MATERIAL CONSEQUENCE, SINCE ALL ACTIVITIES IN CONNE CTION WITH THE OFFSHORE SUPPLY WERE OUTSIDE INDIA, AND THEREFO RE CANNOT BE DEEMED TO ACCRUE OR ARISE IN THE COUNTRY. . 3.H. AFTER HOLDING THAT NO INCOME WAS CHARGEABLE TO TAX BECAUSE NO PART OF THE CONSIDERATION WAS TOWARDS THE SERVIC ES TO BE RENDERED IN INDIA, THE HONBLE SUPREME COURT IN CIT & ANR. VS. HYUNDAI HEAVY INDUSTRIES CO. LTD. (2007) 291 ITR 48 2 (SC) HAS FURTHER HELD THAT : ` NO SUCH TAXABILITY CAN ALSO ARISE IN THE PRESENT CASE AS THERE WAS NO ALLEGATION MADE BY THE DEPARTM ENT THAT THE PRICE AT WHICH BILLING WAS DONE FOR THE SUPPLIES IN CLUDED ANY ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 33 ELEMENT FOR SERVICES RENDERED BY THE PE. IT FOLLOWS THAT IF A PART OF SOME COMPOSITE INCOME IS ATTRIBUTABLE TO THE OPE RATIONS CARRIED ON IN INDIA AND OTHER PART IS NOT, THEN SUCH PART O F INCOME AS IS SO ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT IN INDIA HAS TO BE CHARGED TO TAX. IN THE CASE OF ISHIKAWAJMA HARIMA (SUPRA) , THE INCOME FROM ONSHORE SUPPLY AND ONSHORE SERVICES WAS SUO MOTU OFFERED FOR TAXATION BY THE ASSESSEE AND RIGHTLY SO BECAUSE IT HAD NEXUS WITH INDIA. TO SUM UP, INCOME FOR WHICH EVERYTHIN G IS DONE IN INDIA IS FULLY TAXABLE BUT THE PRINCIPLE OF APPOR TIONMENT APPLIES TO TAX THAT PART OF THE COMPOSITE INCOME WHICH IS RELA TABLE TO OPERATIONS CARRIED OUT IN INDIA, LEAVING ASIDE THA T PART OF INCOME WHICH IS NOT SO. APPLYING THE ABOVE PRINCIPLE, IT IS PALPABLE THAT THAT THE SECOND COMPONENT OF THE SALE PRICE OF OFF SHORE EQUIPMENTS, WHICH IS QUID PRO QUO FOR SERVICES RENDERED IN INDIA (POINT 2 ABOVE), IS CHARGEABLE TO TAX IN INDIA. 4. ATTRIBUTION OF INCOME TO SERVICES RENDERED IN IN DIA. 4.A. WE HAVE HELD ABOVE THAT THE CONSIDERATION FOR SERVICES RENDERED IN INDIA IS ALSO INCLUDED IN THE SALE PRIC E OF OFFSHORE EQUIPMENTS. SUCH PART OF THE SALE CONSIDERATION CON STITUTES REMUNERATION FOR THE OPERATIONS CARRIED OUT IN INDI A AS PER THE MANDATE OF SEC. 9(1)(I) AND THE AMOUNT ATTRIBUTABLE TO THE ROLE OF PERMANENT ESTABLISHMENT IN TERMS OF ARTICLE 7(1) OF THE DTAA. TO THIS EXTENT, THE AMOUNT IS CHARGEABLE TO TAX IN IND IA. ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 34 4.B. NOW COMES THE QUESTION OF DETERMINATION OF SUCH INCOME OR THE ATTRIBUTION OF INCOME FROM SALE PRICE OF OFFSHO RE EQUIPMENT TO SERVICES RENDERED IN INDIA. THE LD. DR ARGUED THAT 35% OF THE TOTAL PROFIT FROM OFFSHORE SUPPLY SHOULD BE ATTRIBUTED TO SUCH SERVICES RENDERED IN INDIA. FOR THIS PROPOSITION, HE DREW ST RENGTH FROM THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN ROLLS ROYCE PLC VS DIT (IT) (2011) 339 ITR 147 (DEL) IN WHICH IT HAS BEEN HELD THAT 35% OF THE PROFIT SHOULD BE ATTRIBUTED TO ACTIVITIE S CARRIED OUT IN INDIA. SOUNDING A CONTRA NOTE, IT WAS STATED ON BE HALF OF THE ASSESSEE THAT EVEN THOUGH SOME OPERATIONS WERE CARR IED OUT IN INDIA, STILL NO PART OF THE SALE PRICE OF OFFSHORE EQUIPMENTS COULD BE ATTRIBUTED TO SUCH OPERATIONS. THE LD. AR RELIED ON THE JUDGMENT OF THE HONBLE UTTARAKHAND HIGH COURT IN THE CASE OF SAMSUNG HEAVY INDUSTRIES LTD. VS. DIRECTOR OF INCOME-TAX (IT), A COPY OF WHICH HAS BEEN PLACED ON PAGE 490 ONWARDS OF THE CASE LAW PAP ER BOOK. IT WAS SUBMITTED THAT IN THIS JUDGMENT, THE HONBLE HI GH COURT HAS HELD THAT NO PROFITS OUT OF THE SALE PROCEEDS OF SU PPLY OF OFFSHORE EQUIPMENT COULD BE ATTRIBUTED TO THE OPERATION CARR IED OUT IN INDIA. 4.C. ON A PROPER ANALYSIS OF THIS JUDGMENT, WE F IND THAT THE FACTS OF THE INSTANT CASE ARE QUITE DISTINGUISHABLE. IN T HAT CASE, THE ASSESSEE ENTERED INTO CONTRACT WITH ONGC AND RECEIV ED CERTAIN AMOUNT OF MONEY. THE ASSESSING OFFICER HELD THAT 25 % OF THE REVENUE RECEIVED ALLEGEDLY FOR OUTSIDE INDIA ACTIV ITIES SHOULD BE ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 35 BROUGHT WITHIN THE TAXING NETWORK OF THIS COUNTRY. THE HONBLE HIGH COURT OBSERVED THAT THE ASSESSEE WAS TAX RESID ENT OF KOREA. IT OBSERVED THAT : THERE WAS NO FINDING ANYWHERE THAT THE REVENUE EARNED AND SAID TO HAVE BEEN ON ACCOUNT OF OUT OF I NDIA ACTIVITY EARNED WAS, IN FACT, ON ACCOUNT OF WITHIN INDIA AC TIVITY . IT WAS IN VIEW OF SUCH FINDING THAT THE HONBLE HIGH COURT CA ME TO HOLD THAT 25% OF GROSS RECEIPTS COULD NOT BE ATTRIBUTED TO TH E ACTIVITIES CARRIED OUT IN INDIA. IN CONTRAST TO THIS JUDGMENT, WE FIND THAT THERE IS SUFFICIENT MATERIAL TO INDICATE THAT SEVERAL ACT IVITIES CONCERNED WITH OFFSHORE SUPPLY OF EQUIPMENTS WERE TO BE CARRI ED OUT IN INDIA. THE LD. DR HAS INVITED OUR ATTENTION TOWARDS SEVERA L CLAUSES OF THE CONTRACT AGREEMENT WHICH AMPLY INDICATE THAT NOT ON LY CERTAIN TRAINING WAS TO BE IMPARTED ON INDIAN SOIL, BUT ALS O REPAIRS AND MAINTENANCE OF MACHINERY ALONG WITH TEST AND INSPEC TION WAS ALSO TO BE DONE BY THE ASSESSEE IN INDIA AT ITS OWN EXPE NSE. WHEN THERE IS A CLEAR-CUT MENTION OF THE ASSESSEE BEING LIABLE TO INCUR CERTAIN EXPENSES ON INDIAN SOIL IN CONNECTION WITH THE OFFS HORE SUPPLY OF EQUIPMENT FOR WHICH THERE IS NO SEPARATE CHARGE, TH E CONSIDERATION FOR RENDERING OF SUCH SERVICES IS DEFINITELY ATTRIB UTABLE TO THE OPERATIONS CARRIED OUT IN INDIA AND, HENCE, CHARGEA BLE TO TAX. 4.D. THE FURTHER RELIANCE OF THE LD. AR ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF HYUDAI HEAVY INDUSTRIES COMPANY LTD. (SUPRA) IS ALSO NOT APPROPRIATE. THIS ASPECT IN THAT ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 36 CASE HAS BEEN DEALT WITH IN PARA 11 BY NOTICING THA T THE PROFITS ON SUPPLY OF FABRICATED PLATFORM COULD NOT BE SAID TO BE ATTRIBUTABLE TO THE P.E BECAUSE THE INSTALLMENT OF P.E EMERGED ONLY AFTER THE CONTRACT WITH ONGC WAS CONCLUDED. THE HONBLE APEX COURT FURTHER HELD THAT NO PART OF PROFITS OF SUCH SUPPL IES COULD BE ATTRIBUTED TO THE INDEPENDENT P.E UNLESS IT WAS EST ABLISHED BY THE DEPARTMENT THAT THE SUPPLIES WERE NOT AT ARMS LENG TH PRICE. FURTHER NO SUCH TAXABILITY WAS HELD TO BE ARISING : AS THERE WAS NO ALLEGATION MADE BY THE DEPARTMENT THAT THE PRICE AT WHICH BILLING WAS DONE FOR THE SUPPLIES INCLUDED ANY ELEMENT OF S ERVICES RENDERED BY THE P.E . WHEN WE TURN TO THE FACTS OF THE EXTANT CASE, IT CAN BE EASILY DEDUCED THAT THE REVENUE HAS PROVE D BEYOND DOUBT THAT THE PRICE CHARGED BY THE ASSESSEE FOR SUPPLY O F OFFSHORE EQUIPMENT ALSO INCLUDES CONSIDERATION FOR CERTAIN S ERVICES RENDERED IN INDIA. THIS MAKES IT CLEAR THAT THE PRICE FOR SU CH SERVICES IS LIABLE TO BE CONSIDERED FOR TAXATION AS PER SEC. 9(1)(I) O F THE ACT AND ALSO ARTICLE 7(1) OF THE DTAA. 4.E. REVERTING TO THE ISSUE OF APPORTIONMENT OF P ROFIT TO THE SERVICES RENDERED IN INDIA, WE FIND THAT SUCH ATTRI BUTION CANNOT BE DONE IN AN ARBITRARY MANNER. IT IS A QUESTION OF F ACT WHICH VARIES FROM CASE TO CASE. IN A GIVEN CASE, THE NATURE OF S ERVICES TO BE RENDERED MAY BE QUITE COST OR LABOUR INTENSIVE, WHI LE IN ANOTHER CASE, IT MAY NOT BE SO. THERE CANNOT BE ANY STRAITJ ACKET SACROSANCT ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 37 FORMULA FOR SUCH ATTRIBUTION. AS WE HAVE RESTORED A PART OF THIS ISSUE TO THE FILE OF THE AO AS PER POINT 2 ABOVE FO R DETERMINING AS TO WHETHER THE TESTING CHARGES IN INDIA AND REPAIR CHARGES DURING THE DEFECT LIABILITY PERIOD ETC. WERE INCLUDED IN S ALE PRICE OF GOODS, IT WOULD BE APPROPRIATE IF THE AO AFTER SUCH DETERM INATION GIVES VALUE TO SUCH SERVICES IF THESE ARE INCLUDED IN THE SALE PRICE OF OFFSHORE SUPPLY OF EQUIPMENTS. AS REGARDS TRAINING EXPENSES, WE HAVE ALREADY HELD THAT COMPENSATION FOR SUCH TRAINI NG IN INDIA IS PART AND PARCEL OF THE SALE PRICE OF OFFSHORE SUPPL Y OF EQUIPMENTS. THE VALUE TO SUCH TRAINING IS DIRECTED TO BE ASSIGN ED BY THE AO AFTER CONSIDERING THE NUMBER OF MAN DAYS AND RATE P ER MAN DAY FOR SUCH TRAINING AND CONSIDERED FOR TAXATION. WE ORDER ACCORDINGLY. II. INCOME FROM ONSHORE SUPPLY OF EQUIPMENTS 5. THOUGH AS PER ORIGINAL CONTRACT AGREEMENT DATED 16.12.2007, THE ASSESSEE WAS NOT TO MAKE ANY ONSHORE SUPPLY OF EQUIPMENTS, WHICH WAS IN THE EXCLUSIVE DOMAIN OF NCC, THE ASSES SEE AGREED TO SUPPLY SOME ONSHORE EQUIPMENT AS PER THE AMENDMENT AGREEMENT DATED 17.12.2008. IT HAS BEEN ADMITTED BY THE ASSES SEE BEFORE THE AO THAT IT RECEIVED RS.15.03 CRORE FROM SAIL THROUG H NCC DURING THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. THIS AMOUNT HAS BEEN INCLUDED BY THE ASSESSING OFFICER IN THE TOTAL INCOME OF THE ASSESSEE. THE AS SESSEE AGREES IN PRINCIPLE THAT THE INCOME FROM ONSHORE SUPPLY OF EQ UIPMENT IS ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 38 CHARGEABLE TO TAX IN INDIA. HOWEVER, THE CASE OF TH E ASSESSEE IS THAT SINCE THE ABOVE AMOUNT WAS IN THE NATURE OF ADVANCE AND NOT FOR ACTUAL SUPPLY OF ANY EQUIPMENT DURING THE YEAR, THE SAME CANNOT BE CHARGED TO TAX. AS IT HAS BEEN ACCEPTED BY THE ASSE SSEE THAT SUCH AMOUNT IS CHARGEABLE TO TAX IN THE CORRECT YEAR, WH ICH IS OTHERWISE ALSO A SETTLED LEGAL POSITION AS PER THE JUDGMENT O F THE HONBLE SUPREME COURT IN ISHIKAWAJMA HARIMA (SUPRA) , WE HOLD IN PRINCIPLE THAT THIS AMOUNT IS CHARGEABLE TO TAX IN THE CORRECT YEAR. THE DETERMINATION OF THE CORRECT YEAR WILL BE DISCU SSED INFRA . III. INCOME FROM ON SHORE SERVICES 6. HERE AGAIN THE ASSESSEE AGREES THAT `FOREIGN SUPERVISION CHARGES ARE FOR THE SERVICES RENDERED IN INDIA. T HE WORD `FOREIGN HAS BEEN USED QUA THE ASSESSEE, BEING A NON-RESIDENT. WE HAVE SET OUT ABOVE THE NATURE OF SUCH CHARGES WHILE DISCUSSI NG THE TAXABILITY OF OFFSHORE SUPPLY OF EQUIPMENTS. THE STAND OF THE ASSESSEE AND THE REVENUE TOWARDS THIS AMOUNT IS SIMILAR TO THE I NCOME FROM ONSHORE SUPPLY OF EQUIPMENTS AS DISCUSSED IN THE PR ECEDING PARA. THE ASSESSEE CONTENDS THAT THE AMOUNT HAS BEEN RECE IVED AS ADVANCE IN THIS YEAR AND THE INCOME WILL BE OFFERED FOR TAXATION IN THE CORRECT YEAR. THE REVENUE HAS TAXED THE AMOUNT RECEIVED IN THE YEAR IN QUESTION. AS IT HAS BEEN ACCEPTED BY THE A SSESSEE THAT SUCH AMOUNT IS CHARGEABLE TO TAX IN THE CORRECT YEAR, W HICH IS OTHERWISE ALSO A SETTLED LEGAL POSITION AS PER THE JUDGMENT O F THE HONBLE ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 39 SUPREME COURT IN ISHIKAWAJMA HARIMA (SUPRA) , WE HOLD IN PRINCIPLE THAT THIS AMOUNT IS CHARGEABLE TO TAX IN THE CORRECT YEAR. THE DETERMINATION OF THE CORRECT YEAR WILL BE DISCU SSED INFRA. IV. INCOME FROM DESIGN & ENGINEERING SERVICES 7.1. THE FACTS CONCERNING THIS ISSUE ARE THAT THE ASSESSEE RECEIVED EURO 150900 TOWARDS DESIGN AND ENGINEERING WHICH WE RE CLAIMED TO BE IN THE NATURE OF ADVANCE. THE AMOUNT WAS STAT ED TO BE NOT AT ALL CHARGEABLE TO TAX ON THE GROUND THAT THE DESIGN AND ENGINEERING WAS TO BE DONE OUTSIDE INDIA AND THEN IMPORTED INTO INDIA WITHOUT ANY ROLE OF THE P.E IN THIS TRANSACTION. IT WAS ALS O CLAIMED THAT THE OFFSHORE DESIGN AND ENGINEERING WAS INEXTRICABLY LI NKED TO THE OFFSHORE SUPPLIES AND HENCE WOULD CEASE TO BE CHARG EABLE TO TAX IN INDIA. THE ASSESSING OFFICER HELD THAT THE EQUIVALE NT AMOUNT OF EURO 150900 RECEIVED ON ACCOUNT OF DESIGN AND ENGIN EERING WAS ROYALTY AS PER SEC. 9(1)(VI) OF THE ACT (AS PARA 8 OF THE ASSESSMENT ORDER) OR ALTERNATIVELY FEES FOR TECHNICAL SERVICES AS PER SEC. 9(1)(VI) OF THE ACT (AS PER PARA 9 OF THE ASSESSMEN T ORDER). HOWEVER, WHILE COMPUTING THE TOTAL INCOME, HE CLUBB ED IT WITH OFFSHORE SUPPLY OF EQUIPMENT AND ATTRIBUTED 90% OF THE PROFIT TO THE PERMANENT ESTABLISHMENT AND HENCE INCLUDED IN T HE TOTAL INCOME. ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 40 7.2. THE LD. AR CONTENDED THAT THE AMOUNT FOR DE SIGN AND ENGINEERING WAS WHOLLY RELATED TO THE OFFSHORE SUPP LY OF EQUIPMENTS. SUCH DRAWINGS AND ENGINEERING WAS ALSO DONE OUTSIDE INDIA. SINCE THE ASSESSEE IS A NON-RESIDENT, THE IN COME ACCRUING OUTSIDE INDIA SHOULD NOT BE CHARGED TO TAX. 7.3. WE ARE NOT CONVINCED WITH THE SUBMISSIONS ADVANCED ON BEHALF OF THE ASSESSEE IN THIS REGARD. THE PRIMARY QUESTION FOR OUR CONSIDERATION IS TO DECIDE THE NATURE OF DRAWINGS A ND DOCUMENTS FOR WHICH SUCH AMOUNT HAS BEEN RECEIVED. PAGE 1042 ONWARDS OF THE PAPER BOOK, WHICH IS A PART OF APPENDIX-2, BEIN G THE TIME SCHEDULE TO THE CONTRACT AGREEMENT, THROWS LIGHT ON THE NATURE OF DRAWINGS AND DOCUMENTS. IT STARTS WITH THE BASIC EN GINEERING AND EXTENDS TO DRAWINGS/DOCUMENTS FOR INFORMATION/REVIE W AND THEN TO AS-BUILT DRAWINGS AND DOCUMENTS. WHEN WE PERUSE THE DETAILS UNDER SUCH BROAD CATEGORIES, IT CAN BE SEEN THAT IT REFERS TO SITE PLAN, PROCESS FLOW SHEET, GA & SECTIONAL DRAWINGS F OR FOUNDATION OF BUILDINGS AND EQUIPMENT, LAYOUT AND SECTIONS OF ROADS, RAILWAY TRACKS, COLOUR SCHEME, SOIL INVESTIGATION REPORT, P RELIMINARY OUTLINE DRAWINGS, EXCAVATION OUTLINE DRAWINGS, DESI GN CALCULATION FOR ALL ELECTRICAL WORKS, CONDUIT DRAWI NGS AND CUT OUT DETAILS ETC. ETC. WE ARE UNABLE TO APPRECIATE AS TO HOW SUCH DESIGNS AND ENGINEERING CAN BE CONSIDERED AS PART OF EQUIPM ENT TO BE SUPPLIED BY THE ASSESSEE FROM ABROAD. IN FACT, SUCH DESIGN AND ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 41 DRAWINGS DEAL WITH EVERY ASPECT OF THE ERECTION AND COMMISSIONING OF THE PLANT RIGHT FROM FOUNDATION OF BUILDINGS AND ROADS TILL THE COMPLETION OF THE ENTIRE PROJECT. ALL SUCH DRAWINGS ARE CUSTOMIZED. IT IS TOTALLY INCORRECT TO SAY THAT SUCH DRAWINGS A ND DESIGNS FOR WHICH CONSIDERATION OF EURO 150900 WAS RECEIVED BE CONSIDERED AS OFFSHORE SUPPLY OF EQUIPMENTS AND HENCE EXEMPTED FR OM TAXATION. OUR VIEW IS FORTIFIED FROM THE JUDGMENT OF THE HON BLE JURISDICTIONAL HIGH COURT IN DIRECTOR OF INCOME TAX VS RIO TINTO TECHNICAL SERVICES (2012)340 ITR 507 WHICH REVERSED THE FINDING GIVEN BY THE TRIBUNAL THAT THE CONSIDERATION RECEIV ED WAS FOR A COMPOSITE CONTRACT AND HENCE COULD NOT BE BIFURCATE D. IT HAS BEEN HELD THAT IN THE ABSENCE OF ANY BIFURCATION, AN EST IMATED ALLOCATION HAS TO BE MADE FOR TAX PURPOSES. FROM THE ABOVE JUD GMENT, IT IS MANIFEST THAT THE CONTENTION OF THE LD. AR THAT THE FEES FOR DESIGN AND DRAWING SHOULD BE CONSIDERED AS PART OF SUPPLY OF OFFSHORE EQUIPMENT, IS NOT SUSTAINABLE. 