UK Grid Solution Limited Vs DCIT (ITAT Delhi)
Global operation fees not taxable as FTS under India-UK DTAA as ‘make available’ clause in Article 13(4)(c) not satisfied
ITAT Delhi held that global operation fees cannot be taxed as Fees for Technical Services (FTS) under the provisions of the Act and the India-UK DTAA as it doesn’t satisfy the ‘make available’ clause contained in Article 13(4)(c) of the India-UK DTAA.
Facts- The assessee appellant is a foreign company incorporated in the United Kingdom and a tax resident of that country in terms of Article 4 of the India-UK Double Taxation Avoidance Agreement.
During the relevant assessment years, the assessee had earned income from various Indian customers which the assessee claimed was not taxable as income was from offshore supplies only. The case of the assessee was selected for scrutiny due to a large claim of refund against tax deducted source.
Thereafter Ld. AO having taken into considered the mechanism to determine the profit of PE in terms of Rule 10 of the Income Tax Rules and concluded that the total receipt source in India should be taken and the tax paid. Thereupon applying special provisions of Section 44BBB of the Act, proceeded to attribute business income to PE in India. Ld. AO also considered the global operation fee as FTS.
Conclusion- Held that in the case in hand for the services rendered, there is renewal of contract on annual basis and the nature of services are all prima facie managerial in nature. They have also passed the arm’s length tests. Thus Ld. Tax authority below have fallen in error in taxing global operation fee of Rs.8,12,37,030 received from GETDIL as Fees from Technical Services (“FTS”) under the provisions of the Act and the India-UK DTAA, without appreciating that provision of said services by the Appellant did not satisfy the ‘make available’ clause contained in Article 13(4)(c) of the India-UK DTAA. Ground is adjudicated in favor of assessee.
FULL TEXT OF THE ORDER OF ITAT DELHI
The assessee has come in appeal challenging the final assessment order dated 28.07.2022 passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act,1961 (hereinafter referred to as ‘the Act’) for the assessment year 2018-19 coupled with challenge of findings of Ld. DRP.
2. The facts in brief are the assesse appellant ALSTOM is a foreign company incorporated in United Kingdom and a tax resident of that country in terms of Article 4 of India-UK Double Taxation Avoidance Agreement (hereinafter referred as for short ‘DTAA’). Assessee company accordingly had claimed to be governed as per the provisions of the Act or the DTAA whichever is more beneficial to the assessee in terms of beneficial provisions of Section 90(2) of the Act. Assessee is engaged in the business of designing, engineering, manufacturing and supply of electric equipment that help in the transmission and distribution of power, commissioning and servicing of transmission and distribution systems on turnkey basis. During the relevant assessment years, the assessee had earned income from various Indian customers which the assessee claimed was not taxable as income was from offshore supplies only. The case of assessee was selected for scrutiny due to large claim of refund against tax deducted source. The record shows the assessee was awarded a contract by Power Grid Corporation India Ltd. (hereinafter referred to as ‘PGCIL) for setting up a 3000 MW HUDC Terminal in Chhattisgarh, India.
2.1 There were three contracts of following nature;
‘First contract’, also called ‘off-shore contract’ was for supply of plant and equipment including spares outside India, Type test and Training to be conducted outside India.
‘Second’ and ‘third contract’ were‘on-shore supply contract’ and ‘on-shore service contract’ which were assigned to an associate enterprise M/s. GE T&D India Ltd (here in after also referred also as ‘ALSTOM-I’ or ‘Indian Associate’).
2.2 The Ld. AO, considered it to be a case of artificial division of composite contract into three special contracts by the assessee while all the responsibilities and liabilities of the project based with the assessee. Taking into consideration arecital of the contract, Ld. AO made following relevant observations in para no. 4 and 5 :-
“4. These provisions clearly indicate that the assessee’s role is an all-encompassing one for the purposes of the project i.e. the onus of completion of every step is on the assessee and it is answerable to PGCIL for the same at all times. Hence, in no way can it be inferred from the contract document that the assessee’s association with and its responsibility towards the project is restricted to mere supply of equipments. Therefore, the contract with all its components has been awarded in full to the assessee.
5. A plain reading of the clauses indicates that the entire offshore supply hinges critically and completely on inputs and consequent approval of PGCIL. The entire installation has to be designed in accordance with the specifications of PGCIL taking into account the peculiarities of each project site. Hence, the offshore supply component of the project cannot be de-linked with the entire set of activities that contribute to the completion of the project. Rather, the offshore supply is governed by the project site itself.”
3. Thereafter, Ld. AO formed an opinion that the Indian Associate was actively involved in soliciting business for the assessee while also taking on the India-Lag of the composite contracts. Thus, concluded that there was a dependent agent PE in India. Thereafter based upon the legal propositions with regard to taxation of business profits u/s 9 (1)(i) of the Act and under the Article 7 of the DTAA the ld. AO concluded as follows in Para 13:-
“UK Grid has been awarded a single composite (EPC) contract on a turnkey basis by PGICL to complete a power project in India. The taxability of UK Grid in India is, therefore, to be decided as per the provisions of the Income-tax Act and relevant provisions of the India-UK DTAA. From the facts of the case, there is no doubt that UK Grid has a “business connection” under section 9(1 )(i) of the Act and a ‘Construction PE’ under the provisions of Art. 5(2) of the India-UK DTAA.
