9911796707
TMI Blog2014 (4) TMI 975X X X X Extracts X X X X X X X X Extracts X X X X ..... offshore services were taxable in India. The said ruling is hereinafter referred to as the 'impugned ruling'. 2. The petitioner no. 1, Linde AG, Linde Engineering Division, Pullach, Germany is hereinafter referred to as 'Linde'. Samsung Engineering Company Ltd., Seoul, Korea is hereinafter referred to as 'Samsung'. Linde and Samsung are hereinafter also referred to as members and collectively referred to as 'Consortium'. ONGC Petro Additions Limited is hereinafter referred to as 'OPAL'. Memorandum of Understanding dated 03.03.2008 is hereinafter referred to as 'MOU'. 3. The principal controversy which is required to be considered in the present petition is: whether in the given facts, Linde and Samsung constitute an Association of Persons within the meaning of 'person' as defined under section 2(31) of the Act? And, whether the income received/receivable by Linde for the supply of equipment, material and spares outside India and for rendering services outside India is taxable in India? 4. The relevant facts in brief are as follows:- 4.1. On 19.4.2007, OPAL floated a Tender Notice inviting bids executing the work (including undertaking all activities and rendering all services) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the Assessing Officer under section 197 of the Act claiming that no portion of the amount payable to Linde for supply of equipment, material and spares and for providing basic and detailed engineering services was liable to be subjected to withholding of tax under section 195 of the Act as it was contended that the said transactions were performed and completed outside India and payments for the said transaction were also received outside India. It was, thus, contended that the amounts received/receivable by Linde for the said supplies and services were not chargeable to tax in India. The Assessing Officer did not accept the plea of Linde and directed OPAL to withhold tax on amounts paid to Linde in terms of the Contract. Thereafter, Linde filed an application before the Authority under section 245Q of the Act seeking advance ruling with regard to the status of Linde and Samsung as an Association of Persons and also as to the tax liability of Linde in India in respect of income received/receivables under Contract dated 10.02.2009. The Authority admitted the application for consideration of the following questions:- "(i) Whether in terms of the Contract dated 10.02.2009 (he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of Linde and Samsung towards OPAL, for due performance of the Contract, was joint and several. The Authority further held that the Contract was an indivisible contract and was incapable of being split up into different components/parts. And, on this basis the Authority concluded that income received/ receivable by the petitioner for offshore supply of equipment, materials and spares and for offshore supply of drawings and designs relating thereto was taxable in India. The Authority also held that since Linde/Samsung continued to be responsible for the supplies up to the stage of acceptance of the work in relation to the erection, procurement and commissioning project, the title of the equipment/material supplied could not be accepted to have transferred to OPAL overseas. 7. Aggrieved by the impugned ruling passed by the Authority, the petitioners have filed the present writ petition. SUBMISSIONS Submissions of Petitioners/Linde 8. It is contended by the learned senior counsel for the petitioner that the status of the Consortium formed by Linde and Samsung was not that of an Association of Persons and as such the Consortium was not liable to be assessed under the Act as an Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... na: (1960) 39 ITR 546 (SC) and also referred to the decisions passed by the Authority in the case of Hyundai Rotem Co. and Mitsubishi Co. v. DIT (International Taxation): [2010] 323 ITR 277 (AAR), Hyosung Corporation v. Director of Income-tax (International Taxation) New Delhi: [2009] 314 ITR 343 (AAR) and In Re: Van Oord Acz. Bv: [2001] 248 ITR 399 (AAR). 11. It is also contended that the Authority was obliged to follow its earlier rulings passed in the cases of Hyundai Rotem Co. and Mitsubishi Co. (supra), Hyosung Corporation (supra) and In Re: Van Oord Acz. Bv (supra) as it is settled law that a principle of law laid down by any Judicial Authority, unless upset in appeal or rendered inapplicable by subsequent change in law would be binding on the said Judicial Authority. In support of this contention, reliance has been placed on the judgment of the Supreme Court in the case of Columbia Sportswear Co. v. DIT: (2012) 11 SCC 224. 12. It was next contended on behalf of Linde that the consideration received/receivable by Linde for supplying equipment, material and spares was not taxable in India as the income arising and accruing from the transaction could not be deemed to accrue o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of the Double Taxation Avoidance Agreement (DTAA) between India and Germany, income of Linde was taxable exclusively in Germany with respect to its global business income, except in cases where the petitioner carried on business through a permanent establishment in India, in which case the profits attributable to the permanent establishment would be taxable in India. The counsel has relied upon Articles 5 and 7 of the said DTAA. It was also submitted that the permanent establishment of Linde did not come into existence till the commencement of the installation stage which was subsequent to Linde providing the basic and detailed engineering and drawings and offshore supply of equipment and material. Thus, the income from provision of offshore supplies and services had already accrued and arisen, prior to Linde's permanent establishment coming into existence. Thus, it was contended that the income from supply of equipments, materials and spares supplied from overseas and offshore services were not taxable under the Act. 15. It was further submitted that treating Linde's enterprise as an Association of Persons would deprive the