7.4. THE LD. AR THEN ARGUED THAT SUCH CONSIDERA TION SHOULD ALTERNATIVELY BE CONSIDERED AS ROYALTY. IN SUPPORT OF THIS CONTENTION, HE RELIED ON CLAUSE 15 OF THE GENERAL C ONDITIONS OF CONTRACT ON PAGE NO. 1103 OF THE PAPER BOOK BY WHIC H IT HAS BEEN PROVIDED THAT THE COPYRIGHT IN ALL DRAWINGS, DOCUME NTS AND OTHER MATERIALS SHALL REMAIN WITH THE CONTRACTOR. THIS CO NTENTION IN OUR CONSIDERED OPINION IS AGAIN BEREFT OF ANY FORCE. SE COND PARA OF THE ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 42 SAME CLAUSE 15 MAKES IT UNEQUIVOCAL THAT SAIL SHALL HAVE RIGHT TO USE THESE DRAWINGS, DOCUMENTS AND OTHER MATERIAL, D ATA AND INFORMATION FOR EXECUTION OF CONTRACT AND OPERATION AND MAINTENANCE OF THE FACILITIES. IT IS FURTHER AXIOMA TIC THAT SUCH DRAWINGS AND OTHER RELATED DOCUMENTS ARE CUSTOMIZED FOR THIS PROJECT OF SAIL. SUCH DRAWINGS ARE NOT USEFUL FOR A NY OTHER PROJECT. IN ORDER TO CATEGORIZE THE CONSIDERATION A S `ROYALTY, IT IS SINE QUA NON THAT THE SAME MUST PASS THROUGH THE DEFINITION OF ROYALTY GIVEN IN EXPLANATION 2 TO SEC. 9(1)(VI) A S UNDER : - EXPLANATION 2.FOR THE PURPOSES OF THIS CLAUSE, 'RO YALTY' MEANS CONSIDERATION (INCLUDING ANY LUMP SUM CONSIDE RATION BUT EXCLUDING ANY CONSIDERATION WHICH WOULD BE THE INCOME OF THE RECIPIENT CHARGEABLE UNDER THE HEAD 'CAPITAL GA INS') FOR (I) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRANTING OF A LICENCE) IN RESPECT OF A PATENT, INVENTION, MO DEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY ; (II) THE IMPARTING OF ANY INFORMATION CONCERNING T HE WORKING OF, OR THE USE OF, A PATENT, INVENTION, MOD EL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY ; (III) THE USE OF ANY PATENT, INVENTION, MODEL, DES IGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERT Y ; (IV) THE IMPARTING OF ANY INFORMATION CONCERNING T ECHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXPERIENCE OR SKILL ; ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 43 (IVA) THE USE OR RIGHT TO USE ANY INDUSTRIAL, CO MMERCIAL OR SCIENTIFIC EQUIPMENT BUT NOT INCLUDING THE AMOUNTS REFERRED TO IN SECTION 44BB ; (V) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING T HE GRANTING OF A LICENCE) IN RESPECT OF ANY COPYRIGHT, LITERARY , ARTISTIC OR SCIENTIFIC WORK INCLUDING FILMS OR VIDEO TAPES F OR USE IN CONNECTION WITH TELEVISION OR TAPES FOR USE IN CONNECTION WITH RADIO BROADCASTING, BUT NOT INCLUDI NG CONSIDERATION FOR THE SALE, DISTRIBUTION OR EXHIBIT ION OF CINEMATOGRAPHIC FILMS ; OR (VI) THE RENDERING OF ANY SERVICES IN CONNECTION W ITH THE ACTIVITIES REFERRED TO IN SUB-CLAUSES (I) TO (IV), (IVA) AND (V). 7.5. IT CAN BE EASILY SEEN FROM THE ABOVE DEFINI TION THAT ROYALTY BASICALLY MEANS A CONSIDERATION FOR TRANSFER OF RIG HTS IN RESPECT OF PATENT, INVENTION ETC. OR IMPARTING ANY INFORMATION CONCERNING THE WORK OF PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR TRADEMARK ETC. IT DOES NOT BY ANY STANDARD CONTEMPL ATE THE DRAWINGS AND DESIGNS CUSTOMIZED FOR A PARTICULAR PR OJECT WHICH ARE NOT CAPABLE OF USE FOR ANY OTHER PURPOSE. 7.6. ON THE CONTRARY, WE FIND THAT THE AMOUNT IN QUESTION IS IN THE NATURE OF FEES FOR TECHNICAL SERVICES AS DEF INED U/S 9(1)(VII) OF THE ACT. SUCH DEFINITION IS CONTAINED IN EXPLAN ATION 2 WHICH READS AS UNDER:- EXPLANATION [2].FOR THE PURPOSES OF THIS CLAUSE, ' FEES FOR TECHNICAL SERVICES' MEANS ANY CONSIDERATION (INCLUD ING ANY ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 44 LUMP SUM CONSIDERATION) FOR THE RENDERING OF ANY MA NAGERIAL, TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PR OVISION OF SERVICES OF TECHNICAL OR OTHER PERSONNEL) BUT DOES NOT INCLUDE CONSIDERATION FOR ANY CONSTRUCTION, ASSEMBLY, MININ G OR LIKE PROJECT UNDERTAKEN BY THE RECIPIENT OR CONSIDERATIO N WHICH WOULD BE INCOME OF THE RECIPIENT CHARGEABLE UNDER T HE HEAD 'SALARIES'.] 7.7. A BARE PERUSAL OF THIS EXPLANATION DEFINING THE TERM FEES FOR TECHNICAL SERVICES MAKES IT CLEAR THAT IT REFERS TO RENDERING OF ANY OF TECHNICAL SERVICES APART FROM MANAGERIAL OR CONS ULTANCY. IT ALSO INCLUDES THE PROVISION OF SERVICES OF TECHNICAL OR OTHER PERSONNEL. AS THE NATURE OF AFORE-DISCUSSED DRAWINGS AND DESIG NS CUSTOMIZED TO THE ASSESSEES REQUIREMENTS ARE RESULT OF THE RE NDERING OF TECHNICAL SERVICES, WE ARE OF THE CONSIDERED OPINIO N THAT THE CONSIDERATION FOR THE SAME QUALIFIES TO BE CATEGORI ZED AS FEES FOR TECHNICAL SERVICES. THE HONBLE JURISDICTIONAL H IGH COURT IN RIO TINTO TECHNICAL SERVICES (SUPRA) VIDE PARA 22 OF THIS JUDGMENT IN THE CONTEXT OF REMUNERATION FOR SUCH SERVICES HAS H ELD THAT THE TRIBUNAL HAS NOT SPECIFICALLY EXAMINED EXPLANATION 2 TO SEC. 9(1)(VII) WHICH DEFINES FEES FOR TECHNICAL SERVICE S. 7.8. AT THIS STAGE IT IS RELEVANT TO DEAL WITH T HE CONTENTION OF THE LD. AR THAT IF SUCH AMOUNT IS CONSIDERED AS FEES FO R TECHNICAL SERVICES, THEN THE SAME SHOULD BE HELD AS NOT CHARG EABLE TO TAX AS PER THE JUDGMENT OF THE HONBLE SUPREME COURT IN TH E CASE OF ISHIKAWAJMA HARIMA (SUPRA). IT CAN BE SEEN FROM PARA 16 READ ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 45 WITH PARA 23 OF THIS JUDGMENT THAT ONLY TWO ISSUES WERE DEALT WITH VIZ, : (A) THE TAXATION OF THE PRICE OF GOODS SUPPL IED, BY WAY OF OFFSHORE SUPPLY PRICE OF WHICH WAS SPECIFIED IN EX. D, CL. 2.1; AND (B) THE TAXATION OF CONSIDERATION PAID FOR RENDITIO N OF SERVICES DESCRIBED IN THE CONTRACT AS OFFSHORE SERVICES AT E X. D. FOR THE TIME BEING, WE ARE CONCERNED ONLY WITH THE PRICE OF DES IGN AND ENGINEERING, WHICH HAS BEEN CONSIDERED AS OFFSHORE SERVICES IN THE CASE OF ISHIKAWAJMA HARIMA (SUPRA) AS UNDER :- 1. XXXXXX 2.. 3. OFFSHORE SERVICES (EXHIBIT D-2.2) IS THE PRICE O F DESIGN AND ENGINEERING INCLUDING DETAIL ENGINEERING IN RELATION TO SUPPLIES, SERVICES AND CONSTRUCTION AND ERECTION AND COST OF ANY OTHER SERVICES TO BE RENDE RED FROM OUTSIDE INDIA. 4' 7.9. THE HONBLE APEX COURT CONSIDERED THE PRIC E OF DESIGN AND ENGINEERING AS `FEES FOR TECHNICAL SERVICES AS PER SECTION 9(1)(VII)(C) OF THE ACT AND DEALT WITH THE SAME IN PARAS 66 AND 70 BY NOTICING THAT : S. 9(1)(VII), READ IN ITS PLAIN, ENVISAGES THE FULFILMENT OF TWO CONDITIONS : SERVICES, WHICH ARE SOURCE OF INCOME SOUGHT TO BE TAXED IN INDIA MUST BE (I) UTILIZED IN INDIA AND (II) RENDERED IN INDIA. IN THE PRESENT CASE, BOTH THESE CONDITIONS HAVE NOT BEEN SATISFIED SIMULTANEOUSLY. THUS IT IS APPARENT THAT THE ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 46 HONBLE SUPREME COURT HELD CONSIDERATION FOR OFFSHO RE SERVICES NOT CHARGEABLE TO TAX BECAUSE THE TWIN CONDITIONS - THE SERVICES WHICH ARE THE SOURCE OF INCOME MUST BE UTILIZED IN INDIA AND SUCH SERVICES MUST BE RENDERED IN INDIA - WERE NOT CUMU LATIVELY FULFILLED, SINCE THE SERVICES WERE NOT RENDERED I N INDIA. HOWEVER, IT IS RELEVANT TO NOTE THAT THE LEGISLATURE HAS STE PPED IN BY SUBSTITUTING EXPLANATION BELOW SEC. 9(2) READING AS UNDER:- [EXPLANATION.FOR THE REMOVAL OF DOUBTS, IT IS HERE BY DECLARED THAT FOR THE PURPOSES OF THIS SECTION, INC OME OF A NON-RESIDENT SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA UNDER CLAUSE (V) OR CLAUSE (VI) OR CLAUSE (VII) OF SUB-SECTION (1) AND SHALL BE INCLUDED IN THE TOTAL INCOME OF TH E NON- RESIDENT, WHETHER OR NOT, (I) THE NON-RESIDENT HAS A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA; OR (II) THE NON-RESIDENT HAS RENDERED SERVICES IN IND IA.] 7.10. THIS SUBSTITUTION HAS BEEN DONE BY THE FINA NCE ACT, 2010 W.R.E.F 1.6.1976. THE ABOVE EXPLANATION MAKES IT CL EAR THAT, INTER ALIA, THE FEES FOR TECHNICAL SERVICES SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA AND SHALL BE INCLUDED IN THE TOTAL I NCOME OF THE NON- RESIDENT, WHETHER OR NOT THE NON-RESIDENT HAS REND ERED SERVICES IN INDIA. THUS IT IS MANIFEST THAT THE LEGISLATURE HAS NULLIFIED THE EFFECT OF THE JUDGMENT OF THE HONBLE SUPREME COURT IN ISHIKAWAJMA HARIMA (SUPRA) TO THE EXTENT IT PROVIDED THAT TECHNICAL SERVICES MUST BE RENDERED IN INDIA SO AS TO QUALIFY FOR TAXA TION. WITH THIS ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 47 RETROSPECTIVE SUBSTITUTION OF THE EXPLANATION, ALSO COVERING THE YEAR UNDER CONSIDERATION, THE VIEW CANVASSED BY TH E LD. AR THAT SINCE SUCH SERVICES WERE NOT RENDERED IN INDIA AND HENCE NO TAX LIABILITY SHOULD ARISE, HAS BEEN RENDERED UNSUSTAIN ABLE. 7.11. WE COME BACK TO THE PRESCRIPTION OF SEC. 9 (1)(VII)(B) AS PER WHICH INCOME BY WAY OF FEES OF TECHNICAL SERVICES PAYABLE BY A PERSON WHO IS RESIDENT OF INDIA SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA EXCEPT WHERE THE FEES ARE PAYABLE IN RESPE CT OF SERVICES UTILIZED IN A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARN ING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA. THE POSITIVE MANDATE OF THIS PROVISION IS FULLY APPLICABLE TO THE PRESENT FACTS AS THE FEES FOR TECHNICAL SERVICES HAS BEEN PAID BY SAIL, WHO IS RE SIDENT OF INDIA, AND FURTHER THE SERVICES PROVIDED BY THE ASSESSEE A RE NOT GOING TO BE USED BY SAIL FOR CARRYING ON ITS BUSINESS OUTSI DE INDIA OR FOR EARNING INCOME FROM ANY SOURCE OUTSIDE INDIA. 7.12. THE LD. AR HAS NOT DISPUTED THAT THE LANGU AGE OF ARTICLE 13 OF THE DTAA, IN SO FAR AS THE FACTS OF THE INSTANT CASE ARE CONCERNED, IS NOT DIFFERENT FROM THAT OF SEC. 9(1)( VII). WE, THEREFORE, HOLD IN PRINCIPLE THAT THE CONSIDERATION FOR DESIGNS AND DRAWINGS IS LIABLE FOR INCLUSION IN THE TOTAL INCOM E OF THE ASSESSEE U/S 9(1)(VII) OF THE ACT. ON A SPECIFIC QUERY FROM THE BENCH, IT WAS ADMITTED BY THE LD. AR THAT HE WANTED THE TAXABILIT Y OF THIS AMOUNT ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 48 TO BE CONSIDERED ONLY UNDER THE ACT AND NOT THE DTA A. AS SUCH, WE ARE DESISTING FROM EXAMINING THE POSITION OF SUC H FEES FOR TECHNICAL SERVICES UNDER THE DTAA. ACCORDINGLY IT I S HELD THAT THE TOTAL AMOUNT OF EURO 30,18,000 AS PER TABLE 1B TO B E RECEIVED BY THE ASSESSEE AS DESIGN AND ENGINEERING (IMP.) OVER THE PERIOD, IS IN THE NATURE OF `FEES FOR TECHNICAL SERVICES CHAR GEABLE TO TAX WITHIN THE MEANING OF SECTION 9(1)(VII) OF THE ACT. HOWEVER, WE WILL DEAL INFRA WITH THE EXTENT OF INCLUSION OF ANY INCOME ON THIS COUNT IN THE TOTAL INCOME OF THE ASSESSEE FOR THE Y EAR UNDER CONSIDERATION. HOW MUCH IS INCOME FOR THE CURRENT YEAR ? 8.1. AFTER HAVING CONSIDERED THE BROADER PRIN CIPLES OF TAXATION IN RESPECT OF I) INCOME FROM OFFSHORE SUPPLY OF EQ UIPMENTS; II) INCOME FROM ONSHORE SUPPLY OF EQUIPMENTS; III) INC OME FROM ONSHORE SERVICES; AND IV)INCOME FROM DESIGN & ENGIN EERING SERVICES, LET US SEE HOW THESE ARE APPLICABLE FOR T HE PURPOSES OF DETERMINATION OF INCOME FOR THE YEAR IN QUESTION. THE REVENUE HAS HELD THAT THE AMOUNT RECEIVED DURING THE YEAR DESIG NATED AS ADVANCE IS FOR THE RENDERING OF ACTUAL SERVICES OR SUPPLY OF GOODS AND HENCE IT IS CHARGEABLE TO TAX TO THE EXTENT AS INDICATED ABOVE. ON THE OTHER HAND, THE ASSESSEE CLAIMED THAT NEITHE R ANY GOODS WERE SUPPLIED NOR ANY SERVICES WERE RENDERED DURING THE YEAR AND HENCE NO INCOME CHARGEABLE TO TAX HAS ARISEN. ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 49 8.2. ON A SPECIFIC QUERY, THE LD. AR SUBMITTED T HAT THE ASSESSEE HAD NOT TAKEN UP ANY CONTRACT WHICH REQUIRED IT TO FOLLOW EITHER THE PROJECTION COMPLETION METHOD OR PERCENTAGE COMPLETI ON METHOD. HE SUBMITTED THAT THE ASSESSEE WAS FOLLOWING ACCOUN TING STANDARD - 9 TO SHOW THE INCOME ON THE ACTUAL RENDERING OF S ERVICES OR ACTUAL SUPPLY OF EQUIPMENT. AS THE AO HAS NO WHERE HELD T HAT THE INCOME OF THE ASSESSEE SHOULD BE COMPUTED AS PER TH E PERCENTAGE COMPLETION OR PROJECT COMPLETION METHOD, WE REFRAIN FROM CONSIDERING THIS ASPECT OF THE MATTER. ACCORDINGLY, WE ARE PROCEEDING WITH THE CONTENTION OF THE LD. AR THAT THE ASSESSEE WAS OFFERING INCOME ON THE ACTUAL RENDERING OF SERVICES OR SUPPLYING THE EQUIPMENT, OFFSHORE OR ONSHORE. 