Supply of rolling stock not taxable in India as transfer of title took place outside India

Bombardier Transportation GmbH Vs DCIT (ITAT Delhi)

ITAT Delhi held that the receipts from offshore supply of rolling stock (train sets) cannot be taxable in India as the transfer of title over the goods has taken place outside India.

Facts- The core issue arising for consideration in the present appeal is whether the project office of the assessee and Bombardier Transportation India Ltd. (BTIL) would constitute fixed place Permanent Establishment (PE) of the assessee in India under Article 5 of India – Germany Double Taxation Avoidance Agreement (DTAA).

Conclusion- Held that the receipts from offshore supply of rolling stock cannot be taxable in India as the transfer of title over the goods has taken place outside India.

Held that none of the conditions of fixed place PE as enshrined under Article 5(1) of India – Germany tax treaty stand satisfied to construe BTIL as the PE of the assessee in India. Thus, in view of our aforesaid conclusion, we hold that the attribution of profit qua the receipts from offshore supplies to the alleged fixed place PE in the form of BTIL is unsustainable as, in our view, BTIL cannot be construed as PE of the assessee in India.

FULL TEXT OF THE ORDER OF ITAT DELHI

The present appeal has been filed by the assessee challenging the final assessment order dated 16.02.2015 passed under section 144C(13)/143(3) of the Income-tax Act, 1961 (for short ‘the Act’) pertaining to assessment year 2010-11 in

2. The core issue arising for consideration in the present appeal is whether the project office of the assessee and Bombardier Transportation India Ltd. (BTIL) would constitute fixed place Permanent Establishment (PE) of the assessee in India under Article 5 of India – Germany Double Taxation Avoidance Agreement (DTAA).

3. Briefly the facts are, the assessee is a non-resident corporate entity incorporated under the laws of Germany and a tax resident of Germany. As stated by the Assessing Officer, the assessee is engaged in the business of integration and manufacturing of complete rolling stocks and railway applications. Delhi Metro Rail Corporation (DMRC) had floated an International Competitive Bid for design, manufacture, supply, testing, commissioning, training and transfer of technology of 340 Electrical Multiple Units (EMU) known as RS2 Contract. Intending to participate in the bid of the DMRC, the assessee entered into a Memorandum of Understanding (MoU) with BTIL to collectively participate in the bid and submit its tender. The joint bid submitted by the assessee and BTIL was accepted by DMRC and RS2 Contract was executed between the DMRC and the Consortium on 19.07.2007. As far as the terms of understanding between the Consortium partners, viz., assessee and BTIL, the scope of work under the bid was specifically defined to be performed by each of the partners. As per the terms of the MoU, the participation ratio between the assessee and BTIL for RS2 Contract would be 70% and 30%. As per the terms of RS2 Contract, the Consortium is to provide passenger rolling stock, i.e., 58 train sets. Further, as per the scope of work of the respective Consortium partners, the assessee would undertake the offshore portion of the contract, such as, preliminary and general requirements for rolling stocks and design of rolling stocks, offshore manufacture, factory testing, inspection, marine insurance up to port in India etc. and offshore training. Whereas, the other Consortium partner, viz., BTIL was required to undertake the onshore portion of the Contract, such as, the indigenous manufacturing, factory testing, inspection and dispatch, transit insurance, inland transportation of offshore manufactured/indigenous manufactured trains in India, integrated testing and commissioning and onshore training etc.

4. In terms with the contract with DMRC, the assessee made onshore supply of 58 rolling stocks (train sets) to DMRC, which were manufactured by BTIL in India. The total value of invoices raised, both in foreign currency and Indian currency, aggregated to Rs.449,26,37,686/-. Besides the aforesaid onshore supply of train sets, the assessee supplied 8 more train sets costing Rs.415,67,27,145/- to DMRC. Insofar as onshore supply of train sets are concerned, which were purchased by the assessee from BTIL and transferred to DMRC on cost to cost basis, BTIL declared income from such sales. Whereas, assessee did not offer income from such sales as the train sets were sold on cost to cost basis.

