Offshore supply of equipment on Cost Insurance and Freight (

Court: Delhi Income-tax Appellate Tribunal

Citation: Tech nip Italy Spa Vs. ACIT (2010-T11-133-ITAT-DEL-INTL)

Brief: It was held that the offshore supply of equipment, even on a CIF basis, under a composite contract is not taxable in India.

Facts

The assessee, a company incorporated in Italy, was awarded a turnkey contract by Indian Oil Corporation Ltd. (“IOCL”) for the designing, construction and commissioning of a Hydro- treater and Hydrogen facility at IOCL’s Guwahati Refinery. For execution of the above services, the assessee established a Project Office (“PO”) in India. Since the PO constituted a Permanent Establishment (“PE”) of the assessee in India, income was computed on a net income basis. While computing its income, revenue arising from onshore services, onshore supply and offshore services were offered by the assessee to tax in India. However, the assessee did not consider the revenue earned from offshore supply of equipment to be chargeable to tax in India.

As regards offshore supply of equipment, the Assessing Officer (“AO”) observed that supplies made by the head office of the assessee form an integral part of a turnkey contract, which was integrated into the business operations carried by the assessee’s PE in India. The AO further held that since the delivery of equipment was on a CIF basis, the title and custody of equipment was not passed on dispatch, but on successful installation. As such, the AO held that income from such offshore supply was taxable in India by placing reliance on the decision of the Authority for Advance Rulings (“AAR”) in the case of Ishikawajima-Harima Heavy Industries Ltd. v. DIT [2004] 271 ITR 193 (AAR).

On first appeal, the Commissioner of Income Tax (Appeals) (“CIT(A)”) observed that the entire work was carried out under a single contract. Further, since there was nothing mentioned in the agreement that the title of equipment would pass outside India, the CIT(A) upheld the order of the AO.

On further appeal, the Delhi Tribunal remanded the matter back to the CIT(A) to decide it afresh in light of the decision of the Supreme Court in Ishikawajima- Harima Heavy Industries Ltd. Vs. DIT [2007] 288 ITR 408 (SC)and the decision of the Madras High Court in M/s. Ansaldo Energia Spa v. ITAT [2009] 222 CTR 55 (Mad), since these decisions were not available before the CIT(A) at the time of passing the order.

In the second round of appeal, the CIT(A) observed that in the case of Ansaldo Energia Spa (above), the Madras High Court has held that if a contract is composite, inspite of the apparent demarcation into separate parts, the mere fact that for offshore supply the title passed outside India alone will not decide taxability.

The CIT(A) thus applied the decision in the case of Ansaldo Energia Spa (above) and held that revenue arising from offshore supply of equipment to IOCL was taxable in India since the agreement with IOCL was a composite turnkey contract and delivery of the equipment was on a CIF Job site basis, where title of the goods passed on delivery of equipment in India.

Aggrieved, the assessee filed an appeal before the Delhi Tribunal.

Issue

Whether income from offshore supply of equipment on a CIF basis under a composite contract is taxable in India?

Assessee’s contentions

The assessee contended that:

• · Merely because the contract is a composite contract does not lead to the conclusion that the offshore supply is taxable in India.
• · Consideration for the offshore supply has been separately determined in the contract and all parts of the transaction were undertaken outside India.
• · Bill of lading was prepared in the name of IOCL and was handed over to its nominee outside India. It cannot be held that the title of equipment has been transferred in India merely because the supplier of equipment takes responsibility for transportation or delivery. Reliance in this regard was placed on the decision of in the case of Mahabir Commercial Co. Ltd. v. CIT [1972] 86 ITR 417 (SC).
• · In addition to the Supreme Court’s decision in the case of Ishikawajima-Harima Heavy Industries Ltd., reliance was also placed on the decision of the Delhi Tribunal in the case of LG Cable Ltd. v. DDIT [2008] 119 TTJ 34 (Del) and of the AAR in the case of Joint Stock Company Foreign Economic Association Technopromexport, In re (2010-TII-10-ARA-INTL) (AAR) to contend that revenue arising from the offshore supply transaction is not taxable in India.
• · The Madras High Court’s decision in the case of Ansaldo Energia Spa (above) is not at all applicable to the present case.

Revenue’s contentions

The revenue contended that:

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

Tribunal Ruling

The Tribunal held that:

• · The fact that a contract is a turnkey contract, by itself, is not conclusive for the purpose of determining taxability in India. It is not necessary that the contract be considered as an integrated contract so as to make the assessee pay tax in India.
• · The doctrine of ‘territorial nexus’ has an important role to play in the taxability of income arising out of the operations of a company in more than one jurisdiction. Therefore, sufficient territorial nexus between rendition of services and territorial limits of India is necessary to make the income taxable in India.
• · The decision in the case of Ansaldo Energia Spa (above) was held as not applicable since, in that case the contract was a single bidder contract and was split up by the foreign entity only for tax purposes with the major part of the profits attributed towards the offshore supply transaction and thus imbalance of price was quite evident. However, such was not the situation in the present case.
• · Merely because the delivery was to be on a CIF Jobsite basis and the supplier took responsibility for transportation, on a standalone basis, is not sufficient ground to hold that the title passed in India at the job site. Reliance was placed on the decision in the case of Mahabir Commercial Co. Ltd. (above).
• · All parts of the transactions had taken place outside India. The rationale in the case of Ishikawajima-Harima Heavy Industries Ltd. was squarely applicable to the facts of the case and the offshore supply transaction was not taxable in India.

Conclusion:-The Tribunal has applied the decision in the case of Ishikawajima- Harima Heavy Industries Ltd. to hold that revenue from offshore supply of equipment forming part of a composite contract shall not be taxable in India. The Tribunal reiterated the principle of the doctrine of territorial nexus and held that delivery, even on a CIF basis, under a composite contract cannot make the income from offshore supply taxable in India.

NF