Case Law Details
Brief of the Case
ITAT Delhi held In the case of Hyundai Heavy Industries Co. Ltd. vs. ADIT that the said issue is already covered in favour of the assessee by tribunal decision given in earlier years in which the tribunal held that the contracts are divisible. The receipts pertaining to designing, fabrication and supply of material, the activities carried out outside India is not taxable in India. It is a well established proposition of law that the authorities below have to follow the decision of ITAT on an identical issue and the ITAT has to maintain consistency in its approach on an identical issue under the similar facts adopted in earlier years. Since the Learned CIT(DR) has disputed this claim of the assessee that during the year facts on the issue are similar to earlier years, Accordingly set aside the matter to the AO to ascertain that facts, are similar to the facts of the earlier years i.e. 2007-08 and 2008-09 after verifying the submissions of the parties in this regard and decide the matter in light of tribunal decision given in earlier years.
Facts of the Case
The assessee is engaged in the business of offshore construction and power project. During the year under consideration, the assessee received revenues from various projects including project Hyundai Construction Equipment India Pvt. Ltd. (HCEIPL) and GMR Diesel Generator Power Project. The two issues were raised:
- As to whether Mumbai Liaison Office is fixed placed PE under Article 5 of DTAA with Korea for the purpose of taxing royalties received from HCEIPL and interest earned on delayed payment of royalty as business income?
- As to whether the Assessing Officer is justified in attributing income from supply of spares FOB, Ulsan, Korea as per contract with GMR Power Ltd.?
Revenue from outside India operations
In these grounds assessee has questioned action of the authorities below in taxing the entire revenue of Rs. 190812234/- pertaining to outside India operations as income of the assesee. It has been contended by the assesee that the authorities below have erred in taxing the revenue of operation outside India disregarding the principle of attribution envisaged in Article 7(3) and principle of consistency envisaged in Article 7 (5) of DTAA, especially considering the facts that in absence of allegation that the payment by ONGC for operation outside India was not at arm’s length or that it included any work carried out for services rendered in India.
Contention of the Assessee
The ld. counsel for the assessee submitted that the issue raised regarding the PE has been decided by the ITAT in the assessee’s own case for the assessment year 2007-08 in ITA No. 5231/Del/2011 and in the assessment year 1998-99 to 2004-05 reported in 31 SOT 482 (Del.) and by the decision of Hon’ble Supreme Court in the assessee’s own case reported in (2007) 291 ITR 482 (S.C).
He further submitted that the HCEIPL is 100% subsidiary of the assessee company. HCEIPL has set up plant in Pune for manufacturing construction and earthmoving equipment. It obtained technology and knowhow from the assessee under the agreement dated 20.3.2008. It paid FTS/Royalty to the assessee which has been found to be at arm’s length price by the learned TPO. The contention of the assessee remained that it has no PE in India as the technology including training is provided to HCEIPL in Korea
He further submitted that DRP is not correct in following its own order that Mumbai LO is fixed PE, which is contrary to past history of the case & jurisdictional High Court in BKI Ham (347 ITR 570 Uttra.) However, even assuming the LO is fixed place PE, it has no role as the receipt of royalty is for direct transfer of technology to HCEIPL. Interest is on delay in payment of royalty by HCEIPL and therefore taxable @ 15 percent under Art. 12 of DTAA, being interest on Debt claim. According to AO, it is business receipt & therefore taxable @ 40%.
He further submitted that the Learned CIT (DR) is now trying to make out an altogether a new case which is not born out of the facts nor is the case of the Assessing Officer/DRP. The case of the Assessing Officer is that Mumbai Liaisoning Office is PE for the purpose of HCEIPL also. This is also endorsed by the DRP holding that facts are same as in the case of old ONGC contract. The Learned AR contended further that it is optional for the HCEIPL to obtain supervising services of an engineer of the assessee company. It is clear from that statement that no engineer was deputed to India for HCEIPL project.
He submitted further that there is no concept of “supervision PE” in Korea DTAA. Even if a supervisor is deputed, no PE in India is formed. There is no fixed place “PE” as the supervisor is deputed not for the business of the Korean Company but that of HCEIPL, an Indian company. “Supervision in connection with” a construction/installation PE would constitute PE only if such supervisory activities continue for more than nine months. There is no allegation to this effect either by the Learned CIT(DR) or the Assessing Officer/Learned CIT(Appeals). Hence, the interest on delayed payment of royalty by HCEIPL cannot be taxed as business income under sec. 44DA @ 40%, but @ 15% as per Article 12 of the DTAA with Korea.
