Case Law Details
ADVANCE RULING DETAILS
DECIDED BY: AUTHORITY FOR ADVANCE RULINGS (INCOME- TAX), NEW DELHI, ADVANCE RULING REQUESTED BY: Joint Stock Company Foreign Economic Association “Technopromexport”, AAR No. 827 of 2009, DECIDED ON: February 25, 2010
RELEVANT PARAGRAPH
The applicant is a company incorporated in Russia and also is tax resident of that country. It is one of the leading companies in the field of power project construction and export of electric power and is further engaged in the business of construction and commissioning of power project. In response to the tender floated by the National Thermal Power Corporation (NTPC), the applicant successfully bid the tender and three separate following contracts are entered into with the NTPC: 1.(1) Offshore supply contract – Contract No. CS-9558-102- 2-FC-COA- 4520 dated 25.3.2005. (`Offshore supply contract No. 4520) 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.
(2) Onshore supply contract – Contract No. CS-9558-102- 2-SC-COA- 4521 dated 25.3.2005.
(3) Onshore services contract – Contract No. CS-9558-102- 2- TC-COA-4522 dated 25.3.2005 In this case we are concerned only with the offshore supply contract No. 4520 and therefore, it is unnecessary to delve into other contracts. The value of the offshore supply contract is US$ 391,121,452 (Rs. 17,084,185,023/ -) to be paid in foreign currency in execution of off-shore supply contract. According to the applicant, the transaction of off-shore plant and equipment etc. was completed outside India and that the property in goods passed to NTPC outside India and no portion of income from the off-shore supply accrues or arises to the applicant in India or received from the NTPC within India and therefore it is not liable to pay any tax under the Income-tax Act.
2. Against this background the applicant seeks the ruling of this Authority on the following question in order to know its tax liability:
(1) On the facts and circumstances of the case, whether the amounts received/receivable by Joint Stock Company Foreign Economic Association “Technopromexport” (`Applicant’ or `JSC Technopromexport’ ) from National Thermal Power Corporation Limited (`NTPC’) under Contract No. CS-9558-102- 2-FC-COA- 4520 dated 25 March 2005 (`Offshore supply contract no. 4520′), for Offshore supply of all plant and equipment including mandatory spares are liable to tax in India under the provisions of the Income-tax Act, 1961 (Act) and the 2.Agreement for Avoidance of Double Taxation between India and Russia (`India-Russia tax treaty’)?
3. The offshore supply contract was made on 25.3.2005 between the applicant and the NTPC for providing work of 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. In the General Conditions of Contract entered into between the applicant and the NTPC, the mode of payment is available in
Article 5 which is extracted below:
“5. Mode of Payment
5.1 The Employer will establish an irrevocable Letter of Credit (L/C) in favour of the Contractor through the Employer’s Bank in Employer’s country for payments due, as per Terms of Payment, on CIF despatch of plant and equipment including mandatory spares covered in Schedule-1 (including due payments towards ocean freight and marine insurance). The value of L/c will be as per dispatch schedule for each quarter of year and the L/C shall remain valid for one quarter of a year. It will be the responsibility of the Contractor to utilise the L/C to the fullest extent. In case L/C has been established by the Employer and not utilised fully/ partially by the Contractor, for reasons of delay attributable to him, all reinstatement charges for the L/C for further period necessitated due to non-utilisation of L/C will be to the account of the Contractor.
5.2 All other payments including payments for advance amount, Type Test Charges, if any, price adjustment amounts, all other supply payments and taxes and duties (wherever admissible) shall be made directly to the Contractor by the Employer and no L/C shall be established by the Employer for such payments. So far as terms of payments are concerned 15% of the total FOB price component is initial advance payment on signing the contract and submission of bank guarantees and also the submission of detailed PERT network. 60% of FOB price component of the contract price for each identified equipment is payable upon dispatch of equipment from manufacturer’ s works on pro-rata basis on production of invoices and satisfactory evidence of shipment. 15% of FOB price component is payable on receipt of the equipment at site on pro-rata basis after physical verification. The remaining 10% of the contract price is payable at various stages up to the successful completion of guarantee tests for units I, II & III.
Some of the other salient features of the contract are as follows:
21.3 Transportation
21.3.1 The Contractor shall at its own risk and expense transport all the Plant and Equipment and the Contractor’s Equipment to the Site by the mode of transport that the Contractor judges most suitable under all the
Circumstances 21.3.3 Upon dispatch of each shipment of the Plant and Equipment and the Contractor’s Equipment, the Contractor shall notify the Employer by courier, post or by tele fax followed by post confirmation of the description of the Plant and Equipment and of the Contractor’s Equipment, the point and means of dispatch, and the estimated time and point of arrival in the country where the Site is located, if applicable, and at the Site. The Contractor shall furnish the Employer with relevant shipping documents to be agreed upon between the parties. The customs clearance is provided under clause 21.4 of the contract, which is extracted below:
21.4 Customs clearance
The Contractor shall, at its own expense, handle all imported Plant and Equipment including spares and Contractor’s Equipment at the point(s) of import and shall handle any formalities for customs clearance, including liability for port charges etc., if any, subject to the Employer’s obligations under GCC sub-clause 14.2, provided that if applicable laws or regulations require any application or act to be made by or in the name of the Employer, the Employer shall take all necessary steps to comply with such laws or regulations.
Transfer of ownership is specified in clauses 31.1 and 31.5 of the contract, which are reproduced below:
31.1 Ownership of Plant and Equipment (including spare parts) to be imported into the country where the Site is located shall be transferred to the Employer upon loading on the mode of transport to be used to convey the Plant and Equipment (including spare parts) from the country of origin to that country and upon endorsement of the dispatch documents in favour of the employer.
31.5 Notwithstanding the transfer of ownership of the Plant and Equipment, the responsibility for care and custody thereof together with the risk of loss or damage thereto shall remain with the Contractor pursuant to GCC Clause 32 (Care of Facilities) hereof until Completion of Facilities or the part thereof in which such Plant and Equipment are incorporated. Insurance
As per Appendix-3 of the contract, the insurance is to be taken by the contractor. The employer shall be named as co-insured under all insurance policies taken out by the contractor pursuant to GCC 34.1 except for Third Party Liability, Workman’s Compensation and Employer’s Liability Insurances and the Contractor’s sub-contractors shall be named as co-insured under all insurances policies taken out by the Contractor pursuant to GCC 34.1, except for the Cargo insurance during transport, Workman’s Compensation and Employer’s Liability Insurances. All insurers rights of subrogation against such co insureds for losses or claims arising out of the performance of the contract shall be waived under such policies.
Notwithstanding the insurance requirements mentioned above, it would be the contractor’s responsibility to take adequate insurance cover as may be pertinent to protect his interest and interest of the employer. If at any point of time during execution of the Contract, the insurance policies are found to be inadequate, the Contractor shall take fresh insurance policies meeting aforesaid requirements. The employer reserves the right to make suitable recovery from the contractor, if any.
4. The Revenue opposed the application on grounds that : (i) the contract is a composite contract;
(ii) the facts are distinguishing from the case of Ishikawajma- Harima Heavy Industries Ltd. vs DIT 1 (hereinafter referred to as `Ishikawajma’ )
1 288 ITR 473 (SC)
(iii) the assessee has business connection in India and also permanent
establishment in India in respect of works relating to offshore supply.
5. The applicant banks its support mainly on the judgement of the Supreme Court in Ishikawajma and also the ruling of this Authority in M/s Hyosung Corporation 2 . The Honourable Supreme Court in Ishikawajma’ s case has held as follows:
(1) That only such part of the income, as is attributable to the operations carried out in India can be taxed in India. (2) Since all parts of the transaction in question, i.e. the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India. (3) The principle of apportionment, wherein the territorial jurisdiction of a particular state determines its capacity to tax an event, has to be followed.
(4) The fact that the contract was signed in India is of no material consequence, since all activities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country. This Authority had an occasion to deal with such type of case in M/s Hyosung Corporation’ s case and the relevant passage is extracted below:
10.1 The above events would indicate that the title to goods stood transferred to Power Grid outside the territory of India. The title passed on to Power Grid well before the goods reached the Indian Port or the territorial waters of India. The bill of lading contains the name of Power Grid as the consignee. The documents were presented to the applicant’s banker for negotiation soon after the goods were shipped FOB and bill of lading was issued. Two days later, the amount equivalent to 70% of the value was transferred to the applicant’s account on the same day. This modus operandi is in accordance with para 2.4.4 of the LOA. The bill of entry which was prepared about 15 days after shipment also shows Power Grid as the importer. Even in the insurance policy taken by the applicant Power Grid has been named as the beneficiary. The customs duty was paid by or on behalf of Power Grid before the goods were taken delivery. These facts unerringly lead to the conclusion that in accordance with the contractual stipulations, the transfer of title to the equipment and materials took place while the goods were outside the territory of India. The events match with the nomenclature – “off-shore supply contract”
and the express stipulation that the transfer of title to equipment and materials shall pass on to Power Grid at FOB Port of shipment with the negotiation of shipping documents. It is worthy of note that the applicant has not reserved the right of disposal during transit or otherwise. The fact that the applicant is not relieved of the responsibility for loss or damage to the goods until the final take over and acceptance of the goods and that the goods are left in the custody of the applicant till the stage of erection and installation are not inconsistent with the Power Grid having already become the owner of equipment well before the goods reached the Indian Port. These are special safeguards which Power Grid wanted to have keeping in view the operational exigencies and overall obligations of the applicant under the contract. It is trite that risk need not pass simultaneously with the title to goods. There could be special stipulation between the parties in this behalf. As rightly pointed out by the learned counsel for the applicant, the applicant, by taking care of goods at the site in India till installation, assumed the capacity of a bailee. As regards the stipulation that the supplier shall continue to be responsible for the
quality and performance of the goods until the final take over on testing of the equipment, it cannot be construed to be a condition which postpones the transfer of title to the goods till that time. It is more in the nature of warranty provision in the contract. Further, after referring to the decision of Supreme Court in
Ishikawajma (supra), it observed:
“10.7 It may be noticed that the clauses in the contract considered by the Supreme Court also contained an obligation on the part of the contractor to retain custody and control of equipment and to take due care thereof until provisional acceptance of the work. Moreover, installation of equipment was also to be carried out by the contractor. In spite of these features, the Supreme Court came to the conclusion that the offshore supply of goods which took place outside India does not give rise to any taxable income in India under the provisions of the Act. The applicant’s case even stands on a better footing inasmuch there is a separate and exclusive contract with the applicant for the supply of goods offshore.”
6. The facts of the present case and the salient features of contract are almost the same and the said ruling which followed the decision of Supreme Court in Ishikawajma` s case fully supports the applicant’s case.
In this case, the bill of lading filed by the applicant shows that the port of loading is Ilyichevsk, in Ukraine and the port of discharge at Haldia in India. The description of cargo is also indicated therein. In another bill of lading the port of loading is Novorossiysk in Russia and port of discharge at Haldia in India. The copies of bill of entry are also filed by the applicant. These go to show that the consignee/ importer is the applicant.
The commercial invoice has also been filed. It shows that the invoice was
raised a few days after shipment and all the material documents including sight draft, bill of lading, freight paid memo, insurance certificate were enclosed.
The terms of contract and the above documents go to show that the transaction of offshore plant and equipment was completed in the high seas and the property in goods passed to the NTPC outside India. As per clause 31 of General Conditions of Contract the ownership of plant and equipment supplied under the ownership contract No. 4520 shall pass on to NTPC upon lading on the ship and upon endorsement of the dispatch documents in favour of the NTPC. The consideration of sale of offshore was remitted to the applicant directly outside India by means of establishing L/C. Hence no portion of consideration for offshore supply was received or could be deemed to have been received in India and therefore not liable to tax. Further no income accrues or arises in India to the applicant attracting income-tax. The applicant has taken aid of a Circular No. 23 dated 23.7.1969 issued by the CBDT, the extract of which is as follows to buttress its stand:
8.”Non-resident exporter selling goods from abroad to Indian importer No liability will arise on accrual basis to the non-resident on the profits made by him where the transactions of sale between the two parties are on a principal to principal basis. In all cases, the real relationship between the parties has to be looked into on the basis of an agreement existing between them, but where:
(1) The purchases made by the resident are outright on his own account,
(2) The transactions between the resident and non-resident are made at arms length and at prices which would normally be chargeable to other customers.