Therefore, the business profits of the PE of UK Grid are taxable in India as per the provisions of Article 7 of the India-IJK DTAA. The sub-article (2) of Article 7 of the DTAA which prescribes the mechanism is reproduced as under:
“(2) Where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, the profits which that permanent establishment might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment shall be treated for the purposes of paragraph 1 of this Article as being the profits directly attributable to that permanent establishment. ”
Therefore, the profits attributable to the PE should be the Arm’s length profit i.e. profit that an independent person under the same or similar conditions engaged in similar activities (EPC contract for Power Project on turnkey basis) should earn.
From the above discussion, it is now clear that both offshore as well as onshore components of the single composite project have to be taken into account in determining profit attributable to the PE as leaving one part would deviate from Arm’s length profit.
It is also noteworthy to mention that BEPS Action Plan 7 extensively dealt with and prohibited various arrangements by the taxpayers for artificial avoidance of PE status ingjudjng splitting up j)f_con tracts. This was included in Article 13 of the MU. Accordingly, as a minimum standard, the signatories of MLI would now modify their treaties to address arrangements directed to artificially avoid PE status.
In view of this, in the present case, the arrangement of the assessee to split the Otherwise single contract into various contracts with a view to avoid PE status is not permissible. As UK Grid already has a PE in India, in the capacity of an awarded of contract, the offshore sub-contract would also form part of the same PE.”
4. Thereafter Ld. AO having taken into consideration the mechanism to determine profit of PE in terms of Rule 10 of the Income Tax Rules concluded that the total receipt source in India should be taken and the tax paid. The profit margins to be applied on these Indian receipts should be at arms length. So as to arrive at arms length profit the Ld. AO concluded in para 14,“in the instant case the assessee company has not furnished the financial statements for the relevant period pertaining to this assessment year. Hence, the relevant provisions of the Act are invoked”. Thereupon applying special provisions of Section 44BBB of the Act, proceeded to attribute business income to PE in India. Ld. AO also considered the global operation fee as FTS.
5. The assessee approached the Ld. DRP which had sustained the draft assessment order except to the extent directing Ld. AO to exclude the receipts on account of off-shore supplies made by assessee to GE T&D and SFO, if they are not related to PGCIL contract.
6. Thus, the assessee is in appeal raising following grounds :-
“1. That on the facts and circumstances of the case and in law, the assessment order dated 28.07.2022 passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (“the Act”) for assessment year 2018-19 assessing the total income of the Appellant at Rs. 131,37,79,750 is bad in law, void-ab-initio and therefore, liable to be quashed and/ or set aside.
2. That on the facts and circumstances of the case and in law, the assessment order passed under section 143(3)/ 144C(13) of the Act on 28.07.2022, being barred by limitation, is bad in law, and void-ab-initio.
Re: Offshore supply receipts of Rs.l 107,81,49,081 from PGCIL
3. That the DRP/ assessing officer erred on facts and in law in holding that receipts of Rs. l107,81,49,081 from offshore supplies to Power Grid Corporation of India Ltd (“PGCIL”) are taxable in India under the provisions of the Act.
4. That the DRP/ assessing officer erred on facts and in law in arbitrarily holding that the Appellant had business connection in India during the subject assessment year.
5. That the DRP/ assessing officer erred on facts and in law in arbitrarily holding that GE T&D India Limited (“GETDIL”) constitutes Dependent Agent Permanent Establishment (“PE”) of the Appellant in India and that the Appellant has Construction PE in India.
6. That the DRP/ assessing officer erred on facts and in law in attributing 100% profits from offshore supplies made to PGCIL to the alleged business connection/ PE.
7. Without prejudice, that the DRP/ assessing officer erred on facts and in law in computing incoms-fem-effehere supplies by applying section 44BBB of the Act.
8. That the DRP/ assessing officer erred on facts and in law in alleging that the Appellant was awarded single composite contract on turnkey basis, which was artificially split into three separate contracts to avoid payment of legitimate taxes in India.
Re: Offshore supply receipts of Rs. 51,85,13,082 from GETDIL & Rs.1,35,55,339 from SFO Technologies
9. That the assessing officer erred on facts and in law in holding that receipts of Rs.51,85,13,082 from GETDIL and Rs.1,35,55,339 from SFO towards offshore supply were taxable in India, contrary to the binding directions of the DRP.
10. That the assessing officer erred on facts and in law in bringing to tax receipts of Rs.51,85,13,082 from offshore supply made to GETDIL, i.e., customer on the ground that said customer itself constituted Dependent Agent PE of the Appellant in India.
11. Without prejudice, that the assessing officer erred on facts and in law in bringing to tax receipts towards offshore supply from GETDIL and SFO Technologies by applying section 44BBB of the Act, not appreciating that said offshore supplies were not linked to any turnkey contract.
