2016 (9) TMI 164 - AAR - Income Tax

Taxability in India - amounts received/receivable by the applicant from Larsen & Toubro towards offshore supply of goods and materials - DTAA between India and Singapore - whether the contract is divisible into offshore supply of goods and materials and services rendered, whether obligations under the work as per the contract are distinct, i.e. whether off shore supply is an independent scope of work in the contract? - PE in India - Held that - The present contract is clearly a composite one for providing services. Appendix V describes the nature of work in detail and a simple reading of work and responsibilities of the applicant shows that contract is one. As in the present case payment is not separately linked with services and supply but is to be made on the basis of stages of completion of the contract irrespective of goods and materials brought in the premise. The contract is a composite one and offshore supplies are not an independent scope of work. All parts of the transaction relating to sale of goods to L & T were not completed outside India. No separate price of goods supplied by way of offshore supply or sale of goods to L & T outside India is specified in the contract. PE played a role in design, selection and procurement of materials to be used in the fagade related work. The fact pattern of this case is not at all similar to that of Ishikawajima Harima 2007 (1) TMI 91 - SUPREME COURT and the law as enunciated herein does not apply to the facts of the present case. The contract in this case is a composite one and the entire amount received by the applicant from L&T is taxable in India.

Issues Involved:
1. Taxability of amounts received by the applicant from Larsen & Toubro for offshore supply of goods and materials under Indian Income Tax Act and India-Singapore Double Taxation Avoidance Agreement (DTAA).
2. Attribution of amounts to operations carried out in India for tax purposes under Section 9(1)(i) of the Act and Article 7(1) of the India-Singapore DTAA.

Analysis of Judgment:

Issue 1: Taxability of Offshore Supply of Goods and Materials

The applicant, a Singapore-based company, sought a ruling on whether amounts received from Larsen & Toubro (L&T) for offshore supply of goods and materials are taxable in India. The applicant argued that the offshore supply contract was separate from the installation and other works executed in India. They relied heavily on the Supreme Court judgment in Ishikawajima Harima Heavy Industries Ltd v. DIT, which held that no income accrues or arises in India if the sale of goods and receipt of consideration occur outside India.

The Department of Revenue countered that the contract was composite, involving both supply and services, and could not be bifurcated. They argued that the applicant’s Project Office in India constituted a Permanent Establishment (PE) and played a significant role in the execution of the entire contract, including offshore supply. The Department also pointed out that the contract did not specify separate prices for offshore supply and services, and payments were linked to stages of project completion, not to the shipment of goods.

Issue 2: Attribution of Amounts to Operations in India

The applicant contended that the profits from offshore supplies were not attributable to their PE in India, which was only involved in installation and related activities. They cited Article 7 of the India-Singapore DTAA, which states that business profits are taxable only in the state where the enterprise is resident unless attributable to a PE in the other state.

The Department argued that the entire contract, including offshore supply, was executed through the PE in India, making the income attributable to operations in India. They relied on the Madras High Court judgment in Ansaldo Energia SPA, which held that contracts should be read as a whole and not dissected artificially.

Detailed Analysis:

1. Composite Nature of Contract:
- The contract between the applicant and L&T was for the entire facade and cladding works, including design, supply, installation, and commissioning.
- The contract did not bifurcate the scope of work into offshore supply and onshore services. Payments were linked to project milestones rather than specific deliveries.
- The applicant’s Project Office in India was involved in design, procurement, and customs clearance, indicating an integrated execution of the contract.

2. Role of Permanent Establishment:
- The Project Office, constituting a PE, played a significant role in the contract execution, including offshore supply.
- The PE was involved in design and procurement activities, and customs duties were paid by the Project Office, demonstrating its involvement in offshore supply.

3. Contractual Obligations and Risk:
- The applicant was responsible for the entire project, including risks and insurance until project completion.
- The insurance was in the applicant’s name, covering risks until the completion of the subcontract works, indicating that the sale was not complete upon shipment.

4. Comparison with Ishikawajima Harima Case:
- Unlike Ishikawajima Harima, where offshore supply and services were distinctly bifurcated, the applicant’s contract was composite with no such bifurcation.
- The insurance in Ishikawajima Harima was in the owner’s name, whereas, in this case, it was in the applicant’s name, indicating retained risks.

5. Pricing and Payments:
- The contract did not specify separate prices for offshore supply and services. Payments were linked to project milestones, not to specific deliveries.
- The cost center values in the contract were for working out the cost and not for bifurcating the scope of work.

6. Conclusion:
- The contract was composite, and offshore supplies were not an independent scope of work.
- All parts of the transaction relating to the sale of goods were not completed outside India.
- No separate price for offshore supply was specified in the contract.
- The PE played a role in the design, selection, and procurement of materials.
- The fact pattern did not match the Ishikawajima Harima case, and the law from that case did not apply here.

Ruling:
The entire amount received by the applicant from L&T is taxable in India as the contract is a composite one, and the income is attributable to the operations carried out in India.

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