TaxTMI 
TaxTMI 
2018 (1) TMI 946
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....is a Chennai based resident company. From the year 2009-10, it started taking steps to set up a factory for production of Bus and Truck tyres and also a manufacturing facility for mixtures and semi-finished products necessary for the production of tyres. For this purpose it entered into an Umbrella Agreement as an "Equipment Purchase Contract" on 1 April 2011 with M/s. Manufacture Francaise des Pneumatiques Michelin (MFPM), a closely associated group company, for design, engineering, manufacturing, inspection and packing, forwarding and dispatch from outside India of machinery and equipment for setting up its new manufacturing facility in India. MFPM is a company incorporated under the laws of France and is a tax resident of France. MFPM has extensive experience in facilitating the development of projects of establishment and extension of factories related to the activities of production of tyres and manufacture of mixtures. 2.1 Under the aforesaidUmbrella Agreement, MFPM wouldsupply the equipment in three phases. As regards Phase I, the total price for the equipment is stated as EURO9,31,90,452 (approx. INR 580 cr) and the purchase of the same was completed upto February 2013. ....
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.... shall take place outside India. The installation of the plant and equipment shall be done by the Applicant or through its contractors and MFPM would only provide required supervisory guidance. LOU 3 - dated 30 September 2011 - MFPM will obtain transit insurance policy for supply of plant and equipment till the port of Chennai on behalf of the Applicant which will be reimbursed by the Applicant and also the risk and rewards are transferred to the Applicant at the port of shipment. LOU 4 - dated 14 December 2012 -It was clarified that the scope of the Agreement strictly excluded installation services, which will be provided under a separate agreement and that too the scope of such services will be restricted to supervisory in nature. The supervision charges as mentioned Schedule - I to the Agreement are in relation to design and manufacture of the equipment prior to importation i.e. outside India and such charges are included as part of the cost of equipment and would be borne by MFPM. 4.2 On conjoint reading of the terms of the Umbrella Agreement and LOUs as mentioned above, it is clear that the supply of equipment is a pure off-shore contract for which supply is completed....
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....erm financing costs." 4.2.4 Customs duties Clause 4.3.5 of the Umbrella Agreement provides that MTTPL shall be responsible for obtaining any import license or carrying out all custom formalities for the import of equipment and its transit through another country. All the custom duties, tariffs, fees, taxes and the charges imposed and levied at the port of importation shall be borne by the Applicant. 4.2.5 Insurance Schedule 1 of the Umbrella Agreement specifically states that the price of the Equipment will be increased by transport, insurance and packing cost until the Port of Chennai. MFPM has obtained transit insurance policy for supply of plant and equipment till the port of Chennai on behalf of MITTPL and also the risk and rewards are transferred to MITTPL at the port of shipment. 4.3 Installation of equipment after importation by MITTPL Under the Umbrella Agreement, majority of the equipment were imported in FY 2011-12 and FY 2012-13 wherein payment amounting to Rs. 343.25 crore and Rs. 199.78 crore respectively were made and in later years emergency spare parts and stand-by equipment were purchased for small amounts. Thereafter, the Applicant entered into i....
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....visory charges for successful installation and implementation of equipment, etc......".It submits that it is clear that the payments made by the Applicant to MFPM as per the agreement included supervisory charges for successful installation and implementation of equipments in India. Hence, it is submitted that the entire amount payable by it to MFPM directly or indirectly includes payment for the supervisory services rendered by MFPM in India and hence as these services have been rendered and utilized in India are as such taxable in India. 5.3 Regarding the Applicant's contention that installation and commissioning of the machinery purchased has been carried on by it by employing local Indian contractors and by foreign nationals, who were employed by the Applicant on long-term basis, Revenue submits that the "local Indian contractors", would have at best only assisted MFPM, the supplier of the machinery, in installing and commissioning of the machinery so supplied by it. These local contractors would have been used for moving of machinery from the "Port of Chennai" to the factory site, for construction of complicated civil works, sophisticated electrical works, etc., so as to fa....