5. As regards offshore supply of 8 number of train sets, the assessee did not offer income from such sales to tax in India, pleading that the transfer of title over the goods took place outside India and the sale consideration was also received outside India. It was submitted by the assessee that the project office had no role to play in offshore supply of train sets. Thus, the assessee submitted, the transfer of title over goods having taken place outside the territory of India, the income would not be taxable in India. The Assessing Officer, however, was not convinced with the submissions of the assessee. He was of the view that the contract with DMRC is a composite contract and beginning with designing, manufacturing, settling, commissioning and testing. Further, the Assessing Officer held that there was active involvement of the project office, both, in relation to onshore and offshore supplies. Thus, he held that the project office of the assessee in India constitutes a fixed place PE in India in terms of Article 5(1) of India – Germany DTAA. He further observed that the expatriate employees of the assessee have frequently visited India and spent total number of 364 man-days in India in the year under consideration. Accordingly, the Assessing Officer attributed profit, both, in respect of offshore and onshore supplies and services to the alleged PE of the assessee in India in the form of project office. Against the draft assessment order so passed, the assessee raised objections before learned DRP.

6. While dealing with assessee’s objection, learned DRP granted substantial relief to the assessee qua the attribution of profit in relation to onshore supply and services. However, insofar as, income from offshore supply of 8 train sets, learned DRP, though, agreed with the assessee that the project office had no involvement with offshore supply, hence, no profit attribution can be made to the PE. However, learned DRP held that the assessee had a fixed place PE in the form of BTIL. Accordingly, learned DRP directed the Assessing Officer to attribute profit to the PE in respect of income earned from offshore supply at 35%.

7. Before us, learned counsel appearing for the assessee submitted that the observations of the Assessing Officer and learned DRP with regard to existence of PE are based on misinterpretation of facts and incorrect application of law. He submitted, merely because the BTIL is a wholly owned subsidiary of the assessee, that by itself, would not make BTIL the PE of the assessee in terms of Article 5(7) of the treaty. In support of such contention, he relied upon the following decisions:

1. DIT Vs. Nokia Networks OY, (2013) 358 ITR 259 (Delhi HC)

2. ADIT Vs. E-Funds IT Solution Inc. (2018) 13 SCC294 (SC)

8. Proceeding further, he submitted, the departmental authorities have completely ignored the fact that the assessee and BTIL worked as a Consortium and earned profit separately from DMRC in accordance with their respective scope of work. Drawing our attention to the RS2 Contract with DMRC, learned counsel submitted, while the assessee earned income in respect of activities pursuant to Cost Centre B, such as, offshore manufacture and shipping to India, BTIL earned its income from activities under Cost Centre D, such as, inland transportation of offshore manufactured trains and commissioning. Thus, he submitted, as per the terms of the Contract, the Consortium partners, i.e., the assessee and BTIL have earned revenue in respect of specific work performed by them, as per Cost Centre B and Cost Centre D. He submitted, the entire revenue earned by BTIL under Cost Centre D has been offered to tax by it in India. He submitted, in terms of Article 5(1) of the treaty, the essential condition for determination of fixed place PE is that business of the non-resident is carried out through the said PE. He submitted, the Revenue has failed to demonstrate that this essential condition is satisfied. To vindicate his stand, learned counsel drew our attention to the invoices raised on DMRC by both the Consortium partners to demonstrate that the assessee has raised invoices only with regard to offshore supply. Whereas, BTIL has raised invoices for onshore supply and services. He submitted, the next condition, which is to be satisfied is the disposal test. He submitted, neither DRP, nor Assessing Officer has brought on record any evidence to establish how the assessee has utilized the premises of BTIL. Therefore, the disposal test for determination of BTIL as fixed place PE has not been satisfied. In this context, he relied upon the decision of the Hon’ble Supreme Court in case of Formula One World Championship Ltd. Vs. CIT (2017) 15 SCC 602 (SC) and the decision of Tribunal in ITA No.859/Del/2016, order dated 29.10.2020.

9. Learned counsel for the assessee submitted, in assessee’s own case in assessment year 2012-13, learned Commissioner (Appeals) being conscious of the directions of learned DRP in the impugned assessment year held that BTIL does not constitute a PE of the assessee. Further, he submitted, Tribunal’s decision in case of Nortel Networks India International Inc. Vs. DDIT (2014) 49 com 147 relied upon by learned DRP is completely misplaced as the said decision has been overruled by the Hon’ble Delhi High Court in case of Nortel Networks India International Inc. Vs. DIT (2016) 386 ITR 353 (Delhi HC). Thus, he submitted, neither the project office, nor BTIL constitute a fixed place of assessee in India in terms of section 5(1) of the treaty.

10. Learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned DRP. Drawing our attention to the RS2 Contract with DMRC, he submitted, responsibility of the assessee does not cease merely with the offshore supply of the train sets. He submitted, assessee’s responsibility in relation to the contract lies from the bidding stage itself till the commission of the train sets. He submitted, this fact is clearly established from the frequent visit of the employees of the assessee to BTIL and further establishes the fact that the employees have come to India for executing the Contract. He submitted, till the train sets are handed over to DMRC and test run/commissioning done, the Contract is not complete. Further, he submitted, the Contract Agreement does not refer to the MoU between the assessee and BTIL. Thus, he submitted, the MoU is an internal arrangement between the assessee and BTIL to split up the composite contract. Thus, he submitted, BTIL constitutes a fixed placed PE in India in terms of Article 5(1) of the treaty.

11. In rejoinder, learned counsel submitted that learned DRP, while treating BTIL as fixed place PE of the assessee in India, has given two reasons that the scope of work relating to Cost Centre D and control exercised by the assessee on BTIL. He submitted, the DMRC Contract, in fact, refers the MoU between the assessee and BTIL. In this context, he drew our attention to the specific clause of the RS2 Contract. As regards the visits of the expatriates to India, learned Counsel submitted, they visited India only for supervisory work to ensure timely delivery of train sets to DMRC.

12. We have considered rival submissions in the light of the decision relied upon and perused the material on record. The Core issue arising for consideration is whether the profits earned on offshore supply of 8 number of train sets to DMRC can be attributed to the alleged PE of the assessee India. The materials on record reveal that the Assessing Officer has treated the project office of the assessee as PE and attributed profit from offshore supplies at 35%. Whereas, learned DRP, though, has observed that the assessee has a fixed place PE in the form of project office (PO), however, the PO has not earned any profit from Contract. Further, learned DRP has observed that the assessee has another fixed place PE in the form of BTIL, as insofar as it relates to the offshore supply of train sets and therefore, the profit arising out of such offshore supply is attributable to the said PE.

13. Thus, the issue which arises for consideration is whether BTIL can be considered to be a fixed place PE of the assessee so as to attribute profit on receipts from offshore supplies. Undisputedly, DMRC has awarded the Contract, termed as RS2 Contract, to a consortium formed by the assessee and BTIL, an Indian company. As per the terms of Contract with DMRC, the scope of work between the Consortium partners, i.e., the assessee and the BTIL is well defined. The scope of work of the assessee is as under:

• BTG will be responsible for design, vehicle integration and setting up production for all trains (off shore and indigenous).
• BTG will supply trains and components manufactured offshore and indigenous.
• BTG will provide training to DMRC officials in Europe and also undertake integrated testing and commissioning of Trains on the Section of Service trails.
• BTG will provide unit exchange spares, Mandatory Spares, Recommended Spares, Consumable Spares for a period of three years, special tools, testing and diagnostic equipment.
• BTG will be responsible for warranty during the Defects Liability Period (DLP)
• BTG will be responsible for the transfer of production know-how to enable the local partner to produce indigenous trains.
• BTG will be responsible for Transfer of Technology for Carbody & Bogies, if the option is exercise by DMRC.

13. Whereas, the scope of work of BTIL is as under:

• BT India will support BTG to procure and supply trains and components manufactured in India.
• BT Indian will support BTG in local procurement for components and goods as well as in testing and commissioning.
• BT India will support BTG to arrange for incidental services like insurances, local and overseas transportation, clearance at port, unloading at DMRC.
• BT India will support BTG to manage project site and warranty sites in Delhi during DLP.
• BT India will support BTG in Training of DMRC official and Transfer of Technology, if required.

14. The payment to be made to the assessee and BTIL under the contract is in pursuance to the Cost Centre profit under the Contract. As per the Consortium Agreement between the assessee and BTIL, the assessee is responsible for the following activities:

> Preliminary and general requirement for rolling stocks and design of rolling stock.

> Offshore manufacture, factory testing, inspection, marine insurance upto port in India etc.

> Offshore training.

15. The responsibility of BTIL is as under:

> Indigenous manufacture, factory testing, inspection and discharge, transit insurance

> Inland transportation of offshore manufactured train in India.

> Inland transportation of indigenous manufactured train in India.

> Integrated testing and commissioning.

> Onshore training etc.