petitioners of the treaty benefits and the same woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... association and the distribution of income to the members of an Association of Persons was not liable to tax. In the present case, the entire consideration under the Contract was paid/payable by OPAL to the members separately and not to the Consortium. Thus, the notional inflow of funds in the hands of the Consortium was also equal to the outflow in favour of the members. And in such case, no income would arise in the hands of the Consortium. It is pertinent to mention that this contention was neither raised by the petitioner before the Authority nor was considered by the Authority. Submissions of Respondent/Revenue 19. The learned counsel for the respondent has supported the impugned ruling passed by the Authority. It was contended by the respondent that the Consortium formed by petitioner and Samsung constituted an Association of Persons and income or profits received/receivable under the Contract were liable to be assessed in the hands of the Consortium as a separate person. It was submitted that the Contract was entered by OPAL with the Consortium as one entity, which was described as the "contractor" under the contract. It is submitted that the common purpose was to bid as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the offshore transaction were not taxable in India. It was contended by the respondent that the project in the present case is a turnkey project and the contract is an integrated and indivisible contract. Any splitting up of the contract would be artificial and could not be resorted to. It was submitted that the offshore and the onshore transactions could be segregated for the purposes of taxation and the contract had to be read as a whole as an indivisible contract. The dominant object of the contract is the execution of a turnkey project and the question whether the title to the goods supplied passes offshore or within India is secondary to the execution of the contract. The offshore and the onshore transactions are interlinked and the non-execution of one transaction/part would result in the breach or failure of the whole contract. The contract itself provides for milestone dates and the breach of any of the terms thereof would result in the breach of the entire contract and not just a particular obligation. The consideration received for the offshore transaction formed part of the consideration for the entire contract and could not be segregated for the purposes of taxation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he income of partnership/Association of Persons and not whether the association was to be taxed as a separate entity. DISCUSSION AND CONCLUSION 25. We have heard the counsel for the parties. The principal questions that are required to be considered are:- (i) Whether the consortium formed by Linde and Samsung constitutes an Association of Persons under section 2(31) of the Act and are they liable to be taxed under the provisions of the Act as an Association of Persons; and (ii) Whether the income/profit received/receivable by the 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 read with the Protocol between India and Germany? Whether the Consortium constitutes an AOP 26. Section 4 of the Act is the charging section. Section 4(1) provides that income tax shall be charged in respect of the total income of a person in the previous year. A person is defined under Section 2(31) of the Act as under:- "(31) 'person' includes- (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the member of the association is an essential ingredient. It is true that even a minor can join an 'Association of Persons' if his lawful guardian gives his consent. In the case of receiving dividends from shares, where there is no question of any management, it is difficult to draw an inference that two more shareholders functioned as an 'Association of Persons' from the mere fact that they jointly own one or more shares, and jointly receive the dividends declared. Those circumstances do not by themselves go to show that they acted as an 'Association of Persons'. (emphasis supplied) 30. It is also relevant to refer to a judgment of the Supreme Court in the case N.V. Shanmugham and Co. v. CIT: (1970) 2 SCC 139 for understanding the meaning of the term Association of Persons. In that case, the Court appointed three receivers in a suit for dissolution of a partnership firm. The receivers were directed to conduct the business of the firm and the profits earned from the business, being treated as an assets of the firm, were directed to be distributed among the partners as per their shares and in accordance with the deed. The issue before the Supreme Court was whether the profits ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged together in some joint enterprise but did not in law constitute partnership.... xxxx xxxx xxxx xxxx xxxx when we find, as we do find in this case, that there is a combination of persons formed for the promotion of a joint enterprise banded together if I may so put it, co-adventurers to use an expression, then I think no difficulty whatever arises in the way saying that in this particular case these four persons did constitute an "association of individuals" within the meaning of both section 3 and section 55 of the Indian Income Tax Act, 1922." 32. The condition that the association must be formed for the object of producing income, profits or gains is no longer applicable in view of the Explanation inserted in Section 2(31) of the Act, with effect from 01.04.2002. However, the essential condition that an association of persons must be one where two or more persons join in common action for a common purpose continues to be applicable and is not diluted in any manner. 33. Therefore, it emerges from the above discussion 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one person with another in serving one's business objective would not be sufficient to constitute an Association of Persons merely because the business interests are common. A common enterprise, which is managed through some degree of joint participation, is an essential condition for constituting an Association of Persons. 