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TMI Blog2010 (12) TMI 948X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of India Ltd. ("PGCIL"). The first was for onshore execution of the Fibre Optic Cabling System Package Project under the System Co-ordination and Control Project for the Eastern Region involving onshore services, including erection/installation, testing and communicating, etc. of the fibre of the cabling system. The second contract was for offshore supply of equipment and offshore services. During the financial year 2001-02, LGCL had set up a "project office" in India after obtaining requisite approval from the RBI. The services under the onshore contract were rendered by LGCL through its project office in India for which separate books of account were maintained, by the assessee. The income attributable to the activities carried out in India in connection with onshore contract was offered to tax on a net income basis in the return of income filed by the assessee in terms of arts. 5 and 7 of the Double Taxation Avoidance Agreement ("DTAA") between India and Korea. As regards offshore supply contract, however, it was claimed by the assessee that this income was not liable to tax in India as the income wholly accrued or arose in Korea. It was also claimed that the entire contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come chargeable to tax in India was worked out at US $ 2,19,770, i.e., at Rs.1,05,48,950. The above amount was added to the income of the assessee in the assessment order. The AO also levied interest under ss. 234B and 234C of the Act. 5. The assessee impugned the above assessment in appeal before the CIT(A), reiterating its submission that the transfer of title in the equipment supplied by it had taken place in favour of PGCIL outside India and hence income of offshore supply equipment could not be said to accrue or arise in India. After comparing and contrasting both the agreements and in particular art. 6 thereof, the CIT(A) held as under: "4.1 From the combined reading of art. 6 of both the agreements, the following facts emerge: (1) Notwithstanding the award of work under two separate agreements, the contractor (the appellant) has the overall responsibility for the execution of all the work right from the beginning till the end. (2) Notwithstanding the award of work under two separate agreements, in case of default or breach under one contract the same shall automatically be deemed to be a default or breach under both the contracts. This means t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rieved by the aforesaid dismissal of its appeal, the assessee preferred a second appeal before the Tribunal. The Tribunal after a detailed consideration of the matter held that the income from the offshore contract taken at Rs.1,05,48,950 was not taxable in the hands of the assessee and directed the deletion thereof. The Tribunal further ruled that the assessee was not liable to pay any tax (sic-interest) under s. 234B of the Act. It was now the turn of the Department to feel aggrieved and hence the present appeal under s. 260A of the Act has been filed by the Department to challenge the order of the Tribunal dt. 8th Aug., 2008 [reported as LG Cable Ltd. vs. Dy. Director of IT (International Taxation) (2008) 119 TTJ (Del) 34 : (2008) 13 DTR (Del)(Trib) 269-Ed.]. 8. The focal point of controversy between the parties is whether the income from the offshore contract between the parties would be taxable in India under the provisions of s. 9 of the Act, the relevant portion whereof reads as under: "9 Income deemed to accrue or arise in India.-(1) The following incomes shall be deemed to accrue or arise in India- (i) all income accruing or arising, whether directl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt C 42 101-S858-1/CA-II/787 Offshore agreement C-42101-S858-1/CA -11/778 The contract agreement No. C-42101-S858-1/CA-I/788 has also been made on 26th Feb., 2001, between the employer and the contractor for onshore erection contract (hereinafter referred to as the 'second contract') for the subject package which includes performance of all activities within India, inter alia port handling and custom clearance of supplies from abroad, inland transit insurance, handling and transportation to site, unloading at site, storage, preservation, insurance, erection/installation (including survey, planning field engineering activities, tower analysis and strengthening as required), testing and commissioning and demonstration for acceptance (with the equipment and services being separately provided by Powergrid as Listed in Specification, Vol. II, of the bidding documents including its subsequent amendments) at site of the complete fiber optics system including associated equipment/civil works etc. for complete execution of the fibre optic cabling system package under Eastern Region System Coordination and Control Project, training of employer's personnel within India and maintenance of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pressly understood and agreed by the contractor that any default or breach under the 'first contract' shall automatically be deemed as a default or breach of this 'second contract' also and vice versa and any such default or breach or occurrence giving the employer a right to terminate the 'first contract', either in full or in part and/or recover damages under that contract, shall give the employer an absolute right to terminate this contract at the contractor's risk cost and responsibility, either in full or in part and/or recover damages under this 'second contract', as well. However, such default or breach or occurrence in the first contract shall not automatically relieve the contractor of any of its obligations under this 'second contract'. It is also expressly understood and agreed by the contractor that the equipment/materials supplied by the contractor under the 'first contract', when erected and commissioned by the contractor under this 'second contract' shall give satisfactory performance in accordance with provisions of the contract. 