INCOME TAX ACT, 1961

Section 9(1)(i) Articles 5 and 7

Income deemed to accrue or arise under section 9(1)(i) - Composite contract of supply and service of equipments - Business connection as well as PE -

Assessee, was a company incorporated under the laws of the Austria. Assessee had entered into two contracts on 19-6-2008 with the 'Century Pulp and Paper Company' (CPPC), a division of M/s. Century Textile Industries Ltd, for equipment supply and service for commissioning of “620 TPD” multilayer packaging coated board plant. The assessee filed return of income declaring nil income in status of a Non-resident Indian (NRI). In the return of income filed, the assessee declared its address as C/o Mohinder Puri & Co. 1A-D Vandana Building 11, Tolstoy Marg, New Delhi. It was contended by the assessee that income in respect of “off-shore supply” of equipment was not taxable as per the provisions of the Income Tax Act, 1961 as well as under Double Tax Avoidance Agreement (DTAA) between India and Austria. The assessee submitted that it had no fixed place of business in India as per article 5(2) of the DTAA between India and Austria as far as offshore supply of machinery was concerned. According to the AO, supply cannot be termed as contract for sale of equipment because machineries though manufactured in Austria but were required for manufacturing and commission of TPD Plant in India and concluded that the contract of supply and service in relation to commission of TPD plant was a composite contract. AO went on to hold that income from the composite contract was taxable under section 9(1) of IT Act as the income deemed to accrue or arise in India through or from the business connection in India. The AO also held existence of the PE in India and taxability under the DTAA between India and Austria and PE of the assessee existed from beginning of the supply contract. In absence of standalone annual acount a profit of 9.75% was assumed as profit earned by the company and 35% of such profits were attributed to PE. The objections filed by the assessee against the draft assessment order before the Dispute Resolution Panel, did not find any favour and rejected by the Dispute Resolution Panel.Held: The business operation being done in India by the assessee were revenue generating as these operations were required to earn the contract and to meet the contractual obligations. Therefore, all parameters of business connection as prescribed by juridical authorities were satisfied in the case of the assessee. Accordingy, the income is deemed to accrue or arise in India in terms of section 9(1)(i) from the offshore supply of goods. AO was correct in observing that substantial part of the business activity of the assessee of manufacturing and commissioning of TPD plant was carried out in taxable territory of the India and supply of parts of machinery for plant was incidental to service contract and for this reason a part of the profit was directly attributbale to the PE in India. The service PE had also played the role in completing the supply agreement between the assessee and the buyer hence, 35% of the profit attributed to the PE was justified. Accordingly, the order of AO was upheld.

Distinguished:DIT v. Ericson AB 343 ITR 470 (Del).Relied: CIT v. Mitsui Engineering & Ship Building Co. Ltd. (2003) 259 ITR 248 (Del) : 2003 TaxPub(DT) 144 (Del-HC), State of Karnataka v. Bangalore Soft Drinks Pvt. Ltd. (2000) 117 STC 413 (SC), Indure Ltd. v. CTO (2010) (2010-TIOL-79-SC-CT), Shanghai Electric Group Co. Ltd. v. Dy. CIT [ITA No. 224 to 227/Del/2015] : 2017 TaxPub(DT) 2098 (Del-Trib), Bharat Sanchar Nigam Ltd. v. UOI (2006) 3 STT 245 45 (SC), CIT v. R.D. Aggarwal & Co. (1965) 56 ITR 20 (SC) : 1965 TaxPub(DT) 193 (SC), CIT v. Hindustan Shipyard Ltd. (1977) 109 ITR 158 (AP) : 1977 TaxPub(DT) 322 (AP-HC), CIT v. Atlas Steel Co. Ltd. (1987) 164 ITR 401 (Cal.) : 1987 TaxPub(DT) 0605 (Cal-HC) and CIT v. Gulf Oil (Great Britain) Ltd. (1977) 108 ITR 874 (Bom) : 1977 TaxPub(DT) 378 (Bom-HC).

REFERRED : CIT v. Mitsui Engg. & Ship Building (2003) 259 ITR 248 (Del) : 2003 TaxPub(DT) 0144 (Del-HC), Hindustan Shipyard Ltd. (2000) 119 STC 533 (SC), DIT v. Ishikawajma-Harima Heavy Industries Ltd. (2007) 288 ITR 408 (SC) : 2007 TaxPub(DT) 876 (SC), Pushalal Mansinghka Pvt. Ltd. v. CIT (1967) 66 ITR 159 (SC) : 1967 TaxPub(DT) 367 (SC), Mahabir Commercial Co. Ltd. v. CIT (1972) 86 ITR 417 (SC) : 1972 TaxPub(DT) 428 (SC), DIT v. Erriction AB (2012) 343 ITR 470 (Del) : 2012 TaxPub(DT) 20 (Del-HC), DIT v. Ishikawajma-Harima Heavy Industries Ltd. (2007) 288 ITR 408 (SC) : 2007 TaxPub(DT) 876 (SC), DIT v. Ericson AB 343 ITR 470 (Del), Nokia Networks OY [ITA No. 1963 & 1964/Del/2001] : 2018 TaxPub(DT) 2996 (Del-Trib), CIT & Anr. v. Hyundai Heavy Industries Co. Ltd (2007) 291 ITR 482 (SC) : 2007 TaxPub(DT) 1249 (SC), DIT v. LG Cable Ltd. (2011)237 CTR (Del) 438 : 2011 TaxPub(DT) 0761 (Del-HC), Hyosung Corporation [AAR No. 773 of 2008] : 2009 TaxPub(DT) 1807 (AAR) further affirmed by the Hon'ble Delhi High Court [WP(C) No. 2765/2010 and CM No. 5515/2010], Skoda Export v. Addl. CIT (2003-TII-34-HC-AP-INTL), L&T Ltd. (2015-TIOL-3055-HC-AP-CT & Usha Belltron Ltd. v. State of Punjab (2005) 7 SCC 58 and Shangahai Electronics Group Co. Ltd. (2017-TII-119-ITAT-DEL-INTL).

FAVOUR : Against the assessee.

A.Y. : 2010-11

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