36. It follows from the above discussions that before an association can be considered as a separate taxable entity (i.e an Association of Persons), the same must exhibit the following essential features: (i) must be constituted by two or more persons. (ii) the constituent members must have come together for a common purpose. (iii) the association must move by common action and there must be some scheme of common management. (iv) the cooperation and association amongst the constituent members must not be perfunctory and/or merely in form. The association amongst members must be real and substantial which is sufficient to treat the association as a separate homogenous taxable entity. 37. The facts in the present case need to be considered in view of the above discussion and in the light of the judgments of the Supreme Court referred above. In the present c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the event that the CONSORTIUM is awarded the CONTRACT, shall be responsible for performance of its responsibilities and services as stipulated in this AGREEMENT and to be stipulated in the CONSORTIUM AGREEMENT in detail. xxxx xxxx xxxx xxxx xxxx 3.4 Each PARTY shall be responsible for timely performance of its share of work under CONTRACT including timely supply of required information, data, and material required for the performance of the scope of the work of other PARTIES. Each PARTY is also responsible for quality of its scope of work. xxxx xxxx xxxx xxxx xxxx 4.4 Notwithstanding any other provisions of the AGREEMENT, in no event shall either PARTY be liable to the other PARTIES, whether arising under contract, tort (including negligence), strict liability or otherwise, for loss of revenue, profit or use of capital, downtime of facilities, damage for failure to meet other contractual commitments or deadlines, loss of business reputation or opportunities, loss of production, loss of product, or for any special, incidental or consequential loss or damage of any nature arising at any time or from any causes whatsoever. xxxx xxxx xxxx xxxx xxxx 4.8 The PARTIES mutually agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd material required for performance of work by the other member. 39. Insofar as the execution of the contract is concerned, the responsibilities of each member were separate and independent. Neither of the members had any role to play with respect to the scope of work which was allocated to the other member. The equipment/material to be supplied and the works to be executed by each member under the MOU as well as under the Contract entered into with OPAL was well defined and the members were to act separately and in accordance with the respective work allocated to them. The opening recitals as recorded in the MOU indicate that the Linde was required to perform Basic Engineering, supply Selected Key Equipment and the related Detail Engineering, Detail Engineering and Procurement of Cracking Furnaces, parts of Technical Supervision Services, Commissioning, Testing, Conducting Performance Tests and Post-Commissioning Services of the Project. Samsung was required to perform Detailed Engineering of DFCU Recovery Section and AU, supply of Equipment, Construction, Erection and Pre-Commissioning of DFCU and AU and parts of Technical Supervision Services of the Project. 40. The allocatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amsung to OPAL (described as the 'company' under the Contract). Clauses 6.1 and 6.3 of the said agreement are relevant and are quoted below:- "6.1 The prices and payment conditions for Linde's and SECL's respective Scope of Work as per Articles 4.1 and 4.2 shall be as stipulated in the Bid and, finally, as stipulated in the Contract with the COMPANY. xxxx xxxx xxxx xxxx xxxx 6.3 Detailed terms and conditions regarding payments to be effected by the COMPANY to the Parties under the Contract shall be as follows: Separate invoices will be issued by SECL and Linde to COMPANY for each milestone payment. The Parties agree and acknowledge that under the Contract there shall be direct payments by the COMPANY to each Party for its respective price portion and/or related progress in the total Contract price. The Contract shall include individual Contract prices and payment schedules for Linde and SECL for which each party shall be solely responsible. " 42. The Internal Consortium Agreement was also explicit with regard to risk to be borne by the members. Linde and Samsung agreed to bear the risk for the work falling within their scope of work including on account of non-payment or defaul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MPANY and claimed by COMPANY under the Contract. (2) Linde's liability for liquidated damages under this Article 9.2.3 shall be limited to 5 percent (%) of Linde's price of its Scope of Work. 9.2.4 Liquidated Damages for Non-fulfilment of Performance Guarantees In case of non-fulfillment of the process performance guarantees - as per the Contract-if claimed by the COMPANY, Linde will be responsible for payment of liquidated damages." 44. Insofar as cooperation between Linde and Samsung towards project management is concerned, it was expressly agreed between the said parties that each shall be responsible for the management and control of work falling within their own scope. However, for the purposes of representing the Consortium to OPAL, it was agreed that 'Project Directors' would be nominated by Linde and Samsung who would have the authority to direct the project execution in accordance with the provisions of the Contract entered into between the parties with OPAL and in conformity with their internal agreements. It was expressly agreed that the Project Directors would remain responsible to their respective sponsors. Clause 7 of the Internal Consortium Agreement is relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per Company's Bidding Documents in response to the above said Tender enquiry of the Company vide the Contractor's offer No. P310-7009 dated 20.03.2008 and 28.07.2008 for Adjustment Price Bid. AND WHEREAS pursuant to the above and the discussions conducted with the Contractor, the Company has