TaxTMI 
TaxTMI 
2008 (8) TMI 406
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....Corporation of India Limited ("PGCIL"). One was for onshore execution of the Fibre Optic Cabling System Package Project under the System Co-ordination & Control Project for the Eastern Region. The other contract was for offshore supply and offshore services. The scope of services under the onshore part was rendered by LGCL through its project office in India for which separate books of account were maintained by the appellant. As the "project office" constitutes a Permanent Establishment ("PE") in India in accordance with Article 5 of the India-Korea Double Taxation Avoidance Agreement ("DTAA"), the income attributable to the activities carried out in India in terms of Article 7 of the DTAA arising from the onshore contract was offered to tax in the return of income in India. 2.2 This way the return filed on 31-10-2002 showed a loss of Rs. 85,69,828 for the assessment year 2002-03. The said return was processed under section 143(1) of the Act vide intimation dated 25-2-2003 and refund of tax deducted at source alongwith interest under section 244A of the Income-tax Act (the Act) was granted. Subsequently, the return was taken up for assessment under section 143(3) of the Act by ....
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....271 ITR 193 (New Delhi), wherein it was held that such offshore supply of material resulting from engineering procurement and construction contract is taxable in India. Following above ruling he held that income from offshore supply of contract was taxable in India. The assessee did not produce any books of account relating to offshore supply of goods. The Assessing Officer found that the contract for offshore supply was for 73,25,665 U.S. dollar. 10 per cent of above amount was deemed to be paid and chargeable to tax in India. Profit on deemed receipt was worked out at 30 per cent of the amount, i.e., at Rs. 1,05,48,950. The above amount was added to the income of the assessee in the assessment order. The Assessing Officer also levied interest under sections 234B and 234D of the Income-tax Act. 4. The assessee impugned above assessment in appeal before the CIT (Appeals) and reiterated its submission that consideration for supply of equipment was remitted directly outside India by PGCIL through Letter of Credit (LC) and, therefore, the same was received outside India. It was, therefore, not possible to treat such income as received or deemed to be received in India. It also did ....
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....dia. Accordingly, no income accrues to the appellant in India from sale of equipment; (c) Mere fact that the appellant warranties that the equipment supplied by it will be new and unused and undertakes to remedy all defects pointed out during warranty period does not mean that the risk continues to be with the appellant even after the equipment is delivered to the purchaser." 4.4 The assessee also tried to distinguish the decision of Authority for Advance Ruling relied upon by the Assessing Officer. The computation of income in the assessment was also challenged besides levy of interest under sections 234B and 234D of the Income-tax Act. 4.5 The learned CIT (Appeals) after examining facts on record considered the question whether income from the offshore supply equipment by the appellant-company was liable to be taxed under the domestic laws under section 9(1)(i) read with Explanation 1(a) of the Act. He noted that appellant-company has entered into two contracts with PGCIL; one relating to supply of offshore equipment and other relating to onshore erection contract. Both were entered on 26-2-2001. After taking into consideration, Article 6 of both the agreements (re....
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....mmissioned successfully in India, both the contracts are liable to be cancelled. Thus there is inter-relation, inter-dependence of two agreements and one cannot exist without the other. With reference to Appendix-I of offshore supply contract relating to payment for delivery of offshore supply contract, the learned CIT (Appeals) concluded that terms clearly indicate that PGCIL was to take delivery of the equipment at the project site and not on the high seas as claimed by the appellant. He, accordingly, concluded that though there were two agreements, in fact it was a composite contract and activities under the contracts were inter-dependent and ultimately linked to each other. It was actually a composite contract for supply of equipment, as well as execution, erection, installation of equipment in India. He further observed that a colourable device was adopted by the appellant to conceal its real tax liability. The sale of equipment alleged to have been completed in South Korea was intimately linked to the onshore services provided by the appellant to PGCIL. The income from sale of goods could be deemed to accrue to the appellant in India as such sale is part of composite contract....
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....them outside India from Indian concern for services rendered outside India. While applying principle of apportionment of income to a composite transaction, which have some operations in one territory and some in others territory, it is essential to determine the taxability of various operations. The location of the source of income within India would not render sufficient nexus to tax the income from that source if all parts of transaction in question, i.e., transfer of property and goods as well as the payments were carried outside the Indian soil. Such transactions could not be taxed in India. Mere existence of a permanent establishment could not constitute sufficient "business connection" to take P.E. as a taxable entity. Fiscal jurisdiction of a country would not extend to taxing the entire income attributable to the permanent establishment. 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, could be taxed in India. There is a difference between the existence of "business connection" and income accruing or arising out of such business connection. Ld. counsel argued further that this ....
