2010 (2) TMI 186 - AAR - Income Tax

Non Resident - The appellant, a Russian Company, which was engaged in the business of construction and Commissioning of power projects, applied successfully to a bid of the National Thermal Power Corporation (NTPC) and entered into three contracts of which the offshore supply contract was one. Claiming that the transaction of off shore plant and equipment were liable to be taxed in India under the Income Tax Act, 1961. On the facts stated the authority ruled- that no portion of the consideration was received by the appellant in India. Further, no income accrued or arose in India to the applicant as all the transaction took place outside India. The material were shipped outside India. The title to the property passed outside India and the payment was received outside India. Therefore, the appellant was not liable to pay tax under the provisions of Income Tax Act, 1961, read with the agreement for Avoidance of Double Taxation between India and Russia in respect of the amount received from the NTPC for execution of the off shore supply contract.

Issues Involved:
1. Tax liability on amounts received under the offshore supply contract.
2. Classification of the contract as composite or separate.
3. Existence of a Permanent Establishment (PE) or business connection in India.
4. Applicability of Supreme Court decisions and previous rulings.
5. Relevance of the Circular No. 23 dated 23.7.1969 issued by the CBDT.
6. Distinction from other case laws cited by the Revenue.

Detailed Analysis:

1. Tax Liability on Amounts Received Under the Offshore Supply Contract:

The applicant, a Russian company engaged in power project construction, entered into three contracts with NTPC, with the offshore supply contract being the focus. The applicant argued that the offshore supply transaction was completed outside India, with the property in goods passing to NTPC outside India, and no income accruing or arising in India. The Authority ruled that the transaction of offshore plant and equipment was completed in high seas, with the property passing to NTPC outside India. The payment was received outside India, and thus, no part of the income was taxable in India under the Income-tax Act or the India-Russia DTAA.

2. Classification of the Contract as Composite or Separate:

The Revenue contended that the contracts were composite, while the applicant argued they were separate. The Authority examined the contracts and determined that they were separate, each with distinct scopes of work. The offshore supply contract was executed entirely outside India, making the Revenue's argument about the composite nature of the contracts unfounded.

3. Existence of a Permanent Establishment (PE) or Business Connection in India:

The Revenue claimed the applicant had a PE and business connection in India, making the offshore supply taxable. However, the Authority found no material evidence of a PE concerning offshore supplies. The Supreme Court in Ishikawajma clarified that a PE must be involved in the transaction for it to be taxable, which was not the case here. The offshore supply was not connected to any activities of the PE in India.

4. Applicability of Supreme Court Decisions and Previous Rulings:

The applicant relied on the Supreme Court's decision in Ishikawajma and the Authority's ruling in Hyosung Corporation. The Supreme Court in Ishikawajma held that only income attributable to operations in India could be taxed. Since the offshore supply transaction occurred outside India, it was not taxable. The Authority found that the facts and contract clauses in the present case were similar to Ishikawajma, supporting the applicant's position.

5. Relevance of the Circular No. 23 dated 23.7.1969 issued by the CBDT:

The applicant cited Circular No. 23, which states that no tax liability arises for non-residents on profits from transactions where the sale is on a principal-to-principal basis, and the transaction occurs outside India. The Authority agreed that the offshore supply contract met these conditions, further supporting the applicant's case.

6. Distinction from Other Case Laws Cited by the Revenue:

The Revenue cited the Madras High Court's decision in Ansaldo Energia to argue the composite nature of the contract. However, the Authority distinguished the present case from Ansaldo, noting that the contracts were separate from the outset, with no evidence of price imbalance or facade entities. The Authority also referenced other Supreme Court decisions, finding them inapplicable due to different facts and legal provisions.

Conclusion:

The Authority ruled that the applicant is not liable to pay tax under the Income-tax Act or the India-Russia DTAA for amounts received from NTPC under the offshore supply contract. The ruling was based on the completion of the transaction outside India, the transfer of property on high seas, and the receipt of payment outside India. The Authority followed the binding decision of the Supreme Court in Ishikawajma, rejecting the Revenue's arguments about the composite nature of the contracts and the existence of a PE.

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