awarded to the Contractor the Contract for the said Work by its NOA No. MR/OW/MM/DFC/02/2007 dated 23.12.2008 which is the effective date of commencement of this Contract and on the terms and conditions as agreed to by the two parties as of the said date of NOA and as outlined in this Agreement, (hereinafter also referred to as "the Contract"). xxxx xxxx xxxx xxxx xxxx 1.1.3 (a) "Company" means ONGC Petro additions Limited ("COMPANY") incorporated under Companies Act, 1956 having its registered office at Jeevan Bharati, Tower-11, 124 Cannought Circus, New Delhi - 110 001, and one of its offices at 4th Floor, VCCI Commercial Complex, 73-GIDC Makarpura, Vadodara - 390010, India including its legal successors and permitted assignees. xxxx xxxx xxxx xxxx xxxx 1.1.10 "Contractor" means consortium of Linde Engineering and Samsung Engineering Co. Ltd. the successful party with whom contractual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of prices. xxxx xxxx xxxx xxxx xxxx Payment shall be made in the currency or currencies given in the schedule of prices for the work executed as per the procedure set forth in Clause 3.2. Adjustment to Contract Price, if any, shall be made in accordance with provisions of Contract. 3.2 Payment Procedure 3.2.1 Pending completion of the whole Works, provisional progressive payments for the part of the Works executed by the Contractor shall be made by Company on the basis of said work completed and certified by the Company's Representative as per the milestone formula provided in the Contract at Annexure 'F'. Such certification of the Work completed shall be made by the Company's Representative within 15 days of receipt of Contractor's Application for Certification. No payments shall become due and payable (with the exception of the 10% down payment of the Contract Price which is due for payment within 30 days after signing of Contract) to the Contractor until Contract is signed by the two parties and Contractor furnishes to the Company Performance Bank Guarantee (as per Clause 3.3) and Insurance policy / Certificate of Insurance (as per requirement of Clause 7.3) for the policies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll the payments outside India by the Company shall be remitted through Electronic Fund transfer (EFT) / Telegraphic transfer (T/T) and credited to the Contractor's bank account to be specified by the Contractor in writing to the Company before submission of the first invoice. The payment shall be made in currencies stated in the Contract. The Company shall be deemed to have arranged payment to the Contractor on the date of transmission of instruction by the Company's bankers to the Contractor's Bank in the country where the money is required to be paid to the Contractor. xxxx xxxx xxxx xxxx xxxx 3.2.6.1 The Contractor agrees to receive all payments inside India under this contract through Electronic Clearing system (ECS) to their Bank account. The details of Bank Account along with MICR No. of the Bank and Branch shall be provided by the Contractor at the time of submission of the first invoice. The Company shall be deemed to have arranged payment to the Contractor on the date of Company's instructions to Company's bankers to effect payment under ECS to the Contractor's account. Payment shall be made by account payee cheque wherever such facility is not available. Upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther matter in respect of which it is issued or shall be taken as an admission of the due performance of the Contract or any part of it or of the accuracy of any claim or demand made by the Contractor or of extra Work/Charge Order having been ordered by the Company nor shall any other certificate conclude or prejudice any of the rights of the Company under the contract. 5.14.1 The Contract shall not be considered as completed until a discharge certificate has been signed by the Company's Representative on behalf of the Company and delivered to the Contractor stating that the Works have been completed and made good to the satisfaction of the Company's Representative in accordance with the Contract. 5.14.2 The Discharge Certificate shall be issued by the Company's Representative within (28) twenty eight days after the expiration of Guarantee period (of if different guarantee periods become applicable to different parts of the Works then, without prejudice to the Company's Representatives' rights upon the expiration of the latest of those periods) or as soon thereafter as any Works ordered during that period have been completed to the satisfaction of the Company's Representation in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FOB shipment for imported supply and FOT for local supply subject to Contractor takes full responsibility for any damage / loss during the course of transportation until acceptance of works. 7.1.2 Deleted 7.1.3 Ownership of the construction Equipment used by the Contractor and its subcontractors in connection with the Works shall remain with the Contractor and its subcontractors." 46. The Contract also included various annexures forming an integral part of the contract and inter alia specifying certain details as agreed between the parties. Annexure C of the said Contract was a Contract Price Schedule which clearly indicated the overall split of prices for the work to be performed by Linde and Samsung respectively. The summary of payments agreed to be made to Linde and Samsung as tabulated from the details specified in Annexure C of the Contract, is as under: Overall split of prices for the work to be performed by LINDE (excluding service tax) DESCRIPTION OF THE SCOPE OF WORK TO BE PERFORMED BY THE LINDE Total Amount to be Paid I. Design and Engineering rendered (outside India) in Germany (Process Design, Basic Engineering, Detailed Engineering) [EUR x 1000] 40.071 II. Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormed independently by Linde and Samsung. The consideration for the work performed was to be made directly to the concerned member of the Consortium in accordance with the work performed by him. Annexure C of the Contract specified the payment schedule i.e. the amount to be paid for the supply of goods and services rendered by both the members of consortium. Linde and Samsung were to be paid on the basis of the separate invoices raised by them respectively. There was no arrangement for sharing of profits and losses between Linde and Samsung. And, each of them would make profits or incur losses based on the price as agreed by them and the costs incurred by them for performance of the contract falling within their independent scope of work. 48. It follows from the above, that Linde and Samsung had joined together to (a) bid for the contract; (b) present a façade of a consortium to OPAL for execution of the contract and accept joint and several liability towards OPAL for due performance of the contract and completion of the project; and (c) put in place a management structure for inter se coordination and execution of the project. However, in all other respects, both Linde and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cilitate OPAL in dealing with the consortium members collectively and not separately. The only conclusion one can draw is that while OPAL treated the consortium members as a single entity for imposing liability for due performance of the Contract, OPAL also recognized that each consortium member would perform the items of work falling within their respective scope of work, independently. 52. While, it is relevant as to how a third party deals with the members of a consortium, the same would not be conclusive in determining whether the consortium members constitute an Association of Persons. It is indisputable that the purpose of Linde and Samsung in collaborating with each other was to procure the Contract and, to that end, both the said members had agreed to present themselves as a consortium. However, as stated earlier the question as to whether the said consortium members formed an Association of Persons would have to be determined by the level of association and the extent of collaboration as agreed between them. The fact that a third party is desirous to deal with the members as one consortium cannot be the determinative factor in considering whether the members constitute an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to conclude that they had constituted an Association of Persons. Clause 7 of the Internal Consortium Agreement between Linde and Samsung specifically records that "each Party shall be responsible for the management and controlling of its Scope of Work". It was further agreed that Linde and Samsung would establish their own project teams and also nominate one responsible "Project Manager" each who would report to the respective "Project Directors" nominated by Linde and Samsung. The Project Directors would represent the consortium in interaction with OPAL. It is, thus, apparent that both Linde and Samsung were managing the execution of their part of the contract separately without interference by the other member. Neither Samsung nor Linde could carry out the work agreed to be performed by the other. Neither of the parties exercised any control over the quality of the equipment/plant supplied by the other or exercised any control with respect to the quality of the works executed. Each of the parties, thus, were responsible for executing the project through their own personnel and through their independent resources. There was no pooling of resources to form a common management. Eac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary. Mere obligation to exchange information, between independent agencies, for co-ordinating their independent tasks would not result in an inference that the agencies had constituted an Association of Persons. 56. It is relevant to keep in mind that Linde and Samsung shared neither the costs nor risks. Both Linde and Samsung managed their own deliverables. As discussed above, in our view, the facts of this 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. 57. The learned counsel for the petitioner had also referred to the Instruction No.1829 dated 21.09.1989 issued by the Central Board of Direct Taxes (CBDT). The said Instruction had been issued in respect of power projects being executed by a Consortium of companies on turnkey basis. The said Instruction explains that the concept of turnkey execution of a project would involve the persons undertaking the project to take complete responsibility of the entire project. It is noted in the circular that the projects may inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , their limited collaboration for coordination of their inter-related tasks would not be sufficient to constitute an Association of Persons under the Act. 59. Although, the said Instruction had been, subsequently, withdrawn on 20.07.2009, the reasons for the withdrawal are principally: that the earlier instruction had been misused by certain assessees who were deliberately splitting up the contract and creating consortia where non-residents took take advantage of the said instruction to avoid exigibility to tax. Therefore, it is apparent that the instructions had not been withdrawn on account of any change in understanding of law and to that extent reference to the Instruction No. 1829 may be relevant. 60. The learned counsel for the petitioner had contended that the Authority has erred in not following its earlier decisions in Hyundai Rotem Co. and Mitsubishi Co. (supra), Hyosung Corporation (supra) and Re: Van Oord Acz BV (supra). He submitted that the facts in the said cases were similar to the facts of the present case and a view in variance with the earlier decision, was not warranted. 