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.... machineries. 5.7 Attention is also drawn to another application for ruling filed by the applicant in AAR No.1366 of 2012, related to the taxability of payments made by Michelin Global Mobility (hereinafter MGM) outside India, towards the expatriate personnel supplied by MGM and employed by MITTPL. The very nature of the composite contract referred here in this report is much larger in the scope, and cannot be confined to the employment of 79 expats alone, who are stated to have been paid just small sum of Rs. 9.95crore for the Financial Year 2014-15. 5.8 Revenue submits that in this context, the details of sums paid by MITTPL to MFPM, (except purchase of raw material and capital goods as reflected in Form 3CEB) are as under: Asst. Year Description of the services availed Amount(Rs.) 2011-12 Feasibility study 5,52,68,300 2011-12 Training of personnel 2,41,294 2012-13 Reimbursement of expenditure: Social security contribution, travel and other costs 11,41,582 2013-14 Training of personnel 77,83,395 2013-14 Admn. services 2,01,23,217 2013-14 Reimbursement of expenditure 13,87,136 2013-14 Trade payable 15,33....
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.... 5.11.1 The agreement with Satnam Global Infra Projects Limited along with Industeam SA is not for installation of MFPM supplied machinery. In this agreement of 24 July 2012, MITTPL is the customer, Satnam Global is supplier and Industeam is a service provider. The recital itself says that: "And whereas the supplier is engaged in the business of manufacturing and supplying machineries and equipment. And whereas the service provider engaged in the business of providing service for manufacturing and installation." The total payment made to Satnam Global Group is Rs. 7.86 crore, out of which Rs. 1.25 crore is for installation of machinery supplied by it and the balance is for the cost of machinery supplied to MITTPL. Thus Satnam Global had supplied the machinery manufactured by it and the same was installed by Industeam, and they were not engaged in installation of MFPM machinery. 5.11.2 Similarly, agreement with Webb India says: "this equipment and machinery purchase and installation agreement is executed......." Here also MITTPL is the customer, Webb India is the supplier and Webb Technology is the confirming party. The recital says: "And whereas the sup....
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....v. Union of India [2012] 204 Taxman 408 (SC). Therein, a three-judge Bench of the Supreme Court has laid down that what is needed is to consider the transaction in its entirety and to look at the transaction as a whole. Based on these observations series of Rulings of this Authority pronounced in the following cases were relied upon: ABC, dated 28.03.2012 [2012] 20 Taxmann.com 152; LindeAG, dated 20.03.2012 [2012] 19 Taxmann .com 238; Roxar Maximum Reservoir Performance WLL, dated 07.05.2012, [2012] 21 taxmann.com 128; and Alstom Transport SA, dated 07.06.2012 [2012] 22 taxmann.com 304. 5.14.1 In all these case laws relied upon by the Revenue, the following findings are stated to have been given: (a) A contract has to be read as a whole, and the purpose for which the contract is entered into by the parties is to be ascertained from the terms of the contract. (b) If the purpose of the contract is for installation / set-up of a factory, the same composite contract cannot be artificially dissected into a contract for supply of machinery separately; and the balance erection. (c) The object of the contract so entered is an indivisible contract and hence cannot be separated for the pu....
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....withal to say that the Umbrella Agreement is only for the supply of offshore machinery and equipment. It is a contract between two closely associated companies. 5.16 Revenue submits that the case of Ishikawajma Harima, from which the Applicant takes support, is very different from the instant case: In that case, it was a consortium of various entities, each with distinct responsibilities to execute various parts of turnkey project. Here, MFPM is the only closely associated company which has setup a factory in India. In that case, the various components (such as offshore and onshore supply of materials and services) of the project were distinctly brought in the main contract along with price components specified thereon. But in this case, the various agreements for onshore and offshore have been entered at various stages and the price components have not been spelt out in the umbrella agreement. Further, in this case the contract price has not been split into offshore and onshore activities in the Umbrella Agreement. Moreover, this is a transaction between two companies which are closely connected and directed by the interest of the ultimate holding Company CGEM. Hence for these ....
