SANKO SHOJI CO. LTD.,OUTSIDE INDIA V. DCIT CIRCLE 3(1)(2) INTL. TAXATION, NEW DELHI

ITA 2245/DEL/2023

AI Insights

The case involves M/s. Sanko Shoji Co. Ltd., a Japan-based company, which appealed against the order of the Assessing Officer under sections 143(3) and 144C(13) of the Income Tax Act, 1961. The dispute centered on the taxation of income from offshore supplies of equipment and related services provided to Indian companies, Suzuki Motor Gujarat Pvt. Ltd. and Maruti Suzuki India Ltd. The Assessing Officer had treated the transactions as a 'composite contract' and attributed the entire income to a Permanent Establishment (PE) in India, leading to a tax demand. The Tribunal's decision to set aside the assessment order was based on the lack of thorough factual verification and the need for a detailed examination of the assessee's claims and the supporting evidence provided.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 474569 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-03-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2020-2021
• Other Referred Cases: Ishikawajima Harima Heavy Industries Ltd vs DIT, CIT vs Hyundai Heavy Industries Co. Ltd., DIT vs LG Cable Ltd., Linde AG, Linde Engineering Division vs DDIT, DIT vs Ericsson AB, E-Funds IT Solution Inc.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VIJAY B.VASANTA
• Assessee Lawyers: AJAY VOHRA
• Keywords: Business income; Opportunity of being heard; Revised return; TDS; Wholly owned subsidiary; Double taxation relief; Permanent establishment
• Section: 143(3); 142(1); 143(2); 195; 22; 133(6); 13; 234B; 43B; 144C; 44AB; 5(2); 20

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH, ‘D’: NEW DELHI BEFORE SHRI VIKAS AWASTHY, JUDICIAL MEMBER AND SHRI BRAJESH KUMAR SINGH, ACCOUNTANT MEMBER ITA No.2245/DEL/2023 [Assessment Year: 2020-21] M/s. Sanko Shoji Co. Ltd. 2- 245, NAGOYA, FOREIGN, JAPAN, C/o-Walker Chandiok & Co. LLP, 2nd Floor, Plot No.19A, Sector-16A, Noida, Uttar Pradesh-201301 Vs DCIT-International Taxation, Delhi-110002 PAN-AAOCS8042B Assessee Revenue Assessee by Shri Ajay Vohra, Sr. Adv. Shri Rishabh Agrawal, CA and Shri Suyush Laad, CA Revenue by Shri Vijay B. Vasanta, CIT-DR Date of Hearing 09.12.2024 Date of Pronouncement 07.03.2025 ORDER PER BRAJESH KUMAR SINGH, AM, This appeal by the assessee is directed against the order of the Assessing Officer dated 30.06.2023 passed u/s 143(3)/144C(13) of the Income Tax Act, 1961 (hereinafter ‘the Act’) arising out of order of Dispute Resolution Panel dated 30.05.2023 pertaining to Assessment Year 2020-21 2. The grounds of appeal are as under:- 2 ITA No.2245/Del/2023 1. “That on the facts and in the circumstances of the case and in law, the order passed by the Assessing Officer under section 143(3) read with section 144C(13) of the Act is bad in law and void ab initio. 2. That on the facts and in the circumstances of the case and in law, the Assessing Officer erred in completing the assessment of income of Rs.21,97,09,834/- as against returned income of Rs.10,63,44,660/- revised to Rs.4,18,74,180/-. 3. That on the facts and in the circumstances of the case and in law, the Assessing Officer erred in bringing to tax profit on offshore supply of goods alleging the same to be attributable to the installation Permanent Establishment (“PE”) of the Appellant in India. 4. That on the facts and in the circumstances of the case and in law, the Assessing Officer erred in alleging that the contract for offshore supply of equipment and contract for rendition of services for installation and commissioning of the equipment was a composite contract, ignoring the separate purchase orders placed by the customers in that behalf. 5. Without prejudice, on the facts and in the circumstances of the case and in law, the Assessing Officer erred in attributing 100% of the global profits on offshore supply of goods and services to the PE in India at Rs.21,97,09,834/-. 6. That on the facts and in the circumstances of the case and in law, the Assessing Officer erred in not allowing deduction for expenses of Rs.29,57,92,750/- 7. That on the facts and in the circumstances of the case and in law, the Assessing Officer erred in levying interest under section 234A of the Act. 8. That on the facts and in the circumstances of the case and in law, the Assessing Officer erred in levying interest under section 234B of the Act. 9. That on the facts and in the circumstances of the case and in law, the Assessing Officer erred in levying interest under section 234D of the Act. ” 3. Ground No. 1 and 2 are general in nature. 3.1. Ground No.3 to 6 of the appeal are taken up together. 3 ITA No.2245/Del/2023 4. Brief facts of the case: The assessee M/s. Sanko Shoji Co. Ltd. is a company incorporated under the laws of Japan. It is engaged in the business of manufacturing and selling of various industrial equipments. During the subject Assessment Year 2020-21, the assessee supplied certain industrial equipment to Suzuki Motor Gujarat Private Limited (SMG\") and Maruti Suzuki India Limited (\"MSIL\"). Further, the assessee also provided installation and commissioning services of such equipment including supervision of such activities at the factory premises/ site of SMG and MSIL. 4.1. The assessee also submitted its Tax Residency certificate (TRC) issued by Japan for the income received by it in the F.Y 2019- 20. During the year under consideration, the assessee submitted that it has a Permanent Establishment (in short “PE”) in India. The financial statement of the PE in India was submitted, wherein revenue from operation of Rs.32,82,26,281/- was reported. The assessee has a wholly owned subsidiary in India, by the name- Sanko Shoji India Private Limited, wherein the assessee holds 99% shareholding. It is engaged in the business of import/export, buy/sell of machine tools, electric/gas machine, pollution control machine etc., installation and construction contracting business for the machines including after-sales services. The assessee filed its return of income for Assessment Year 2020-21 on 15.02.2021 declaring total income of Rs.10,63,44,660/- and subsequently revised the return of 4 ITA No.2245/Del/2023 income on 31.03.2021 declaring total income of Rs.4,18,74,180/- under the head 'Profit and gains from business or profession' after claiming various expenses. The assessee claimed refund of Rs.6,03,96,620/- against TDS amounting to Rs.7,81,64,675/-. Such TDS has been deducted by Suzuki Motor Gujarat Private Limited (\"SMG\") and Maruti Suzuki India Limited (\"MSIL\") u/s 195 of the Act. In its ITR, the assessee has shown revenue of Rs.32,82,28,281/- from sale of services and declared income of Rs.4,18,74,180/- The case was selected for complete scrutiny under CASS due to \"Reduction of income in revised return\" and \"Claim of refund\". The statutory notice under section 143(2) of the IT Act, 1961, was issued on 29.06.2021 which was duly served upon the assessee. In order to examine the veracity of the assessee's claims, notices u/s 142(1) along with questionnaires were issued to it from time to time. The draft assessment order u/s 144(C)(1) of the Act was passed on 26.09.2022. 