TaxTMI 
TaxTMI 
2021 (2) TMI 992
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....e Applicant had submitted a techno commercial offer letter dated 28th May, 2010 and price proposals for execution of the scope of work mentioned in the tender floated by OPAL The bid of the Applicant was accepted by OPAL and contract was awarded to it vide Notification of Award ('NOA') dated April 15, 2011. Pursuant to the NOA, the Contract Ref No. OPAL/BDA/MM/CTS/275/11-12 dated 21 st November, 2011 was signed between OPAL and the Applicant. The Plant was to be setup using proprietary technology owned by a non-resident, namely, Axens, France, which was an international provider of established technology to the hydrocarbon industry. The Applicant's scope of work and corresponding price payable by OPAL under the contract was stated to be as under: Particulars Consideration payable in EURO INR Offshore scope of work 1. Offshore supply of equipments 2,779,595 - 2. Engineering License Fee • Offshore services for basic engineering design in relation to setting up of the Plant at site. • Assistance in detailed engineering • Technology Licensing ....
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....dia-France DTAA? The application was admitted on 3^rd February, 2015. Submission or the Applicant 3. The Ld. AR for the Applicant submitted that the Applicant is tax resident of France and is, therefore, eligible to tax under the provisions of the India-France DTAA or the provisions of the Act, whichever was beneficial to it. It was stated that a non-resident is liable to tax in India only in respect of the income that is 'received' or 'deemed to be received' in India and the income that 'accrues or arises' or is 'deemed to accrues or arises in India', as stipulated under section 5(2) of the IT Act. The consideration for offshore supplies was remitted to the Applicant directly outside India and, therefore, it was received outside India. As regarding 'accrual or arising' of income in India, it was submitted that the Apex Court in the case of Ishikawajima-Harima Heavy Industries Limited Vs. DIT (288 ITR 408) (SC) has held that separate and identified scope of work under a composite contract for offshore and onshore supplies and services is to be viewed separately for tax purposes. Applying the ratio of this decision to the compos....
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....not attributable to activities carried on by the project office in India. It was further submitted that the price payable for supply of equipments was at arm's length as agreed to by unrelated parties and that it did not include price for any service rendered or goods supplied by the PE in India. 5. On the taxability of offshore engineering design services in relation to setting up of the Plant at site, it was submitted that the taxability of this consideration has to be considered either as Fee for Technical Services (FTS) or as business profit, under Article 13 or Article 7 of the India-France DTAA respectively. The Applicant drew our attention to definition of FTS under India-France DTAA, India-Portugal DTAA and India-Finland DTAA. It was submitted that DTAA with Portugal and Finland were signed afterwards wherein the scope of FTS was more restricted and narrower as compared to Article 13 of India-France DTAA and, therefore, the restricted and narrower definition of FTS has to be imported to India-France DTAA. According to the Applicant, the consideration for services shall be construed as FTS under Article 13 of India-France DTAA only if the managerial, technical o....
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.... the consideration for advisory services was not taxable as FTS under the restricted source rule. Further, as the services were rendered from France, they were not attributable to PE in India and not taxable as business profit as well under Article 7 of India-France DTAA. Submission of the Revenue 7. The Revenue submitted that the contract was for setting up Butene-l plant at Dahej Petro Chemical Complex on a lump-sum turnkey basis, which was a composite works contract and the so-called supply element was only a part of the overall work contract for Butene-l plant. Most of the activities, starting from project conceptualization, gathering and analysis of data for preparation of bids, preparation of designs etc. could have been carried out only at site in India. Considering the nature of works contract, which was heavily engineered project constructed according to the local / customized requirement, even the so-called offshore supply and services could not have been carried out without first carrying out detailed pre-engineering surveys, gathering of data etc. The contract price itself showed that contract was on lump-sum basis which included collection of data required ....
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....n India and, hence, the profit was attributable to the PE and was taxable in India. The Revenue has placed reliance on the decision of Chennai High Court in the case of Ansaldo Energia SPA (310 ITR 239) (Mad). It was further submitted that the contract should be read as a whole and it could not be split up / dissected for taxation purpose and that it has to be looked up rather than looked through. In this regard, reliance was placed on the following decisions: i. Vodafone International Holding BV Vs. Union of India (341 ITR 1) (SC). ii. Roxar Maximum Reservoir Performance WLL (349 ITR 189) (AAR). iii. Alstom Transport SA (AAR No. 958 of 210). iv. Samsung Heavy Industries co. Limited vs. ADIT (ITA No. 5237/Del/2010). 10. It was further submitted by the Revenue that the responsibilities of the Applicant did not end with simply handing over the equipments of offshore supply to OPAL, rather the responsibilities were not discharged till the works contract was executed to the satisfaction of OPAL. It was contended that passing of title and passing of risk can take place separately as held by Ld. ITAT, Delhi in the case ....
