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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 ..... 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 instant case. Clause (a) of Expln. 1 to s. 9(1)(i) would not be attracted at all which provides that in the case of a business where all operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. In the instant case there was no operation qua the agreement for supply of equipment, which was carried but 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 - Decided in favor of the assessee - IT Appeal No. 703 of 2009 - - - Dated:- 24-12-2010 - A.K. Sikri, Reva Khetrapal, JJ. Sanjeev Sabharwal, for the Appellant N. Venkatraman with Satish Kumar, for the Respondent JUDGMENT MS. Reva Khetrapal, J.: This is an appeal under s. 260A of the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 244A of the Act was granted. Subsequently, the return was taken up for assessment under s. 143(3) of the Act by the Dy. Director of IT, Circle 1(1), International Taxation, New Delhi ('AO'). 4. In the course of the assessment proceedings, the contention of the LGCL, as stated above, was that income from the offshore supply was not taxable in India. Several judicial precedents and circulars of the CBDT in support of the said contention were cited. The AO, however, did not accept the claim of the assessee relating to offshore supply of equipment in the light of the decision of the Authority for Advance Rulings in the case of Ishikawajima Harima Heavy Industries Co. Ltd., In re (2004) 192 CTR (AAR) 289 : (2004) 271 ITR 193 (AAR), wherein it was held that such offshore supply of material resulting from engineering procurement and construction contract is taxable in India. The AO accordingly held the income accruing to LGCL from the offshore supply contract with PGCIL to be taxable in India. The AO found that the total revenue from the offshore supply contract in the relevant year was US $ 73,25,665. Since the assessee did not produce the profitability statement for the offshore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his condition has been specified in art. 6 of the onshore erection contract. This clearly shows that even in the onshore erection contract it is the responsibility of the appellant that the materials/equipment supplied by it under the offshore equipment supply contract shall give satisfactory performance. The same responsibility has been cast on the appellant in art. 6 of the offshore supply of equipment also. (4) Notwithstanding the award of contract under two separate agreements, the contractor (appellant) shall achieve successful completion of the project under both contracts and successful taking over the project by PGCIL." 6. The CIT(A) held that it was clear from the foregoing that the two contracts were not independent of each other as claimed by the assessee, that there was interrelation and inter-dependence between the two agreements and that one could not exist without the other. Thus, the CIT(A) concluded that though there were two agreements, in fact, it was a composite contract for supply of equipment as well as execution, erection and installation of equipment in India. He further observed that a colourable device had been adopted by the assessee to conceal it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as is reasonably attributable to the operations carried out in India." 9. It was submitted by Mr. Venkatraman, the learned counsel for the assessee that the supply of equipment in this case was made on principal to principal basis and, therefore, the income from supply of equipment was not taxable in India. In this regard, reliance was placed on the circular of CBDT Circular No.23, dt. 23rd July, 2009 (sic-1969). Reliance was also placed on the decisions of the Supreme Court rendered in ITO vs. Sriram Bearings Ltd. (1997) 138 CTR (SC) 169 : (1997) 224 ITR 724 (SC) and Mahabir Commercial Co. Ltd. vs. CIT 1972 CTR (SC) 375 : (1972) 86 ITR 417 (SC) to submit that income from the offshore supply of equipment was not covered under s. 5(2) of the Act. 10. At the outset Mr. Sanjeev Sabharwal, the learned counsel for the Revenue contended that a plain reading of the two contracts would show that they were integrated contracts. Relying heavily upon art. 6 of both the contracts, the contention of Mr. Sabharwal was that any default or breach in one contract was not to relieve the respondent-assessee of its obligation under the other contract. Mr. Sabharwal emphasized that a reading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract' shall automatically be deemed as a default or breach of this 'first contract' also and vice versa and any such default or breach or occurrence giving the employer a right to terminate the 'second 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 risks cost and responsibility, either in full or in part and/or recover damages under this 'first contract', as well. However, such default or breach or occurrence in the second contract shall not automatically relieve the contractor of any of its obligations under this 'first 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. The contract agreement No. C 42101-S858-1/CA-I/787 has also been made on 26th Feb., 2001, between the employer and the contractor for offshore contract (hereinafter referred to as the 'first