4.2. In the draft assessment order, the Assessing Officer held that the assessee had a PE in India in respect of supply/ sales of equipment to the Indian customers as well since the Assessee had entered into a \"composite contract\" for both supply of equipment and rendering of related installation/supervisory services and he attributed entire income from offshore supply of equipment to the said PE in India. 5 ITA No.2245/Del/2023 4.3. There are mainly two issues in this appeal. Firstly, the assessee claims that the amount received for off-shore supply in respect of equipments to two resident Indian companies being Suzuki Motor Gujarat Pvt. Ltd. (hereinafter referred as ‘SMG’) and Maruti Suzuki India Ltd. (hereinafter referred as ‘MSIL’) are not taxable on the ground that none of the activities pertaining to such supply/sale had any economic nexus with India. 4.4. The second issue is with respect to the assessee filing a revised tax audit report in which additional expenses of Rs.6,44,70,480/- was claimed. The Assessing Officer noticed that the assessee had filed its original tax audit report on 14.01.2021, which was revised on 30.04.2021 and according to the Assessing Officer, the assessee did not explain why the tax audit report was revised when both the tax audit reports were audited by the same accountant. The Assessing Officer noted that the assessee filed original return of income on 15.02.2021, wherein, expenses of Rs.23,13,22,271/- was reported. Further, this return was revised on 31.03.2021, wherein, expenses on account of supervision fee of Rs.6,44,70,480/- were additionally claimed which were not reported in original ITR. The Assessing Officer noted that the payment for supervision fee was made during February, 2020 and March, 2020 and referred to the notification no.28/2021 in respect of revising of the audit report by the assessee, issued by CBDT, wherein, it is 6 ITA No.2245/Del/2023 stated that the audit report can be revised if there is a payment by the assessee after furnishing of report under sub-rule-(1) and (2) which necessitates recalculation of disallowance u/s 40 of 43B of the Act. Accordingly, the Assessing Officer held that the revised audit report filed by the assessee did not necessitate recalculation of disallowance u/s 40 of 43B of the Act and therefore he rejected the revised tax audit report. The relevant extract of the draft assessment order is reproduced as under:- “It is noticed that the assessee filed his original tax audit report on 14.01.2021. This was revised on 30.04.2021. The assessee did not explain as to why the tax audit report was revised. Both the tax audit reports were audited by the same accountant, named Mr. Pratik Sharma, with Membership Number: 513788 It is pertinent to mention that the assessee filed original return of income on 15.02.2021 wherein expenses of Rs 23,13,22,271/- were reported. This return was revised on 31.03.2021 wherein expenses on account of Supervision Fee of Rs. 6,44,70,480/- were additionally claimed. These expenses had not been reported in the original ITR. As per the details submitted by the assessee, the payment for supervision fee was made during February 2020 and March 2020. This indicates that these payments were made during FY 2019-20. 10. The CBDT issued a Notification no. 28/2021 in respect of revising of the Audit report by the assessee. The same is reproduced below: \"In exercise of the powers conferred by section 44AB read with section 295 of the Income tax Act (43 of 1961), the Central Board of Direct Taxes, hereby, makes the following rules further to amend the Income-tax Rules, 1962, namely:- 1. Short title and commencement.- (1) These rules may be called the Income-tax (eighth Amendment) Rules, 2021. 7 ITA No.2245/Del/2023 (2) They shall come into force on the date of their publication in the Official Gazette. 2. In the Income-tax Rules, 1962,- (a) in rule 6G, after sub-rule (2), the following sub-rule shall be inserted, namely:- - (3) The report of audit furnished under this rule may be revised by the person by getting revised report of audit from an accountant, duly signed and verified by such accountant, and furnish it before the end of the relevant assessment year for which the report pertains, if there is payment by such person after furnishing of report under subrule (1) and (2) which necessitates recalculation of disallowance under section 40 or section 43B.; Thus, in view of the sub-rule (3) of the Rule 6G of Income Tax Rules, the assessee was not eligible to revise the audit report since payments were made before furnishing the original Audit report in Form CD and it did not necessitate recalculation of disallowance under section 40 or section 43B. Therefore, the revised audit report furnished by the assessee in Form CD is rejected for the purposes of the Income-tax Proceedings.” 5. During the course of assessment proceedings, the Assessing Officer noted that certain details asked by him were not furnished by the assessee. The reference to the same and the details not furnished by the assessee as mentioned in the assessment order are tabulated as under:- Sr. No. Issue Comment of the Assessing Officer Para number and page number of the draft assessment order as mentioned in the final assessment order 1 PE of the assessee in India The Assessing Officer noted that the assessee submitted that it had operated in India for more than six months and thus it constituted a permanent establishment (PE) in Para no.8, Page no.5 8 ITA No.2245/Del/2023 India. The Assessing Officer asked the assessee to provide details of the works performed in India, the details of receipts from India and the underline contracts in respect of the payments received in India. The Assessing Officer noted that the assessee failed to furnish the said details. 