8.3. THE ASSESSEE ARGUED BEFORE THE ASSESSING OFF ICER THAT THE AMOUNTS RECEIVED BY IT WERE ONLY IN THE NATURE OF 5 % ADVANCE OF THE CONTRACT PRICE AND NO ACTIVITY WAS CARRIED OUT IN THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDER ATION. THE ASSESSING OFFICER REJECTED THIS CONTENTION BY OBSER VING FROM CLAUSE 12 OF THE `GENERAL CONDITIONS OF CONTRACT O N PAGE 1093 OF THE PAPER BOOK, WHICH PROVIDES THAT: `NO INITIAL M OBILIZATION ADVANCE WILL BE PROVIDED TO THE CONTRACTOR AND THE PAYMENTS WILL BE LINKED WITH THE PROGRESS. IT IS IN THE LIGHT OF THIS CLAUSE THAT THE AO REPELLED THE CONTENTION OF THE ASSESSEE THAT AMOUNT RECEIVED DURING THE YEAR WAS ONLY IN THE NATURE OF ADVANCE AND ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 50 NEITHER ANY GOODS WERE SUPPLIED NOR SERVICES RENDER ED. ON THE OTHER HAND, THE ASSESSEE DREW SUPPORT FOR ITS CONTE NTION FROM CLAUSE 2.1 OF APPENDIX 3 WHICH PROVIDES AS UNDER : - 2.1.1 FIVE PER CENT (5%) OF THE TOTAL CONTRACT PRI CE SPECIFIED IN THE APPENDIX-1 EXCLUDING TAXES, DUTIES AND TRAINING CHARGES SHALL BE RELEASED ON SUBMISSION OF FOLLOWING DRAWINGS/DOCUMENTS/DATA. A) AREA LAYOUT OF BF COMPLEX SHOWING LOCATION & DISPOSITION OF ALL UNITS OF BF COMPLEX B) PRELIMINARY TECHNOLOGICAL LAYOUT OF BF COMPLEX INDICATING THE LOCATION & DISPOSITION OF DIFFERENT TECHNOLOGICAL UNITS. C) GENERAL ARRANGEMENT AND ELEVATION DRAWINGS FOR BF PROPER, HOT BLAST STOVES, GAS CLEANING PLANT. D) BASIC PROCESS FLOW DIAGRAM AND MAJOR PROCESS PARAMETERS FOR MAIN TECHNOLOGICAL UNITS LIKE BF, STOVE, STOCK HOUSE, WATER SYSTEM, GAS FACILITIES, GCP. E) ELECTRICAL SINGLE LINE DIAGRAM FOR BF COMPLEX F) PFDS FOR ALL UTILITY AND SERVICES. 2.1.2 FIVE PER CENT (5%) OF THE TOTAL CONTRACT PRI CE SPECIFIED IN THE APPENDIX-1 EXCLUDING TAXES, DUTIES AND TRAINING CHARGES SHALL BE RELEASED ON SUBMISSION (APPROVAL/APPROVED AS NOTED) DRAWINGS/DATA, UN-PRIC ED COPY OF PURCHASE ORDER/FACTORY INDENTS BY THE CONTR ACTOR AS SPECIFIED BELOW: A) PAUL WURTH BELL LESS TOP CHARGING SYSTEM ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 51 B) CAST HOUSE EQUIPMENT LIKE MUDGUN, DRILLING M/C AND TILTING RUNNER C) UNDER BURDEN PROBES WITH GAS ANALYZER D) PROFILOMETER E) BF BLEEDER VALVES F) SLAG GRANULATION AND ITS ASSOCIATED EQUIPMENT, AUXILIARIES. G) WASTE GAS HEAT RECOVERY SYSTEM EQUIPMENT H) HOT BLAST STOVE CHECKER SUPPORTING SYSTEM I) GAS CLEANING PLANT AND ITS ASSOCIATED EQUIPMENT, AUXILIARIES. J) BLAST FURNACE HEARTH REFRACTORIES INCLUDING GRAPHITE, SEMI-GRAPHITE, CARBON, MICRO-PORE CARBON, MULLITE BRICKS, ETC. K) BF ALL TYPES OF STAVE COOLING PLATE LIKE CU, C.I & S. G. IRON COOLING PLATES. 2.1.3. SEVENTY SEVEN AND A HALF PERCENT (77.5%) OF THE TOTAL CONTRACT PRICE SPECIFIED IN THE APPENDIX 1, EXCLUDING TAXES, DUTIES AND TRAINING CHARGES SHA LL BE RELEASED TOWARDS PROGRESS PAYMENTS AND 100% OF THE TAXES AND DUTIES ON SUBMISSION OF DOCUMENTARY EVIDENCE ALONG WITH RELEASE OF PROGRESS PAYMENT OF 77.5% AS PER SUB-CLAUSE 2.3. 2.1.4 TO 2.1.8 8.4. BEFORE WE PROCEED TO EVALUATE THE RIVAL CO NTENTIONS IN THIS REGARD, IT NEEDS TO BE HIGHLIGHTED THAT ONE OF THE PARTIES TO THIS CONTRACT AGREEMENT IS SAIL, WHICH IS A GOVERNMENT O F INDIA ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 52 UNDERTAKING. AS SUCH, THE TERMS OF THE CONTRACT CAN NOT BE CONSIDERED AS SMOKESCREEN OR NOT REFLECTING THE TRU E INTENTION OF THE PARTIES. IN THE ABSENCE OF ANYTHING TO THE CONT RARY BROUGHT OUT BY THE ASSESSING OFFICER OR THE LD. DR, WE SHALL PR OCEED WITH THE PRESUMPTION THAT THERE IS NO FAADE OR COVER-UP IN THE TERMS OF THE CONTRACT AGREEMENT. 8.5. COMING BACK TO OUR CONTEXT, IT CAN BE SEEN THAT THERE IS AN APPARENT CONFLICT BETWEEN THE LANGUAGE OF CLAUSE 12 OF THE `GENERAL CONDITIONS OF CONTRACT ON ONE HAND WHICH SUPPORTS THE STAND OF THE REVENUE THAT THE PAYMENT WILL BE LINKE D WITH THE PROGRESS AND NO INITIAL MOBILIZATION ADVANCE WILL B E PROVIDED; AND CLAUSE CLAUSE 2.1 OF APPENDIX 3 ON THE OTHER, WHIC H SUPPORTS THE POINT OF VIEW OF THE ASSESSEE. MECHANISM FOR RESOL VING SUCH CONFLICTS HAS BEEN PROVIDED IN ARTICLE 1 OF THE CON TRACT AGREEMENT ITSELF. CLAUSE 1.2 OF ARTICLE 1 GIVES DETAIL OF `C ONTRACT DOCUMENTS BY MENTIONING AS UNDER: THE FOLLOWING DOCUMENTS SHALL CONSTITUTE THE CONTR ACT BETWEEN THE EMPLOYER AND THE CONTRACTOR, AND EACH S HALL BE READ AND CONSTRUED AS AN INTEGRAL PART OF THE CO NTRACT: (A) THIS CONTRACT AGREEMENT AND APPENDICES HERETO (B) SPECIAL CONDITIONS OF CONTRACT AND ANNEXURES HE RETO (C) GENERAL CONDITIONS OF CONTRACT AND ANNEXURES HE RETO (D) CONTRACT TECHNICAL SPECIFICATIONS AND DRAWINGS (E) GENERAL TECHNICAL SPECIFICATION ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 53 8.6. CLAUSE 1.3 OF ARTICLE 1 GIVES THE `ORDER O F PRECEDENCE AS UNDER: IN THE EVENT OF ANY AMBIGUITY OR CONFLICT BETWEEN THE CONTRACT DOCUMENTS LISTED ABOVE, THE ORDER OF PRECE DENCE SHALL BE THE ORDER IN WHICH THE CONTRACT DOCUMENTS ARE LISTED IN ARTICLE 1.2 (CONTRACT DOCUMENTS) ABOVE. 8.7. ON GOING THROUGH CLAUSE 1.3 IN JUXTAPOSITION TO CLAUSE 1.2 OF ARTICLE 1 OF THE CONTRACT AGREEMENT, IT BECOMES EAS Y TO UNDERSTAND THAT IN THE EVENT OF ANY CONFLICT, AS IS PREVAILING BEFORE US, THE ORDER OF PRECEDENCE SHALL BE THE ORDER IN WHICH THE CONTRACT DOCUMENTS ARE LISTED IN CLAUSE 1.2. CLAUSE 2.1 ON P AGE 1048 OF THE PAPER BOOK FAVORING THE ASSESSEE HAS BEEN PLACED IN APPENDIX 3, WHICH FALLS UNDER SUB-CLAUSE (A) OF CLAUSE 1.2 OF A RTICLE 1 OF THE CONTRACT AGREEMENT. CLAUSE 12.1 ON PAGE 1093 OF THE PAPER BOOK FAVORING THE REVENUE HAS BEEN PLACED IN GENERAL CO NDITIONS OF CONTRACT, WHICH FALLS UNDER SUB-CLAUSE (C) OF CLAU SE 1.2 OF ARTICLE 1. THUS, IT IS EVIDENT THAT DUE TO CONFLICT IN THE LANGUAGE OF THESE TWO PROVISIONS, SUB-CLAUSE (A) SHALL HAVE PRECEDENC E OVER SUB- CLAUSE (C) OF CLAUSE 1.2 OF ARTICLE 1. THE RESULT I S THAT THE INITIAL MOBILIZATION ADVANCE OF 5% CANNOT BE LINKED WITH TH E PROGRESS OF WORK BUT WILL HAVE TO BE CONSIDERED IN TERMS OF CLA USE 2 ON PAGE 1048 OF THE PAPER BOOK, WHICH PROVIDES THAT THE FIR ST 5% OF THE TOTAL CONTRACT PRICE SHALL BE RELEASED ON SUBMISSIO N OF DRAWINGS/DOCUMENTS/DATA CONCERNING ITEMS SPECIFIED IN SUB- ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 54 CLAUSES A) TO F). THE ASSESSEE RAISED INVOICE FOR THIS FIRST 5% ON 6.3.2008 FOR WHICH THE PAYMENT WAS RECEIVED A FEW D AYS LATER. THE SECOND INSTALLMENT OF 5% WAS TO BE RELEASED ON SUBM ISSION OF APPROVAL/APPROVED DRAWINGS/DATA AND ALSO UN-PRICED COPY OF PURCHASE ORDER/FACTORY INDENTS BY THE ASSESSEE OF T HE ITEMS LISTED IN SUB-CLAUSES A) TO K). THE INVOICE FOR THE SECOND 5% INSTALLMENT WAS RAISED IN THE NEXT YEAR. THIS SHOWS THAT BY THE END OF THE FINANCIAL YEAR NAMELY, 31.3.2008, THE ASSESSEE DEFI NITELY SUBMITTED DRAWINGS/DOCUMENTS/DATA OF ITEMS LISTED IN SUB-CLAU SES A) TO F) OF CLAUSE 2.1.1. AND ALSO STARTED DOING THE ACTIVITIES MAKING IT ELIGIBLE FOR THE RECEIPT OF SECOND 5% INSTALLMENT, WHICH REQ UIRED IT TO SUBMIT APPROVAL/APPROVED DRAWINGS/DATA AND ALSO UN- PRICED COPY OF PURCHASE ORDER/FACTORY INDENTS OF THE ITEMS LIST ED IN SUB-CLAUSES A) TO K) AS PER CLAUSE 2.1.2. IT EXPLAINS THAT TILL THE INVOICING FOR THE RELEASE OF SECOND 