TaxTMI 
TaxTMI 
2019 (8) TMI 1643
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....e-conditions of the Tender contained in clause 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 ....
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....e brought to tax in India, needs to be examined on the following two parameters: 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....
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.... (a) Whether the offshore and onshore elements of the contract were so inextricably linked, that the breach of the offshore element would result in the 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 Applica....
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....rveys & inspection of various places through its employees, which would result in PE exposure for the Applicant. The employees of the Applicant must also have visited 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 fact....
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....re services). The Applicant placed reliance on the ruling of this Authority in case of Hyosung Corporation [A.A.R. 773 of 2008] wherein the aspect of cross-fall breach in case 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 awar....
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.... with Toshiba JSW, in terms of which requisite technical support was being provided by the Applicant to Toshiba JSW. The technical services alleged to have been rendered by the Applicant 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 ta....
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.... specified in the Contract Documents. All the above contracts will contain a cross-fall breach clause specifying that breach of one contract will constitute breach of the other contracts which will confer a 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,....
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....r all liabilities, including any liability to pay liquidated damages to NTPC, arising out of their respective contract(s) without any recourse to the other party. TJTG acknowledges that in accordance with NTPC's GCC, 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/cla....
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....scussions, the clear stipulation in the bid document, appointment of Toshiba JSW as an Assignee, the mutual obligations of the Applicant and the Assignee as documented in the MoU, the transparent process of the award of tender as discussed 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 o....
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....dia upon loading of the Plant and Equipment on to the mode of transport to be used to convey the same from the country of origin and upon endorsement of despatch document in favour of the Employer. The invoice was generated by the Applicant in the name of Meja Urja Nigam Private 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 ladi....
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....y of goods had taken place outside India and did not give rise to any taxable income in India under the provisions of the Act. In fact, that case was a case of composite contract, whereas in the present case there is a separate and exclusive contract for supply of goods offshore. 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 ma....
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...., follows that in a composite contract where only a part of the operations is to be carried out in India, the assessee would not be liable for part of income that arises from operations conducted outside India. In such a case, income from the contract has to be appropriately apportioned. 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)....
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....ake care of other responsibilities and risks of assessee with respect to contracts III and IV on account of single bidder responsibility. He also held that Ansaldo had a PE and business connection in India and estimated profit on entire project, taking into consideration losses of contracts III and IV and the profit attributable 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 equipment....
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....ablishment' shall be deemed not to include : (a) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise ; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display ; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing 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....
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....dated 27-1-2011, the income in respect of off-shore supply contract, to the extent it is attributable to the operation of the PE, can be subjected to tax in the hands of the Applicant as per Article 7.1 of DTAA. Fee for Technical Services 30. The revenue has drawn our attention to the technical meetings held between the Applicant, Toshiba JSW and NTPC during the period from 26/10/2010 to 11/11/2010 and pointed out that technical issue with regard to operation 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 NT....
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....tract were in respect of materials to be manufactured and supplied to the customer and there was no intention of the customer to procure any design and drawing service in the first contract and accordingly no technical service was rendered by the Applicant. Therefore, the claim of FTS as raised by the revenue was completely baseless and out of context. 32. We have carefully considered the facts of the case and the submissions made in this regard. It is found from the bid document that the qualifying requirement 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 in....
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....oods, transportation from manufacturer's works/place of dispatch to site (both in India), transit insurance, delivery at site, receipt, unloading, handling, storage, in-plant transportation, taking delivery of employer supplied equipment from site stores, comprehensive all risk insurance, installation, supervision, testing and commissioning of all equipment and materials, and all other services leading to successful "completion of facilities" and handling over to Employer of the Equipment/Materials including Mandatory 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 ....
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.... be lowered from 38M to 24M which is adequate for NPSH requirement of the pumps. During the discussion Toshiba provided a layout drawing of Jimah 2X700MW plant which has similar arrangement and compact layout. Toshiba has also submitted a list of about 50 reference plants of capacity ranging from 600 to 1000MW (copy attached at Appendix-I) where the units are operating for past several years with similar arrangement. Toshiba confirmed that handling requirement for O&M purpose and any requirement arising due to above change shall be provided without any 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 th....
