TaxTMI 
TaxTMI 
2009 (6) TMI 7
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....ctor subject to the approval of Power Grid. In view of such provision, the applicant, pursuant to the understanding reached with L&T, requested Power Grid to award the Off-Shore Contract to it and the On-Shore Supply and Services Contract to be performed in India to L&T. This proposal was preceded by a Memorandum of Understanding dated 8/8/2005 between the applicant and the L&T. As per para 12( c) of the MOU, the applicant was permitted to assign any portion of the Contract either in full or in part to L&T, in which event L&T will be permitted to work as an independent contractor and the customer, namely, Power Grid will enter into a separate Contract with L&T. Thus, L&T was nominated as the assignee in respect of certain works in case the bid of applicant was accepted. L&T in its letter dated 8/8/2005 addressed to Power Grid confirmed this understanding and consented to work as an independent contractor as per the terms and conditions offered by Power Grid. By the Letter of Award dated 24th March 2006, (for short 'LOA) Power Grid accepted the bid proposal submitted by the applicant and awarded to the applicant the Off-Shore Contract covering all the works to be performed outside I....
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....to the contract referred to in the application? 4. It is the contention of the applicant that no income accrues or arises in India under section 5 of the Income-tax Act, 1961 (for short, the Act') in respect of offshore supply contract undertaken by it inasmuch as the property in the goods and title passes outside India and the payment is received outside India. Overall responsibility for the successful completion of the contract undertaken by the applicant is not incompatible with the contention that the income does not accrue or it receives in India. Reliance has been placed on the decision of the Supreme Court in Ishikawajima - Harima Heavy Industries 1 (hereinafter referred to as 'Ishikawajima'). Viewed from the angle of the Treaty provisions, the applicant has no PE in India in connection with the contract and in any case no profits can possibly be attributed to the PE in the case of offshore supply. Article 7.1 of the DTAA between India and Korea has been referred to in this connection. 5. The Revenue has taken the stand that the applicant and the L&T have executed the contracts as Association of Persons (AOP) and the amount received by L&T and the applicant from Power Gri....
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....ining to be conducted outside India, required for the complete execution of 800KV (F)/400KV Tehri Pooling Station (GIS) Package associated with Koteshwar Transmission System, as set forth in the bidding documents." The detailed list of equipment and materials to be supplied was appended to the Letter of Award. 6.2 The contract price is specified to be US # 6,935, 389 and the break-up thereof was given under four heads viz. (i) CIF price {US # 6,495,564}, (ii) Indian agent commission, (iii) type testing charges for tests conducted abroad, and (iv) charges for training imparted abroad. The break-up of contract price for the purpose of on account payments is given in Annexures to the LOA. The contract price as regards the offshore supply is payable in three instalments i.e. (i) 70 per cent of the CIF price of each shipment shall be paid through irrevocable Letter of Credit established in favour of the applicant after dispatch of the equipment/materials and on presentation of supplier's invoice, clean on board bill of lading marked 'freight pre-paid', Insurance policy certificate, test certificate, etc. (ii) 20 per cent of CIF price of each shipment of main equipment excluding mandat....
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....U, the Revenue has drawn our attention to the following terms and conditions set out in LOA and the Deed of Assignment: 1. The overall responsibility for the successful completion of the three contracts rested with the applicant in line with the proposal in the bidding document. 2. 10% of the agreed price shall be paid only on successful completion of erection, testing and commissioning of the GIS sub-station (vide clause (iv) of para 5.1.1 of LOA). 3. A contract performance guarantee has to be furnished by the applicant to Power Grid for 10% of the value of all the three contracts, in addition to the guarantee L&T provides to Power Grid as regard the 2nd and 3rd contracts. 4. Liquidated damages (LD) are recoverable both from the applicant and L&T in case of delay in the performance of the 2nd and 3rd contracts awarded to L&T. (vide para 11.2 of LOA). If LD is charged due to reasons attributable to the applicant, the applicant will bear the LD for all the three contracts and if LD is charged due to reasons attributable to L&T, then L&T will bear LD on all the three contracts including the 1st contract (vide para 7 of the deed of assignment). 5. Each of the parties shall inde....
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....t. It cannot therefore be said that the two contractors have promoted a joint enterprise with a view to earn income (vide the dicta in CIT vs. Karunakaran*) 7.4 The applicant being the supplier of crucial equipments imported from abroad and possessed of necessary expertise in the field was entrusted with the supervisory responsibilities especially at the stage of testing and commissioning. On the one hand, it is meant to ensure that the equipments supplied by the applicant were blemish-less. Secondly, Power Grid very much relied on the applicant to render all the necessary technical assistance and guidance to L&T - a contractor brought into the picture by the applicant and to oversee its performance at all crucial stages. By incorporating various safeguards in the contract, Power Grid took the necessary precautions to see that notwithstanding the split up of contract into three, the applicant and L&T would act in harmony and maintain requisite coordination for the timely and successful completion of project. Such a role assigned to the applicant by Power Grid was in the overall interest of the project. It is an arrangement conceived of and agreed to by the parties keeping in view....