Re: Global operation fee of Rs.8,12,37,030 received from GETDIL
12. That the DRP/ assessing officer erred on facts and in law in taxing global operation fee of Rs.8,12,37,030 received from GETDIL as Fees from Technical Services (“FTS”) under the provisions of the Act and the India-UK DTAA, without appreciating that provision of said services by the Appellant did not satisfy the ‘make available’ clause contained in Article 13(4)(c) of the India-UK DTAA.
Re: Other grounds relating to computation of tax demand & penalty proceedings
13. That the assessing officer erred on facts and in law in levying interest under section 234A, 234B and 234C of the Act.
The Appellant craves leave to add to, amend, alter or vary the above grounds of appeal at or before the time of hearing.”
7. Heard and perused the record. The Bench has given thoughtful consideration to the matter before it and submissions and has gone through the law cited.
The ground wise findings are as follows;
8. Ground no 1 and 2; While opening arguments, Sh. Sh. Ajay Vohra, Ld. Sr Counsel appearing for appellant assessee, has not pressed ground no. 2 and ground no. 1 is general in nature.
9. Ground no 3 to 8. Sr. Counsel for the assessee/ appellant contended that Ld. Tax Authorities below have erred in understanding the nature of three agreements entered between the assessee, its associate ALSTOM-I and employer PGCIL. It was submitted that Ld. Tax Authorities have fallen in error in concluding that there was an artificial splitting of the contract between the assessee and ALSTOM-I. Referring to the contracts executed between the assessee and PGCIL, made available on page no. 6 to 249 of the paper book, it was submitted that engaging an Associate was an integral part of the bid proposal and the execution of two separate contracts between PGCIL and ALSTOM-I was part of bidding documents. It was submitted that Ld. Tax Authorities below have selectively construed the recitals of the bid and contract documents.
9.1 It was submitted that tax authorities below have also fallen in error in construing the business connection in India without appreciating that the sales were concluded outside India and the property in goods under the offshore agreement had passed outside India. No payment or consideration was received within India. Specially referring to judgment in IshikaWasma- Harima Heavy Industries Ltd. vs. DIT : [2007] 288 ITR 408 (SC) Ld. Sr. Counsel submitted that Hon’ble Supreme Court has held in many words that when the transfer of property in goods and the payment are carried out outside India the transactions cannot be taxed in India. In this context, judgment in CIT vs. Hindustan Shipyard Ltd. 109 ITR 158 (AP) was also relied.
9.2 It was submitted that when the scope of work under the bid documents covered off-shores supply and off-shores services as distinguished from onshore supply and construction work, Ld. Tax Authorities had fallen in error in considering the three contracts to be part of one consolidated contract. It was submitted that in case of contracts by consortium, the law is settled that when a project is executed by consortium then income of foreign entity has to be assessed on the business of income occurring to it in India. Specially referring to Board Circular dated 07.03.2016 he submitted that even the Board recognizes the fact that in case of projects executed under consortium arrangement and if each member is independently responsible for executing its part of work, thenaccordingly the income is taxable. In this context, he specially refered to judgment of Hon’ble Delhi High Court in Linde AG, Linde Engineering Division vs. DDIT : [2014] 365 ITR 1 (Del) of Income Tax.
9.3 He submitted thatoverstress is laid by Ld. Tax Authorities on the fact that the primary liability of execution of contracts and damage for beach of the contracts being upon the assessee ALSTOM only, so the ALSTOM-I was merely an extended arm. And thus the Ld. Tax Authorities have fallen in error in considering the associate M/s. ALSTOM-I to be Agency PE. It was submitted that there was no legal and financial dependency between the assessee and its associates.
9.4 Ld. Sr. Counsel submitted that the assessee had earned revenues from offshores supplies and no activity was performed in India for earning its revenue. He specifically stressed on fact that no employee of the assessee visited India and as such there is no branch or place of business in India.
9.4.1 As with regard to Dependent PE it was submitted the Tax Authorities have not discussed any evidence and an incorrect observation is made by Ld. AO that GE India was actively involved in soliciting business for the assessee as the assessee had procured the contract by way of open bidding.
9.5 It was submitted that the Associate was engaged in independent contracts under the bid and was independent entity. Referring to the financial statements of GE T &D India Limited, available on page no. 429 to 437 for F.Y. 2017-18 and 438-445 for F.Y. 2018-19 it was submitted that related party transactions have been disclosed and it was submitted that the Indian associates has several independent source of revenue. The income earned from the two contracts was independently offered to Tax under the Act.
9.6 As with regard to the Associate constituting a Construction PE,he submitted that the associate was independent and responsible for concluding the contracts and the role of assessee was limited to off-shore supplies. In this context he specifically contended in regard to the findings of construction PE that there was no factual evidence to support the findings. Assessee was not involved into any activity of construction project and as “supply” is not included in the activities taxable in the provisions, so Article 5(2) of the treaty was not applicable.
9.7 He also referred to Section 44BBB of the Act and submitted that as assessee was merely a supplier to PGCIL so provisions which are otherwise applicable in case of business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with the turnkey power project is not applicable and the income received against offshore supply of equipments cannot be taxed by virtue of section 44BBB.
