TaxTMI 
TaxTMI 
2010 (9) TMI 624
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....n India. 3. Without prejudice to ground Nos. 1&2, that on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the taxation of entire income from off shore supply, i.e. 10 per cent of gross revenue arising from such supplies though the income attributable to the project office in India was 10 per cent of such income, i.e. 10 per cent of 10 per cent as stated by the Assessing Officer himself." 2. Vide order dated 31-7-2009, the Tribunal, in the first round, in the assessee's appeal in ITA No. 173 (Delhi) 06, dealt with, inter alia, Ground Nos. 4&8 raised by the assessee. These grounds were as follows:- "4. That on the facts and circumstances of the case, and in law, the CIT(A) has erred in holding that revenue arising from off shore supply of equipment to IOCL was taxable in India. 8. That on the facts and circumstances of the case and in law, the CIT(A) erred in upholding the levy of interest under sections 234B and 234D of the Act." 3. The Tribunal set aside these issues to the CIT(A), to be decided de novo, observing as follows:- "11. Having considered the rival contentions in the light of the material placed on record, we find t....
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....ign and engineering services, the consideration for which was denominated partly in Indian currency and partly in foreign currency. Revenues arising to the assessee from on-shore construction, on-shore design and engineering, on-shore supply, off-shore construction and off-shore design and engineering were offered by the assessee to tax in India. The assessee did not consider the revenues earned from off-shore supply of equipment to be chargeable to tax in India. The assessee had established a Project Office in India for the execution of the said contract. Since this Project Office constituted a Permanent Establishment ("PE", for short) of the assessee in India, the assessee computed its income for the year under consideration on a net income basis, at Rs. 7,34,39,734, against which, the brought forward business loss of Rs. 7,34,39,734 was set off in accordance with the provisions of section 72 of the I.T. Act. That being so, the assessee filed a return of income for the year declaring nil income. 6. Vide the assessment order dated 31-3-2005, passed under section 143(3) of the I.T. Act, the Assessing Officer rejected the books of account of the assessee and estimated its profits....
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....)'s order in the assessee's case for assessment year 2001-02. 10. The Tribunal, as seen above, remitted the matter to the file of the ld. CIT(A), to decide it afresh in the light of Ishikawajima-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 4081 (SC), wherein, as per the assessee, the Hon'ble Supreme Court has held that in the case of an offshore supplier, since the entire transaction is completed on the high seas, the profits on such sale do not arise in India and they are not taxable in India, and in the light of Ansaldo Energia Spa v. ITAT [2009] 178 Taxman 57, wherein, according to the Department, the Hon'ble Madras High Court has, on having considered Ishikawajima-Harima Heavy Industries Ltd. (supra), held that if a contract is composite in spite of the apparent demarcations into separate parts, the mere fact that for offshore supply the title passed outside India alone will not decide the taxability. 11. While passing the impugned order, the ld. CIT(A) has observed that in the case of Ansaldo Energia Spa (supra), the Hon'ble Madras High Court has held that if a contract is composite in spite of the apparent demarcation into separate parts, the mere fact that for of....
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....ecifically when the consideration for the same has been separately determined in the contract and all parts of the transaction have taken place outside India. 15. Apropos the CIT(A)'s observation that in the case of Ishikawajima (supra), everything was done outside India and there was no PE of the assessee in India, the learned counsel for the assessee has submitted that the said finding of the CIT(A) is contrary to the facts in the case of Ishikawajima (supra), wherein there is a clear cut undisputed finding of the AAR that the assessee in the case of Ishikawajima-Harima Heavy Industries Co. Ltd. (supra) had a permanent establishment in India which finding has been endorsed by the Hon'ble Supreme Court. 16. The learned counsel for the assessee has submitted that the ld. CIT(A) has erred in holding that the delivery in the assessee's case was 'CIF Jobsite' and that accordingly, it is to be considered that the title had passed on to 'IOCL' on delivery of the jobsite. It has been contended that in the assessee's case, it is an undisputed fact that the bill of lading was prepared in the name of IOCL and was handed over to its nominee, i.e., the banker, in Rome, i.e., outside Ind....
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....held by the Hon'ble Madras High Court, that if a contract is composite in spite of the apparent demarcation into separate parts, the mere fact that for off-shore supply, the title passed outside India, alone will not decide taxability; that Ishikawajima (supra), does hold that since in that case, the entire transaction took place outside India, no taxable event took place in India, but it said so after looking at the entire contract and the terms of the contract necessary to determine whether all parts of the off-shore transaction took place off-shore and it did so after looking into whether the PE in India had anything to do with the offshore supply and also whether the contract was split up or a composite contract; that it was in that context that in Ishikawajima (supra), the Supreme Court had said that all parts of the transaction in question, that is, transfer of properties in goods, as well as payment were carried on outside India and therefore, the transaction could not have been taxed in India and that, even though the contract was signed in India, that is of no material consequence, since all activities in connection with off-shore supply were outside India; that the Suprem....
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....and have perused the material on record. The issue herein is as to whether the ld. CIT(A) has rightly confirmed the action of the Assessing Officer in bringing to tax the revenue arising to the assessee from offshore supply of equipment to IOCL in India. 24. The assessee, an Italian Company, under the terms of the contract awarded to it by IOCL, supplied equipment to IOCL and undertook construction/installation services. The assessee did not offer to tax in India, revenues arising to it from off-shore supply of equipment. 25. The Assessing Officer brought to tax the assessee's income from off-shore supply of equipment to IOCL. In doing so, the Assessing Officer relied on the decision of the AAR in the case of Ishikawajima-Harima Heavy Industries Co. Ltd. (supra). 26. In the impugned order, the CIT(A), on remand from the Tribunal, considered Ishikawajima-Harima Heavy Industries Ltd. (supra) handed down by the Hon'ble Supreme Court and Ansaldo Energia Spa (supra) pronounced by the Hon'ble Madras High Court, both of which had not been rendered by the time the CIT(A)'s order in the first round was delivered on 30-11-2005. 27. The ld. CIT(A) upheld the action of the Assessin....