61. In the case of Hyosung Corporation (supra), the applicant therein - Hyosung Corporati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sharing the amount receivable for execution of the Contract. DMRC insisted on a separate guarantee from the parent company of each consortium member and the same was provided. The liability of each consortium member towards DMRC was also joint and several. The Authority considered the facts of that case and came to the conclusion that the Consortium could not be treated as an Association of Persons. The factors which weighed with the Authority to conclude that MRMB Consortium did not constitute an Association of Persons were as under:- (a) The nature of work undertaken and capable or being executed by each consortium member was different and the scope of work of one member could not be undertaken by the other. (b) Each consortium member had a different skill set. (c) Overseeing of each others work, by the consortium members was not possible. (d) Each consortium member had independently determined the prices (by way of agreeing to separate discounts). (e) The consortium agreements specifically recorded that nothing in the agreement would be construed as creating a partnership, joint venture or any other legal entity with the other parties to the said agreements. (f) The pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Samsung as an Association of Persons in view of the provisions of the "Agreement between Republic of India and Federal Republic of Germany for avoidance of double taxation with respect to taxes on income and capital" (referred to as DTAA herein). It is contended that in the event of a conflict between the provisions of the DTAA and the provisions of the Act, the provisions of the Act would prevail to the extent the same are more beneficial to the tax payer. It is contended that treating Linde and Samsung as an Association of Persons would amount to depriving Linde of the benefits under the DTAA and as such constitutes a "Treaty override". We are unable to accept this contention as it based on an erroneous assumption that there would be a conflict between the provisions of the DTAA and the Act in the event an Association of Persons, which has a resident of Federal Republic of Germany as one of its constituent members, is assessed to tax in India. If in given facts, it is found that a non-resident has formed an association with another entity for conduct of a business venture in India, there is no doubt that the said association would be assessed to tax in India and the same is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DTAA defines the expression "permanent establishment". It is clear from a plain reading of paragraph 6 of the said Article that the same only clarifies that an enterprise conducting business through a broker, commission agent or an agent of independent status would not be deemed to have a permanent establishment only for the reason of conducting business through the said specified agents. Undisputedly, a non-resident carrying business through brokers and agents of independent status acting in normal course of business on usual terms would not be construed as forming an Association of Persons with them. It is, thus, obvious that the said paragraph has no application to an Association of Persons. 70. It was submitted on behalf of the petitioners that even if Linde and Samsung were considered as an Association of Persons, no income could be assessed in the hands of the said Association as all the fund were received directly by Linde and Samsung separately. And, any notional inflow of funds would be matched by the outflow of funds. We do not propose to consider this submission for the following reasons: First of all, this contention was not canvassed by the petitioner before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sential to first examine whether any amount receivable/received by Linde in respect of design and engineering or for supply of equipment is liable to tax under the Act. In the event, a portion of income is not exigible to tax under the Act, it would not be necessary to consider whether the DTAA is applicable. 74. The scope of work under the Contract has been broadly described in clause 2.1.1 of the Contract and the same is quoted below:- "2.1.1 Scope of Work The scope of work for the tender shall include in general but not be limited to the following, as defined by Annexure - B and Annexure - E in the bidding document. In case of any contradictions, scope of Work described in Annexure - B of the Contract shall prevail over the scope of Work outlined in the GCC of the contract document. Scope of EPC (LSTK) within RFSU Preparation of the Process Design Package Residual Basic Engineering Detailed Engineering Management Control of all procurement activities of all materials Fabrication, construction, installation, testing etc. Trial run and Pre-commissioning Obtaining statutory approvals as far as in Contractor's scope and required prior to Commissioning Project Management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s year includes income that is received or is deemed to be received in India or which accrues or arises or is deemed to accrue or arise in India. Section 9 of the Act indicates the income that shall be deemed to accrue or arise in India. Sections 5(2), 9(1)(i) and 9(1)(vii) of the Act are relevant and are quoted below:- "5. Scope of total income - (1) xxxx xxxx xxxx xxxx xxxx (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which - a) is received or is deemed to be received in India in such year by or on behalf of such person; or b) accrues or arises or is deemed to accrue or arise to him in India during such year." xxxx xxxx xxxx xxxx xxxx "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 directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India: Explanation 1.- For the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivity in India which can be ascribed to result in any income to Linde in India. The business connection as contemplated under Section 9 of the Act has to be direct and real. A sale of goods simplicitor outside India would not give rise to any taxable income in India even though the said goods are to be utilized within India. Similarly, income from providing offshore services (other than Fees for Technical Services) would also not be taxable under the Act unless the same can be said to arise through or from any "business connection" in India. Thus, in order to determine whether any income accrues or arises from provision of services by Linde, it would be necessary to consider whether the consideration for such services can be considered as "Fees for Technical Services" or whether the income subsumed in the consideration for the services accrues or arises through or from any business connection in India. Similarly, it would also be necessary to consider whether income from supply of equipment, materials and spares outside India can be stated to arise from any business connection in India. 