TaxTMI 
TaxTMI 
2014 (4) TMI 975
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.... by petitioner no.1 for the offshore supply of goods and for rendering of offshore services were taxable in India. The said ruling is hereinafter referred to as the 'impugned ruling'. 2. The petitioner no. 1, Linde AG, Linde Engineering Division, Pullach, Germany is hereinafter referred to as 'Linde'. Samsung Engineering Company Ltd., Seoul, Korea is hereinafter referred to as 'Samsung'. Linde and Samsung are hereinafter also referred to as members and collectively referred to as 'Consortium'. ONGC Petro Additions Limited is hereinafter referred to as 'OPAL'. Memorandum of Understanding dated 03.03.2008 is hereinafter referred to as 'MOU'. 3. The principal controversy which is required to be considered in the present petition is: whether in the given facts, Linde and Samsung constitute an Association of Persons within the meaning of 'person' as defined under section 2(31) of the Act? And, whether the income received/receivable by Linde for the supply of equipment, material and spares outside India and for rendering services outside India is taxable in India? 4. The relevant facts in brief are as follows:- 4.1. On 19.4.2007, OPAL floated a Tender Notice inviting bids exe....
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....cal Complex is hereinafter referred to as the 'Contract'. 5. Linde filed an application before the Assessing Officer under section 197 of the Act claiming that no portion of the amount payable to Linde for supply of equipment, material and spares and for providing basic and detailed engineering services was liable to be subjected to withholding of tax under section 195 of the Act as it was contended that the said transactions were performed and completed outside India and payments for the said transaction were also received outside India. It was, thus, contended that the amounts received/receivable by Linde for the said supplies and services were not chargeable to tax in India. The Assessing Officer did not accept the plea of Linde and directed OPAL to withhold tax on amounts paid to Linde in terms of the Contract. Thereafter, Linde filed an application before the Authority under section 245Q of the Act seeking advance ruling with regard to the status of Linde and Samsung as an Association of Persons and also as to the tax liability of Linde in India in respect of income received/receivables under Contract dated 10.02.2009. The Authority admitted the application for consideratio....
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....ward was in the name of the Consortium and not in the name of Linde and Samsung individually. The liability of Linde and Samsung towards OPAL, for due performance of the Contract, was joint and several. The Authority further held that the Contract was an indivisible contract and was incapable of being split up into different components/parts. And, on this basis the Authority concluded that income received/ receivable by the petitioner for offshore supply of equipment, materials and spares and for offshore supply of drawings and designs relating thereto was taxable in India. The Authority also held that since Linde/Samsung continued to be responsible for the supplies up to the stage of acceptance of the work in relation to the erection, procurement and commissioning project, the title of the equipment/material supplied could not be accepted to have transferred to OPAL overseas. 7. Aggrieved by the impugned ruling passed by the Authority, the petitioners have filed the present writ petition. SUBMISSIONS Submissions of Petitioners/Linde 8. It is contended by the learned senior counsel for the petitioner that the status of the Consortium formed by Linde and Samsung was not ....
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....ntions, the learned counsel placed reliance on the judgment of the Supreme Court in the case of CIT v. Indira Balkrishna: (1960) 39 ITR 546 (SC) and also referred to the decisions passed by the Authority in the case of Hyundai Rotem Co. and Mitsubishi Co. v. DIT (International Taxation): [2010] 323 ITR 277 (AAR), Hyosung Corporation v. Director of Income-tax (International Taxation) New Delhi: [2009] 314 ITR 343 (AAR) and In Re: Van Oord Acz. Bv: [2001] 248 ITR 399 (AAR). 11. It is also contended that the Authority was obliged to follow its earlier rulings passed in the cases of Hyundai Rotem Co. and Mitsubishi Co. (supra), Hyosung Corporation (supra) and In Re: Van Oord Acz. Bv (supra) as it is settled law that a principle of law laid down by any Judicial Authority, unless upset in appeal or rendered inapplicable by subsequent change in law would be binding on the said Judicial Authority. In support of this contention, reliance has been placed on the judgment of the Supreme Court in the case of Columbia Sportswear Co. v. DIT: (2012) 11 SCC 224. 12. It was next contended on behalf of Linde that the consideration received/receivable by Linde for supplying equipment, material a....
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.... taxable in India and the Authority misdirected itself in passing the impugned ruling. 14. It was also contended that in terms of the Double Taxation Avoidance Agreement (DTAA) between India and Germany, income of Linde was taxable exclusively in Germany with respect to its global business income, except in cases where the petitioner carried on business through a permanent establishment in India, in which case the profits attributable to the permanent establishment would be taxable in India. The counsel has relied upon Articles 5 and 7 of the said DTAA. It was also submitted that the permanent establishment of Linde did not come into existence till the commencement of the installation stage which was subsequent to Linde providing the basic and detailed engineering and drawings and offshore supply of equipment and material. Thus, the income from provision of offshore supplies and services had already accrued and arisen, prior to Linde's permanent establishment coming into existence. Thus, it was contended that the income from supply of equipments, materials and spares supplied from overseas and offshore services were not taxable under the Act. 15. It was further submitted that....
