Linde AG, Linde Engineering Division & Anr. Vs DDIT (Delhi High Court)
Hon’ble high court held that ‘mere cooperation’ between consortium members not results in an AOP. High Court held that where there is an independent / separate scope of work for each member coupled with no profit / loss or risk sharing between the members, there should be no AOP under Income Tax Act,1961, notwithstanding that a consortium may have signed an agreement with the project owner jointly.
While, it is relevant as to how a third party deals with the members of a consortium, the same would not be conclusive in determining whether the consortium members constitute an Association of Persons. It is indisputable that the purpose of Linde and Samsung in collaborating with each other was to procure the Contract and, to that end, both the said members had agreed to present themselves as a consortium. However, as stated earlier the question as to whether the said consortium members formed an Association of Persons would have to be determined by the level of association and the extent of collaboration as agreed between them. The fact that a third party is desirous to deal with the members as one consortium cannot be the determinative factor in considering whether the members constitute an Association of Persons for the purposes of being assessed for taxation. Both the consortium members had agreed to present a common face. However, the agreement inter se between the members clearly spelt out that except for presenting a common face and complying with the conditions as imposed by OPAL, the members would conduct their business independently with no interference from the other. This, in our view, clearly indicates that Linde and Samsung had no intention to form an Association of Persons. Clause 4.8 of the MOU and 16 of the Internal Consortium Agreement expressly recorded that the members did not have any intention to form an association.
We are also unable to accept the contention that the fact that Samsung and Linde had agreed to be jointly and severally liable for performance of the contract, would be sufficient to hold that they constituted an Association of Persons for the purposes of the Act. Linde and Samsung agreeing to be jointly and severally liable to OPAL for due performance of the Contract only indicates that Linde and Samsung had accepted a contractual obligation towards a third party, the same does not by itself lead to a conclusion that the said members had formed an Association of Persons. Any entity/individual may agree, for its own business purposes, to accept a liability for due performance of an obligation of another. This by itself would not lead to a conclusion that the said persons had formed a common enterprise or an association which was moved by joint action for a common purpose. As a matter of illustration, let us take a case where a director of a company provides a personal guarantee for a loan taken by the company. Having stood as a surety for the company, the director and the company would be jointly and severally liable to the lender. However, they continue to be independent of each other and the fact that are jointly and severally liable cannot possibly lead to the conclusion that the company and its director constitute an Association of Persons for the purposes of the Act. In order for independent entities/individuals to be considered as an Association of Persons, they must exhibit some trappings of a partnership in relation to their common enterprise.
Lastly, it is necessary to consider whether the joint management structure of the project as agreed to be constituted by Linde and Samsung is sufficient to conclude that they had constituted an Association of Persons. Clause 7 of the Internal Consortium Agreement between Linde and Samsung specifically records that “each Party shall be responsible for the management and controlling of its Scope of Work”. It was further agreed that Linde and Samsung would establish their own project teams and also nominate one responsible “Project Manager” each who would report to the respective “Project Directors” nominated by Linde and Samsung. The Project Directors would represent the consortium in interaction with OPAL. It is, thus, apparent that both Linde and Samsung were managing the execution of their part of the contract separately without interference by the other member. Neither Samsung nor Linde could carry out the work agreed to be performed by the other. Neither of the parties exercised any control over the quality of the equipment/plant supplied by the other or exercised any control with respect to the quality of the works executed. Each of the parties, thus, were responsible for executing the project through their own personnel and through their independent resources. There was no pooling of resources to form a common management. Each of the parties conducted its business independently. However, in terms of the MOU, Linde and Samsung had agreed to share information and material to enable the other member to perform its work. The Gantt chart annexed to the Contract indicated the schedule in accordance with which each member was expected to complete the various tasks and works within their respective scope of works. This would undoubtedly, require co-ordination between Linde and Samsung.
In every project which is executed by multiple independent agencies, a certain level of cooperation and coordination is required to ensure that the agency involved performs its work in a timely manner as per a predetermined schedule in order to enable the other agency to commence and complete its portion of work. The level of cooperation as agreed between Linde and Samsung was also akin to the level of cooperation as expected from independent agencies executing a project. This can be understood by taking an illustration of a simple project for construction of a building. It is only after an Architect or a Designer provides the detailed drawings that a civil contractor can commence construction. Similarly, it is only after the civil construction is commenced and progressed to a certain level that space for electrical contractors is available for them to perform their work. The work of Interior finishing can take place only after the civil works are complete. The fact that each of the aforesaid agencies, namely, the architect, the civil and electrical contractors are required to complete their work in a pre-determined sequence and are required to cooperate with each other in providing the necessary information and adhering to a specified schedule would not necessarily imply that the architect, civil contractors and electrical contractors had formed an Association of Persons. In this illustration each one of the participants works towards a common project with a certain level of cooperation. However, since the said participants do not act as a single cohesive entity, but perform their independent allocated works, they cannot be considered as an Association of Persons. In order to consider independent agencies as an Association of Persons, it is necessary that they form a joint enterprise with a greater level of common management. An element of mutual agency and joint action for mutual purpose is also necessary. Mere obligation to exchange information, between independent agencies, for co-ordinating their independent tasks would not result in an inference that the agencies had constituted an Association of Persons.
It is relevant to keep in mind that Linde and Samsung shared neither the costs nor risks. Both Linde and Samsung managed their own deliverables. As discussed above, in our view, the facts of this case do not indicate a sufficient degree of joint action between Linde and Samsung either in execution or management of the project to justify a conclusion that they had formed an Association of Persons and in our view, the Authority erred in concluding so.
FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT
1. The petitioners have filed the present petition under Articles 226/227 of the Constitution seeking quashing of the ruling dated 20.03.2012 passed by the Authority for Advance Rulings (hereinafter referred to as the ‘Authority’). By the said ruling dated 20.03.2012, the Authority has disposed of the application (AAR No.962 of 2010) filed by the petitioner under section 245Q of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) and held that the Consortium of the petitioner no.1 and Samsung Engineering Company Ltd. constitutes an Association of Persons and the income or profits received/ receivable by petitioner no.1 for the offshore supply of goods and for rendering of offshore services were taxable in India. The said ruling is hereinafter referred to as the ‘impugned ruling’.
2. The petitioner no. 1, Linde AG, Linde Engineering Division, Pullach, Germany is hereinafter referred to as ‘Linde’. Samsung Engineering Company Ltd., Seoul, Korea is hereinafter referred to as ‘Samsung’. Linde and Samsung are hereinafter also referred to as members and collectively referred to as ‘Consortium’. ONGC Petro Additions Limited is hereinafter referred to as ‘OPAL’. Memorandum of Understanding dated 03.03.2008 is hereinafter referred to as ‘MOU’.
3. The principal controversy which is required to be considered in the present petition is: whether in the given facts, Linde and Samsung constitute an Association of Persons within the meaning of ‘person’ as defined under section 2(31) of the Act? And, whether the income received/receivable by Linde for the supply of equipment, material and spares outside India and for rendering services outside India is taxable in India?
4. The relevant facts in brief are as follows:-
4.1. On 19.4.2007, OPAL floated a Tender Notice inviting bids executing the work (including undertaking all activities and rendering all services) for the design, engineering, procurement, construction, installation, commissioning and handing over of the plant for the Dual Feed Cracker and Associated Units of Dahej Petrochemical Complex in accordance with the Bid Documents. The project was to be executed on turnkey basis.