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....t was not used in the treaty cannot be read though by importing wording from other treaty, as the treaty negotiator did not intend on the use of those words. Reference in this context was made to decision of the AAR in the case of Steria India (45 taxmann.com 281)(AAR). Revenue has further contended that even the "make available" condition was satisfied in this case as the Applicant had imparting technical knowledge by way of a technology license. It was pointed out that out of the total payment of Euro 61,77,093 for Engineering and Design Services, payment of Euro 53,22,963 was on account of Technology licensing, which was for Licensing and Use of Technology of the Applicant by OPAL and which was also evident from the overall tenure of contractual terms. In this regard our attention was drawn to Para 1.2 of Annexure - E (Project Instructions), which specifically provided that the Contractor shall provide Technology License and carry out Process design and all engineering and design requirements to completely design and engineer these facilities. It was submitted that apart from FTS the consideration for Engineering / Designs Services also qualified as Royalty. Rejoinder or the ....
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....s, transfer of technology a copy of tripartite agreement between Axens France, OPAL and the Applicant was furnished. It was submitted that the same does not form part of the question raised before the Authority and hence are not relevant for the proceeding. The Applicant clarified that none of its employees engaged in other contracts undertaken in India were engaged in the offshore scope work of the present contract. 14. In respect of offshore supply, it was submitted that the contract entered into by the Applicant provided break up of onshore and offshore components, in line with the draft bid documents defining scope of work against each payment. Further, the ownership of offshore supplies was transferred to OPAL on FOB shipment basis when goods were placed on board the vessel at the port of shipment. The bill of lading, invoices, certificate of origin indicated that ownership was transferred out of India. The Ld. A.R. submitted that merely because Applicant continued to resume responsibility, which was a commercial requirement, it does not postpone the transfer of title of the goods till that time. It was contended that activities relating to offshore supply were comple....
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....n case any of the questions is not answered in their favour. As regarding direction to the Applicant, who is a non-resident Applicant, to provide details of the amount offered by it in its return of income in different years, the Department was not precluded to collect such details on its own as the proceedings before the AO had not abated in terms of provisions of section 245RR of the Act. We, therefore, don't deem it necessary to accede to the request of the Revenue as those details are not necessary to decide the issues before us. Issue of PE in India 17. In order to answer the questions as raised it will be necessary to examine the role of the PE of the Applicant in India. 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 performance guarantee tests, it had the permanent establishment (PE) in India. It was submitted that elaborate pre-bid work was done which involved site visits, inspection at site through its employees, pre-bid discussions etc. and, therefore, the Applicant had a Fixed Place PE. Further that the Applicant had a business connection as stipulated u/s 9(1)(i) of....
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....der contract dated 21^st November, 2011 with OPAL. The scope of work as per clause 2.1.1 of the contract document is found to be as under: Scope of Works : The scope of work shall include in general but not be limited to the following, as defined in Annexure- 'B' and Annexure- 'E' of the Contract document. Scope of EPC (LSTK) Contractors • Providing Licenses • Preparation of the Process Design Package • FEED & Basic Engineering • Detailed Engineering • Management Control of all procurement activities of all materials • Fabrication, construction, installation, testing etc. • Trial run, pre-commissioning and commissioning • Obtaining statutory approvals • Supply of CRWS system and hardware for Emergency HT Power • Project Management and Support Services • Carrying out of performance tests • Preparation of start-up and operating manuals. • Training of operators • Post commissioning services for six months • Providing as built drawings • Suppl....
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....t was made till FOB delivery of materials, 5% on arrival of materials at site and remaining 5% on successful completion of work. The payment outside India was remitted through electronic fund transfer / telegraphic transfer to the Contractor's bank account. 20. The Hon'ble Supreme Court has enunciated the principle in the case of Mahabir Commercial Company Limited (86 ITR 417) 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. From the materials brought on record, it is found that the invoice and the bill of lading in respect of offshore supply was in the name of OPAL and not in the name of the Applicant or any other agent. Therefore, the title to and property in the goods shipped by the Applicant at the foreign port was transferred at the port of shipment itself This event took place outside ....