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....lastly, contended that in terms of Section 86 of the Act, the income of an Association of Persons was to be taxed in the hands of the association and the distribution of income to the members of an Association of Persons was not liable to tax. In the present case, the entire consideration under the Contract was paid/payable by OPAL to the members separately and not to the Consortium. Thus, the notional inflow of funds in the hands of the Consortium was also equal to the outflow in favour of the members. And in such case, no income would arise in the hands of the Consortium. It is pertinent to mention that this contention was neither raised by the petitioner before the Authority nor was considered by the Authority. Submissions of Respondent/Revenue 19. The learned counsel for the respondent has supported the impugned ruling passed by the Authority. It was contended by the respondent that the Consortium formed by petitioner and Samsung constituted an Association of Persons and income or profits received/receivable under the Contract were liable to be assessed in the hands of the Consortium as a separate person. It was submitted that the Contract was entered by OPAL with the Con....
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.... present case. 20. The counsel for the respondent disputed the contention of the petitioner that income/profits received outside India for the offshore transaction were not taxable in India. It was contended by the respondent that the project in the present case is a turnkey project and the contract is an integrated and indivisible contract. Any splitting up of the contract would be artificial and could not be resorted to. It was submitted that the offshore and the onshore transactions could be segregated for the purposes of taxation and the contract had to be read as a whole as an indivisible contract. The dominant object of the contract is the execution of a turnkey project and the question whether the title to the goods supplied passes offshore or within India is secondary to the execution of the contract. The offshore and the onshore transactions are interlinked and the non-execution of one transaction/part would result in the breach or failure of the whole contract. The contract itself provides for milestone dates and the breach of any of the terms thereof would result in the breach of the entire contract and not just a particular obligation. The consideration received for ....
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....7.2009. 24. It is submitted that the Sections 86 and 67A of the Act relied upon by the petitioners only dealt with the method of computation of the income of partnership/Association of Persons and not whether the association was to be taxed as a separate entity. DISCUSSION AND CONCLUSION 25. We have heard the counsel for the parties. The principal questions that are required to be considered are:- (i) Whether the consortium formed by Linde and Samsung constitutes an Association of Persons under section 2(31) of the Act and are they liable to be taxed under the provisions of the Act as an Association of Persons; and (ii) Whether the income/profit received/receivable by the Linde towards the offshore supply of equipment, materials and spares and for drawings and designs in relation thereto, is taxable in India under the provisions of the Act or under the Double Taxation Avoidance Agreement read with the Protocol between India and Germany? Whether the Consortium constitutes an AOP 26. Section 4 of the Act is the charging section. Section 4(1) provides that income tax shall be charged in respect of the total income of a person in the previous year. A person is defi....
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....e purpose of producing an income. An 'Association of Persons' can be formed only when two or more individuals voluntarily combine together for a certain purpose. Hence volition on the part of the member of the association is an essential ingredient. It is true that even a minor can join an 'Association of Persons' if his lawful guardian gives his consent. In the case of receiving dividends from shares, where there is no question of any management, it is difficult to draw an inference that two more shareholders functioned as an 'Association of Persons' from the mere fact that they jointly own one or more shares, and jointly receive the dividends declared. Those circumstances do not by themselves go to show that they acted as an 'Association of Persons'. (emphasis supplied) 30. It is also relevant to refer to a judgment of the Supreme Court in the case N.V. Shanmugham and Co. v. CIT: (1970) 2 SCC 139 for understanding the meaning of the term Association of Persons. In that case, the Court appointed three receivers in a suit for dissolution of a partnership firm. The receivers were directed to conduct the business of the firm and the profits earned from the business, being treat....
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....tnership, it was in many respects similar to a partnership and was approximate to a partnership and it may well be that the intention of the Legislature was to hit combinations of individuals who were engaged together in some joint enterprise but did not in law constitute partnership.... xxxx xxxx xxxx xxxx xxxx when we find, as we do find in this case, that there is a combination of persons formed for the promotion of a joint enterprise banded together if I may so put it, co-adventurers to use an expression, then I think no difficulty whatever arises in the way saying that in this particular case these four persons did constitute an "association of individuals" within the meaning of both section 3 and section 55 of the Indian Income Tax Act, 1922." 32. The condition that the association must be formed for the object of producing income, profits or gains is no longer applicable in view of the Explanation inserted in Section 2(31) of the Act, with effect from 01.04.2002. However, the essential condition that an association of persons must be one where two or more persons join in common action for a common purpose continues to be applicable and is not diluted in any manner. ....
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....oint participation for a common enterprise, it would not be appropriate to treat two or more persons as an Association of Persons for the purposes of assessing them as a separate taxable entity. A mere cooperation of one person with another in serving one's business objective would not be sufficient to constitute an Association of Persons merely because the business interests are common. A common enterprise, which is managed through some degree of joint participation, is an essential condition for constituting an Association of Persons. 36. It follows from the above discussions that before an association can be considered as a separate taxable entity (i.e an Association of Persons), the same must exhibit the following essential features: (i) must be constituted by two or more persons. (ii) the constituent members must have come together for a common purpose. (iii) the association must move by common action and there must be some scheme of common management. (iv) the cooperation and association amongst the constituent members must not be perfunctory and/or merely in form. The association amongst members must be real and substantial which is sufficient to treat the ass....
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....xx xxxx xxxx xxxx 2.4 The PARTIES confirm herewith that direct payments to each PARTY shall be made by ONGC/OPaL according to the details of the price break-up and payment schedule as laid down in the BID. xxxx xxxx xxxx xxxx xxxx 3.1 Each PARTY, in the event that the CONSORTIUM is awarded the CONTRACT, shall be responsible for performance of its responsibilities and services as stipulated in this AGREEMENT and to be stipulated in the CONSORTIUM AGREEMENT in detail. xxxx xxxx xxxx xxxx xxxx 3.4 Each PARTY shall be responsible for timely performance of its share of work under CONTRACT including timely supply of required information, data, and material required for the performance of the scope of the work of other PARTIES. Each PARTY is also responsible for quality of its scope of work. xxxx xxxx xxxx xxxx xxxx 4.4 Notwithstanding any other provisions of the AGREEMENT, in no event shall either PARTY be liable to the other PARTIES, whether arising under contract, tort (including negligence), strict liability or otherwise, for loss of revenue, profit or use of capital, downtime of facilities, damage for failure to meet other contractual commitments or deadlines, lo....
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....ch consortium member would be responsible for performance of its responsibilities and services as stipulated in the MOU. Clause 3.4 of the MOU further specified that each consortium member would be responsible for its share of work and would also provide the information, data and material required for performance of work by the other member. 39. Insofar as the execution of the contract is concerned, the responsibilities of each member were separate and independent. Neither of the members had any role to play with respect to the scope of work which was allocated to the other member. The equipment/material to be supplied and the works to be executed by each member under the MOU as well as under the Contract entered into with OPAL was well defined and the members were to act separately and in accordance with the respective work allocated to them. The opening recitals as recorded in the MOU indicate that the Linde was required to perform Basic Engineering, supply Selected Key Equipment and the related Detail Engineering, Detail Engineering and Procurement of Cracking Furnaces, parts of Technical Supervision Services, Commissioning, Testing, Conducting Performance Tests and Post-Comm....
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....the said agreement expressly provided that prices and payment for the respective works to be performed by the members would be stipulated separately in the bid and the Contract to be entered into with OPAL. Clause 6.3 contemplated that separate invoices would be issued by Linde and Samsung to OPAL (described as the 'company' under the Contract). Clauses 6.1 and 6.3 of the said agreement are relevant and are quoted below:- "6.1 The prices and payment conditions for Linde's and SECL's respective Scope of Work as per Articles 4.1 and 4.2 shall be as stipulated in the Bid and, finally, as stipulated in the Contract with the COMPANY. xxxx xxxx xxxx xxxx xxxx 6.3 Detailed terms and conditions regarding payments to be effected by the COMPANY to the Parties under the Contract shall be as follows: Separate invoices will be issued by SECL and Linde to COMPANY for each milestone payment. The Parties agree and acknowledge that under the Contract there shall be direct payments by the COMPANY to each Party for its respective price portion and/or related progress in the total Contract price. The Contract shall include individual Contract prices and payment schedules for Linde and SECL fo....
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....es in Linde's execution of its Scope of Work as defined in Article 4.1.1 and in Annex 2 to this Agreement result in a delay in the penalized milestone(s) according to the Contract with COMPANY, Linde shall be responsible for the payment of the liquidated damages for the length of delay caused by Linde due to COMPANY and claimed by COMPANY under the Contract. (2) Linde's liability for liquidated damages under this Article 9.2.3 shall be limited to 5 percent (%) of Linde's price of its Scope of Work. 9.2.4 Liquidated Damages for Non-fulfilment of Performance Guarantees In case of non-fulfillment of the process performance guarantees - as per the Contract-if claimed by the COMPANY, Linde will be responsible for payment of liquidated damages." 44. Insofar as cooperation between Linde and Samsung towards project management is concerned, it was expressly agreed between the said parties that each shall be responsible for the management and control of work falling within their own scope. However, for the purposes of representing the Consortium to OPAL, it was agreed that 'Project Directors' would be nominated by Linde and Samsung who would have the authority to direct the proje....