contract') for the subject pack ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India since the property in goods/equipments was transferred outside India. The bill of lading in respect of the equipment sold was issued in Korea in favour of PGCIL, i.e., the buyer, and the notified party was also the PGCIL. The bill of entry clearly showed that the importer was PGCIL and the goods were directly transferred to the site of PGCIL and not to that of LGCL. In terms of the contract, the ownership of the equipment and materials supplied to the PGCIL was transferred to PGCIL in the country of origin, i.e., in Korea. PGCIL was also the co-insurer under the insurance policy pertaining to the equipment. It was further submitted that the property in goods got transferred to the buyer outside India in terms of cl. 31.2 of the contract which clarifies that the assessee and the PGCIL intended to transfer the title in the property/goods as soon as the goods were loaded on to the ship at the port of shipment and the shipping documents were handed over to the nominated bank where the letter of credit was opened. There was no other term in the contract which was inconsistent with cl. 31.2. 13. It was submitted that sequentially, with the completion of the sale, income accrue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f emphasis specifically states that notwithstanding award of work under two separate contracts, the contractor shall be overall responsible to ensure the execution of both the two contracts to achieve successful completion and taking over of the project by Power Grid. It further provides that any default or breach under the 'second contract' shall automatically be deemed as a default or breach of this 'first contract' and also vice versa. 10.5 Appendix 1 relating to Terms and procedures of payment' is as under: '1.0 Terms of payment In addition to the conditions stipulated under cl. GCC cl. 12, the following terms and conditions will apply: 1.1 CIF price component excluding Indian agent's commission (IAC) of the contract price for all the equipment and materials excluding 'mandatory spares and tools and tackles for off-line maintenance'. 1.1.1 Advance payment Ten per cent (10 per cent) of the CIF price component (excluding IAC) of the contract price for all the equipment and materials excluding 'mandatory spares and tools and tackles for off-line maintenance', amounting to US $ 637,302 (US dollars six hundred thirty seven thousand three hundred and two only) s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the required number of reproducible, O and M manuals, approved drawings, data sheets, test reports, pamphlets and manual of spares, maintenance and testing equipment etc. as per the contract and as (sic ? on) submission of claim by the contractor. 1.2 CIF price component (excluding IAC) of 'mandatory spares and tools and tackles for off-line maintenance' (a) Seventy five per cent (75 per cent) of the CIF price component (excluding IAC) of the 'mandatory spares and tools and tackles for off-line maintenance' shall be paid on pro rata basis through irrevocable confirmed letter of credit established in favour of contractor on shipment and submission of documents specified in cl. SCC 18.1. (b) Balance twenty five per cent (25 per cent) of the CIF price component (excluding IAC) of the 'mandatory spares and tools and tackles for off-line maintenance' shall be paid on pro rata basis within 30 days of receipt and shortage of material at site and on submission of claim by the contractor and physical verification by the employer. Note:- Pro rata shall refer to functionally complete part(s) of the facilities, for which unit rates are identified in the contract. 10.6 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantees by the assessee. 10.7 There are then general conditions of contract, which also include definition of words and expressions used in the agreement. Para 31.1 relating to transfer of ownership is relevant and is as under: '31.1 Ownership of the plant and equipment (including spare parts) to be imported into the country where the site is located shall be transferred to the employer upon loading onto the mode of transport to be used to convey the plant and equipment from the country of origin to that country'." 15. Insofar as the provisions of the second contract, viz., "onshore erection contract" are concerned, the relevant terms thereof as reproduced by the Tribunal are as under: "10.8 It would be appropriate to refer to the second onshore 'erection contract'. The job assigned under the contract is relevant and is as under: 'M/s LG Cable Ltd., South Korea, a company incorporated under the laws of South Korea and having its registered office at LG Twin Tower, 20, Yoido-dong, Youngdungpo-gu, Seoul 150-605, South Korea (hereinafter called 'the contractor' and also referred to as 'LG'). Whereas the employer desires to engage the contractor for performanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and insurance charges and expatriate supervision and other local service charges i.e., erection, testing and commissioning charges shall be paid as follows: (i) Eighty five per cent (85 per cent) of inland transportation and insurance charges shall be paid on pro rata basis after receipt of material at site, production of documentary evidence by the contractor