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2019 (12) TMI 534 - AAR - Income TaxAccrual of income - offshore supply of equipments and materials etc. including supply of spares - DTAA between India and Japan - Scope of the term a transaction u/s 245N for advance ruling - the property in the goods and the title had passed outside India and the payment was also received in foreign currency outside India. - The Bill of Lading named JSW as the consignee of the goods and the commercial invoice was drawn by the applicant on JSW. Further, the Marine Insurance Policy was taken by the purchaser on its own for all the equipments supplied by the applicant under the contract for any loss/damage during transit after FOB delivery on the basis of INCOTERMS 2000. Held that - In view of the above interpretation of a singular word as given by the various Courts under Income Tax Act as well as other Acts, it is crystal clear that 'a transaction' appearing in Section 245N(a) of the Act would include more than one transaction. The provisions of the Income Tax Rules, the Notes to Form No, 34C and the clarification issued by the CBDT vide 0M dated 28-08-2019 fortify this interpretation. However, a question may arise whether an applicant can file one application in respect of two unrelated set of transactions. In our opinion as the advance ruling is in respect of a transaction , an applicant can file one application in respect of related set of transactions. If the facts and circumstances of the two transactions are not identical and totally different, then such transactions may not be clubbed in one application. The facts clearly establish that the supply of equipment and material was made outside India and thus the transfer of title to the equipment and materials also took place while the goods were outside the territory of India. The payment for the offshore supply of equipments was also made outside the country in foreign currency as per the terms of contract. The revenue has relied upon the enquiries made from JSW in respect of the contention that all the seven contracts were not independent but part of the composite contract. This admission of JSW that the seven contracts were not evaluated separately and the evaluation was done from the entire package, does not prove that the contract was composite. It was further submitted that JSW had confirmed that the contract was split at the request of Nippon Steel. This submission is not found to be correct. The revenue has alleged a lop-sided attribution of cost to the contract for offshore supply of materials and equipments without any concrete evidence. The revenue has neither placed any material in support of such suspicion nor has any transfer pricing adjustment made in the case of the payee been brought on record to substantiate the same. The principle of apportionment of income on the basis of territorial nexus is now well accepted. Explanation I(a) to section 9(l)(i) of the Act stipulates that where all the operations are not carried out in India, only that part of income which can be reasonably attributed to the operations in India, would be deemed to accrue or arise in India. It, therefore, follows that in a composite contract where only a part of the operations is to be carried out in India, the assessee would not be liable for part of income that arises from operations conducted outside India. Existence of PE in India - The applicant does not have any fixed place of business through which its business was wholly or partly carried on to be considered as PE under Article 5.1. As per Alticle 5.3 of India-Japan DTAA, a building site or construction, installation or assembly project constitutes PE, only if it had lasted for more than six months. Similarly as per Article 5.4, for the supervisory activities to constitute a PE, such activity should be carried on for more than six months. No such evidence has been brought on record by the revenue in respect of offshore supply contracts. There is no dispute to the fact that the applicant had a supervisory PE which was in respect of contract for supervision services and the income in respect of this supervisory PE had already been offered to tax in India. The revenue has alleged that the supervisory PE was also involved in offshore supply contract for equipments, for which no evidence has been brought on record. Further, from th terms of the contract as already discussed earlier, there is no element of Fee for Technical Services (FTS) involved in the contracts for offshore supply of equipments. The amounts received/receivable by Nippon Steel Engineering Co., Ltd. under contracts for offshore supply of Coke Dry Quenching (CDQ) Units for CO 3 AND CO # 4 vide Contract # JSWPL/VJNR/CDQ/OOI for Japan portion and Contract # JSWPL/VJNR/CDQ/002 for China portion dated 30 September 2010 awarded by JSW Projects Ltd., are not chargeable to tax in India under the provisions of Income-Tax Act 1961 and Double Taxation avoidance agreement between India and Japan
Issues Involved:
1. Scope of "a transaction" under Section 245N of the Income Tax Act. 2. Taxability of amounts received/receivable for offshore supply of Coke Dry Quenching (CDQ) units. 3. Existence of a Permanent Establishment (PE) in India in connection with offshore supply contracts. 4. Attribution of income to operations carried out in India. Detailed Analysis: 1. Scope of "a transaction" under Section 245N of the Income Tax Act: The revenue raised a preliminary objection that the term "a transaction" in Section 245N implies a single transaction, whereas the applicant's question pertains to two transactions. The Authority for Advance Rulings (AAR) clarified that the term "a transaction" includes more than one transaction, as per Section 13 of the General Clauses Act, 1897, and the Income Tax Rules. The AAR also referenced the Karnataka High Court's interpretation that "a" does not necessarily mean one. Furthermore, the CBDT's Office Memorandum and the Notes to Form No. 34C support the inclusion of multiple transactions in a single application. Thus, the objection was not sustained. 2. Taxability of amounts received/receivable for offshore supply of Coke Dry Quenching (CDQ) units: The applicant argued that no income accrues or arises in India from the offshore supply contracts since the transfer of title and risk occurred outside India, and payment was received in foreign currency. The contracts specified that the equipment was delivered on an FOB basis as per INCOTERMS 2000, with the title and risk passing to the purchaser at the port of shipment. The AAR found that the supply of equipment and materials was made outside India, and the transfer of title occurred upon loading the equipment onto the transport mode at the foreign port. The payment was made outside India, and the applicant did not retain control over the goods during transit. The AAR relied on the Supreme Court's decision in Ishikawajima-Harima Heavy Industries Ltd. and other cases, concluding that no income from offshore supply accrues or arises in India. 3. Existence of a Permanent Establishment (PE) in India in connection with offshore supply contracts: The revenue contended that the applicant had a Fixed Place PE and a Dependent Agent PE in India due to pre-bid activities, site visits, and supervisory roles. The AAR found no evidence of a Fixed Place PE or Dependent Agent PE related to the offshore supply contracts. The supervisory PE was established later for supervision services, and there was no evidence that it was involved in the offshore supply contracts. The AAR referred to Article 5 of the India-Japan DTAA, which defines PE, and found that the applicant did not have a PE in India for the offshore supply contracts. 4. Attribution of income to operations carried out in India: The revenue argued that the offshore supply contract was part of a composite contract, and income attributable to operations in India should be taxed. The AAR noted that the offshore supply contracts were separate and exclusive, with no involvement of the supervisory PE in the offshore supply. The principle of apportionment of income based on territorial nexus was applied, and only income attributable to operations in India would be taxable. The AAR found that the offshore supply was completed outside India, and no part of the income from these contracts was attributable to operations in India. Conclusion: The amounts received/receivable by Nippon Steel Engineering Co., Ltd. under the contracts for offshore supply of Coke Dry Quenching (CDQ) units are not chargeable to tax in India under the provisions of the Income-Tax Act, 1961, and the Double Taxation Avoidance Agreement between India and Japan.
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