TaxTMI 
TaxTMI 
2009 (6) TMI 7
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....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 In....
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....-tax Act, 1961 in relation 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 receiv....
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.... mandatory spares from country(ies) outside India, and testing & training 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, et....
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....ault of the respective party in performance of the contract works" (vide para 4 of MOU). 7.2 In addition to the MOU, 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....
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....ividual identity of each party in doing the part of work entrusted to it is preserved, notwithstanding the coordination between the two and the overall responsibility of the applicant. 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 ....
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.... facts here are vastly different. 7.7 We are, therefore of the view that the applicant and L&T cannot be treated as AOP falling within Section 2(31) of the Income-tax Act, 1961. Accordingly, we overrule 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 i....
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.... by you shall pass on to POWERGRID at FOB Port of shipment with negotiation of shipping documents. This transfer of title shall not relieve you from the responsibility for all risks of loss or damage to the equipment and materials until taking over, 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 ne....
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....ith the provisions of the Contract(s)." 10. The applicant has furnished a chart sequencing the events in relation to a typical transaction along with written submissions filed on 16/12/2008. They are as follows: Particulars Letter of Credit ('LC') opened 24 April 2007 LC opened in India by Power Grid with Indian Overseas Bank Commercial invoice 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 pass....
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....n testing of the equipment, it cannot be construed to be a condition which postpones the transfer of title to the goods till that time. It is more in the nature of warranty provision in the contract. 10.2 As seen earlier, the Agreement dated 27/10/2006 refers to supply of equipment on "CIF Indian Port of disembarkation basis". The letter of award also refers to "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 availab....
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.... be deemed to have taken place in India on testing and successful commissioning of the project cannot be upheld. 10.4 We are fortified in our view by the decision of the Supreme Court in Ishikawajima case. The legal position stated and the reasoning adopted therein applies a fortiori to the facts of the present case. In Ishikawajima, a similar question arose whether the amounts received / receivable 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 on....
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.....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 India, and therefore cannot 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 containe....
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....e first contract took place within India in view of the stipulations similar to those contained in the contract with which we are concerned. These contentions were rejected by the Tribunal. As regards the passing of property, the Tribunal observed thus: "Under the Sales of Goods Act, the property in goods will pass to the buyer as per the intention of the parties. Such intention is to be gathered from the facts and circumstances of the case. In the present case as per para 31.2 quoted above, there is specific agreement between the parties 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 propert....
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....e point of view of the provisions in the DTAA. We may refer to those provisions in the Act and DTAA for ready reference: Section 9 of the Income-tax Act,1961 (the 'Act') 9. Income deemed to accrue or arise in India. (1) The following incomes shall be deemed to accrue or arise in India. (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. Explanation: 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 per....
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....a PE in India. If the enterprise carries on business through the PE, then the profits can be taxed in India to the extent they are attributable to the PE. The applicant seeks to draw support from the first part of Art. 7(1) and contends that it has or will not have a permanent establishment in India. Therefore, we must focus our attention on the question whether the PE exists or will come into being at the appropriate time. In this connection, we have to refer to the definition of 'permanent establishment' in Art. 5 of the Treaty. The relevant extracts from that Article are as under: Article 5: Permanent Establishment: 1. For the purposes of this Convention, the term permanent establishment 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 e....
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....aints at the Koteshwar GIS-site and there was delay in transportation of equipments stored at Rishikesh storeyard of Hyosung. Moreover, as seen from the record notes of post-bid discussions on technical and other issues held on 16th and 31st January 2006, the soil investigation work was also within the scope of the applicant's contract. The applicant was further required to furnish the monthly Engineering and progress reports by 10th of every month till the commissioning of sub-station. The Revenue then pointed out, while referring to the documents appended to MOU between the applicant and L&T, that L&T will do the system testing under the supervision of the applicant and the commissioning assistance will be provided by L&T. 26 tests have to be conducted at site out of which for 6 tests, even the testing equipment has to be arranged by 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....
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....mage takes place. We do not think that this contention can be accepted. The applicant, in carrying out the equipment to the work site and in safeguarding the same from any damage, is only carrying out the contractual obligations incidental to the offshore supplies of goods. It cannot be considered to be a supervisory activity contemplated by Art.5.3 of the Treaty. Then, the Revenue's representative has drawn our attention to the stipulation in the minutes of meeting held in January 2006 that the applicant has to submit the monthly engineering and progress reports (vide para 18.0 of post-bid discussions). We do not have clear facts to know the precise role of the applicant in this behalf and the starting point of such activity. This aspect is subject to verification by the Department, if considered necessary. On the point of PE, there are two more aspects which 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 Powe....
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....ctional connection between the two project works which are located at different and distant places. If the establishment that is being maintained for the purpose of executing a different contract with a different party is separate, distinct and independent of the other contract work being executed by the applicant, it is not in our view permissible to combine the establishments of two different projects of fairly long duration for the purpose of arriving at the threshold period of 9 months. Moreover, even going by the facts placed by the Revenue in regard to Maharani Bagh sub-station project, prima facie it appears that even if both projects are taken together, the duration of supervisory activities are not likely to exceed 9 months. In the absence of better particulars, we are not inclined to delve into this aspect further. 14. In the light of above discussion, it cannot be ruled at this 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 app....
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....ce set up on 17/10/2007 with the permission of the Reserve Bank is not engaged in any business activity much less in the operations related to the present contract. Then, in regard to agency PE, it has been clarified by the applicant that the Indian agent Alpasso Industries Pvt. Ltd., is an independent entity working for various clients and is not a dependent agent. In the affidavit filed on behalf of Alpasso Industries Pvt. Ltd., it is stated that the company is engaged in the business of rendering consultancy / marketing services and the relationship between the applicant and the said company is purely on principal to principal basis and that of a service provider and client. On the facts stated, it is not possible to infer an agency PE. The other contention that L&T is a sub-contractor of the applicant is an extreme contention and we have no hesitation in rejecting the same. This contention has been raised by the Revenue to put forward a case that in computing the 9 month period, whatever work is done by L&T should also be taken into account. There is no legal or factual basis for branding an independent contractor described as such in the contract document as a sub-contractor o....