11. It was contended by the learned counsel for the Revenue that a reading of the terms of the offshore supply contract clearly showed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be taxed in India. It was contended that there was a subtle but clear-cut distinction between the existence of 'business connection' and the income accruing or arising out of such business connection, which was required to be borne in mind as no activity relating to the offshore supply of goods was carried out in India, what to speak of income accruing or arising out of such business connection. Dealing with the contention of the learned counsel for the Revenue that one of the conditions imposed by the RBI while permitting the assessee to have a project office as per letter dt. 11th April, 2001 was that the office expenses will be met in India only from the remittance received from the head office and that this showed a business connection of the project office with the head office, it was stated that such a contention was altogether meaningless. 14. A look now at the relevant provisions of the offshore agreement entered into on 26th Feb., 2001, which have been reproduced by the Tribunal as under: "10.4 .... In art. 1, there is description of contract documents. Article 2 provides for contract price and terms of payment. The assessee was to receive US $ 72,82 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract in the specified format, shall be kept valid initially at least upto 31st Oct., 2003 and 30th Sept., 2004, respectively, and shall be extended from time to time as may be required under the contract. 1.1.2 Progressive payment Seventy five per cent (75 per cent) of the CIF price component (excluding IAC) for all the equipment and materials excluding 'mandatory spares and tools and tackles for off-line maintenance' shall be paid as follows: (i) Fifty five per cent (55 per cent) of the CIF price component (excluding IAC) for all the equipment and materials excluding 'mandatory spares and tools and tackles for off-line maintenance' shall be paid on pro rota basis through irrevocable confirmed letter of credit established in favour of contractor and on shipment of equipment and submission of documents specified in cl. SCC 18.1. (ii) Twenty per cent (20 per cent) of the CIF price component (excluding IAC) for all the equipment and materials excluding 'mandatory spares and tools and tackles for off-line maintenance' shall be paid on pro rata basis within 30 days of receipt of equipment at site and on submission of claim and physical verification b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he employer within thirty (30) days of submission of an invoice/claim and other requisite documents as per the contract, by the contractor. All the payments shall be released to the contractor directly except the payment due on shipment, mentioned at 1.1.2(i) and 1.2(a) above, which shall be paid through irrevocable confirmed letter of credit, Letter of credit will be established approximately 30 days prior to confirmed date of shipment and shall remain valid for a period of 90 days. 2.2 The contractor shall submit a request to the employer at Power Grid, Kolkata (ERULDC), for opening the letter of credit, at least 60 days in advance, accompanied with details for establishment of letter of credit along with supporting documents, if any. A copy of the same along with supporting documents (if any) shall, however, be submitted to the employer at Power Grid, New Delhi (International Finance Department and T and CC Department). 2.3 All invoices/claims for payment along with requisite documents as per the contract, shall be submitted to the employer at Power Grid, Kolkata (ERULDC). The advance copy of documents in case of payment through letter of credit shall be sent to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the complete fibre optic system including associated equipment/civil works etc. for complete execution of the fibre optic cabling system package ('the facilities') under eastern region system co-ordination and control project, training of employer's personnel within India and maintenance of the fibre optic cabling system as per technical specifications, and the contractor has agreed to such engagement upon and subject to the terms and conditions hereinafter appearing.' 