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.... contractor "assessee" of its obligation under the other contract. He emphasized that equipment/material supplied by the assessee when erected and commissioned was required to give satisfactory performance in accordance with the terms of the contract. Only then agreement would be taken as performed and not earlier. 9.1 Ld. DR also referred to performance on the part of the assessee of activities in India, inter alia, port handling and custom clearance of supplies from abroad, inland transit insurance, handling and transportation to site, unloading at site, storage, preservation, insurance, erection/installation. These activities/terms clearly showed that property in equipment passed to the buyer only in India. Ld. DR stated that plain reading of two contracts would show that they are integrated contracts and the default of one contract would be construed to be default under the other contract. This fact, according to him, has also been highlighted in the impugned order. It was further contended that one of the conditions imposed by RBI while permitting the assessee to have a "project office" as per letter dated 11-4-2001 was that office expenses will be met in India only from re....
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....y acceptable agreement." It was, accordingly, contended by Departmental Representative that neither the property in goods were transferred in Korea, nor the total price was paid outside India. In fact goods were transferred in India. The property in equipment did not pass to the purchaser unless equipment was erected and satisfactorily performed. All the above activities were carried in India and, therefore, a portion of income on offshore supply of goods arose in India and was rightly taxed. 10. We have given careful consideration to rival submissions of the parties and examined them on the basis of material on record. At the very outset, it is necessary to clarify that the decision of Authority for Advanced Rulings in the case of Ishikawajima Harima Heavy Industries Co. Ltd., In re [2004] 271 ITR 193 has been modified and reversed by the Hon'ble Supreme Court in the same case as reported in 288 ITR 408 on the assess ability of profit on offshore supply of equipment. Secondly, in the light of provisions of section 90(2), the assessee appellant cannot be taxed on the basis of provisions of DTAA between India and Korea. Section 90(2) of the Act is as under:- "90(2....
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....equipment, we would have to consider in some detail the agreement entered into between the assessee and the PGCIL. A copy of the said agreement is available at pages 3-45 of the paper book. The contract/agreement was entered on 26-2-2001. In Article 1, there is description of contract documents. Article 2 provides for contract price and terms of payment. The assessee was to receive US $ 7,282,069 as CIF price component including testing and training charges. The amount also includes Indian Agent's Commission (IAC) at the rate of 1.01 per cent. Article 3 provides for effective date for determining time for completion of the Contract. Article 4 provides that this contract is between the assessee and Power Grid and not with Government of India. Article 5 refers to the list of Appendices, which shall form integral part of the agreement. Article 6 on which revenue has laid lot of emphasis specifically states that notwithstanding award of work under two separate contracts, the contractor shall be overall responsible to ensure the execution of both the two contracts to achieve successful completion and taking over of the project by Powergrid. It further provides that "any default or b....
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.... and on shipment of equipment and submission of documents specified in Clause SCC 18.1. (ii) Twenty per cent (20%) of the CIF price component (excluding IAC) for all the equipments and materials excluding 'Mandatory spares and Tools & Tackles for Off-line Maintenance' shall be paid on pro-rata basis within 30 days of receipt of equipment at site and on submission of claim and physical verification by the employer. Note -Pro-rata shall refer to functionally complete part(s) of the facilities, for which unit rates are identified in the contract. 1.1-3 Final payment-The final fifteen per cent (15%) of the CIF price component (excluding IAC) for all the equipment and materials excluding 'Mandatory Spares and Tools & Tackles for Off-line Maintenance' shall be paid within 30 days of Operational Acceptance (on successful completion of .system availability tests) and proof of submission of the required number of reproducible, O&M manuals, approved drawings, data sheets, test reports, pamphlets and manual of spares, maintenance & testing equipment etc. as per the contract and on submission of claim by the contractor. 1.2 CIF Price Componen....
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....if any) shall, however, be submitted to the Employer at Powergrid, New Delhi (International Finance Department And T&CC Deptt.) 2.3 All invoices/claims for payment along with requisite documents as per the Contract, shall be submitted to the Employer at Powergrid, Kolkata (ERULDC). The advance copy of documents in case of payment through Letter of Credit shall be sent to the Employer at Powergrid, Kolkata (ERULDC) and copies of the same shall be sent to the Employer at Powergrid, New Delhi (International Finance Department and T&CC Department) invoice/claim for Advance Payment along with requisite documents shall, however, be submitted to the Employer at Powergrid, New Delhi (Contract Services Department.)." Appendix 3 provides for taking of insurance policy by the assessee including Cargo Insurance and Installation All Risks Insurance etc. Appendix 4 provides for Time Schedule. Appendix 8 provides for Functional Guarantees by the assessee. 10.7 There are then general conditions of contract, which also include definition of words and expressions used in the agreement. Para 31.1 relating to transfer of ownership is relevant and is as under:- "3....