2 Providing the details of personal/engineers who visited India for performing works related to installation and commissioning and their duration of stay in India in relation to work allotted by SMG As per the responses submitted, it is clearly evident that SMG paid an amount of JPY 529,68,67,120 on account of supply of equipments and JPY 371,227,000 on account of supervision services for installation & commissioning of these equipments. This amounts to a total of JPY 5,668,094,120, which is equivalent to IN 394,78,27,555/. The conversion rate is applied as per Rule 115 of the Income Tax Rule read with Rule 26 of Income Tax Rule, thus arriving at a conversion rate of 1 JPY= 0.6965 INR as on 31.03.2020. During the course of proceedings, the assessee was asked to provide the details of personnel/engineers who visited India for performing works related to installation and commissioning and their duration of stay in India. However, these details were not provided by the assessee. Para No.7(v) and 8 3 Examination of financial statements of PE The Assessing Officer noted that the assessee submitted two different financial statements showing revenue of Rs.32,82,26,281/- and expenses of Rs.23,13,22,271/- and again a revised financial statement showing revenue of Rs.32,82,26,281/- and expenses of Rs.29,57,92,750/-. The Assessing Officer noted that the assessee had submitted a two page financial statement of balance sheet and P & L Account and the assessee failed to furnish the complete notes/documentation to the financial statements for both the sets of the financial statements. Para-11 at page 7 9 ITA No.2245/Del/2023 4 Claim of expenses- Rs.22,33,94,462/- In response dated 13.09.2022, assessee claimed that the expenses of Rs.22.03 crores was incurred on salary but in its reply dated 23.09.2022, it submitted that the expenses of Rs.22.03 cores were incurred on account of travelling expenses. The Assessing Officer noted that the assessee failed to furnish the details about the salary paid to its employees or name of the employees in respect of whom travelling expenses were claimed along with the complete invoices. The Assessing Officer further noted that in the break up of expenses submitted, the assessee had separately claimed travelling expenses of Rs.70,90,637/- and expenses of Rs.6,44,70,480/- on account of supervision fee. Para.12 at page-7 5 Claim of expenses of Rs.6,44,70,480 on account supervision fee paid The Assessing Officer observed that the assessee did not furnish any underlying contract/ agreement so as to ascertain that to which entity the assessee paid this amount, what was the nature of services provided by that entity to the assessee. Para-14 at page-7 & 8 5.1. The Assessing Officer noted that the assessee failed to furnish details of the works performed in India, the details of receipts from India and the underlying contracts in respect of the payments received in India. The Assessing Officer issued notice u/s 133(6) of the Act to the payers SMG and MSIL to provide the details of payment made to the assessee, TDS deducted on such payments, copy of contract/agreement/purchase order and details of taxability in India on the payment made to the assessee. On perusal of the reply received from SMG, the Assessing Officer ascertained that the 10 ITA No.2245/Del/2023 assessee was engaged in the business of supply of equipments and installation and commissioning work in India. However, it is later discussed in the order that the assessee claimed that the Assessing Officer did not share the copy of information received by him u/s 133(6) of the Act from the payers SMG and MSIL. 5.2. On perusal of the Purchase Order (‘PO’) issued by the SMG and MSIL, the Assessing Officer noted that it was clear that the assessee was awarded a composite contract for supply of equipments and services for installation and commissioning of the equipments. The Assessing Officer further noted that the assessee did not report any revenue in its ITR or in its financial statements on account of the payment received for the aforesaid supply of the equipments mentioned in the PO as per the sample details on page no.3 and listed on page no.8 of the assessment order. The Assessing Officer held that the financial statements submitted by the assessee were not complete and could not be relied upon because the revenue does not reflect the actual receipts of the assessee from India. Accordingly, the Assessing Officer issued a show-cause notice dated 14.09.2022 asking the assessee to explain why the receipts from suppliers, claimed as exempt, should not be treated as taxable in India on account of the assessee constituting a PE in India in terms of Article- 5 of India Japan DTAA. According to the Assessing Officer, the assessee in its response submitted that it had not earned any 11 ITA No.2245/Del/2023 revenue from supplies, which according to the Assessing Officer was in direct contradiction by the response received from SMG and MSIL in response to notice u/s 133(6) of the Act, wherein, these entities provided a clear break-up of the amounts paid to the assessee on account of supply of equipments and amounts paid for installation and commissioning. The Assessing Officer held that the response of the assessee was not found to be correct and was not acceptable. The Assessing Officer also noted that the assessee had to received an amount of Rs.394,78,27,555/- and Rs.1,80,53,930/- from SMG and MSIL respectively totalling Rs.396,58,81,485/- on account of supply and services of equipments during the year under consideration. 5.3. The Assessing Officer again taking note of the fact that the assessee by its own admission stated that it constituted a PE in India and in terms of Article-5 of India Japan DTAA, the assessee had receipts amounting to Rs.396,58,81,485/- on account of supply of equipments and provision of supervision services and therefore the profit of the PE shall be determined in accordance with Article-7 of India Japan DTAA. The Assessing Officer noted about the source rule of the taxation of the non-resident and taxation of business profit under India Japan DTAA as provided in section 5(2) r.w.s. 9(1)(i) of the Act and Article-7 of the relevant DTAA and observed that once both the threshold were met, the next question would be what would be the amount of profit attributable to the PE. The Assessing Officer 12 ITA No.2245/Del/2023 as per the discussion in the assessment order held that the assessee satisfies both the conditions as laid down in section 5(2) r.w.s. 9(1)(i) of the Act and Article-7 of the relevant DTAA and taxed the total receipt of the PE in India amounting to Rs.396,58,81,485/- @ 5.54% being the operative margin by the assessee in similar services on the Indian receipts and arrived at a total profit of the PE at Rs.21,97,09,834/-. The relevant discussion in para no. 28 and 29 of the draft assessment order is reproduced as under:- 28. Based on the facts of this case, the profit of the PE would be computed under clause (i) of Rule 10 of the Income-tax Rules, 1962. In the instant case, the assessee company furnished the financial statements for the relevant period pertaining to this assessment year. It is ascertained that the assessee company also carries out similar business in other countries. Therefore, the operating profit margin shown by the assessee company itself from similar businesses across the world could be taken as the profit similar to the Arms' length profit margin. The assessee submitted a copy of its global financial statements. The operating profit margin of similar business as per the global financials of the company for the year ending 31 March 2020 is ascertained at 5.54%. If this profit margin is applied to the total turnover earned by the PE for Indian business operation, the resultant profit would be arm's length profit. 29. Accordingly, the profit of the PE is determined as under: During the year under consideration, the receipts that accrued or arose in India are receipts from supply of equipment (goods) and services. The profit from such receipts are to be taxed on net basis being a business receipt. The Arm's Length profit would be arrived by applying global operating profit margin as shown by the assessee in similar services on the Indian receipts. The operating profit margin is to be taken as 5.54%. 13 ITA No.2245/Del/2023 Total receipts of the PE in India= Rs. 396,58,81,485/- Accordingly, the arm's length profit for receipts = 5.54% of 396,58,81,485/- = Rs. 21,97,09,834/- Total profit of PE = Rs. 21,97,09,834/- Income from Business (which would be chargeable to tax at 40%) = Rs. 21,97,09,834/- Penalty u/s 270A of the I.T. Act, 1961 is also proposed to be initiated as I am satisfied, in view of the above, that the assessee has under reported its income by way of misreporting.” 5.4. Aggrieved with the said draft assessment order, the assessee filed objections before the Ld. DRP. The Ld. DRP agreed with the Assessing Officer and the findings of the Ld. DRP as reproduced in the final assessment order on page no.17 are reproduced as under:- On perusal of the purchase order raised to assessee it is seen that the assessee is completely responsible for supply of equipment, their installation, their maintenance. In case of any failure to honour any commitment during the entire supply chain involving the supply of goods and their commissioning, the assessee is liable. Further, the entire consideration of amount of Rs. 3,96,58,81,485/-, has suffered tax deduction at source under Section 195 of the Act and therefore, embeds a component of income in India. This is clearly a composite contract. Interestingly out of this composite contract of Rs.3,96,58,81,485/-, the assessee is only offering the receipts of Rs.32,82,28,281/- (which is even less than 10% of the composite contract value), for the purpose of taxation and after claiming expenditures has only offered Rs. 4,18,74,180/, as declared income from profits and gains from business. The AO is, therefore correct in treating Rs. 3,96,58,87,485/- as total receipt of the PE in India and determining the profit margin of 5.54%, which is the disclosed Global Profit of the assessee and attributing Rs. 21,97,09,834/, as the total profit of the PE which works 14 ITA No.2245/Del/2023 out to be 5.54% of the consideration receipts by the assessee from Indian entity. Reliance is placed on the ratio of the case of GVK Industries case (332 TR 130) where in the Apex Court has held that the income of the recipient is to be charged or chargeable in the country where the source of payment is located, to clarify, where the payer is located. The assessee's principal reliance on the ratio of case laws Ishikawajima Harima Heavy Industries Ltd v. DIT (2007) 288 ITR 408 (SC) is misplaced as the same has been substantially overturned by the amendment brought under Finance, 2010 in Section 9 of Income Tax Act. The assessee's objection on the above is rejected.\" 5.5 Following the direction of the ld. Dispute Resolution Panel, the Assessing Officer passed the final assessment order u/s 143(3) r.w.s. 144C of the Act on 30.06.2023 at a total income of Rs.21,97,09,834/- as proposed in the draft assessment order. 6. Aggrieved with the said order, the assessee is in appeal before us. 7. During the course of hearing, the Ld. Sr. Counsel, submitted that the assessee had submitted extensive evidences before the Ld. Assessing Officer and the Hon’ble DRP to substantiate its claim that the supply of equipment from Japan to Indian customers qualified as offshore supplies and therefore income for such supplies could not be taxed in India in view of the principles laid down by the Hon’ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. vs DIT[2007] 288 ITR 408 (SC). The ld. Sr. Counsel submitted that the perusal of the POs, invoices, bill of lading, letter of credit substantiated its claim that the title in equipment was passed on to 15 ITA No.2245/Del/2023 the Indian customers outside India and also the consideration was also received outside India and therefore its case was fully covered by the decision of the Hon’ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. vs DIT (supra). In this regard, ld. Sr. Counsel also referred to the copies of invoices in support of expenses claimed on account of rendering services. It was further submitted that even if it is assumed to be a ‘composite contract’ for the sake of argument, no part of consideration received from offshore supplies can be taxed in India for want of economic nexus of such supplies with the Installation PE in India. It was further submitted that none of the activities related to supply of equipment took place in India and even the Ld. CIT DR could not point to any evidence in support of the same. Apropos the above, the Appellant reiterates that no part of revenue from offshore supplies is attributable to India. The ld. Sr. counsel also drew attention to the relevant pages being no.43, 44, 45, 46-50 of the paper book to claim that the supply of the equipments was made outside India (discussed in details later in this order) and therefore the same was not taxable in India. It was further submitted by him that there could not be a general finding that the assessee has a PE in India and therefore the payments received for supplies of equipments offshore will also be taxable in India. It was further submitted that the DRP was wrong to hold that the judgment of the Hon’ble Supreme Court in the case of 16 ITA No.2245/Del/2023 Ishikawajima Harima Heavy Industries Ltd. vs DIT (supra) has been overruled by the amendment brought under Finance Act, 2010 in Section 9 of the Act. Further, it was submitted referring to page no.175 of the paper book that the Indian PE was involved only in installation and supervision of the contract and therefore the profit attributable to said activity was taxable in India, which was duly offered by the assessee. 