Case Law Details
This article contain summary of a recent ruling of the Authority for Advance Rulings (AAR) [AAR No. 827 of 2009] in the case of Joint Stock Company Foreign Economic Association “Techno prom export” (Applicant) on the issue of tax ability of income from offshore supplies. Based on the terms of the contract, documents submitted by the Applicant and the legal precedents, the AAR held that the transaction for sale was concluded outside India.
Hence, no income from offshore supplies accrues or arises or can be deemed to accrue or arise to the Applicant in India under the Indian Tax Law (ITL). The AAR also ruled that the Applicant does not have a Permanent Establishment (PE) in relation to offshore supplies. Therefore, no part of income from offshore supplies can be said to be taxable in India.
Background and facts of the case
- Applicant is a company formed and registered under the laws of Russia. It is one of the world’s leading companies in the field of power project construction and export of electric power and also engaged in the business of construction and commissioning of power projects. The Applicant successfully bid for the tender floated by National Thermal Power Corporation Limited (NTPC) for Main Plant Package Part- A (Steam Generator & Auxiliaries) for Barh Super Thermal Power Project-3X660 MW located in Bihar, India.
2. The Applicant entered into three separate contracts with NTPC:
- Contract no. 1: Offshore supply contract – for design, engineering, manufacture, inspection and testing at supplier?s works, packing, forwarding and dispatch from manufacturer?s works to the port of disembarkation in India of all offshore plant & equipment including mandatory spares on CIF basis.
- Contract no. 2: Onshore supply contract – for design, engineering, manufacture, inspection and testing at supplier?s works, packing, forwarding and dispatch from manufacturer’s works/ place of dispatch (both in India) of all Ex- works (India) plant and equipment including mandatory spares on Ex- works (India) basis.
- Contract no. 3: Onshore services contract – for providing all services i.e. port handling and port clearance and port charges for the imported goods, loading inland transportation for delivery at site, inland transit insurance, unloading, storage, handling at site, insurance covers other than inland transit insurance, erection, supervision, pre-commissioning testing and commissioning including conducting guarantee tests in respect of all plant and equipment, completion of facilities and handing over to the Employer.
- The ruling of the AAR was sought on whether the amount received/receivable by the Applicant from NTPC under Contract no. 1 for offshore supply of plant and equipment including mandatory spares is taxable in India under the provisions of the ITL and the Treaty between India and Russia (`Treaty`)
Contentions of the Tax Authority :- The Tax Authority argued that the income from offshore supplies is taxable in India because:
1. The Applicant has a PE and a Business Connection in India in relation to offshore supply of goods and hence, profits from offshore supply are attributable to the PE in India.
2. As the essence of the contract is manufacturing and erection of the boiler at NTPC?s site. Therefore, equipment and materials supplied from outside India are integrally connected with installation of the boiler.
3. The facts of the instant case are similar to those in the case of Ansaldo Energia SPA [310 ITR 237 (Mad.)] and are distinguishable from the case of Ishikawajima– Harima Heavy Industries Ltd. [288 ITR 408].
4. The three contracts entered into between the Applicant and NTPC are connected with each other and in effect the contract is a composite contract for construction of boiler. Hence, each contract cannot be considered independently from an income tax perspective.
Contentions of the Applicant:- Applicant submitted that it is not liable to pay tax on income from offshore supplies in India. In support of the same the following arguments were submitted:
1. Title in the plant and equipment was transferred to NTPC outside India. Therefore, no income accrues or arises to the Applicant in India.
2. Payment for offshore supplies was received outside India through L/C.
3. Consideration for offshore supplies is separately identifiable from onshore supply and services contracts.
4. Sale was concluded outside India and the Project Office of the Applicant does not play any role in offshore supplies.
5. Reliance was placed on the Supreme Court’s (SC) judgement in the case of Ishikawajima (supra) and decision of AAR in the case of Hyosung Corporation [314 ITR 343 (AAR)].
Ruling of the AAR: The AAR held that the Applicant is not taxable in India in respect of income from offshore supplies:
1. The Tax Authority has not brought anything on record to show that the Applicant has a PE in India as regards offshore supplies.
2. Applicant has separate scope of work under all the three contracts. Therefore, contention of the Tax Authority that the contract was an integrated contract cannot be accepted.
3. The argument of the Tax Authority that transfer of equipment cannot be considered independently as essence of the transaction is manufacturing and erection of boiler is not valid. There is nothing in law which prevents parties from entering into a contract for sale of material for a specified consideration, which are ultimately utilised in fabrication and installation of a complete plant or unit.
4. The stipulations in the offshore supply contract and the modus operandi of the transactions are almost the same as in the case of Ishikawajma. Thus, the judgement of the SC in the case of Ishikawajma (supra) and the ruling of the AAR in the case of Hyosung (supra) fully support Applicant’s case.
5. The documents filed by the Applicant, such as Certificate of Origin, Bill of Lading, Insurance certificate, Bill of Entry and Commercial Invoice reinforce the conclusion that the ownership and property in goods passes to NTPC outside India.
6. The Applicant’s obligation relating to transit of goods till they reach the site is part of onshore services contract.
7. It is not necessary that the risk and title in the goods should pass to the buyer simultaneously. The parties to a contract can have a special stipulation for transfer of risks subsequent to the transfer of title.
8. The Applicant’s case is distinguishable from the case of Ansaldo (supra). NTPC has invited separate bids for all the three contracts, i.e. offshore supply, onshore supply and onshore services and the contracts were not split at the instance of the Applicant as was in the case of Ansaldo. Similarly there was no price imbalance in the value of these three contracts.
Comments
1. A ruling by the AAR is binding only on the Applicant, in respect of transaction in relation to which the ruling is sought and on the Tax Authority, in respect of the Applicant and the said transaction. However, it does have persuasive value and the Courts in India, the Tax Authority and the appellate authorities do recognise the principles and ratio laid down by the AAR, in deciding comparable cases.
2. The ruling of the AAR has reiterated the principle that income from offshore supply of equipment is not taxable in India, where essential conditions, such as passing of title in the goods, payment received outside India and conclusion of sale outside India, are met.
Does this ruling continue to hold ground after the recent retrospective amendment in Explanation to Sec 9, in the Finance Bill 2010?