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....dred and Sixty only) and US $ 88,400 (US Dollars Eighty Eight thousand and Four hundred only), or such other sums as may be determined in accordance with the terms and conditions of the contract. The break-up of the contract price is as under:- (i) Inland Transportation & Insurance charges INR 3,734,944 (ii) Erection, Testing & Commissioning charges INR 56,247,216 (iii) Maintenance charges US $ 76,046 (iv) Training charges US $ 12,354 TOTAL (i to iv) INR 59,982,160 +US$ 88,400" Article 3 refers to effective date for determining time for completion. Articles 4 to 6 of second contract are similar to the first contract. Thereafter in Appendix 1, para 1.1 relates to Terms of Payment of Services Portion and is as under:- "Inland Transportation and Insurance Charges and expatriate supervision and other local service charges i.e., Erection, Testing & Commissioning Charges shall be paid as follows:- (i) Eighty five per cent (85 per cent) of Inland Transportation and Insurance Charges shall be paid on pro-rata basis after receipt of material at site, production of do....
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....ding spare parts and tools and tackles for off-line maintenance therefore) and to the construction equipment to be provided by the Contractor or its sub-contractors. Amount Deductible Limits Parties Insured From To 110% of the CIF value Mandatory limit of insurance company, subject to maximum of 5% of insurance amount Contractor and employer Warehouse Warehouse + 60 days (b) Installation All Risks Insurance Covering physical loss or damage to the facilities at the site, occurring prior to completion of the facilities, with an extended maintenance coverage for the contractors liability in respect of any loss or damage occurring during the Defect Liability Period while the contractor is on the Site for the purpose of performing its obligations during the Defect Liability Period." 10.10 In the light of above agreements, PGCIL opened Letter of Credit with a bank, which nominated a bank in South Korea with a letter of credit to the assessee appellant. PGCIL placed order for purchase of specified goods which were delivered to shipping company for delivery to PGCIL. Documents evidencing the dispatch i.e., Bill of Lading dated 14-2-2002 ha....
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....t in case of a business where all operations are not carried out in India, the income of business deemed under this clause to accrue or arise in India shall be only such part of income as is reasonably attributable to operations carried out in India. Thus the provision provides as to what would be the portion of income in case of a business where all business operations or activities are not carried in India. It provides for assessment of a portion of income of the business, which is reasonably attributable to the operation carried out in India. In the present case, it is an admitted position that onshore operations relating to erection of equipment were carried in India and entire onshore income was liable to and has been subjected to tax in India. In fact there was no income and the loss returned by the assessee from onshore operation carried in India has been accepted by the Revenue. Even in respect of offshore supply of equipment, the department has accepted that all operations relating to supply were not carried in India. Its case is that 10 per cent of amount paid for offshore supply should be deemed to have accrued and chargeable to tax in India. Therefore, the question befo....
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.... the end of the decision and is as under:- "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. (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....
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....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 Advanced 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 th....
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.... of the seller, the property in the goods thereupon passes to the buyer. Such assent may be express or implied, and may be given either before or after the appropriation is made.Delivery to carrier.-(2) Where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee (whether named by the buyer or not) for the purpose of transmission to the buyer, and does not reserve the right of disposal, he is deemed to have unconditionally appropriated the goods to the contract." 13.1 It is clear from above that section 23(1) is independent of section 23(2) of the Act. Section 23(1) does not contemplate unconditional appropriation in pursuance of a contract. It refers to unconditional appropriation with the assent of the parties. Whereas in section 23(2) it is delivery to a carrier in pursuance of a contract which operates as an unconditional appropriation and is, therefore, deemed to be unconditional appropriation. As the goods were delivered in accordance with agreement, the property in goods was transferred to the buyer and a sale did take place. Rules laid down in sections 20 to 24 of Sale of Goods Act are applicable only when intention of t....
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.... did not receive entire payment outside India. A part of it was received outside India. In fact 15 per cent of payment was retained by Power Grid and was to be paid 30 days after operational acceptance on erection and completion of the system and on proof of submission of required number of reproducible. (iii) That assessee after loading of equipment on the ship was required to take delivery of equipment in India and was required to transport the same to site and complete execution of Fibre Optic Cabling System package and was responsible for successful completion till taking over of project by Power Grid. It was also responsible for the insurance of the equipment. Therefore, it cannot be said that property in the goods got transferred outside India. In fact it is clear from the terms of the agreement that property in goods would be transferred to India on execution and satisfactory completion of work and handing over of the same to the Power Grid. Unless all the acts were performed successfully and satisfactorily, the property in the goods did not pass. In these circumstances, there was justification for the Revenue to assess part of income in India, attributable to the o....