The Learned AR submitted that for GMR (operations & maintenance) contract, consideration received is undisputably for technical services, which were rendered by Chennai PE within India. Yet, the AO arbitrarily and unilaterally taxes business income at 75% of gross receipts, thus contradicting his own show cause notice dt. 20.3.2013, whereby he sough to tax 25% of GMR receipt as business income. There is no allegation that price received from off-shore supply of spares etc is not arm’s length price or that it contains any element of service rendered by the PE. Custom Duty & clearance for is reimbursed by GMR (Pg. 250/Vol.-II). As per contract, assessee procures material and spare parts on behalf of GMR and title to the imported goods pass to GMR on delivery at site. Thus no operation is carried out by the PE in India in respect of imported goods used in the project.
Contention of the Revenue
The ld counsel of the revenue submitted that the agreement is dated 20.3.2008 and provisions of sec. 44DA will apply if the royalty received is effectively connected to the PE of the assessee. He submitted further that as per Article 14.3(b), an engineer is deputed to supervise the plant which is part of technology agreement (pages 122 to 140 of the paper book – Vol.I). As the services are performed at a fixed place and business by the employee of the assessee, the corresponding fee/royalty is effectively connected to PE and can be worked out by applying the fee per man day. The Learned CIT(DR) contended that the royalty effectively connected with PE and taxable as per provisions of sec. 44DA can be worked out by deducting expenses incurred on the deputed employee from the royalty attributable to services of employees.
Held by ITAT
Whether Mumbai Liaison Office is fixed placed PE under Article 5 of DTAA with Korea for the purpose of taxing royalties received from HCEIPL and interest earned on delayed payment of royalty as business income?
We find that since beginning the Revenue’s contention has been that the assessee’s Mumbai office is a fixed placed Permanent Establishment (PE) within the meaning of Article 5(1) and 5(2) of the Treaty. The assessee on the other hand has always maintained a position that wherever the projects duration exceeds a period of nine months stipulated in Article 5(3) of the Treaty, it has an installation PE, else it does not have any PE in India.
Having gone through the orders of the Tribunal in the case of the assessee itself for the assessment years 2007-08 and 2008-09, as cited above by the Learned AR, we find that the issue of Mumbai Liaisoning Office constitutes PE was in relation to the contract with ONGC and in the assessment year 2007-08, the ITAT order dated 29.5.2012 in ITA No.5231/Del/2010 on the aspect propounded by the Assessing Officer as to whether Mumbai Office constituting a PE or not, the ITAT has noted that for holding that it constitutes a PE, the Assessing Officer had made reference to a large number of correspondence in order to demonstrate that PE was in existence. The ITAT has noted further that the issue regarding existence of PE was not disputed by the assessee and the dispute instead was as to how much profit was attributable to the PE. We thus find that the issue regarding the existence of PE at Mumbai relation to contracted project with ONGC in the assessment year 2007-08 has not been disputed by the assessee and it has been accepted as such by the ITAT.
In view of the above discussion, we find that the authorities below has simply followed its orders for earlier assessment years on the issue of treating the Mumbai Liasioning Office as PE. However, to decide the issue as to whether Mumbai Liaisoning is PE for the purpose of HCEIPL as well for the purpose of taxing royalties received from HCEIPL and interest earned on delayed payment of royalty as business income, verification of the above aspects of the facts/contentions raised by the Learned AR is required to be made afresh to meet out the ends of justice. We thus set aside the matter to the file of the Assessing Officer to decided the issue raised in ground Nos. 7 to 9 afresh after affording opportunity of being heard to the assessee under the above stated background.
Whether the Assessing Officer is justified in attributing income from supply of spares FOB, Ulsan, Korea as per contract with GMR Power Ltd.?
The assessee admitted that during the year, it had Permanent Establishment (PE) in India in relation to GMR contract. MUT contract was with ONGC and GMR Project was with Vasai Power Corporation Ltd. Besides, the assessee had also entered into contract with SCEIPL, TATA Motors Ltd. and Nissan during the year. The assessee has shown income from fee for technical services under sec. 115A from contracts with SECIPL, TATA Motors and Nissan Motors. Under the GMR Project, the assessee was required to provide services relating to design, engineering, procurement, fabrication, construction, manufacture, transport, demonstration, testing, commissioning and startup of the units and facilities in respect of a 200 Mg. capacity diesel engine based power generating facilities consisting of four units of 50 Mg. near basing bridge, Chennai.