5% INSTALLMENT, THE ASSESSEE WAS TO SIMPLY PROCURE COPIES OF PURCHASE ORDERS TO BE PLACED BY I T FOR THE PURPOSE OF SUBMISSION OF EQUIPMENT TO SAIL AFTER APPROVAL O F THE DRAWINGS AND DOCUMENTS AS MENTIONED ABOVE. THIS GOES TO PROV E THAT NO SUPPLY OF EQUIPMENTS WAS CONTEMPLATED TILL THE INVO ICE FOR THE SECOND INSTALLMENT OF 5% WAS RAISED, WHICH EVENT TO OK PLACE IN THE NEXT YEAR. THIS CHAIN OF EVENTS BRINGS US TO THE PO INT THAT THE ASSESSEE DEFINITELY SUBMITTED DRAWINGS/DOCUMENTS/DA TA AS PER SUB- CLAUSES (A) TO (F) OF CLAUSE 2.1.1 OF APPENDIX 3 AN D STARTED PLACING THE PURCHASE ORDERS OF CERTAIN EQUIPMENTS TO BE SUP PLIED TO SAIL ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 55 IN TERMS OF CLAUSE 2.1.2 OF APPENDIX 3 AFTER APPROV AL. THE RELEASE OF THESE TWO INSTALLMENTS OF 5% EACH DOES NOT CONTE MPLATE THE SUPPLY OF ANY EQUIPMENT TO SAIL EITHER OFFSHORE OR ONSHORE. THUS THE LEVEL OF ACTIVITY DEFINITELY DONE BY THE ASSESS EE FOR SAIL UP TO 31.3.2008 IS RESTRICTED TO THE SUPPLYING OF DRAWINGS/DOCUMENTS/DATA AS PER SUB-CLAUSES (A) TO ( F) OF CLAUSE 2.1.1 AND ALSO SOME PART OF APPROVAL BY SAIL OF DRA WINGS/DATA AND PLACING OF PURCHASE ORDERS FOR THE EQUIPMENTS AS ME NTIONED IN SUB- CLAUSES A) TO K) OF CLAUSE 2.1.2. THIS ALSO PROVES THE FALLACY OF THE ASSESSEES CONTENTION THAT IT DID NOT SUPPLY ANY EQ UIPMENT OR RENDER ANY SERVICES TO SAIL AND THE ENTIRE AMOUNT R ECEIVED BY IT WAS IN THE NATURE OF ADVANCE. THUS INCOME ATTRIBUTA BLE TO SUCH SERVICES RENDERED IN INDIA IS CHARGEABLE TO TAX DUR ING THE YEAR IN QUESTION. IT CAN BE FURTHER SEEN THAT THE ASSESSEE HAS CLAIMED DEDUCTION OF MORE THAN RS.1 CRORE TOWARDS EXPENSES INCURRED ON THIS PROJECT. IT GOES ON ESTABLISH THAT THE ASSESSE E DID SOME ACTIVITY IN RESPECT OF THE SAIL PROJECT DURING THE YEAR IN Q UESTION. 8.8. THE LD. AR REFERRED TO CERTAIN BILLS ISSUE D BY THE ASSESSEE IN THE YEAR 2009 COINCIDING WITH THE COMPLETION STAGE OF 77.5%. HE SUBMITTED THAT THE INVOICE WAS RAISED IN SUCH LATER YEAR AND INCOME WAS ACCORDINGLY OFFERED FOR TAXATION AT THAT STAGE. CERTAIN DETAILS OF THE EQUIPMENT SUPPLIED WERE ALSO SHOWN. ON BEIN G CALLED UPON TO SHOW THE DATES OF DELIVERY OF SUCH GOODS, BOTH O NSHORE AND ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 56 OFFSHORE, HE STATED THAT SUCH INFORMATION WAS NOT A VAILABLE. IT IS RELEVANT TO NOTE THAT THE TERMS OF THE CONTRACT AGR EEMENT PROVIDE FOR THE `RELEASE OF PAYMENT ON ACHIEVING CERTAIN M ILESTONES AS REFERRED TO ON PAGE 1048 AND 1049 OF THE PAPER BOOK . THE RELEASE OF THE PAYMENT HAS NO DIRECT AND INSEPARABLE CONNEC TION WITH THE ACTUAL DOING OF WORK. AS THE ASSESSEE RAISED INVOIC E FOR THE FIRST 5% OF THE ENTIRE CONTRACT PRICE BEFORE THE CLOSE OF THE CURRENT YEAR INCLUDING TOWARDS SUPPLY OF EQUIPMENT WITHOUT ACTUA LLY SUPPLYING THEM, SIMILARLY IT WAS TO RAISE INVOICE AND GET 77. 5% OF THE TOTAL CONTRACT PRICE ON THE SUBMISSION OF DOCUMENTARY EVI DENCE AS PER SUB-CLAUSE 2.3. THE ACTUAL SUPPLY OF EQUIPMENTS WAS TO NECESSARILY START MUCH BEFORE THIS MILESTONE OF RELEASE OF 77.5 % OF CONTRACT PRICE. IT IS OF IMPORTANCE TO NOTE THAT THE ASSESSE E ENTERED INTO CONTRACT WITH SAIL IN 2007 AND ALSO SET UP ITS PROJ ECT OFFICE. NOT ONLY THAT, IT ALSO RECEIVED TWO INSTALLMENT OF 5% O F THE CONTRACT PRICE. IT IS NOT POSSIBLE THAT AFTER DOING SO, IT S AT IDLE TILL THE RAISING OF INVOICE FOR 77.5% IN THE YEAR 2009. ON A SPECIFI C QUERY, IT WAS ADMITTED BY THE LD. AR THAT THE SUPPLY OF OFFSHORE AND ONSHORE EQUIPMENTS WAS TO BE MADE OVER THE PERIOD OF CONTRA CT AND IT WAS NOT A CASE OF ENTIRE SUPPLY OF EQUIPMENTS HAVING BE EN EFFECTED ON THE DATE OF RAISING INVOICE IN THE YEAR 2009. HE AD MITTED OF NOT READILY HAVING THE DATES OF ACTUAL SUPPLY OF EQUIPM ENTS FOR WHICH THE INVOICE WAS RAISED IN 2009. WE WANT TO MAKE IT CLEAR THAT AS NO INCOME CAN BE CHARGED TO TAX SIMPLY ON THE RECEIPT OF ADVANCE, ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 57 SIMILARLY THE TAXABILITY CANNOT BE POSTPONED TO THE `RELEASE OF THE AMOUNT FOR WHICH INVOICE IS MADE MUCH AFTER THE SUP PLY OF GOODS. THE RELEVANT POINT OF TAXATION IS THE ACTUAL SUPPLY ING OF GOODS AND ACTUAL RENDERING OF SERVICES AND NOT WHEN THE INVOI CE IS RAISED AS PER THE PECULIAR TERMS OF THE CONTRACT OR THE AMOUN T IS RECEIVED. AS THE RELEVANT DATES OF ACTUAL SUPPLY OF EQUIPMENTS A RE NOT AVAILABLE, THIS ASPECT IS ALSO DIRECTED TO BE EXAMINED BY THE AO AND RESULTANTLY CHARGING INCOME TO TAX FOR THE PERIOD D URING WHICH ACTUAL GOODS WERE SUPPLIED OR SERVICES RENDERED. 8.9. WITH THE ABOVE OBSERVATIONS, WE PROCEED T O LAY DOWN THE MECHANISM FOR DETERMINING HOW MUCH INCOME WAS EARNE D BY THE ASSESSEE DURING THE YEAR UNDER THE FOLLOWING DISTIN CT HEADS:- I. INCOME FROM OFFSHORE SUPPLY OF EQUIPMENTS. IT HAS TWO COMPONENTS, VIZ., OFFSHORE SUPPLY OF EQU IPMENTS AND RENDERING OF SERVICES IN INDIA. IN SO FAR AS PROFIT FROM OFFSHORE SUPPLY SIMPLICITOR IS CONCERNED, THE SAME IS NOT CH ARGEABLE TO TAX IN THE HANDS OF THE NON-RESIDENT DUE TO TRANSFER OF TITLE OF EQUIPMENTS OUTSIDE INDIA. HOWEVER, CONSIDERATION FO R RENDERING OF SERVICES IN INDIA, WHICH IS IN-BUILT IN THE PRICE O F EQUIPMENT, IS CHARGEABLE TO TAX AT THE POINT OF RENDERING OF SUCH SERVICES. THE ASSESSING OFFICER IS DIRECTED TO VERIFY THE DATES O F ACTUAL SUPPLY OF OFFSHORE EQUIPMENTS TAKING PLACE IN THE NEXT YEAR A ND SEE IF ANY ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 58 PRE-SUPPLY TRAINING ETC. IN THIS REGARD WAS GIVEN B Y THE ASSESSEE TO THE PERSONNEL OF SAIL IN INDIA DURING THE YEAR UNDE R CONSIDERATION. IF IT WAS SO GIVEN, THEN HE WILL COMPUTE THE VALUE OF SUCH TRAINING AS DISCUSSED SUPRA AND CHARGE THE RELEVANT AMOUNT TO TAX. II. INCOME FROM ONSHORE SUPPLY OF EQUIPMENTS INCOME FROM ONSHORE SUPPLY OF EQUIPMENTS IS OTHERWI SE FULLY CHARGEABLE TO TAX. SINCE NO SUCH SUPPLY WAS MADE DU RING THE YEAR, NATURALLY THERE CAN BE NO INCOME ATTRIBUTABLE TO SU CH SUPPLY OF EQUIPMENTS SIMPLICITOR. HOWEVER, THE ASSESSING OFFI CER IS DIRECTED TO VERIFY IF ANY SERVICES WERE RENDERED BY THE ASS ESSEE IN THIS YEAR IN CONNECTION WITH SUCH ONSHORE SUPPLY OF GOODS. IF IT TURNS OUT TO BE SO AND THE PRICE FOR SUCH SERVICES IS NOT SEPARA TELY CHARGED, THEN THE VALUE FOR SUCH SERVICES SHOULD BE DETERMINED AN D THEN CONSIDERED FOR THE PURPOSES OF INCLUSION IN THE TOT AL INCOME OF THE ASSESSEE FOR THE CURRENT YEAR. III. INCOME FROM ONSHORE SERVICES FOREIGN SUPERVISION CHARGES REPRESENT THE AMOUNT CH ARGED BY THE ASSESSEE FOR RENDERING SERVICES IN INDIA DURING ERE CTION, START-UP, COMMISSIONING AND PERFORMANCE GUARANTEE