7.1. The Ld. Sr. Counsel also relied upon the following other case laws in support of its proposition:- 1. Ishikawajima Harima Heavy Industries Ltd. vs DIT [2007] 288 ITR 408 (SC) 2. CIT vs Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482 (SC) 3. DIT vs LG Cable Ltd. [2011] 237 CTR 438 (Del.) 4. Linde AG, Linde Engineering Division vs DDIT [2014] 268 CTR 274 (Del.) 5. DIT vs Ericsson AB [2012] 343 ITR 470 (Del.) 6. E-Funds IT Solution Inc. [2017] 399 ITR 34 (SC) 7.2. The Ld. Sr. Counsel also filed a written submission, which is reproduced as under:- “1. Brief facts/background of the case 1.1. The Appellant is a Japan-based company and a tax resident of Japan under Article 4 of the India-Japan tax Treaty (the Tax Treaty\"). It is engaged, inter alia, in the business of manufacturing and selling of various industrial equipment. During AY 2020-21, the Appellant supplied certain industrial equipment to Suzuki Motor Gujaral 17 ITA No.2245/Del/2023 Private Limited (\"SMG*) and Maruti Suzuki India Limited (\"MSIL\") and also provided installation and commissioning services of such equipment including supervision of such activities at the factory premises/ site of SMG and MSIL 1.2 While filing ITR, the Appellant admitted existence of an Installation Permanent Establishment (\"PE\") in India and offered net income from installation services of Rs. 4,18,74,180 (i.e., total receipts of Rs. 33,76,66.931 less expenses of Rs. 29,57,92,750) to tax @ 40% plus surcharge 1.3 The Appellant submitted extensive evidence with the Ld. AO and Hon'ble DRP to substantiate that supply of equipment from Japan to Indian customers qualified as \"offshore-supplies and therefore income for such supplies could not be taxed in India as per principles laid down by the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd v. DIT [2007] 288 ITR 408 (SC). Such evidence comprised of copies of Purchase Orders (POs\"), Invoices, Bill of Lading, Letter of credit substantiating that title in equipment was passed on to the Indian customers outside India and consideration was also received outside India by the Appellant Further, the Appellant also submitted copies of invoices in support of expenses claimed on account of rendering services in India Such evidence has been placed on sample basis in Paper Book-1 and Paper Book-2 submitted before the Hon’ble Bench 1.4 However, the Ld. AO and the Hon'ble DRP failed to appreciate the aforesaid settled legal position as well as evidence submitted by the Appellant and brought to tax income from offshore supply of equipment alleging that the same was attributable to the Appellant's installation PE in India The Ld. AO also incorrectly held that there was a \"composite contract\" for both supply of equipment and rendering installation services by completely ignoring the fact there were separate POs and invoices for both supply and services with clearly identifiable consideration as well 2.1 Supply of equipment by Appellant fulfilled all the conditions for \"offshore-supplies\" as * The equipment sold to Indian customers was manufactured outside India and no manufacturing or related process took place within India. 18 ITA No.2245/Del/2023 * The title of such equipment was transferred by the Appellant to Indian customers outside India at the time of shipment from Japan. * The shipping of equipment was done by the Appellant on Free on Board (\"FOB\") basis i.e. the responsibility and costs of shipping and transit insurance was borne by the Indian customers and not the Appellant * The entire consideration for sale of equipment was received by the Appellant outside India with a substantial part of consideration received at the time of shipping of equipment from Japan. 2.2 It is further submitted that: * Separate POs were issued by Indian customers for supply of equipment and installation services to be rendered thereafter with respective scope of work also demarcated * Consideration for both supplies and services were clearly determined and agreed 1o separately- * Separate invoices were raised by the Appellant for supplies and services, * Title/ risk of equipment was transferred outside India by the assessee and consideration also received outside India. 2.3 On page 4 of the assessment order, the Ld. AO has himself mentioned that there was separate consideration for supply of machines and installation services - relevant extract is reproduced below for your Honours' ready reference: - The Purchase Order issued by SMG provides a break-up of the amount charged separately for supply of the machines and spares, supervision fees and installation and commissioning of the machines.\" 2.4 Apropos the above, the Appellant submits that its case is squarely covered by the Hon’ble Supreme Court's decision in the case of Ishikawajima Harima (supra) wherein it was held that no income could be attributed to India if the sales made by foreign company did not have any economic nexus with India 19 ITA No.2245/Del/2023 2.5 Without prejudice to same, the Appellant submits that even in case of composite contracts encompassing both goods and services, the Hon'ble courts have held that if it can be demonstrated that the goods were manufactured and sold outside India, then the service portion must be segregated from the supply of goods and only then would question of This is in consonance with the principle advocated by section 9(1)(i) of apportionment arise the Act, which states that income is taxable in India only to the extent it arises in India In this regard, attention is invited to Hon'ble Supreme Court decision in the case of Ishikawajma Harima (supra) which opined as under! \"17. The contract is a complex arrangement. Petronat and Appellant are not the only parties thereto, there are other members of the consortium who are required to carry out different parts of the contract. The consortium included an Indian company. The fact that it has been fashioned as a turnkey contract by itself may not be of much significance. The project is a turnkey project. The contract may also be a turnkey contract, but the same by itself would not mean that even for the purpose of taxability the entire contract must be considered to be an integrated one so as to make the appellant to pay tax in India. The taxable events in execution of a contract may arise at several stages in several years. The liability of the parties may also arise at several stages. Obligations under the contract are distinct ones. Supply obligation is distinct and separate from service obligation. Price for each of the component of the contract is separate. Similarly offshore supply and offshore services have separately been dealt with. Prices in each of the segment are also different. 