9.8 As with regard to the submission that the agreements were not deliberately split for tax avoidance, Ld. Sr. Counsel relied Linde AG, Linde Engineering Division vs DDIT: [2014] 365 ITR 1 (Del) where the Department’s SLP dismissed in 242 Taxman 371 (SC). He also relied DIT vs Ericsson AB: 343 ITR 470 (Del).
9.8.1 In support of the submission that there is no business connection of assessee in India, Ld. Sr. Counsel relied, CIT vs. R D Aggarwal and Co. [1965] 56 ITR 20 (SC), CIT vs Hindustan Shipyard Ltd: 109 ITR 158 (AP) and CIT vs Atlas Steel Company Ltd: 164 ITR 401 (Cal).
9.8.2 As with regard to the submission that Offshore supply are not taxable under the Act, he relied Ishikawajma-Harima Heavy Industries Ltd vs DIT: [2007] 288 ITR 408 (SC), DIT vs LG Cable Ltd: [2011] 237 CTR 438 (Del), DIT vs Nokia Networks OY: 358 ITR 259 (Del) and Siemens Mobile Communications SPA vs DCIT: [2020] 182 ITD 479 (Del Trib.)
9.8.3 The non applicability of Section 44BBB qua offshore supply was supported by Ld. Sr. Counsel by relying DDIT vs Mitsui & Co Ltd: 118 taxmann.com 379 (Del Trib.), DOT vsWhessoe Oil & Gas Ltd: 87 taxmann.com 342 (Mum Trib.) and Atomstroy Export vs DCIT: ITA No.6945/Mum/2017 (Mum Trib.)
9.8.4 He supported his contentions with regard to law on Dependent Agent Permanent Establishment (“PE”) under the India-UK DTAA he referred to the Copy of India-UK DTAA and section 182 of Indian Contract Act, 1872. He also cited judgments in National Petroleum Construction Company vs DIT: 383 ITR 648 (Del), Western Union Financial Services Incvs ADIT: 101 TTJ 56 (Del Trib.),Mitsui & Co Ltd vs ACIT: ITA No.4764/Del/2016 (Del Trib.), ITO vs International Reinsurance and Insurance Consultancy & Broking Services (P) Ltd: 142 taxmann.com 509 (Mum Trib.), DCIT vs Adobe Systems Software Ireland Ltd: ITA Nos.l978/Del/2019 &Ors. dated 27.07.2022 (Del Trib.), Net App BV vs DDIT: [2017] 78 taxmann.com 97 (Del Trib.), TVM Ltd vs CIT: 237 ITR 230 (AAR) and KronesAktiengesellschaftvs CIT: ITA No.907/Del/2017 dated 30.12.2022 (Del Trib.)
9.8.5 The Ld. Sr. Counsel stressed that the onus is on Department to prove existence of PE and for that he relied CIT vs eFunds IT Solution: 399 ITR 34 (SC), DIT vs Samsung Heavy Industries Co Ltd: 426 ITR 1 (SC), DIT vs Mitsui & Co Ltd: 399 ITR 505 (Del) and AB SciexPte Ltd vs ACIT: 195 ITD 384 (Del Trib.)
9.8.6 As with regard to principles of attribution to business connection/ PE he relied DIT vs Morgan Stanley & Co Inc: 292 ITR 416 (SC), DIT vs Morgan Stanley & Co Inc: 292 ITR 416 (SC), The Anglo French Textile Co Ltd vs CIT: 25 ITR 27 (SC), Annamalais Timber Trust and Co vs CIT: 41 ITR 781 (Mad), CIT vsBertrams Scotts Ltd: 31 Taxman 444 (Cal), CIT vs Hyundai Heavy Industries Co Ltd: 291 ITR 482 (SC), Samsung Heavy Industries Co Ltd vs DIT: 265 CTR 109 (Uttarakhand), Affirmed by the Supreme Court in 426 ITR 1(SC), DCIT vs Roxon OY: 106 ITD 489 (Mum Trib.)
10. Ld. DR however, supported the findings of Ld. Tax Authorities below and submitted that it was not a case of consortium but one consolidated bid was fragmented. It was submitted that the PGCIL had invited bid and assessee was the contractor and the Associate, Indian entity was given authority to execute the local work while the responsibility continued to stay with the assessee. He referred to various clauses of agreement trying to show that when over all responsibility was of assessee, then PE has to be presumed.
11. Now, giving thoughtful consideration to the matter on record and the submissions, at the outset, the Bench feels relevant to observe that in the assessment order the Ld. AO has discussed more about the various provisions and principles of law governing the taxability in case of income which is deemed to accrue or arises in India for the purpose of Section 9 of the Act and how there has to be attribution to profit to the PE, without discussing the evidence in the case in hand, to give conclusive findings as to how the Indian associate of the assessee happens to be an agent or construction PE. His primary and ultimate reliance was on the fact that there was single composite contract which was divided into three contracts and that in two contracts, which were to be performed by the Indian entity, the ultimate liability for non-performance or compensation being on assesse, therefore, the Indian entity was a PE and the provisions of profit attribution were applicable.
