2008 (8) TMI 406 - AT - Income Tax

Offshore service - DTAA between India and Korea - whether the contract in question is not a composite one and, therefore, the assessee is not liable to pay tax in India in respect of offshore service? - income can be deemed to have accrued or arisen in India - HELD THAT - It is clear that the assessee is entitled to more beneficial treatment under Treaty or under the provisions of this Act. Provisions of Double Taxation Treaty would be attracted only if provisions of domestic law i.e. Indian Income-tax Act are applicable. If provisions of Indian Income- tax Act are not applicable to the off-shore supply of equipment, then the question of application of Double Taxation Avoidance Agreement would not arise - Admittedly, onshore operations relating to erection of equipment were carried in India and entire onshore income was liable to and has been subjected to tax in India. In fact there was no income and the loss returned by the assessee from onshore operation carried in India has been accepted by the Revenue. Even in respect of offshore supply of equipment, the department has accepted that all operations relating to supply were not carried in India. Its case is that 10 per cent of amount paid for offshore supply should be deemed to have accrued and chargeable to tax in India. Whether 10 per cent of income from supply of equipment can be reasonably attributable to operations carried out in India in terms of Explanation 1(a) of sub-section (1)(i) of section 9 of the Income-tax Act - HELD THAT - For justifying assessment of 10 per cent, it is the case of the revenue that agreements between the assessee and PGCIL were not merely for supply of equipment but also for erection and commissioning of the equipment and its satisfactory performance in accordance with provisions of the agreement. In terms of Article 6 of both the Agreements, default in supply or in erection would be taken as a default in the other agreement and the two being so intricately linked with each other that one agreement could not work without the other. In view of close connection of the two agreements, it was held that some operations were carried out in India and an attribution of 10 per cent of total receipt is most fair and reasonable. The assessee, on the other hand had reiterated that income on supply of offshore equipment accrued outside India and no part of such income was attributable to any operation carried out in India. We are of view that contentions of learned counsel for the assessee are well taken. The AO and on appeal, the CIT (Appeals) have mainly relied upon the case of Ishikawajima Harima Heavy Industries Co. Ltd. 2004 (10) TMI 87 - AUTHORITY FOR ADVANCE RULINGS . The decision of Authority for Advance Ruling has not been approved by Supreme Court in Ishikawajima Harima Heavy Industries Co. Ltd. v/s Director of Income Tax 2007 (1) TMI 91 - SUPREME COURT and it has been held that income from offshore supply of goods is not taxable in India. Therefore, it is neither possible nor permissible for the revenue to contend that above decision of Supreme Court is not applicable to the facts of the case. The Supreme Court after considering almost identical facts and circumstances and even when there was one agreement both for supply and erection of equipment held that income from offshore supply of material/equipment did not arise in India and was not taxable. It is the claim of the assessee that offshore supply of equipment related to supply of specified goods dispatched from Korea through a shipping company named in the Bill of Lading - Earlier, PGCIL had opened letter of credit and had nominated a bank to issue irrevocable LOC favouring the appellant. Equipment was delivered to ship and Bill of Lading and other documents were handed over to the nominated bank and accordingly with the delivery of bill of lading etc., to the bank, the property in goods got transferred to PGCIL and thus sale of offshore equipment was complete. Profit, if any, on such supply of equipment arose to the assessee outside India and, therefore, same cannot be taxed in India u/s 9(1)(i) of the Income-tax Act. We have to examine above claim with reference to the Indian Sales of Goods Act, 1930. Under the Sales of Goods Act the property in goods will pass to the buyer as per the intention of the parties. Such intention is to be gathered from the facts and circumstances of the case. In the present case , there is specific agreement between the parties that property would pass to the buyer as and when the assessee loads the equipment on to the mode of transport to be used to convey from the country of origin. There is no other term, which would convey a contrary intention. It is, therefore, clear from above that ownership is intended to pass to PGCIL as soon as goods are loaded and in this case were put on the ship and documents were handed to the nominated bank where letter of credit was opened. Section 23(1) is independent of section 23(2) of the Sale of Goods Act . Section 23(1) does not contemplate unconditional appropriation in pursuance of a contract. It refers to unconditional appropriation with the assent of the parties. Whereas in section 23(2) it is delivery to a carrier in pursuance of a contract which operates as an unconditional appropriation and is, therefore, deemed to be unconditional appropriation. As the goods were delivered in accordance with agreement, the property in goods was transferred to the buyer and a sale did take place. Rules laid down in sections 20 to 24 of Sale of Goods Act are applicable only when intention of the parties is not clear. But here as noted intention of parties in agreement is clear. All the circumstances mentioned above are fully satisfied in the present case also as goods were ascertained and delivered to ship for transportation to India, bill of lading was also handed over to the bank nominated by the assessee and payment was also received outside India. The property in goods got transferred to the buyer and sale was completed. With the completion of the sale, income accrued and that accrual was outside India. Accrual of such income was not attributable to any operation carried out in India. Therefore, contention of the assessee that income from offshore contract for supply etc., did not arise in India and provisions of Indian Income-tax Act had no application is well founded and is required to be accepted. Buyers right to examine and repudiate the goods, does not by itself indicate that property in goods has not passed to him. This position was accepted in the case of Kwei Tek Chao v. British Traders Shippers Ltd duly approved by the Supreme Court in the case of Mahabir Commercial Co. Ltd. 1972 (9) TMI 2 - SUPREME COURT . In the present case even the buyer has no right under the contract to repudiate the goods (equipment). Other assurances and warrantees given in the agreement relating to satisfactory performance of equipment are normal warrantees to secure performance by the buyer and cannot be read as condition entitling the seller to repudiate contract and have the goods back or restored to him. There is no term under which property once passed could be re-vested in the seller. All conditions of the CIF contract were fulfilled. Therefore, neither taking of insurance policy nor taking of delivery from the Port at arrival or fixation of goods and their operation in a satisfactory manner could prevent the passing of property from the seller to the buyer at the time of delivery of equipment to the ship, along with documents as provided in the agreement. The delivery of goods, document and receipt of substantial part of sale consideration did take place outside India where the sale took place and income accrued. Such income could only be taxed outside India and not under Indian Law. We, therefore, hold that income from offshore contract taken at was not taxable in the hands of the assessee . It is directed to be deleted. The learned counsel for the assessee has rightly relied upon the decision in the case of Motorola Inc 2005 (6) TMI 226 - ITAT DELHI-A . We further agree that said decision should have been followed by the learned CIT (Appeals) unless he could cite some decision taking a contrary view. That is not the case here. Even otherwise in the light of our decision on above issue, the assessee is not liable to pay any interest u/s 234B. Therefore, the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Taxability of income from offshore supply of equipment in India.
2. Application of Indian Income-tax Act and DTAA between India and South Korea.
3. Attribution of income to operations carried out in India.
4. Levy of interest under sections 234B and 234D of the Income-tax Act.