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....which has two subsidiaries, MFPM and CFM, Switzerland. MFPM, France is the manufacturer, sales entity and service provider. MFPM, Switzerland is the holding and the finance company for non-French entities including MITTPL. Both work for the interest and profit of the ultimate holding company CGEM, France. In such transactions the substance and intention is to be seen. Michelin Group's intention is to establish a manufacturing facility for its subsidiary MITTPL, and not merely supply of machinery, and MFPM is actively involved in establishing the manufacturing facility right from the feasibility study in FY 2010-11. The supply of machinery by MFPM is only one part of the various stages and has to be seen as a whole. The Revenue relies upon the case of MERO Asia Pacific Private Limited as decided by this authority in AAR No.981 of 2010 on this issue. 6. The Applicant, represented by MrRajanVora, FCA, has vehemently argued and submitted that the contentions of the Department are without any reasonable basis or analysis, and are based on assumptions and surmises without any supporting documents. 6.1 At the outset, the Applicant reiterates that it has entered into two agreements w....
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....d between the years 2010 and 2017..............." 6.3.1 Thus, the aforesaid Umbrella Agreement dated 1 April 2011 was only for off-shore supply of equipment by MFPM to Michelin India and a separate Services agreement was entered into for supervision of installation of the equipment, post supply of equipment outside India. This supports the fact that installation of plant and equipment was to be done by the Applicant or through its contractors and that MFPM would only provide required guidance for successful installation and implementation of the equipment. 6.3.2 In this regard, it is submitted that, under the aforesaid Umbrella Agreement, majority of the equipment were purchased under Phase 1 during the period April 2011 to February 2013. As per the said Umbrella Agreement, the total value of the machinery and equipment under Phase 1 was EURO 9,31,90,452 (approx. INR 580 crore). The details of payments made for the purchase of equipment as reflected in the Related Party Schedule of the financial statements of Michelin India are tabulated as under: Particulars Year ended 31.03.2012 Year ended 31.03.2013 Year ended 31.03.2014* Year ended 31.03.2015* Payments m....
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.... crore. 169 employees of Michelin India were engaged and 79 foreign expats were employed on long term basis with Michelin India for installation work. 6.5.1 As against this, MFPM has sent only 33 technicians under the Services Agreement for a short period of 14 days to oversee the work of installation done by the external suppliers. Michelin India has paid an amount of Rs. 9.95 crore in respect of the deployment of such technicians to MFPM, and appropriate taxes were withheld by Michelin India under Section 195 of the Act. 6.5.2 It is submitted that the equipment as imported under the Umbrella agreement and the expenses incurred for installation of the equipment were reflected as capital work in progress in the financial statements of the Applicant. The fixed assets as reflected in the financial statements of the Applicants are as under: Particulars Year ended 31.03.2011 Year ended 31.03.2012 Year ended 31.03.2013 Year ended 31.03.2014 Tangible Assets 6.07 crore 27.88 crore 27.85 crore 798.39 crore Intangible Assets 79.20 crore 86.79 crore 86.96 crore 2.58 crore Capital work in progress - Construction in progress 28.69 crore ....
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.....' 6.6.1 The Applicant further clarifies from the recitals of the Agreement that MFPM is supplying the equipment directly or through the subcontractors outside India: "The Supplier has extensive experience in facilitating the development of projects of establishment and extension of factories related to the activities of production of tires and manufacture of mixtures and is able to deliver - directly or through specialized subcontractors - specific machinery and equipment needed by the Client". "Clause - 8 The Supplier will be able to subcontract, transfer or assign part of this Contract to a third party..." 6.6.2 The Applicant submits that MFPM would draw up the price of these equipment on the following basis: "Schedule 1 - Price Computation Cost incurred by MFPM towards third party suppliers comprising of (a) the full engineering costs (design, project steering, etc., including the related transport costs); and (b) Full projection and external purchase costs of the equipment Cost incurred by MFPM as increased by appropriate coefficients determined on an arm's length basis accounting for, but not limited to, the following as may ....