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....10.02.2009 was executed between the OPAL on one part and the Consortium on the other. It is necessary to refer to the relevant clauses of the said Contract and the same are reproduced hereunder:- "AND WHEREAS the Contractor represents that it has expertise and technical know-how in respect of the said Work and had submitted his offer as per Company's Bidding Documents in response to the above said Tender enquiry of the Company vide the Contractor's offer No. P310-7009 dated 20.03.2008 and 28.07.2008 for Adjustment Price Bid. AND WHEREAS pursuant to the above and the discussions conducted with the Contractor, the Company has awarded to the Contractor the Contract for the said Work by its NOA No. MR/OW/MM/DFC/02/2007 dated 23.12.2008 which is the effective date of commencement of this Contract and on the terms and conditions as agreed to by the two parties as of the said date of NOA and as outlined in this Agreement, (hereinafter also referred to as "the Contract"). xxxx xxxx xxxx xxxx xxxx 1.1.3 (a) "Company" means ONGC Petro additions Limited ("COMPANY") incorporated under Companies Act, 1956 having its registered office at Jeevan Bharati, Tower-11, 124 Cannought Circus, New ....
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....Four Million and Five Hundred Twelve Thousand only) plus USD 365,109,000 (in words: United States Dollars: Three Hundred Sixty Five Million and One Hundred Nine Thousand only) plus INR 27,088,667,000 (in words: Indian Rupees: Twenty Seven Billion Eighty Eight Million and Six Hundred Sixty Seven Thousand only) as per the details and breakup of prices given in Schedule of prices. xxxx xxxx xxxx xxxx xxxx Payment shall be made in the currency or currencies given in the schedule of prices for the work executed as per the procedure set forth in Clause 3.2. Adjustment to Contract Price, if any, shall be made in accordance with provisions of Contract. 3.2 Payment Procedure 3.2.1 Pending completion of the whole Works, provisional progressive payments for the part of the Works executed by the Contractor shall be made by Company on the basis of said work completed and certified by the Company's Representative as per the milestone formula provided in the Contract at Annexure 'F'. Such certification of the Work completed shall be made by the Company's Representative within 15 days of receipt of Contractor's Application for Certification. No payments shall become due and payable (wi....
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....uted portion of the invoices for the period beyond 30 Working days. Payment for amount objected to by Company as referred to in Clause 3.2.3 shall be made in accordance with provision under this Clause when the objection due to which the amount withheld by the Company has been removed/settled and the Contractor submits fresh invoice for the same. xxxx xxxx xxxx xxxx xxxx 3.2.6 All the payments outside India by the Company shall be remitted through Electronic Fund transfer (EFT) / Telegraphic transfer (T/T) and credited to the Contractor's bank account to be specified by the Contractor in writing to the Company before submission of the first invoice. The payment shall be made in currencies stated in the Contract. The Company shall be deemed to have arranged payment to the Contractor on the date of transmission of instruction by the Company's bankers to the Contractor's Bank in the country where the money is required to be paid to the Contractor. xxxx xxxx xxxx xxxx xxxx 3.2.6.1 The Contractor agrees to receive all payments inside India under this contract through Electronic Clearing system (ECS) to their Bank account. The details of Bank Account along with MICR No. of....
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....ctor had notified to the Company subject to the Company's Representative certifying that the entire Works were completed by the Contractor without any defect on the said notified completion date except for the Punch List items. 5.14 Performance of Contract/Discharge Certificate No certificate other than the Discharge Certificate referred to in Clause 5.14.1 shall be deemed to constitute approval of any Work or other matter in respect of which it is issued or shall be taken as an admission of the due performance of the Contract or any part of it or of the accuracy of any claim or demand made by the Contractor or of extra Work/Charge Order having been ordered by the Company nor shall any other certificate conclude or prejudice any of the rights of the Company under the contract. 5.14.1 The Contract shall not be considered as completed until a discharge certificate has been signed by the Company's Representative on behalf of the Company and delivered to the Contractor stating that the Works have been completed and made good to the satisfaction of the Company's Representative in accordance with the Contract. 5.14.2 The Discharge Certificate shall be issued by the Company's Rep....
