2017 (11) TMI 709 - AT - Income Tax

Taxability of income - accrual of income in India - Direction of the DRP to exclude the income received from off shore supplies of equipments from taxation - Held that - Material brought on record clearly reveal that the P.E. has no role to play as far as it relates to off shore supply of equipments and materials which is evident from the fact that not only the goods were supplied from Sweden and other countries on CIF/CIP basis but payments have been made directly to the assessee outside India in foreign currency and in the bank account of the assessee in Sweden. Therefore, the P.E. has no connection with the off shore supply of goods. Therefore, only because the contracts entered into by the assessee are single composite contracts it cannot be said they are indivisible. The reading of contract as a whole clearly demonstrates that the scope of work as per the contract is divisible in nature and has been segregated to supply portion and erection and commissioning portion. Therefore, the off shore supply of equipments having been effected from outside the territory of India and the sale having been completed outside territory of India, the ratio laid down by the Hon ble Supreme Court in Ishikawajma-Harima Heavy Industries Ltd. (2007 (1) TMI 91 - SUPREME COURT ) squarely applies to the facts of the present case. Thus the income received from off shore supply of equipments in case of a divisible contract is not taxable in India - Decided against revenue

Issues Involved:
1. Taxability of income received from off-shore supplies of equipment.
2. Nature of the contracts (composite vs. divisible).
3. Role and involvement of the Permanent Establishment (P.E.) in India.
4. Applicability of the Supreme Court decision in Ishikawajma-Harima Heavy Industries Ltd.
5. Segregation of income from on-shore and off-shore activities.

Detailed Analysis:

1. Taxability of Income from Off-Shore Supplies:
The primary issue is whether the income received from off-shore supplies of equipment amounting to ?1,76,92,876 is taxable in India. The assessee, a tax resident of Sweden, argued that off-shore supplies are not taxable in India since the title to the goods passed outside the territory of India. The Assessing Officer disagreed, viewing the contracts as composite and indivisible, thus making the income from off-shore supplies taxable in India. The Dispute Resolution Panel (DRP), however, found that the contracts clearly delineated on-shore and off-shore portions, with the latter being non-taxable as the title passed outside India.

2. Nature of the Contracts:
The contracts in question were between the assessee and Delhi International Airport Pvt. Ltd. (DIAL) and Mumbai International Airport Pvt. Ltd. (MIAL) through a sub-contract with Larsen & Toubro Ltd. (L&T). The Assessing Officer considered these contracts as composite and indivisible, meaning the entire income, including off-shore supplies, would be taxable in India. The DRP, however, noted that the contracts specified separate payments for off-shore and on-shore activities, indicating that the contracts were divisible. The DRP concluded that the contracts should be treated as divisible, with only the income from on-shore activities being taxable in India.

3. Role and Involvement of the Permanent Establishment (P.E.):
The Assessing Officer argued that the P.E. in India was involved in the design and supervision of the production of equipment, thus attributing the income from off-shore supplies to the P.E. and making it taxable in India. The DRP found no evidence supporting the involvement of the P.E. in off-shore supplies. The DRP observed that the P.E. had no role in the off-shore supply of equipment, which was completed outside India, and thus the income from such supplies could not be attributed to the P.E.

4. Applicability of Supreme Court Decision in Ishikawajma-Harima Heavy Industries Ltd.:
The DRP relied on the Supreme Court decision in Ishikawajma-Harima Heavy Industries Ltd., which held that income from off-shore supplies is not taxable in India if the sale is completed outside the Indian territory. The DRP applied this principle, concluding that the income from off-shore supplies in the present case is not taxable in India since the title of goods passed outside India.

5. Segregation of Income from On-Shore and Off-Shore Activities:
The DRP found that the contracts clearly segregated the income from on-shore and off-shore activities, with separate payments specified for each. The assessee had offered the income from on-shore activities to tax in India, while excluding the income from off-shore supplies. The DRP upheld this segregation, directing the Assessing Officer to exclude the income from off-shore supplies from the taxable income.

Conclusion:
The appeal by the Revenue was dismissed, and the cross-objection by the assessee was also dismissed as infructuous. The DRP's decision to exclude the income from off-shore supplies from taxation in India was upheld, based on the principles laid down by the Supreme Court and the clear segregation of on-shore and off-shore activities in the contracts. The judgment emphasized the importance of the contractual terms and the passage of title in determining the taxability of off-shore supplies.

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