TaxTMI 
TaxTMI 
2007 (1) TMI 91
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....ies on 19.03.2001. The contract envisaged a turnkey project. Role and responsibility of each member of the consortium was specified separately. Each of the member of the consortium was also to receive separate payments. Appellant was to develop, design, engineer and procure equipment, materials and supplies, to erect and construct storage tanks of 5 MMTPA capacity, with potential expansion to 10 MMTPA capacity at the specified temperatures i.e. -200 degree Celsius. The arrangement also was to include marine facilities (jetty and island break water) for transmission and supply of the LNG to purchasers; to test and commission the facilities relating to receipt and unloading, storage and re-gasification of LNG and to send out of re-gasified LNG by means of a turnkey fixed lump-sum price time certain engineering procurement, construction and commission contract. The project was to be completed in 41 months. The contract indisputably involved : (i) offshore supply, (ii) offshore services, (iii) onshore supply, (iv) onshore services and (v) construction and erection. The price was payable for offshore supply and offshore services in US doll....
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.... was that the contract being a divisible one, it did not have any liability to pay any tax in regard to offshore services and offshore supply. Revenue, on the other hand, contended that the contract being a composite and integrated one, they were so liable. 7. The Authority referred to a large number of decisions governing the field and opined that having regard to the provisions contained in Section 5 read with Section 9 of the Act, following propositions of law would emerge : "(1) In a case of sale of goods simpliciter by a non-resident to a resident in India, if the consideration for sale is received abroad and the property in the goods also passes to the purchaser outside India, no income accrues or arises or deemed to accrue or arise to the seller in India. (2) In a case of transaction of sale of goods by the 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. (3) In the case of a business of which all operations are not ....
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....ssions we rule on : (i) Question No.1 that on the facts and in the circumstances of the case, the amounts received/receivable by the applicant from Petronet LNG in respect of offshore supply of equipment and materials is liable to be taxed in India under the provisions of the Act and the India-Japan Treaty. (ii) Question No.2 that in view of the Explanation (a) to section 9(1)(i) of the Act and/or Article 7(1) read with the Protocol of the India-Japan Treaty the amounts that would be taxable in India is so much of the profit as is reasonably attributable to the operations carried out in India, we decline to answer the other part of the question in regard to quantification of the amount taxable in India as the parties produced no evidence and did not address in this regard. (iii) Question No. 3 that the amount received/receivable by the applicant from Petronet LNG for offshore services is liable to be taxed in India both under the provisions of the Act as well as under Indo-Japan Treaty. (iv) Question No.4 that the entire amount received for offshore services is chargeable to tax under the Act and under the Treaty but at the rate not more th....
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....p; Appellant being a non-resident in terms of Section 5(2) of the Act, it would be chargeable to tax in India only in the event income accrues or arises in India or is deemed to accrue or arise in India or income is received or is deemed to be received in India and not otherwise; (vi) As no part of the income for the "offshore supply" or "offshore services" is received in India, the Authority misdirected itself in passing the impugned judgment; (vii) A legal fiction raised under the Act cannot be pushed too far. Also, as all operations in connection with the offshore supply are carried out outside India, the question of any portion of the consideration to be regarded as deemed to accrue or arise in India would not arise; (viii) The requirement of the appellant to perform certain services in India, such as unloading, port clearance, transportation of the equipments supplied would not render the appellant eligible to tax as the consideration thereof is embedded in the consideration for the offshore supply; (ix) Although the appellant was required to carry out certain activities in India, the consideration for offshore ....
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....he Authority cannot be faulted; (vii) By reason of DTAA, the parties thereto can always allocate the jurisdiction to tax the entire income attributable to such permanent establishment to the country in which it is established; (viii) Supply of goods whether offshore or onshore as well as rendition of service whether offshore or onshore are attributable to the turnkey project and, thus, it would be wrong to contend that in terms of Article 7 of DTAA, no tax could be levied upon the appellant. Contract : The Material Part : 14. Petronat LNG Limited, on the one hand, and five members of the consortium, on the other, are parties to the contract. The contract contained broad items. It has its own interpretation clauses. Clause 2.1 provides for scope of the work in the following terms : "2.1 The Work Except as otherwise expressly provided in this Contract, Contractor shall provide, furnish and perform, or cause to be provided, furnished and performed, on a turnkey basis all necessary design, engineering, procurement, supplies, installation, erection, construction, testing, commissioning, operation and turning over services, acti....