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.... if technically required) related to the date of Ready for Start-Up (RFSU) subject to provision of Clause 8.3. The Company shall give 14 working days notice to the Contractor of its intention to terminate the Contract and shall so terminate the Contract unless during the 14 days notice period, the Contractor initiates remedial action acceptable to the Company. 7.1.1 Ownership of materials shall be transferred to the Company upon FOB shipment for imported supply and FOT for local supply subject to Contractor takes full responsibility for any damage / loss during the course of transportation until acceptance of works. 7.1.2 Deleted 7.1.3 Ownership of the construction Equipment used by the Contractor and its subcontractors in connection with the Works shall remain with the Contractor and its subcontractors." 46. The Contract also included various annexures forming an integral part of the contract and inter alia specifying certain details as agreed between the parties. Annexure C of the said Contract was a Contract Price Schedule which clearly indicated the overall split of prices for the work to be performed by Linde and Samsung respectively. The summary of payments agreed....
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.... 1000] 25.519.258 47. It is material to note that even, as per the terms of the Contract, the scope of work to be executed by Linde and Samsung was separate and was accordingly specified in the annexures to the Contract. The payments to be made for separate items of work were also specified. The currency in which the payments were to be made was also separately indicated. Thus, insofar as execution of the work was concerned, even OPAL recognised that different items constituting the Contract would be performed independently by Linde and Samsung. The consideration for the work performed was to be made directly to the concerned member of the Consortium in accordance with the work performed by him. Annexure C of the Contract specified the payment schedule i.e. the amount to be paid for the supply of goods and services rendered by both the members of consortium. Linde and Samsung were to be paid on the basis of the separate invoices raised by them respectively. There was no arrangement for sharing of profits and losses between Linde and Samsung. And, each of them would make profits or incur losses based on the price as agreed by them and the costs incurred by them for p....
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....contention. 51. A plain reading of the said Contract clearly indicates that insofar as OPAL is concerned, the consortium members were treated as a single party for due performance of the Contract. However, the annexures to the contract provided for the split of the Contract between the consortium members and amounts payable to each of the consortium members is detailed separately. The scope of work of each of the members was also separately listed. The Contract specified that an organisation structure would be set up which would facilitate OPAL in dealing with the consortium members collectively and not separately. The only conclusion one can draw is that while OPAL treated the consortium members as a single entity for imposing liability for due performance of the Contract, OPAL also recognized that each consortium member would perform the items of work falling within their respective scope of work, independently. 52. While, it is relevant as to how a third party deals with the members of a consortium, the same would not be conclusive in determining whether the consortium members constitute an Association of Persons. It is indisputable that the purpose of Linde and Samsung in....
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....of each other and the fact that are jointly and severally liable cannot possibly lead to the conclusion that the company and its director constitute an Association of Persons for the purposes of the Act. In order for independent entities/individuals to be considered as an Association of Persons, they must exhibit some trappings of a partnership in relation to their common enterprise. 54. Lastly, it is necessary to consider whether the joint management structure of the project as agreed to be constituted by Linde and Samsung is sufficient to conclude that they had constituted an Association of Persons. Clause 7 of the Internal Consortium Agreement between Linde and Samsung specifically records that "each Party shall be responsible for the management and controlling of its Scope of Work". It was further agreed that Linde and Samsung would establish their own project teams and also nominate one responsible "Project Manager" each who would report to the respective "Project Directors" nominated by Linde and Samsung. The Project Directors would represent the consortium in interaction with OPAL. It is, thus, apparent that both Linde and Samsung were managing the execution of their part....
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....f Persons. In this illustration each one of the participants works towards a common project with a certain level of cooperation. However, since the said participants do not act as a single cohesive entity, but perform their independent allocated works, they cannot be considered as an Association of Persons. In order to consider independent agencies as an Association of Persons, it is necessary that they form a joint enterprise with a greater level of common management. An element of mutual agency and joint action for mutual purpose is also necessary. Mere obligation to exchange information, between independent agencies, for co-ordinating their independent tasks would not result in an inference that the agencies had constituted an Association of Persons. 56. It is relevant to keep in mind that Linde and Samsung shared neither the costs nor risks. Both Linde and Samsung managed their own deliverables. As discussed above, in our view, the facts of this case do not indicate a sufficient degree of joint action between Linde and Samsung either in execution or management of the project to justify a conclusion that they had formed an Association of Persons and in our view, the Authority....