The assessee submitted that the GMR contract was an old contract running from assessment year 1998-99 and since assessment year 1998-99, the assessee has been claiming part of receipts from GMR contract on account of operations carried outside India, to be not taxable in accordance with the provisions of sec. 5(2) read with sec. 9 of the Act and also Article-7 of the DTAA. It was pointed out that the issue with regard to taxability of Revenue from operations carried outside India, in respect of this year contract, has been a subject of dispute with the Revenue right from the assessment year 1998-99 and has travelled up to the ITAT and has also been decided in favour of the assessee i.e. the appellate authorities have confirmed the same to be not taxable in India. It was pointed out that for the assessment years 1998-99 to 2004-05, the ITAT vide its order dated 29.5.2009 (31 SOT 482) held that income from offshore operations cannot be brought to tax in India. For the assessment years 2005-06 and 2006-07, the then Assessing Officer herself did not tax income from outside India operation in the light of the decision of Hon’ble Supreme Court in the case of assessee itself reported in 291 ITR 482 (S.C). For the assessment year 2007-08, the ITAT vide order dated 29.5.2012 has held the revenues from outside India operation as non-taxable in India. The Assessing Officer did not agree with the assessee and following its own order for the assessment year 200708 has decided the issue against the assessee that Mumbai Liaison Office is a P.E. and is connected with ONGC or GMR Project.
The claim of the assessee as per the above discussion remained that the offshore supplies are not taxable and Learned AR placed reliance on the decisions of the ITAT in its own case on an identical issue for the assessment years 2007-08 and 2008-09 decided in favour of the assessee. The contention of the Revenue remained that bifurcation of income from GMR Project in items of “inside India” and “outside India” is not correct. The submissions of the Learned AR remained that it is the last tenth complete year of the contract and finding of the authorities below are not only contrary to the terms of the contract but it is also contrary to the tax treatment approved by the ITAT ever since assessment year 1999-00.
In the assessment year 2008-09, the ITAT has held that the contracts are divisible. The receipts pertaining to designing, fabrication and supply of material, the activities carried out outside India is not taxable in India. Further it was held that outside receipts pertaining to designing, fabrication and supply of material, activities carried out outside India is not taxable in India. So far as taxability of receipts pertaining to HMI (sub station) of Hyundai Heavy Industries Ltd. is concerned the matter is set aside to the file of the AO to examine the issue in relation to these project in view of finding of the Tribunal on the issue in relation to the above stated three projects and decide the issue accordingly after affording opportunity of being heard to the assessee. Ground No. 6 (consisting of ground Nos. 6.1, 6.2 & 6.3) are thus partly allowed.
We thus find that there is no dispute that existence of PE was there during the year and the year under consideration was last year of completing the contract. It is a well established proposition of law that the authorities below have to follow the decision of ITAT on an identical issue and the ITAT has to maintain consistency in its approach on an identical issue under the similar facts adopted in earlier years. Since the Learned CIT(DR) has disputed this claim of the assessee that during the year facts on the issue are similar to earlier years and the Learned AR has also tried to meet out the efforts of the Learned CIT(DR) distinguishing the facts of the case on the issue during the year, we are of the view that before following the order of earlier years on the issue by the ITAT, it is necessary to ascertain that the facts relating to the issues raised in ground Nos. 3 to 6 in the appeal for this year are similar to the facts of the earlier years i.e. assessment years 2007-08 and 2008-09.
We accordingly set aside the matter to the file of the Assessing Officer to ascertain that facts like performance of the assessee as per the terms of contract with GMR and others regarding operation and maintenance of the project and supply of spare and tool kits from Korea, Offshore Sales or activities claimed to be carried outside India, etc. as well as income from inside India activities on the issues during the year, are similar to the facts of the earlier years i.e. 2007-08 and 2008-09 after verifying the above submissions of the parties in this regard and affording opportunity of being heard to the assessee in view of materials available on record. If the Assessing Officer after verification finds that the facts of this year on the issues raised in ground Nos. 3 to 6 are similar to the facts of the earlier years on the issues then he is directed to decide the issues following the decision of the ITAT in this regard for the assessment years 2007-08 and 2008-09 and of the Hon’ble Supreme Court in the case of assessee reported in 291 ITR 482. The ground Nos. 3 to 6 involving the issue No.2 are thus allowed for statistical purposes.
Accordingly appeal of the assessee allowed for statistical purpose.