12. At the same time the Ld. DRP bettered it little while discussing quite more of the recitals of the agreements and contracts but reached same finding that as there was no separate bid for each contract and that in case of any default in second or third contract, it was to be construed to be default of the assessee and result into right of termination and recovery of damages from the assessee by PGCIL, accordingly it too concluded that Associate as PE was involved throughout the contract period. DRP observed that the off-shore supply of equipments by the assessee would have been rendered meaningless in the absence of service of supervision, erection, commissioning etc. all of which was an integral and indivisible part of the contract.
13. So the key question is if this was independent contract as claimed by assessee or there was artificial spilt of one contract to the benefit of assessee, into three contracts leading to evasion of tax. The first and a very important concept that has to kept in mind is that the controversy regarding taxability event, in case of complex arrangement of contacts, may arise at several stages and with different tax incidences. The adjudication of an issue should be on basis of wholesome reading of the contract and context of terms. In regard to this principle of law the Hon’ble Supreme Court in Ishikawajma-Harima Heavy Industries Ltd. (supra) has observed in para no. 60 as follows :-
“In construing a contract, the terms and conditions there of are to be read as a whole. A contract must be construed keeping in view the intention of the parties. No doubt, the applicability of the tax laws would depend upon the nature of the contract, but the same should not be construed keeping in view the taxing provisions.”
14. Thus, it will be relevant to reproduce some major clauses of agreements and contracts entered between the PGCIL and the assesse, unlike selectively done by the Revenue Authorities below. The Off-shore contract agreement along with 11 Appendices dated 17.08.2012 is available at page no. 6 to 43 of the paper book and is the basic document and the relevant clauses of same starting from page 9, are reproduced as below :-
“WHEREAS the Employer is desirous of setting up ±800kV, 3000 MW HVDC Terminal ‘ Package associated with Western / Northern Region Interconnector for IPP Projects in Chhattisgarh under “National Grid improvement Project” and had invited bids for complete project- management, design, engineering, manufacture, testing, supply, port handling and customs clearance for the Plant and Equipment including mandatory Spares to be supplied from abroad, further handling, inland transportation and delivery at destination Site, unloading, storage, – handling at site, erection/installation including associated civil works, employer staff training, testing and commissioning including performance testing of Plant and Equipment including mandatory Spares and any other services as required for complete execution of the package.
WHEREAS M/s. ALSTOM Grid ‘UK Limited participated in the above referred bidding vide its First Stage bid proposal reference rro.T0193 dated 26.11.2011, updated Technical Bid, Compliance to Amendment No.-I and Clarification to the provisions of the Bidding Documents pursuant to First Stage Bid Evaluation. submitted vide communication reference CC-CS/156-WR1/HVDC-1489/7/G10 dated 12.03.2012 and Second Stage Bid vide ref. No. T0193 dated 21st March 2012 read alongwith discount letter ref no. T- 0193/01 dated 22.03.2012.
WHEREAS, as per the provisions of the Bidding Documents (Part I) and confirmations as per the documents referred in Notification of Award mentioned under Article 1.1 below, the construction of contracts shall be as follows:
First Contract’ for CIF Indian Port of Entry supply of Plant and Equipment including mandatory Spares from outside India, Type Test and Training to be conducted outside India (also referred to as Off-Shore Contract),
‘Second Contract’ for Ex-works supply of Plant and Equipment including mandatory Spares from within India and Type Test to be conducted within India (also referred to as On-Shore Supply Contract), and
Third Contract’ for all services to be performed in India covering, inter alia, port handling, port clearance, inland transportation, insurance, delivery at site, handling, storage, erection including associated civil works, testing and commissioning of all equipment and materials, including the equipment supplied under the First Contract end the Second Contract, Training in India etc. (also referred to as On-Shore Services Contract).
WHEREAS M/s. ALSTOM Grid UK Limited in their Bid, had proposed M/s. ALSOM T&D India Limited having its Registered Office at A-18, First Floor, Okhla Noida-201301, U.P. Area, Phase-ll, New Delhi-110020 and business address as A-7, Sector-65, : ca-201301, (hereinafter referred to as “ALSTOM-l” as their Associate for the purpose of executing the On-Shore Supply Contract and On-Shore Services Contract) and furnished “ALSTOM-l” written unequivocal consent vide their letter dated 26.11.2011 (enclosed in their First Stage bid) to work as Employer’s independent Contractor, on the terms and conditions as laid down in the Bidding Documents.
WHEREAS the associate proposed by ALSTOM has been accepted by the Employer, as above, subject to the condition that ALSTOM shall be overall responsible and liable for the execution of all the three Contracts irrespective of the fact that the Employer will enter into the ‘First Contract’ with them and the ‘Second Contract’ and the Third Contract’ with ALSTOM-I. Further, in the Contract Documents, for ‘First Contract’ the word ‘Contractor’ shall mean ALSTOM, who had submitted the bid and shall, for the purpose of ‘Second Contract’ and ‘Third Contract’, include’ ALSTOM-I – the Permitted Associate of ALSTOM. Accordingly, without prejudice to the overall responsibility and the liability of ALSTOM for the execution of all the three Contracts, the word ‘Contractor’ wherever appearing in the ‘Second Contract’and the Third Contract’shall also mean ALSTOM-I.