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.... Circular No.7/2008 dated 22nd October, 2009, such withdrawal can have no retrospective effect and the principle laid down in Instruction No. 1829 must continue to govern the assessment for the relevant year." 58. Having stated the above, we must add that although, the said instruction does not strictly apply to the facts of the present case, however, the said instruction does indicate the correct understanding in law. That is, in projects where various foreign companies form a consortium for a coordinated execution of the project on turnkey basis, their limited collaboration for coordination of their inter-related tasks would not be sufficient to constitute an Association of Persons under the Act. 59. Although, the said Instruction had been, subsequently, withdrawn on 20.07.2009, the reasons for the withdrawal are principally: that the earlier instruction had been misused by certain assessees who were deliberately splitting up the contract and creating consortia where non-residents took take advantage of the said instruction to avoid exigibility to tax. Therefore, it is apparent that the instructions had not been withdrawn on account of any change in understanding of law and....
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....B Consortium Agreement provided for constitution of a "project board" which included project directors nominated by each consortium member. The function of the project board included overall planning, organizing and directing the complete execution of the project in an efficient manner. After the bid of the MRMB Consortium was accepted, the consortium members entered into a Supplementary Consortium Agreement which specified the role of each consortium member. The percentage of each participating member in the contract was specifically agreed for the purposes of sharing the amount receivable for execution of the Contract. DMRC insisted on a separate guarantee from the parent company of each consortium member and the same was provided. The liability of each consortium member towards DMRC was also joint and several. The Authority considered the facts of that case and came to the conclusion that the Consortium could not be treated as an Association of Persons. The factors which weighed with the Authority to conclude that MRMB Consortium did not constitute an Association of Persons were as under:- (a) The nature of work undertaken and capable or being executed by each consortium memb....
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.... the event the Authority was of the opinion that the earlier view was erroneous, it was incumbent upon the Authority to refer the matter to a larger bench. In the present case, the Authority has sought to distinguish its earlier decision in the case of Hyundai Rotem (supra) without pointing out any material dissimilarity in facts which would render the earlier decision inapplicable. We are also unable to find any material dissimilarity in facts that would warrant such a conclusion. 66. The next contention to be considered is whether the Income Tax Authorities can assess Linde and Samsung as an Association of Persons in view of the provisions of the "Agreement between Republic of India and Federal Republic of Germany for avoidance of double taxation with respect to taxes on income and capital" (referred to as DTAA herein). It is contended that in the event of a conflict between the provisions of the DTAA and the provisions of the Act, the provisions of the Act would prevail to the extent the same are more beneficial to the tax payer. It is contended that treating Linde and Samsung as an Association of Persons would amount to depriving Linde of the benefits under the DTAA and as s....
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....on paragraph 6 of Article 5 of the DTAA is misplaced. The said paragraph of DTAA reads as under:- "6. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business and in their commercial and financial relations to the enterprise no conditions are agreed or imposed which differ from those usually agreed between independent persons." 69. Article 5 of the DTAA defines the expression "permanent establishment". It is clear from a plain reading of paragraph 6 of the said Article that the same only clarifies that an enterprise conducting business through a broker, commission agent or an agent of independent status would not be deemed to have a permanent establishment only for the reason of conducting business through the said specified agents. Undisputedly, a non-resident carrying business through brokers and agents of independent status acting in normal course of business on usual terms would not be construed as forming an Association of Pe....
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....do not contain any charging provisions by virtue of which income tax is levied. Income tax is charged by virtue of Section 4 read with Section 5 of the Act. It is only in the event that an assessee is liable to pay tax under the Income Tax Act (dehors any Double Taxation Avoidance Agreements) that the question of examining whether the assessee is entitled to any benefit under the relevant Double Taxation Avoidance Agreement would arise. Any income which is not liable to tax under the normal provisions of the Act would not be bought to tax only by virtue of a Double Taxation Avoidance Agreement. It would thus, be essential to first examine whether any amount receivable/received by Linde in respect of design and engineering or for supply of equipment is liable to tax under the Act. In the event, a portion of income is not exigible to tax under the Act, it would not be necessary to consider whether the DTAA is applicable. 74. The scope of work under the Contract has been broadly described in clause 2.1.1 of the Contract and the same is quoted below:- "2.1.1 Scope of Work The scope of work for the tender shall include in general but not be limited to the following, as defined ....
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....f onshore supply and services, viz,: supervision during the pre commissioning construction, post commissioning services and supplies, training and other items of work/activities to be performed in India. However, the liability in respect of income arising in respect of offshore services and supplies is disputed. And, it would be necessary to first consider whether any income can be deemed to accrue or arise in India in respect of the income which is received / receivable for offshore supply of equipment, material, spares and provision of services outside India. 77. Section 5(2) of the Act provides that the total income of a person who is a non-resident in any previous year includes income that is received or is deemed to be received in India or which accrues or arises or is deemed to accrue or arise in India. Section 9 of the Act indicates the income that shall be deemed to accrue or arise in India. Sections 5(2), 9(1)(i) and 9(1)(vii) of the Act are relevant and are quoted below:- "5. Scope of total income - (1) xxxx xxxx xxxx xxxx xxxx (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income....
