Court : Delhi bench of the Income-tax Appellate Tribunal
Citation : Tech nip Italy Spa Vs. ACIT (2010-TII-133-ITAT-DEL-INTL)
Brief : Recently, the Delhi bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Technip Italy Spa v. ACIT (2010-TII-133-ITAT-DEL-INTL) after applying the decision of the Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. v. DIT  288 ITR 408 (SC) held that the income from offshore supply of equipment on a Cost Insurance Freight (CIF) basis under a composite contract is not taxable in India.
Facts of the case
The taxpayer, 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. As per the terms of the Agreement, the assessee was required to supply equipment to IOCL and undertake construction/installation services and related design and engineering services. The consideration for same was denominated partly in Indian currency and partly in foreign currency.
For execution of the above services, the taxpayer established a Project Office (PO) in India. Since the PO constituted a Permanent Establishment (PE) of the taxpayer 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 taxpayer to tax in India. However, the taxpayer did not consider the revenue earned from offshore supply of equipment for the purpose of taxability in India.
However, the Assessing Officer (AO) took the view that the income from off-shore supply of equipment by the assessee to IOCL was also taxable in India since the supplies made by the taxpayer’s head office forms an integral part of a turnkey contract, which was integrated into the business operations carried by the taxpayer’s PE in India. Even though the delivery of equipment was on a CIF basis, the title and custody of equipment was passed only on successful installation and not on dispatch. The AO, while taxing the income from off-shore supply of equipment, relied on the decision of the Authority for Advance Rulings (AAR) in the case of Ishikawajima-Harima Heavy Industries Ltd. v. DIT  271 ITR 193 (AAR).
The Commissioner of Income-tax (Appeals) [CIT(A)], applying the decision in the case of Ansaldo Energia Spa v. ITAT  222 CTR 55 (Mad), held that revenue arising from offshore supply of equipment to IOCL was taxable in India. As the agreement with IOCL was a composite turnkey contract and even though the delivery of the equipment was on a CIF basis outside India, title of the goods was passed on the delivery of equipment in India and upheld the order of 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 Co. Ltd and the decision of the Madras High Court in Ansaldo Energia Spa v. ITAT  222 CTR 55 (Mad), since these decisions were not available before the CIT(A) at the time of passing the order.
Issue before the Tribunal:- Whether income from offshore supply of equipment on a CIF basis under a composite contract is taxable in India?
Tax department’s contentions
The concept of ‘territorial nexus’ was a issue for debate which was settled by Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. However, the Finance Act 2010, to overrule the Supreme Court decision, made retrospective amendment to tax the services in the nature of ‘interest’, ‘royalty’ and ‘fees for technical services’ whether the services are rendered in or outside India. Accordingly, the ratio of the Supreme Court decision was overruled to the extent of services in the nature of ‘interest’, ‘royalty’ and ‘fees for technical services’.
In the present ruling, the Tribunal has rightly 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. Accordingly, the Supreme Court decision still holds good for the offshore services which are not in the nature of interest, royalty or fees for technical services.
Further, the Tribunal also made an observation that merely because the delivery was to be on a CIF Job site 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.