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TMI Blog2021 (2) TMI 992X X X X Extracts X X X X X X X X Extracts X X X X ..... nvolved in the project from the very beginning but its key personnel were managing the affairs of the Applicant which makes them PE from the effective contract date. These employees not only had a secured right to use their office space but they were carrying on the business of the parent enterprise and in this sense the Applicant had a fixed place of business. Therefore, there is no doubt that the Applicant had a PE from the effective date of Contract. Taxability of offshore supply of Equipments - In view of the Clause (a) of Explanation 1 to Section 9(1)(i) and respectfully following the decision of the Apex Court in the case of Ishikawajima Harima Heavy Industries Ltd.[ 2007 (1) TMI 91 - SUPREME COURT] we are clear that no income arising in the hands of the Applicant from the off-shore supply of equipments materials can be held to be chargeable to tax in India, under the Income tax Act 1961, as the sale was completed outside India and there was no accrual or deemed accrual in India. Taxability of offshore services - Basic Engineering' and 'Detailed Engineering' services - The nature of these services has been dealt with earlier and these are not found co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il production - offshore and onshore, refining, petrochemicals, fertilizers, chemicals, pharmaceuticals, non-conventional energy, sub-marine pipes etc. ONGC Petro Additions Limited ( OPAL ) is a company incorporated under the Companies Act, 1956 and having its registered office in Vadodara, Gujarat. OPAL desired to setup Butene-l Plant at Dahej Petro Chemicals Complex, Gujarat on a lump-sum turnkey basis for which a tender was issued on 22.01.2010 inviting bids for designing, engineering and construction of the Plant at site. The Applicant had submitted a techno commercial offer letter dated 28th May, 2010 and price proposals for execution of the scope of work mentioned in the tender floated by OPAL The bid of the Applicant was accepted by OPAL and contract was awarded to it vide Notification of Award ('NOA') dated April 15, 2011. Pursuant to the NOA, the Contract Ref No. OPAL/BDA/MM/CTS/275/11-12 dated 21 st November, 2011 was signed between OPAL and the Applicant. The Plant was to be setup using proprietary technology owned by a non-resident, namely, Axens, France, which was an international provider of established technology to the hydrocarbon industry. The Applicant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Central Government on September 7, 1994? 2. On the facts and circumstances of the case, whether the consideration receive/receivable by the Applicant from OPAL in respect of basic engineering design services carried or to be carried out in France in relation to the construction, erection, installation, commissioning and testing of the Plant at Dahej is liable to tax in India under the India-France DTAA read with Protocol? 3. On the facts and circumstances of the case, whether the consideration received/receivable by the Applicant from OPAL for offshore advisory services rendered or to be rendered from France in relation to detailed engineering to be done by the Applicant's project office in India for setting up of Butene-l Plant at site is liable to tax in India under the India-France DTAA? The application was admitted on 3 rd February, 2015. Submission or the Applicant 3. The Ld. AR for the Applicant submitted that the Applicant is tax resident of France and is, therefore, eligible to tax under the provisions of the India-France DTAA or the provisions of the Act, whichever was beneficial to it. It was stated that a non-resident is liable to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of equipments was made by the Applicant to OPAL from outside India on principal-to-principal basis and the sale was concluded outside India. It was also clarified that no operations were carried out by the Applicant in India in connection with the offshore supply of equipments under the contract. 4. As regarding taxability under India-France DTAA, it was submitted that the Applicant had setup a project office (PO) in India for execution of the onshore scope of work under the Contract in respect of installation / supervisory activities and thus, the Applicant had a PE in India under Article 5(3) of the India-France DTAA. It was, however, submitted that the PO/PE had no role to play in the offshore supply of equipments and, therefore, the income from such offshore supply was not attributable to activities carried on by the project office in India. It was further submitted that the price payable for supply of equipments was at arm's length as agreed to by unrelated parties and that it did not include price for any service rendered or goods supplied by the PE in India. 5. On the taxability of offshore engineering design services in relation to setting up of the Plant at s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Article 7 of India-France DTAA, it was submitted that such services were not attributable to the PE of the Applicant in India. 6. As regarding advisory services in relation to detailed engineering (i.e. preparation of drawings, designs, layout, etc.) to be done by the Applicant's project office in India for setting up the Butene-l Plant, it was submitted that such advisory services were provided by Applicant's technical specialists from France (i.e. outside India) though e-mails, teleconferencing, video-conferencing, etc. Further that such service did not make available technical knowledge, experience, skill, knowhow or process to the recipient and could not be independently used by OPAL for setting up a similar plant. It was, therefore, submitted that the consideration for advisory services was not taxable as FTS under the restricted source rule. Further, as the services were rendered from France, they were not attributable to PE in India and not taxable as business profit as well under Article 7 of India-France DTAA. Submission of the Revenue 7. The Revenue submitted that the contract was for setting up Butene-l plant at Dahej Petro Chemical Complex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Applicant had an established presence right from the pre-tendering stage and its employees or representatives were present in India throughout. The Applicant had carried out site visits, site surveys, acquired and analysed data, prepared