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....in India. The expression "Business Connection" has been explained in a catena of decisions. The Supreme Court in the case of CIT v. R.D. Aggarwal & Co.: (1965) 56 ITR 20 explained that the expression "Business Connection" as contemplated under Section 42 of the Indian Income-tax Act, 1922 (corresponding to Section 9 of the Act) envisaged "a relation between a business carried on by a non-resident and some activity in the taxable territories which are attributable directly or indirectly to the earnings, profits or gains of such business". The core issue to be addressed is whether the amount receivable by Linde for supply of goods outside India and for providing services outside India bears a nexus with any activity in India which can be ascribed to result in any income to Linde in India. The business connection as contemplated under Section 9 of the Act has to be direct and real. A sale of goods simplicitor outside India would not give rise to any taxable income in India even though the said goods are to be utilized within India. Similarly, income from providing offshore services (other than Fees for Technical Services) would also not be taxable under the Act unless the same can be ....
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....ivable by the appellant (therein) from Petronet LNG for offshore supply and offshore services. The contention of the appellant (therein) was that the contract being a divisible one, it did not have any liability to pay any tax with regard to offshore services and offshore supplies. The Revenue, on the other hand, contended that the contract was a composite and integrated one, and thus could not be split for the purposes of considering whether the income arising therefrom was taxable under the Act. The Supreme Court considered the question whether the income in respect of 'offshore supply' and 'offshore services' was taxable under the Act and/or the DTAA between India and Japan and held as under:- "30. The contract is a complex arrangement. Petronet and the 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 an 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 pu....
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....ions 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 purpose of assessment of income of a non-resident under a Double Taxation Avoidance Agreement, and the latter is for the application of Section 9 of the Income Tax Act. (6) Clause (a) of Explanation 1 to Section 9(1)(....
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....ntire 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 the same manner." 82. The facts obtaining in the present case are quite similar to the facts as in the case of Ishikawajima-Harima Heavy Industries (supra). It is indisputable that as far as obligations of Linde and Samsung are concerned, the Contract is an indivisible one. However, for the purposes of tax, the Contract doe....
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.... basis that the contract as a whole was the subject of taxation. The subject matter of taxation was not the Contract between the parties but the income that the petitioner derived from the Contract. Thus, the situs of the object of the Contract would not be as relevant as determining the situs where the income of Linde had accrued or arisen. By virtue of Section 4 of the Act, income tax is charged in respect of the total income of a person. By virtue of Section 5 of the Act, the scope of total income of a non-resident is limited to income which is received or deemed to be received in India and income which accrues or is deemed to accrue or arise in India. It, therefore, follows that the object of inquiry would have to be to determine whether any income of Linde accrued or arose in India or whether any income could be deemed to accrue or arise in India. The fact that the contractual obligations of Linde were not limited to merely supplying equipment, but were for due performance of the entire Contract, would not necessarily imply that the entire income which was relatable to the Contract could be deemed to accrue or arise in India. 85. The principle of apportionment of income on ....
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.... Act by virtue of Section 9(1)(i) of the Act as the transaction also implied transfer of control and assets of the Indian subsidiary of the overseas company, whose share had been sold and purchased. The Supreme Court observed that the last sub-clause of Section 9(1)(i) of the Act referred to income arising from "transfer of capital asset in India". The Court further explained that Section 9(1) of the Act created a legal fiction which had a limited scope and could not be expanded. Accordingly, transfer of capital asset situated outside India could not be taxed by virtue of Section 9(1)(i) of the Act. The expression "look through" had been used by the Supreme Court in this context. The relevant extract of the judgment is as under:- "90. We have to give effect to the language of the section when it is unambiguous and admits of no doubt regarding its interpretation, particularly when a legal fiction is embedded in that section. A legal fiction has a limited scope. A legal fiction cannot be expanded by giving purposive interpretation particularly if the result of such interpretation is to transform the concept of chargeability which is also there in Section 9(1)(i), particularly when....
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....only revolves around the situs of the income accruing or arising from the contract. To our minds, the Authority has read the principles applied by the Supreme Court in Vodafone International Holdings B.V. (supra) completely out of context. Income from Offshore Supplies 89. In the present case, the Contract involves supply of equipment, materials and spares by Linde. The contract specifically provides that the ownership of the material to be supplied by Linde would be transferred to OPAL upon FOB shipment. Article 7 of the Contract is quoted below:- "7.1.1 Ownership of materials shall be transferred to the Company upon FOB shipment for imported supply and FOT for local supply subject to Contractor takes full responsibility for any damage / loss during the course of transportation until acceptance of works. 7.1.2 Deleted 7.1.3 Ownership of the construction Equipment used by the Contractor and its subcontractors in connection with the Works shall remain with the Contractor and its subcontractors." 90. FOB is an abbreviation of "Free on Board" and clearly indicates that the ownership of the material to be supplied by Linde would transfer to OPAL, the moment, the mater....