4.2. On 03.03.2008, Linde and Samsung entered into a Memorandum of Understanding (hereinafter referred to as the ‘MOU’) whereby both the parties agreed to form a Consortium, for jointly submitting a bid to secure the contract for execution of the aforesaid project. The MOU was followed by an ‘Internal Consortium Agreement’ dated 14.03.2008 executed between Linde and Samsung. taxguru.in Thereafter, on 20.03.2008, the Consortium submitted its proposal pursuant to the aforementioned tender notice publicised by OPAL. The price bid was submitted by the Consortium on 28.07.2008.
4.3. The said proposal submitted by Linde and Samsung was accepted and OPAL issued a Notification of Award on 23.12.2008 awarding the work of executing the project on a turnkey basis to the Consortium. 23.12.2008 was also fixed as the effective date.
4.4 Thereafter, OPAL (referred in the Contract as the ‘Company’) and the Consortium (referred in the Contract as the ‘Contractor’) entered into a definitive agreement on 10.02.2009. As per the said agreement, OPAL awarded the contract for carrying on work of all activities and services required for the design, engineering, procurement, construction, installation, commissioning and handing over of the plant on a lump sum turnkey basis in accordance with the Bidding Documents, to the Consortium. The Consortium agreed to perform the work in conformity with the terms of the agreement and OPAL agreed to pay the consideration in the manner as specified in the contract. The agreement included various annexures, viz.: the General conditions of contract as amended, Technical documents, Agreed clarifications, contract price schedule, construction schedule, Project instructions, Milestone payment formula, Notification of award, Letter of acknowledgement of notification of award from the Consortium, Integrity pact and the MOU executed between the Consortium members. The said agreement being Contract No. MR/OW/MM/DFC/02/2007 dated 10.02.2009 for dual feed cracker and associated units of Dahej Petro Chemical Complex is hereinafter referred to as the ‘Contract’.
5. Linde filed an application before the Assessing Officer under section 197 of the Act claiming that no portion of the amount payable to Linde for supply of equipment, material and spares and for providing basic and detailed engineering services was liable to be subjected to withholding of tax under section 195 of the Act as it was contended that the said transactions were performed and completed outside India and payments for the said transaction were also received outside India. It was, thus, contended that the amounts received/receivable by Linde for the said supplies and services were not chargeable to tax in India. The Assessing Officer did not accept the plea of Linde and directed OPAL to withhold tax on amounts paid to Linde in terms of the Contract. Thereafter, Linde filed an application before the Authority under section 245Q of the Act seeking advance ruling with regard to the status of Linde and Samsung as an Association of Persons and also as to the tax liability of Linde in India in respect of income received/receivables under Contract dated 10.02.2009. The Authority admitted the application for consideration of the following questions:-
“(i) Whether in terms of the Contract dated 10.02.2009 (hereinafter referred to as the contract) between ONGC Petro Additions Limited (hereinafter referred to as “OPAL”) and Consortium of Linde AG, Germany, and Samsung Engineering Company Ltd., Korea (hereinafter referred to as “SEC”) the applicant and SEC are taxable in the status of AOP?
(ii) Whether in terms of the Contract, the amount receivable/received in respect of design and engineering, prepared solely for manufacture, procurement of equipment outside India and being inextricably linked to such equipment to be supplied, liable to tax in India, under the provisions of the Income-tax Act, 1961 (“the Act”) or under the Double Taxation Avoidance Agreement read with Protocol between India and Germany (“DTAA”).
(iii) If the answer to question no. 2 is in the affirmative, to what extent and at what rate of tax, are the amounts received/receivable for design and engineering liable to tax in India?
(iv) Whether in terms of the Contract, the amount receivable by the applicant for supply of equipment, material and spares, outside India are liable to tax in India, under the provisions of the Income-tax Act, 1961 or under the DTAA read with Protocol?
(v) If the answer to (iv) is in the affirmative, to what extent are the profits from supply of plant and equipment taxable in India?
(vi) Whether in terms of the Contract, consideration for onshore services comprising supervision of installation, testing, commissioning and construction, management/ supervision is liable to tax on the profits of the PE, as may be deemed to exist in India, in terms of Section 44DA of the Act read with the provision of the DTAA?
(vii) If the answer to question No. (vi) is in the affirmative, whether for the purpose of determining the profits of the PE in India, the actual expenditure incurred by head office exclusively and specifically in relation to onshore activities of the PE (not being general administrative/executive expenses) and reimbursed to it, are allowable in full and not subject to limits in Section 44C of the Income-tax Act, 1961?”
6. The said application (AAR No.962 of 2010) was disposed of by the impugned ruling whereby the Authority held that the Consortium of the Linde and Samsung constitutes an Association of Persons. The Authority noted that the Notification of Award was in the name of the Consortium and not in the name of Linde and Samsung individually. The liability of Linde and Samsung towards OPAL, for due performance of the Contract, was joint and several. The Authority further held that the Contract was an indivisible contract and was incapable of being split up into different components/parts. taxguru.in And, on this basis the Authority concluded that income received/ receivable by the petitioner for offshore supply of equipment, materials and spares and for offshore supply of drawings and designs relating thereto was taxable in India. The Authority also held that since Linde/Samsung continued to be responsible for the supplies up to the stage of acceptance of the work in relation to the erection, procurement and commissioning project, the title of the equipment/material supplied could not be accepted to have transferred to OPAL overseas.
7. Aggrieved by the impugned ruling passed by the Authority, the petitioners have filed the present writ petition.
SUBMISSIONS
Submissions of Petitioners/Linde
8. It is contended by the learned senior counsel for the petitioner that the status of the Consortium formed by Linde and Samsung was not that of an Association of Persons and as such the Consortium was not liable to be assessed under the Act as an Association of Persons. It was submitted on behalf of Linde that an Association of Persons is one in which two or more persons join in a common purpose or common action whether or not the same is formed with the object to produce income, profits or gains. It is contended that in the present case, there is no element of the common action or common purpose and, therefore, the status of the Consortium was not that of an Association of Persons.
9. It was submitted on behalf of petitioners that Linde and Samsung were having the requisite technical experience in their respective fields and, therefore, had jointly submitted the bid in order to fulfil the criteria/conditions specified under the bid documents. It was submitted that the common object of Linde and the Samsung was to secure the contract and the Consortium was formed only for this limited purpose and each party was required to perform its specified portion of the Contract separately. The learned counsel for Linde referred to various clauses of the MOU, the Internal Consortium Agreement as well as the Contract and submitted that Linde and Samsung were responsible for performing separate items of work. Both Linde and Samsung were responsible for their respective profits and liabilities and there was no sharing of risks, expenses or profits. The expenses or the costs incurred by each member, for the part of the work performed by it, was also borne exclusively by that member. There was also no sharing of assets or resources employed by each of them. The scope of the work to be performed under the Contract by both the parties was clearly demarcated and separately identified. The considerations payable to Linde and Samsung for the respective items of work to be performed by them were separately specified and the amounts payable by OPAL under the Contract were also paid directly to each member of the Consortium. It was also pointed out that the Performance Bank Guarantee was also required to be submitted by the members of the Consortium separately. It was submitted that in these facts, no joint management or joint action or common purpose in the performance of the Contract could be inferred and hence, the Consortium could not be assessed as an Association of Persons.
10. In support of these contentions, the learned counsel placed reliance on the judgment of the Supreme Court in the case of CIT v. Indira Balkrishna: (1960) 39 ITR 546 (SC) and also referred to the decisions passed by the Authority in the case of Hyundai Rotem Co. and Mitsubishi Co. v. DIT (International Taxation): [2010] 323 ITR 277 (AAR),taxguru.in Hyosung Corporation v. Director of Income-tax (International Taxation) New Delhi: [2009] 314 ITR 343 (AAR) and In Re: Van Oord Acz. Bv: [2001] 248 ITR 399 (AAR).
11. It is also contended that the Authority was obliged to follow its earlier rulings passed in the cases of Hyundai Rotem Co. and Mitsubishi Co. (supra), Hyosung Corporation (supra) and In Re: Van Oord Acz. Bv (supra) as it is settled law that a principle of law laid down by any Judicial Authority, unless upset in appeal or rendered inapplicable by subsequent change in law would be binding on the said Judicial Authority. In support of this contention, reliance has been placed on the judgment of the Supreme Court in the case of Columbia Sportswear Co. v. DIT: (2012) 11 SCC 224.
12. It was next contended on behalf of Linde that the consideration received/receivable by Linde for supplying equipment, material and spares was not taxable in India as the income arising and accruing from the transaction could not be deemed to accrue or arise in India. It was submitted that certain offshore services provided by Linde were inextricably linked with the offshore supplies and income arising therefrom would also not accrue or arise in India. It is contended that the petitioner being a non-resident would be chargeable to tax in India only in the event income accrues or arises in India or is deemed to accrue or arise in India. Therefore, the amount received/receivable by the petitioners for the offshore supplies or offshore services were not liable to tax under the provisions of the Act or under the Double Taxation Avoidance Agreement read with Protocol between India and Germany.
13. It is contended that although the liability of Linde and Samsung for due performance of the Contract was joint and several, the respective items of work to be executed by them were separately identified along with the consideration payable for the same. It was submitted that as per the Contract, the petitioner was obliged to perform, broadly, the following activities, viz.: (i) basic and detailed engineering and drawings; (ii) procurement and offshore supply of equipment and material; and, (iii) onshore services such as supervision during pre-commissioning, construction, post-commissioning, training of personnel, etc. While activity (iii) had to be performed in India, activities (i) and (ii) were required to be performed entirely outside India. As per the Contract, the consideration/price for the offshore and onshore transactions was also separately provided. Whilst, the considerations for the offshore transactions were also to be paid in foreign currency (i.e. Euros), the considerations for the onshore transactions were to be paid in Indian currency. It was pointed out that in terms of Clause 7 of the Contract, the equipments, materials and spares were to be supplied on FOB basis. It was submitted that this meant that the title to the said equipment, materials and spares was transferred to OPAL outside the territory of India. The offshore services were stated to be inextricably linked to the supply of equipment and had also been rendered outside India. It was submitted that as no part of the income for the offshore supply or offshore services was received or accrued in India, the same was not taxable in India and the Authority misdirected itself in passing the impugned ruling.
14. It was also contended that in terms of the Double Taxation Avoidance Agreement (DTAA) between India and Germany, income of Linde was taxable exclusively in Germany with respect to its global business income, except in cases where the petitioner carried on business through a permanent establishment in India, in which case the profits attributable to the permanent establishment would be taxable in India. The counsel has relied upon Articles 5 and 7 of the said DTAA. It was also submitted that the permanent establishment of Linde did not come into existence till the commencement of the installation stage which was subsequent to Linde providing the basic and detailed engineering and drawings and offshore supply of equipment and material. Thus, the income from provision of offshore supplies and services had already accrued and arisen, prior to Linde’s permanent establishment coming into existence.
Thus, it was contended that the income from supply of equipments, materials and spares supplied from overseas and offshore services were not taxable under the Act.
15. It was further submitted that treating Linde’s enterprise as an Association of Persons would deprive the petitioners of the treaty benefits and the same would amount to “treaty override” which is illegal and impermissible. It was contended that, as per section 90A of the Act and as per the judgment delivered by the Supreme Court in the case of Azadi Bachao Andolan v. Union of India: 263 ITR 706 (SC), it was settled that in case of conflict between the provisions of the Act and the provisions of DTAA, the provisions of DTAA would prevail to the extent that the treaty provisions are more beneficial to the tax payer.
16. It was submitted that the case of the petitioner was covered by the judgment of the Supreme Court in the case of Ishikawajima-Harima Heavy Industries v. Dir. Of Income Tax: (2007) 288 ITR 408 (SC) and also in the case of CIT v. Hyundai Heavy Industries Co. Ltd.: (2007) 291 ITR 482 (SC). The counsel has also placed reliance on the judgment of this Court in the case of DIT v. LG Cable Ltd.: 197 Taxmann 100 (Del.). It is contended that the impugned ruling was liable to be set aside as the Authority had not considered the judgments in Ishikawajima-Harima Heavy Industries (supra) and Hyundai Heavy Industries Co. Ltd. (supra). It is contended that the Authority had erred in referring to the judgment of the Supreme Court in the case of Vodafone International Holdings B.V. v. Union of India (UOI) and Anr.: (2012) 6 SCC 613 as the same was not applicable to the facts of the present case.
17. The learned counsel for the petitioner also referred to Instruction No.1829 dated 21.09.1989 issued by the Central Board of Direct Taxes in respect of taxability of income of non-residents arising from the execution of power projects on turnkey basis involving activities to be carried out in India as well as outside India. It was submitted by the petitioner that the said instruction indicated a correct understanding of law. The said Instruction has been withdrawn subsequently by the Board by an Instruction No.5/2009 dated 20.07.2009. However, it was submitted by the petitioner that the withdrawal of the Instruction was prospective in nature as held by this Court in the case of DIT v. Ericsson AB: 343 ITR 470 and the since the Contract was entered into by Linde prior to 20.07.2009, the said instruction would still be applicable in respect of income arising from the Contract.
18. It was lastly, contended that in terms of Section 86 of the Act, the income of an Association of Persons was to be taxed in the hands of the association and the distribution of income to the members of an Association of Persons was not liable to tax. In the present case, the entire consideration under the Contract was paid/payable by OPAL to the members separately and not to the Consortium. Thus, the notional inflow of funds in the hands of the Consortium was also equal to the outflow in favour of the members. And in such case, no income would arise in the hands of the Consortium. It is pertinent to mention that this contention was neither raised by the petitioner before the Authority nor was considered by the Authority.
19. The learned counsel for the respondent has supported the impugned ruling passed by the Authority. It was contended by the respondent that the Consortium formed by petitioner and Samsung constituted an Association of Persons and income or profits received/receivable under the Contract were liable to be assessed in the hands of the Consortium as a separate person. It was submitted that the Contract was entered by OPAL with the Consortium as one entity, which was described as the “contractor” under the contract. It is submitted that the common purpose was to bid as a single entity and the common action was to execute the contract as a single entity. The subsequent division of the work between the members of the consortium was not relevant. It is submitted that Linde and Samsung agreed to jointly cooperate as a Consortium in the submission of the proposal and for jointly executing the same. The learned counsel for the respondent drew the attention of this court to various clauses of the Contract to indicate that insofar as OPAL was concerned, it regarded the Consortium as a single entity for due performance of the Contract. It was further submitted that the Contract was awarded to the Consortium for the entire work with the parties agreeing to be jointly and severally liable to OPAL for due performance of the Contract. It is further submitted that the Contract provided for a lump sum consideration payable for execution of the entire Contract and as such the same was not divisible. The certificate of completion and acceptance of work was to be given to the Consortium and not to individual members. The Consortium was liable to OPAL for consequential and liquidated damages and Linde and Samsung being members of the Consortium were both jointly and severally liable for the same. It is submitted that Linde and Samsung submitted their bid as one and the Contract is indivisible. It was further submitted that the object and purpose of the Contract was to set up the Dual Feed Cracker and Associated Units of the Petrochemical Complex. The activities required for the execution of the Contract could not be considered as independent transactions. Linde and Samsung had joined for the said common purpose of bidding and execution of the contract and thus any income arising therefrom was assessable in their hands as an unregistered association i.e. an Association of Persons. The counsel for the respondent relied upon the ruling passed by the Authority in the case of Geoconsult ZT GmbH v. Director of Income Tax (International Taxation): [2008] 304 ITR 283 (AAR) in support of his contentions. The counsel for the respondent has also submitted that the facts in the case of Hyundai Rotem Co. (supra) were not similar to the facts in the present case and, therefore, the said decision was not applicable to the present case.
20. The counsel for the respondent disputed the contention of the petitioner that income/profits received outside India for the offshore transaction were not taxable in India. It was contended by the respondent that the project in the present case is a turnkey project and the contract is an integrated and indivisible contract. Any splitting up of the contract would be artificial and could not be resorted to. It was submitted that the offshore and the onshore transactions could be segregated for the purposes of taxation and the contract had to be read as a whole as an indivisible contract. The dominant object of the contract is the execution of a turnkey project and the question whether the title to the goods supplied passes offshore or within India is secondary to the execution of the contract. The offshore and the onshore transactions are interlinked and the non-execution of one transaction/part would result in the breach or failure of the whole contract. The contract itself provides for milestone dates and the breach of any of the terms thereof would result in the breach of the entire contract and not just a particular obligation. The consideration received for the offshore transaction formed part of the consideration for the entire contract and could not be segregated for the purposes of taxation. Therefore, the consideration for the whole work was receivable by the Consortium and could not be segregated on the basis of the transactions/activities involved in execution of the Contract. As such, the whole income or profit received/receivable under the contract was taxable in India.
21. It is submitted that the judgments in the case of Ishikawajima-Harima Heavy Industries (supra) and Hyundai Heavy Industries Co. Ltd. (supra) relied upon by the petitioner in support of its contention were not applicable in the present case. It is submitted by the respondent that the facts in each case were dissimilar. It was submitted that in the present case, the role and responsibilities were not specified and the different milestones specified for the execution of the contract made no difference in so far as the taxability of the income arising from the Contract was concerned. The Contract specified that the contract price/consideration was payable by OPAL to the Consortium for the whole of the Contract and the entire work was to be executed by the Consortium.
22. In response to the submission made on behalf of the petitioner that the petitioner did not have any permanent establishment in India at the material time when the offshore transactions were performed, it was contended that Linde had a direct subsidiary in India and the same was involved in pre-bidding negotiations. Thus, Linde had a permanent establishment in India even prior to the Contract being signed. It was further submitted that the Contract entailed execution of the project on a turnkey basis and the ground work for the same commenced shortly after execution of the Contract. The same also implied that Linde had its permanent establishment in India. It was contended that the Consortium was liable to be taxed as a tax resident entity in India and to that extent the DTAA between India and Federal Republic of Germany did not apply.
23. With regard to the contention of the petitioner on the application of Instruction No.1829 dated 21.09.1989 in the present case, it is submitted by the respondent that the said Instruction is not applicable in the facts of the present case as the same was limited to power projects and in any event the same was withdrawn on 21.07.2009.
24. It is submitted that the Sections 86 and 67A of the Act relied upon by the petitioners only dealt with the method of computation of the income of partnership/Association of Persons and not whether the association was to be taxed as a separate entity.
DISCUSSION AND CONCLUSION
25. We have heard the counsel for the parties. The principal questions that are required to be considered are:-
(i) Whether the consortium formed by Linde and Samsung constitutes an Association of Persons under section 2(31) of the Act and are they liable to be taxed under the provisions of the Act as an Association of Persons; and
(ii) Whether the income/profit received/receivable by the Linde towards the offshore supply of equipment, materials and spares and for drawings and designs in relation thereto, is taxable in India under the provisions of the Act or under the Double Taxation Avoidance Agreement read with the Protocol between India and Germany?
Whether the Consortium constitutes an AOP
26. Section 4 of the Act is the charging section. Section 4(1) provides that income tax shall be charged in respect of the total income of a person in the previous year. A person is defined under Section 2(31) of the Act as under:-
“(31) ‘person’ includes—
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) a local authority, and
(vii) every artificial juridical person, not falling within any of the preceding sub-clauses;
Explanation.— For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains;”
27. Section 3(42) of the General Clauses Act, 1897 defines a ‘person’ to include “any company or association or body of individuals, whether incorporated or not”.
28. The expression ‘Association of Persons’ has not been defined in the Act. However, it is apparent that the expression has not been used in any technical sense and the expression has to be construed as per the plain ordinary meaning of the words used. Given the wide definition of the word ‘person’, the meaning of the expression ‘Association of Persons’ would also be of wide import. The Supreme Court in the case of Indira Balkrishna (supra), taking cue from the dictionary meaning of the word ‘associate’, interpreted the said expression and held as under:-
“9. In B.N. Elias [(1935) 3 ITR 408] Derbyshire, C.J., rightly pointed out that the word “associate” means, according to the Oxford dictionary, “to join in common purpose, or to join in an action”. Therefore, an association of persons must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. This was the view expressed by Beaumont, C.J. in CIT v. Laxmidas Devidas [(1937) 5 ITR 548] taxguru.in at page 589 and also in Re. Dwaraknath Harishchandra Pitale [(1937) 5 ITR 716] ….”
(emphasis supplied)
29. The Supreme Court in the case of Murugesan and Brothers v. Commissioner of Income Tax, Madras: (1973) 4 SCC 211 made the following observations:-
For forming an ‘Association of Persons’, the members of the association must join together for the purpose of producing an income. An ‘Association of Persons’ can be formed only when two or more individuals voluntarily combine together for a certain purpose. Hence volition on the part of the member of the association is an essential ingredient. It is true that even a minor can join an ‘Association of Persons’ if his lawful guardian gives his consent. In the case of receiving dividends from shares, where there is no question of any management, it is difficult to draw an inference that two more shareholders functioned as an ‘Association of Persons’ from the mere fact that they jointly own one or more shares, and jointly receive the dividends declared. Those circumstances do not by themselves go to show that they acted as an ‘Association of Persons’.
(emphasis supplied)
3. It is also relevant to refer to a judgment of the Supreme Court in the case N.V. Shanmugham and Co. v. CIT: (1970) 2 SCC 139 for understanding the meaning of the term Association of Persons. In that case, the Court appointed three receivers in a suit for dissolution of a partnership firm. The receivers were directed to conduct the business of the firm and the profits earned from the business, being treated as an assets of the firm, were directed to be distributed among the partners as per their shares and in accordance with the deed. The issue before the Supreme Court was whether the profits earned in the business should be considered as profits earned by an ‘Association of Persons’ or whether it should be considered as having been earned by individuals (individual partners as beneficiaries). The Supreme Court held that the receivers constituted an Association of Persons on the ground that the business was carried on by the receivers jointly and the control and the management of the business was a unified one in the hands of the receivers. The relevant portion of the judgment is as under:-
“7. We are unable to accede to the contentions of the learned counsel for the assessee. It is not denied that the business was carried on by the receivers on behalf of erstwhile partners of the firm and that considerable profits were earned from the business. The control and the management of the business was in the hands of the receivers. That control and management was a unified one. The receivers had joined in a common purpose and they acted jointly. When they did so they acted on behalf of the persons who were the owners of the business. The receivers did not and could not have represented the individual interest of the various owners of the business. If they had done so there would have been chaos in the business. The profits to which those owners lay claim and which they were not averse to pocket, were earned on behalf of an “association of persons”. The profits were earned on behalf of the persons who had a common interest created by the order of the Court and were on that account of an “association of persons”. The existence of specific or defined interest in the profits did not make the earning any the less by an “association of persons”. Liability to tax depends upon the earning of profits by a unit and not upon the ultimate division of the profits…..”
(emphasis supplied)
31. It is also relevant to refer to the decision of the Calcutta High Court in the case of B. N. Elias and others, In Re.: (1935) 3 ITR 408 (Cal). The Supreme Court in the case of Indira Balkrishna (supra) cited the following passages from the concurring opinion of Costello J, with approval:-
“…although these four persons did not constitute a body which was the same as partnership, it was in many respects similar to a partnership and was approximate to a partnership and it may well be that the intention of the Legislature was to hit combinations of individuals who were engaged together in some joint enterprise but did not in law constitute partnership….
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when we find, as we do find in this case, that there is a combination of persons formed for the promotion of a joint enterprise banded together if I may so put it, co-adventurers to use an expression, then I think no difficulty whatever arises in the way saying that in this particular case these four persons did constitute an “association of individuals” within the meaning of both section 3 and section 55 of the Indian Income Tax Act, 1922.”
32. The condition that the association must be formed for the object of producing income, profits or gains is no longer applicable in view of the Explanation inserted in Section 2(31) of the Act, with effect from 01.04.2002. However, the essential condition that an association of persons must be one where two or more persons join in common action for a common purpose continues to be applicable and is not diluted in any manner.
33. Therefore, it emerges from the above discussion that the Association of Persons is one in which two or more persons join together for a common purpose or common action and there is a joint management or joint action by the said two or more persons. In order to treat persons as an association, it is necessary that the members must have a common intention and must act jointly for fulfilling the object of their joint enterprise.
34. However, it is also necessary to bear in mind that the purpose of treating two or more persons as an association of persons is to impose tax on the income that may be attributed to their joint enterprise. It is, thus, obvious that it would be necessary to consider the extent and the nature of the common purpose and the common action, in order to determine whether the said persons form an association for the purposes of imposing tax or not. As explained by the Calcutta High Court in B. N. Elias (supra), the intention of the Legislature was to treat combinations of persons, who were engaged together in some joint enterprise but did not in law constitute partnerships, as a separate taxable entity. It is, thus, essential that an Association of Persons has the trappings of a partnership for conducting the joint enterprise which makes it amenable to be treated as a separate taxable entity. A person carrying on business may in the usual course cooperate with others for a common purpose. In many instances, the test of common purpose and common action, if literally applied, may also hold true. However, treating every instance of such cooperation between two or more persons as resulting in an Association of Persons would militate against the purpose of considering an association as a separate tax entity. Whether an arrangement or collaborative exercise between two or more persons results in constituting an Association of Persons as a separate taxable entity would depend on the facts of each case including the nature and the extent of collaboration between them. The Supreme Court in Indira Balkrishna (supra) had also clarified that:-
“there is no formula of universal application as to what facts, how many of them and of what nature are necessary to come to a conclusion that there is an association of persons within the meaning of Section 3”.
35. It is obvious that unless the facts lead to a conclusion that there is sufficient joint participation for a common enterprise, it would not be appropriate to treat two or more persons as an Association of Persons for the purposes of assessing them as a separate taxable entity. A mere cooperation of one person with another in serving one’s business objective would not be sufficient to constitute an Association of Persons merely because the business interests are common. A common enterprise, which is managed through some degree of joint participation, is an essential condition for constituting an Association of Persons.
36. It follows from the above discussions that before an association can be considered as a separate taxable entity (i.e an Association of Persons), the same must exhibit the following essential features:
(i) must be constituted by two or more persons.
(ii) the constituent members must have come together for a common purpose.
(iii) the association must move by common action and there must be some scheme of common management.
(iv) the cooperation and association amongst the constituent members must not be perfunctory and/or merely in form. The association amongst members must be real and substantial which is sufficient to treat the association as a separate homogenous taxable entity.
37. The facts in the present case need to be considered in view of the above discussion and in the light of the judgments of the Supreme Court referred above. In the present case, the MOU dated 03.03.2008 and the Internal Consortium Agreement dated 14.03.2008 entered into by Linde and Samsung record their agreement, on the basis of which they had agreed to bid and execute the project. The intention of the parties has to be ascertained from the terms of the said MOU and the Internal Consortium Agreement. The relevant extracts of the said MOU are quoted below:-
“WHEREAS LE (“LEADER OF CONSORTIUM”) will perform Basic Engineering, supply of Selected Key Equipment and the Related Detail Engineering, Detail Engineering and Procurement of Cracking Furnaces, parts of Technical Supervision Services, Commissioning, Testing, Conducting Performance Tests and Post-Commissioning Services of the PROJECT.
WHEREAS, SECL will perform Detailed Engineering of DFCU Recovery Section and AU, Supply of Equipment, Construction, Erection and Pre-Commissioning of DFCU and AU and Parts of Technical Supervision Services of the PROJECT.
WHEREAS, PARTIES intend to jointly cooperate as consortium (hereinafter referred to as “CONSORTIUM”) in order to prepare and submit a joint proposal as a consortium for the PROJECT, (hereinafter referred to as “BID”) and if the BID is accepted by ONGC/OPaL to perform the contract (hereinafter referred to as “CONTRACT”) for the execution of the PROJECT.
NOW THEREFORE the PARTIES agree as follows:
1. AGREEMENT TO COOPERATE
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As far as the CONSORTIUM MEMBERS are concerned, this AGREEMENT is signed only for the purpose of bidding and, if awarded, as a basis for a consortium agreement (“CONSORTIUM AGREEMENT”) in order to execute the CONTRACT.
2. CONSORTIUM
2.1 The PARTIES agree to cooperate on the basis of the CONSORTIUM AGREEMENT with joint and several responsibility/liability towards ONGC/OPaL for execution of the entire works and discharging all obligations under the CONTRACT.
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The overall responsibility of the project management of the entire project shall be that of the leader of the consortium and shall also perform by himself and not through sub-contract, Project Management + FEED Engineering for the DFCU.
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2.4 The PARTIES confirm herewith that direct payments to each PARTY shall be made by ONGC/OPaL according to the details of the price break-up and payment schedule as laid down in the BID.
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3.1 Each PARTY, in the event that the CONSORTIUM is awarded the CONTRACT, shall be responsible for performance of its responsibilities and services as stipulated in this AGREEMENT and to be stipulated in the CONSORTIUM AGREEMENT in detail.
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3.4 Each PARTY shall be responsible for timely performance of its share of work under CONTRACT including timely supply of required information, data, and material required for the performance of the scope of the work of other PARTIES. Each PARTY is also responsible for quality of its scope of work.
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4.4 Notwithstanding any other provisions of the AGREEMENT, in no event shall either PARTY be liable to the other PARTIES, whether arising under contract, tort (including negligence), strict liability or otherwise, for loss of revenue, profit or use of capital, downtime of facilities, damage for failure to meet other contractual commitments or deadlines, loss of business reputation or opportunities, loss of production, loss of product, or for any special, incidental or consequential loss or damage of any nature arising at any time or from any causes whatsoever.
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4.8 The PARTIES mutually agree and confirm that the CONSORTIUM shall constitute an unincorporated arrangement established for the limited purpose of representations and dealing with ONGC/OPaL with independent and separate scope of work as set forth herein. The PARTIES shall be liable jointly & severally vis-a-vis ONGC/OPaL for the obligations of the PROJECT in accordance with the terms & conditions of the Tender document. Such Joint and Several Liability shall not extend to any third party other than ONGC/OPaL nor for any purpose other than the Project and each one will be liable in respect of its separate and independent scope of work set forth herein.
Nothing in the AGREEMENT shall be deemed to constitute, create, give effect to, or otherwise recognize a corporation, association, partnership joint venture or formal or informal business entity of any kind (incorporated or not incorporated). Nothing shall be construed as providing for common management and the sharing of profits or losses arising out of the Project. Both parties shall file their respective tax returns and be assessed separately.
Each of the Parties expressly agrees that it is not their intention through the joint venture to carry on business in common with the other PARTIES with a view to profit. Each party shall bear its own losses and retain all profits arising from the performance of its respective scope of work.
The CONSORTIUM Linde – Samsung is a non-incorporated one-time co-operation of two individual, independent and separate legal entities with a defined split of scope of work under this CONTRACT. Individual payments will be released by ONGC/OPaL to the members of the CONSORTIUM as per their separate invoices.”
38. The intention of the members of the Consortium is discernable from the various clauses of the MOU which are quoted above. Clause 4.8 of the MOU expressly provided that “the CONSORTIUM shall constitute an unincorporated arrangement established for the limited purpose of representations and dealing with ONGC/OPaL with independent and separate scope of work as set forth” in the MOU. Clause 3.1 of the MOU clearly specifies that each consortium member would be responsible for performance of its responsibilities and services as stipulated in the MOU. Clause 3.4 of the MOU further specified that each consortium member would be responsible for its share of work and would also provide the information, data and material required for performance of work by the other member.
39. Insofar as the execution of the contract is concerned, the responsibilities of each member were separate and independent. Neither of the members had any role to play with respect to the scope of work which was allocated to the other member. The equipment/material to be supplied and the works to be executed by each member under the MOU as well as under the Contract entered into with OPAL was well defined and the members were to act separately and in accordance with the respective work allocated to them. The opening recitals as recorded in the MOU indicate that the Linde was required to perform Basic Engineering, supply Selected Key Equipment and the related Detail Engineering, Detail Engineering and Procurement of Cracking Furnaces, parts of Technical Supervision Services, Commissioning, Testing, Conducting Performance Tests and Post-Commissioning Services of the Project. Samsung was required to perform Detailed Engineering of DFCU Recovery Section and AU, supply of Equipment, Construction, Erection and Pre-Commissioning of DFCU and AU and parts of Technical Supervision Services of the Project.
40. The allocation of the work was done in such a manner that each member was required to perform work which was within its field of expertise and could not be performed by the other party. The work to be performed by both the members was separate, definite and divisible. Therefore, as far as execution of the project was concerned, each party had to work independent of the other. The only area of cooperation and management envisaged under the MOU was in respect of sharing of information and material, to enable the other member to perform its work. In terms of the MOU, each member was obliged to provide the necessary information to the other which was necessary for the other member to perform its work. This level of cooperation is necessary for execution of any project where multiple agencies are involved. Even in cases where the agencies involved in execution of a project are not related, it would be necessary that they cooperate with each other in providing information so that each agency can work in a coordinated manner. The said MOU formed an integral part of the Contract entered into between Linde, Samsung and OPAL and was appended as Annexure J to the said Contract. And, to that extent OPAL also recognized the relationship between Linde and Samsung.
41. Subsequent to the MOU, Linde and Samsung entered into an Internal Consortium Agreement. This agreement also clearly specified that the scope of works of Linde and Samsung were separate and independent. Each of the members was responsible for its own scope of work. The annexures to this agreement included a Gantt Chart which indicated the schedule for execution of the project. This schedule clearly specified the separate tasks/work to be executed by the Linde and Samsung. The agreement also made a specific provision in case the scope of work of the respective members was altered and either of the members was required to execute additional work. It was agreed that in such case, the price for additional work would have to be paid to the party executing additional work in addition to the consideration as agreed under the contract. Clause 6.1 of the said agreement expressly provided that prices and payment for the respective works to be performed by the members would be stipulated separately in the bid and the Contract to be entered into with OPAL. Clause 6.3 contemplated that separate invoices would be issued by Linde and Samsung to OPAL (described as the ‘company’ under the Contract). Clauses 6.1 and 6.3 of the said agreement are relevant and are quoted below:-
“6.1 The prices and payment conditions for Linde’s and SECL’s respective Scope of Work as per Articles 4.1 and 4.2 shall be as stipulated in the Bid and, finally, as stipulated in the Contract with the COMPANY.
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6.3 Detailed terms and conditions regarding payments to be effected by the COMPANY to the Parties under the Contract shall be as follows: Separate invoices will be issued by SECL and Linde to COMPANY for each milestone payment. The Parties agree and acknowledge that under the Contract there shall be direct payments by the COMPANY to each Party for its respective price portion and/or related progress in the total Contract price. The Contract shall include individual Contract prices and payment schedules for Linde and SECL for which each party shall be solely responsible. ”
42. The Internal Consortium Agreement was also explicit with regard to risk to be borne by the members. Linde and Samsung agreed to bear the risk for the work falling within their scope of work including on account of non-payment or default by OPAL. Neither of the members would be liable to each other on account of any loss or damages incurred by the other member on account of non-payment by OPAL. This was expressly provided in Clause 6.4 of the said agreement which reads as under:-
“6.4 Each Party to this Agreement shall bear the risk of nonpayment or payment default by the COMPANY WHETHER from equity or from loans or from other sources of the COMPANY’S funding for the Project regarding its respective price portion and related progress in the total Contract Prices under the Contract.”
43. Each of the members was also responsible for any deficiency in performance of the work falling within their scope of works. Although, the parties had agreed to be joint and severally liable to OPAL, the members had internally agreed that each of them would be responsible and liable for performance and completion of their scope of work. Clauses 9.1 and 9.2 of the said agreement are relevant and are quoted below:-
“9.1 Notwithstanding Linde’s and SECL’s liability towards the COMPANY as per Contract, it is agreed that internally the Parties shall each be responsible and liable for the performance and completion of their Scope of Work for the Project according to the requirements and stipulations of the Contracts and this Agreement.
9.2 Linde’s Liabilities
9.2.1 Licensing and Engineering
(1) In case of deficiencies in Linde’s engineering work defined in Article 4.1.1(1) and (2) above, Linde will perform the necessary corrective engineering work at its own expense.
9.2.2 Equipment
If for reasons attributable to Linde the equipment supplied by Linde as per Article 4.1.1(10) above is found defective by COMPANY prior to the expiration of the warranty period as per Contract, Linde will, at its cost, repair or replace such defective equipment including related CIF transportation, as well as any import duties and any taxes or expenses according to the stipulations of the Contract, and will compensate the respective additional construction costs.
9.2.3 Liquidated Damages for Delay
(1) In case deficiencies in Linde’s execution of its Scope of Work as defined in Article 4.1.1 and in Annex 2 to this Agreement result in a delay in the penalized milestone(s) according to the Contract with COMPANY, Linde shall be responsible for the payment of the liquidated damages for the length of delay caused by Linde due to COMPANY and claimed by COMPANY under the Contract.
(2) Linde’s liability for liquidated damages under this Article 9.2.3 shall be limited to 5 percent (%) of Linde’s price of its Scope of Work.
9.2.4 Liquidated Damages for Non-fulfilment of Performance Guarantees
In case of non-fulfillment of the process performance guarantees – as per the Contract-if claimed by the COMPANY, Linde will be responsible for payment of liquidated damages.”
44. Insofar as cooperation between Linde and Samsung towards project management is concerned, it was expressly agreed between the said parties that each shall be responsible for the management and control of work falling within their own scope. However, for the purposes of representing the Consortium to OPAL, it was agreed that ‘Project Directors’ would be nominated by Linde and Samsung who would have the authority to direct the project execution in accordance with the provisions of the Contract entered into between the parties with OPAL and in conformity with their internal agreements. It was expressly agreed that the Project Directors would remain responsible to their respective sponsors. Clause 7 of the Internal Consortium Agreement is relevant and is quoted below:-
“7. Project Management
7.1 Each Party shall be responsible for the management and controlling of its Scope of Work.
Linde and SECL will nominate one responsible Project Manager each and will establish their Project teams.
The Project Directors are persons to be nominated by the Parties to whom the Project Managers report and are responsible and who are the official representatives of the Consortium towards COMPANY. The Project Directors shall be given full authority by Linde’s and SECL’s management to direct the Project execution in accordance with the provisions of the Contract and this Agreement and to act in the best interest of the Consortium. The Project Directors shall remain responsible to Linde and SECL respectively and shall regularly report to Linde and SECL with respect to any matters concerning the Consortium.
For the avoidance of doubt, Project Directors responsibility towards Linde and/or towards SECL shall not constitute a personal financial liability of the Project Directors.
The Project Managers shall discuss all important matters related to the Project and shall make best efforts to reach agreement on all issues. In order to achieve a successful implementation of the Project in accordance with the provisions of the Contract, un-resolvable disagreements between the Project Managers shall be referred to the Project Directors.
In addition to representing the Consortium towards COMPANY, the Project Directors shall receive un-resolvable disagreements between the Project Managers and make best efforts to facilitate a consensus with regard to such disagreements.
Should no consensus be reached, despite best efforts of the Project Directors and the Project Managers, the Project Directors shall refer such unresolved disagreements to the Steering Committee for further action.”
45. Subsequent to executing the Internal Consortium Agreement, Linde and Samsung submitted a bid as a Consortium which was accepted and a Notice of Award dated 23.12.2008 was issued. Thereafter, a Contract dated 10.02.2009 was executed between the OPAL on one part and the Consortium on the other. It is necessary to refer to the relevant clauses of the said Contract and the same are reproduced here under:-
“AND WHEREAS the Contractor represents that it has expertise and technical know-how in respect of the said Work and had submitted his offer as per Company’s Bidding Documents in response to the above said Tender enquiry of the Company vide the Contractor’s offer No. P310-7009 dated 20.03.2008 and 28.07.2008 for Adjustment Price Bid.
AND WHEREAS pursuant to the above and the discussions conducted with the Contractor, the Company has awarded to the Contractor the Contract for the said Work by its NOA No. MR/OW/MM/DFC/02/2007 dated 23.12.2008 which is the effective date of commencement of this Contract and on the terms and conditions as agreed to by the two parties as of the said date of NOA and as outlined in this Agreement, (hereinafter also referred to as “the Contract”).
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1.1.3 (a) “Company” means ONGC Petro additions Limited (“COMPANY”) incorporated under Companies Act, 1956 having its registered office at Jeevan Bharati, Tower-11, 124 Cannought Circus, New Delhi – 110 001, and one of its offices at 4th Floor, VCCI Commercial Complex, 73-GIDC Makarpura, Vadodara – 390010, India including its legal successors and permitted assignees.
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1.1.10 “Contractor” means consortium of Linde Engineering and Samsung Engineering Co. Ltd. the successful party with whom contractual relations are subsequently formed for the Dual Feed Ethylene Cracker & Associated units for the Dahej Petrochemical Complex at Dahej.
The consortium is comprising of LINDE AG, Linde Engineering Division, a company organized and existing under the laws of Germany, whose principal office is at Dr.-Carl-von-Linde-Strasse 6-14,82049 Pullach, Germany
and
SAMSUNG ENGINEERING CO. LTD., a company organized and existing under the laws of the Republic of Korea, whose principal office is at Samsung SEI Tower, 467-14 Dogok 2-Dong,Gangnam-Gu, Seoul, Korea, a Company established and registered under the laws of Korea, the party to this Contract so defined in the agreement including their legal successors or permitted assignees.
1.1.11 “Contract Price” means the total amount specified in the substantive article in the contract (i.e. Section 3.1) subject to any additions thereto, or deductions there from which may be made through applications of the relevant provisions of the Contract.
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1.2.5 Entire Agreement
The Contract constitutes the entire agreement between the Company and the Contractor with respect to the subject matter of the Contract and supersedes all communication, negotiations and agreement (whether written or oral) of the parties with respect thereto made prior to the date of this Agreement.
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2.4 Scope of Works for each discipline
The Scope of work for the tender shall include in general but not be limited to the following, as defined by Annexure – B and Annexure – E of the Contract. In case of any contradiction, scope of Work described in Annexure – B of the Contract shall prevail over the scope of Work outlined in the GCC (Annexure – A) of the bidding document.
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3.0 PAYMENT
3.1 Contract Price
The Company shall pay to the Contractor in consideration of satisfactory completion of all the works covered by the Scope of Work under the Contract the Contract Price of
EURO 354,512,000 (in words: EURO Three Hundred Fifty Four Million and Five Hundred Twelve Thousand only)
plus
USD 365,109,000 (in words: United States Dollars: Three Hundred Sixty Five Million and One Hundred Nine Thousand only)
plus
INR 27,088,667,000 (in words: Indian Rupees: Twenty Seven Billion Eighty Eight Million and Six Hundred Sixty Seven Thousand only) as per the details and breakup of prices given in Schedule of prices.
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Payment shall be made in the currency or currencies given in the schedule of prices for the work executed as per the procedure set forth in Clause 3.2. Adjustment to Contract Price, if any, shall be made in accordance with provisions of Contract.
3.2 Payment Procedure
3.2.1 Pending completion of the whole Works, provisional progressive payments for the part of the Works executed by the Contractor shall be made by Company on the basis of said work completed and certified by the Company’s Representative as per the milestone formula provided in the Contract at Annexure ‘F’. Such certification of the Work completed shall be made by the Company’s Representative within 15 days of receipt of Contractor’s Application for Certification. No payments shall become due and payable (with the exception of the 10% down payment of the Contract Price which is due for payment within 30 days after signing of Contract) to the Contractor until Contract is signed by the two parties and Contractor furnishes to the Company Performance Bank Guarantee (as per Clause 3.3) and Insurance policy / Certificate of Insurance (as per requirement of Clause 7.3) for the policies specific for the Project and requirement of Reserve Bank of India, if any (for foreign Contractors).
3.2.2 The Contractor shall submit its invoice(s) once in each month along with four copies for the work completed and certified by Company’s Representative as per agreed milestone formula, with all required supporting documents and details of the said work to the Company’s Representative for certification of the said invoice, at Company’s Office for approval of the amount payable and any payment thereafter. Contractor shall submit separately in accordance with the Clause 3.2.5 hereof a monthly invoice for Extra Work approved by the Company. Payment shall be done to each member of the Consortium individually as per each member’s detailed price break down as indicated under Annexure -C to the Agreement to be authorized by the leader of the Consortium.
3.2.3 The Company shall arrange approval of the invoice (undisputed amount) and payments within 15 (fifteen) working days of receipt thereof by the Company. In the event of the Company objecting to any portion of Work covered by the said invoice, such objection shall be communicated to the Contractor within 10 working days from the date of receipt of invoice by the Company at its office. The Contractor shall have the right to claim the payment of such amounts objected by the Company in subsequent invoice after removal of cause of such objection.
3.2.4 The payment against clear (undisputed) bills/invoices submitted by the Contractors will be made by Company within 15 (Fifteen) working days from the date of submission of bill/invoices complete in all respects. However, in case of payment to non-resident contractors, the time required for obtaining NOC and / or RBI permit for release of subject payment shall be in addition to 15 working days (normally applicable for first payment only). In case of delay in payment of undisputed portion of the invoices beyond 30 Working days, interest @ LIBOR plus 1% shall be applicable on the undisputed portion of the invoices for the period beyond 30 Working days.
Payment for amount objected to by Company as referred to in Clause 3.2.3 taxguru.in shall be made in accordance with provision under this Clause when the objection due to which the amount withheld by the Company has been removed/settled and the Contractor submits fresh invoice for the same.
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3.2.6 All the payments outside India by the Company shall be remitted through Electronic Fund transfer (EFT) / Telegraphic transfer (T/T) and credited to the Contractor’s bank account to be specified by the Contractor in writing to the Company before submission of the first invoice. The payment shall be made in currencies stated in the Contract. The Company shall be deemed to have arranged payment to the Contractor on the date of transmission of instruction by the Company’s bankers to the Contractor’s Bank in the country where the money is required to be paid to the Contractor.
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3.2.6.1 The Contractor agrees to receive all payments inside India under this contract through Electronic Clearing system (ECS) to their Bank account. The details of Bank Account along with MICR No. of the Bank and Branch shall be provided by the Contractor at the time of submission of the first invoice.
The Company shall be deemed to have arranged payment to the Contractor on the date of Company’s instructions to Company’s bankers to effect payment under ECS to the Contractor’s account.
Payment shall be made by account payee cheque wherever such facility is not available.
Upon Company’s instruction to Company’s bankers, the Company shall also inform in writing to the Contractor the details of remittance i.e amount and date of payment.
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3.3 Performance Guarantee
3.3.1 The Contractor shall furnish to the Company within 2 weeks from the date of signing of this Contract two separate unconditional and irrevocable letters of guarantee (“Performance Bank Guarantee(s)”) for due performance of the Contract, each of which shall be as per proforma given at Appendix – I of the Contract, for an aggregate sum equivalent to 10% (ten percent) of the Contract price. The Performance Bank Guarantees shall be drawn in favour of the Company and shall be valid upto a period of Scheduled Completion Date for the Works of the Contract and warranty period plus sixty (60) days. The aggregated value of Performance Bank Guarantees for warranty period shall be reduced from 10% to 5% of Contract value.
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3.3.4 The Contractors will submit individually irrevocable and unqualified bank guarantees issued by Hypovereinsbank / Germany and K-EXIM Bank (Korean Export and Import Bank) / Korea (or any other bank as listed in the ITB) in the aggregate sum equivalent to 10% (ten percent) of the Contract Price.
5.2.1 Assignment
The Contractor shall not, except with the explicit prior approval in writing of the Company, transfer, sub-contract or assign his obligations or any benefit or interests in the Contract or any part thereof in any manner whatsoever. Any such assignment shall not absolve the Contractor from his obligations and responsibilities under this Contract.
5.10.2 If the Company is satisfied that the entire Works have been completed as specified in 5.10.1 above and have successfully passed all tests provided in the Contract then the Company shall issue within fourteen working days a Certificate of Completion and Acceptance which certificate shall be effective from the completion date which the Contractor had notified to the Company subject to the Company’s Representative certifying that the entire Works were completed by the Contractor without any defect on the said notified completion date except for the Punch List items.
5.14 Performance of Contract/Discharge Certificate
No certificate other than the Discharge Certificate referred to in Clause 5.14.1 shall be deemed to constitute approval of any Work or other matter in respect of which it is issued or shall be taken as an admission of the due performance of the Contract or any part of it or of the accuracy of any claim or demand made by the Contractor or of extra Work/Charge Order having been ordered by the Company nor shall any other certificate conclude or prejudice any of the rights of the Company under the contract.
5.14.1 The Contract shall not be considered as completed until a discharge certificate has been signed by the Company’s Representative on behalf of the Company and delivered to the Contractor stating that the Works have been completed and made good to the satisfaction of the Company’s Representative in accordance with the Contract.
5.14.2 The Discharge Certificate shall be issued by the Company’s Representative within (28) twenty eight days after the expiration of Guarantee period (of if different guarantee periods become applicable to different parts of the Works then, without prejudice to the Company’s Representatives’ rights upon the expiration of the latest of those periods) or as soon thereafter as any Works ordered during that period have been completed to the satisfaction of the Company’s Representation in accordance with the Contract. In case Company fails to issue such Discharge certificate within the period prescribed herein above without any reason having been notified to the Contractor in writing, the Discharge Certificate shall be deemed to have been issued on the expiry of the above said period.
6.1.1 The Contractor agrees to ensure that all materials and components used in execution of the works under this Contract, shall be new and unused (not reconditioned) and of recent manufacture which shall in no case be of a date of manufacture older than one year from the date of delivery.
6.2.2 The Company or its other contractors or their personnel shall in no event be responsible for or liable to the Contractor or his Sub-contractor for consequential damages suffered by the contractor or his sub-contractor including without limitation to business interruption or loss of profits etc.
6.3.2 Liquidated Damages
If the Contractor, due to reasons not solely attributable to Company, fails to achieve the date of Ready for Start-Up (RFSU) on or before 44 (Forty four) months from the date of issue of NOA or the extended date for Ready for Start- Up (RFSU) or if Contractor repudiates the Contract before completion of the Works related to Ready for Start Up (RFSU), the Company may without prejudice to any other right or remedy available to the Company as under the Contract.
i) recover from the Contractor as ascertained and agreed liquidated damages and not by way of penalty, sum equivalent to 1/2 % (Half percent) of the total Contract Price for each week of delay or part thereof beyond the date of Ready for Start-Up (RFSU) subject to a maximum of 5% (Five percent) of the total Contract Price even though the Company may accept delay for the date of Ready for Start-Up (RFSU) after the expiry of the Ready for Start-Up (RFSU) date
ii) terminate the Contract or a portion or part of the Work thereof after 90 days of delay (or longer if technically required) related to the date of Ready for Start-Up (RFSU) subject to provision of Clause 8.3. The Company shall give 14 working days notice to the Contractor of its intention to terminate the Contract and shall so terminate the Contract unless during the 14 days notice period, the Contractor initiates remedial action acceptable to the Company.
7.1.1 Ownership of materials shall be transferred to the Company upon FOB shipment for imported supply and FOT for local supply subject to Contractor takes full responsibility for any damage / loss during the course of transportation until acceptance of works.
7.1.2 Deleted
7.1.3 Ownership of the construction Equipment used by the Contractor and its subcontractors in connection with the Works shall remain with the Contractor and its subcontractors.”
46. The Contract also included various annexures forming an integral part of the contract and inter alia specifying certain details as agreed between the parties. Annexure C of the said Contract was a Contract Price Schedule which clearly indicated the overall split of prices for the work to be performed by Linde and Samsung respectively. The summary of payments agreed to be made to Linde and Samsung as tabulated from the details specified in Annexure C of the Contract, is as under:
Overall split of prices for the work to be performed by LINDE (excluding service tax)
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