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....tivities and work, and personnel and labour, and all Equipment and Materials (and components thereof) and Contractor's Equipment, and any other items not specifically described in the Scope of Work (Exhibit-(A) and/or the Technical Documents if (a) it reasonably may be inferred in accordance with Good Industry Practice that the providing, or causing the provision, of such additional items was contemplated as part of the Work (including the Technical Documents) or (b) the providing, or causing the provision, of such additional items is necessary in order for Contractor to satisfy the Completion and Performance Guarantees and the warranties set forth, in this Contract and to make the Facilities operable and capable of performing as specified in the Technical Documents or as otherwise necessary in order to comply with the requirements of this Contract. Without limitation to the foregoing, wherever this Contract describes any portion of the Work in general terms, but not complete in detail, Contractor agrees that the Work shall include any incidental work, activities and services which may be reasonably inferred as required or necessary to complete and render oper....
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....39;s Equipment and other things required for the Works." 17. Price is specified under Clause 13.1 in the following terms : "13.1 Contract Price The total price to be paid by or on behalf of Owner to Contractor in full consideration for the performance by Contractor of its obligations and responsibilities under this Contract, including the Work, shall be a fixed and firm lump sum price of US$ 151,044.192 (One hundred fifty one million forty four thousand one hundred ninety two US Dollars) (the "US Dollar Portion) and Rs.7,602,796,324 (Seven billion six hundred two million seven hundred ninety six thousand three hundred twenty four Indian Rupees) (the "Indian Rupee Portion"), which shall be subject to adjustment only as provided under Clause 13.4 (the US Dollar Portion and the Indian Rupee Portion, as the same may be so adjusted, together, the "Contract Price")." 18. The contract envisages that the appellant may do the job itself or get the same done by sub-contracting. It may only do a part of the job itself. 19. The contract splits in dollar and rupee components separately. Clause 14.8 provides for general terms of payment, effect ....
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...., detail engineering, customs clearance, inland transportation, procurement services, supervision services, project management, testing and commissioning and any such service in relation to the Works rendered in India." 22. The break down of contract price is as under : Exhibit No./Sl. No. Description of Scope In Indian rupees In US Dollars Name and address of contracting entity D-2.1 Offshore Supply (Total of 2.1.1., 2.1.2 and 2.1.3) Nil 81,711,877 IHI, BNI & TEIL D-2.2 Offshore Services (Total of 2.2.2 to 2.2.3) Nil 19,756,225 IHI, BNI & TEIL D-2.3 Onshore Supply (Total of 2.3.1 to 2.3.3) 1,869,978,658 Nil IHI, BNI & TEIL D-2.4 Onshore Services (Total of 2.4.1 to 2.4.3) 1,774,353,282 12,780,467 IHI, BNI & TEIL D-2.5 Construction and erection (Total of 2.5.1. to 2.5.3) 3,958,464,384 36,795,623 IHI, BNI & TEIL D-2.0 Total (D-2.1 to D-2.5) (See Note 9 ) 7,602,796,324 151,044,192 Treaty : Double Tax....
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....al owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply." 26. The Treaty contains the Japanese notes, clause 6 whereof reads as under : "6. With reference to paragraph 1 of article 7 of the Convention, it is understood that by using the term "directly or indirectly attributable to the permanent establishment", profits arising from transactions in which the permanent establishment has been involved shall be regarded as attributable to the permanent establishment to the extent appropriate to the part played by the permanent establishment in those transactions. It is also understood....