site modification plans and effected site modifications etc. which were used for designs services as well as for manufacturing of the so-called offshore supplies. Therefore, many activities in the manufacturing and supply of the equipments were attributable to its PE in India. Further, the passing of the title of the equipments was contingent upon performance guarantee test and satisfactory operation of works in India. The Revenue further submitted that apart from a fixed place PE, the Applicant also had a service PE in India and, hence, the profit was attributable to the PE and was taxable in India. The Revenue has placed reliance on the decision of Chennai High Court in the case of Ansaldo Energia SPA (310 ITR 239) (Mad). It was further submitted that the contract should be read as a whole and it could not be split up / dissected for taxation purpose and that it has to be looked up rather than looked through. In this regard, reliance was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13 of the India France DTAA; the Revenue has submitted that the Protocol to the India France DTAA, cannot be used to import the make available clause from treaty with a third country. The scope of the protocol was restricted to only the more beneficial rate of tax and not to the definition of the FTS in the DTAA. It was submitted that as per Article 31 (1) of Vienna Conventions of Law of Treaties (VCLT), the treaties need to be interpreted in good faith and, therefore, it was not permissible to import the 'make available' clause from the treaty with a third country to India-France DTAA. According to Revenue, the treaties are bilateral negotiations between two governments and a word that was not used in the treaty cannot be read though by importing wording from other treaty, as the treaty negotiator did not intend on the use of those words. Reference in this context was made to decision of the AAR in the case of Steria India (45 taxmann.com 281)(AAR). Revenue has further contended that even the make available condition was satisfied in this case as the Applicant had imparting technical knowledge by way of a technology license. It was pointed out that out of the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tract in India it was submitted that this has no material consequence while determining taxability of offshore supply of equipments, as held by Hon'ble Supreme Court in the case of Ishikawajima (supra). The Applicant clarified that the operator's training scope was already covered within the onshore scope of work performed by the Applicant's PO which constituted an installation P.E. in India. It was submitted that for the onshore scope of the work and the consideration identified for such scope of work was duly offered to tax in India. Similarly, certain minor scope of construction services was subcontracted to TIL by the PO, on which applicable taxes were paid by the P.O. As regards, transfer of technology a copy of tripartite agreement between Axens France, OPAL and the Applicant was furnished. It was submitted that the same does not form part of the question raised before the Authority and hence are not relevant for the proceeding. The Applicant clarified that none of its employees engaged in other contracts undertaken in India were engaged in the offshore scope work of the present contract. 14. In respect of offshore supply, it was submitted that the contract en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of DTAA and they had already offered the revenue received from services rendered in India as fee for technical service / royalty and, therefore, the present application had become infructuous. Admittedly, these returns were filed after the filing of the present application and there was no pendency on the date of application. As rightly pointed out by the Ld. AR we have to adjudicate the legal issues of the questions raised in the application and merely because the Applicant has declared income in the returns filed afterwards, it does not make the application infructuous. The filing of returns might be a precautionary measure to escape the rigors of interest liability in case any of the questions is not answered in their favour. As regarding direction to the Applicant, who is a non-resident Applicant, to provide details of the amount offered by it in its return of income in different years, the Department was not precluded to collect such details on its own as the proceedings before the AO had not abated in terms of provisions of section 245RR of the Act. We, therefore, don't deem it necessary to accede to the request of the Revenue as those details are not necessary to decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nel were employees of TIL. Thus TIL was not only involved in the project from the very beginning but its key personnel were managing the affairs of the Applicant which makes them PE from the effective contract date. These employees not only had a secured right to use their office space but they were carrying on the business of the parent enterprise and in this sense the Applicant had a fixed place of business. Therefore, there is no doubt that the Applicant had a PE from the effective date of Contract. Taxability of offshore supply of Equipments 18. The first question raised in the application is with reference to offshore supply of equipments by the Applicant under contract dated 21 st November, 2011 with OPAL. The scope of work as per clause 2.1.1 of the contract document is found to be as under: Scope of Works : The scope of work shall include in general but not be limited to the following, as defined in Annexure- 'B' and Annexure- E' of the Contract document. Scope of EPC (LSTK) Contractors Providing Licenses Preparation of the Process Design Package FEED Basic Engineering Detailed Engineering Management Control of all p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the terms of the contract that ownership of the equipments and materials under offshore supply part of the contract was transferred outside India. Further, clause 3.2 of the contract document prescribed that progressive payment for the part of the work executed shall be made on the basis of work completed as certified by OPAL as per the milestone formula provided in the contract. As per milestone formula 90% of the payment was made till FOB delivery of materials, 5% on arrival of materials at site and remaining 5% on successful completion of work. The payment outside India was remitted through electronic fund transfer / telegraphic transfer to the Contractor's bank account. 