B R Baskaran, AM: -The assessee has filed this appeal challenging the order dated 25.10.2011 passed by the assessing officer u/s 143(3) r.w.s. 144C(13) of the Act in pursuance of directions given by the DRP for assessment year 2007-08.
2. The assessee is aggrieved by the decision of the assessing officer in holding that the contract executed by the assessee is composite contract and hence entire contract receipts is liable for taxation in India.
3. The facts relating to the above said issue are stated in brief. The assessee is a Israel company. An Indian company named Hindustan Petroleum Corporation Limited (HPCL) floated tenders to supply, install /implement and support retail automation systems on select HPCL retail outlets. The assessee won the bid for executing the work, which consisted of supplying certain equipments and installation of automation systems. During the year under consideration, the assessee received a sum of Rs. 9,77,59,979/- towards sale of equipments and Rs. 81,48,650/- under the head “Service Revenue” on account of installation and commissioning charges. The aggregate of both the amounts was Rs. 10,59,08,629/-. The assessee claimed equal amount as “Project cost” and in the result, it did not declare any income against the receipt of Rs. 10.59 crores cited above.
4. The assessee explained before the AO that the project consisted of two parts, viz., (a) supply of equipments from Israel to HPCL sites and (b) installation of systems at the HPCL sites. It was further explained that the assessee has entered into a sub-contracting agreement with Honeywell Automation India Ltd (HAIL) for installation and commissioning of equipments in the automation system. The assessee submitted that, as per the sub-contracting agreement, it has supplied the equipments to HAIL outside India and the payments relating to the same was also received outside India. Accordingly, the assessee has claimed that the income relating to supply of equipments is not taxable in India, since the equipments were supplied outside India and the payments for the same was also received outside India.
The AO/DRP did not accept the said contentions and accordingly held that the contract cannot split into “off shore supply of equipments” and “service in the form of installation/implementation”. Accordingly they held the contract was a “composite contract”. The assessee had opened a project office in India. Accordingly, the AO/DRP held that the project office constitutes “Permanent Establishment” in India. It is pertinent to note that it is the assessee, who had raised invoices upon HPCL for supply of equipments and services and not the sub-contractor HAIL. The invoices for supply of equipments and warrant service charges was raised for a sum aggregating to US $ 46,83,522. The assessee did not offer the profit arising from the above said amount for the reasons stated above, which was not accepted by the AO/DRP.
5. The AO noticed that the assessee had declared the profit margin before taxes at 17.77%. The AO applied the same rate to the amount of US$ 46,38,522 and further attributed 75% of the same to the Indian operations and accordingly made an addition of Rs. 2,46,68,265/-. In addition above, the AO also disallowed following expenses explained above:-
| (a) |
Interest on delayed payment of service tax as the same is in the nature of penalty |
- |
1,10,006 |
(b) |
Professional tax as no evidence produced |
- |
5,000 |
(c) |
Rates & Taxes as there is no proof |
- |
2,444 |
(d) |
Sundry expenses as no evidence filed |
- |
13,09,647 |
The assessee is aggrieved by the decision taken by the AO/DRP in respect of all the issues.
6. The Assessing officer had placed reliance on the decision rendered by the Hon’ble High Court of Madras in thecase of Ansaldo Energia SPA Vs. ITO (2009)(310 ITR 237), wherein the High Court held that the sub division of a composite contract according to the convenience of contractor had to be ignored when the contractor has taken up entire responsibility for executing the project. The Ld A.R, on the contrary, placed reliance on the decision rendered by Hon’ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd Vs. DIT (288 ITR 403)(SC) and submitted that the income arising on off shore supplies of machineries was not taxable in India as all parts of the transaction were carried out outside India and the assessee’s permanent establishment in India had no role to play in the transaction. Accordingly the Hon’ble Supreme Court held that the income arising without any activity of permanent establishment is not liable for taxation in India.
7. Accordingly, the Ld A.R contended that the it has supplied the necessary equipments offshore and has also received the payment offshore. The assessee has sub-contracted the work of installation and Commissioning only to HAIL. He further submitted that the assessee has opened the Project Office in India only to co-ordinate the activities carried on by HAIL. Accordingly he submitted that the project office cannot be considered to be a permanent establishment also.
8. On the contrary, the Ld D.R submitted that the assessee has received only composite contract to install and commission the automated systems and it did not contemplate the splitting of the contract into two components as contended by the assessee. It is the only the assessee, who has split the contract into two at its own convenience. Further, the equipments were supplied to the sub-contractor, but the invoices were raised upon HPCL. He submitted that the sub-contracting of the work is only one of the methods of executing the contract. The assessee has taken fully responsibility in this work and hence the splitting of contract at the level of sub-contractor at the convenience of the assessee should not be recognised. Accordingly he submitted that the ratio laid down by the Hon’ble Madras High Court in the case of Ansaldo Energia SPA (supra) shall squarely apply to the facts of the instant case.
9. We have heard rival contentions and perused the record. A careful perusal of the record shows that the assessee only has been given contract by HPCL to implement automated systems in some of the petrol bunks owned by HPCL. It appears that the assessee and HAIL initially wanted to bid the tender jointly. However, since the HPCL did not approve joint bidding, the assessee has bid the tender singly and won the same. Thereafter, it has entered into a sub-contracting work with HAIL to implement the automation systems. As per the said contract, the assessee has supplied the equipments to HAIL. However, it is pertinent to note that the assessee has raised the bill towards supply of equipments upon HPCL and not on HAIL. The payment for the supply of equipments was also received from the HPCL.
10. The assessee has contended that the invoices relating to equipments were raised in US $ and the same strengthens its case of supply of the machineries off shore. We are not able to agree with the same. The invoices are generally raised as per the terms and conditions that were agreed between the parties. A perusal of the tender enquiry document placed at page 455 of the paper book (clause 1.0) shows that the HPCL has given an option to the foreign bidders to quote the bid price either in Indian Rupees or in US $. Hence it appears that the assessee herein, being a foreign bidder, has quoted the value of equipments in US $. In our view, the manner of rasing invoices may not be relevant to determine the taxability of any receipt.
11. The tender document further states that the liability to pay all taxes, duties, cess, levies etc. is placed upon the bidder (vendor). Further, it is provided that the bidder (vendor) shall provide a Bank Guarantee to HPCL as security for performance of the implementation of vendor’s obligation and/or discharge of implementation of vendor’s liability in connection with the said contract. Thus it is seen that the liability for implementation of the project is fully placed upon the vendor, i.e., the assessee herein. Following clause further reiterates this point:-
“10.0 VENDORS RESPONSIBILITY:-
10.1 Vendor will be wholly and solely responsible and liable for all the jobs carried out by them / services provided by them. HPCL acceptance having signed off a particular milestore will not exonerate the vendor from his prime responsibilities to have done a correct job as per the requirement of the job/contract and as per international practices in the first instance itself. If required, vendor will be required to revisit those milestores which are already signed off and will be required to make suitable correctness at no extract cost to HPCL.”
It is further stated as under in clause 14.0 of the tender document:-
“14.1 The vendor shall indemnify HPCL and every member, officer and employee of HPCL also the Project team and his staff against all the actions, proceedings, claims, demands, costs, expenses, whatsoever arising out of or in connection with the works and all actions, proceedings, claims, demands, costs, expenses which may be made against HPCL for in respect of or arising out of any failure by the vendor in performance of his obligations under the contract. The vendor shall be liable for or in respect of or in consequent of any accident or injury to any person engaged by vendor or agencies engaged by him, if any, and vendor shall indemnify and keep indemnified HPCL against all such damages, proceedings, costs, charges and expenses whatsoever in respect thereof or in relation thereto.
14.2 The vendor will be fully responsible and liable for the persons engaged by him or agencies engaged by him and no claims can be made against HPCL by such persons or any other persons/agencies in any respect during or after the completion of the contract.”
The above said clauses show that the entire liability arising out of the impugned contract is placed upon the assessee.
12. We have also perused sub-contracting agreement entered by the assessee with HAIL. The liability of HAIL seems to be limited and the relevant clause reads as under:-
“In no event will Honeywell (here HAIL) be liable for any incidental damages, consequential damages, special damages, indirect damages, loss of profits, loss of revenues or loss or use, even if informed of the possibility of such damages. Honeywell’s liability for damages arising out of or related to this agreement shall in no case exceed the lesser of the amount paid by Orpak to Honeywell or the contract price for the specific product or service that gives riseto the breach to the extent permitted by applicable law, these limitations and exclusions will apply regardless of whether liability arises from breach of contract, warranty tort (including but not limited to negligence), by operation of law or otherwise.”
Thus, we notice that the liability of sub-contractor is limited. We have noticed earlier that the assessee has contended that the bid for tender was initially planned to be jointly given by the assessee and HAIL, but it was not so given due to prohibition of joint bidding. Accordingly, it was submitted that the assessee was constrained to bid the tender simply and consequently was constrained to sub-contract the work. However, the limiting the liability on the part of the HAIL defies the logic of this contention.
13. Be that as it may, the reality is that the entire liability arising out of the implementation of the contract is placed upon the assessee. Further, we notice that the HPCL has not entered into any separate contract with the assessee and it has given only a “Purchase Order” to the assessee and it only envisages supply of products named as “Core automation” of various functions. Thus the HPCL has intended to purchase products (equipments as well as the softwares) relating to automation of various functions relating to petrol pumps through the tender and it did not intend to split up the purchase order into supply of equipments and installation of the same, as contended by the assessee.
14. Further, we notice that the assessee has supplied the equipments to HIAL, who in turn has installed the same in the petrol pumps of HPCL. The payments towards the contract has been received by the assessee from the HPCL and it has compensated the HAIL for the works carried out by it. Thus, in our view, the Ld D.R was right in contending that the sub-contracting of work is only one of the methods of executing the contract undertaken by the assessee, since it is the assessee which has taken up full responsibility for executing the contract. Hence there is no merit in the contentions of the assessee that the contract consists of two separate parts consisting of supply of equipments and installation of the same. Under the facts and circumstances of the case, the said contention could not accepted and hence the assessee could not place reliance on the decision rendered by the Hon’ble Supreme Court in the case of Ishikawajima Harima Heavy Industries ltd (supra).
15. We notice that the separate bills raised by the assessee in dollar terms for supply of equipments and in rupee terms for the work relating to installation was to suit its convenience and it was not contemplated by the HPCL, since the HPCL was concerned with the implementation of the work in toto only. Hence, we are of the view that the assessing officer was justified in placing reliance on the decision rendered by the Hon’ble Madras High Court in thecase of Ansaldo Energia SPA (supra). Accordingly, we uphold the view taken by the assessing officer that the impugned contract is a composite contract.
16. The Ld A.R further contended that the assessee does not have a Permanent Establishment in India and hence no part of its profit is attributable to the Indian operations. The Ld A.R submitted that M/s HAIL is an agent of independent status and hence, in terms of Article 5 and 6 of India-Israel treaty, the HAIL cannot be considered to be the Permanent Establishment of the assessee.
17. We are not able to agree with the said contentions of the Ld A.R. We have earlier noticed that the sub-contracting of works is one of the methods of executing the contract and hence, we are of the view that the concept of agency cannot be applied in the facts and circumstances of the case. The assessee has opened a project office in India to oversee the implementation of the project and, in our view, the assessing officer was justified in treating the same as Permanent Establishment and hence the profit attributable to Indian operations needs to be determined and assessed in India.
18. In this regard, the Ld A.R put up an alternative argument that the assessing officer was not justified in adopting the rate of profit at 17.7% on the basis of global profit and further attributing 75% of the same as the profit attributable to the Indian operation. The Ld A.R submitted that the profit attributable to the Indian operations have to be computed by undertaking FAR analysis. He submitted that the assessee has arrived at a gross profit of 3.90% on the basis of FAR analysis conducted by it. Accordingly he submitted that the gross profit should be computed at 3.90% of the gross revenue and the expenses should be deducted there from. He further submitted that the AO was not justified in disallowing the entire expenses on the reasoning that the assessee has not furnished evidences. The Ld A.R submitted that the assessee is having all the evidences and hence the AO was not justified in disallowing the expenses.
19. We notice that there is merit in the submissions of the Ld A.R that the profit attributable to Indian operations should be determined by undertaking FAR analysis. Since the assessee had taken the view that the profit arising from supply of equipments was not taxable in India, it appears that the assessee did not consider it necessary to put up its arguments on the profitability issue. Further, it is stated that the assessee is possessing evidences in support of the expenses claimed by it. Hence, we are of the view that the assessee should be provided with one more opportunity, in the interest of natural justice, to make its submissions before the AO and also to produce evidences. Hence, we are of the view that the issue relating to the attribution and determination of income should be examined afresh at the end of the assessing officer. Accordingly, we set aside the issue relating to determination of income to the file of the AO with the direction to examine the same afresh by duly considering the information and explanations that may be furnished by the assessee. The assessee is also directed to furnish evidences supporting various expenses claimed by it and also make its submissions with regard to the income attributable to the Indian operations.
20. In the result, the appeal filed by the assessee is treated as partly allowed for statistical purposes.