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....shore services. It is not denied or disputed, as indicated hereinbefore, that in respect of the first element of onshore supply and onshore service, and construction tax would be payable in India. 29. 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. 30. The contract is a complex arrangement. Petronat 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 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 purpose of taxability the entire contract must be considered to be an integrated one so as to make the appellant to pay ta....
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....ice escalation. 35. The question of imposition of tax on income arising from a business connection may, thus, have to be considered keeping in view the aforementioned factual backdrop. 36. Section 9(1)(i) of the Act states that income accruing or arising whether directly or indirectly, through or from any business connection in India shall be deemed to accrue or arise in India. Appellant is a non-resident assessee. 37. Section 9 raises a legal fiction; but having regard to the contextual interpretation and furthermore 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 and Others, [2005] 2 SCC 638). 38. 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. 39. Territorial nexus doctrine, thus, plays an important part in assessment of ....
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....le or works contract. Laying down the tests therefor, having regard to the terms and conditions contained therein, it was opined that a contract of sale of goods was separate from a contract for works and labour. In regard to the categories of contract, it was stated : "(i) the contract may be for work to be done for remuneration and for supply of materials used in the execution of the work for a price; (ii) it may be a contract for work in which the use of the materials is accessory or incidental to the execution of the work; and (iii) it may be a contract for supply of goods where some work is required to be done as incidental to the sale." 44. Whereas the first contract was held to be a composite contract, the second was held to be a contract for work and labour not involving the sale of goods; and the third was held to be a contract of sale where the goods were sold as chattels and the work done was merely incidental thereto. 45. The view taken in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. [1958] 9 STC 353 (SC) ; [1959 SCR 379] is sought to be applied. The contract in such a case must stipulate that the....
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....In that case the respondents contracted with the Secretary of State for War to do the work and supply the material mentioned in the Schedules to the contract, including the supply of black-out curtains, curtain rails and battens and their erection at a number of police stations. It was held by the Court of Appeal that the respondents were liable to pay purchase-tax. Reliance was placed upon the observations made by Godiard, L.J. at page 487: "If one orders another to make and fix curtains at his house the contract is one of sale though work and labour are involved in the making and fixing, nor does it matter that ultimately the property was to pass to the War Office under the head contract. As between the plaintiff and the defendants the former passed the property in the goods to the defendants who passed it on to the War Office." We do not think that these observations furnish a universal test that whenever there is a contract to "fix" certain articles made by a manufacturer the contract must be deemed one for sale and not of service. The test in each case is whether the object of the party sought to be taxed is that the chattel as chattel passes to the oth....
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....s are stipulated with regard to taxing of dividends under Article 10, interest under Article 11, royalties under Article 12, capital gains under Article 13, income derived from independent personal services in Article 14, income from dependent personal services in Article 15, directors' fees in Article 16, income of artists and athletes in Article 17, governmental functions in Article 18, income of students and apprentices in Article 20, income of professors, teachers and research scholars in Article 21 and other income in Article 22." 55. In Commissioner of Income Tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay [(1950) SCR 335], this Court, having regard to the provisions contained in Section 42 of the Income Tax Act, 1922, held that profits accrued to the assessee of a part of the business in an Indian State having accrued out of such business carried on in such State are exempted under the third proviso to Section 5 of the Excess Profit Tax Act. 56. Opining that the source of income can never be the place where the income accrues or arises, Kania, CJ, stated : "In my opinion there is nothing to prevent income accruing or arising at the place of the source. The....
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....e and they arise only at that place is to confuse the idea of receipt of income and realization of profits with the idea of the accrual of profits. The act of sale is the mode of realizing the profits. If the goods are sold to a third person at the mill premises no one could have said that these profits arose merely by reason of the sale. Profits would only be ascribed to the business of manufacture and would arise at the mill premises. Merely because the mill owner has started another business organization in the nature of a sales depot or a shop, that cannot wholly deprive the business of manufacture of its profits, though there may have to be apportionment in such a case between the business of manufacture and business of shop keeping. In a number of cases such apportionment is made and is also suggested by the provisions of Section 42 of the Indian Income Tax Act, reference to which has also been made in Proviso (2) of Section 5 of the Excess Profits Tax Act." 59. In Anglo-French Textile Co. Ltd. v. Commissioner of Income Tax, Madras (1954) SCR 523], the question which arose for consideration, inter alia, was : " (2) Can the income received in India be said to arise....
