TaxTMI 
TaxTMI 
TaxTMI 
2009 (3) TMI 38
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....e concerned here with the contract entered into between Sterlite and the applicant evidenced by the Agreement executed by and between the said parties on 1st August, 2003. The services required to be performed by the applicant under the Agreement are broadly engineering services and to be more specific, they are conceptual and basic engineering services and providing deliverables as set out in Annexure-I and IV to the agreement for the design of an Alumina Refinery with a capacity of 1.4. million tonnes per year. The next stage in the execution of engineering services is known as Detailed Engineering. The detailed engineering services were not done by the applicant. 1.2. Before we refer to some relevant clauses in the Agreement, we may advert to the facts stated in its written submissions filed after the hearing on 17th October, 2008. They are stated as follows: The applicant is responsible for development of a set of Basic Engineering Documents which involves preparation of various diagrams, designs, drawings and lay out plans. The applicant has its design centres at Perth - Australia fromwhere the design services were performed. However, for the purpose of gathering inputs for....
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....de India is not to be taxed." The amended question has been raised placing reliance on the decision of the Supreme Court in the case of Ishikawajima- Harima Heavy Industries vs. DIT^ (for short Ishikawajima). Relying on the said decision, the applicant submits that the receipts related to the operations carried out in Australia cannot be taxed in India. However, according to the applicant, the amount worked out on the basis of man-hours spent by the applicant's personnel in India can be taxed in India. We have permitted arguments on the amended question. 3. We shall now refer to the relevant clauses in the Agreement. Art. 2 bears the heading 'Scope of Work'. Art.2.1 reads thus : "2.1 Engineering Services WORLEY shall perform the conceptual and basic Engineering Services and provide the associated deliverables as defined in Annexure-1 and Annexure-4 to the Contract for the design of an Alumina Refinery with a design capacity of 1.4 Million tonnes per year at Lanjigarh, Orissa, India. The content of such deliverables shall be such that it shall be adequate to proceed with detail engineering." Art.3 is about 'Contract price'. The opening part of the Art. reads thus : "The ....
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....hat is available. From this information, a generic process block-diagram will be proposed for the purpose of selection of the particular unit operations that will be required. Upon the selection of appropriate technologies, a more detailed process block-diagram would be developed. Then, the inputs required from Sterlite during conceptual Engineering phase are set out. In para 1.5 of Annex-1, it is stated that Sterlite representative with sign-off authority will be present in the Worley design office for the duration of the project and that Sterlite will provide at least one engineering person to the Worley team. 3.2 Annex-4 refers to 'deliverables' and the details thereof are set out in a Table. Broadly it is stated that the services covered by the Agreement are the preparation of a set of basic engineering documents as required by the document "Enquiry for basic engineering for greenfield Alumina refinery." In the details of deliverables given in the Table, we find the classifications such as Area Deliverables (which include block-floor diagram, area design criteria, quantitative floor diagram etc. to be prepared at the Concept phase) and the Basic Engineering deliverables (such....
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....l and basic engineering services, it can be said as submitted by the applicant, that most of the work and services could be done from the applicant's office abroad i.e. at Perth. The deemed provision in Art. 5.3 (c), is not applicable here. We, therefore, accept the contention of the applicant that no permanent establishment was set up by the applicant to perform the services under the contract with Sterlite. The Revenue, as already stated, has not refuted the applicant's contention as regards the PE. 5. The only question that was debated before us was that related to the amended question for which the applicant seeks support from the decision of the Supreme Court in Ishikawajima case. Based on that decision, the principle of territorial nexus and apportionment of profits has been projected to deny the power of taxation to the Indian authorities to levy tax on the entirety of royalty income. It is the case of the applicant that on the application of such principles, the services rendered outside India cannot be taxed in India. Thus, according to the applicant, only that part of the receipts attributable to Indian operations which relate to services rendered and utilized in India c....
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....ady noted the details of visits and the duration of stay of the applicant's personnel in India. Though as stated by the applicant, the core activities of preparation of designs and plans took place in Australia, the activities and services undertaken by the applicant at various stages (both before and after the preparation of designs and other deliverables) are by no means negligible or insufficient. In fact, they were essential to carry out the obligations under the Contract. Hence, it cannot be said that there is no sufficient territorial nexus for the levy of tax under the Act read with the provisions of the DTAA. We would like to state in reiteration of what we said in AAR/747.2007 that in the case of Ishikawajima, the entire offshore services which according to their Lordships were inextricably linked to offshore supply of goods, were rendered from outside India, and therefore, the Supreme Court held that the deeming provision in Section 9 cannot reach such income. We are, therefore, of the view that the applicant cannot press into service the ratio of the decision in Ishikawajima in support of its contention. 6.2. The learned counsel for the applicant has relied on the follo....
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....ignificance ……………. Having regard to the internationally accepted principle and DTAA, it may not be possible to give an extended meaning to the words "income deemed to accrue or arise in India" as expressed in section 9 of the Act. ……………….. whatever is payable by resident to a non-resident by way of fee for technical services (FTS), thus, would not always come within the purview of Section 9(1)(vii). It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax". Then, it was observed that "services of a non-resident utilized in India may not have much relevance in determining whether the income of the non-resident accrues or arises in India". However, the reason for such statement is not given. But, with due deference to this observation, we must proceed on the basis that the utilization of services of non-resident in India, by itself does not establish territorial nexus where the entirety of services giving rise to FTS or royalty were performed abroad. In ultimate analysis, the requirement of rendering services was read into Section 9(1)(vii)(c). At the same time, it was pointed out that "it (income) must have direct 'liv....
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....ment. Even in relation thereto, principle of apportionment shall apply. (sic) (at p.445) The Authority, in our opinion, has committed an error in this behalf, as if services rendered by the head office are considered to be the services rendered by the permanent establishment, the distinction between Indian and foreign operations and the apportionment of the income of the operations shall stand obliterated." (at p.446) 8.2. It appears that the observations of the Supreme Court on the aspect of apportionment of income are based on the decision in Anglo-French Textiles Co. vs. CIT (1952) 25 ITR 27. The proposition stated in the earlier decision of CIT vs. Ahmedbhai Umarbhai & Co., Bombay which arose under the Excess Profits Tax Act was reiterated in that case. The relevant passages in Anglo-French Textiles may be referred to: "The above passage is also sufficient in our opinion to establish that the apportionment of income, profits or gains between those arising from business operations carried on in the taxable territories and those arising from business operations carried on without the taxable territories is based not on the applicability of section 42(3) of the Act but on gene....
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....able territories. Section 42(3) also is a part of the scheme which is enacted in Section 42 and cannot help in the determination of the question before us." "If therefore Section 42(3) has nothing to do with the determination of the income arising in the taxable territories as distinguished from the income arising without the taxable territories as understood in Section 4A(c)(b) of the Act what we have got to consider is whether there is anything in the Act which prevents the application of the general principle of apportionment of income, profits or gains between those which are derived from business operations carried on within the taxable territories and those which are derived from business operations carried on without the taxable territories." After referring to the observations in Ahmedbhai's case in regard to Section 42(3), it was observed thus: "The above passage is also sufficient in our opinion to establish that the apportionment of income, profits or gains between those arising from business operations carried on in the taxable territories and those arising from business operations carried on without the taxable territories is based not on the applicability of Secti....