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....a business connection in India. However, in view of the decision of the Supreme Court in Ishikawajima-Harima Heavy Industries (supra) it cannot be concluded that the Contract provides a "business connection" in India and accordingly, the Offshore Supplies cannot be brought to tax under the Act. Income from Offshore Services 93. It is stated that Linde was responsible for preparing drawings and designs for manufacturing and fabricating equipment to be supplied to OPAL. It is submitted that the said work is a part of the Basic and Detailed Engineering that was to be performed by Linde outside India. The steps for process design and Basic Engineering have been described by Linde as under:- "Block Diagram, Process Flow Diagram, Material and Heat Balance, Process Simulation, Process Data Sheets for Equipment, Instruments, Piping etc., Piping & Instrumentation Diagram, Operating Manual, Process Safety Design. All of the above is prepared by qualified engineers using in-house knowhow and software applications, in Germany. Detailed engineering, designing of each plant unit, equipments, components before it's manufacture. These are prepared in Germany and sent for approval of OP....
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....ependent that the FTS will be assessable." 95. It is clarified that in order to fall outside the scope of Section 9(1)(vii) of the Act, the link between the supply of equipment and services must be so strong and interlinked that the services in question are not capable of being considered as services on a standalone basis and are therefore subsumed as a part of the supplies. Given the fact that its Linde's case that the consideration for the supplies are separately specified, this aspect would require a closer scrutiny and determination of facts, which we do not propose to do in the present proceedings. 96. It is clarified that in the event, it is found that the offshore services rendered by Linde are not inextricably linked to the manufacture and fabrication of equipment overseas so as to form an integral part of the supply of the said equipment, the income arising from the said services would be taxable in India as fees for technical services. By virtue of Section 9(1)(vii) of the Act, fees for technical services paid by a resident are taxable in India (except where such fees are payable in respect of services utilised by such person in business and profession carried outsi....
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...." includes especially,- (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, including an installation or structure used for the exploration or exploitation; (g) a warehouse or sales outlet; (h) a farm, plantation or other place where agricultural, forestry, plantation or related activities are carried on; and (i) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities continue for a period exceeding six months. 3. An enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it provides services or facilities in connection with, or supplies plant and machinery on hire used for or to be used in the prospecting for or extraction or exploitation of mineral oils in that State. 4. Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include,- (a) the use of facilities solely....
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....are agreed or imposed which differ from those usually agreed between independent persons. 7. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other. xxxx xxxx xxxx xxxx xxxx ARTICLE 7 - Business profits - 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the pro....
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....ly." 98. In terms of paragraphs 1 & 2 of Article 12 "fees for technical services" are liable to be taxed in the Contracting State in which they arise and according to the laws of that State. However, paragraph 5 of Article 12 provides that paragraphs 1 and 2 of the said Article would not apply, if the beneficial owner of fees for technical services carries on business through a permanent establishment situated in the State. And, in that case Article 7 of the DTAA would apply. Thus, fees for technical services (which are not inextricably linked with offshore supplies and form integral part of those supplies) are liable to be taxed in the State in which they arise. In this case, the source of fees for technical services is in India and, therefore, by virtue of paragraph 1 and 2 of Article 12 of the DTAA read with Section 9(1)(vii) of the Act, the fees for technical services would be liable to be taxed in India provided the said fees is not attributable to Linde's Permanent Establishment in India. In the event such fees is attributable to Linde's PE in India, by virtue of paragraph 5 of Article 12 of DTAA, Article-7 of the DTAA would be applicable and the income arising from provis....
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.... jurisdiction over the operations of a company. Unless the PE is treated as a separate profit centre, it is not possible to ascertain the profits of the PE which, in turn, constitutes profits arising to the foreign GE in India. The computation of profits in each PE (taxable jurisdiction) decides the quantum of income on which the source country can levy the tax. Therefore, it is necessary that the profits of the PE are computed as independent units. However, in a case where the Government of India has entered into a tax treaty with a foreign country (Korea, in the present case) then in relation to an assessee on whom such tax treaty applies, the provisions of the Act shall apply only to the extent to which the provisions thereof are more beneficial to the assessee xxxx xxxx xxxx xxxx xxxx 11. Applying the above test to the facts of the present case, we find that profits earned by the Korean GE on supplies of fabricated platforms cannot be made attributable to its Indian PE as the installation PE came into existence only after the transaction stood materialised. The installation PE came into existence only on conclusion of the transaction giving rise to the supplies of the fab....