TaxTMI 
TaxTMI 
2010 (2) TMI 186
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....nd testing at supplier's works, packing, forwarding and dispatch from manufacturer's works to the port of disembarkation in India of all offshore plant & equipment including mandatory spares. (2) Onshore supply contract - Contract No. CS-9558-102-2-SC-COA-4521 dated 25.3.2005. (3) Onshore services contract - Contract No. CS-9558-102-2-TC-COA-4522 dated 25.3.2005 2. In this case we are concerned only with the offshore supply contract No. 4520 and therefore, it is unnecessary to delve into other contracts. The value of the offshore supply contract is US$ 391,121,452 (Rs.17,084,185,023/-) to be paid in foreign currency in execution of off-shore supply contract. According to the applicant, the transaction of off-shore plant and equipment etc. was completed outside India and that the property in goods passed to NTPC outside India and no portion of income from the off-shore supply accrues or arises to the applicant in India or received from the NTPC within India and therefore it is not liable to pay any tax under the Income-tax Act. 3. Against this background the applicant seeks the ruling of this Authority on the following question in order to know its tax liability: ....
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....e component is initial advance payment on signing the contract and submission of bank guarantees and also the submission of detailed PERT network. 60% of FOB price component of the contract price for each identified equipment is payable upon dispatch of equipment from manufacturer's works on pro-rata basis on production of invoices and satisfactory evidence of shipment. 15% of FOB price component is payable on receipt of the equipment at site on pro-rata basis after physical verification. The remaining 10% of the contract price is payable at various stages upto the successful completion of guarantee tests for units I, II & III. 6. Some of the other salient features of the contract are as follows: 21.3 Transportation 21.3.1 The Contractor shall at its own risk and expense transport all the Plant and Equipment and the Contractor's Equipment to the Site by the mode of transport that the Contractor judges most suitable under all the circumstances. 21.3.3 Upon despatch of each shipment of the Plant and Equipment and the Contractor's Equipment, the Contractor shall notify the Employer by courier, post or by telefax followed by post confirmation of the description of th....
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.... Insurances. All insurers rights of subrogation against such coinsureds for losses or claims arising out of the performance of the contract shall be waived under such policies. Notwithstanding the insurance requirements mentioned above, it would be the contractor's responsibility to take adequate insurance cover as may be pertinent to protect his interest and interest of the employer. If at any point of time during execution of the Contract, the insurance policies are found to be inadequate, the Contractor shall take fresh insurance policies meeting aforesaid requirements. The employer reserves the right to make suitable recovery from the contractor, if any. 8. The Revenue opposed the application on grounds that : (i) the contract is a composite contract; (ii) the facts are distinguishing from the case of Ishikawajma-Harima Heavy Industries Ltd. vs DIT [2007] 288 ITR 408 (SC) (hereinafter referred to as 'Ishikawajma') (iii) the assessee has business connection in India and also permanent establishment in India in respect of works relating to offshore supply. 9. The applicant banks its support mainly on the judgement of the Supreme Court in Ishikawajma and also ....
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.... FOB Port of shipment with the negotiation of shipping documents. It is worthy of note that the applicant has not reserved the right of disposal during transit or otherwise. The fact that the applicant is not relieved of the responsibility for loss or damage to the goods until the final take over and acceptance of the goods and that the goods are left in the custody of the applicant till the stage of erection and installation are not inconsistent with the Power Grid having already become the owner of equipment well before the goods reached the Indian Port. These are special safeguards which Power Grid wanted to have keeping in view the operational exigencies and overall obligations of the applicant under the contract. It is trite that risk need not pass simultaneously with the title to goods. There could be special stipulation between the parties in this behalf. As rightly pointed out by the learned counsel for the applicant, the applicant, by taking care of goods at the site in India till installation, assumed the capacity of a bailee. As regards the stipulation that the supplier shall continue to be responsible for the quality and performance of the goods until the final take ove....
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....uments in favour of the NTPC. The consideration of sale of offshore was remitted to the applicant directly outside India by means of establishing L/C. Hence no portion of consideration for offshore supply was received or could be deemed to have been received in India and therefore not liable to tax. Further no income accrues or arises in India to the applicant attracting income-tax. 14. The applicant has taken aid of a Circular No. 23 dated 23.7.1969 issued by the CBDT, the extract of which is as follows to buttress its stand: "Non-resident exporter selling goods from abroad to Indian importer. No liability will arise on accrual basis to the non-resident on the profits made by him where the transactions of sale between the two parties are on a principal to principal basis. In all cases, the real relationship between the parties has to be looked into on the basis of an agreement existing between them, but where: (1) The purchases made by the resident are outright on his own account, (2) The transactions between the resident and non-resident are made at arms length and at prices which would normally be chargeable to other customers. (3) The Non-resident ....
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....ated by the Madras High Court in Ansaldo's case [2009] 310 ITR 237 (Mad) is not applicable to the present facts of the case and therefore the contention of the Revenue in this regard cannot be accepted. 17. The Revenue has argued that there was a PE and also business connection in respect of offshore supply of goods and therefore it is taxable and the profits from such supply attributable to the PE is taxable in India. Permanent establishment is not defined in the Income-tax Act but it is available under the DTAA. The Revenue has not brought out any material relating to the PE of the applicant as regards the offshore supplies and therefore the contention cannot be acceptable. 18. The Hon'ble Supreme Court in the case of Ishikawajma have held (page 446): "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 Av....
