2012 (3) TMI 281 - AAR - Income Tax

Turnkey project taxability of amount receivable under project - DTAA between India and Germany - consortium formed by applicant (German company) and Samsung (Korean company) to undertake the project of carrying work of all activities and services required for the design, engineering, procurement, construction, installation, commissioning and handing over of the plant on a lump sum turnkey basis project awarded by OPAL assessee contended it to be divisible, off shore contract of sale and services, and consideration of obligations of the applicant independent of the obligations of Samsung - Held that - It is supply and erection contract, and risk is retained not merely until delivery but until acceptance of the works by OPAL, which is after trial and commissioning of the project. Moreover, contract does not specify that title to the machinery shall pass on to OPAL on high seas or in the country of origin. There was no mention of off-shore or on-shore supply of services in contract. Therefore, situs of the contract is in India. Contract was awarded to the Consortium and not to the two members individually. Also, price schedule and payment also deals with the entire gamut of works to be performed under the contract. Therefore, this is a case of the applicant and Samsung forming an AOP in respect of the work undertaken by the Consortium. Since contract is indivisible, hence if a part of the design and engineering work prepared solely for manufacture, procurement of equipment outside India, is done outside the country, even if it constitutes a significant part, the same cannot be viewed in isolation and apart from the contract as a whole and amount received/receivable against the aforesaid are liable to tax in India. Since the assessment is to be as an AOP and taxable in India, the question of existence or non-existence of a PE does not arise.

Issues Involved:

1. Taxability status of the applicant and SEC as an Association of Persons (AOP).
2. Taxability of amounts received for design and engineering under the contract.
3. Extent and rate of tax on amounts received for design and engineering.
4. Taxability of amounts received for supply of equipment, material, and spares outside India.
5. Extent of tax on profits from the supply of plant and equipment.
6. Taxability of consideration for onshore services.
7. Allowability of actual expenditure incurred by the head office for onshore activities.

Issue-wise Detailed Analysis:

1. Taxability Status as an Association of Persons (AOP):
The applicant and Samsung Engineering Company Ltd. (Samsung) formed a Consortium to bid for a project floated by ONGC Petro Additions Ltd. (OPAL). The contract was awarded to the Consortium, and the work was to be performed jointly. The Revenue argued that the Consortium constituted an AOP because the two companies came together with a common purpose to earn income, and the responsibility for the project was joint. The court concluded that the applicant and Samsung formed an AOP, as they joined together for a common purpose and were jointly liable for the project.

2. Taxability of Amounts for Design and Engineering:
The applicant contended that the contract was divisible, and the amounts received for design and engineering performed outside India should not be taxable in India. However, the court found that the contract was an indivisible whole, and the design and engineering work was inextricably linked to the erection and commissioning of the project in India. Thus, the amounts received for design and engineering were liable to be taxed in India.

3. Extent and Rate of Tax on Design and Engineering Amounts:
Given the conclusion that the contract was indivisible and the Consortium was an AOP, the court ruled that the amounts received for design and engineering were taxable in India. The specific rate of tax was not detailed, but it was implied that the amounts would be subject to the relevant provisions of the Income-tax Act.

4. Taxability of Amounts for Supply of Equipment, Material, and Spares:
The applicant argued that the amounts received for the supply of equipment, material, and spares outside India should not be taxable in India. However, the court held that since the contract was indivisible and the Consortium was to be taxed as an AOP, the amounts received for the supply of equipment, material, and spares were taxable in India.

5. Extent of Tax on Profits from Supply of Plant and Equipment:
Following the same reasoning as for the supply of equipment, material, and spares, the court concluded that the profits from the supply of plant and equipment were taxable in India, as the contract was indivisible and the Consortium was an AOP.

6. Taxability of Onshore Services:
The court ruled that the consideration for onshore services, including supervision of installation, testing, commissioning, and construction management, was taxable in India. The profits from these activities were to be taxed under the provisions of Section 44DA of the Income-tax Act, read with the DTAA.

7. Allowability of Actual Expenditure for Onshore Activities:
The court held that the actual expenditure incurred by the head office exclusively and specifically in relation to onshore activities of the PE (not being general administrative/executive expenses) was allowable in full and not subject to the limits in Section 44C of the Income-tax Act, 1961.

Conclusion:
The court concluded that the contract was an indivisible whole, and the Consortium formed by the applicant and Samsung was taxable as an AOP. All amounts received under the contract, whether for design and engineering, supply of equipment, or onshore services, were taxable in India. The ruling emphasized the need to look at the contract as a whole and not adopt a dissecting approach for taxation purposes.

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