2009 (6) TMI 7 - AAR - Income Tax

Sale outside India treated as non-resident income not taxable under IT Act or India-Korea DTAA; Art.5.3 PE not established.

AAR held that under the contract the sale of equipment and materials occurred outside India, so the related income did not accrue or arise in India and ... Construction of power station – offshore supplies made by the applicant (a company incorporated in Korea) and onshore operations are undertaking by an Indian Company – Question:- On the facts and circumstances of the case, whether the amounts received/receivable by the applicant i.e. Hyosung Corporation from Power Grid Corporation of India Limited (“PGCIL”) for offshore supply of equipments, materials, etc., are liable to tax in India under the provisions of the Act and India-Korea tax treaty – AAR held that under the terms of the contract, the sale of equipments and materials took place outside the territories of India and the income in relation thereto cannot be said to accrue or arise in India and, therefore, not liable to be taxed under the Income-tax Act, 1961 – Further the applicant cannot be said to have a Permanent Establishment within the meaning of Art. 5.3 of DTAA - However, question of PE left open to AO subject to inquiries. Issues: (i) Whether amounts received/receivable for offshore supply of equipment and materials are taxable in India under domestic law and the IndiaKorea DTAA; (ii) If taxable, whether and to what extent any part of such amounts is reasonably attributable to operations carried out in India (including attribution to a Permanent Establishment); (iii) Whether the applicant together with L&T constitute an Association of Persons (AOP) for assessment under the Income-tax Act, 1961.Issue (i): Whether amounts received for offshore supply are taxable in India.Analysis: Relevant contract terms provide for CIF/FOB shipment, negotiation of shipping documents at foreign port, bill of lading naming the purchaser, insurance naming purchaser as beneficiary and payment by irrevocable L/C outside India. Binding guidance from the CBDT circular and Supreme Court precedent (Ishikawajima) treat offshore supplies where title and payment pass outside India as lacking territorial nexus for taxation. The contractual incidents of CIF/FOB and documentary flow support transfer of property outside India despite supplier's contractual obligations of custody, insurance and post-sale supervision; such obligations are contractual safeguards and do not postpone passing of title.Conclusion: In favour of the assessee. The sale of equipment and materials under the offshore supply contract took place outside India and the related receipts do not accrue or arise in India for taxation.Issue (ii): Whether any part of the income is attributable to operations in India or to a Permanent Establishment and therefore taxable.Analysis: Article 7(1) of the DTAA permits taxation only of profits attributable to a PE in India. Article 5(3) requires supervisory or installation/assembly activities to continue for more than nine months to constitute a PE. The supervisory activities identified begin principally at erection, testing and commissioning; on the facts presented the threshold period of nine months is not shown to be met. Certain factual aspects (monthly reports, soil investigation, possible extensions and other projects) create areas for limited verification by tax authorities, but absent clear factual showing of supervisory activities exceeding nine months or of an agency/dependent agent, PE is not established on the material before the Authority. If a PE is later found after limited inquiry, attribution principles permit estimating and taxing only profits reasonably attributable to the PE; routine transportation, storage and delivery incidental to supply are not to be attributed to a PE.Conclusion: In favour of the assessee. On the facts presented, no Permanent Establishment exists and no part of the offshore supply receipts is attributable to operations in India. If subsequent inquiry establishes a PE, only profits attributable to the PE may be taxed.Issue (iii): Whether the applicant together with L&T constitute an Association of Persons (AOP).Analysis: The contractual framework shows three separate contracts awarded by the purchaser to two separate contractors, independent billing and payment streams, and preservation of distinct legal identities. Clauses imposing overall responsibility, guarantees and indemnities are safeguards imposed by the purchaser and do not, by themselves, evidence a joint venture or common enterprise to share profits. The features that characterise an AOPunity of enterprise, pooling of receipts, joint billing or treatment as a single contracting entityare absent on the facts.Conclusion: In favour of the assessee. The applicant and L&T do not constitute an Association of Persons for assessment under the Income-tax Act, 1961.Final Conclusion: The Authority rules that the offshore supply receipts are not taxable in India on the facts presented; no Permanent Establishment is found on the material before the Authority and the applicant is not an AOP with L&T. Limited verification by assessing authorities is permitted on narrowly identified factual points, and if a PE is thereafter established, only profits attributable to that PE may be taxed.Ratio Decidendi: Where contractual incidents show transfer of title and receipt of payment outside India for offshore supply, such receipts lack the territorial nexus required for taxation under Section 9(1)(i) and, under Article 7 of the DTAA, only profits attributable to a Permanent Establishment in India (if established) may be taxed.