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....there was no independent sub-contract for supply of offshore equipments, a holistic approach should be adopted and the PE of the Applicant held responsible for all the activities under the contract, including offshore supply part of materials and the equipments. The Revenue has not brought out any evidence on record to establish the involvement of PE in offshore supply of equipments and materials. It is found from Annexure-C of the contract that item wise break up of materials was detailed in respect of "Supply, Fabrication / Construction, Erection and Installation". Further, under the column "Supply", break up of "Imported component" (Euro) and "Indian component" (INR) was mentioned in respect of each item in the contract document itself. Such breakup was also available in respect of 'spares & consumables' and 'catalysts'. Thus, the entire requirement of imported components of supply was identified at the time of preparation of bid document itself and included in the contract document. It is not that the imported components of supply were identified in the course of execution of the contract and ordered at the instance of the PE. We, therefore, do not see any role ....
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....r the Income tax Act 1961, as the sale was completed outside India and there was no accrual or deemed accrual in India. The essence of this decision of the Hon'ble Supreme Court, was also followed in the cases of Hyosung Corp. (supra) and other decisions as relied upon by Applicant. 24. The revenue has relied upon the decision of Madras High Court in the case of Ansaldo Energia SPA (310 ITR 239). In this case NLC, an Indian company, had awarded a turnkey contract to Ansaldo Energia SPA on a single bidder basis. However, Ansaldo requested NLC to award the Indian portion of the turnkey contract to other legal entities to be selected by Ansaldo, as it had no business persons in India. NLC accepted Ansaldo's request on assurance that it would take the overall responsibility of the entire turnkey contract in its capacity as a single bidder. Contracts I and Il dealt with offshore supply of equipments along with designing and engineering and offshore service of supervision of erection, testing and commissioning; and contracts Ill and IV dealt with onshore supply of equipments and onshore services. Ansaldo had offered 20 per cent of income on contracts I and Il to tax, whe....
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....greed to, cannot alter the terms of the tender. The terms of the contract of the present case has already been reproduced earlier which clearly stipulates that ownership of offshore equipment and materials will be transferred to the company upon FOB shipment for the imported supply. Thus, this case is found distinct on facts. For this reason the reliance placed by Revenue on the other decisions is also not found relevant. Taxability of offshore services 26. The Applicant has contended that the basic engineering design service was in relation to the construction, erection, installation, commissioning and testing of the plant at Dahej and was rendered from France. Similarly, offshore advisory services were also rendered from France in relation to detailed engineering to be done by the Applicant's PO in India for setting up of Butene-l Plant at site. According to the Applicant, these services were in the nature of FTS covered under Article 13 of India-France DTAA and not business income under Article 7 of the Treaty. It is found from the Annexure-C of the Contract document that the lump-sum consideration for complete Butene-l plant for Dahej Petrochemical Complex ....
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....in respect of technology licensing services and inspection services were already offered to tax in India under the applicable provisions of India-France DTAA and were not subject matter of determination before the Authority. As the Applicant has not raised any specific question in respect of "Technology Licensing" services and "Third Party Inspection" services, we do not deem it necessary to address this issue. 28. The questions before us are in respect of 'Basic Engineering' and 'Detailed Engineering' services only. So far as taxability of these offshore services under the provision of the Act is concerned, there is no dispute. It has been admitted that these amounts will be taxable under Section 9(1)(vii) of the Act read with Explanation below Section 9(2) inserted vide Finance Act, 2010 with retrospective effect from 01.06.1976, which stipulates that such income will be deemed to accrue or arise in India irrespective of the fact whether the non-resident had a place of business or business connection in India or had rendered any service in India. The Applicant is only seeking benefit in respect of non-taxability of these amounts under the DTAA in accordan....
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....nd DTAA, FTS shall be deemed to arise in the state in which the services are performed. According to the Applicant, the services raised in Questions 2 and 3 were performed in France, therefore, they are taxable only in France and not in India. 30. The Applicant has also sought to import the provisions of India-Portugal DTAA entered in the year 2000, the Article 12.4 of which is as under: 12.4. For the purposes of this Article, " fees for included services" means payments of any kind, other than those mentioned in Articles 14 and 15 of this Convention, to any person in consideration of the rendering of any technical or consultancy services (including through the provisions of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received, or (b) make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design which enables the person acquiring the services to appl....