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....d pedestal centreline distance and width shall be furnished in preliminary data. 4 Front and rear water box handling-scheme, column location, load data and insert details; 4a. Preliminary data P-12 Monorail arrangement and load shall be furnished in preliminary data. 4b Final Data F-24 5a CW plt-GA, level, foundation plan and loading data P-4 & F-14 Layout of CW pit, bottom level of pit and staircase location data to be furnished in preliminary data 5b CW plt pedestals embedment and pipe opening details. F-22 (Except valve pedestal); F-32 for valve pedestals 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....
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....Standard drawing shall be furnished by NTPC to bidder for information ELEVATORS 19a GA of elevator pit for piles and pile cap Drawings Required for Interface Engineering 1 Layout of CW supply and return piping to condenser P-8 & F-36 2 Turbine drainage piping layout NA (since this is for UG drainage piping, Waste Water Collection System (WWCS) piping embedded in floor is not required at this time) Clarification: NTPC is asking to receive the required slope height requirement for the flashbox drain pipe (if applicable) 3 Oil canal details NA No Oil canal required General 1 Condenser, mechanical, thermal & hydraulic calculations and condenser sizing criteria 18 P- Preliminary Drawing/data, F- Final Drawing/data 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 r....
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....nutes of Meeting. The Applicant provided Brief Integrated Network and Detailed PERT network as under:- M/s TOSHIBA shall furnish a brief integrated master (L1) network after integrating with schedule of various owner inputs identified in Annexure-II in Primavera/MS Project format by 22-11-2010 which will be mutually discussed and finalized. Work programme in the form of Detailed Integrated Network (L-2) covering details of engineering, BOI ordering, procurement, manufacturing, shipment/delivery, inland transportation, erection, testing and commissioning activities within the overall work schedule as agreed at Sl No. 3 above, shall be submitted by M/s TOSHIBA in Primavera/Microsoft Project format to NTPC for approval. Above mentioned L2 network should also indicate Inter dependency of all the activities as mentioned above. The submission of L2 network 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 T....
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....nd documentation, quality system manuals and imparting relevant personnel training to the Indian Manufacturing Company. Such technology transfer agreement must have provision that the transfer of technology to the Indian Manufacturing Company shall be complete by the time eighth 660/800 MW supercritical unit is supplied by the Bidder. The Bidder shall be required to furnish an undertaking in this regard as per format enclosed with the bidding documents for transfer of technology which shall be supported by board resolution of the technology transferring Company. 40. It is thus found that the Bidder had to transfer the technical knowhow for super critical steam turbine generator by way of providing the design dossier, design software, drawing and documentation, quality system manuals and by imparting necessary training. The technology transfer agreement was between Toshiba and Toshiba 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 co....
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....rendered unsustainable. Further Article 12.4 of India-Japan DTAA stipulates as under: 4. The term 'fees for technical services' as used in this article means payments of any amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred to in article 14, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel. In the instant case the Applicant by providing the design dossier, design software, drawing and documentation, quality system manuals etc. is found to have rendered technical or consultancy service. Further, by providing the drawings, designs and engineering aspects as envisaged in the contract in conjunction with the Minutes of Meeting the Applicant has rendered technical/consultancy service. Even if the services 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, ....
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....5,255,137 2 Ocean Freight and Marine Insurance Charges for Main Equipment USD 3,453,100 3 CIF (Indian Port of entry) Price for Main Equipment [1+2] JPY 10,523,480,181 + USD 18,708,237 4 CIF (Indian Port of entry) Price for Mandatory Spares JPY 1,224,964,221 3 Type Test Charges JPY 22,959,918 + USD 3,784 4 Total (3+4+5) JPY 11,771,404,320 + USD 18,712,021 As regards the issue of apportionment of profit to the technical services rendered by the Applicant, we find that such attribution cannot be done in an arbitrary manner. It is a question of fact which varies from case to case. In the present case such apportionment can be done only out of the "FOB Price for Main Equipment" and not against the other payments as per contract as detailed above. Even for apportionment of FTS out of FOB Price for Main Equipment, we do not have any straitjacket sacrosanct formula for such attribution. It would be appropriate if the AO determines this aspect and gives value to the FTS, as these are included in the sale price of offshore supply of equipments, after making further necessary enquiries and giving a basis thereof. It has to be appreciated that in....