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....ome accruing or arising from any business connection in the taxable territories - even though the income may accrue or arise outside the taxable territories - will be deemed to be income accruing or arising in such territory provided operations in connection with such business, either all or a part, are carried out in the taxable territories. If all such operations are carried out in the taxable territories, sub-section (1) would apply and the entire income accruing or arising outside the taxable territories but as a result of the operations in connection with the business giving rise to the income would be deemed to accrue or arise in the taxable territories. If, however, all the operations are not carried out in the taxable territories the profits and gains of the business deemed to accrue or arise in the taxable territories shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. Thus comes in the question of apportionment under sub-section (3) of Section 42." 63. In CIT v. Mitsui Engineering and Ship Building Co. Ltd. [2003] 259 ITR 248], on which reliance was placed; the contention....
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....nt (British) companies beneficially owned the entire share capital of the appellant company. In the present situation there is no such connection, which can be said to give rise to a business connection between the permanent establishment in India and the transaction that is sought to be taxed. 69. Yet again in Anglo French Textile Co. Ltd. v. CIT Madras [1953] 23 ITR 101(SC), in the fact situation obtaining therein, it was held that when there was a continuity of business relationship between the person in India who helps make the profits and the person outside who receives or realizes this profit, a business connection exists. 70. In that case, the assessee company incorporated in the UK, owned a textile company in French Pondichery and had appointed another limited company in Madras to act as its constituted agents. The same was held to be a business connection within British India. Such a close connection cannot be envisaged in the present case since it does not involve any such principle-agent relationship between the PE and the non residents. 71. Barendra Prasad Ray v. ITO [1981] 129 ITR 295 (SC) whereupon reliance has been placed, is not apposite. Therei....
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....04] following Carborandum Co. [1977] 108 ITR 335 (SC), held that notwithstanding the amendment of Section 9 of the Act by the addition of Clauses (vi) and (vii), the cases continued to be governed by the provisions of Section 9 of the Act. 75. In Commissioner of Income-Tax v. Atlas Steel Co. Ltd. [(1987) 164 ITR 401], a Division Bench of the Calcutta High Court following Carborandum (supra) and other decisions held : "35. The expression "business connection" in the context of the Income-tax Act has come to acquire a special meaning as laid down by the Supreme Court in R. D. Aggarwal & Co.'s case. A business connection contemplated under Section 42 of the Indian Income-tax Act, 1922 (corresponding to Section 9 of the Income-tax Act, 1961, involved "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". It was laid down by the Supreme Court that there must be trading activity both outside and within the taxable territory. In the facts of this case, for the supply of inventions, patents, applic....
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....act. The operations in India for the erection of the machinery are only the responsibility of the Indian company. It is only any defect in the machinery or any negligence in the performance of the foreign engineer, that may give rise to a claim for damages. But that is not the same as the foreign company performing any operation in pursuance of this contract in India. Whatever we have said above would apply also to deputation of foreign personnel for procuring Indian spare parts. It was obviously considered necessary to get foreign personnel from abroad for this purpose only because the type of spare parts required for the foreign machinery could be better picked up by these personnel, who have experience in running the machinery. It is merely an assistance provided to the Indian company, the foreign personnel being treated as the employees of the Indian company. Having gone through the terms of the agreement in full, we are satisfied that there are no operations in India attributable to the foreign company which can give rise to any profits being earned in India. The agreement itself says that the terms of the payments were in Germany. Thus, there is absolutely no operation in Ind....