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....specifically and separately fixed. So the duties to be performed in India by the assessee are being paid for separately. These are being performed for and on behalf of the "Employer" for a consideration, which is separate from consideration for supply of equipment. There is no justification to mix and take them as one. The above fixed separate consideration is not affected by article 6 of the Agreements, which only emphasizes that the contractor cannot leave after supply of equipment but must give performance under both the contracts. It cannot follow that consideration for offshore supply of equipment is not separately fixed and did not accrue when goods were sold. As emphasized by their Lordship of Supreme Court, even in respect of one composite transaction with several operations, it is essential to determine taxability of each of the operation. Here we are concerned with taxability of sale operation which took place outside India. The above operation/event is quite separate and when goods (equipment) were transferred and sold, it was to be considered whether income had accrued. Therefore, performance of duties mentioned in the Erection Contract cannot postpone the transfer of p....
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....lied give satisfactory performance. These obligations are nothing beyond trade warranties. Under the law when equipment is supplied by the buyer, the equipment is expected to perform all the functions which equipment of that character ordinarily perform. The terms and conditions of contract clearly envisage that all the terms in favour of the purchaser are warrantee conditions and not condition of contract. There is obligation on the part of the assessee appellant to handover the equipment functionally complete. That is the warrantee, which the seller has to satisfy. In case any damage or defect is caused to the equipment in its transportation or during the course of its erection, then buyer has to make good and give the equipment in the running condition. The cost for making it in running condition is to be borne by the buyer. That is the essence of the contract. Rights secured by the buyer (employer) are rights, which are ordinarily secured under commercial contracts. Useful reference can be made to section 59 of the Act, which is as under: "59. Remedy for breach of warranty.-(1) Where there is a breach of warranty by the seller, or where the buyer elects or is compelled....
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.... supplied and/or finds a moisture content in the goods supplied in excess of the maximum percentage of moisture allowed under clause 8 by not less than 3 per cent and stipulates an allowance therefore, buyers shall thereupon be entitled to exercise any of the following options (a) Of accepting the goods with the allowance(s) awarded. (b) Of cancelling the contract in respect of the particular lot or lots of goods supplied and charging sellers for the market difference on the goods as contracted for and those offered in fulfilment of the contract and on which the award has been made. (c) Of rejecting the particular lot or lots of goods supplied and claiming a fresh tender in lieu thereof to be made within days from the date on which the option is declared." 14.3 Their Lordship after considering in detail the relevant facts and law held that above stipulation in the contract did not affect the passing of the property- "In the case before us the High Court relied on clauses (7) and 9(3) of the contract for its conclusions. In our view nothing in those clauses justifies that conclusion. Under clause (7) where there is a total failure on the part o....
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....f the contract the seller delivers the goods to the buyer or to a carrier or other bailee whether named by the buyer or not for the purposes of transmission to the buyer and does not reserve the right of disposal he is deemed to have unconditionally appropriated the goods to the contract. The buyer's assent to the passing of the property in the said circumstances is implied and that when the seller despatches the goods and delivers them to the common carrier for purposes of transit to the buyer, the common carrier not only receives the goods as agent of the buyer but also assents to the appropriation made by the seller. Where however the intention is clearly indicated and the carrier assents it is immaterial by what document the consignment is effected. In cases where the seller bears the freight for the transmission of the goods free of cost to the buyer, the property in the goods passes to the buyer as soon as they are sent to the carrier, though there may be a provision that they are to be paid for by the buyer on behalf of the seller after the arrival of the goods. But where however the seller exercises a right of disposal or where he agrees to deliver the goods at their de....
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.... of better securing payment, some condition is made out in favour of the seller. But in the present case there is no such terms or conditions. The seller is entitled to 85 per cent of the price on delivery of goods to the ship and balance 15 per cent on completion of execution as provided in the agreement. The seller has no right to repudiate the contract or to get back the equipment in case the price of the goods was not paid. There is specific agreement that he would only be entitled to interest in case the price of the equipment is not paid in time. Buyers right to examine and repudiate the goods, does not by itself indicate that property in goods has not passed to him. This position was accepted in the case of Kwei Tek Chao v. British Traders & Shippers Ltd 2 Q.B. 459 duly approved by the Supreme Court in the case of Mahabir Commercial Co. Ltd. In the present case even the buyer has no right under the contract to repudiate the goods (equipment). Other assurances and warrantees given in the agreement relating to satisfactory performance of equipment are normal warrantees to secure performance by the buyer and cannot be read as condition entitling the seller to repudiate contract....