Detailed Analysis:

1. Taxability of Income from Offshore Supply of Equipment in India:
The primary issue was whether the income from offshore supply of equipment by LG Cable Limited (LGCL) was taxable in India. The Assessing Officer and CIT (Appeals) held that the income from offshore supply was taxable in India, relying on the decision of Authority for Advance Ruling in the case of Ishikawajima Harima Heavy Industries Co. Ltd. The assessee contended that the income from offshore supply wholly accrued and arose outside India, and thus, was not taxable under section 5 of the Income-tax Act. The Supreme Court in Ishikawajima Harima Heavy Industries Co. Ltd. v. DIT [2007] 288 ITR 408 held that income from offshore supply of equipment was not taxable in India as the activities generating profits were carried wholly outside India. The Tribunal agreed with the assessee, stating that since the property in goods and payment were transferred outside India, no income accrued in India.

2. Application of Indian Income-tax Act and DTAA between India and South Korea:
The Tribunal emphasized that the provisions of the Indian Income-tax Act would apply only if they were more beneficial to the assessee compared to the DTAA. The Supreme Court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 clarified that no provision of the DTAA could fasten a tax liability where the liability was not imposed by the Act. The Tribunal concluded that since the provisions of the Indian Income-tax Act were not applicable to the offshore supply of equipment, the DTAA provisions did not come into play.

3. Attribution of Income to Operations Carried Out in India:
The Tribunal examined the contracts between LGCL and PGCIL, noting that the offshore supply contract and the onshore erection contract were interdependent. However, the Tribunal found that the offshore supply of equipment was a separate transaction where the property in goods passed to the buyer outside India. The Tribunal relied on the Sales of Goods Act, 1930, and the Supreme Court's decision in Mahabir Commercial Co. Ltd. to conclude that the property in goods passed to PGCIL upon delivery to the carrier in Korea. Therefore, no part of the income from the offshore supply was attributable to operations carried out in India, and hence, not taxable under section 9(1)(i) of the Income-tax Act.

4. Levy of Interest under Sections 234B and 234D of the Income-tax Act:
The assessee challenged the levy of interest under section 234B, arguing that since the payment was subjected to tax deducted at source, the assessee was not liable to pay advance tax. The Tribunal agreed, citing the decision in Motorola Inc., and concluded that the assessee was not liable to pay interest under section 234B. Regarding interest under section 234D, it was accepted by both parties that it was consequential, and thus, the Tribunal did not record a specific finding on this issue.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the income from offshore supply of equipment was not taxable in India. The levy of interest under section 234B was also set aside, and the issue of interest under section 234D was deemed consequential.