68. In cases such as this, where different severable parts of the composite contract is performed in different places, the principle of apportionment can be applied, to determine which fiscal jurisdiction can tax that particular part of the transaction. This principle helps determine, where the territorial jurisdiction of a particular state' lies, to determine its capacity to tax an event. Applying it to composite transactions which have some operations in one territory and some in others, is essential to determine the taxability of various operations.\" 2.6 Identical conclusions have been reached at by the Honble SC in CIT v. Hyundai Heavy Industries Co. Ltd. [2007) 291 ITR 482 (SC) and the Jurisdictional Hon'ble 20 ITA No.2245/Del/2023 Delhi High Court in case of DIT vs. LG Cable Ltd., [2011] 237 CTR 438 (Delhi), in addition to several other court rulings relied upon by the Appellant in the Paper Books 2.7 It is submitted that the Appellant's case is clearly covered by the aforesaid judicial precedents and is not a case of composite contract. Even if it is assumed so for the sake of argument, no part of consideration received from offshore supplies can be taxed in India for want of economic nexus of such supplies with the Installation PE in India. None of the activities related to supply of equipment took place in India and even the Ld. CIT DR could not point to any evidence in support of the same. Apropos the above, the Appellant reiterates that no part of revenue from offshore supplies is attributable to India. 2.8 The Appellant offered full revenue earned from rendering of installation services to tax in India after claiming the corresponding expenses. The Assessing Officer brought to tax the gross revenue from rendering installation services, applying the global net profit rate The Assessing Officer disallowed deduction for expenses on the ground that necessary details in that behalf were not furnished by the Appellant, despite the same having been filed both before the Assessing Officer during the assessment proceedings and also before the Hon’ble DRP The details on record clearly demonstrate the incurring of expenses for earning income from rendition of installation services, by way of travelling expenses, payment to third parties for deputation of consultants/ engineers to the installation sites in India. The Assessing Officer without examining the same has rejected the claim for expenses incurred in rendering installation services and brought to tax the gross consideration in the hands of the Appellant. 2.9 In view of the submissions as aforesaid, the assessment order passed by the Assessing Officer needs to be reversed and the income returned by the Appellant accepted in toto. 8. On the other hand, the ld. DR supported the orders of the authorities below and submitted that the Assessing Officer had taxed the transaction as a ‘composite contract’ which is a supply of specialized equipment and therefore the assessee supplied it. It was 21 ITA No.2245/Del/2023 further submitted that warranty was insured by the assessee and the assessee did not produce the contract in this regard. The Ld. DR also referred to the purchase order placed by SMG to the assessee placed at page no.22 of the paper book and submitted that the payment terms was 85% on FOB basis through LC and 15% on commissioning, which shows that it was a ‘composite contract’ and since the assessee had PE in India, the Assessing Officer had rightly taxed the entire receipts amounting to Rs.396,58,81,485/- received from SMG & MSIL as its business income. 8.1. The Ld. DR distinguished the facts of the asseessee’s case from the decision of the Hon’ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. vs DIT (supra) and stated that in the cited case there were five unrelated parties and each party were performing separate and distinct work whereas in the present case, it was only one party, which was supplying the equipment and installing it. The Ld. DR also submitted that the Assessing Officer asked the assessee about the agreement and whether the order was placed through the PE or whether the PE played any role in getting the order to which the assessee did not submit any reply. According to the Ld. DR, the surrounding circumstances shows that it was a case of ‘composite contract’ and therefore the Assessing Officer was justified in making the addition of Rs.21,97,09,834/-. 22 ITA No.2245/Del/2023 9. We have heard the rival submissions and perused the materials available on record. We have noted in para no.5 of this order that the various details called for by the Assessing Officer in this case was not submitted by the assessee during the assessment proceedings. As noted above, before the Ld. DRP, the assessee company had filed a detailed submission vide letter dated 27.04.2023 which contained written submission from internal pages 1 to 13 at running pages no. 4 to 16 and documents from pages 17 to 170 of the paper book. The same was forwarded by the Ld. DRP vide letter dated 15.03.2023 and subsequent reminders were sent to the Assessing Officer. However, as noted by the DRP in para no.4.5 of its order that the said remand report was not received by the Ld. DRP and the DRP passed its directions on 30.05.2023. The said noting of the DRP in para 4.5 is reproduced as under:- “4.5 The Panel has gone through the draft assessment order, the rival averment by the assessee and the additional evidences submitted by the assessee. A remand report was sought from the assessing officer vide letter from the Secretary DRP on 15.03.2023 and through subsequent reminders. The AO has not furnished the remand report till date. The case is being decided on the basis of available documents.” 