2019 (8) TMI 1643 - AAR - Income Tax

Advance ruling - Income accrues or arises in India in respect - offshore supply contract undertaken in as much as the property in the goods and the title passes outside India and the payment was also received in foreign currency outside India - India-Japan DTAA - taxability of the amounts received/receivable by Toshiba from MUNPL for Offshore supply of equipments and materials etc. under offshore contract - Applicant has submitted that the work under first contract in connection with offshore supply of equipment was executed wholly from outside India and the Applicant had not established any project office or any other office in India in connection with the work under the first contract - Whether the transfer of title in goods was outside India? - Whether the payment was received outside India? HELD THAT - On the evidences as available, we cannot rule that the Applicant had a PE falling within the specific description of Article 5 of DTAA. This is a tentative finding based on facts as presented by the Applicant. Further, even if it is assumed that there was a PE of the Applicant, the business income attributable to such PE only, will be taxable in India - no material to conclude that the work relating to offshore supply of contract was executed from PE of the Applicant in India, if any - if the Department comes to the conclusion that there is a PE based on stay of employees of the Applicant for a period exceeding six months after the issue of Letter of Intent dated 27-1-2011, the income in respect of off-shore supply contract, to the extent it is attributable to the operation of the PE, can be subjected to tax in the hands of the Applicant as per Article 7.1 of DTAA. Fee for Technical Services - In the instant case the Applicant by providing the design dossier, design software, drawing and documentation, quality system manuals etc. is found to have rendered technical or consultancy service. Further, by providing the drawings, designs and engineering aspects as envisaged in the contract in conjunction with the Minutes of Meeting the Applicant has rendered technical/consultancy service. Even if the services were rendered from outside India, the services were utilized in India and are, therefore, liable to tax in India as FTS u/s 9(1)(vii) of the Act read with Article 12.4 of India-Japan DTAA. As the technology transfer by providing the design dossier, design software, drawing and documentation, quality system manuals, engineering aspects etc. was part of the Invitation of Bid for STG Package for MEJA TPP, it is imperative that the cost element for this technology transfer was also embedded in the overall contract bid. However, the cost for this technology transfer has not been specifically mentioned in any of the three contracts. As already mentioned earlier there was no element of drawings, design and engineering cost in the third contract for onshore services. As the work for Design Engineering are mentioned only in offshore and onshore contracts for supply of materials and equipments, it is imperative that the cost for design dossier/design software, drawing and documentation engineering work etc; is embedded in these contracts only. Once the drawings, design and engineering services have been provided but have not been exclusively charged, the natural corollary which follows is that the charges for providing these services were 'included' in the sale price of equipments. In such a case, the sale price so charged is required to be split towards the price of goods simplicitor and compensation for fee for technical services that the Applicant has rendered. Tribunal has also erred in holding that the extracted portion of the agreement establishes and shows that the consideration received was for a composite contract. Further, even in a case of a composite contract for supply of goods/equipment/machinery and for providing technical services, bifurcation, if already made in the contract, has to be considered and accordingly the income has to be taxed. In absence of bifurcation, an estimated allocation is justified and has to be made for the purpose of tax. Apportionment of profit to the technical services rendered by the Applicant - Such attribution cannot be done in an arbitrary manner. It is a question of fact which varies from case to case. In the present case such apportionment can be done only out of the FOB Price for Main Equipment and not against the other payments as per contract as detailed above. Even for apportionment of FTS out of FOB Price for Main Equipment, we do not have any straitjacket sacrosanct formula for such attribution. It would be appropriate if the AO determines this aspect and gives value to the FTS, as these are included in the sale price of offshore supply of equipments, after making further necessary enquiries and giving a basis thereof. It has to be appreciated that in a given case, the nature of services to be rendered may be quite cost or labour intensive, while in another case, it may not be so. Therefore, it will be appropriate for the AO to collect information in respect of similar/identical cases for the purpose of assigning value to FTS and also after making necessary enquiries/obtaining information from the Employer in this regard. Further, the AO shall determine the FTS after allowing an opportunity to the Applicant in respect of the information collected in this respect. Ruling - The amounts received/receivable by Toshiba from MUNPL for Offshore supply of equipments and materials etc. under offshore contract ('Offshore supply contract') read with letter of Award ('NOA for Offshore supply contract') is, prima facie, not liable to tax in India as the sale was completed outside India and there was no accrual or deemed accrual in India. However, if the Department comes to the conclusion that there is a PE based on stay of employees of the Applicant for a period exceeding six months after the issue of Letter of Intent dated 27-1-2011, the income in respect of off-shore supply contract, to the extent it is attributable to the operation of the PE, can be subjected to tax in the hands of the Applicant as per Article 7.1 of DTAA. Further, an element of Fee for Technical Services is found embedded in this contract as the Applicant had provided the drawings, designs and engineering aspects as envisaged in the contract in conjunction with the Minutes of Meeting, which is liable to tax in India u/s 9(1)(vii) of the Income-tax Act read with Article 12.4 of India-Japan DTAA.