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....lding shop; Curing tyres; Quality Control area; SAS Area; Warehouse to stock the finally manufactured/ quality tested tyres; Scrap yard area; Stores for maintaining spare parts; Tyre test area; Utility building managing water supply, electricity etc.; Sewage Water Treatment (SWT) and process water treatment area; and Admin building for employees in group service teams i.e. HR, finance, Safety etc. 4500 tonnes of machinery requiring 2,80,000 meters of cable were installed to operationalize the factory. In January 2014, when the manufacturing plant started commercial production, it had a capacity of manufacturing 3 lakh radial truck/ bus tyres per annum. In view of the above volume and size of the project, the overall activity of setting up and installation of the factory of such large magnitude could not have been completed by only 33 technicians. 6.7.1 The Department has erroneously assumed that the aforesaid local contractors and the employees of the Applicant, 'would have at best only assisted Michelin France, the supplier of machinery in installing and commissioning of the machinery so supplied by it and that the role played by the Indian employees of the Applicant company ma....
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....ng with external specialized contractors having hundreds of workers who were involved in the installation of equipment. 6.8.1 As regards the issue of MGM raised by Revenue, it is submitted by the Applicant that under the arrangement between MGM and the Applicant, expatriate personnel shall be employed by the Applicant for the services to be rendered in India and the personnel shall be released/ discharged in the home country from the obligation and rights of employment. MGM has agreed to pay certain portion of the salary in foreign currency directly to the foreign bank account of the expatriate employees and fully recover it from the Applicant. 6.9 Further, the aforesaid transactions of purchase of equipment from MFPM were part of the Transfer Pricing report in Form 3CEB and were subjected to scrutiny before the Transfer Pricing Officer ('TPO')/ Assessing Officer ('AO'), wherein, after considering various aspects and documentation, the learned TPO/ AO have accepted the said transaction to be at arm's length and hence an independent transaction between two related parties. 6.10 Regarding Revenue's contention that MFPM had a business connection in India, in terms of Section ....
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....MFPM to Michelin India in India, and hence, the Applicant submits that Michelin India does not have any PE in terms of Article 5(3) of the India France DTAA. 6.11.2 Further, without prejudice to the contention that MFPM does not have a PE in India, the Applicant submits that the alleged PE of MFPM cannot come into existence till the commencement of the installation stage which was subsequent to the sale of equipment offshore by MFPM to Michelin India. Thus, the income from provision of offshore equipment had already accrued and arisen outside India, prior to Michelin France's alleged PE coming into existence. Accordingly, it is contended that even if a PE of MFPM is established in India, the income from supply of equipment, materials and spares supplied offshore is not taxable in India. 6.11.3 Without prejudice, even if it is assumed that MFPM had a permanent establishment in India for carrying out its operations i.e. of supervision of installation, then also, only income that is attributable to such supervision services could be considered for the purpose of taxation and that since payment for supervision charges received by MFPM has already borne tax in India (by way of TDS....
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....and Anrvs DCIT (WP No. 3914/2012), vide it's order dated 23 April 2014 and in case of Nokia Networks OY (253 CTR 417), has overruled the above mentioned judgments and has distinguished the judgment laid down by the Hon'ble Supreme Court in the case of Vodafone International Holdings BV vs. Union of India, in respect of offshore supply of goods and decided the issue in favour of the Assessee. 6.14.1 The Applicant has referred to the decision of the Hon'ble Supreme Court in the case of Ishikawajma (supra) and other rulings, to say that all the conditions to determine whether the supply of machinery and equipment and materials qualify as offshore supply, are clearly fulfilled in the present case of Michelin India, and hence the off-shore supply of equipment by MFPM to Michelin India shall not be taxable in India. 6.15 Reliance is placed on the ruling of this Authority in the case of Hyosung Corporation [2009] (314 ITR 343)(AAR), to say that in the event the sale took place outside the territory of India, the income arising out of such sale cannot be said to have accrued or arisen in India. Again, on similar facts, case of LG Cable Ltd. (237 CTR 438) (Delhi), which has approved t....
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....ted the same. 6.16 The Applicant also states that even if it is assumed that there is a composite contract for supply and installation of machinery between Michelin India and Michelin France, a conjoint reading of section 4, 5 and 9(1)(i) states that an income which accrues or arises to a foreign enterprise in India can only be such portion of income as is attributable to its business carried out in India. Hence supply has to be segregated from the installation and only then question of apportionment will arise. Alternatively, such permanent establishment based in India cannot have any role to play in a transaction of offshore supply of equipment. In the case of a turnkey project the PE is set up at the installation stage while the entire turnkey project including the sale of equipment is finalized before the installation stage. The setting up of the PE in such a case is a state subsequent to the conclusion of the contract. It is as a result of sale of equipment that installation PE comes into existence. Reliance in this regards is placed on the Supreme Court decision in case of Hyundai Heavy Industries Co Ltd 210 CTR 178. 6.17 With regard to Revenue's mention of the feasibil....
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....hore services of supervision. 7.3 As per the requirements of the Agreement entered into, from a perusal of the Ocean Bill of Lading issued by transporting container company, in the name of Michelin India, describing the equipment being shipped from Shanghai to Michelin India and a copy of the Bill of Entry issued by Indian Customs in favour of Michelin India describing equipment imported from MFPM, it is clear that the title in the property was transferred outside India. The sample copies ofBill of Lading, Purchase order and Invoice also show that the delivery of the equipment took place outside India on FOB basis. The consideration for supply of plant and equipment was paid by Michelin India to MFPM in Euros to a bank outside India. All the custom duties and other charges levied at the port of importation were borne by Michelin India. Further, MFPM obtained transit insurance policy for supply of equipment till the port of Chennai on behalf of Michelin India, and also the risk and rewards were transferred to Michelin India at the port of shipment. We do not consider it necessary to discuss here the further details appearing in these documents, as these are not so much in dispute....
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....tioned in the Agreement itself, and includes full engineering costs, full production and external purchase costs of the equipment, designing, project steering, transportation, administrative costs relating to production and sales, supervision and short term financing etc. That is, cost involved in their production and till the time of shipment. There is no mention of any installation cost included or charged with the price, nor any evidence has been brought on record, to this effect. In this situation their installation by the Applicant through its employees, expats and third party contractors under the supervision of MFPM personnel seems a realistic assertion by the Applicant. 7.5.2 As regards the role of the third party contractors, who were paid Rs. 131.58 crore, after the equipment was received in India, we fail to understand on what basis Revenue submits that the "local Indian contractors would have at best only assisted MFPM in installing the machinery..... and would have been used for moving of machinery from the port to the factory, for construction of complicated civil works, sophisticated electrical works.......since they did not have the requisite skills". A close loo....
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....as per the standard purchase orders. Avasarala Technologies Ltd too was into similar business of installation and commissioning, and has undertaken contract for installation only. Many of the items supplied or installed have the same markings, such as A4LOA, A4LO7 etc. as are appearing in the purchase orders placed with MFPM. 7.5.6 Thus, even if it is said that some of these contractors were providing machines and installing the same as per the specifications of the Applicant, as contended by the Revenue, it is very clear that they were into installation of similar, in fact identical machines for the Applicant as the imported ones as are appearing in the list of equipment imported, in Schedule II to the Equipment Purchase Agreement. Hence it is incorrect to say that the local contractors did not possess the requisite skills for carrying out installation work. There was a mix of third parties that were suppliers also, and some were only into installation work. 7.5.7 As regards the qualifications of the 169 Indian employees and 79 Expats involvement in installation and commissioning, Revenue's questioning their competence is rather sweeping. Such evaluation can only be done by ....
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....ssion). The balance expenditure of Rs. 742.62 crore, therefore, appears to pertain to various other costs, such as purchase of machinery from third parties and employee cost (capitalised) by the Applicant for synchronizing the installation of machinery and setting up the entire factory, with the help of local contractors, Indian employees and expats, under the supervision of MFPM personnel. 7.6 The above examination tells us that the activities of equipment purchase and the services of supervision, respectively, were carried out as per the two clearly demarcated agreements, with different periods of execution, clearly stipulated terms of payment, including a schedule to the Umbrella Agreement showing item wise pricing of equipment supplied by MFPM, one for offshore supply and the other for on shore services. There is no material to suggest that MFPM had dealt with the Applicant on a turnkey basis, for supply, installation, commissioning and supervision of the setting up of the plant in India, as argued by the Revenue. Also, the two had transacted on a principal to principal basis, as found by the TPO while assessing the payments for purchase of equipment, and it cannot be sai....
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....the income that MFPM 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 the applicant had accrued or arisen. In this connection, we may add that though various cases have been cited by both sides on the issue of composite contracts, we are of the view that the number of contracts or parties to the contract are of limited significance. What is important is whether from the contracts and activities undertaken there under, in the normal course of business, the taxable events and the situs of income are clearly determinable or not, and whether they can clearly demonstrate a business connection under section 9 of the Act, and taxability under sections 4 and 5 of the Act. Where this becomes difficult, for reasons of blurred connecting points in the chain of events, overlapping arrangements, unclear terms and obligations, intermixed pricing, or unsegmented continuity etc., being some of the illustrative examples, the need to treat the entire arrangement of multiple contracts as composite may become necessary. That is, even if there are fewer parties and fewer segments, if the income generating even....
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....n. Hence, there was no continuity in these activities. Besides, in Ansaldo Energia, a case was made out that the different segments had been created to manipulate the costing for the purposes of tax avoidance, which is not the case here. Again, reliance on the case of Linde AG is misplaced, as the reasoning given by the AAR was not accepted by the Hon'ble Delhi High Court. In the case of Alstom Transport, the Ruling flowed from the facts that one single supplier had split the contract into 4 parts, though they were found to be indivisible. In the instant case, the segments are clearly demarcated and also involve third and unrelated parties, who have done substantial part of the work. 7.9 Let us now examine the facts vis-à-vis section 9 of the Act. The Applicant has made payments of about Rs. 580 crore for the off shore supply of equipment under the Umbrella Agreement. There is no way that it can be contended that since MFPM had a role in the supervision of setting up the same, the transfer of the property extended beyond the shores of France such as to have income arisen or accrued in India. The point at which the property is passed to the Applicant, on the shore of the s....
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....ecution of a contract may arise at several stages and the same would have to be considered on the anvil of territorial nexus. It was held in Ishikawajima Harima that: "30 ..............The project is a turnkey project. The contract may be also 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............ The taxable events in execution of a contract may 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 separate from service obligation. Price for each of the component of this contract is separate. Similarly, offshore supply and offshore services have separately been dealt with. Prices in each of the segment are also different. The very fact that in the contract, the supply segment and the service segment have been specified in different parts of the contract is a pointer to show that the liability of the applicant thereunder would also be different. The contract indisputably was executed in India. By entering into a ....
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....e supply of equipment can be held to be chargeable to tax in India, under the Income tax Act 1961. For this reason we do not consider it necessary to deal with in any detail with the issue of its being taxable under the India France DTAA read with its Protocol, especially as we are not tying the erection and commissioning of the project to MFPM. We have been following the essence of this decision of the Hon'ble Supreme Court, in cases cited by the Applicant, in cases such as LS Cable Limited, AAR 858 of 2009, Hyosung Corporation, 314 ITR 343 (AAR), 2009, and Deepak Cables India Limited, AAR 940 of 2010 etc., differing only where the fact situation was different. 7.11 While examining provisions of section 9, we gave reasons why the income from off shore supply could not be brought to tax in India. By the same reasoning under this provision, we have to hold that income derived from the discharging of its obligations by MFPM, namely provision of services of supervision in India at the factory site where the plant has been set up, is chargeable to tax in India as the income arising therefrom can be said to have arisen or accrued in India. There is a direct and real nexus between the....