Case Law Details
Facts
• L G Cable Ltd (“LGCL”), a Korean company, was awarded two contracts by Power Grid Corporation of India Limited (“PGCIL”).
• One contract was for “onshore” execution of the Fibre Optic Cabling System Package Project involving onshore services including erection / installation, testing and communication etc of the fibre of the cabling system. The other was for “offshore” supply of equipment.
• LGCL offered to tax in India the income attributable to activities carried out in India in connection to onshore contract on a net income basis under Article 5 and 7 of the Double Taxation Avoidance Agreement between India and Korea (“DTAA”).
• In respect of the profit from the offshore supply contract, LGCL claimed that the same was not liable to tax in India, since the transfer of title in the goods with the attendant risks had entirely passed on to PGCIL outside India.
• The Assessing Officer (AO) & Commissioner of Income Tax (Appeals) rejected the LGCL’s claim on the ground that there was inter-dependence between the two agreements and they could be construed as a composite contract for supply of equipment and its installation in India. As such the supply of the offshore equipment was inextricably linked with the operations to be carried out in India.
• However, the Delhi Tribunal accepted LGCL’s contentions and held that the profits from the off-shore supply were not taxable in India.
• Aggrieved by the above order, Department preferred an appeal before the Hon’ble Delhi High Court.
Issues before the High Court
• Whether the contract for the onshore execution and the offshore supply was a composite contract and LGCL was liable to pay tax in India in respect of the offshore supply of equipment?
Observation and Ruling of the High Court
• The two contracts entered into on the same day and between the same parties, could not be considered for holding that there was a composite contract. On facts, the contract provided that the supply of equipment was completed outside India and the property got transferred to PGCIL outside India. The sale was complete and unequivocal as soon as the goods were loaded on the ship at the port of shipment & the shipping documents were handed over to the nominated bank where the Letter of Credit was opened.
• The profits from the offshore supply of equipment accrued when the goods were sold. The fact that a part of the consideration for the supply was payable to the assessee only after operational acceptance on erection and completion of the system cannot mean that the title in the goods did not pass to the buyer outside India. The obligation to handover the equipment functionally completed was in the nature of a trade warranty and could not affect the passing of the property as held by the Tribunal.
• Even under clause (a) of Expl (1) to s. 9 (i) of the Indian Income tax Act (the Act) only such part of the income as is reasonably attributable to the operations carried out in India is deemed to arise in India. In the present case, since there were no operations qua the agreement for supply of equipment which were carried out in India, no income can be deemed to have accrued or arisen in India whether directly or indirectly or through any business connection in India.
• Further the High Court observed that though LGCL had a “permanent establishment”(PE) with regard to the onshore activities, the same would be of no relevance as the said PE had no role to play in the execution of the offshore supply contract and was set up for the sole purpose of enabling the performance of the onshore services contract.
Conclusion
The principles regarding taxability of income from offshore supplies under a turnkey contract undertaken by a foreign company in India have been laid down by the Supreme Court in Ishikawajma-Harima Heavy Industries Ltd. The above decision of the Delhi High Court reiterates the position that profits from the off-shore supply of equipment would not be taxable in India under the provisions of the Act and the Treaty where the supply of equipment was completed outside India and the property in the equipment got transferred outside India.
Source : DIT V/s LG Cable (Delhi High Court)- Tax case ( Appeal Nos) ITA No. 703/2009 dated 24th December, 2010.
