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TMI Blog2004 (10) TMI 87X X X X Extracts X X X X X X X X Extracts X X X X ..... roject work which fell to the share of the applicant involves to develop, design, engineer, procure equipment materials and supplies; to erect, construct storage tanks of a 5 MMTPA capacity with potential expansion to a 10 MMTPA capacity at the specified temperatures (-200 degrees Celsius) including marine facilities (jetty and island break water) for transmission and supply of the LNG to purchasers; to test and commission the facilities relating to receipt and unloading, storage and regasification of LNG and to send out of regasified LNG by means of a turnkey fixed lump-sum price time certain engineering procurement, construction and commission contract. The project is required to be completed in 41 months. The description of the work allotted to the applicant is categorized thus: (1) offshore supply, (2) offshore services, (3) onshore supply, (4) onshore services and (5) construction and erection. The price is payable for offshore supply and offshore services [(1) and (2)] in US dollars, for onshore supply(3) in Indian rupees and for two items [(4) and (5)], namely, onshore services and construction and erection partly in US dollars and partly in Indian rupees. The price of offsh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services under the Act and/or the India-Japan tax treaty? 2. The Director of Income Tax (International Taxation), Mumbai (referred in this ruling as the Commissioner) submitted the following comments. There is no dispute with regard to the particulars of the contract between the Consortium and the Petronet which was signed in India. In regard to offshore supply, it is stated that though the income is not received in India, it is definitely taxable as it is deemed to accrue or arise in India under sec. 9 of the Act. The applicant has entered into a contract of a turnkey project which has been signed in India. The project is one composite whole. The applicant is not only to procure the goods from outside India but also to have them unloaded at the port when they arrive in India, pay Customs duty and take the same to the project site; the Customs duty is, however, reimbursable to the applicant. It is not correct to say that the property in goods passed to the Petronet at high seas as the applicant itself is taking actual delivery of the goods and not the Petronet. There is business connection between the applicant and the Petronet. The project which involves numerous activities is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rformed by the PE or persons employed by it. Therefore, under both the Act and the treaty, the entire amount received by the applicant as fees for technical services shall be taxable at the rate prescribed in section 115A(1)(b)(B) and in article 12(2) i.e. 20% of the gross amount. 3. Mr. Pranav Sayta, who presented the case of the applicant, has submitted that as far as the income from onshore supply and onshore services is involved in the questions; the applicant has offered and is paying income tax under the Act in respect of onshore supply, onshore service, construction and erection. He argued that the price of the equipment and the machinery was paid outside India and the property in the goods passed to the Petronet at high seas, therefore, the sale was completed outside India, as such the profit arising to the applicant on the offshore supply of equipment and machinery would not be taxable in India. 4. Mr. Pradip Mehrotra, Addl. CIT, who appeared for the Commissioner, submitted that the procurement of equipment and the machinery was not a case of sale of goods but was a part of turnkey project so the principles governing the sale of goods would not apply; all the profits acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to accrue or arise in India. Explanation (a) indicates that for the purpose of the aforementioned clause where the business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. To attract the provisions referred to above, it must be shown that (i) the applicant has 'business connection' in India; and (ii) income accrues or arises (whether directly or indirectly) from such business connection in India. In such a situation explanation (a) limits the quantum of taxable income deemed to accrue or arise only to such part of the income as is reasonably attributable to the business operations carried out in India. 7. It is a common ground that the applicant has business connection in India. In regard to requirement (ii), there can be no denial of the fact that income accrues to the applicant from offshore supply. The moot point is whether such income accrues from business connection in India. The turnkey project contract dated January 19, 2001 entered into between the Petronet and the consortium ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ured by the applicant for use in the project in India for which the price was paid by the Petronet through bank in Japan to the applicant; the documents of title were sent to the Petronet two weeks before the dispatch of the goods by sea and while the goods were on high seas, the property in the goods passed to the Petronet. The plea advanced by Mr. Mehrotra, however, is that as the applicant and not the Petronet took delivery of the goods by unloading them from the ship, got them cleared from Customs by paying duty and transported them to the site, therefore, the property in the goods did not pass to the Petronet. We are afraid we cannot accede to the contention of Mr. Mehrotra. It is the settled position in law that property in the goods passes to the purchaser when the goods are dispatched and documents of title are handed over or sent by post to the purchaser unless the parties expressed a different intention in the contract. On the facts of this case, it is clear that the price of the goods was paid in Japan; the document of title were dispatched two weeks before loading of the goods on ship and while the goods were on high seas, the document were with the purchaser. Indeed, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee whether named by the buyer or not for the purposes of transmission to the buyer and does not reserve the right of disposal, he is deemed to have unconditionally appropriated the goods to the contract. The buyer's assent to the passing of the property in the said circumstances is implied and, when the seller despatches the goods and delivers them to the common carrier for purposes of transit to the buyer, the common carrier not only receives the goods as agent of the buyer but also assents to the appropriation made by the seller" CIT, Delhi vs. Mewar Textile Mills Ltd. [91 ITR 542] (2). In that case the assessee put on rails in Bhilwara (outside British India), certain bales of cloth and took the railway receipts in the names of consignees who were dealers in British India and sent the railway receipts to them by post. The purchasers paid the sale price to a banker in British India who was also the banker of the assessee. The Tribunal found that the banker acted as agent of the purchasers and not of the assessee. The question for consideration of the Hon'ble Supreme Court was, whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits and gains accrued or arisen to the non- resident in India on account of supply of machinery and documentation to the said undertaking. The High Court held that: • it was clear from the agreement that the insurance risk during the course of the journey was that of the assessee and it paid for the same and even the freight charges from the European