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TMI Blog2016 (9) TMI 164X X X X Extracts X X X X X X X X Extracts X X X X ..... No separate price of goods supplied by way of offshore supply or sale of goods to L & T outside India is specified in the contract. PE played a role in design, selection and procurement of materials to be used in the fagade related work. The fact pattern of this case is not at all similar to that of Ishikawajima Harima [2007 (1) TMI 91 - SUPREME COURT ] and the law as enunciated herein does not apply to the facts of the present case. The contract in this case is a composite one and the entire amount received by the applicant from L&T is taxable in India. - A.A.R. NO. 981 OF 2010 - - - Dated:- 17-8-2016 - V.S. SIRPURKAR AND A.K. TEWARY, JJ. For The Applicant : Dr. Anita Sumanth, Advocate and R. Venkataramani, FCA For The Department : Ms. Sukhvinder Khanna, S.S. Negi, Sachin Dhania, J. Albert and Pawan Kumar RULING A.K Tewary, Revenue - The applicant has sought ruling on the following questions:- (1) On the facts and circumstances of the case, whether the amounts, received/receivable by the applicant from Larsen Toubro towards offshore supply of goods and materials are liable to tax in India under the provisions of the Indian Income Tax Act read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be treated as comprising of two different scope of work. Clause 1.1.4 reads as under: 1.1.4 Supply of all the materials, shipment and/or transportation, prefabrication/fabrication, erection, installation, inspection, testing and commissioning, including all the necessary enabling and allied activities for the entire subcontracts works. 2.4 According to the applicant's counsel 'supply of all materials, shipment and/or transportation, prefabrication/fabrication' may be treated as separate and considered as part of offshore supply of goods. The applicant has heavily relied upon the judgment of Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd v. DIT (288 ITR 408) saying that the present contract was an offshore supply contract in respect of supply of goods, the title to the goods passed to L T Offshore, that the payment for the same was received in Singapore and, therefore, the said judgment is applicable and no income accrues or arises or is deemed to accrue or arise in India. The applicant has further pointed out that the Hon'ble Supreme Court in the case of Ishikawajima harima has noted the following proposition of law that e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxed in the other state but only so much of them as it is directly/ indirectly attributable to that permanent establishment. The Applicant carries on business in India through a Project Office that constitutes its Permanent Establishment in India. However, the Project Office of the Applicant is a separate taxable entity. The Applicant submits that the profits earned by way of off-shore supplies to M/s Larsen Toubro Limited are not either directly or indirectly attributable to that Permanent Establishment, the permanent establishment (Project Office) in India oversees the installation of structural glazing works and wall cladding works for the Delhi International Airport and has no connection, whatsoever, directly or indirectly in the offshore supplies and the off-shore supplies executed by the Applicant are an independent scope of work. 3. During the course of hearings spread over a long period both the Department of Revenue and the applicant have given several submissions and counter-submissions. These are contained in Department's letter dated 3/9/13, 2/4/14, 4/9/15 and 9/10/15. The applicant's responses are contained in submission dated 7/2/14, 6/5/14 and 14/10/15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed till the goods are supplied and commissioned on site. (g) The Department has drawn attention to the resource material Vision No.42 2009-10 of the applicant which reads as under: 'Delhi will be hosting the Commonwealth Games in October 2010 and the modernization and expansion plans for the airport are slated for completion before the Games. The clients and main contractor for the Airport are GMR and L T respectively. Having successfully worked with both parties on the New Hyderabad Airport, MAPL was awarded the facade contract for new domestic and international piers, fixed link bridges, nodes and apron glazing. The facade comprises of high grade steel supporting mullions and unitized aluminum curtain wall systems with aluminum cladding panels and louvers. The area of the facade is approximately 120,000 sqm which was to be completed within 10 months from award. To meet challenges like very tight time lines stringent specification to cater for seismic loads, planning and logistics for fabrication and installation, the MERO-team designed and engineered a system that would be completely fabricated in factory and delivered to site as a finished product, ready to be lifted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... graph 1, the term directly or indirectly attributable to the permanent establishment includes profits arising from transactions in which the permanent establishment has been involved and such profits shall be regarded as attributable to the permanent establishment to the extent appropriate to the part played by the permanent establishment in those transactions, even if those transactions are made or placed directly with the overseas head office of the enterprise rather than with the permanent establishment. (k) The Department has relied upon on the judgement by Hon'ble Madras High Court in the case of Ansaldo Energia SPA [310 ITR 237 (Mad)] saying that, it is not just where the title passed, but also whether there was a crucial and intimate relation, whether there was an element of continuity between the business of the non-resident and the activity within the taxable territories . It has been pointed out that the case of Ishikawajima harima was discussed in detail in the judgment and the court held that the decision in Ishikawajima harima cannot be torn from its context and there are obviously situations where profits from offshore supply cannot be totally excluded from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead as a whole and the purpose of the contract is to be ascertained from the terms of the contract. (l) According to the Department the factual matrix in Ishikawajima harima case is contrasted