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....nbsp; : Design Reviews a) Company and/or its representative will review all facets of Contractor' s design including design calculations in order to ascertain compliance with design criteria, specifications and conceptual design. b) Contractor shall furnish all design information , calculations of non-proprietary nature, drawings, catalogue, reprints along with the methodology of computation necessary for review by Company and/or its representative . All the above items shall be made available any time at the request of the representative of the Company. Copies of relevant codes and standards, handbooks , engineering practices and any other related items which may be required from time to time shall be made available to the design review team. Contractor shall also ensure availability of two copies of complete set of Contract documents with Addendum, Drawings etc . exclusively for the Company's engineering team at the design review centre. 2.2.2 Engineering Reviews The Company and/or its representative will formally review for approval including, but not limited to, the following items, utilizing procedures s....
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....s process, the Applicant was not only making available the design services to OPAL but the design, even if prepared in France, were not being rendered directly from France. The design and engineering services were subject matter of review by OPAL and only after approval of OPAL they were being rendered. Thus the rendering of actual service was in India and not in France. Similarly, review and approval of OPAL was contemplated in the case of engineering reviews, design verification and construction drawings & specifications. The Applicant was required to submit process package, all layout designs, detail construction and approval drawings, design specifications, details calculations, purchase specifications etc. for review and approval of OPAL. A formal design verification meeting between the Applicant and OPAL was also contemplated in the contract. The procedure for review by the Company was appearing in Clause 2.3 of the Contract which is as under: a) Contractor will forward copies of all preliminary drawings and specifications in accordance with the correspondence schedule and procedure . Distribution of a 11 documents etc . is the responsibility of the....
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....by the Applicant. Further, the process of review and approval of these services also satisfy the condition of 'make available' of these services. When we analyze the nature of services and the process in which they were provided, it is found that the all design information, calculations, drawings, methodology of computation etc. were provided to OPAL in order to ascertain compliance with design criteria, specifications and conceptual design. The entire design and engineering aspect of the project was reviewed by OPAL and verifications were carried out through formal design review meetings. All preliminary drawings and specifications were provided by the Applicant and OPAL had reviewed these drawings and specifications and advised the Contractor with its comments or suggestions and had returned a marked-up drawings print with corrections to be made by the Contractor. The hard copies of documents/drawings were provided to the Company at the same time as their distribution within Contractor's organization. The entire process has been set out in detail earlier in this order and we find that these services enabled the recipient of these services to perform the same ser....
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....g out all activities and services for setting up Butene-l Plant and the payment received by the Applicant was for construction and erection at site within the territory of India and for performance of the contract as a whole in India. There was no exception in the contract for accrual of any part of the contract outside India except in respect of offshore supply of equipments and materials as discussed earlier. It is, therefore, clear that the consideration paid to the Applicant in respect of 'Basic Engineering' and 'Detailed Engineering' services had accrued in India. 37. These services were part and parcel of the Contract and could not have been rendered divested from the execution of the contract. The Applicant has admitted that the basic engineering design service were in relation to the construction, erection, installation, commissioning and testing of the plant at Dahej. Such engineering design had to be customized and prepared vis-a-vis the location of the site and taking into account the local factors and could not have been delivered exclusively from France. The involvement of the PE of the Applicant in such designing proces....
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....d, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable to that permanent establishment. There is no dispute to the fact that business of the Applicant was carried through its PO in India. As the design services were inextricably connected with setting up of the plant and were rendered through this PE, the profit of the PE is required to be taxed in India as per the provision of Article 7.1 of the India-France DTAA in respect of these services. As the basic engineering design service and offshore advisory services are found covered under Article 7.1 of the DTAA, it is not necessary to examine whether the same are also covered under Article 13 of the DTAA or not. 40. The Applicant has relied upon the decision of Hon'ble Supreme Court in the case of CIT Vs Hyundai Heavy Industries Company Limited (291 ITR 482) (SC). In that case ONGC had entered into an agreement with Hyundai for designing, fabrication, hook-up and commissioning of some platform in Bombay High. The contract was in two parts. One was for fabrication of platform in Korea and other was installation and commissioning of said platform i....