2012 (11) TMI 307 - AT - Income Tax

Taxability offshore supply - foreign company was engaged in the execution of various projects in India - company has executed five contracts - For the purpose of executing the five contracts mentioned above, LGCL had set up a project office in India - It was also claimed by the assessee during the assessment proceedings that the Power Grid Corporation of India Limited (PGCIL) imported certain materials from LGCL, Korea - PGCIL deducted tax at source while making payments to LGCL Held that - There were no operation qua the agreement for supply of equipment, which was carried out in India, and therefore, no income could be deemed to have accrued or arisen in India whether directly or indirectly or through any business connection in India - credit of TDS deducted allowed - in favour of the assessee

Issues Involved:
1. Taxability of receipts from offshore supply of equipment in India.
2. Attribution of income to operations carried out in India.
3. Relationship between offshore supply contracts and onshore services contracts.
4. Applicability of previous judicial decisions and tribunal orders.

Issue-wise Detailed Analysis:

1. Taxability of Receipts from Offshore Supply of Equipment in India:
The primary issue in this case is whether the receipts from offshore supply of equipment by LG Cable Ltd. (LGCL) to Power Grid Corporation of India Limited (PGCIL) are taxable in India. The Assessing Officer (AO) argued that the offshore supply of equipment is part of a composite contract involving both offshore supply and onshore services, making the income taxable in India. The AO highlighted that the contracts for offshore supply and onshore services are interdependent and cannot be separated. The AO also noted that the offshore supply was on CIF terms, and the transfer of title does not relieve LGCL from responsibilities until the final acceptance of the goods. Consequently, the AO attributed 50% of the income from offshore supply to operations carried out in India and taxed 10% of the CIF price of components.

2. Attribution of Income to Operations Carried Out in India:
The AO contended that the income from offshore supply of equipment should be attributed to operations carried out in India. The AO reasoned that significant activities related to the offshore supply contract, such as signing the contracts, determining prices, and the involvement of the project office in India, contributed to the income generation. Therefore, the AO held that the income from offshore supply is taxable under Section 9 of the Income Tax Act and Article 7 of the tax treaty between India and Korea.

3. Relationship Between Offshore Supply Contracts and Onshore Services Contracts:
The AO argued that the offshore supply contracts and onshore services contracts are essentially for a single composite work. The contracts are interrelated, interdependent, and cannot exist without each other. The AO emphasized that the offshore supply of equipment is not a standalone transaction but part of a comprehensive project involving design, fabrication, testing, supply, commissioning, and demonstration for acceptance. The AO also noted that the contracts included clauses for insurance, project completion schedules, and operational acceptance, further indicating the interdependence of the contracts.

4. Applicability of Previous Judicial Decisions and Tribunal Orders:
The learned CIT(A) decided the issue in favor of the assessee, LGCL, by relying on previous judicial decisions and tribunal orders. The CIT(A) referred to the jurisdictional ITAT's decision in LGCL's own case for A.Y. 2002-03, where it was held that the income from offshore supply of goods is not taxable in India. The CIT(A) also noted that the Delhi High Court dismissed the department's appeal against the ITAT's order. Additionally, the CIT(A) referred to the ITAT's order for A.Y. 2003-04 to 2005-06, which again deleted the addition made by the AO on similar grounds. The CIT(A) concluded that the facts of the current year are similar to the earlier years and held that the income from offshore supplies is not taxable in India.

Conclusion:
The appeal filed by the department was dismissed, and the order of the CIT(A) was upheld. The receipts from offshore supply of equipment by LG Cable Ltd. were held not taxable in India, following the jurisdictional ITAT's and Delhi High Court's decisions in the assessee's own case for earlier years. The contracts for offshore supply and onshore services were deemed interdependent, but the income from offshore supply was not attributed to operations carried out in India.

← Previous Next →