I-T- non-resident assessee supplies telecom equipment outside India – provides support services through subsidiary in India – since sale transaction is on principal to principal basis outside India, there is no business connection to attract deeming provisions of Sec 9(1)(i): ITAT

The assessee a German Company, had been executing various contracts through its PE in India for many decades. During the relevant year, the assessee was asked to furnish the details of the contracts executed by it in India for turnkey project, supplies and services. Despite various reminders the assessee did not submit copies of the contracts executed in India. Copies of some contracts executed in India were collected by DCIT, Non-resident Circle, New Delhi which were transferred to the A.O. of the assessee.

One such contract executed during the year was with BPL for execution of the Cellular Mobile Project on CIF basis for a total consideration of USD 2,08,53,039, converted into Rs.74,57,04,674. In the absence of any information about the consideration in respect of other contracts, the A.O. estimated the same at Rs.10 crores. Thus the total turnover of the Indian projects was determined at Rs 84,57,04,674-. In response to the query as to why the profit be not computed under Rule 10, the assessee replied that it did not have any employees stationed in India for carrying out any activity on its behalf. It was further stated that some of its employees were deputed to Siemens Ltd. who were on their rolls under their supervision and control for the purposes of fulfilling of the obligations of the M/s. Siemens Limited, the Indian company.

It was further clarified that all the onshore operations were the responsibility of the Indian company, who was engaged in ensuring supplies and the availability of know-how whenever required. It was further clarified that for such services, there was no separate recovery by the assessee company and the charges were recovered by the Indian company directly from the customers. It was thus stated that the assessee did not have any P. E. in India and hence no income was taxable.

The Assessing Officer, relying on Article 7 of Indo-Australia Treaty, came to the conclusion that the assessee was present in India for many decades and further it had executed many contracts in India exceeding the period of six months. Even the contract with BPL Mobile was also found to have been executed for a period of far more than six months. The A.O. further noted that the assessee-company had taken full turnkey contract but assigned a part of it to its subsidiary M/s. Siemens Limited. He further took note of the fact that the assessee had sent its technicians for executing projects in India who were paid through their Indian subsidiary. In view of these facts it was held that the assessee had P.E. in India and its income from all contracts was taxable India. In the absence of any detail of expenditure, the profit earned was determined at 10% of the total turnover and thus the total business income was determined at Rs. 8,45,70,467 on this score.

In the first appeal, the CIT(A) observed that the A.O. had wrongly relied on DTAA with Australia, whereas the assessee was a German company. He further held that the contract between the assessee and BPL was for supply of equipment on principal to principal basis and since the assessee did not have any P.E. in India, the question of supply of equipment being attributable to the P.E. did not arise.

On further appeal, it was argued by the Department that the goods were not supplied to BPL outside India as the assessee was under obligation to supply the equipment at Bombay on CIF basis, that that training was to be given in India for 15 working days for 5 trainees. It was argued that the income accrued to the assessee in India as per the regular provisions of the Act and further that since it had a TAC (Technical Assistance Centre) in Bombay, it meant having PE in India also and even going as per DTAA, the taxable business profits were to be determined on the basis of such PE in India.

The assessee contended that there was contract of the assessee with BPL for the supply of equipment only and the services in this regard were rendered by Siemens Ltd, the Indian company, which had received the income in its individual right and offered the same for tax in its own hands. That the AO had considered the DTAA with France for fixing the assessee’s liability to tax, whereas the assessee was tax resident of Germany. It was submitted that the assessee did not have any taxable income from this contract as per Income-tax Act, 1961 and hence there was no question of going into DTAA with Germany. It was stated that the assessee had supplied the equipment to BPL outside India and the payment was also received outside India. It was pointed out that the ownership of equipment was to be delivered to the carrier at the port of the shipment and the equipment was to become the absolute property of the purchaser free from any encumbrances at the time of delivery at the port of shipment only. It was stated that the concept of CIF basis was not properly appreciated. That all the risks of loss or damages to the goods were to be borne by the seller until the property was delivered at the port of the shipment. The incurring of cost insurance and freight by the seller, was only after the delivery of the property at the port of shipment to the buyer.

Having heard the parties the Tribunal held,

• that the object of the DTAA is not to create any fresh tax liability if it is not there as per domestic law but to restrict it, if it exists and is permissible. If there is no tax liability as per domestic law then the DTAA cannot create it. The assessee received the payment outside India. The offshore supply of equipment from abroad, in common parlance, means that the supply of goods is made outside India. Ordinarily in such a case, the Indian party opens a letter of credit and nominates a bank to issue irrevocable LOC favouring the foreign party. Equipment is handed over to ship and Bill of Lading etc are delivered to the nominated bank. With such delivery of bill of lading and other relevant documents, the property in goods passes to the Indian party and thus the sale of equipment is complete outside India. The local activity with respect to the installation was carried out by Siemens India Limited in their independent capacity.

• that in a letter from the assessee to the A.O it is mentioned that the copies of invoices raised by the assessee were duly furnished and the copies of contract with Siemens India Limited was already with the A.O. Thus it cannot be said that the assessee had not furnished any information enabling the Assessing Officer to determine the correct income. It is settled legal position that the primary onus to produce the desired details/information, necessary for the assessment, is on the assessee. Once the needful is done and such information etc. is supplied, then the onus shifts on the assessing authority to controvert the assessee’s stand. It becomes his duty to make out a case contrary to what has been stated, if he is not agreeable with the submissions and evidence advanced before him. Thereafter he cannot allege the existence of a fact contrary to record without specifically disproving the material before him.

• that in the case of CIF contract, the property in goods passes on to the buyer at the port of shipment. Though the Cost, Insurance and Freight etc. is met by the seller but the property in the goods gets transferred to the buyer at the port of shipment.

• that where there is a transaction of sale between two parties on principal to principal basis, it cannot be held that there is any business connection which would attract the deeming provisions of section 9(1)(i). Even if there is a business connection of the non-resident in India, then also only that part of the income shall be deemed to accrue or arise in India which is related to the operations carried out in India.

• that the AO went to estimate the further receipt at Rs. 10.00 crores without any material, worth the name to indicate, even remotely, that the assessee did earn any income from other contracts.

• that the TAC (Technical Assistance Centre) is not there to carry out any repair on behalf of the assessee. Its role is to accept the defective parts from BPL and then ship it back to the assessee for replacement or repair as the case may be. Further, it has been stated that the TAC is no organization of the assessee but in fact part of Siemens Ltd., the Indian concern, which has the obligation to render the services to BPL for consideration as per their separate contract. The assessee cannot be said to have any PE in India through the TAC in Bombay.

• that no interest is chargeable under section 234B.

• that following the Tribunal’s decision in assessee’s own case, fees for technical services should be taxed on receipt basis.