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....ule the contention of the Revenue and hold that the applicant in conjunction with L&T cannot be treated and assessed as an 'association of persons' under the Income-tax Act, 1961. Question No. 1 and 2: 8. The contention of the learned senior counsel appearing for the applicant is that the title to the equipment and material passed outside India and the payment was received in foreign currency outside India and therefore the consideration was neither received in India nor did it accrue or arise in India under Section 5 of the Act. Further, it cannot even be taxed as deemed income under Section 9(1)(i) of the Act. In any case, it is submitted that profits on the sale of equipment outside India cannot be attributed to the Permanent Establishment (PE) even if it is held to exist and therefore under Art.7(1) of the DTAA, no tax is liable to be paid in India. Reliance is placed on the decision of the Supreme Court in Ishikawajima supra and the instructions issued by CBDT by its circular dated 21st Sept., 1989. First, we shall refer to the relevant extracts from the circular of CBDT. "(b) Profits from sale of equipment and materials on FOB basis where the payments are also made outsid....
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....er, as specified in the bidding documents." "4.3 Indian Customs duty or levies including the Stamp Duty and Import License Fee levied by the Government of India or any State Government in India on the equipment, materials and spare parts covered in the Contract to be imported into India and which will become our property under the Contract, shall be to our account and shall be paid directly by us to the Government of India or concerned authorities." Para 22.0 of the General Conditions of Contract, which is also an integral part of the Agreement, speaks of "transfer of titles". The relevant provisions are : "22.1 Transfer of the title in respect of Goods supplied by the Supplier to the Purchaser pursuant to the terms of the Contract shall pass on to the Purchaser with negotiation of shipping documents at foreign port of embarkation of that Goods in case of Goods supplied from outside the Purchaser's country and on negotiation of despatch documents (Ex-works basis) in case of Goods supplied from within the Purchaser's country. 22.2 This transfer of title shall not be construed to mean the acceptance and the consequent "Taking Over"/"Final Acceptance" of Goods. The Supplier shall ....
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....nvoice 30 July 2007 For determination of price for custom clearance Insurance policy 10 August 2007 Marine Cargo Insurance Policy taken for goods to be exported by Hyosung from Korea. PowerGrid named as the beneficiary in the policy Bill of lading (BOL) 14 August 2007 BOL naming Power Grid as the consignee issued an acknowledgement of receipt of goods shipped by Hyosung from Korea Actual date of negotiation (i.e. date on which documents was handed by Hyosung to Woori Bank) 16 August 2007 Actual date of transfer of funds by Woori Bank to Hyosung 16 August 2007 Bill of entry (BOE) 31 August 2007 BOE, naming Power Grid as the importer, issued acknowledging shipment of goods by Hyosung, Korea 10.1 The above events would indicate that the title to goods stood transferred to Power Grid outside the territory of India. The title passed on to Power Grid well before the goods reached the Indian Port or the territorial waters of India. The bill of lading contains the name of Power Grid as the consignee. The documents were presented to the applicant's banker for negotiation soon after the goods were shipped FOB and bill of lading was issued. Two days later, the amount equivalent to 70%....
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....o "CIF supply of all off-shore equipment and materials". The price is also noted as 'CIF Price' (vide para 3.1 of LOA). The Supreme Court in the case of Mahabir Commercial Co. Ltd. vs. CIT, West Bengal* discussed the features and legal incidents of a CIF contract. The following statement of law is quite apposite, - especially on the aspect of passing of property in goods. "In a c.i.f. contract the seller has first to ship at the port of shipment goods of the description contained in the contract. He must then procure the shipping documents (contract of affreightment) as contemplated by the contract upon the terms current covering the whole transit of the goods. He must arrange for an insurance for an amount equal to their reasonable value of shipment upon the terms current in the trade which will be available and it should be for the benefit of the buyer. He must also make out an invoice which is a written account of the particulars of goods delivered to the buyer with value of the goods or their price and charges, etc. annexed. This invoice is made out debiting the buyer with the agreed price and giving him credit for the amount of freight which he will pay the ship-owner on actu....
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....vable by the applicant - a foreign company, for the off-shore supply of equipment and materials supplied to Petronet L&G Ltd. (Indian Company) was liable to be taxed in India under the provisions of the Act or the India-Japan Tax treaty. That was a case of a turnkey contract consisting of off-shore supply and services and on-shore supply and services. The break-up of contract price for each of the segments i.e., for supply, services and construction and erection were separately given in the Agreement. 10.5 The two issues in Ishikawajima were about the consideration received by the non-resident for offshore supply and offshore services, both of which were held to be taxable in India by this Authority (AAR). The relevant clauses in that contract are substantially similar to the present one. Clause 22.1 laid down: "22.1. Title to equipment and materials and contractor's equipment: The contractor agrees that title to all equipment and materials shall pass to the owner from the supplier or sub-contractor pursuant to section E of exhibit H (general project requirements and procedures). Contractor shall, however, retain care, custody and control of such equipment and materials and exer....
