2009 (1) TMI 81 - HC - Income Tax

Agreement between assessee, a non-resident co. and Indian statutory corporation - contract was divided into four contracts - offshore supply of equipments, offshore services of erection, testing and commissioning, civil construction and the commissioning all responsibility rested on the assessee held that activity under the contracts are inextricably linked and it was a composite contract - business connection existed part of profits from offshore supply deemed to arise in India

Issues Involved:
1. Taxability of income from offshore supply of equipment.
2. Existence of a "permanent establishment" (PE) and "business connection" in India.
3. Applicability of the Supreme Court's decision in Ishikawajima-Harima Heavy Industries Ltd. (IHHI) case.
4. Estimation of profits attributable to activities conducted outside India.

Issue-wise Detailed Analysis:

1. Taxability of Income from Offshore Supply of Equipment:
The primary issue in this case revolves around the taxability of income generated from the offshore supply of equipment by the assessee, a non-resident company. The assessee argued that the income from offshore supply should not be taxed in India, relying on the Supreme Court's decision in the IHHI case, which held that if the transfer of property and payment occur outside India, the transaction cannot be taxed in India. However, the Tribunal and the Commissioner of Income-Tax (Appeals) found that the contract in question was a composite contract, and the offshore supply could not be completely segregated from the other parts of the contract. The Tribunal concluded that only 25% of the activity could have been done outside India and directed that the profit shall be taxed at 7% in relation to 75% of the receipts from Contract I.

2. Existence of a "Permanent Establishment" (PE) and "Business Connection" in India:
The Tribunal and the Commissioner of Income-Tax (Appeals) found that the assessee had a "permanent establishment" and a "business connection" in India through its subsidiary, ASPL. The Tribunal noted that the assessee controlled and managed ASPL for quality ensuring, maintenance of time schedule, and progress of work. The Tribunal held that ASPL was a facade created for tax purposes and that the corporate veil should be lifted to consolidate the four contracts. The Tribunal's findings were based on evidence that the assessee had a continuous and intimate relationship with ASPL, and the entire project was managed and controlled by the assessee.

3. Applicability of the Supreme Court's Decision in Ishikawajima-Harima Heavy Industries Ltd. (IHHI) Case:
The assessee relied heavily on the IHHI case, arguing that since the transfer of property and payment occurred outside India, the income from offshore supply should not be taxed in India. However, the Tribunal distinguished the present case from IHHI, noting that in IHHI, the contract was clearly demarcated and not a composite contract. The Tribunal found that in the present case, the contract was a composite one, and there was a close relationship between the assessee and ASPL. The Tribunal also noted that in IHHI, the permanent establishment had no role in the offshore supply, whereas in the present case, the permanent establishment was involved in the entire project.

4. Estimation of Profits Attributable to Activities Conducted Outside India:
The Tribunal held that only 25% of the activities related to Contract I could have been conducted outside India. The Tribunal directed that the profit from Contract I should be taxed at 7% in relation to 75% of the receipts. The Tribunal's estimation was based on the profit margins of similar companies and the various clauses of the contract indicating that many plant and equipment were fabricated in India. The High Court, however, remitted the matter to the Tribunal to reassess the percentage of taxable profit, noting that the Tribunal did not provide reasons for fixing the percentage and that the assessee had not provided the requested figures.

Conclusion:
The High Court confirmed the Tribunal's findings that the contract was a composite one, the assessee had a permanent establishment and a business connection in India, and the income from offshore supply could not be entirely excluded from taxation. The High Court remitted the matter to the Tribunal to reassess the percentage of taxable profit from Contract I, directing the Tribunal to provide reasons for its estimation and to hear submissions from both parties. The tax case (appeal) was partly allowed to the extent of remitting the matter for reassessment.

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