9.1. The assessee in its submission dated 27.04.2023 before the Ld. DRP in para no.2.5 had inter alia submitted as under:- 1) The employees or any other personnel associated with the Applicant did not visit India to negotiate discuss, deliberate, finalize, etc. the terms of the sale of equipment with the 23 ITA No.2245/Del/2023 Indian customers or to discuss any other matter whatsoever, connected to such sale/ supplies, 2) The Applicant did not have any place of business in India which was used for any purpose, whatsoever, connected to sale of equipment, 3) The risk and rewards connected to the ownership of such equipment was transferred at the port of shipment in Japan, 4) The equipment was shipped on Free on Board (\"FOB\") basis i.e., the responsibility and costs of shipping, transit insurance and any other related costs were borne by the Indian customers, and 5) The substantial part of payment for supply of equipment was received by the Applicant (through a Letter of credit issued by Indian customer to a bank in favor of the Applicant) at the time of shipping of equipment from Japanese port. 9.2. Though it is a contested fact that the assessee submitted the details during the assessment proceedings but however the Assessing Officer has recorded that the vital details as noted in para no.5 of this order were not submitted. Further, all the above issues at sr. no.1 to 5 submitted by the before the Ld. DRP assessee requires factual verification by the Assessing Officer which was not done by the AO in this case before the ld. DRP could have decided the matter and given its directions on 30.05.2023. 9.3. Further, in the submission dated 27.04.2023 in para no.1.5 and 1.6, the assessee submitted that there was no evidence of ‘composite contract’ in the POs or invoices as claimed in the draft assessment order by treating the supply of equipments and rendering of services as part of composite contract. It was further submitted 24 ITA No.2245/Del/2023 that shipping of equipment is done by the Applicant on “Free on Board (FOB)”, basis i.e., the responsibility and costs of shipping and insurance is borne by the Indian customers. Further, substantial part of payment for supply of equipment is received by the Applicant (through a Letter of credit issued by Indian customer to a bank in favour of the Applicant) at the time of shipping of equipment from Japanese port and the balance consideration for such supplies was also received by the assessee outside India. 9.4. To substantiate its claim that the supply of equipment took place outside India the assessee submitted the following in para no.1.7 of its letter dated 27.04.2023 before the Ld. DRP:-. i. To substantiate that the supply of equipment took place outside India, the Applicant has enclosed the following details/ documents: ii. A copy of PO no. 12498 as Annexure-3 which was issued by one of the customers i.e., SMG to the Applicant for purchase of a \"Grinding Machine\". iii. In the invoice issued by Applicant against such PO (enclosed as Annexure-4), it is clearly mentioned that the sales consideration for such equipment is JPY 61,90,00,000 on FOB basis i.e., the responsibility of freight, transit insurance and other such related costs are to be borne by the Indian customer and not the Applicant. iv. Further, your goodself would appreciate that the bill of lading (enclosed as Annexure-5) has been issued in the name of purchaser i.e., Suzuki Motor Gujarat Private Limited. Therefore, the Applicant was only responsible for equipment ill the port of shipment i.., Japanese port and it was the responsibility of Indian customer to arrange for transport from the Japanese Port and then receive the same at the Indian port. 25 ITA No.2245/Del/2023 v. The relevant Letter of Credit No. ILC-792-190200 is also enclosed as Annexure-6. 85% of total sales consideration is received by the Applicant on shipping of equipment from Japan which is received through such Letter of Credit. vi. Lastly, the Applicant has enclosed copy of PO issued for supervision fee for installation of the aforesaid equipment (enclosed as Annexure-7). It can be clearly inferred that such supervision fees was charged separately and was in addition to sales consideration of equipment. The aforementioned details of documents are tabulated below for ease of reference: 1.8 To further substantiate the above, the Applicant has provided below the details of additional POs (pertaining to supply of equipment to Indian customers) in the below table on sample basis along with copies of relevant documents comprising of invoices, Bills of Lading, Letter of Credit (as Annexures-8) for your goodself's kind perusal. These details pertain to the subject AY for supplies made to Indian customers and on a perusal of same, your goodself would appreciate that the conditions mentioned above (i.e., title of goods getting transferred outside India, etc.) are getting fulfilled in the below mentioned cases as well. 26 ITA No.2245/Del/2023 9.5. In view of the above facts, it was contended in the letter dated 27.04.2023 before the Ld. Hon’ble DRP that it was abundantly clear that the transfer of title and risk of loss or damage to the equipment in supply/ sale of equipment by the Applicant was passed on to the Indian customers outside India i.e., it is transferred on the date of issuance of Bill of Lading. Further, the entire payments for such supply of equipment are also received by the Applicant outside India in Japanese Currency and such payment or consideration for sale/ supply is received by the Applicant on FOB basis i.e., such consideration does not include any costs towards international freight or transit insurance or any other such related cost from the Japanese port. Accordingly, it was submitted that such sale of equipment qualifies as \"Offshore sales/ supplies\" 9.6. Thus, on perusal of the above details, it is seen that the assessee submitted the following documents as depicted in the tabular form as below:- Sr. No. Documents Annexure No. Page no. of the paper book Claim of the assessee 1. Copy of PO Number 12498 regarding PO of a grinding machine by SMG 3 42 -- 2 Invoice issued by the assessee 4 43 it is clearly mentioned that the sales consideration for such equipment is JPY 61,90,00,000 on FOB basis i.e., the responsibility of freight, transit insurance and other such related costs 27 ITA No.2245/Del/2023 are to be borne by the Indian customer and not the Applicant. 