(3) The Non-resident exercises no control over the business of the resident and sales are made by the latter on his own account, or
(4) The payment to the non-resident is made on delivery of documents and is not dependent in any way on the sales to be effected by the resident, It can be inferred that the transactions are on basis of principal to principal.
7. Now we examine below as to how the Revenue is countering the stand of the applicant. (i) The Revenue wanted to distinguish this case from that of the Ishikawajma’ s case and cited the judgement of the Madras High Court in the case of M/s Ansaldo Energia SPA 3 . In this case the Madras High Court examined the decision of the ITAT and held:
23. The ASPL and the assessee did not form a consortium of equal players as in the case of IHHI. The facts show that even though the ssessee requested NLC to separate the single contract into distinct contracts, NLC did not agree initially, but did so only after making certain stipulations. ASPL came into the picture, at the instance of the assessee. ASPL is there only so that the single contract could be made into four and there would be an entity which will execute Contracts III and IV with NLC. The NLC contract was with the Assessee alone. The fact that separate price had been given to each of the contract would not make a difference. In IHHI 3 310 ITR 237 also there is a clause which refers to the total price, yet, the Supreme Court held that the price for each component was compartmentalised and so for the supplies made on high seas there was no tax liability. But, in IHHI, there was no factual finding that there was price imbalance in the four contracts and it was skewed in favour of the off-shore supply contract, nor was there any finding that the entity which executed the contracts for the on shore supply and the on shore services were mere facades. In this case these are all factual findings for which there is basis on the materials on record. The main distinction is that in Ishikawajma- Harima Heavy Industries’s case the appellants are members of the consortium wherein in the case of Ansaldo Energia there is only party, although both relate to the turnkey project. The distinction enumerated by the Madras High Court in Ansaldo’s case is not applicable to the present facts of the case and therefore the contention of the Revenue in this regard cannot be accepted.
8. The Revenue has argued that there was a PE and also business connection in respect of offshore supply of goods and therefore it is taxable and the profits from such supply attributable to the PE is taxable in India. Permanent establishment is not defined in the Income Tax Act but it is available under the DTAA. The Revenue has not brought out any material relating to the PE of the applicant as regards the offshore supplies and therefore the contention cannot be acceptable.
The Honourable Supreme Court in the case of Ishikawajma have held- “There exists a distinction between a business connection and a permanent establishment. As the permanent establishment cannot be said to be involved in the transaction, the aforementioned provision will have no application. The permanent establishment cannot be equated to a business connection, since the former is for the purpose of assessment of income of a non-resident under a Double Taxation Avoidance Agreement, and the latter is for the application of Section 9 of the Income-tax Act”.
10. It is, further, held that-
“The term `permanent establishment’ has not been defined in the Income-tax Act. Since the applicant carried on business in India through a permanent establishment, they clearly fall out of the applicability of Article 12(5) of the DTAA and into the ambit of Article 7. The protocol to the DTAA, in paragraph 6, discusses the involvement of the permanent establishment in transactions, in order to determine the extent of income that can be taxed. It is stated that the term ` directly or indirectly attributable’ indicates the income that shall be regarded on the basis of the extent appropriate to the part played by the PE in those transactions. The permanent establishment here has had no role to play in the transaction that is sought to be taxed, since the transaction took place abroad”.
9. The Revenue has taken a plea that it is a composite contract and the applicant has entered into 3 contracts which are intimately connected to each other and therefore constitute a composite contract in respect of which income accrues or arises in India. The Revenue has cited some decisions in support of its stand, which are noted below:
In State of Madras Vs Gannon Dunkerley and Company (Madras) Limited 4 the Supreme Court has held that in a building contract, which is a one, entire and indivisible, there is no sale of goods, and is not within the competence of the provincial legislature under Entry 48 to impose a tax on the supply of materials used in such a contract, treating it as a sale. This case is clearly distinguishable from the case in hand as this is an offshore supply contract which was executed entirely outside India and there are two different contracts and therefore this case does not come to the aid of the Revenue. In M/s Hindustan Shipyard Ltd. Vs. State of Andhra 4 7 STC 7123 Pradesh 5 , the Supreme Court has dealt with Andhra Pradesh General Sales Tax Act, 1957. The terms of agreement are different in that case and the issue was different and therefore, it has no semblance with the present case. In Sentinel Rolling Shutters & Engineering Co. (P) Ltd. vs. Commissioner of Sales Tax, Maharashtra 6 the Supreme Court has held that the contract was a contract for work and labour and not a contract of sale. The contract is one single and indivisible contract and the erection and installation of the rolling shutter is as much a fundamental part of the contract as the fabrication and supply. That case also has no application in view of different facts and the provisions applicable. On perusal of the contract documents, we find that 3 contracts are entered into by the applicant with the NTPC ahead of execution i.e.
(i) Offshore supply contract;
(ii) Onshore supply contract; and
(iii) onshore services contract. Each contract has a separate scope of work.
Therefore it cannot be an integrated one. In this case we are concerned only with the offshore supply contract though related to the turnkey project. This contract is executed by supplying the materials from outside India, therefore, the contention of the Revenue regarding the nature of the contract is not well founded.
10. The Revenue has filed subsequent to the hearing a paper book containing Xerox copies of FIR, letter rogatory, application for impleadment, affidavit and assessment order. A criminal case might have
5 199 STC 533(2000) 6 1978 SCC (4) 260 12.been registered and investigated into on the allegation of favouring the applicant in awarding the contract or and an intermediary playing a part in the negotiations. This does not attract the tax liability of the applicant as the tax liability of the applicant is governed by the Income-tax Act and DTAA in this case.
11. In view of our above analysis, perusal of documents and case laws, we find that no portion of consideration is received by the applicant in India. Further, no income accrues or arises in India to the applicant as all the transactions took place outside India. The materials were shipped outside India , the title and property passed outside India (on high seas) and the payment was received outside India and therefore the applicant is not liable to pay Income Tax in India.
12. In view of our discussion, it is ruled that the applicant is not liable to
pay tax under the provisions of the Income Tax Act read with India-Russia DTAA in respect of the amount received from the NTPC for execution of offshore supply contract and we therefore answer the question in the negative. Accordingly, the ruling is pronounced on the day of 25th February 2010
13.Per P.V. Reddi, J (Honourable Chairman),
1. The issue raised in this matter is concluded by two decisions rendered by Honourable Supreme Court and this Authority which have been referred to in extenso by the learned Member. Though much can be said in favour of the view that in a composite turnkey project contract including supply of equipment, sales, assembly, erection, testing and commissioning of the project, the supply part of the contract cannot be isolated or viewed separately and that the income has in reality occurred or arisen within India notwithstanding the stipulations as to the transfer of title abroad, we have no option but to implicitly follow the binding decision of the Supreme Court in Ishikawajma case * . That is why in Hyosung Corporation case, this Authority reached the conclusion that income of similar nature earned by the non-resident was not taxable in India. The Revenue has made yet another endeavour in this case to persuade us to take a view virtually contrary to the aforementioned decisions by projecting pointless distinctions. It is axiomatic that this Authority is not free to disregard the law laid down by the Supreme Court and to have a fresh look into the matter. In the instant case, as pointed out by the learned Member, the clauses in the offshore supply contract Agreement regarding transfer of ownership, the payment mechanism in the form of letter of credit which ensures the credit of the amount in foreign currency to the applicant’s foreign bank account on receipt of shipment advice and the * (2007) 288 ITR 410 insurance clause would go to establish that the transaction of sale and the concomitant transfer of title took place outside the Indian territory. The documents relating to a sample transaction filed by the applicant i.e. the certificate of origin, the bill of lading, the bill of entry as well as the commercial invoice reinforces the conclusion that the ownership and property in goods passed outside India. The contractor’s obligation to insure the goods to cover loss or damage during transit and the responsibility cast on the applicant to take proper care of goods till they reach the site and are inspected shall be viewed in the context of the fact that the co-insured is the applicant and moreover, the applicant has undertaken onshore services contract. Further, as pointed out in Hyosung Corporation’ s case, the fact that the transit risk is borne by the contractor till the goods reach the site in India is not necessarily inconsistent with the sale of goods taking place outside the territorial waters of India. As observed in that case, “it is trite that risk need not pass simultaneously with the title to goods. There could be special stipulation between the parties in this behalf”. Further, as held in Hyosung’s case, the clause that the supplier continues to be responsible for the quality and performance of the goods until the final take over at the site cannot be construed to be a condition which postpone the transfer of title to goods.
2. The Revenue’s reference to the case law on the subject of works contract versus sale arising under the Sales Tax Acts apparently to support its stand that in a composite contract, there can be no sale of goods is in the teeth of the decision of the Supreme Court in the case of Ishikawajma (supra). In spite of the fact that in Ishikawajma case, the contract was a composite one for offshore and onshore supplies as well as services in furtherance of the integrated execution of turnkey project, still, the Supreme Court, having regard to the clauses similar to those in the present contract held that the sale took place outside India. The Supreme Court primarily relied on the fact that the consideration for the sale portion of contract was separately specified and therefore it can be separated from the whole. This Authority cannot take a different view in the matter. However, I would like to analyse the decision of the Supreme Court in Ishikawajma in some detail so that the ratio of that decision in so far as it has relevance to the present case could be appreciated better.
3. Under the heading “material part” of the contract, clause 2.1, which sets out the scope of work, has been extracted. It requires the contractor to provide, furnish and perform on a turnkey basis all necessary design, engineering, procurement, supplies, installation, erection, construction, testing, commissioning, operation and turning over services, activities and work for the Equipment and Materials and the Facilities in accordance with the scope of work and the other terms. The paragraph which says that the parties acknowledge and agree that this contract is lump-sum firm fixed price time certain turnkey contract has also been referred to. Clause 7.1 which provides for shipment has been extracted. The contractor is required to notify the employer setting forth all the material information concerning the shipment including the date of embarkation and departure, the port of origin and the port of entry, the value and weight of the shipment, the number and value of bill of lading or airfreight bill and the estimated date of arrival in India. It further states that the contractor shall be responsible for packing, loading, transporting, receiving, unloading, storing and protecting all equipment and materials and/or contractor’s equipment and other things required for the works. Clause 13.1 relating to contract price is then extracted. The contract price is split into (a) `US Dollar portion’; and (b) `Indian rupee portion’. Then clause 22.1 dealing with passing of title to the goods is extracted. It says- “Title to Equipment and Materials and Contractor’s
Equipment Contractor agrees that title to all Equipment and Materials shall pass to Owner from the Supplier or Subcontractor pursuant to Section E of Exhibit H (General Project Requirements and Procedures). Contractor shall, however, retain care, custody and control such Equipment and Materials and exercise due ca e thereof until (a) Provisional Acceptance of the Work or (b) termination of this Contract, whichever shall first occur. Such transfer of title shall in no way affect Owner’s rights under any other provision of this Contract”.
Pausing here for a moment, it may be noticed that this clause is almost similar to clauses 31.1 and 31.5 of the contract with which we are concerned. The fact that the expression `loss or damage’ has not been specifically mentioned in clause 22.1 of the contract in Ishikawajma does not make a material difference. Then, their Lordships referred to Note-2 to clause 21.1 which declared that offshore supply is the price of Equipment and Material (including cost of engineering, if any involved in the manufacture thereof ) supplied from outside India on CFR basis, and the property therein shall pass on to the owner on high seas for permanent incorporation in the works, in accordance with the provisions of the contract. Then the break up of contract price in respect of offshore and onshore supplies and services has been given. The price relating to offshore supply specified in US Dollars has been mentioned.
4. Under the heading `analysis’, the two `basic issues’ that arose for consideration were indicated, the first one being the “taxation of price of goods supplied by way of offshore supply” and the second being the “taxation of consideration paid for rendition of offshore services”. Then, the following observations were made:
“Supply obligation is distinct and separate from service obligation. Price for each of the component of the contract is separate. Similarly offshore supply and offshore services have separately been dealt with. Prices in each of the segment are also different.
The very fact that in the contract, the supply segment and service segment have been specified in different parts of the contract is a pointer to show that the liability of the appellant thereunder would also be different. The contract indisputably was executed in India. By entering into a contract in India, although parts thereof will have to be carried out outside India would not make the entire income derived by the contractor to be taxable in India.”
Then the importance of territorial nexus doctrine was stated. While disapproving the view taken by AAR in that case, the Supreme Court observed thus-
“Income arising out of operation in more than one jurisdiction would have territorial nexus with each of the jurisdiction on actual basis. If that be so, it may not be correct to contend that the entire income ` accrues or arises’ in each of the jurisdiction. The Authority has proceeded on the basis that supplies in question had taken place offshore. It, however, has rendered, its opinion on the premise that offshore supplies or offshore services were intimately connected with the turnkey project.”
Then, the Works Contract cases arising under the Sales tax Acts which were referred to by the Additional Solicitor General in support of the contention that the contract being a composite one, the sale of Equipment and Material cannot be inferred were referred to and it was observed that those decisions under the Sales tax laws have to be considered on a different footing. Then, the case of CIT Vs Mitsui Engineering and Ship Building Co. Ltd. ** was referred to. It was held in that case that the contract for designing, manufacturing, shop testing and packing up to f.o.b. port of embarkation could not be split up since the entire contract was to be read together and has a complete transaction. It was then observed –
This case is clearly distinguishable from the facts of the present case, since the payment for the offshore and onshore supply of goods and services was in itself clearly demarcated and cannot be held to be a complete contract that has to be read as a whole and not in parts. The following passage is also important :
What is relevant is receipt or accrual of income, as would be evident from a plain reading of Section 5(2) of the Act.. The legal fiction created although in a given case may be held to be of wide import, but it is trite that the terms of a contract are required to be construed having regard to the international covenants and conventions. In a case of this nature, interpretation with reference to the nexus to tax territories will also assume significance. Territorial nexus for the purpose of determining the tax liability is an ** [259 ITR 248] internationally accepted principle. An endeavour should, thus, be made to construe the tax ability of a non-resident in respect of income derived by it. Having regard to the internationally accepted principle and DTAA, it may not be possible to give an extended meaning to the words ‘income deemed to accrue or arise in India’ as expressed in Section 9 of the Act.
5. Then while recording the conclusion in respect of offshore supply contract, the following findings were given:
(1) Since all parts of the transaction in question, i.e. the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India.
(2) The fact that the contract was signed in India is of no material consequence, since all activities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country.
(3) There exists a distinction between a business connection and a permanent establishment. As the permanent establishment cannot be said to be involved in the transaction, the aforementioned provision will have no application.
(9) Paragraph 6 of the Protocol to the DTAA is not applicable, because, for the profits to be ‘attributable directly or indirectly’, the permanent establishment must be involved in the activity giving rise to the profits.
6. These propositions equally apply to the instant case. The legal position enunciated in Ishikawajma case applies in all fours to the present case. The stipulations in the contract and the modus operandi of the transactions are almost the same. In fact, the said decision applies a fortiori to the present case as the contract for offshore supply equipment and material is a separate and distinct one. Just as in the case of Ishikawajma, the PE of the applicant evidently set up for the purposes of carrying out the onshore supply and services does not play any role in the offshore supplies except carrying out certain incidental services such as clearance from customs and transportation to the site. The attempt of the Revenue to get over the ratio of the decision in Ishikawajma is unsupportable from any point of view. The Revenue’s representative has placed reliance on the decision of Madras High Court in the case of Ansaldo Energia SPA Vs. ITAT * . In that case, a contract for offshore supply awarded to the assessee was held to be a composite contract together with onshore supply contract etc. awarded to another. The factual findings of the Tribunal weighed with the High Court. First, the turnkey project as a whole was awarded to the applicant who was not a single bidder. Thereafter, the contract was split up and separate contracts were awarded to the assessee’s associated company, namely, ASPL. The Tribunal found, after examining the material on record, that ASPL was a facade created for the purpose of avoiding tax. Further, the High Court relied on the finding of the appellate authorities that there was price imbalance in the four contracts and it was skewed in favour of the offshore supply contract so that the tax liability could be minimised and therefore the fact that a separate price has been fixed in each contract would not make a difference in these circumstances. Referring to Ishikawajma case it was observed :
“……But, in IHHI, there was no factual finding that there was price imbalance in the four contracts and it was skewed in favour of the * 310 ITR pg.237 off-shore supply contract, nor was there any finding that the entity which executed the contracts for the on shore supply and the on shore services were mere facades. In this case these are all factual findings for which there is basis on the materials on record.”
It was further observed:
“if a contract is a composite contract in spite of the apparent demarcation into separate parts, the mere fact that for offshore supply the title passed outside India alone will not decide taxability. In IHHI, both the title and consideration passed outside the taxable territory and very importantly, it was found that it was not a composite contract, nor was there any involvement of the permanent establishment in the transaction (underlined for emphasis). It was further factually found that the contract was a divisible one segregating the supply segment and service segment, and that by agreement the parties had decided when
title passed.”
Thus, the decision in the case of Ishikawajma was distinguished by the learned judges of Madras High Court. It is of course debatable whether the points of distinctions made out are correct. But, the fact situation in the present case is quite different. Firstly, at the initial stage itself, the bids were invited by NTPC for three separate works viz. offshore supply, onshore supply and onshore services. Three separate contracts were executed. There is no basis to think nor is there any allegation that the contracts were split up at the instance of the applicant or that there was price imbalance. In any case, we find no distinguishing feature that makes the Ishikawajma case inapplicable to the facts of the present case, as discussed earlier and this Authority is bound by that decision.
I may now refer to a few other points put forward on behalf of the Revenue. It is contended that the main equipment to be installed at site is boiler and the piecemeal equipment and parts required for assembling the boiler have no independent existence and therefore the supplies equipment and material are integrally connected with the manufacture and erection of boiler which has taken place in India. In the circumstances, it is argued on behalf of the Revenue that the Clauses in the Contract relating to transfer of title in the equipment outside India do not really make any sense and they are only artificial in nature. We find it difficult to appreciate this argument. First of all, it must be noted that even in Ishikawajma, there was no importation of a finished product as a unit. The equipment and material were supplied piecemeal and they went into the assembly and fabrication of the main plant. Nothing in law prevents the parties to enter into a contract which provides for sale of material for a specified consideration, although they were meant to be utilised in the fabrication and installation of a complete plant or unit. As pointed out by the learned senior counsel for the applicant, relying on the observations in the State of Madras Vs. Richardson* , that even in a transaction which is in the nature of works contract, a contract of sale of materials that are ultimately utilised in the works can be inferred. Here, the offshore and onshore sale contracts have identified the components for sale with separate stipulations as to passing of ownership, price and mode of payment. Moreover, it is seen from the various documents filed that the (1968) 21 STC 245 clause relating to transfer of title to goods before importation into India has been acted upon and implemented by the parties. Thus, viewed from any angle, we find no force in this contention.
The Revenue’s representative wanted to distinguish the decision in Ishikawajma on the ground that the PE in that case had nothing to do with offshore supply. We do not see how the factual position is different here. Evidently, the PE would be for the purpose of carrying out the contract for onshore supplies and services including fabrication, installation and commissioning of plant. That such a PE would have had a role to play in offshore supplies is nothing but a surmise. As observed earlier, even if the PE was involved in carrying on some incidental activities such as clearance from the port and transportation, it cannot be said that the PE in connection with the offshore supplies could be inferred. With this supplement, I concur with the conclusion of the learned Member that the question has to be answered in the negative. This Ruling is given and pronounced on this the 25th day of February, 2010.
