The income from offshore supply of equipment on a CIF basis under a composite contract is not taxable in India

Court  : Delhi bench of the Income-tax Appellate Tribunal

Citation :  Tech nip Italy Spa Vs. ACIT (2010-TII-133-ITAT-DEL-INTL)

Brief : Recently, the Delhi bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Technip Italy Spa v. ACIT (2010-TII-133-ITAT-DEL-INTL) after applying the decision of the Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 (SC) held that the income from offshore supply of equipment on a Cost Insurance Freight (CIF) basis under a composite contract is not taxable in India.

Facts of the case

The taxpayer, a company incorporated in Italy, was awarded a turnkey contract by Indian Oil Corporation Ltd. (IOCL) for the designing, construction and commissioning of a Hydro-treater and Hydrogen facility at IOCL’s Guwahati Refinery. As per the terms of the Agreement, the assessee was required to supply equipment to IOCL and undertake construction/installation services and related design and engineering services. The consideration for same was denominated partly in Indian currency and partly in foreign currency.

For execution of the above services, the taxpayer established a Project Office (PO) in India. Since the PO constituted a Permanent Establishment (PE) of the taxpayer in India, income was computed on a net income basis. While computing its income, revenue arising from onshore services, onshore supply and offshore services were offered by the taxpayer to tax in India. However, the taxpayer did not consider the revenue earned from offshore supply of equipment for the purpose of taxability in India.

However, the Assessing Officer (AO) took the view that the income from off-shore supply of equipment by the assessee to IOCL was also taxable in India since the supplies made by the taxpayer’s head office forms an integral part of a turnkey contract, which was integrated into the business operations carried by the taxpayer’s PE in India. Even though the delivery of equipment was on a CIF basis, the title and custody of equipment was passed only on successful installation and not on dispatch. The AO, while taxing the income from off-shore supply of equipment, relied on the decision of the Authority for Advance Rulings (AAR) in the case of Ishikawajima-Harima Heavy Industries Ltd. v. DIT [2004] 271 ITR 193 (AAR).

The Commissioner of Income-tax (Appeals) [CIT(A)], applying the decision in the case of Ansaldo Energia Spa v. ITAT [2009] 222 CTR 55 (Mad), held that revenue arising from offshore supply of equipment to IOCL was taxable in India. As the agreement with IOCL was a composite turnkey contract and even though the delivery of the equipment was on a CIF basis outside India, title of the goods was passed on the delivery of equipment in India and upheld the order of AO.

On further appeal, the Delhi Tribunal remanded the matter back to the CIT(A) to decide it afresh in light of the decision of the Supreme Court in Ishikawajima-Harima Heavy Industries Co. Ltd and the decision of the Madras High Court in Ansaldo Energia Spa v. ITAT [2009] 222 CTR 55 (Mad), since these decisions were not available before the CIT(A) at the time of passing the order.

Issue before the Tribunal:- Whether income from offshore supply of equipment on a CIF basis under a composite contract is taxable in India?

Taxpayer’s contentions

• · The taxpayer after relying on the decision of the Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 (SC) contended that the nature of contract as Composite/Turn-key contract has no significance for determining the tax ability of off-shore supply under the provisions of the Income Tax Act, 1961 (the Act). The tax ability of a particular stream of income under the provisions of the Act is to be determined on the basis of accrual of income.
• · Merely because the contract was a composite contract does not lead to the conclusion that the offshore supply is taxable in India. Consideration for the offshore supply has been separately determined in the contract and all parts of the transaction were undertaken outside India.
• · The Bill of Lading was prepared in the name of IOCL and was handed over to the nominee, i.e., Banker in Rome. Merely because the supplier took the responsibility for transportation or delivery, it cannot be held that the title had been transferred later. Further the contract being on CIF basis is not relevant as already held by the Supreme Court in Mahabir Commercial Co.Ltd [1972] 86 ITR 417 (SC).
• · The taxpayer also relied on the decision of the Delhi Tribunal and AAR in the case of LG Cable Ltd. v. DDIT [2008] 119 TTJ 34 (Del) and Joint Stock Company Foreign Economic Association Technopromexport, In re (20 10- Tll-10-ARA-INTL) wherein both the cases it has been held that the offshore supply transaction was not taxable in India.

Tax department’s contentions

• • · The department contended that the preamble to the contract provides that it was a composite turnkey contract. Delivery was on a CIF Jobsite basis, where the title of equipment was not passed to IOCL abroad, but on delivery at the jobsite.
  • · The decision of the Supreme Court in the case of Ishikawajima­Harima Heavy Industries Ltd. was not applicable, since in that case the contract was divisible, segregating the supply and service segment, PE was not involved in such transaction and the parties had decided by an agreement that the title of equipment shall pass outside India.
  • · The decision in the case of Ansaldo Energia Spa, which was rendered after considering the decision of Ishikawajima-Harima Heavy Industries Ltd., was squarely applicable to the present case.

Tribunal’s ruling

• • · The Tribunal observed that in the case of Ishikawajima-Harima Heavy Industries Ltd. the Supreme Court had held that a contract is a turnkey contract, by itself, is not conclusive for the purpose of determining taxability in India. It is not necessary that the contract be considered as an integrated contract so as to make the assessee pay tax in India. Same ratio was also held by Supreme Court in the case of ITO v. Shreeram Bearings Ltd. [1997]224 ITR 724 (SC).
  • · The doctrine of ‘territorial nexus’ has an important role to play in the taxability of income arising out of the operations of a company in more than one jurisdiction, as observed by Supreme Court. Income arising out of the operations in more than one jurisdiction would have territorial nexus with each of the jurisdiction and in such cases the entire income cannot be said to accrue or arise in each of the jurisdictions.
  • · The decision in the case of Ansaldo Energia Spa was not applicable to the present case since in that case the contract was a single bidder contract and was split up by the foreign entity only for tax purposes with the major part of the profits attributed towards the offshore supply transaction and thus, imbalance of price was quite evident.
  • · Further, the Tribunal, after relying on the decision of the Supreme Court in the case of Mahabir Commercial Co. Ltd., observed that merely because the delivery was to be on a CIF Jobsite basis and the supplier took responsibility for transportation, on a standalone basis, is not sufficient ground to hold that the title passed in India at the jobsite.
  • · Accordingly, the Tribunal held that since all parts of the transactions had taken place outside India the decision of the Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. was squarely applicable to the facts of the case and the transaction of offshore supply of equipment was not taxable in India.

Our Comments

The concept of ‘territorial nexus’ was a issue for debate which was settled by Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. However, the Finance Act 2010, to overrule the Supreme Court decision, made retrospective amendment to tax the services in the nature of ‘interest’, ‘royalty’ and ‘fees for technical services’ whether the services are rendered in or outside India. Accordingly, the ratio of the Supreme Court decision was overruled to the extent of services in the nature of ‘interest’, ‘royalty’ and ‘fees for technical services’.

In the present ruling, the Tribunal has rightly applied the decision in the case of Ishikawajima-Harima Heavy Industries Ltd. to hold that revenue from offshore supply of equipment forming part of a composite contract shall not be taxable in India. Accordingly, the Supreme Court decision still holds good for the offshore services which are not in the nature of interest, royalty or fees for technical services.

Further, the Tribunal also made an observation that merely because the delivery was to be on a CIF Job site basis and the supplier took responsibility for transportation on a standalone basis is not sufficient ground to hold that the title passed in India at the job site.