3 Bill of lading issued by SMG 5 44-45 The bill of lading has been issued in the name of purchaser i.e., Suzuki Motor Gujarat Private Limited. Therefore, the Applicant was only responsible for equipment till the port of shipment i.e., Japanese port and it was the responsibility of Indian customer to arrange for transport from the Japanese Port and then receive the same at the Indian port. 4. Letter of credit no.ILC - 792-190-2000 6 46-50 The relevant Letter of Credit No. ILC-792-190200 shows 85% of total sales consideration is received by the Applicant on shipping of equipment from Japan which is received through such Letter of Credit. 5 PO issued for supervision fee for installation of the equipment ‘grinding machine’ 7 51 Copy of PO issued for supervision fee for installation of the aforesaid equipment from it where it can be clearly inferred that such supervision fees was charged separately and was in addition to sales consideration of equipment. 6 Supply of equipment and other details on sample basis as per the description at Sl.no.1 to 5 8 52-170 As per the submission of the assessee in para no.1.8 as reproduced on page no.25 of this order. 9.7. The above claims of the assessee go to the root of the matter with respect to the stand of the Assessing Officer in taxing the entire amount of Rs.396,58,81,485/- as business income on account of the asseesse’s PE in India and the counter claim of the assessee that amount received by the assessee for the supply of offshore 28 ITA No.2245/Del/2023 equipment supplied to the two Indian parties i.e. SMG & MSIL was not taxable on the ground that such supply of offshore equipment supplied had no economic nexus with India and also relying upon the decision of the Hon’ble Apex Court in the case of Ishikawajima Harima Heavy Industries Ltd. vs DIT (supra). However, the above evidences and the contentions of the assessee and the other contentions as referred in Para no.8.1 of this order and other submissions made in the letter dated 27.04.2023 to the Ld. DRP was not verified by the Assessing Officer in the assessment proceedings and also no remand report was submitted by the Assessing Officer to the Ld. DRP with respect to the above claim of the assessee before the Ld. DRP issued its directions on 30.05.2023. 9.8. Further, the assessee in para below para-4 of its submission dated 27.04.2023 before the Ld. DRP submitted that the assessee was not provided with the copy of the information received by the Assessing Officer from SMG & MSIL called vide notice u/s 133(6) of the Act and submitted that Ld. DRP had directed the AO to make available a copy of the same to the assessee. Therefore, during the assessment proceedings, the assessee was denied the copy of the information received by the assessee from SMG & MSIL u/s 133(6) of the Act on the basis of which the Assessing Officer framed the assessment order. 29 ITA No.2245/Del/2023 9.9. Further, the assessee submitted that it was incorrectly noted in the impugned order that the applicant did not submit any details pertaining to expenses incurred against revenue earned by the assessee. However, the assessee also admitted in para no.3.1 of its letter dated 27.04.2023 that the assessee was a Japan based company and has been filing tax returns in India since AY 2011-12. The assessee further submitted that the tax return filed for the subject year i.e., AY 2020-21 was the first instance for which assessment proceedings were initiated u/s 143(3) of the Act for the Applicant and therefore, the Assessee did not have prior experience with the said proceedings. 9.10. Therefore, the claim of the expenses amounting to Rs.23,13,22,271/- in the original return and further claim of Rs.6,44,70,480/- in the revised return also needs to be examined by the Assessing Officer as per law, which was not done in the assessment proceedings and also no remand report was submitted by Assessing Officer to the Ld. DRP with respect to the above claim of the assessee before the DRP issued its directions on 30.05.2023. 9.11. Thus, it is seen that the factual verification regarding the claim of the assessee that it had no PE in India in respect of the offshore supplies of the equipments as per the respective POs placed by the SMG & MSIL and therefore the same could not be taxed in India was not examined by the Assessing Officer in the assessment 30 ITA No.2245/Del/2023 proceedings and also the Assessing Officer did not submit the remand report to the Ld. DRP with respect to the above claim of the assessee before the Ld. DRP issued its directions on 30.05.2023. Similarly, the claim of the expenses amounting to Rs.29,57,92,750/- which included a fresh claim of Rs.6,44,70,480/- filed by way of revised return was not examined by the Assessing Officer in the assessment proceedings and also no remand report was submitted by the Assessing Officer to the Ld. DRP with respect to the above claim of the assessee before the DRP issued its directions 30.05.2023. Therefore, in absence of the same, we cannot adjudicate the issues in grounds nos. 3 to 6 of the appeal and also cannot appreciate the case laws relied by the either parties in respect of their respective contentions. It is an undisputed fact that the remand report in respect of the submissions made by the assessee vide letter dated 27.04.2023 before the ld. DRP was not received by the Ld. DRP and the factual verification of the same was also not made by the DRP before issuing its direction on 30.05.2023. Therefore, in view of these fact, we are of the considered view that the order of the ld. Assessing Officer and the finding of the Ld. DRP cannot be sustained. We, therefore, set-aside the final assessment order u/s 143(3) r.w.s. 144C of the Act dated 30.06.2023 and direct the Assessing Officer to frame the assessment de novo after considering the submissions made by the assessee vide letter dated 27.04.2023 before the Ld. DRP and 31 ITA No.2245/Del/2023 after giving a reasonable opportunity of being heard to the assessee and in accordance with law. Further, we may also add that the assessee will be at liberty to submit any further submission(s)/evidence(s) in support of its claim before the Assessing Officer and the Assessing Officer will also be at liberty to call for any further details as per law. Grounds no.3 to 6 of the appeal are allowed for statistical purposes. 10. Grounds no.7, 8 and 9 are with respect to the levy of interest u/s 234A, 234B and 234D which are consequential in nature and the Assessing Officer is directed to levy interest as per law. 11. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 07th March, 2025 Sd/- Sd/- [VIKAS AWASTHY] [BRAJESH KUMAR SINGH] JUDICIAL MEMBER ACCOUNTANT MEMBER Dated .03.2025. f{x~{tÜ f{x~{tÜ f{x~{tÜ f{x~{tÜ Copy forwarded to: 1. Assessee 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi "