ITD Failure to consider receipts from Offshore Supplies as Income of PE: ITAT directs Readjudication [Read Order]

The two member bench of Delhi Income Tax Appellate Tribunal ( ITAT ) directed readjudication after finding that the Income Tax Department failed to consider the receipts from the offshore supplies as income of Permanent Establishment ( PE ).

The Assessee, J.M. Voith SE & Co. KG  is a non-resident corporate entity incorporated under the laws of Germany and a tax resident of Germany. The assessee is engaged in the business of design and manufacture of paper machines. The assessee has entered into four contracts with certain Indian entities for design, manufacture, supply, installation, commissioning etc. of paper machines.

During the assessment proceedings it was observed that  the amount received towards design, manufacture and supply of paper machines was not offered to tax in India.

Assessing Officer issued show cause notice to the assessee to explain why the amount received should not be brought to tax in India, as the contract is a turnkey/composite project, hence, a part of profit earned from contract including offshore supply portion should not be taxed in India.

In response to the show cause notice, the assessee filed a detailed reply stating that the contracts are divisible in nature.After examining the contracts agreements of assessee the AO concluded that, though, the equipment needed for the paper mill were manufactured by the assessee in Germany but were utilized in India, hence, a part of the profit earned by the assessee from offshore sale/supply is directly attributable to PE in India. Accordingly made additions.

Aggrieved, the assessee filed an appeal before the Commissioner of Income Tax Appeal, CIT(A) who confirmed the addition.Accordingly the assessee filed appeal before the tribunal.

During the adjudication Rajan Bhatia, the counsel for assessee  submitted that as per the general and specific terms of the contract, the contract price for supply of plants, equipment and spares and contract price of onshore services are divisible and distinctly de-marketed.

Further submitted that the assessee received payment directly outside India in foreign currency either through letter of credit or direct bank transfer. Moreover the INCOTERMS agreed between parties under various contracts is FOB, CIF etc. in terms of which, the title in respect of the goods passes at the port of shipment.

Thus he submitted, no income in relation to offshore supplies can be said to have accrued or arisen in India under section 5 of the  Income Tax Act.

Sanjay Kumar, Counsel for Revenue supported the order of lower authorities and argued that “the assessee’s claim that the revenue received from supply of plant and equipment made from outside India is not taxable in India, is unacceptable, as, such plant and machinery have been incorporated in India by the assessee itself in terms with the contracts.”

The tribunal observed that the receipts from offshore supplies are in relation to four projects in India. The departmental authorities have referred only to terms of agreement between the assessee and SPMCIL, Hoshangabad. Whereas, the terms of the agreement with other three parties, viz., J.K. Paper Ltd., Bank Note Paper Mill India Pvt. Ltd., Mysore and Tamil Nadu Newsprint and Papers Ltd., Tamilnadu, to whom the assessee has supplied plant and equipment, have not at all been examined.

Accordingly the bench observed that various claims and contentions of the assessee have not been considered by the departmental authorities, while attributing part of the receipts from offshore supplies as income of the PE

After reviewing the facts the ITAT bench of G.S. Pannu ( Vice-President ) and Saktijit Dey ( Vice-President )  directed readjudication after finding that the Income Tax Department failed to consider the receipts from the offshore supplies as income of Permanent Establishment ( PE ).

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates