TaxTMI 
TaxTMI 
2019 (8) TMI 1643
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....use 31.4 of Invitation for Bids read with clause 3.6 of General Conditions of Contract was that in the event of award to a bidder, three separate contracts will be entered into, the first contract for offshore supply of equipments, second contract for onshore supply of equipments and third contract for rendering onshore services. The foreign bidder had an option to execute the second and third contract through an Assignee and in such case the onshore contracts were to be executed directly with such Assignee. 2. In pursuance to the Global Invitation of Bids, Toshiba entered into an MoU with Toshiba JSW Turbine and Generator Private Limited (Toshiba JSW) to act as an Assignee of Toshiba for the second and third contract for the MTPP. Toshiba JSW had submitted an Unequivocal Consent Letter dated 8th February, 2010 to NTPC confirming that it was willing to work as an independent contractor to MUNPL for onshore supply and onshore service contracts, in case the contracts were awarded to Toshiba. Pursuant to evaluation of techno-commercial bids and financial bids, three separate contracts were awarded in connection with MTPP: (a) The first contract for offshore supply to the Applicant;....
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....A. Whether the transfer of title in goods was outside India? B. Whether the payment was received outside India? Wherever the aforesaid twin tests were satisfied, income from offshore supply shall not be liable to tax in India. The Applicant submitted that in his case also the transfer of title of good was outside India at the port of loading and the payment for the materials supplied was also received outside India. It was also pointed out that as per terms of contract all equipments supplied by Toshiba were to be insured by Toshiba at its own cost and MUNPL was to be named as co-insured in the insurance policies. Accordingly, it was contended that the supply of equipment of materials was from outside India and no part of such remuneration had accrued or arisen in India. The Applicant has relied upon the following decision in support: (i) Ishikawajma Harima Heavy Industries Limited (288 ITR 408) (SC). (ii) Michelin Tamil Nadu Tyres Private Limited (AAR No. 1218 of 2011). (iii) Hyosung Corporation v. DIT (314 ITR 343), AAR. (iv) L S Cables Limited (337 ITR 35), AAR, confirmed by Delhi High Court (234 Taxman 427). (v) Joint Stock Company Foreign Economic Association ....
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....e breach of the whole contract? (b) Whether the dominant object of the contract was the execution of turnkey project and the question whether the title to the goods supplied passed offshore or within India was secondary to the execution of the contract? The revenue strongly contended that these conditions were fulfilled in the facts of the present case and the contract was a composite one, which was artificially divided into three contracts. There was element of continuity in the role of the Applicant right from supply of goods to successfully commissioning of the plant and that one part of transaction cannot be read in isolation or dissociated from the other parts. The supply of offshore equipments was an integral part and parcel of the main contract and the same cannot be severed and treated differently. The revenue pointed out that the three contracts were part of one unified contract was also corroborated by the fact that unconditional corporate guarantee towards performance and security was provided by the Applicant. According to revenue, the Applicant should not be given benefit for artificially separating the composite contract into three contracts in a pre-decided and pr....
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....India for site surveys, protracted negotiations, data collection, consultation, signing of contracts etc; and the place, manner and mode of execution of the contract led to have a Fixed Place PE for the Applicant. Therefore, the income of the assessee arising out of these contracts was liable to be assessed as business income under Article 7 of the Treaty. The applicant also had a business connection as stipulated under section 9(1)(i) of the Act. 9. As an alternative argument, the revenue has contended that the applicant had rendered highly technical services to the Indian entity in connection with offshore supplies as the payment under this contract included payments on the account of drawing and designing services. Therefore, a portion of the total consideration under the contract is attributable to fee for technical services (FTS), which is liable to tax in India. 10. The revenue also submitted that the ratio of the decisions as relied upon by the Applicant were not applicable to the present case as the facts were different. Further, reliance was placed on the decision of Madras High Court in the case of Ansaldo Energia SPA (310 ITR 239) in support of the plea that in case th....
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.... of contracts was considered and the aforesaid aspect was affirmed by the Hon'ble Delhi High Court in the case of DIT v. Ericsson A.B., New Delhi (343 ITR 470) (Delhi) and DIT v Nokia Networks OY (358 ITR 259). 12. As regards the suspicion of the revenue regarding loading the price on off- shore contract the Applicant submitted that the bids were called by the Customer/NTPC for total of 5 projects (with similar scope of work and contract scheme). As per the evaluation criteria first the Evaluated Project Price was arrived for all bidders based on the Evaluated Project Price for all the 5 projects, based on which bidder's position were ranked in ascending order as L1, L2, L3 and so on. Further, based on the above Evaluated Bid Price, the "Award Criteria" stipulated in the bid documents was applied, which clearly provided that Customer would award the contracts for 2 projects to the lowest bidder, another 2 to the second lowest bidder and balance 1 project to the third lowest bidder. However, the award to the L1, L2 and L3 bidder would be made only after matching the lowest Evaluated Project Price. The Applicant submitted that in spite of submitting its own independent price....
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....icant were for the purpose of business of Toshiba JSW to develop the manufacturing capability in India as well as technology absorption as intended by Government of India. The Applicant drew our attention to the fact that second contract and third contract was awarded to Toshiba JSW and revenue for onshore supply and onshore service portion flowed to Toshiba JSW and not to the Applicant. The corresponding cost incurred by Toshiba JSW for availing the technical services from Applicant was being duly considered in the Profit & Loss statement of Toshiba JSW. The Applicant pointed out that being an inter-company transaction, the same has been subject to assessment by the Transfer Pricing Officer having jurisdiction over Toshiba JSW and such transactions were accepted to be at arm's length without drawing any adverse inference. Thus, technical support provided by the Applicant to Toshiba JSW under separate contract (in pursuance of the Technology Transfer Agreement) would have no bearing on determining taxability of the income arising in hands of the Applicant under the present offshore supply contract in relation to which the ruling is being sought before this Authority. Findings ....
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....right on the Employer to terminate the other Contracts also at the risk and the cost of the Contractor. The foreign bidder, however, has the option, to be exercised as a part of its bid proposal, to propose an Assignee in its bid to execute the Second Contract and/or the Third Contract. For the scope of work envisaged by the foreign bidder, in its bid, to be executed by Assignee, the Assignee should have relevant/required capacity and experience of executing similar job. The bidder shall substantiate with relevant/required documents in the bid to establish capacity and experience of the Assignee. If the foreign bidder has proposed an assignee in its bid to execute the Second Contract and/or the Third Contract and has also furnished written unequivocal consent of the proposed Assignee to work as an independent Contractor on the terms and conditions offered by the bidder and if the Employer is satisfied with the capacity and experience of the Assignee proposed in the bid, the Employer will enter into the 'Second Contract' and/or the "Third Contract' with the Assignee. However, if the Employer in its judgement does not find acceptance of the Assignee proposed in the bid ....
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...., in case of award, Toshiba is required to furnish a performance security for ten percent of the value of all the three Contracts, as such TJTG shall furnish a corporate guarantee to TSB as a counter guarantee in a mutually agreed form for the second and third contracts on or before the date of formation of the Contract(s). The MoU also stipulated that in case of award of contract, the Applicant and Toshiba JSW shall perform their respective contracts independently and that each party shall be solely responsible for the execution of their respective Contract(s). Toshiba JSW had also submitted an Unequivocal Consent Letter dated 08/02/2010 to NTPC confirming that it was willing to work as an independent contractor in case the contract was awarded to the Applicant. 17. The clause 19.6 of the bid document stipulated that after evaluation of Stage-I (Techno-Commercial) bid, the Employer may invite individual bidders for clarification and may issue amendments/clarifications, if necessary. Thereafter, Stage-II (Price) bid will be invited from the bidders who were considered qualified and whose bid was considered Techno-Commercially responsive. The Applicant had submitted the bid with t....
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....scussed above and three separate contracts entered into by the Employer; the contention of the revenue that the Applicant has artificially divided the composite contracts into three contracts is absurd and preposterous. 19. As regards the transfer of title of ownership of imported plant and equipment is concerned, clause 31.1 of General Conditions of Contract stipulated as under:- Ownership of the Plant and Equipment (including spare parts) to be imported into the country where the site is located shall be transferred to the Employer upon loading on to the mode of transport to be used to convey the Plant and Equipment from the country of origin to that country and upon endorsement of despatch document in favour of the Employer. Further, clause 34 of GCC specified that the Contractor shall at its expense, take out and maintain the insurance and that the Employer shall be named as co-insured under all insurance policies. The relevant clause 34.2 of GCC was as under: The Employer shall be named as co-insured under all insurance policies taken out by the Contractor pursuant to GCC Sub-Clause 34.1, except for the Third Party Liability, Workers Compensation and Employer's Liabili....
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....ate Limited, who is also the consignee in the Bill of Lading. In the Marine Cargo Insurance policy the name of Meja Thermal Power Project is appearing as a co-insured. These facts clearly establish that the supply of equipment and material was made outside India and thus the transfer of title to the equipment and materials also took place while the goods were outside the territory of India. The payment for the offshore supply of equipments was also made outside the country in foreign currency as per terms of the contract. 22. In the case of Mahabir Commercial Company Limited (86 ITR 417) Hon'ble Supreme Court has enunciated the principle that under CIF contract, the property in the goods, passes once the documents are tendered by the seller to the buyer or the agent, as required under the contract. It was further held that where the seller retains control over the goods by either obtaining a bill of lading in his name or to his order, the property in the goods does not pass to the buyer until he endorses the bill to the buyer and delivers the document to him. As already mentioned earlier, in the instant case the seller did not retain control over the goods as the invoice and t....
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.... In Ishikawajma case (supra), the Supreme Court has held that no part of profit arising from the supply of equipment outside India would be chargeable to tax in India. 24. The argument of the revenue is that all the three contracts were part of one unified contract considering that an unconditional corporate guarantee towards performance and security was given by the Applicant. The cross-fall breach clause in the contracts is found to be as per customer's requirement which is incorporated in all the three contracts. In the NOA for CIF supply of STG Package, the Applicant has been made responsible for works to be executed under the Second contract and the Third contract and it is stipulated that any breach under the Second contract and Third contract shall automatically be deemed as a breach of the First contract. Similarly, in the NOA for Ex-works (India) supply of equipments, Toshiba JSW has been made fully responsible for the works to be executed under the First contract and Third contract with stipulation that any breach under the First contract and Third contract shall automatically be deemed as breach of the Second contract. An identical stipulation is found in NOA for on....
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....d. The Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DIT (supra) had considered this aspect and held that merely because the project is a turnkey project it would not necessarily imply that for purposes of taxability, the entire contract is to be considered as an integrated one. The taxable income in execution of a contract may arise at several stages and the same would have to be considered on the anvil of territorial nexus. The Court, in respect of offshore supply had held as under: Re : Offshore Supply : (1) That only such part of the income, as is attributable to the operations 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....
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....tributable to PE. The Tribunal while upholding the findings of Commissioner (Appeals), held that 25 per cent of activity could have been done outside India and, therefore, taking into account profit margins of similar companies, directed to tax entire profit in context of contracts II, III and IV and to tax 75 per cent of profit with regard to contract I. The High Court upheld the findings of Tribunal regarding PE and business connection of assessee in India as correct. However, as regards finding that 75 per cent of profit of contract I was taxable, since no reason had been given for fixing that percentage, matter was remitted back to Tribunal to assess percentage of taxable profit properly. Thus the facts of this case are found to be different and distinguishable from the facts of the present case. Further, the principle that income from offshore supply of equipments is not liable to tax in India was not controverted in this case as well. Whether the Applicant has a PE in India? 28. The revenue has contended that in view of the continuity of the activities and the onus cast on the Applicant for successful completion of the project, it had the permanent establishment (PE) in Ind....
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....essing by another enterprise ; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise ; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character. 29. As per Article 5.3 of India-Japan DTAA, a building site or construction, installation or assembly project constitutes PE, only if it had lasted for more than six months. Similarly as per Article 5.4, for the supervisory activities to constitute a PE, such activity should be carried on for more than six months. No such evidence has been brought on record by the revenue. In fact the Applicant had no role in the installation and the contract for installation, testing, commissioning of STG Package was assigned to Toshiba JSW under the Third contract. The revenue has relied upon the pre-bid activities including Minutes of the Meeting between the applicant and NTPC authorities. All these work including the Minutes of Meetings were held prior to the award of the contract to the Applicant. At the pre-bid stage and during the Meeti....
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....ation and testing as well as civil and structural drawings were discussed in those meetings. As per revenue the main issues decided in the meetings were as under:- - The Toshiba will change its layout to reduce the Civil cost and the NTPC agreed to adopt the proposed arrangement. - M/s Toshiba confirmed that they shall conduct all type tests on One (1) generator and excitation system and all routine tests on both the generators and excitation systems as per technical specification. - M/s Toshiba confirmed that they shall provide Vibration Monitoring System, Online partial discharge (PD) monitoring, Rotor flux monitoring system for the generator conforming to technical specification. - M/s NTPC informed that Civil & Structural drawings released for construction shall be furnished to Toshiba for their reference and comments, if any, with regard to interface with respect to Toshiba utilities. - It has been decided that Details Engineering information schedule shall be discussed and finalized at the earliest. However, Critical Engineering Drawing List along with agreed Engineering information Schedule required for Civil Works is enclosed as Annexure-III. - Before the meetin....
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....irement for Bidder was that he should be a qualified steam turbine generator manufacturer with experience of having designed, engineered, manufactured, erected and commissioned steam turbine and generator set of specified capacity. Further, Clause 20 of General Conditions of Contract stipulated that the Contractor shall execute the basic and detailed design and the engineering work in compliance with the provisions of the Contract or in accordance with good engineering practice. Thus it was imperative that the Contractors will not only supply and erect the equipments but will also provide with the detailed design, drawing and engineering work of the project. The project was an integrated one which could not have been executed without the provision of design, drawing and the engineering services. We have to, therefore, examine as to under which contract the design, drawing and engineering service was provided and who had rendered this service. 33. It is found that the offshore supply contract required the Applicant to design & provide engineering, manufacture and supply the equipments. The scope of work under this contract as per clause 2.1 of NOA is once again reproduced below: T....
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....ndatory Spares covered under Steam Turbine Generator Package for Meja Thermal Power Project (2 x 660 MW), as per Bidding Document and its Amendments/Clarifications/Errata read in conjunction with agreed Minutes of Meeting. 34. It is thus found that providing the design, drawings and engineering services was not part of the scope of the onshore service contract. The precise work to be done in this contract was transportation of the material to the work site, installation, supervision, testing and commissioning of all equipments and materials but nothing in respect of design, drawings and engineering services. From the terms of payment for this contract it is found that the Employer had agreed to pay for following services under the contract: 1 Local Transportation including port clearance and port charges and inland insurance charges for plant and equipment covered under the First Contract and Second Contract INR 271,093,075 2 Local Transportation including port clearance and port charges and inland insurance charges for Mandatory Spares covered under the First Contract and Second Contract INR 23,189,201 3 Installation Services JPY 766,725,421 +INR 1,321,163,136 4 Total ....
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.... cost implication to NTPC. Toshiba further explained that the proposed arrangement offers better maintainability for the plant and it is their standard proven practice. In view of M/s Toshiba standard practice of compact layout and resultant reduction in civil cost NTPC agreed to adopt the proposed arrangement. 36. It is clear from above that the design and drawing issues discussed in the above meetings were not in respect of offshore supply of materials. Further, the C&I issues as discussed in these meetings were also not in respect offshore supply of material but regarding actual designing of the plant which is evident from the following decision recoded in the Minutes: M/s Toshiba handed over the essential data required for Employer's Station C&I package referred at clause No. : 1.00.00 of section-VI Part-A, Sub Section-VII (Page 1 to 3 of 3) of technical specification documents related to NTPC for reference. For the items against which M/s Toshiba has indicated that the details shall be furnished later, M/s Toshiba confirmed to furnish the required information before NOA. M/s Toshiba further clarified that these are indicative and shall be further discussed and finalized....
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....bsp; 6a CEP PIT-G.A. level, foundation plan and loading data P-4 & F-24 Preliminary canister size (Dla & elevation at bottom) and location of CEP shall be furnished in preliminary data 6b CEP pit-pedestals and embedment details F-24 7 Deaerator, HP Heater, LP Heater load data P-4 & F-24 Deaerator and heater location and load shall be furnished in preliminary data 8 Wall openings for main plant building coulun rows, Internal walls A row P-18, F-24; B row P-20, F-24; C row P-20, F-24; Balance P-24, F-40 9 Floor openings/insert details for Main plant building floors P-24, F-36 TG FOUNDATION 10 TG foundation GA foundation plan, loading data including GA of top deck and TG foundation column layout and details P8, F16 (Outline, loading of TG foundation and Embedded detail of Pedestal) Based on inputs furnished at item 10, NTPC shall work out the TG column and beam sizes which shall be furnished to bidder for Information/Interface. Observation/comments if any shall be communicated to NTPC within 3 weeks of submission 11 Write up and design criteria for TG foundation P-4, F12 Typical drawing for TG column arrangemen....
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.... NOTES: The preliminary information provided will be adequate and will not change significantly at the final stage to affect the civil design/drawings significantly. 37. It is evident from the above detail that drawings, designs and engineering aspects as mentioned in this Annexure were not in respect of offshore supply of materials but in respect of actual lay out and installation plan of the plant in India. When we peruse the details under the broad categories, it can be seen that it refers to Equipment Layout & Loading data, TG foundation & GA foundation plan, TDBFP and MDBFP foundations, Control Equipment room, Drawings Required for Interface Engineering, Elevators, their Site plan, Process flow sheet, GA & Sectional drawings for foundation of equipments, Layout plan, etc. etc. We are unable to appreciate as to how such Designs and engineering can be considered as part of equipment to be supplied by the assessee from abroad. In fact, such Design and drawings deal with every aspect of the planning and layout of the plant right from foundation till the completion of the entire project. All such drawings are customized. Further, the agreed Engineering coordination procedure was....
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....etwork to NTPC shall be made by Toshiba within four weeks of Notification of Award (NOA)., which will be plans for the following, which will be submitted along with L2 network: (a) Site Manpower deployment (b) Site T&Ps deployment (c) Detailed site mobilization plan It was agreed upon in this meeting that Toshiba shall furnish the detailed break up of area-wise and discipline-wise organisational manpower deployment specific to Meja Project during L2 network finalisation. 38. It is crystal clear from the above facts that the Applicant had agreed to provide drawings and designs in respect of the STG project and had rendered technical services in connection with the execution of the STG package contract. The scope of work in respect of drawings and design as agreed upon is not found specifically appearing in any of the three contracts but are part of Minutes of Meeting. These drawings, designs and engineering aspects as mentioned in the Minutes of Meeting, which are part of Notification of Award, are not in respect of offshore supply of materials but in respect of actual lay out and installation of the plant in India. 39. The Applicant has submitted that it had entered into a....
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....oshiba JSW and the transfer of technical information, know-how etc. in connection thereof was their internal matter; which could not have been done on e-desk Portal of NTPC. Further, this issue never cropped up in the Minutes of Meeting and, therefore, the technical services as provided by the Applicant could not have been in connection with this technology transfer agreement. 41. The discussions in the Minutes of Meeting on the part of the Applicant, which are part of NOA, are found to be neither in connection with the offshore supply of materials nor in connection with the Technology Transfer Agreement with Toshiba JSW. These are independent services rendered by the Applicant to the customer. Further, providing the design dossier, design software, drawing and documentation, engineering services etc. can't be part of the third contract as we do not find any mention of these services in the NOA for onshore services issued to the Toshiba JSW. The Applicant has admitted that the design and drawing services were provided by it to the customer directly through e-desk Portal of NTPC. By providing the design, drawing and engineering aspects as discussed in the Minutes of Meeting, th....
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....ervices were rendered from outside India, the services were utilized in India and are, therefore, liable to tax in India as FTS u/s 9(1)(vii) of the Act read with Article 12.4 of India-Japan DTAA. 43. As the technology transfer by providing the design dossier, design software, drawing and documentation, quality system manuals, engineering aspects etc. was part of the Invitation of Bid for STG Package for MEJA TPP, it is imperative that the cost element for this technology transfer was also embedded in the overall contract bid. However, the cost for this technology transfer has not been specifically mentioned in any of the three contracts. As already mentioned earlier there was no element of drawings, design and engineering cost in the third contract for onshore services. As the work for Design & Engineering are mentioned only in offshore and onshore contracts for supply of materials and equipments, it is imperative that the cost for design dossier/design software, drawing and documentation engineering work etc; is embedded in these contracts only. Once the drawings, design and engineering services have been provided but have not been exclusively charged, the natural corollary whic....