and on certification by the employer. Eighty five per cent (85 per cent) of expatriate supervision and other local service charges i.e., erection, testing and commissioning charges shall be paid on pro rata basis after installation at site and on certification by the employer. Note:- Pro rata shall refer to functionally complete part(s) of the facilities, for which unit rates are identified in the contract. [A condition precedent to release of above-mentioned pro rata payments shall be submission of performance security of 10 per cent of the total contract price i.e., INR 5,998,216 (Indian rupees five million nine hundred ninety eight thousand two hundred sixteen only) plus US $ 8,840 (US dollars eight thousand eight hundred and forty only) for the 'onshore erection contract'. Submission of performance secur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of the respondent-assessee that the supply of equipment was completed outside India and the property in the case got transferred to PGCIL outside India, and thus the profit, if any, on such supply of equipment accrued to the assessee outside India and therefore the same could not be taxed under s. 9(1)(i) of the Act, the following facts are noteworthy. 17. That the offshore supply of equipment related to the supply of specified goods discharged from Korea for which the PGCIL had opened an irrevocable letter of credit in the name of the respondent-assessee with a bank in South Korea. The consignor of the equipment supplied from Korea to Haldia Port was the respondent while the importer was the PGCIL. The equipment was delivered to the shipping company named in the bill of lading and the bill of lading and other documents were handed over to the nominated bank. Accordingly, with the delivery of the bill of lading to the bank, the property in the goods stood transferred to PGCIL. The cargo insurance policy was obtained by the respondent-assessee and it named the PGCIL as co-insurer. Clause 31.2 of the contract unequivocally clarified that the respondent-assessee and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a turnkey contract, but the same by itself would not mean that even for the purpose of taxability the entire contract must be considered to be an integrated one so as to make the appellant to pay tax in India. The taxable events in execution of a contract may arise at several stages in several years. The liability of the parties may also arise at several stages. Obligations under the contract are distinct ones. Supply obligation is distinct and separate from service obligation. Price for each of the component of the contract is separate. Similarly offshore supply and offshore services have separately been dealt with. Prices in each of the segments are also different." 20. It is also noteworthy that in the case of Ishikawajma (supra) the contract was entered into between the appellant which was a company incorporated in Japan, and which had formed a consortium along with Ballast Nedam International BV, Itochu Corporation, Mitsui and Co. Ltd., Toyo Engineering Corporation and Toyo Engineering (India) Ltd. on the one hand and the Petronet LNG Ltd. on the other indisputably involving "(i) offshore supply, (ii) offshore services, (iii) onshore supply, (iv) onshore services and (v) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Clause 22.1 deals with passing of title to the goods supplied in the following terms: 22.1 Title to equipment and materials and contractor's equipment contractor agrees that title to all equipment and materials shall pass to owner from the supplier or sub-contractor pursuant to section E of Ext. H (general project requirements and procedures). Contractor shall, however, retain care, custody, and control of such equipment and materials and exercise due care thereof until (a) provisional acceptance of the work or (b) termination of this contract, whichever shall first occur. Such transfer of title shall in no way affect owner's rights under any other provision of this contract." 23. The interpretation of different components of contract was dealt with in Annex. A appended thereto. So far as 'offshore services work items' are concerned, the same had been defined to mean the items of work set forth as item Nos. D-2.2.1, 2.2.2 and 2.2.3 of the contract price, schedule, details whereof have been mentioned in the said Annexure, which, inter alia, provided: "Notes General 1............... 2. Offshore supply (Ext. D-2.1) is the price of equipment and material (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty, as already stated, opined that the assessee company was liable to pay tax in India though the property in the goods which were subject-matter of the offshore supply passed outside India, in view of the fact that it had a business connection in India. It further opined that if a contract envisaged a composite compensation for the various obligations to be performed and if certain operations are to be performed by or through a business connection then, profits would be deemed to have accrued in India. The petitioner had a PE in India within the meaning of the said term in para 3 in art. 5 of the DTAA entered into between the Governments of India and Japan. 