80. The Authority has held, by the impugned ruling, that the Contract entered into by the Conso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct is a complex arrangement. Petronet and the appellant are not the only parties thereto, there are other members of the consortium who are required to carry out different parts of the contract. The consortium included an Indian company. The fact that it has been fashioned as a turnkey contract by itself may not be of much significance. The project is a turnkey project. The contract may also be 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 segment are also different. 31. The very fact that in the contract, the supply segment and service segment have been specified in different parts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manent establishment cannot be said to be involved in the transaction, the aforementioned provision will have no application. The permanent establishment cannot be equated to a business connection, since the former is for the purpose of assessment of income of a non-resident under a Double Taxation Avoidance Agreement, and the latter is for the application of Section 9 of the Income Tax Act. (6) Clause (a) of Explanation 1 to Section 9(1)(i) states that only such part of the income as is attributable to the operations carried out in India, is taxable in India. (7) The existence of a permanent establishment would not constitute sufficient "business connection", and the permanent establishment would be the taxable entity. The fiscal jurisdiction of a country would not extend to the taxing of entire income attributable to the permanent establishment. (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 permanent establishment must be involved in the activity gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices are inextricably linked to the supply of goods, and it must be considered in the same manner." 82. The facts obtaining in the present case are quite similar to the facts as in the case of Ishikawajima-Harima Heavy Industries (supra). It is indisputable that as far as obligations of Linde and Samsung are concerned, the Contract is an indivisible one. However, for the purposes of tax, the Contract does specify the amounts that are payable with respect to the various activities carried on by Linde/Samsung. Income may accrue or arise at various stages and on account of varied activities. In case of a nonresident tax entity any income which accrues or arises from an activity outside India, would not be taxable unless the same falls within the deeming provision contained in Section 9(1) of the Act. In these circumstances, following the decision of the Supreme Court in Ishikawajima-Harima Heavy Industries (supra), it would not be apposite to consider the contract as a composite one for the purposes of imposition of tax under the Act. 83. The Authority concluded that although, payments for each item or work were specified or that the amounts payable for the work to be performed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia or whether any income could be deemed to accrue or arise in India. The fact that the contractual obligations of Linde were not limited to merely supplying equipment, but were for due performance of the entire Contract, would not necessarily imply that the entire income which was relatable to the Contract could be deemed to accrue or arise in India. 85. The principle of apportionment of income on the basis of territorial nexus is now well accepted. Explanation 1(a) to section 9(1)(i) of the Act also specifies that only that part of income which is attributable to operations in India would be deemed to accrue or arise in India. It necessarily follows that in cases where a contract entails only a part of the operations to be carried on in India, the assessee would not be liable for the part of income that arises from operations conducted outside India. In such a case, the income from the venture would have to be appropriately apportioned. The Supreme Court in the case of Ishikawajima-Harima Heavy Industries (supra) had considered this aspect and held that merely because a project is a turnkey project would not necessarily imply that for the purposes of taxability, the entire cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n when it is unambiguous and admits of no doubt regarding its interpretation, particularly when a legal fiction is embedded in that section. A legal fiction has a limited scope. A legal fiction cannot be expanded by giving purposive interpretation particularly if the result of such interpretation is to transform the concept of chargeability which is also there in Section 9(1)(i), particularly when one reads Section 9(1)(i) with Section 5(2)(b) of the Act. What is contended on behalf of the Revenue is that under Section 9(1)(i) it can "look through" the transfer of shares of a foreign company holding shares in an Indian company and treat the transfer of shares of the foreign company as equivalent to the transfer of the shares of the Indian company on the premise that Section 9(1)(i) covers direct and indirect transfers of capital assets. 91. For the above reason, Section 9(1)(i) cannot by a process of interpretation be extended to cover indirect transfers of capital assets/property situate in India. To do so, would amount to changing the content and ambit of Section 9(1)(i)." 87. In the present case also, Linde has contended that it being a nonresident is not liable to pay tax in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of works. 7.1.2 Deleted 7.1.3 Ownership of the construction Equipment used by the Contractor and its subcontractors in connection with the Works shall remain with the Contractor and its subcontractors." 