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2014 (4) TMI 975 - HC - Income TaxChallenge to the advance ruling given by the AAR Assessee and Samsung AOP or not u/s 2(31) - existence of PE - Taxability of Income or profits received from off-shore supply of goods and services Held that - The Association of Persons is one in which two or more persons join together for a common purpose or common action and there is a joint management or joint action by the said two or more persons - In order to treat persons as an association, it is necessary that the members must have a common intention and must act jointly for fulfilling the object of their joint enterprise - the intention of the members of the Consortium is discernable from the various clauses of the MOU - MOU expressly provided that the CONSORTIUM shall constitute an unincorporated arrangement established for the limited purpose of representations and dealing with ONGC/OPaL with independent and separate scope of work as set forth in the MOU - each consortium member would be responsible for performance of its responsibilities and services as stipulated in the MOU. The consortium of Linde and Samsung constitutes an AOP - Linde and Samsung are jointly and severally liable to OPAL for due performance of the Contract dated 10.02.2009 - in terms of the Contract dated 10.02.2009, Linde and Samsung were described as a contractor and for the purpose of the obligations under the Contract were considered as a Consortium - the agreement between the parties provided for certain level of cooperation by way of appointing Project Directors and Manager for execution of the project - Linde and Samsung shared neither the costs nor risks - Both Linde and Samsung managed their own deliverables - the facts of the case do not indicate a sufficient degree of joint action between Linde and Samsung either in execution or management of the project to justify a conclusion that they had formed an Association of Persons and in our view, the Authority erred in concluding so - Relying upon In re M/s Hyundai Rotem Co., and Mitsubishi Co. 2010 (3) TMI 119 - Authority for advance ruling - DTAA recognises that the laws of each of the Contracting State may define a tax entity - Section 2(31) of the Act defines a person to include an Association of Persons - a venture undertaken by an Association of Persons formed by a resident of Germany in India would not be considered as an enterprise of Germany. Whether the income received/receivable in respect of the specified items of work is liable to tax in India under the provisions of the Act and whether the income received in respect of the specified items of work is taxable under the DTAA Held that - In the contract, the supply segment and service segment have been specified in different parts of the contract is a pointer to show that the liability of the appellant thereunder would also be different - The contract was executed in India - By entering into a contract in India, although parts thereof will have to be carried out outside India would not make the entire income derived by the contractor to be taxable in India - the look at principle must be applied to see the transaction as it existed and piercing of the Corporate Veil was not necessary where the transactions were genuine and had commercial substance - there is no controversy which involves lifting of the corporate veil or looking at any scheme to find whether a transaction is a sham or has any substance - Both the Revenue and Linde are accepting the Contract as it stands and the controversy only revolves around the situs of the income accruing or arising from the contract. By virtue of Section 9(1)(vii) of the Act, fees for technical services paid by a resident are taxable in India (except where such fees are payable in respect of services utilised by such person in business and profession carried outside India) - in the event the services in question are not considered as an integral and inextricable part of equipment and material supplied, it would be necessary to examine whether any relief in respect of such income would be available to Linde by virtue of the DTAA between Germany and India. Admittedly, Linde has a permanent establishment in India, however, it is contended by Linde that its Permanent Establishment came into existence after Linde had completed the offshore supplies of equipment and duly provided the offshore services. This is disputed by the Revenue and it is contended that Linde had a pre-existing permanent establishment in India. The stage at which the permanent establishment came into existence is a mixed question of fact and law. The Authority has not considered this question in view of its conclusion that Linde and Samsung had constituted an Association of Persons which was a tax resident entity in India for the purposes of the Act. The question at what stage Linde s permanent establishment came into existence would have to be examined by the Authority. Thus, the order is set aside and the matter is remitted back to the Authority for fresh adjudication Decided in favour of Assessee.
Issues Involved:
1. Whether the consortium formed by Linde and Samsung constitutes an Association of Persons (AOP) under section 2(31) of the Income Tax Act, 1961. 2. Whether the income/profit received/receivable by Linde towards the offshore supply of equipment, materials, and spares and for drawings and designs in relation thereto, is taxable in India under the provisions of the Act or under the Double Taxation Avoidance Agreement (DTAA) between India and Germany. Detailed Analysis: 1. Whether the consortium formed by Linde and Samsung constitutes an Association of Persons (AOP) under section 2(31) of the Income Tax Act, 1961: - Definition and Interpretation: Section 2(31) of the Act defines a 'person' to include an AOP. The Supreme Court in CIT v. Indira Balkrishna and G. Murugesan and Brothers v. CIT provided that an AOP must involve two or more persons joining for a common purpose or action, with a joint management or common purpose. - Facts and Agreements: - The MOU and Internal Consortium Agreement between Linde and Samsung indicated that each member had separate and independent responsibilities. - The MOU specified that the consortium was an unincorporated arrangement established for limited purposes, with separate scopes of work. - Payments were to be made directly to each member based on their respective work, and each member bore its own risks and liabilities. - The consortium members agreed to be jointly and severally liable to OPAL for due performance of the contract. - Analysis: - The consortium's collaboration was limited to presenting a common face to OPAL and ensuring coordination. - There was no pooling of resources or sharing of profits and losses. - The level of cooperation was akin to independent agencies working on a project, which does not constitute an AOP. - The Authority erred in concluding that the consortium was an AOP based on joint and several liabilities and a common management structure for project coordination. - Conclusion: The consortium of Linde and Samsung does not constitute an AOP under section 2(31) of the Act as it lacks sufficient joint participation and common management. 2. Whether the income/profit received/receivable by Linde towards the offshore supply of equipment, materials, and spares and for drawings and designs in relation thereto, is taxable in India under the provisions of the Act or under the DTAA between India and Germany: - Income Tax Act Provisions: - Section 5(2) and Section 9: Income of a non-resident is taxable in India if it is received or deemed to be received in India or accrues or arises in India. - Explanation 1(a) to Section 9(1)(i): Only income attributable to operations carried out in India is taxable. - Offshore Supplies: - The contract specified that ownership of materials supplied by Linde would transfer to OPAL upon FOB shipment. - Following the Supreme Court's decision in Ishikawajima-Harima Heavy Industries, income from offshore supplies where the transfer of property and payment occur outside India is not taxable in India. - Offshore Services: - If services for design and engineering are inextricably linked to the manufacture and fabrication of equipment supplied overseas, they are not taxable as fees for technical services under Section 9(1)(vii). - The Authority needs to determine whether such services are integral to the supplies or can be considered standalone services. - DTAA Provisions: - Article 7: Business profits are taxable only in the resident state unless attributable to a permanent establishment in the other state. - Article 12: Fees for technical services are taxable in the state where they arise, unless attributable to a permanent establishment. - Permanent Establishment: - Determination of whether Linde had a permanent establishment in India at the material time is crucial. - If Linde had a permanent establishment, income attributable to it would be taxable as business profits under Article 7 of the DTAA. - Conclusion: The Authority must re-examine whether the offshore services are inextricably linked to the offshore supplies and determine the existence and timing of Linde's permanent establishment in India. Final Decision: The impugned ruling is set aside, and the matter is remanded to the Authority for a fresh decision in accordance with the views expressed. The petition and application stand disposed of.
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