with the facts of the applicant's case as under: (i) In Ishikawajima Harima case, there is a consortium of various entities each with distinct responsibilities to execute parts of the turnkey project. Role and responsibility of each member of the consortium was specified separately. In the applicant's case, MAPL is the single sub-contractor with the full responsibility of executing the work called Facade and Associated Works . (ii) The contract document in Ishikawajima Harima case specified the various components of the project distinctly as offshore supply and onshore supply of materials and services. The price for each component was also specified separately. In the applicant's contract with L T there is no such specification. The division of the total value of contract into Indian rupees and Singapore dollars is not spelt out in the contract as attributable to different distinct components of the contract and no basis for the division into two currencies is available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s differ in quality and various other parameters. Also the revenue has compared wrong goods in wrong geographical location. d. As regards reliance of the Revenue on the decision of the Madras High Court in the case of Ansaldo Energia SPA [310 ITR 237 (Mad)], the applicant has mentioned that this decision is distinguishable on facts and is pending before the Hon'ble Supreme Court for final hearing. Contract 6.1 Before taking up these issues, it is necessary to set out the important portions of the contract/appendices for two reasons: one, the issues can be considered only on the basis of contracts, clauses and respective contentions and, second, quoting one portion of the clause from here and one from there on selective basis is not appropriate way to consider the issues involved. To recall the facts, DIAL floated the global tender and contract for development of Delhi Airport was awarded to L T, which, in turn, gave sub-contract to the applicant. The sub- contract agreement is titled 'sub-contract -T3 - 04.1 Facade Associated Works' and comprises of special conditions of contract (SCD), sub-contract data (SD) Appendices 1 to 12 (App). 6.2 Appendix 2A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the grouting of base plates, the provision of cleats and drilling of holes for the attachment of the glazing and cladding system, and repairs to damage surfaces during constrictions, etc. 6.3 Clause 1.2.7 of this Appendix 2A further provides sub-contractor's responsibilities as under:- Selection of materials, components suppliers; procurement, manufacture, assembly, shipping to Site, profiling at Project Site, multiple handling on Site and installation into the Works, commissioning and placing into service, including all protection and cleaning of the subcontract works therefor. 6.4 Clause 2.3 of this Appendix reads as under:- The Sub-contractor is responsible for the general arrangement, detailed design, technical specification, adequacy and contractual and legal compliance of the whole subcontract works, including all of their interfaces, and leading the design and specification aspects of their testing, commissioning, trials and defect remediation, and including obtaining the endorsement of the Employer's Representative and the consent/approval of all Relevant Authorities thereto. 6.5 Appendix 2B, Clause 2.2.4 provides that 'sub-contractor, at his own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to import such shipment at such concessional rate of Customs duty. 5.1.4.5 The Sub-contractor pays the Indian Customs duty upon that shipment and clears it through Indian Customs, as the agent of the employer; subject to all additional Employer's documentation regarding any concessional rate of Customs duty as App5.1.4.3.3 complying with all Applicable Law:- 1.4.5.1 the Sub-contractor pays only that concessional Rate of Customs duty upon that shipment. 1.4.5.2 the Total Value of the Subcontract is reduced by the amount of Customs duty so saved. 5.1.4.6 subject to s.App5.1.4.3 and to s.App5.1.4.4.3 if applicable, the Sub-contractor remains responsible for the timeliness, cost and risk of the shipmen's delivery to the Project Site and. of the subcontract works as a whole. 6.7 App5.2 gives the value of the contract as under: Cost Centre Description Amount, INR Amount, SGS T4. 1-Ci Pier AB 349,365,709 167,54,444 T4.1C2 Pier CD 333,018,384 15,686,842 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ground that portion of the contract relating to supply of plant and materials would not generate any tax liability in India The order u/s 195 of the Act passed on 16/4/2009 in which it was held that the supply of plant and materials form part of the composite contract and the request for a certificate for NIL deduction of tax was not acceptable. Inferences Conclusions 7.1 The contentions of both the applicant and the department have been broadly summarized in earlier paragraphs. The question revolves around the fact as to whether the amount received by the applicant from L T pursuant to the contract can be bifurcated into offshore supply of goods and materials and services rendered and to consider this question the following issues arise for consideration before us: I. Whether the contract is divisible into offshore supply of goods and materials and services rendered, whether obligations under the work as per the contract are distinct, i.e. whether off shore supply is an independent scope of work in the contract? II. Whether all parts of transaction relating to sale of goods to L T, i.e. transfer of property in goods as well payments, were carried outside Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existence long before the design of materials and equipments for offshore supply started. The project office had already one design manager, one design team leader and three designers working full time for this purpose with effect from May, 2008.The project office is admittedly PE and there is no dispute about the fact that this came into being much before the supply of goods and materials started. The contract document shows that it was being manned by personnel deployed for design of goods and materials to be selected and procured. The goods have been cleared from customs in India by the project office and customs duty has also been paid by the project office. In these circumstances, to say that PE had no role in respect of