WHEREAS the Employer desires to engage the Contractor for the CIF Indian Port of Entry supply of all Plant and Equipment including mandatory Spares inter-alia including Design, engineering, manufacture, testing at manufacturer’s works and CIF supply of all off-shore equipment and materials from country(ies) outside India including Type Testing and training to be conducted outside India for the complete execution of the ±800kV, 3000 MW HVDC Terminal Package associated with Western / Northern Region. Interconnector for IPP Projects in Chhattisgarh under “National Grid Improvement Project” as detailed in the Contract Documents (“the Facilities”), and the Contractor has agreed to such engagement upon and subject to the terms and conditions hereinafter appearing.
Article 6.
ALSTOM having proposed ALSTOM-I as its Associate for the purpose of executing the On-Shore Supply Contract and On-Shore Services Contract and furnished ALSTOM-I’s written unequivocal consent to work as the Employer’s independent Contractor, on the terms and conditions as laid down in the Bidding Documents and, in accordance with the confirmations as per the documents referred in Notification of Award mentioned under Article “1.1 above, Contract Agreement Nos. CC-CS/156-WR1/HVDC-1489/7/G10/CA-II/4336 and CC-CS/156-WR1 /HVDC-1489/7/G10/CA-l11/4337 between the Employer and the Contractor’s Associate – ALSTOM-I has also been made on 17.08.2012, respectively for the On-Shore Supply Contract (also referred to as the ‘Second Contract’) and On-Shore Services Contract (also referred to as the Third Contract’).
The scope of ‘Second Contract’ includes Design, engineering, manufacture, testing at manufacturer’s works and Ex-works supply of all the equipment and materials including mandatory spares from within India and Type Testing, as detailed in the Contract Documents of said contract, required’ for the complete execution of ±800kV, 3000 MW HVDC Terminal Package associated with Western / Northern Region Interconnector for IPP Projects in Chhattisgarh under “National Grid Improvement Project”. The scope of ‘Third Contract’ includes all services to be performed covering, inter alia, port handling, port clearance, inland transportation, insurance, delivery at site, handling, storage, erection including associated civil works, testing and commissioning of all the Plant and Equipment including mandatory Spares supplied under the Off- Shore Contract and On-Shore Supply Contract, Training in India etc. and any other services specified in the Contract Documents of said contract, for complete execution of ±800kV, 3000 MW HVDC Terminal Package associated with Western / Northern Region Interconnector for IPP Projects in Chhattisgarh under “National Grid Improvement Project”.
Notwithstanding the award of work under three separate Contracts in the aforesaid manner, ALSTOM shall be overall responsible to ensure the execution of all the three Contracts to achieve successful completion and operational acceptance / taking over of the facilities by the Employer as per the requirements stipulated in the respective Contract Documents. It is expressly understood and agreed by ALSTOM that any default or breach by its Associate, ALSTOM-l under the ‘Second Contract’ and/or Third Contract’ shall automatically be deemed as a default or breach of this ‘First Contract’ also and vice-versa, and any such default or breach or occurrence giving the Employer a right to terminate the ‘Second Contract’ and/or Third Contract’, either in full or in part, and/or recover damages under those contract(s), shall give the Employer an absolute right to terminate this Contract, at ALSTOM risk, cost and responsibility, either in full or in part and/or recover damages under this ‘First Contract’ as well. However, such default or breach or occurrence in the ‘Second Contract’ and/or ‘Third Contract’, shall not automatically relieve ALSTOM of any of its obligations under this ‘First Contract’. It is also expressly understood and agreed by ALSTOM that the Plant and Equipment including mandatory Spares supplied by ALSTOM under this ‘First Contract’ and by its associate, ALSTOM-I under the ‘Second Contract’, when erected and commissioned by its associate, ALSTOM-I under the ‘Third Contract’ shall give satisfactory performance in accordance with the provisions of the Contract”.
14.1 Further, from the notification of award of off-shore contract dated 21.06.2012 and the relevant minutes dated 28.10.2011, page 125-127 of PB, relevant clauses are reproduced as below :-
“1.3 Your First Stage Bid submitted for the subject package under Proposal reference no. T0193 dated 26.11.2011; which was opened on 28th November, 2011. In your bid, you have confirmed that M/s. ALSTON T&D India (ALSTOM INDIA) (earlier known as M/s. AREVA T&D India Limited) shall be your Associate for the purpose of executing the On-Shore Supply Contract and On-Shore Services Contract (refer para 2.2 below) and furnished ALSTOM INDIA’S written unequivocal consent vide their letter dated 26.11.2011.