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....r work and labour and not a contract of sale. The contract is one single and indivisible contract and the erection and installation of the rolling shutter is as much a fundamental part of the contract as the fabrication and supply. That case also has no application in view of different facts and the provisions applicable. On perusal of the contract documents, we find that 3 contracts are entered into by the applicant with the NTPC ahead of execution i.e. (i) Offshore supply contract; (ii) Onshore supply contract; and (iii) onshore services contract. Each contract has a separate scope of work. Therefore it cannot be an integrated one. In this case we are concerned only with the offshore supply contract though related to the turnkey project. This contract is executed by supplying the materials from outside India, therefore, the contention of the Revenue regarding the nature of the contract is not well founded. 22. The Revenue has filed subsequent to the hearing a paper book containing xerox copies of FIR, letter rogatory, application for impleadment, affidavit and assessment order. A criminal case might have been registered and investigated into on the allegation of fa....
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....out by the learned Member, the clauses in the offshore supply contract Agreement regarding transfer of ownership, the payment mechanism in the form of letter of credit which ensures the credit of the amount in foreign currency to the applicant's foreign bank account on receipt of shipment advice and the insurance clause would go to establish that the transaction of sale and the concomitant transfer of title took place outside the Indian territory. The documents relating to a sample transaction filed by the applicant i.e. the certificate of origin, the bill of lading, the bill of entry as well as the commercial invoice reinforces the conclusion that the ownership and property in goods passed outside India. The contractor's obligation to insure the goods to cover loss or damage during transit and the responsibility cast on the applicant to take proper care of goods till they reach the site and are inspected shall be viewed in the context of the fact that the co-insured is the applicant and moreover, the applicant has undertaken onshore services contract. Further, as pointed out in Hyosung Corporation's case [2009] 314 ITR 343 (AAR), the fact that the transit risk is borne by th....
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....ed to. Clause 7.1 which provides for shipment has been extracted. The contractor is required to notify the employer setting forth all the material information concerning the shipment including the date of embarkation and departure, the port of origin and the port of entry, the value and weight of the shipment, the number and value of bill of lading or airfreight bill and the estimated date of arrival in India. It further states that the contractor shall be responsible for packing, loading, transporting, receiving, unloading, storing and protecting all equipment and materials and/or contractor's equipment and other things required for the works. Clause 13.1 relating to contract price is then extracted. The contract price is split into (a) 'US Dollar portion'; and (b) 'Indian rupee portion'. Then clause 22.1 dealing with passing of title to the goods is extracted. It says: "Title to Equipment and Materials and Contractor's Equipment Contractor agrees that title to all Equipment and Materials shall pass to Owner from the Supplier or Subcontractor pursuant to Section E of Exhibit H (General Project Requirements and Procedures). Contractor shall, however, retain care, custody a....
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....approving the view taken by AAR in that case, the Supreme Court observed thus (page 430 of 288 ITR): "Income arising out of operation in more than one jurisdiction would have territorial nexus with each of the jurisdiction on actual basis. If that be so, it may not be correct to contend that the entire income ' accrues or arises' in each of the jurisdiction. The Authority has proceeded on the basis that supplies in question had taken place offshore. It, however, has rendered, its opinion on the premise that offshore supplies or offshore services were intimately connected with the turnkey project." 33. Then, the Works Contract cases arising under the Sales tax Acts which were referred to by the Additional Solicitor General in support of the contention that the contract being a composite one, the sale of Equipment and Material cannot be inferred were referred to and it was observed that those decisions under the Sales tax laws have to be considered on a different footing. Then, the case of CIT v. Mitsui Engineering and Ship Building Co. Ltd. [2003] 259 ITR 248 was referred to. It was held in that case that the contract for designing, manufacturing, shop testing and packing upto....
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....in the activity giving rise to the profits." 35. These propositions equally apply to the instant case. The legal position enunciated in Ishikawajma case applies in all fours to the present case. The stipulations in the contract and the modus operandi of the transactions are almost the same. In fact, the said decision applies a fortiori to the present case as the contract for offshore supply equipment and material is a separate and distinct one. Just as in the case of Ishikawajma, the PE of the applicant evidently set up for the purposes of carrying out the onshore supply and services does not play any role in the offshore supplies except carrying out certain incidental services such as clearance from customs and transportation to the site. The attempt of the Revenue to get over the ratio of the decision in Ishikawajma is unsupportable from any point of view. 36. The Revenue's representative has placed reliance on the decision of Madras High Court in the case of Ansaldo Energia SPA vs. ITAT [2009] 310 ITR 237. In that case, a contract for off-shore supply awarded to the assessee was held to be a composite contract together with onshore supply contract etc. awarded....
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.... by NTPC for three separate works viz. offshore supply, onshore supply and onshore services. Three separate contracts were executed. There is no basis to think nor is there any allegation that the contracts were split up at the instance of the applicant or that there was price imbalance. 38. In any case, we find no distinguishing feature that makes the Ishikawajma case inapplicable to the facts of the present case, as discussed earlier and this Authority is bound by that decision. 39. I may now refer to a few other points put forward on behalf of the Revenue. It is contended that the main equipment to be installed at site is boiler and the piecemeal equipment and parts required for assembling the boiler have no independent existence and therefore the supplies equipment and material are integrally connected with the manufacture and erection of boiler which has taken place in India. In the circumstances, it is argued on behalf of the Revenue that the Clauses in the Contract relating to transfer of title in the equipment outside India do not really make any sense and they are only artificial in nature. We find it difficult to appreciate this argument. First of all, it must be no....