2011 (7) TMI 98 - AAR - Income Tax

Tax liability - Agreement for Avoidance of Double Taxation between India and Korea - The applicant is a company incorporated and located in Korea - applicant entered into three separate contracts with DTL - 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 utilized in the fabrication and installation of a complete plant - Regarding the revenue s plea that as the applicant has a PE in India, the income arising should be taxed in India, it stated that the existence of PE would be for the purpose of carrying out the contract for onshore supplies and services etc. but such a PE would have no role to play in offshore supplies - Even if a PE is involved in carrying on some incidental activities such as clearance from the port and transportation, it cannot be said that the PE is in connection with the offshore supplies - Accordingly hold that the applicant is not liable to tax in respect of offshore supplies as per the Act - Decided in favour of assessee.

Summary

Issues:
1. Tax liability on amounts receivable by LS Cable Limited from Delhi Transco Limited under various contracts.
2. Interpretation of offshore supply contracts and tax implications under the Income-tax Act and India-Korea tax treaty.
3. Consideration of Permanent Establishment (PE) in India and its impact on tax liability.

Issue 1: Tax liability on amounts receivable by LS Cable Limited from Delhi Transco Limited under various contracts:

The applicant, LS Cable Limited, entered into multiple contracts with Delhi Transco Limited for various projects involving offshore supply, onshore supply, and onshore service contracts. The applicant contended that no income accrued or arose in India due to the nature of the contracts and the passage of title outside India. The revenue argued that the contracts were composite in nature, and the passing of title outside India did not negate the taxability of income earned in the transaction. The revenue highlighted the interconnectedness of the contracts and the requirement for satisfactory equipment demonstration before full payment. Additionally, the revenue raised concerns about the existence of a Permanent Establishment (PE) in India for the applicant.

Issue 2: Interpretation of offshore supply contracts and tax implications under the Income-tax Act and India-Korea tax treaty:

The Advance Ruling Authority considered the specifics of the offshore supply contracts entered into by LS Cable Limited and Delhi Transco Limited. The authority analyzed clauses related to ownership transfer, payment mechanisms, and insurance to determine the jurisdiction of the sale. It was established that the transaction of sale and title transfer occurred outside Indian territory, supported by the payment mechanism in foreign currency and insurance clauses. The authority differentiated this case from previous rulings involving composite contracts and emphasized the separation of consideration for the sale portion as permissible under law. The authority also addressed the revenue's argument regarding the existence of a PE in India and its relevance to offshore supplies, ultimately ruling in favor of the applicant regarding tax liability.

Issue 3: Consideration of Permanent Establishment (PE) in India and its impact on tax liability:

The revenue contended that the applicant's PE in India should lead to taxation of income arising from the contracts. However, the Advance Ruling Authority clarified that while a PE might be involved in onshore activities, it did not impact the taxability of income from offshore supplies. The authority emphasized that the existence of a PE for onshore services did not extend to offshore supplies, especially when considering activities like port clearance and transportation. Therefore, the ruling concluded that LS Cable Limited was not liable to tax in India concerning offshore supplies as per the provisions of the Income-tax Act.

In conclusion, the Advance Ruling Authority ruled in favor of LS Cable Limited, determining that the amounts receivable under the contracts with Delhi Transco Limited for offshore supplies were not liable to tax in India. The ruling provided a detailed analysis of the contractual arrangements, ownership transfer, and the impact of a Permanent Establishment on tax liability, ultimately clarifying the tax implications under the Income-tax Act and the India-Korea tax treaty.