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....non-resident to an Indian resident which is a part of a composite contract involving various operations within and outside India, income from such sale shall be deemed to accrue or arise in India if it accrues or arises through or from any business connection in India. The findings of the AAR which travelled as such upto the Hon'ble Supreme Court were, that the assessee had a business connection in India; that if consideration accrues only for supply of goods and the sale is completed outside India, no profits can accrue in India; that however, if a contract envisages a composite consideration for the various obligations to be performed and if certain operations are to be performed by or through the business connection, then, profits would be deemed to accrue in India; that property in the goods, which were, the subject-matter of the offshore supply, passed outside India; and that the assessee had a PE in India within the meaning of the Double Taxation Avoidance Agreement ('DTAA' for short), entered into between the Governments of India and Japan. 30. Before the Hon'ble Supreme Court, the case of the Department was that the contract involved was a composite contract, involving e....
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....ayable in India. Two basic issues which, thus, arise for our consideration are: (a) the taxation of the price of goods supplied, by way of offshore supply price of which is specified in Ex.D, clause. 2.1; and (b) the taxation of consideration paid for rendition of services described in the contract as offshore services at Ex.D. 24. The contract is a complex arrangement. Petronet and appellant are not the only parties thereto, there are other members of the consortium who are required to carry out different parts of the contract. The consortium included in Indian company. The fact that it has been fashioned as a turnkey contract by itself may not be of much significance. The project is a turnkey project. The contract may also be a turnkey contract, but the same by itself would not mean that even for the purpose of taxability the entire contract must be considered to be an integrated one so as to make the appellant to pay tax in India. The taxable events in execution of a contract may arise at several stages in several years. The liability of the parties may also arise at several stages. Obligations under the contract are distinct ones. Supply obligation is distinct and separat....
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.... Section 9 raises a legal fiction; but having regard to the contextual interpretation and further more in view of the fact that we are dealing with a taxation statute the legal fiction must be construed having regard to the object it seeks to achieve. The legal fiction created under section 9 of the Act must also be read having regard to the other provisions thereof. [See Maruti Udyog Ltd. v. Ram Lal & Ord. [2005] 2 SCC 638]. 28. For our benefit, we may notice the provisions of section 42 of the Income-tax Act, 1922. It provided that only such part of income as was attributable to the operations carried out in India would be taxable in India. Territorial nexus doctrine, thus, plays an important part in assessment of tax. Tax is levied on one transaction where the operations which may give rise to income may take place partly in one territory and partly in another. The question which would fall for our consideration is as to whether the income that arises out of the said transaction would be required to be proportioned to each of the territories or not. Income arising out of operation in more than one jurisdiction would have territorial nexus with each of the jurisdiction....
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....entity. The fiscal jurisdiction of a country would not extend to the taxing entire income attributable to the permanent establishment. (8) There exists a difference between the existence of a business connection and the income accruing or arising out of such business connection. (9) Paragraph 6 of the protocol to the DTAA is not applicable, because, for the profits to be 'attributable directly or indirectly', the permanent establishment must be involved in the activity giving rise to the profits. Re: Offshore services: (1) Sufficient territorial nexus between the rendition of services and territorial limits of India is necessary to make the Income-taxable. (2) The entire contract would not be attributable to the operations in India viz. the place of execution of the contract, assuming the offshore elements form an integral part of the contract. (3) Section 9(1)(vii) of the Act read with memo cannot be given a wide meaning so as to hold that the amendment was only to include the income of non-resident taxpayers received by them outside India from Indian concerns for services rendered outside India. (4) The test of residence, as applied in International Law also,....
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.... by the Hon'ble Supreme Court, has an important role to play in the assessment of tax. Income arising out of the operations in more than one jurisdiction would have territorial nexus with each of the jurisdiction, on actual basis and if that is so, the entire income cannot be said to accrue or arise in each of the jurisdictions. In the case of Ishikawajima-Harima Heavy Industries Ltd. (supra), the Hon'ble Supreme Court observed that it was only for the purpose of taxability that the terms of the contract were required to be construed. It was observed that a turnkey contract may involve supply of materials used in the execution of the contract, as also for the use of the materials by works and labour, but the same may not have any relation with its taxability part. It was held, inter alia, that so far as regards offshore supply, only such part of the income, as was attributable to the operations carried out in India, could be taxed in India; and that since all parts of the transaction, i.e., the transfer of property in goods, as well as the payment, were carried on outside India, the transaction could not have been taxed in India; that the principle of apportionment, wherein, the te....
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....act, of itself, per se, is not conclusive of the offshore supply portion thereof being taxable in India. This, particularly so, when undisputedly, the consideration for the offshore supply stands separately determined in the contract. It may be underlined that herein, undisputedly, all parts of the transactions have taken place outside India. 35. So far as regards Ansaldo Energia Spa (supra), therein, the offshore supply transaction in India was taxed basically for the reason that the contract involved therein was a single bidder contract. The contract was split up on the asking of the foreign party. This to start with, was not accepted by ASPL - NLC, a company set up in India by the assessee therein. The finding of fact recorded was that the four concerned contracts were planned in such a manner as resulted in loss in India and the major part of the profits was shown towards the offshore supply transaction. The split up of the contract was held to have been brought about only for tax purposes, the imbalance of price being evident. 36. The ld. DR has contended that Ansaldo Energia Spa (supra), has duly taken into consideration Ishikawajima (supra), to hold that if a contract ....