12.1 We confirm having accepted your Bid referred to at para 1.3, 1.7 & 1.8 above) read in conjunction with all the specifications, terms & conditions of the Bidding Documents (referred to at para 1.2, 1.2.1, 1.2.2, 1.2.3 & 1.6 above) and your confirmations as per the documents referred above, and award on you the ‘Off-Shore Contract’ (also referred to as the ‘First Contract’) covering inter-alia supply on CIF Indian Port of Entry of all equipment and materials, mandatory spares including Type Testing to be conducted outside India, Training to be imparted abroad for the complete execution of the ±800kV, 3000 MW HVDC Terminal Package associated with Western / Northern Region Interconnector for IPP Projects in Chhattisgarh under “National Grid Improvement Project”, as detailed in the Bidding Documents referred hereinabove. The scope of work inter-alia includes the following: Design, engineering, manufacture, testing at manufacturer’s works and CIF supply of all off-shore equipment and materials from country(ies) outside India including Type Testing and training to be conducted outside India.
The scope of work under this Notification of Award (NOA) shall also include all such items which are not specifically mentioned in the Bidding Documents and/or your bid but are necessary for the successful completion of your scope under the Contract for the construction of ±800kV, 3000 MW HVDC Terminal Package associated with Western / Northern Region Interconnector for IPP Projects in Chhattisgarh under “National Grid Improvement Project”, unless otherwise specifically excluded in the Bidding Documents or in this NOA.
2.2 As per the Record Notes of Clarification Meetings (referred to in para 1.5 above) and the acceptance of proposed Associate confirmed vide our communication dated 01.03.2012 (referred to in para 1.6 above), we have notified your Associate M/s. ALSTOM T&D India Limited vide our Notification of Award Ref. No. CC-CS/156- WR1/HVDC-1489/7/G10/NOA-II/4336 dated 21.06.2012 for award of ‘On-Shore Supply Contract’ (also referred to as the ‘Second Contract’) for the subject package which includes the Ex-works supply of all equipment/materials including Type Testing to be conducted within India, required, for the complete execution of ±800kV, 3000 MW HVDC Terminal Package associated with Western / Northern Region Interconnector for IPP Projects in Chhattisgarh under “National Grid Improvement Project”, ‘as set forth in the Bidding Documents., viz. Design, engineering, manufacture,, testing at manufacturer’s works and Ex-works supply of all the equipment and materials including mandatory spares and Type Testing from within India. We have also notified your Associate M/s. ALSTOM T&D India Limited vide. our Notification of Award Ref. No. CC-CS/156-WR1/HVDC-1489/7/G10/NOA-lIl/4337 dated 21.06.2012 for award of ‘On-Shore Services Contract’ (also referred to as the Third Contract’) for performance of all other activities, as set forth in the Bidding Documents, viz. port handling, port clearance, inland transportation, insurance, delivery at site, handling, storage, erection including associated civil works, testing and commissioning of all equipment and materials, including the equipment supplied under the First Contract and the Second Contract, Training in India etc. required for the complete execution of +800kV, 3000 MW HVDC Terminal Package associated with Western / Northern Region Interconnector for IPP Projects in Chhattisgarh under “National Grid Improvement Project”
Notwithstanding the award of work under three separate Contracts in the aforesaid manner, you shall be overall responsible to ensure the execution of all the three Contracts to achieve successful completion and taking over of the works under the package by the Employer as per the requirements stipulated in the Bidding Documents. It is expressly understood and agreed by you that any default or breach by your Associate , M/s. ALSTOM T&D India Limited under the ‘Second Contract’ and/or the Third Contract’ shall automatically be deemed as a default or breach of this ‘First Contract’ also and vice-versa, and any such default or breach or occurrence „ giving us a right to terminate the ‘Second Contract’ and/or ‘Third Contract’, either in full or in part, and/or recover damages under those contract(s), shall give us an absolute right to terminate this Contract, at your risk, cost and responsibility, either in full or in part and/or recover damages under this ‘First Contract’ as well. However, such default or breach or occurrence in the ‘Second Contract’ and/or Third Contract’, shall not automatically relieve you of any of your obligations under this ‘First Contract. It is also expressly understood and agreed by you that the equipment/materials supplied by you under this ‘First Contract’ and by your Associate M/s. ALSTOM T&D India Limited under the ‘Second Contract’, when erected, installed & commissioned by your Associate M/s, ALSTOM T&D India Limited under the Third Contract’ shall give satisfactory performance in accordance with the provisions of the Contract.”
15. When these minutes dated 28.10.2011 are considered, the clause 1.3 makes it apparent that in the bid itself ALSTOM-I was proposed and confirmed as an Associate for the purpose of executing the on-shore supply and service contracts. So having an Indian Associate was an integral part of the Bid and not introduced at the discretion of the assessee. Reference in this context can be made to the bid document of September, 2011 containing special conditions of contract available at page no. 231 of the paper book which required that success full bidder shall be under an obligation for entering into the three contracts. The first for off-shore contract and second & third for on-shore supply contract.
16. Next in the notification of the award, the ‘scope of contract’ of the off shore contract, given to the assessee was limited to, “Design, engineering, manufacture, testing at manufacturer’s works and CIF supply of all off-shore equipment and materials from country(ies) outside India including Type Testing and training to be conducted outside India. As distinguished with Scope of contract, meant for Second and Third Contracts. Thus there was not one scope of contract under which the assesse and Indian Associate were working together.
17. In aforesaid context only, this notification of award letter dated 26.06.2012 in clause 2.2 mentions that as ALSTOM-I was ‘awarded’ contract 2 and 3 for which ‘separate notification’ of award on-shore supply contract and on-shore service contract was made on 21.06.2012. Thereupon the offshore contract was executed on 17.08.2012 where it was specifically mentioned that ALSTOM-I was made part of the contract as the part of proposal at the bid stage itself. This of-shore contract specifically mentions that ALSTOM-I shall be ‘independent contractor’ of PGCIL on the terms and conditions as laid down in the bidding document. Article 6 of this document dated 17.08.2012 specifically makes reference to ALSTOM-I’s ‘written unequivocal consent to work as the independent contractor of PGCIL’ and that separate contracts have been entered between PGCIL and Indian Associate of the assesse, ALSTOM- I, on the same date 17.08.2012 for the second and third contract.
18. The aforesaid discussion of the relevant clauses leave no doubt in the mind of this Bench that at the stage of bid itself ALSTOM-I had joined the assessee in terms of the requirement of the bid. These clauses and stipulations go on to establish that there was a collaborative effort of the assessee and the Indian associate and as such there was not actually a consortium to which one contract was awarded with bifurcation at level of the members of Consortium. The award of separate off shore contract by the PGCIL to assessee and on shore contracts to the permitted associate ALSTOM-I, which was classified as independent contractor of employer, coupled with the execution of separate contracts with defined scope of work of each contract, required each party to perform its obligation under the respective contracts awarded to them separately and to receive the consideration under the contracts independent to each other. The terms negotiated and document executed firmly establish that there was no mix up in the role and identity.
19. The Ld. Tax Authorities below have actually fallen in error in construing the aforesaid discussed clauses because what appears to be a narrow and not a pragmatic approach. As observed above, they were selective in considering the bid and contract documents clauses and failed to take note of it as a whole and to understand the business prudence of such Bidding involving International entities, while dealing with Indian entities, for such infrastructural contracts. The Ld. AO has merely focused on the fact of three contracts, alleging that a single composite contract awarded on turnkey basis was split artificially into three sub-contracts by the assessee. The matter of fact happens to be it was a condition in bid and there was nothing on the part of assessee to do the splitting of a composite contract.
20. Then the Ld. DRP has fallen in error in making certain factual errors in observations. As for instance in para no. 5 of its order Ld. DRP mentions that there are only two signatories to all the three contracts namely PGCIL (the Employer) and the assessee company (the Contractor). The above discussion has established there were three different award of contract and three different contracts were signed and executed. Only the ‘first contract’ was executed and signed between the assessee and PGCIL.
20.1 Further in para 5, the Ld. DRP has taken into account ‘Part D’ of a document relating to “commercial issues”, and mentioned that it provided that “if ALSTOM-I fails to enter into the second contract and the third contract, the said contracts shall be entered into between ALSTOM and Power Grid in lines with the provisions of the bid document”. Now as a matter of fact this clause is part of Appendices 10, to the off-shore agreement which contains ‘specific agreements’ made during meetings held from 03.07.2012 to 05.07.2012 between the PGCIL and M/s. ALSTOM, along with its associate ALSTOM-I. This agreement was on the part of ALSTOM to execute second and third contract, merely as an assurance that at advance stage after the bid is accepted and before the contract is actually executed the bid is not frustrated. In any case when the three contract stand executed on 17.08.2012, the issues discussed in the meeting between 03.07.2012 and 05.07.2012 became superfluous but Ld. DRP has unnecessarily stressed upon the same to draw a conclusion that primary commitment in all the three contracts was of the assessee.
20.2 Further in para 5.2, the Ld. DRP has reproduced para 3.2 of the notification of award dated 21.06.2012 without understanding the context in which the same was made. As for the convenience para 5.2 of the order of DRP is reproduced as below :-
“5.2 It has also been clarified at para 3.2 therein that-
“3.2 Notwithstanding the break-up of the Contract Price, the Contract shall, at all times, be construed as a single source responsibility Contract and any breach in any part of the Contract shall be treated as a breach of the entire Contract.”
As a matter of fact that this para 3.2 is part of clause 3.0 in notification of award, which makes reference to contract price and it will be beneficial to reproduce the whole of it, from the notification of award dated 21.06.2012, available at page no. 127 of paper book as under :-
“3.0 Contract Price
3.1 The total Contract Price for the entire scope of work under this Contract shall be GBP 107,590,567 + EURO 68,835,118+USD 13,559,144 (Great Britain Pound One Hundred Seven Million Five Hundred Ninety Thousand Five Hundred Sixty Seven Plus Euro Sixty Eight Million Eight Hundred Thirty Five Thousand One Hundred Eighteen Plus USD Thirteen mijlion Five Hundred Fifty Nine Thousand One Hundred ‘ Forty Four Only) as per the following break-up :