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....t be deemed to accrue or arise in the country. (5) xx xx xx xx xx xx xx xx Earlier, at page 445, while dealing with 'offshore services,' it was observed: "in a case of this nature, interpretation with reference to the nexus to tax territories will also assume significance ……….. Whatever is payable by a resident to a non-resident by way of fees for technical services, thus, would not always come within the purview of section 9(1)(vii) of the Act. It must have sufficient territorial nexus with India so as to furnish the basis for imposition of tax." 10.7 It may be noticed that the clauses in the contract considered by the Supreme Court also contained an obligation on the part of the contractor to retain custody and control of equipment and to take due care thereof until provisional acceptance of the work. Moreover, installation of equipment was also to be carried out by the contractor. In spite of these features, the Supreme Court came to the conclusion that the offshore supply of goods which took place outside India does not give rise to any taxable income in India under the provisions of the Act. The applicant's case even stands on a better footing inasmuch there is a sepa....
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....that property would pass to the buyer as and when the assessee loads the equipment on to the mode of transport to be used to convey from the country of origin. There is no other term, which would convey a contrary intention. It is, therefore, clear from above that ownership is intended to pass to PGCIL as soon as goods are loaded and in this case were put on the ship and documents were handed to the nominated bank where letter of credit was opened. " It was further observed : "The irrecovable letter of credit in the present case after which delivery was made by the seller to the ship, is clear indication of transfer of property in goods from the seller to the buyer. None of the circumstances referred by the revenue and noted above can lead to an inference that transfer of title to the buyer was conditional or there was intention on the part of the seller retain the right of disposal of equipment. Certain circumstances like insurance of the goods, unloading of the goods, fixation of goods are only to square the contract and its performance. There is no term in the contract, which is inconsistent with the intention stated clearly in para 31.2 of the contract to pass the property in....
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....: For the purposes of this clause - (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; xx xx xx xx xx Article 7 - Business profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or ....
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....t means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term permanent establishment shall include especially (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; and (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. 3. The term permanent establishment likewise encompasses a building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only where such site, project or activities continue for a period of more than nine months. 4. Notwithstanding the preceding provisions of this article, the term permanent establishment shall be deemed not to include (a) xx xx xx xx xx xx xx (b) xx xx xx xx xx xx xx (c ) xx xx xx xx xx xx xx (d) xx xx xx xx xx xx xx (e) the maintenance of a fixed place of business solely for the purpose of advertising, the supply of information, scientific research or any other activity, if it has a preparatory or auxiliary character in the trade or business of the enterprise; (f) xx xx xx xx xx xx xx 11.2 It is the contention of the applicant that if at al....
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.... the applicant. The supervision of testing is the responsibility of the applicant. Therefore, having regard to the enormity of testing and commissioning work involved, there is every possibility of the duration of the project and the activities of the applicant going beyond 9 months. It is submitted that there is no basis for the assumption of the applicant that the supervisory activities of the applicant in connection with the project would be for duration of 74 days only. In this regard, we would like to mention that the statement of the applicant in the written submissions filed on 16th December, 2008 that it has already furnished the complete information as regards the time duration of the supervision work is not correct. No such specific details have been filed apparently because the work of erection has not been completed and the process of testing and commissioning has not begun. 12. It must be noted that there are two limbs to para 3 of Art.5. The first limb is - "building site, construction, assembly or installation project" and the second limb is supervisory activities in connection therewith. Both should extend over 9 months in order to constitute a PE. The applicant's....
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....h remain in the grey area and that is about the soil investigation and revising civil foundations on the basis of soil data. In the post-bid discussions, there is also a reference to the fact that detailed engineering work in respect of GIS Pooling Station will be done by the applicant based on the drawings prepared by PowerGrid. It is not clear how the applicant is concerned with these items of work. In the absence of relevant details, it is not possible to say to what extent it has bearing on the aspect of PE. 13. Another contention raised by the Revenue in an apparent bid to make out a case of PE is that the applicant has undertaken a project of similar nature i.e. Maharani Bagh sub-station as per the contract awarded by Delhi Transco. Ltd. to the Power Grid and the applicant. It is further pointed out that as per the information received from L&T, the employees of the applicant were present at the Maharani Bagh site for erection and testing work between July and October 2008. However, the commissioning is yet to be done. The Revenue contends that all the projects of the nature described in Art 5.3 which are being carried out by the applicant should be seen together for the pur....
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....is stage that the applicant has a PE falling within the specific description of Art.5.3 of DTAA. Though we have given a tentative finding that on the facts presented by the applicant, a PE does not exist, the factual aspects adverted to above which give rise to some doubts can be probed by the appropriate authority, if considered necessary. The department cannot, however, indulge in a roving inquiry into the existence or otherwise of PE, without regard to the observations made and news expressed in this order. Subject to this rider, we reach the conclusion that the applicant has no permanent establishment in India. If in the light of further inquiry that may be made, the Department comes to the conclusion that there is a PE, the income to the extent it is attributable to the operations of the PE can be subjected to tax in the hands of the applicant as per the 2nd sentence of Art. 7.1 of DTAA. 14.1. No doubt, the contract does not specify the consideration payable for the supervisory activities to be carried out by the applicant especially at the stage of testing and commissioning. But, that does not mean that attribution of profits is not possible or permissible. A reasonable qua....