90. FOB is an abbreviation of "Free on Board" and clearly indicates that the ownership of the material to be supplied by Linde would transfer to OPAL, the moment, the materials were placed for shipment. The petitioner had pointed out that shipping Documents/Bill of Lading also recorded the name of Linde as a Consignor and OPAL as a Consignee. In terms of the Contract, Linde and Samsung were fully responsible for any damage/loss during the transportation of the equipment and material. However, the same would not in any manner contradict the position that the ownership of the material in question was transferred to OPAL overseas. The petitioner has also submitted that the payment for design and engineering, supply, insurance and spares and consumables was to be paid to Linde in Euros and for the balance onshore work the payments were to be made in INR. According to the petitioner, this also indicated the portion of work that was required to be done overseas. 91. In the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents, Piping etc., Piping & Instrumentation Diagram, Operating Manual, Process Safety Design. All of the above is prepared by qualified engineers using in-house knowhow and software applications, in Germany. Detailed engineering, designing of each plant unit, equipments, components before it's manufacture. These are prepared in Germany and sent for approval of OPAL. Only after receipt of approval, order for purchase/manufacture of equipment is placed. Invoices for payments for engineering are raised based on each equipment, drawings, calculations. At the end of engineering phase, all documents are compiled and issued as engineering package soft and hard copy. Consignee for Dahej Project is always OPAL. Entire set of final drawings, documents, manuals, hard copies were cleared through the Indian Customs. No customs duty was payable being a SEZ, project." 94. It has been contended by Linde that the above steps are only for the purposes of manufacturing and fabricating the equipment that was to be supplied overseas. It is submitted that the work relating to design and engineering is inextricably linked with the manufacture and fabrication of the material and equipment to be supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said equipment, the income arising from the said services would be taxable in India as fees for technical services. 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 view of the Explanation to Section 9(2) as substituted by Finance Act 2010 with retrospective effect from 01.06.1976, the decision of the Supreme Court in Ishikawajima-Harima Heavy Industries (supra), in so far as it holds that in order to tax fees for technical services under the Act the services must be rendered in India, is no longer applicable. Therefore, 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. Taxability under the DTAA 97. The next question that requires to be considered is whether the amount receivable/received by Linde in respect of design and engineering and supply of equipm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n with, or supplies plant and machinery on hire used for or to be used in the prospecting for or extraction or exploitation of mineral oils in that State. 4. Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include,- (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; (f) the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs (a) to (e), provided that the overall activity of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make, if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. xxxx xxxx xxxx xxxx xxxx 5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. xxxx xxxx xxxx xxxx xxxx 7. Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article. xxxx xxxx xxxx xxxx xxxx ARTICLE 12 - Royalties and fees for technical services - 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the said fees is not attributable to Linde's Permanent Establishment in India. In the event such fees is attributable to Linde's PE in India, by virtue of paragraph 5 of Article 12 of DTAA, Article-7 of the DTAA would be applicable and the income arising from provision of services would be liable to tax in India as Business Profits. 99. At this stage, it is relevant to refer to the decision of the Supreme Court in Hyundai Heavy Industries Co. Ltd. (supra). In that case, the petitioner (therein) had entered into an agreement with ONGC for designing, fabrication, hook-up and commissioning of South Bassein Field Central Complex Facilities in Bombay High. The contract was divided into two parts i.e. the fabrication of the platform was to be performed in Korea and the installation and commissioning of the platform was to be done in India. The petitioner (therein) claimed that no tax is payable for the operations outside India as there is no permanent establishment of the petitioner (therein) in India and for Indian operations, the petitioner claimed exemption under Article 7 of the Convention for Avoidance of Double Taxation (between India and South Korea which is similar to the DTAA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... latforms cannot be made attributable to its Indian PE as the installation PE came into existence only after the transaction stood materialised. The installation PE came into existence only on conclusion of the transaction giving rise to the supplies of the fabricated platforms. The installation PE emerged only after the contract with ONGC stood concluded. It emerged only after the fabricated platform was delivered in Korea to the agents of ONGC. Therefore, the profits on such supplies of fabricated platforms cannot be said to be attributable to the PE. There is one more reason for coming to the aforestated conclusion. In terms of Para (1) of Article 7, the profits to be taxed in the source country were not the real profits but hypothetical profits which the PE would have earned if it was wholly independent of the GE. Therefore, even if we assume that the supplies were necessary for the purposes of installation (activity of the PE in India) and even if we assume that the supplies were an integral part, still no part of profits on such supplies can be attributed to the independent PE unless it is established by the Department that the supplies were not at arm's length price. No s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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