10.9 The contract price and terms of payment are provided in art. 2 and are as follows: 'Article 2. Contract price and terms of payment 2.1 Contract price (reference GCC cl. 11/SCC cl. 9) The employer hereby agreed to pay to the contractor the contract price in consideration of the performance by the contractor of its obligations hereunder. The contract price shall be aggregate of INR 59,982,160 (Indian rupees fifty nine million nine hundred eighty two thousand one hundred and sixty only) and US $ 88,400 (US dollars eighty eight thousand and four hundred only), or such other sums as may be determined in accordance with the terms and conditions of the contract. The break-up of the contract p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d payment. It is similar to provision of interest of agreement 1 quoted above. In Appendix 3, there is provision for insurances to be taken by the contractor. It is provided as under: 'In accordance with the provisions of GCC cl. 34 read in conjunction with SCC, the contractor shall at its expense take out and maintain in effect, or cause to be taken out and maintained in effect, during the performance of contract, the insurances set forth below in the sums and with the deductibles and other conditions specified. The identity of the insurers and the form of the policies shall be subject to the approval of the employer, such approval not to be unreasonably withheld. (a) Cargo insurance Covering loss or damage occurring, whilst in transit from the supplier's or manufacturer's works or stores until at the site, to the facilities (including spares parts and tools and tackles for off-line maintenance therefor) and to the construction equipment to be provided by the contractor or its sub-contractors. Amount Deductible limits Parties insured From To 110% of CIF value Mandatory limit of insurance company, subject to maximum of 5% of insurance a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... role to play in the offshore supply of the equipments. 18. Furthermore, as noticed above, the scope of work under the onshore contract was under a separate agreement and for separate consideration. There is, therefore, in our opinion no justification to mix the consideration for the offshore and onshore contracts. None of the stipulations of the onshore contract could conceivably postpone the transfer of property of the equipments supplied under the offshore contract, which, in accordance with the agreement, had been unconditionally appropriated at the time of delivery, at the port of shipment. When the equipment was transferred outside India, necessarily the taxable income also accrued outside India, and hence no portion of such income was taxable in India. 19. The contention of the learned counsel for the Revenue during the course of arguments that offshore supplies are not taxable only in the case of sale of goods simpliciter, and that the contract is a turnkey contract split/divided into offshore and onshore supplies at the instance of the respondent-assessee, in our considered opinion, is not sustainable in view of the authoritative pronouncement of the Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case, whether the amounts, received/receivable by the applicant from Petronet LNG for offshore supply of equipments, materials, etc. are liable to tax in India under the provisions of the Act and India-Japan Tax Treaty? 2. If the answer to (1) is in the affirmative in view of Expln. (a) to s. 9(1)(i) of the Act and/or art. (1) read together with the protocol of the Indian-Japan Tax Treaty, to what extent are the amounts reasonably attributable to the operations carried out in India and accordingly taxable in India?" 21. Before the Authority, no issue was raised as regards the liability of the appellant to pay income-tax on onshore supply and onshore services and on its activities relating to construction and erection. The Authority after referring to a large number of decisions governing the field inter alia opined that in the case of a transaction of sale of goods simpliciter by the nonresident to an Indian resident, which is a part of a composite contract involving various operations within and outside India, income from such sale shall be deemed to accure or arise in India, if it accrues or arises through or from any business connection in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and material supplied from within India for direct delivery at site and permanent incorporation in the works. 5. Onshore services (Ext. D-2.4) is the price of design engineering, detail engineering, customs clearance, inland transportation, procurement services, supervision services, project management, testing and commissioning and any such service in relation to the works rendered in India." 24. The breakdown of contract price was as under: Exhibit No./Sl. No. Description of scope In Indian Rupees In US dollars Name and address of contracting entity D-2.1 Offshore supply (total of 2.1.1. 2.2.2 and 2.2.3) Nil 81,711,877 IHI, BNI and TEIL D 2.2 Offshore services (total of 2.2.2 to 2.2.3) Nil 19,756.225 IHI, BNI and TEIL D-2.3 Onshore supply (total of 2.3.1 to 2.3.3) 1,86,99,78,658 Nil IHI, BNI and TEIL D-2.4 Onshore services (total of 2.4.1 to 2.4.3) 1,77,43,53,282 12,780,467 IHI, BNI and TEIL D-2.5 Construction and erection (total of 2.5.1 to 2.5.3) 3,95,84,64,384 36,795,623 IHI, BNI and TEIL D-2.0 Total (D 2.1 to D-2.5) (see note 9) 7,60,27,96,324 151,044,192 25. Since it was not in dispute that the title in the eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the IT Act. (6) Clause (a) of Expln. 1 to s. 9(1)(i) states that only such part of the income as is attributable to the operations carried out in India, are taxable in India. (7) The existence of a PE would not constitute sufficient 'business connection' and the PE would be the taxable entity. The fiscal jurisdiction of a country would not extend to taxing the entire income attributable to the PE. (8) There exists a difference between the existence of a business connection and the income accruing or arising out of such business connection. (9) Para 6 of the protocol to the DTAA is not applicable, because, for the profits to be 'attributable directly or indirectly' the PE must be involved in the activity giving rise to the profits." 