Summary

Issues Involved:
1. Taxability of amounts received/receivable by Toshiba for offshore supply of equipment and materials under the offshore supply contract.
2. Whether the offshore supply contract is a composite contract artificially divided into three separate contracts.
3. Transfer of title and ownership of imported plant and equipment.
4. Permanent Establishment (PE) status of Toshiba in India.
5. Attribution of income to Fee for Technical Services (FTS).

Detailed Analysis:

1. Taxability of Amounts Received/Receivable by Toshiba:
The primary issue is whether the amounts received/receivable by Toshiba from MUNPL for offshore supply of equipment and materials under the offshore supply contract are liable to tax in India. Toshiba contended that no income accrues or arises in India as the property and title of goods pass outside India, and the payment is received in foreign currency outside India. The revenue argued that the contracts were intertwined and inextricably linked, forming a composite contract. However, the Authority concluded that the offshore supply of equipment and materials was completed outside India, and the income from such transactions cannot be said to have accrued or arisen in India.

2. Composite Contract Argument:
The revenue argued that the offshore supply contract was part of a composite contract artificially divided into three separate contracts (offshore supply, onshore supply, and onshore services). The Authority examined the terms and conditions of the contract documents and found that the bid document itself stipulated three separate contracts. The Authority concluded that the contention of the revenue that the Applicant artificially divided the composite contracts into three contracts is unfounded.

3. Transfer of Title and Ownership:
The Authority examined the General Conditions of Contract, which stipulated that the ownership of the imported plant and equipment would be transferred to the Employer upon loading onto the mode of transport and endorsement of dispatch documents in favor of the Employer. The Authority found that the title to the goods supplied by Toshiba was transferred outside the territory of India, and the payment for the offshore supply was made outside India in foreign currency. Therefore, the income arising from such transactions cannot be taxed in India.

4. Permanent Establishment (PE) Status:
The revenue contended that Toshiba had a PE in India due to the continuity of activities and the onus cast on Toshiba for the successful completion of the project. The Authority examined the relevant provisions of the India-Japan DTAA and found no evidence that Toshiba had a PE in India. The Authority concluded that even if there was a PE, the business income attributable to such PE only would be taxable in India. However, no material evidence was found to conclude that the work relating to the offshore supply contract was executed from a PE in India.

5. Attribution of Income to Fee for Technical Services (FTS):
The revenue argued that Toshiba rendered technical services by providing drawings, designs, and engineering aspects, which should be considered as FTS and taxed in India. The Authority found that the design and engineering work was part of the offshore supply contract and was carried out through electronic mode. The Authority concluded that the design, drawings, and engineering services were part of the contract and not rendered in India. However, the Authority noted that the cost for these services was embedded in the overall contract bid and should be attributed to FTS. The Authority directed the AO to determine the value of FTS after making necessary inquiries and giving a basis for the attribution.

Conclusion:
The Authority ruled that the amounts received/receivable by Toshiba for offshore supply of equipment and materials are not liable to tax in India as the sale was completed outside India. However, if the Department concludes that there is a PE based on the stay of employees for a period exceeding six months, the income attributable to the operation of the PE can be subjected to tax. Additionally, an element of FTS is embedded in the contract, which is liable to tax in India under Section 9(1)(vii) of the Income-tax Act and Article 12.4 of the India-Japan DTAA.