20. The Hon'ble Supreme Court has enunciated the principle in the case of Mahabir Commercial Company Limited (86 ITR 417) that under CIF contract, the property in the goods, passes once the documents are tendered by the seller to the buyer or the agent, as required under the contract. It was further held that where the seller retains control over the goods by either obtaining a bill of lading in his name or to his order, the property in the goods does not pass to the buyer until he endorses the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of composite contract; the Supreme Court has categorically held that no part of profit arising from the supply of equipment outside India would be chargeable to tax in India. 22. The Revenue has contended that the Applicant had a presence in India in the form of fixed placed permanent establishment (PE), which was responsible for offshore supply of equipments and materials. It was submitted that as there was no independent sub-contract for supply of offshore equipments, a holistic approach should be adopted and the PE of the Applicant held responsible for all the activities under the contract, including offshore supply part of materials and the equipments. The Revenue has not brought out any evidence on record to establish the involvement of PE in offshore supply of equipments and materials. It is found from Annexure-C of the contract that item wise break up of materials was detailed in respect of Supply, Fabrication / Construction, Erection and Installation . Further, under the column Supply , break up of Imported component (Euro) and Indian component (INR) was mentioned in respect of each item in the contract document itself. Such breakup was also available in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n view of the Clause (a) of Explanation 1 to Section 9(1)(i) and respectfully following the decision of the Apex Court in the case of Ishikawajima Harima Heavy Industries Ltd., we are clear that no income arising in the hands of the Applicant from the off-shore supply of equipments materials can be held to be chargeable to tax in India, under the Income tax Act 1961, as the sale was completed outside India and there was no accrual or deemed accrual in India. The essence of this decision of the Hon'ble Supreme Court, was also followed in the cases of Hyosung Corp. (supra) and other decisions as relied upon by Applicant. 24. The revenue has relied upon the decision of Madras High Court in the case of Ansaldo Energia SPA (310 ITR 239). In this case NLC, an Indian company, had awarded a turnkey contract to Ansaldo Energia SPA on a single bidder basis. However, Ansaldo requested NLC to award the Indian portion of the turnkey contract to other legal entities to be selected by Ansaldo, as it had no business persons in India. NLC accepted Ansaldo's request on assurance that it would take the overall responsibility of the entire turnkey contract in its capacity as a single bi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was a composite contract for supply and erection at sites within the territory of India and what was paid for by ONGC was for the supply and erection done in India. The Authority had held that the contract cannot affect the object of the tender or the terms of the tender notification and that a separate payment schedule, if any, agreed to, cannot alter the terms of the tender. The terms of the contract of the present case has already been reproduced earlier which clearly stipulates that ownership of offshore equipment and materials will be transferred to the company upon FOB shipment for the imported supply. Thus, this case is found distinct on facts. For this reason the reliance placed by Revenue on the other decisions is also not found relevant. Taxability of offshore services 26. The Applicant has contended that the basic engineering design service was in relation to the construction, erection, installation, commissioning and testing of the plant at Dahej and was rendered from France. Similarly, offshore advisory services were also rendered from France in relation to detailed engineering to be done by the Applicant's PO in India for setting up of Butene-l Plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, construction, erection, testing, pre-commissioning and commissioning during the execution of the contact. Thus, the consideration of third party inspection was in respect of the services rendered by TPI Agency and the Applicant was only being reimbursed this expense. As the third party inspection was not carried out by the Applicant directly, there cannot be any question of rendering this service by the Applicant. It was submitted by the Applicant that consideration in respect of technology licensing services and inspection services were already offered to tax in India under the applicable provisions of India-France DTAA and were not subject matter of determination before the Authority. As the Applicant has not raised any specific question in respect of Technology Licensing services and Third Party Inspection services, we do not deem it necessary to address this issue. 28. The questions before us are in respect of 'Basic Engineering' and 'Detailed Engineering' services only. So far as taxability of these offshore services under the provision of the Act is concerned, there is no dispute. It has been admitted that these amounts will be taxable under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ority, or a resident of that State. Where, however, the right or property for which the royalties are paid is used within a Contracting State or the fees for technical services relate to services performed, within a Contracting State, then such royalties or fees for technical services shall be deemed to arise in the State in which the right or property is used or the services are performed . The Applicant has contended that as per India-Finland DTAA, FTS shall be deemed to arise in the state in which the services are performed. According to the Applicant, the services raised in Questions 2 and 3 were performed in France, therefore, they are taxable only in France and not in India. 