27. Applying the aforesaid law enunciated by the Supreme Court in the case of Ishikawajma (supra), there can be no manner of doubt that the offshore supplies in the instant case are not chargeable to tax in India. The instant case, in fact, in our view stands on a better footing as two separate contracts have been entered into between the parties, albeit on the same day, one for the offshore supply and the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the entire price of the equipment to the seller. Even otherwise, a substantial amount in this case was paid to the seller outside India and the Tribunal observed that for the unpaid price the purchaser could have resorted to the provisions of s. 46 of the Sale of Goods Act, which read as under: "46. Unpaid seller's rights.-(1) Subject to the provisions of this Act and of any law for the time being in force, notwithstanding that the property in the goods may have passed to the buyer, the unpaid seller of goods, as such has by implication of law- (a) A lien on the goods for the price while he is in possession of them; (b) In case of the insolvency of the buyer a right of stopping the goods in transit after he has parted with the possession of them; (c) A right of resale as limited by this Act. (2) Where the property in goods has not passed to the buyer, the unpaid seller has, in addition to his other remedies, a right of withholding delivery similar to and co-extensive with his rights of lien and stoppage in transit where the property has passed to the buyer." 29. Thus, the mere fact that 15 per cent of the payment was to be retaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted in the case of Kwei Tek Chao vs. British Traders and Shippers Ltd. 2 Q.B. 459 (QB) which was duly approved by the Supreme Court in the case of Mahabir Commercial Co. Ltd. (supra) wherein it was held as under: "...........Where in pursuance of the contract the seller delivers the goods to the buyer or to a carrier or other bailee whether named by the buyer or not for the purposes of transmission to the buyer and does not reserve the right of disposal he is deemed to have unconditionally appropriated the goods to the contract. The buyer's assent to the passing of the property in the said circumstances is implied and that when the seller dispatches the goods and delivers them to the common carrier for purposes of transit to the buyer, the common carrier not only receives the goods as agent of the buyer but also assents to the appropriation made by the seller. Where however the intention is clearly indicated and the carrier assents it is immaterial by what document the consignment is effected. In cases where the seller bears the freight for the transmission of the goods free of cost to the buyer, the property in the goods passes to the buyer as soon as they are sent to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not actually engaged in executing onshore contracts. It is for this reason that the Madras High Court also noticed that the subsidiary company i.e., ASPL already existed in India prior to the award of the contract. In the instant case, there is no such allegation made by the Department and as a matter of fact also the respondent-assessee in the present case had established a PE in India after the award of the contract for the specific purpose of executing the onshore contract. Again in Ansaldo Energia SPA (supra), it is noteworthy that initially a single contract was awarded to Ansaldo Energia SPA and later on at the instance of Ansaldo, the contract was split into four separate contracts. In the instant case, right from the inception and as part of the documents, two separate contracts, i.e., a contract for offshore supplies and another contract for onshore services were executed between the PGCIL and the respondent-assessee. Yet again, in Ansaldo (supra) there was a specific allegation that the contract was 'loaded on' to the contract price for offshore contract whereas no such allegation has been made in the case of the respondent-assessee. It therefore stands on an altoget ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the country of origin itself as soon as the goods were loaded upon the mode of transfer to be used to convey the plant and machinery, i.e., the shipping vessel, even prior to the goods reaching the high seas. Once the title was transferred in the aforesaid manner, there was no provision either in the agreement or in law providing a recourse to the respondents to take back the title. 36. With regard to the setting up of a PE also, the PE of the respondent in the instant case, as in the case of Ishikawajma (supra), had no role to play in the execution of the offshore supply contract and as a matter of fact was set up for the sole purpose of enabling the performance of the onshore services contract. 37. The contract, however, in the instant case as in the case of Ishikawajma (supra) would be said to have been successfully performed only after the satisfactory commissioning and erection of the plant and equipments. Since the PE was not at all involved in the transaction of the offshore supply of equipment, the existence of the PE [which as held in Ishikawajma (supra) is for the purpose of assessment of income of a nonresident under the DTAA], would be irrelevant in the in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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