TESTS. THI S AMOUNT IS OTHERWISE CHARGEABLE TO TAX IN INDIA. ERECTION AND COMMISSIONING MAY BE OF BUILDING STRUCTURE OR PLANT. IT HAS BEEN NOTICED ABOVE THAT NO SUPPLY OF PLANT COMMENCED UP TO 31.3.2008. THUS NO ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 59 INCOME CAN BE CHARGED TO TAX IN RESPECT OF ERECTION COMMISSIONING ETC. OF PLANT AND MACHINERY. HOWEVER, THE ASSESSING OFFICER IS DIRECTED TO VERIFY IF THE ASSESSEE WAS INVOLVED IN ERECTION OF BUILDING STRUCTURE ALSO. IF THE ANSWER IS FOUND TO BE IN AFFIRMATIVE, THEN HE WILL VALUE SUCH SERVICES, IF ANY, ACTUALLY RENDERED DURING THE YEAR. THE VALUE SO DETERMINED WILL BE INCLUDED IN THE TOTAL INCOME FOR THE CURRENT YEAR. IV. INCOME FROM DESIGN & ENGINEERING SERVICES SUCH AMOUNT IS CHARGEABLE TO TAX AS FEES FOR TECHNI CAL SERVICES AS PER SECTION 9(1)(VII) OF THE ACT. THE ASSESSEE DEFI NITELY RENDERED SOME TECHNICAL SERVICES DURING THE YEAR FOR BECOMIN G ENTITLED TO RECEIPT OF 5% OF THE TOTAL CONTRACT PRICE. THE A.O. IS DIRECTED TO EXAMINE THE ACTUAL SERVICES RENDERED DURING THE YEA R AND VALUE THEM FOR THE PURPOSES OF INCLUSION IN THE TOTAL INC OME FOR THE YEAR IN QUESTION. IT SHOULD BE KEPT IN MIND THAT IF THE VALUE OF SUCH SERVICES SO RENDERED IN INDIA BREACHES 5% OF TOTAL CONSIDERATION OF SUCH SERVICES, THEN SUCH HIGHER AMOUNT SHOULD BE CH ARGED TO TAX. SUCH HIGHER AMOUNT WILL BE DEEMED TO BE INCOME ACCR UING OR ARISING TO THE ASSESSEE. 8.10. WITH THE ABOVE OBSERVATIONS, WE SET ASIDE T HE IMPUGNED ORDER ON THIS ISSUE AND RESTORE THE MATTER TO THE F ILE OF THE ASSESSING OFFICER FOR WORKING OUT THE INCOME FOR TH E YEAR UNDER ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 60 CONSIDERATION IN THE TERMS AS SET OUT IN THE IMMEDI ATELY PRECEDING PARAS. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWE D A REASONABLE OPPORTUNITY OF BEING HEARD IN SUCH FRESH PROCEEDING S. B. TRANSFER PRICING ADJUSTMENT 9. THE NEXT ISSUE RAISED THROUGH VARIOUS GROUND S IS AGAINST THE ADDITION OF RS.2,15,27,090/- ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 10. AT THE OUTSET, WE WANT TO MAKE IT CLEAR THAT THE LD. AR DID NOT PRESS GROUND NO.5.2 BY WHICH IT WAS CLAIMED THAT TH E ASSESSEE DID NOT HAVE ANY PE IN TERMS OF ARTICLE 5 (3) OF THE DT AA. IN FACT, IT WAS ACCEPTED BY THE LD. AR THAT PE MAY BE CONSIDERE D IN EXISTENCE DURING THE YEAR IN QUESTION. SUCH GROUND IS THEREFO RE, REJECTED. 11. THE FACTUAL MATRIX OF THE ADDITION ON MERITS IS THAT THE ASSESSEE ENTERED INTO A CONSTRUCTION CONTRACT WITH ITS AE FOR THE CONSTRUCTION OF PLANT AT BAWAL, HARYANA. THE CONTRA CT WAS AWARDED TO THE ASSESSEE IN JUNE, 2007 WHICH WAS TO BE COMPL ETED BY MARCH, 2008. THE ASSESSEE SUB-CONTRACTED THE PROJECT TO AN INDEPENDENT THIRD PARTY, NAMELY, ENG CONSTRUCTION PVT. LTD. IT RECEIVED CONSIDERATION FOR CONSTRUCTION CONTRACT FROM ITS AE AT RS. 19,80,58,253/- WHICH WAS DECLARED AS AN INTERNATION AL TRANSACTION. THERE WAS ANOTHER INTERNATIONAL TRANSACTION OF `REI MBURSEMENT OF EXPENSES AMOUNTING TO RS. 96,73,257/-, WHICH HAS NOT BEEN ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 61 DISPUTED BY THE TPO. IN SO FAR AS THE CONSIDERATION FOR CONSTRUCTION CONTRACT FROM ITS AE IS CONCERNED, THE ASSESSEE FOL LOWED COST PLUS METHOD (CPM) IN ITS TP STUDY TO DEMONSTRATE THAT TH IS TRANSACTION WAS AT ARMS LENGTH PRICE (ALP). IT WAS SHOWN IN T HE TP DOCUMENTATION THAT THE ASSESSEE RECEIVED OPERATING INCOME OF RS.19.80 CRORE FROM ITS AE AND PAID RS.19.15 CRORE TO ENG CONSTRUCTION, THEREBY LEAVING OPERATING PROFIT OF R S.65.31LAKH GIVING OP/OC PERCENTAGE AT 3.41%. THE ASSESSEE CHOS E ELEVEN COMPARABLE CASES LISTED ON PAGE 3 OF THE TRANSFER P RICING OFFICERS (TPO) ORDER GIVING AVERAGE OF OP/OC AT 3.42%. IT WA S, THUS, CLAIMED THAT THIS INTERNATIONAL TRANSACTION WAS AT ARMS LENGTH PRICE. THE TPO OBSERVED ON PAGE 4 OF HIS ORDER THA T CERTAIN EXPENSES LIKE POWER AND FUEL, RAW MATERIAL, PERSONN EL, ETC., WERE REQUIRED BE EXCLUDED AND ONLY MANUFACTURING EXPENSE S WERE ELIGIBLE FOR INCLUSION IN THE COST BASE. WITHOUT DI STURBING THE SELECTION OF COMPARABLE CASES AND MOVING WITH SUCH LIMITED EXPENSES, HE RECOMPUTED THE MEAN OP/OC OF SUCH COMP ARABLES AT 26.74%. BY APPLYING THIS PERCENTAGE OF COMPARABLE C ASES, HE INITIALLY PROPOSED TP ADJUSTMENT OF RS.4,46,82,666/ - FOR COMMENTS TO THE ASSESSEE. THE ASSESSEE RAISED CERTAIN OBJE CTIONS BEFORE THE TPO AS REGARDS THE EXCLUSION OF EXPENSES FROM THE C OST BASE. THE OFFICER GOT PARTLY SATISFIED AND CAME TO HOLD THAT `SALARIES COULD ALSO BE TREATED AS OPERATING EXPENSE OF THE COMPARA BLES, BUT DID NOT MOVE FROM HIS EARLIER STAND AS REGARDS OTHER EX PENSES LIKE ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 62 DEPRECIATION, POWER AND FUEL, TRAVELLING EXPENSES A ND CONVEYANCE. BY THE INCLUSION OF THE AMOUNT OF SALAR IES, THE TPO RE-WORKED OUT THE AVERAGE OP/OC OF COMPARABLES ON P AGE 12 OF HIS ORDER AT 14.65%. IN THE FINAL ANALYSIS, THE TPO APPLIED TRANSACTIONAL NET MARGIN METHOD (TNMM) AND USED AV ERAGE MARGIN OF COMPARABLES AT 14.65% TO PROPOSE ADDITION U/S 92CA AT RS.2,15,27,090/-. THE ASSESSEE WAS UNSUCCESSFUL BEF ORE THE DISPUTE RESOLUTION PANEL (DRP) IN THIS REGARD. THE ASSESSING OFFICER IN THE FINAL ORDER PASSED U/S 144C MADE THE ABOVE ADDITION. THE ASSESSEE IS AGGRIEVED AGAINST SUCH ADDITION. 12. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD. SECTION 92(1) OF THE A CT PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTIO N SHALL BE COMPUTED HAVING REGARD TO ARMS LENGTH PRICE. COMP UTATION OF ALP HAS BEEN PRESCRIBED U/S 92C. SUB-SECTION (1) OF SECTION 92C, IN SO FAR AS ASSESSMENT YEAR UNDER CONSIDERATION IS CONCERNED, ENLISTS FIVE SPECIFIC METHODS AND ONE GENERAL METHO D FOR THE COMPUTATION OF ALP. SUB-SECTION (2) OF SECTION 92C STATES THAT THE MOST APPROPRIATE METHOD REFERRED TO IN SUB-SECT ION (1) SHALL BE APPLIED FOR THE DETERMINATION OF ALP IN THE MANNER AS MAY BE PRESCRIBED. THE MANNER HAS BEEN ENSHRINED UNDER RUL E 10B READ WITH RULE 10C. FROM THE ABOVE NARRATION OF THE RELE VANT PROVISIONS, IT IS APPARENT THAT ONE OF THE PRESCRIB ED METHODS IS ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 63 REQUIRED TO BE ADOPTED FOR THE PURPOSES OF DETERMIN ATION OF ALP. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE ASSESSEE INITIALLY STARTED WITH `COST PLUS METHOD. HOWEVER, DURING THE COURSE OF PROCEEDINGS BEFORE THE TPO, TNMM WAS SUGG ESTED AND THE TPO HAS WORKED OUT ALP BY APPLYING SUCH METHOD. THE ASSESSEE HAS NOT RAISED ANY OBJECTION BEFORE US ON THE APPLICATION OF TNMM. THE MODUS OPERANDI FOR COMPUTATION OF ALP AS PER TNMM HAS BEEN PRESCRIBED IN RULE 10B(1)(E). SUB-CLA USE (I) OF RULE 10B (1)(E) STATES THAT THE NET PROFIT MARGIN R EALIZED BY THE ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRE D OR SALES EFFECTED OR ASSETS EMPLOYED OR HAVING REGARD TO ANY OTHER RE LEVANT BASE. SUB-CLAUSE (II) OF RULE 10B (1)(E) STATES THAT THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE OR BY AN UNRELATED ENTER PRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION, ETC., IS COMPU TED HAVING REGARD TO THE SAME BASE. SUB-CLAUSE (III) PROVIDE S FOR ADJUSTMENT TO BE MADE TO THE NET PROFIT MARGIN DETERMINED IN S UB-CLAUSE (II) BY TAKING INTO CONSIDERATION THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND COMPARABLE UNCONTROLL ED TRANSACTION. AN OVERVIEW OF VARIOUS SUB-CLAUSES OF RULE 10B (1)( E) BRINGS OUT TWO THINGS WHICH ARE RELEVANT FOR OUR PURPOSE. FIRS T, THAT IT IS A `NET OPERATING PROFIT MARGIN REALIZED BY THE ENTE RPRISE WHICH IS CONSIDERED AND SECOND, THAT SUCH NET OPERATING PROF IT MARGIN IS TO BE SEEN WITH REFERENCE TO ANY ONE OF THE BASES PROV IDED IN SUB-RULE (I), SUCH AS, COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED, ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 64 ETC. THE ASSESSEE INITIALLY MADE A CLAIM FOR ADOPTI NG THE BASE AS `DIRECT COSTS ALONE, WHICH, IN OUR CONSIDERED OPIN ION, HAS NO SANCTION OF LAW. WHEN THE RULE PROVIDES FOR THE BAS E AS `COSTS INCURRED, IT CANNOT BE A PART OF SUCH COSTS. IT HAS TO BE THE `TOTAL COST AND NOT ANY FRACTION THEREOF. IT IS SEEN THA T THE TPO PROCEEDED WITH DETERMINATION OF ALP BY CONSIDERING THE BASE OF TOTAL COSTS. HOWEVER, HE SKIPPED CERTAIN EXPENSES, AS DISCUSSED SUPRA . THE MANNER IN WHICH HE SELECTED CERTAIN EXPENSES AND IGNORED OTHERS, IS EQUALLY NOT SUSTAINABLE. THE CO RRECT POSITION IS THAT TOTAL OPERATING COST REFERS TO COST OF GOODS S OLD, ADMINISTRATION, SELLING, DISTRIBUTION EXPENSES AND DEPRECIATION ETC . NET OPERATING PROFIT MARGIN, BEING THE NUMERATOR, IN THE FORMULA IS EXCESS OF OPERATING REVENUE OVER OPERATING COSTS. THERE CAN BE NO QUESTION OF VIEWING NET OPERATING PROFIT MARGIN WITH REFEREN CE TO A PART OF `TOTAL COSTS. IT NEEDS TO BE NECESSARILY SEEN WIT H REFERENCE TO THE TOTAL COSTS OR TOTAL SALES ETC. WHEN THE RULE PROVI DES THAT NET OPERATING PROFIT MARGIN IS NUMERATOR AND TOTAL COST S ARE DENOMINATOR, IF BASE OF COSTS IS ADOPTED, THEN IT I S NOT PERMISSIBLE TO DEVIATE FROM THE SAME. THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF LG ELECTRONICS INDIA PVT. LTD. VS. DCIT (2013) 140 ITD 41 (DEL) (SB) HAS HELD THAT THE STEPS GIVEN IN THE RULE ARE REQUI RED TO BE RELIGIOUSLY FOLLOWED FOR DETERMINATION OF ALP UN DER THE RESPECTIVE METHOD. IT HAS ALSO BEEN LAID DOWN BY TH E SPECIAL BENCH THAT : WHEN THE RULE PRESCRIBES A PARTICULAR METHOD TO BE ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 65 FOLLOWED AND THE STEPS SO GIVEN ARE UNAMBIGUOUS, IT IS IMPERMISSIBLE TO SUBSTITUTE SUCH STEPS WITH ANY OTH ER MODE. PROCEEDING WITH THE COMPUTATION OF ALP UNDER THIS M ETHOD, WE NOTICE THAT THERE IS A FURTHER REQUIREMENT OF HAVIN G A `SIMILAR BASE FOR COMPARABLES AS HAS BEEN CHOSEN FOR THE ASSESSEE . IT IS NOT POSSIBLE TO COMPARE THE NET OPERATING PROFIT EARNED BY THE ASSESSEE WITH REFERENCE TO THE BASE OF SALES WITH THE NET OP ERATING PROFIT MARGIN EARNED BY COMPARABLES WITH REFERENCE TO TOTA L COSTS. IN THE SAME MANNER, IT IS EQUALLY NOT POSSIBLE TO HAVE A C OMMON BASE BUT CHANGE ITS COMPONENTS FOR THE ASESSEE VIS--VIS THE COMPARABLES. AS THE TPO HAS EMBARKED UPON THE DETERMINATION OF A LP BY CONSIDERING THE DENOMINATOR OF `TOTAL COST, ALL TH E ASPECTS OF `TOTAL OPERATING COST SUCH AS COST OF GOODS SOLD, ADMINIS TRATION, SELLING, DISTRIBUTION EXPENSES AND DEPRECIATION ETC. ARE REQ UIRED TO BE CONSIDERED BOTH FOR THE ASSESSEE AND COMPARABLES AS WELL. 13. WHEN WE MULL OVER THE FIRST COMPUTATION OF OP/OC OF THE COMPARABLES BY THE TPO AT 26.74%, IT COMES TO LIGH T THAT HE EXCLUDED THE EXPENSES SUCH AS POWER AND FUEL, RAW M ATERIAL, PERSONNEL ETC., FROM `TOTAL COST BASE AS IS APPAR ENT FROM 3.1 OF HIS ORDER. WHEN THE ASSESSEE OBJECTED TO SUCH EXCLU SION, THE TPO FURTHER INCLUDED ONLY SALARIES AND DETERMINED AVERA GE OF OP/OC OF THE COMPARABLES AT 14.65%. IT DIVULGES THAT CERT AIN OTHER IMPORTANT EXPENSES, SUCH AS, POWER AND FUEL, RAW M ATERIAL ETC. ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 66 STILL DO NOT FIND THEIR DESTINATION IN THE BASE OF `TOTAL OPERATING COST OF COMPARABLES. SUCH A FRACTURED BASE OF `TOT AL COST, IN OUR CONSIDERED OPINION, HAS NO SANCTION OF LAW. IT HAS TO HAVE ALL THE OPERATING EXPENSES, BOTH DIRECT AND INDIRECT IN THE `TOTAL OPERATING COSTS. THE LD. DR TOOK PAINS IN EXPLAINING THAT EV EN THE ASSESSEE WAS WRONG IN COMPUTING `TOTAL COSTS BY WHICH THE R ATIO OF OP /TC FROM ITS INTERNATIONAL TRANSACTION WAS COMPUTED. IT IS AXIOMATIC THAT WHEN THE DELEGATED LEGISLATURE PROVIDES IN UNE QUIVOCAL TERMS THAT THE `TOTAL OPERATING COSTS SHOULD TO BE CONSI DERED, THE TPO OR THE ASSESSEE CANNOT AT THEIR SWEET-WILL CHOOSE TO S UBSTITUTE SUCH BASE WITH ANY OTHER SUITABLE BASE AS PER THEIR CONV ENIENCE. WE, THEREFORE, SET ASIDE THE CALCULATION OF OP/OC AS MA DE BY THE ASSESEE AS WELL AS THE TPO IN RESPECT OF THE ASSESS EE AND COMPARABLES AND DIRECT THE AO/TPO TO DE NOVO COMPUTE OP/TC OF THE ASSESSEE AS WELL AS COMPARABLES BY CONSIDERING `NET OPERATING PROFIT MARGIN AS NUMERATOR AND `TOTAL OPERATING C OSTS AS DENOMINATOR. WE WANT TO MAKE IT CLEAR THAT THERE IS NO DISPUTE ON THE SELECTION OF TNMM AS THE MOST APPROPRIATE METHO D; SELECTION OF PROFIT LEVEL INDICATOR AS OP/TC; AND SELECTION OF COMPARABLES. NO DEPARTURE SHOULD BE MADE ON THE ABOVE MATRIXES I N SUCH FRESH PROCEEDINGS. IT IS ON THE BASIS OF SUCH FRESH CALC ULATION THAT THE CORRECT ALP WILL BE DETERMINED FOR VIEWING IF ANY A DDITION ON ACCOUNT OF TP ADJUSTMENT IS CALLED FOR. IT GOES WIT HOUT SAYING THAT ITA NO. 5787/DEL/2013 POSCO ENGINEERING & CONSTRUCTION COMPANY LTD. 67 THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNI TY OF BEING HEARD IN THIS REGARD. 14. IN THE RESULT THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 26/02/2014. SD/- SD/- (I. C. SUDHIR) (R. S. SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 26/02/2014 *SUBODH* COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(APPEALS) 5.DR: ITAT ASSISTANT REGISTRAR DATE INITIAL 1. DRAFT DICTATED ON 14.02.2014 PS 2. DRAFT PLACED BEFORE AUTHOR 24.02.2014 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/ AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER. **