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2009 (6) TMI 7 - AAR - Income TaxConstruction of power station offshore supplies made by the applicant (a company incorporated in Korea) and onshore operations are undertaking by an Indian Company Question - On the facts and circumstances of the case, whether the amounts received/receivable by the applicant i.e. Hyosung Corporation from Power Grid Corporation of India Limited ( PGCIL ) for offshore supply of equipments, materials, etc., are liable to tax in India under the provisions of the Act and India-Korea tax treaty AAR held that under the terms of the contract, the sale of equipments and materials took place outside the territories of India and the income in relation thereto cannot be said to accrue or arise in India and, therefore, not liable to be taxed under the Income-tax Act, 1961 Further the applicant cannot be said to have a Permanent Establishment within the meaning of Art. 5.3 of DTAA - However, question of PE left open to AO subject to inquiries.
Issues Involved:
1. Tax liability of amounts received for offshore supply of equipment under the India-Korea tax treaty. 2. Attribution of income to operations carried out in India under section 9(1)(i) of the Income-tax Act and Article 7(1) of the India-Korea tax treaty. 3. Whether the applicant and L&T constitute an Association of Persons (AOP) under the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Tax Liability of Amounts Received for Offshore Supply of Equipment The applicant, a Korean company, entered into a contract with Power Grid Corporation of India Ltd. (Power Grid) for the supply of offshore equipment and materials. The applicant argued that no income accrues in India as the property in the goods and title passes outside India, and payment is received outside India. The Revenue contended that activities related to offshore supplies took place in India, and thus part of the profits arose in India. The Authority for Advance Rulings (AAR) held that the title to goods transferred to Power Grid outside India, and the income from offshore supply does not accrue or arise in India. This conclusion was supported by the Supreme Court's decision in Ishikawajima - Harima Heavy Industries and the CBDT circular dated 21st September 1989, which clarified that profits from the sale of equipment on FOB basis, where payments are made outside India, are not deemed to accrue or arise in India. 2. Attribution of Income to Operations Carried Out in India The applicant contended that even if a Permanent Establishment (PE) existed, no profits could be attributed to it for offshore supply under Article 7(1) of the DTAA. The Revenue argued that the applicant's supervisory activities in India should be considered for counting the period of 9 months under Article 5.3 of the Treaty. The AAR noted that the applicant's supervisory role begins at the stage of erection, testing, and commissioning but does not extend to transportation and storage of equipment. The Authority tentatively concluded that the applicant does not have a PE in India, but allowed the Revenue to verify the facts. If a PE is found, profits attributable to the PE should be estimated and taxed accordingly, excluding activities incidental to the supply of imported goods. 3. Whether the Applicant and L&T Constitute an Association of Persons (AOP) The Revenue argued that the applicant and L&T executed the contracts as an AOP. The AAR examined the Memorandum of Understanding (MOU) and the Letter of Award (LOA) and found that the parties operated as independent contractors with separate contracts awarded by Power Grid. The applicant's overall responsibility for the project's successful completion did not constitute an AOP. The Authority concluded that the applicant and L&T do not form an AOP under Section 2(31) of the Income-tax Act, 1961, and should not be assessed as such. Conclusion: 1. The applicant and L&T cannot be treated as an AOP for assessment under the Income-tax Act, 1961. 2. The amounts received by the applicant for offshore supply of equipment do not accrue or arise in India and are not taxable under the Income-tax Act, 1961. 3. The applicant does not have a PE in India based on the facts presented. However, the Revenue may verify further to determine if a PE exists, and if so, profits attributable to the PE should be taxed, excluding activities incidental to the supply of imported goods. (Accordingly, the Ruling is given and pronounced on this 17th day of June, 2009)
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