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.... of the permanent establishment', i.e. against the principle that, where there is a permanent establishment, the State of the permanent establishment should be allowed to tax all income derived by the enterprise from sources in that State irrespective of whether or not such income is economically connected with the permanent establishment. In line with the domestic law then prevailing in the USA, such a 'force of attraction' was, for instance, incorporated in Germany's 1954 DTC with USA (second sentence of Art. III (I). In contrast, the second sentence of Art. 7(1) MC allows the State of the permanent establishment to tax only those profits which are economically attributable to the permanent establishment, i.e. those which result from the permanent establishment's activities, which arise economically from the business carried on by the permanent establishment (cf. also para 5 MC Comm. Art. 7, supra m. no. 10). As regards the profits made by the enterprise in the State of the permanent establishment, a distinction must always be made between those profits which result from the permanent establishment's activities and those made, without any....
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....acting the taxing statute there has to be some activities through permanent establishment. If income arises without any activity of the permanent establishment, even under the DTAA the taxation liability in respect of oversea services would not arise in India. Section 9 spells out the extent to which the income of non-resident would be liable to tax in India. Section 9 has a direct territorial nexus. Relief under a Double Taxation Treaty having regard to the provisions contained in Section 90(2) of the Income Tax Act would arise only in the event a taxable income of the assessee arises in one Contracting State on the basis of accrual of income in another Contracting State on the basis of residence. Thus, if Appellant had income that accrued in India and is liable to tax because in its State all residents it was entitled to relief from such double taxation payable in terms of Double Taxation Treaty. However, so far as accrual of income in India is concerned, taxability must be read in terms of Section 4(2) read with Section 9, whereupon the question of seeking assessment of such income in India on the basis of Double Taxation Treaty would ar....
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.... to be taxed, has to be rendered in India, as well as utilized in India, to be taxable in India. In the present case, both these conditions have not been satisfied simultaneously, therefore excluding this income from the ambit of taxation in India. Thus, for a non-resident to be taxed on income for services, such a service needs to be rendered within India, and has to be a part of a business or profession carried on by such person in India. The Petitioners in the present case have provided services to persons resident in India, and though the same have been used here, it has not been rendered in India. 92. Section 9(1)(vii) of the Act whereupon reliance has been placed by the learned Additional Solicitor General, must be read with Section 5 thereof, which takes within its purview the territorial nexus on the basis whereof tax is required to be levied, namely, : (a) resident; and (b) receipt or accrual of income. 93. Global income of a resident although is subjected to tax, global income of a non-resident may not be. The answer to the question would depend upon the nature of the contract and the provisions of DTAA. 94. What is relevant is receipt or accrua....
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....; 96. The provisions of Section 9(1)(vii) of the Act are plain and capable of being given a meaning. There, therefore, may not be any reason not to give full effect thereto. However, even in relation to such income, the provisions of Article 7 of the DTAA would be applicable, as services rendered outside India would have nothing to do with permanent establishment in India. Thus, if any services have been rendered by the head office of Appellant outside India, only because they were connected with permanent establishment. Even in relation thereto, principle of apportionment shall apply. 97. The Authority, in our opinion, has committed an error in this behalf, as if services rendered by the head office are considered to be the services rendered by the permanent establishment, the distinction between Indian and foreign operations and the apportionment of the income of the operations shall stand obliterated. 98. It would be contrary to the intent and purport of the Double Taxation Convention which is a part of the scheme under the Income Tax Act. 99. We, therefore, hold as under : Re : Offshore Supply : ....
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....ns 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, is that of the taxpayer and not that of the recipient of such services. (5) For Section 9(1)(vii) to be applicable, it is necessary that the services not only be utilized within India, but also be rendered in India or have such a "live link" with India that the entire income from fees as envisaged in Article 12 of DTAA becomes taxable in India. (6) The terms "effectively connected" and "attributable to" are to be construed differently even if the offshore services and the permanent establishment were connected. (7) Section 9(1)(vii)(c) of the Act in this case would have no application as there is nothing to show that the income derived by a non-resident company irrespective of where rendered, was....