26. Reversing the aforesaid finding of the Authority for Advance Rulings, the Supreme Court in respect of the offshore supply and equipments held as under: "Re: Offshore supply: (1) That only such part of the income, as is attributable to the operations carried out in India can be taxed in India. (2) Since all parts of the transaction in question, i.e., the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India. (3) Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt-assessee loads the equipment onto the mode of transport for transportation from the country of origin. The stipulation in the second agreement (erection contract) relating to certain performances by the respondent-assessee including port handling, customs clearance, transportation, insurance, handling on site, unloading at transportation site, testing and commissioning to the satisfaction of the buyer are in a separate agreement for a separate consideration which is clearly enunciated in the second agreement as follows: "Whereas the employer desires to engage the contractor for performance of all activities within India.................. subject to the terms and conditions hereinafter appearing." 28. As regards the payment for the performance of the activities within India, the contract price aggregating to INR 59982,160 plus US dollars 88,400 was specifically and separately fixed by art. (2) of the contract titled "Contract price in terms of payment". This consideration was separate from the consideration for the supply of equipment and there appears to be no justification to intermingle the two. The consideration for the offshore supply of equipment, it is repeated at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the nature of a trade warranty and the Tribunal in this regard has rightly observed as follows: "14.1 But in the case in hand, there is no power either with the seller (the assessee) or with buyer (PGCIL) to repudiate the contract. Warranty is to give equipment after erection in the running condition. The normal trade warrantees could not be mixed up and taken as a right of repudiation or right of disposal of equipment with the buyer or with the seller. The property in equipment having been passed on handing over the equipment to the ship with the delivery of documents to the bank under irrevocable letter of credit, the terms referred to above could not affect the passing of the property. Thus when goods were transferred outside India, the taxable income accrued outside India. It being not attributable to any operation carried out in India, no portion of the same was taxable in India." 31. We may note also that the buyer's right to examine and repudiate the goods in law does not by itself indicate that the property in the goods had not passed, as is evident from the provisions of s. 59 of the Sale of Goods Act, which read as under: "59. Remedy for breach of warranty-( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases are of little help and are only illustrative of the principles which are applicable for determining when the goods are unconditionally appropriated to the contract. In the case of transactions of sale of goods between the buyer and seller living in two different countries, the contract may envisage, the seller sending the goods through a carrier and the payment being made either at that place or at the place where the buyer resides. In such a transaction the banks have come to play an important part and the bankers' commercial credit system facilitates merchants domiciled in different countries and assures payment to the seller on the one hand and delivery of the goods contracted for to the buyer on the other. This is done by means of what are known as letters of credit which under the terms of the contract the seller may insist on the buyer to provide for in a bank doing business in the place of the seller's domicile........" 33. In the case of ITO vs. Sriram Bearings Ltd. (supra) the Hon'ble Supreme Court held as under: "The only controversy is with respect to the taxability of 165,000 US dollars which is stipulated as the consideration for sale of trade secrets. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in India and there was no such overlapping of responsibilities envisaged under the supply contract and the erection contract performed by the respondent through its head office and PE. Ansaldo's case (supra) is thus clearly inapplicable to the fact situation in the present case and is therefore of no avail to the Revenue. 35. In the final analysis we have no hesitation in holding that viewed from any angle, the fact situation in the instant case is almost identical to that in the case of Ishikawajma (supra) and the law as enunciated by the Supreme Court in the said case will squarely apply to the facts of the present case. If at all there is a difference, the facts in the present case stand on a better footing than in Ishikawajma (supra). In Ishikawajma (supra) there was a turnkey contract with four separate component activities, viz., offshore supply, offshore services, onshore supply and onshore services awarded by Petronet LNG to a consortium of companies led by the Japanese company Ishikawajma-Harima. In the instant case there are two separate contracts i.e., offshore supply and the onshore services contract awarded by the PGCIL to the respondent-assessee. As in the said ..... X X X X Extracts X X X X X X X X Extracts X X X X
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