16. The cost attached to the scope of work assigned to the Consortium partners have been put under different cost centres in the Contract with DMRC. Cost Centre B relates to offshore manufacture and shipping to India, which is the responsibility of the assessee. Whereas, Cost Centre D relates to inland transportation in India, delivery and testing in the depot of offshore manufactured trains. The activity under Cost Centre D is the responsibility of BTIL. It is further observed, the Consortium partners have raised separate invoices on DMRC according to the scope of work and falling under specific Cost Centres and payments have been made separately by DMRC to the consortium partners. While, the assessee has been paid the cost for all offshore work, such as, designing, planning, offshore manufacture and supply, offshore training etc. BTIL has been paid for all onshore activities. It is a fact on record that the payments received under Cost Centre D have been offered to tax in India by BTIL. In fact, the transaction between BTIL and the assessee have been subjected to transfer pricing analysis by the Transfer Pricing Officer (TPO) and adjustment was suggested to the Arm’s Length Price (ALP). Thus, on a conjoint reading of the contract between the DMRC and the consortium partners and the Consortium Agreement would make it clear that not only the scope of work under the contract given to Consortium partner is well defined but the cost relating to such scope of work has also been specifically demarcated under different cost centres.

17. Thus, it can be safely concluded that though DMRC executed a single contract with the Consortium partners, however, the scope of work to be performed by each of Consortium partner has been well defined and demarcated. Therefore, essentially the contract is a divisible Contract. On a careful perusal of observations of learned DRP, it is observed that learned DRP has misconstrued the terms of the agreement between the DMRC and the Consortium partners as well as the terms of the Consortium Agreement. Learned DRP has erroneously assumed that the activities under Cost Centre D are also performed by the assessee. Whereas, factually and in terms of the contract, such activities falling under Cost Centre D were not only performed by BTIL but the profits from such activities have been offered to tax by BTIL. Therefore, in our view, the receipts from offshore supply of rolling stock cannot be taxable in India as the transfer of title over the goods has taken place outside India.

18. The next issue arising for considered is whether BTIL constitutes a fixed place PE of the assessee in India. As per Article 5(1) of India – Germany Tax Treaty, a fixed place PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on. For construing BTIL as fixed place PE of the assessee in India, the burden is on the department to establish firstly, that the premises of BTIL was used by the assessee to carry out its business and secondly, the premises of BTIL was at the disposal of the assessee. Though, it is the allegation of the Revenue Authorities that the expatriate employees of the assessee have visited India frequently during the year under consideration and have stayed in India for carrying out their activities by utilizing the premises of BTIL. However, these are in the nature of bald allegations without being backed by any evidence brought on record to establish that the expatriates were utilizing the premises of BTIL. As held by Hon’ble Supreme Court in case of ADIT Vs. E-Funds IT Solutions Inc. (supra), the burden is entirely on the Revenue to establish the existence of PE. Even, no documentary evidence has been brought on record by the Revenue to establish the disposal test so as to determine BTIL as the fixed place PE of the assessee in India. Nothing has been brought on record by the Revenue to demonstrate that the premises of BTIL were given at the disposal of the assessee. In this context, we rely upon the decision of the Hon’ble Supreme court in case of Formula One World Championship Ltd. Vs. CIT (supra).

19. It is further relevant to observe, in assesse’s own case in assessment year 2012-13, learned Commissioner (Appeals), being conscious of the observations of learned DRP with regard to BTIL constitutes a fixed place PE of the assessee in India, has held that BTIL is not the PE of the assessee. In fact, while considering identical nature of dispute in case of Bombardier Transportation Sweden AB Vs. DCIT (supra), the Coordinate Bench, while considering the dispute relating to offshore supply made under a somewhat similar Contract with DMRC held that receipts from offshore supplies cannot be taxed in India in view of the ratio laid down by the Hon’ble Supreme Court in case of Ishikawajma Harima Heavy Industries Ltd. Vs. DIT, 158 Taxman 259.

20. At this stage, it is relevant to observe, learned DRP, while coming to conclusion that BTIL constitutes fixed place PE in India, has relied upon the decision of the Tribunal in case of Nortel Networks India International Inc. However, the decision of the Tribunal stands reversed by the Hon’ble Jurisdiction High Court in Nortel Networks International Inc. Vs. DIT [2016] 386 ITR 253 (Delhi). Thus, analyzing the facts and materials on record in the touchstone of the ratio laid down in the judicial precedents cited before us, we are of the view that none of the conditions of fixed place PE as enshrined under Article 5(1) of India – Germany tax treaty stand satisfied to construe BTIL as the PE of the assessee in India. Thus, in view of our aforesaid conclusion, we hold that the attribution of profit qua the receipts from offshore supplies to the alleged fixed place PE in the form of BTIL is unsustainable as, in our view, BTIL cannot be construed as PE of the assessee in India.

21.3 In view of our decision above, the other issues/grounds raised by the assessee, having become either academic or consequential, do not require adjudication.

22. In the result, the appeal is allowed, as indicated above.

Order pronounced in the open court on 14^th July, 2023