30. The Applicant has also sought to import the provisions of India-Portugal DTAA entered in the year 2000, the Article 12.4 of which is as under: 12.4. For the purposes of this Article, fees for included services means payments of any kind, other than those mentioned in Articles 14 and 15 of this Convention, to any person in consideration of the rendering of any technical or consultancy services (including through the provisions of services of technical or other personnel) if such services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rements to completely design and engineer these facilities. The basic engineering design, even if developed in France could not have been provided directly without verification, review and approval by the Company. The relevant clauses of the Contract for Design Reviews, Engineering Review and Design Verification are found to be as under: 2.2.1 : Design Reviews a) Company and/or its representative will review all facets of Contractor' s design including design calculations in order to ascertain compliance with design criteria, specifications and conceptual design. b) Contractor shall furnish all design information , calculations of non-proprietary nature, drawings, catalogue, reprints along with the methodology of computation necessary for review by Company and/or its representative . All the above items shall be made available any time at the request of the representative of the Company. Copies of relevant codes and standards, handbooks , engineering practices and any other related items which may be required from time to time shall be made available to the design review team. Contractor shall also ensure availability of two copies of complete set of Contract doc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions, drawings etc. along with the methodology of computation for review by OPAL. In this process, the Applicant was not only making available the design services to OPAL but the design, even if prepared in France, were not being rendered directly from France. The design and engineering services were subject matter of review by OPAL and only after approval of OPAL they were being rendered. Thus the rendering of actual service was in India and not in France. Similarly, review and approval of OPAL was contemplated in the case of engineering reviews, design verification and construction drawings specifications. The Applicant was required to submit process package, all layout designs, detail construction and approval drawings, design specifications, details calculations, purchase specifications etc. for review and approval of OPAL. A formal design verification meeting between the Applicant and OPAL was also contemplated in the contract. The procedure for review by the Company was appearing in Clause 2.3 of the Contract which is as under: a) Contractor will forward copies of all preliminary drawings and specifications in accordance with the correspondence schedule and procedure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f these services also satisfy the condition of 'make available' of these services. When we analyze the nature of services and the process in which they were provided, it is found that the all design information, calculations, drawings, methodology of computation etc. were provided to OPAL in order to ascertain compliance with design criteria, specifications and conceptual design. The entire design and engineering aspect of the project was reviewed by OPAL and verifications were carried out through formal design review meetings. All preliminary drawings and specifications were provided by the Applicant and OPAL had reviewed these drawings and specifications and advised the Contractor with its comments or suggestions and had returned a marked-up drawings print with corrections to be made by the Contractor. The hard copies of documents/drawings were provided to the Company at the same time as their distribution within Contractor's organization. The entire process has been set out in detail earlier in this order and we find that these services enabled the recipient of these services to perform the same services, in the future, without recourse to the assessee. Thus the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived by the Applicant was for construction and erection at site within the territory of India and for performance of the contract as a whole in India. There was no exception in the contract for accrual of any part of the contract outside India except in respect of offshore supply of equipments and materials as discussed earlier. It is, therefore, clear that the consideration paid to the Applicant in respect of 'Basic Engineering' and 'Detailed Engineering' services had accrued in India. 37. These services were part and parcel of the Contract and could not have been rendered divested from the execution of the contract. The Applicant has admitted that the basic engineering design service were in relation to the construction, erection, installation, commissioning and testing of the plant at Dahej. Such engineering design had to be customized and prepared vis-a-vis the location of the site and taking into account the local factors and could not have been delivered exclusively from France. The involvement of the PE of the Applicant in such designing process was inevitable. The Applicant has contended that such services were not attributable to the PE of the Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permanent establishment. There is no dispute to the fact that business of the Applicant was carried through its PO in India. As the design services were inextricably connected with setting up of the plant and were rendered through this PE, the profit of the PE is required to be taxed in India as per the provision of Article 7.1 of the India-France DTAA in respect of these services. As the basic engineering design service and offshore advisory services are found covered under Article 7.1 of the DTAA, it is not necessary to examine whether the same are also covered under Article 13 of the DTAA or not. 40. The Applicant has relied upon the decision of Hon'ble Supreme Court in the case of CIT Vs Hyundai Heavy Industries Company Limited (291 ITR 482) (SC). In that case ONGC had entered into an agreement with Hyundai for designing, fabrication, hook-up and commissioning of some platform in Bombay High. The contract was in two parts. One was for fabrication of platform in Korea and other was installation and commissioning of said platform in Bombay High. It was held by the Apex Court that since installation PE in India came into existence only on conclusion of transaction giv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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