Income Tax Appellate Tribunal - Mumbai
Haldor Topsoe, Mumbai vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI 'L ' BENCH
MUMBAI BENCHES, MUMBAI
BEFORE SHRI RAJENDRA SINGH, AM & VIJAY PAL RAO, JM & SHRI
ITA No. 8364/Mum/2010 (Asst Year 2007-08 )
Haldor Topsoe A/s Denmark Vs The Addl Commr of Income Tax
Jeevan Vihar Annexure International Taxation)
3 Sansad Marg Range 3, Mumbai
New Delhi 110 011
(Appellant ) (Respondent )
&
ITA No. 7008/Mum/2011 (Asst Year 2008-09 )
The Addl Commr of Income Tax Vs Haldor Topsoe A/s Denmark
International Taxation) Jeevan Vihar Annexure
Range 3, Mumbai 3 Sansad Marg
New Delhi 110 011
(Appellant ) (Respondent )
PAN No. AAACH2767A
Assessee by Sh H P Agarwal/Mr Ashish Kumar Gupta
Revenue by Sh Mahesh Kumar
Dt.of hearing 8th March 2013
Dt of pronouncement 5th, April 2013
ORDER
PER VIJAY PAL RAO, JM
Appeal in ITA No.8364/Mum/2010 is by the assessee against the assessment order dated 13.10.2010 passed u/s 143(3) r.w.s 144C(13) of the IT Act in pursuant to the directions of the Dispute Resolution Panel (DRP) passed u/s 144C(5) of the Act for the AY 2007-08. Appeal in ITA No. 7008/Mum/2011 is by the revenue against the order dated 22.7.2011 of the Commissioner of Income Tax(Appeals) for the Assessment Year 2008-09.
2 First we will take up the appeal of the assessee in ITA No. 8364/Mum/2010. 2
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ITA No. 8364/Mum/2010 (Asst Year2007-08 ) The only ground raised by the assessee in this appeal is as under:
"The Assessing Officer and the DRP erred in law and on facts in not accepting the claim of the assessee regarding the non taxability of the amount of Euro 187,615,68 paid by Gujarat Narmada Valley Fertilizers Company Ltd (GNFC) for technical documentation/engineering, etc, which formed an integral part of the price of the Converter basket and connected hardware supplied on FOB basis from outside India."
2.1 The brief facts leading to the controversy are that the assessee is a leading chemical technology company in Denmark and engaged in supplying of Fertilizes technical know-how, engineering and technical services to various Indian companies in connection with projects, mainly in the fertilizers and petrochemical industry. The assessee has entered into an agreement with Gujarat Narmada Valley Fertilizers Company Ltd (GNFC) for supply of equipments along with associated materials as per the specific design and technical data to meet the specific requirements of the party's plant.
2.2 In the return of income, the assessee has claimed an amount of Euro 1,87,615.68( converted at the rate of ` 58.47) received from GNFC for revamp of Ammonia Loop as exempt from tax. The Assessing Officer noted that this amount received vide invoice no. 90029101 was claimed to be exempt on the ground that this amount has been received towards engineering fee which forms an integral part of the supply of the converter basket as supplied on FOB basis to them.
2.3 The assessee contended before the Assessing Officer that a similar addition made for the AY 2000-01 was deleted by the CIT(A). The Assessing Officer did not 3 Haldor Topsoe A/s Denmark .
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accept the contention of the assessee on the ground that the department has not accepted the order of the CIT(A) and has filed appeal before the Income Tax Appellate Tribunal. Accordingly, the Assessing Officer framed te draft assessment order and proposed to make an addition of ` 1,09,69,889/- to the income of the assessee on the ground that the fee received by the assessee is for supply of technical know how in India and does not form part of the FOB price on the goods imported by Indian clients.
2.4 The assessee filed its objection against the draft assessment order before the DRP on 29.1.2010. Before the DRP, the assessee contended that a similar matter has been considered and decided by the Tribunal in favour of the assessee for the AYs 1998-99 to 1990-91 vide order dated 29.5.2006. The DRP did not agree with the contention of the assessee and held that the amount in question was received by the assessee vide a separate invoice which was not part of supply of the equipments. Therefore, the fee received by the assessee is for the supply of technical know-how, which is independent of equipment sales. Accordingly, the DRP held that taxability of the fee for services is determined in terms of section 9(1)(vii) of the Act. While deciding the issue, the DRP has considered the retrospective amendment whereby the Explanation to section 9 has been introduced by the Finance Act 2010 w.e.f 1.4.1976 and observed that the said Explanation has not been considered in the decisions which have been relied upon by the assessee. Hence, the DRP concurred with the proposed addition made by the Assessing Officer by treating the amount as royalty/fee for technical services. Consequently, the Assessing Officer passed the impugned assessment order whereby the amount in question received by the assessee is treated as liable to tax in India.
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3 Before us, the ld AR of the assessee has submitted that the assessee has entered into an agreement with the Indian clients for supply of equipment together with associated equipments and materials in accordance with the particular requirements of each client. Along with the equipments supplied, the assessee also provided drawings, manuals, mechanical design, diagram, operating manual, installation documentation etc., because without this information, the equipments cannot be utilised by the client. Thus, the ld AR has submitted that this information supplied by the assessee in the shape of process description, process flow diagrams, piping and instrument diagram, mechanical design etc., as per the specific requirement is an integral part of the overall cost of the equipment purchased by the party. Thus, the amount received for the services are purely in accordance with the exclusive purchase of property therein with reference to the supply of the equipments. The amount paid towards license, engineering, know-how etc., is not for the use of or the right to use, any design, model, plan secret formula or process as such but for the outright acquisition thereof and, hence, cannot be considered as royalty within the definition of the term as provided u/s 9 of the I T Act or under Article 13 of the Indo-Danish Tax Treaty. He has further contended that when certain technical equipments are imported by an Indian Party from the assessee, the know-hw and engineering becomes an integral part of such equipment and has no separate existence. Hence, the price payable to the assessee under the contract is not taxable being part of the total contract price which covers the supply of equipments from the stage of design to the stage of commissioning. He has relied upon the decision of the Tribunal in assessee's own case for the AYs 1988-89 to 1990- 91 which has been followed in the subsequent assessment years from 1991-92 to 1996-97 and further in the AYs 1997-98 and 98-99 and submitted that the Tribunal in 5 Haldor Topsoe A/s Denmark .
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the earlier years has held that the payment received by the assessee formed integral part of the price of converters of internal supply of outright and principle to principle basis.
3.1 On the other hand, the ld DR has submitted that in the earlier year, there was only one agreement by which the assessee supplied the equipments as well as technical know-how services; though the price of the equipment and technical know-how were separately given; whereas for the AY under consideration, the assessee has entered into two separate agreements one for supply of equipments and another for supply of technical know-how services. He has further submitted that the assessee has also raised two separate invoices one for the supply of goods and another for the supply of technical now-how services. He has further submitted that the assessee is in the business of rendering engineering services. 3.2 The ld DR has filed copy of the agreement and submitted that a separate agreement for engineering and technical assistance services was entered into. He has referred article 3 of the agreement dated 23.11.2006 and submitted that the assessee granted to GNFC a non exclusive, non transferable right and license regarding ammonia loop revamp designed and implemented using Topose Technical Information and engineering services. The ld DR has then referred article 6.2 and 6.3 of the agreement and submitted that in consideration of the rights and licenses granted by the assessee for the supply of engineering package, GNFC shall pay a net fixed lump sum fee of Euro 1,680,000 whereas for technical services fee was agreed at Euro 1,200 per man-day. The ld DR then submitted that for the earlier assessment years, the Tribunal has held that the said payment was for the supply and not towards the license to use whereas for the AY under consideration, the 6 Haldor Topsoe A/s Denmark .
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payment has been received specifically for technical services and license. Therefore, the payment for the supply of equipments and payment for technical services/information are exclusive and independent. There is not correlation or dependence of each other. He has relied upon the decision of the Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd vs Director of Income Tax reported in 288 ITR 408(SC) and submitted that the Hon'ble Supreme Court has held that for the purpose of taxability, the entire contract shall not be considered to be an integrated one so as to make the appellant to pay tax in India. The taxability events in execution of a contract may arise at several stages in several years and accordingly, the liability of the parties may also arise at every stage. Thus, even there is one contract, the price for each of the components of the contract is separate and therefore, the Hon'ble Supreme Court has held that the contract amount received under a single contract has to be considered separately for each of the components of the contract for the purpose of taxability in India. He has further submitted that in the earlier years, the Tribunal has not considered the decision of the Hon'ble Supreme Court and further the facts are distinguishable for the year under consideration. The decision of the Tribunal in assessee's own case for the earlier years cannot be apply to the facts of the assessment year under consideration. He has further submitted that in the earlier years, the Tribunal has decided the issue of royalty whereas for the year under consideration, the DRP has held that the payment is covered as fee for technical services as per the terms of sec. 9(1)(vii) of the I T Act.
3.4 In rebuttal, the ld AR of the assessee has submitted that the Assessing Officer in the earlier years taxed the payment as royalty which has been followed by the Assessing Officer in the year under consideration without distinguishing the facts. 7
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He has further submitted that even for the year under consideration, the Assessing Officer has treated the payment as royalty. In the earlier years, the Tribunal has specifically held that it is not royalty but the payment is for the services supplied being integral part of the supply of equipments; therefore, the payment was part and parcel of the contract of supply of equipments. He has further submitted that though there are two separate agreements entered for the year under consideration; but there is no change in the facts and circumstances as well as the nature of payment and the terms of the agreement. The ld AR has submitted that the terms and the additions of the agreement are identical in the earlier years as in the year under consideration. The only difference is that in the earlier year, only agreement contains all the terms and conditions whereas for the year under consideration, the terms and conditions have been bifurcated in two separate agreements. He has strongly relied upon the decision of the Tribunal in assessee's own case for the earlier years.
4 We have considered the rival submissions as well as the relevant material on record. There is no dispute that in the earlier years, the issue has been decided by the Tribunal; but on the issue of royalty. For the AY 1988-89 to 1990-91, the Tribunal has decided the issue in para 25 as under:
"25 Thus a plain reading of all clauses of contract that designs flow charts and information supplied by the assessee are relating to supply of S-200 Converters and their successful installation at the premises of buyer i.e. Indian Company, such information are integrated to the equipment and their installation at the premises of the buyer. It is not the case of A.O that assessee had supplied copy right design or other information which can enable the buyer i.e. Indian Company to manufacture S-200 Converters in its rights. The alleged information is as how to use S-200 Converters. If we look the clauses of the contract as well as the payment received by the assessee in the light of authoritative pronouncements of the Hon'ble Courts discussed supra, particularly keeping in mind the decision of Hon'ble Andhra Pradesh High Court, 262 ITR 110 wherein supplementary contracts for remittance made to 8 Haldor Topsoe A/s Denmark .
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the supervising staff deputed by the foreign company in India as well as paid towards other information were considered by the Hon'ble High Court as payments forming part of the main contract for setting up of the machinery and held that the supplementary contracts cannot be read in isolation and such payments cannot be treated within the ambit of expression "Royalty" It was also brought to our notice at the time of hearing that scope of royalty as provided in section 9(1)(vi) is much wider than the DTAT executed between India and Denmark, we find that the alleged payments for S-200 Converters made to the assesses are even not covered within the expression royalty provided u/s. 9(1)(vi) of the Income Tax Act, which is much wider than the one provided in DTAT. Otherwise as per the settled proposition, we are required to examine these payment within the limited scope of royalty provided within the DTAT but when such payments does not come in the ambit of wider scope of royalty then we do not deem it necessary to discuss the scope of expression royalty provided in DTAT. Therefore, we allow the ground raised by the assesses in the cross objection and reject the ground of appeal raised by the revenue. In other words, even 10% of these receipts treated by the Id. CIT(A) as taxable would not be sustainable. The A.O is directed not to tax the receipts received by the assesses on supply of S-200 Converters in all the three years."
4.1 In the subsequent AY, the Tribunal has followed the earlier years order and decided the issue in similar terms. It is clear from the decision of the Tribunal for the earlier years that the payment received by the assessee towards the information, design and other material was held as necessary for installation of the equipments supplied by the assessee as an integral part of the payment for the supply of the equipments and therefore, not covered the expression' royalty' provided u/s 9(1)(vi) of the IT act as well as under DTAA.
4.2 For the year under consideration, the DRP has decided the issue as under;
"The arguments of the assessee and the Tribunal's decisions have been considered. It is seen that the claim of the assessee is based on the fact that engineering and know how formed an integral part of the sale on FOB basis and therefore was not taxable In India. It is to be seen that the amount paid in respect of technical documentation / Engineering are in the nature of Fee for Technical Services and not similar to payments made for purchase of goods. If the know-how was part of the sale as claimed by the assessee, there would have been no need to draw a separate invoice for the same. This fact itself confirms that the know-how has been supplied independent of 9 Haldor Topsoe A/s Denmark .
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equipment sales. These taxability of Fee for services is determined in terms of section 9(i)(vii) of the Act. It is seen that the explanation to section 9 introduced by Finance Act, 2010 w.e.f. l-4 1976 has not been considered in various decisions on which assessee has placed reliance. In case of income in the nature of royalty or fee for technical services is to be taxed irrespective of the fact whether the services or rights are rendered in India or not. Therefore, in view of the amended provisions contained in section 9, the Assessing Officer has rightly treated the amount as royalty and lial5ble to tax in India. Therefore, the action of the A.O. is upheld. The ground of appeal is upheld."
4.3 It is clear that the DRP held that the payment received by the assessee is towards the supply of technical know-how and therefore, it was treated as fee for technical services in terms of section 9(1)(vii) as well as Explanation to sec. 9 introduced by the Finance Act, 2010 retrospectively w.e.f 1.4.1976. 4.4 It is to be noted that the decision in the case of the assessee in the earlier years were prior to the retrospective amendment in sec 9 whereby the Explanation has been introduced retrospectively by the Finance Act 2010. Further, the decision of the Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd (supra) has also not been brought to the notice of the Tribunal and therefore, the same was not considered.
4.5 The Hon'ble Supreme Court while deciding the issues of taxability of the payment under one contract has observed in para 24 as under;
"The contract is a complex arrangement. Petronet and the 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. The obligations under the contract are distinct 10 Haldor Topsoe A/s Denmark .
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ones. The supply obligation is distinct and separate from the service obligation. The price for each of the component of the contract is separate. Similarly offshore supply and offshore services have separately been dealt with. The prices in each of the segment are also different.
4.6 Thus, it has been held by the Hon'ble Supreme Court that though under a single turnkey contract, the price of each component of the contract is separate and taxable events in the execution of the contract may arise at every stage in several years and therefore, the prices of each segment are also different. Though, the contract was executed in India; but parts thereof to be carried out outside India would not be taxable in India. Thus, it is clear that under a single contract for the purpose of taxability of the income, the payment received for the execution of different parts of the contract has to be treated separately as per the real nature of the execution of work and payment.
4.7 The Hon'ble Supreme Court has concluded in para 73 bifurcating the income attributable to the various operations for the purpose of taxability in India as under:
" 73 We, therefore, hold as under :
Re : Offshore supply :
(1) That only such part of the income, as is attributable to the operations carried out in India can be taxed in India.
(2) Since all parts of the transaction in question, i.e., the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India.
(3) The principle of apportionment, wherein the territorial jurisdiction of a particular State determines its capacity to tax an event, has to be followed.
(4) The fact that the contract was signed in India is of no material consequence, since all activities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country.11
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(5) There exists a distinction between a business connection and a permanent establishment. As the permanent establishment cannot be said to be involved in the transaction, the aforementioned provision will have no application. The permanent establishment cannot be equated to a business connection, since the former is for the purpose of assessment of income of a non-resident under a Double Taxation Avoidance Agreement, and the latter is for the application of section 9 of the Income-tax Act.
(6) Clause (a) of Explanation 1 to section 9(1)(i) states that only such part of the income as is attributable to the operations carried out in India, are taxable in India.
(7) The existence of a permanent establishment would not constitute sufficient "business connection", and the permanent establishment would be the taxable entity. The fiscal jurisdiction of a country would not extend to the taxing entire income attributable to the permanent establishment. (8) There exists a difference between the existence of a business connection and the income accruing or arising out of such business connection.
(9) Paragraph 6 of the Protocol to the DTAA is not applicable, because, for the profits to be "attributable directly or indirectly", the permanent establishment must be involved in the activity giving rise to the profits. Re : Offshore services :
(1) Sufficient territorial nexus between the rendition of services and territorial limits of India is necessary to make the income taxable.
(2) The entire contract would not be attributable to the operations in India viz. the place of execution of the contract, assuming the offshore elements form an integral part of the contract.
(3) Section 9(1)(vii) of the Act read with the Memo cannot be given a wide meaning so as to hold that the amendment was only to include the income of non-resident taxpayers received by them outside India from Indian concerns for services rendered outside India.
(4) The test of residence, as applied in international law also, is that of the taxpayer and not that of the recipient of such services.
(5) For section 9(1)(vii) to be applicable, it is necessary that the ser-
vices not only be utilized within India, but also be rendered in India or have such a "live link" with India that the entire income from fees as envisaged in article 12 of the DTAA becomes taxable in India. (6) The terms "effectively connected" and "attributable to" are to be 12 Haldor Topsoe A/s Denmark .
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construed differently even if the offshore services and the permanent establishment were connected.
(7) Section 9(1)(vii)(c) of the Act in this case would have no application as there is nothing to show that the income derived by a non- resident company irrespective of where rendered, was utilized in India. (8) Article 7 of the DTAA is applicable in this case, and it limits the tax on business profits to that arising from the operations of the permanent establishment. In this case, the entire services have been rendered outside India, and have nothing to do with the permanent establishment, and can thus not be attributable to the permanent establishment and therefore not taxable in India.
(9) Applying the principle of apportionment to composite transactions which have some operations in one territory and some in others, is essential to determine the taxability of various operations. (10) The location of the source of income within India would not render sufficient nexus to tax the income from that source. (11) If the test applied by the Authority for Advance Rulings is to be adopted here too, then it would eliminate the difference between the connection between Indian and foreign operations, and the apportionment of income accordingly.
(12) The services are inextricably linked to the supply of goods, and it must be considered in the same manner."
4.8 The authorities below have decided the issue by treating the payment as fee for technical services; however, the crucial fact of having two separate agreements for the year under consideration has not been considered and further the provisions of DTAA have also not been considered. Since the facts are distinguishable in the year under consideration and the decision of the Hon'ble Supreme court in the case of Ishikawajma-Harima Heavy Industries Ltd (supra) as well as the retrospective amendment in section 9 has not been considered in the earlier years, therefore, the issue has to be decided on the basis of the facts of the year under consideration. 13
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4.9 Since certain crucial aspects and facts related to two separate agreements and provisions of DTTA as well as decisions of Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd (supra) have not examined by the authorities below; therefore, in the interest of justice, we remit this issue to the record of the AO for deciding the same after considering all the relevant facts as well as the decisions on the point.
ITA No.7008/Mum/2011 (Asst Year2008-09 ) (By the revenue) 5 The revenue has raised the following ground in this appeal:
"1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) en-ed in accepting the claim of the assessee regarding the non taxability of the amount received from Gujrat Narmada Valley fertilizers ltd, Gujrat State Fertilizers and Chemical ltd and Numaligarh Refinary ltd on account of technical document ation/ engineering etc. without appreciating the facts that fees received are separate and distinct from the machinery and equipment supplied.
2. The appellant prays that the order of the ld. CIT(A) on the above ground be set aside and that of the assessing officer restored."
The issue in this appeal is common as in the appeal of the assessee for the Assessment Year 2007-08.
6 We have heard the ld DR as well as the ld AR of the assessee and considered the relevant material on record. The facts are identical to the facts for the Assessment Year 2007-08. We have decided the identical issue in the appeal of the assessee for the AY 2007-08. Accordingly, we set aside the impugned order of the CIT(A) and remand the matter to the record of the Assessing Officer on the identical terms as for the Assessment Year 2007-08.
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8 In the result, the appeal filed by the assessee as well as the revenue are allowed for statistical purpose.
Order Pronouncement in the Open Court on this 5th day of April 2013 Sd/ Sd/-
( RAJENDRA SINGH ) ( VIJAY PAL RAO )
Accountant Member Judicial Member
Place: Mumbai : Dated: 5th, April 2013
Raj*
Copy forwarded to:
1 Appellant
2 Respondent
3 CIT
4 CIT(A)
5 DR
/TRUE COPY/
BY ORDER
Dy /AR, ITAT, Mumbai