port to the place of destination were paid by the assessee; • the sale of the machinery which were goods within the meaning of the Sale of Goods Act was completely outside India and the sale of machinery though completed outside India, was not an independent or isolated transaction and that it was a part and parcel of the business venture or business connection between the assessee and the non-resident. The bench observed; "According to the main clause, all income accruing or arising, whether directly or indirectly, through or from any business connection in India, shall be deemed to be income accruing or arising in India. If this were the only clause, there is no doubt that the income arising by the sale of machinery would be income arising in India, notwithstanding the fact that the sale took place outside India. This is for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffice and the project site office of ABC were situated in India, which constituted its permanent establishment in India. One of the questions on which ruling was sought was, whether the payments under the agreement were taxable under article 13 and article 7 of the Treaty. It was ruled that the net effect of application of the treaty would practicably be the same as of the application of Section 9 (1) (i) read with the explanation and in the result the assessment should be restricted only to such part of the business profits as are attributable to the actual operation conducted by the permanent establishment of ABC company, in India. Income Tax Officer and others v. Sriram Bearings Ltd. [224 ITR 724] (5). In that case, the respondent assessee company entered into a technical collaboration agreement with a non-resident company - Japanese company. The assessee proposed to manufacture cylindrical, spherical and tapered roller bearings in India. The said agreement was in two parts - one is to sell trade secrets (know-how) by the Japanese company relating to the products and manufacturing technique which also included the patent rights and advice of plant layout and installation. The co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was paid in US Dollars in USA. The documents of title were sent to the GOAP by courier. One of the questions addressed to the Authority for Advance Rulings, was whether on the facts and circumstances of the case any income would accrue or arise under the Income Tax Act or can be deemed to accrue or arise under the Act to the non resident- Company in India. It was opined that though the contract was executed in India , the goods were delivered to carrier appointed by the purchaser in USA and consideration for sale of and installation of the machinery and for providing service was received by the applicant in USA , no income would accrue or arise to the applicant in India . In regard to deemed accrual or deemed arising of income under sec. 9(1)(i) read with the explanation appended thereto, it was ruled that the business profit that could be deemed to arise/accrue to the applicant in India through business connection from the sale, installation of equipment and machinery as well as furnishing of services would be taxable in India if they are through a permanent establishment in India and only so much as is attributable to the business operations of the PE in India. On facts it was f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rries 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. (3) to (7)xxxxxxxxx 9. Para 1 of article 7 provides that profit by an enterprise (applicant) of a contracting state (Japan) shall be taxable only in that contracting state (Japan) unless the enterprise (applicant) carries on business in the other contracting state (India) through a permanent establishment situated therein (India). If the enterprise (applicant) so carries on business the profits to the enterprise (applicant) may be taxed in the other contracting state (India) but only so much of them as is directly or indirectly attributable to that permanent establishment. The principles for apportioning profits attributable to the permanent establishment are outlined in para 2 of article 7. 10. Article 5 of the Treaty defines the term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or indirectly attributable to the permanent establishment as postulated in para 6 of the protocol. Inasmuch as the parties did not address in regard to the actual apportionment of the profits, we decline to pronounce ruling on the aspect of the apportionment of profits. Question No.3 relates to taxability, under the Act and /or the Treaty, of the amount received/receivable by the applicant from Petronet for offshore services. It has already been noticed that offshore services comprise of design, engineers including detail engineering in relation to the supply, services, construction and erection and any other services rendered outside India. It is submitted by Mr. Sayta that the said services fall under clause (vii) of sub-section (1) of section 9 of the Act but are covered by the exclusionary clause of the definition of the expression 'fee for technical services' in explanation 2 to the said provision. So they are not taxable; it is also stated that the explanation to clause (i) of sub-section (1) of section 9 is not attracted. We are afraid we cannot accept the contention of Mr. Sayta. The relevant provisions of clause (vii) of sub-section (1) of section 9 are in the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) of section 9 of the Act. Faced with this situation Mr. Satya made a faint attempt to contend that the offshore services are part of the gamut of activities under the EPC contract, therefore, the income has to be treated as part of the business income and not as 'fee for technical services'. We would only say that this is an argument in despair and is wholly untenable for reasons which are too obvious to merit enumeration. 11. We shall now examine the position under the Treaty. The relevant clause of the Treaty is article 12 and in so far as it is relevant for our purpose, runs thus: Article 12 • Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. • However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 20 per cent of the gross amount of the royalties or fees for technical services. • xxxx xxxx xxx xx xx xx xxx x ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticle 7 or article 14, as the case may be. However, the case of the applicant that services are effectively connected with the PE but the price received therefor cannot be said to be directly or indirectly attributable to such PE of the applicant in India is on the face of it untenable. In our view, Article 12(5) is not attracted. Further, it is specifically provided by para 7 of article 7, that where income which is dealt with separately in other article of the treaty, the provisions of other articles shall not be affected by article 7. Inasmuch as fee for technical services is specifically provided in article 12 the same cannot be brought under article 7 of the Treaty. We are, therefore, clear that the price of offshore services is taxable under the Act as well as under the treaty. 12. Question No. 4 is a consequential question. There is nothing in clause (vii) of sub-section (1) of Section 9 of the Act or Article 12 of the Treaty which apportions the amount received by the applicant for purposes of taxability thereunder. However, in view of sec.115A(1)(b)(B) and para 2 of article 12, tax will be payable at the fixed rate of 20% of the gross amount of fee for technical services ..... X X X X Extracts X X X X X X X X Extracts X X X X
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