supply of goods and materials is incorrect. (d) There is no bifurcation between supply and erection/installation in the contract. In fact, in the entire contract there is no such bifurcation, either in the context of sub-contractor's works and responsibilities or with reference to cost center where cost of Pier AB, Pier CD etc is mentioned or with reference to payments required to be made. The applicant is relying on one portion of clause 1.1.4 of Appen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the applicant. Nowhere in the contract is it specified that payment for supply of goods materials will be in Singapore dollars and in Singapore. The cost centre, which shows cost in Singapore dollars Indian Rupees, is only for working of the cost and conversion in Indian rupees thereof and it says that total amount (shown in Indian rupees) will become due to the applicant in his final account. (k) Payments in the contract are not related with sale of goods and materials to L T outside India. Payments are linked with the different stages of design, drawing, supply and commissioning of the entire networks and have been made at different stages as under: - 2% - on submission of detailed working programme 2% - shop drawing detailed fabrication 1 % - whole of subcontract works 27% - all bought on materials components documented as being in sub-contractor's premise 3% - Prototype complete 7% - on plants and materials shipped to site 26% - on plant materials assembled and/or Fabricated units delivered to site with Custom Duties paid. 27% - on plant materials assembled and/or Fabricated units installed at site. 3% - Test being successful. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is in India. However, the option to receive payment in foreign currency is not linked with shipment of goods but it is with reference to entire contract value, i.e. option has been given to receive part payment in foreign currency without reference to offshore supply. (d) The applicant further asserts that the transaction of supply is completed upon the consignment leaving the factory. The applicant has stated that the sale to L T was done outside India. This leads to a major question whether on the basis of facts the sale to L T could be considered to be completed outside India. Under the Sale of Goods Act, Section 19 of the Sale of Goods Act makes it clear that property in goods passes when the parties intend it to pass. Section 19 is reproduced as under: (1) Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. (2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. (3) Unless a different intention appears ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a. The permanent establishment was not involved in the transactions. As regards offshore supply it was held that since all parts of the transaction in question, i.e., the transfer of property in goods as well as the payment, was carried outside the Indian soil, the transaction could not have been taxed in India. In this case the Hon'ble Court had reproduced all relevant clauses of the contract to show that clause 14.8 showed separate payment in US dollars and Indian rupees depending on the nature of supply viz. offshore supply and offshore services and onshore supply and onshore services. Exhibit D-2.1 mentioned that offshore supply was the price of Equipment Material (including cost of engineering, if any, involved in the manufacturing of such Equipment Material) supplied from outside India on CFR basis. Exhibit D-2.2 was for offshore services, Exhibit D-2.3 was for onshore supply and Exhibit D-2.4 was for onshore services. Article 13.3.2 specifically referred to the cost and offshore supplies. The insurance was in owner's name. Then the Court concluded obligations under the contract are distinct one. Supply obligation is distinct and separate from service obligation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Linde AG, Linde and Samsung were responsible for performing separate items of work. The scope of work to be performed under the contracts by both the parties was clearly demarcated and separately identified. The considerations payable to Linde and Samsung for the respective items of work to be performed by them were separately specified and the amounts payable by Opal under the contract were also paid directly to each member of the consortium. The permanent establishment of Linde did not come into existence till the commencement of installation stage which was subsequent to Linde providing a basic and detailed engineering and drawings and offshore supply of equipment and material. 7.6 The common facts in all above mentioned decisions as compared to the facts in the present case are: (a) In these cases there were separate contracts for offshore supply and onshore services or such distinction was specific with supply obligation being distinct from service obligation. There is no such distinction in the present case. (b) In these cases price for each component was separately specified. However, cost value centre in the present case mentions the price of entire contract. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contract irrespective of goods and materials brought in the premise. 7.9 This Authority in the case of Roxar Maximum (supra), wherein also the applicant had relied upon the judgment in Ishikawajima Harima, also held as under- A contract has to be read as a whole. The purpose for which the contract is entered into by the parties is to be ascertained from the terms of the contract. In the case on hand, ONGC clearly called for a contract for services for supply, installation and commissioning of 36 manometer gauges . The purpose of the contract is the installation of the gauges at site to enable ONGC to carry out its operations. I have quoted earlier the relevant portion of the contract. On a reading of the same, there cannot be any doubt that that the contract in question was for erection and commissioning of 36 manometer gauges for the use of ONGC. The contract is clearly not one for sale of equipment. Nor is it one for mere erection of the equipment. It is a composite contract for supply and erection at sites within the territory of India. What is paid for by ONGC is for the supply and erection done in India. The payment is received by the applicant for the performance of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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