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TMI Blog2009 (1) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... n short) floated a single-bid tender for its expansion plan of setting up two thermal plants at Neyveli. The assessee applied for the bid in response to NLC's advertisement. It did so as a single bidder. 2. According to the assessee, it had communicated to NLC right from the beginning that NLC should award the Indian portions of the turnkey contract to other legal entities to be selected by the assessee. According to the assessee, this condition was imposed since the assessee had no business persons in India. The assessee assured NLC that it would take the overall responsibility of the entire turnkey contract in its capacity as a single bidder. After the technical and financial evaluation of the bids, NLC awarded the turnkey contract to the assessee on a single bidder basis. 3. Thereafter, the contract was divided into four contracts. Contract I dealt with the offshore supply of equipments along with designing and engineering (contract price DM 224,40028). Contract II dealt with the offshore services of supervision of erection, testing and commissioning (Contract price DM 197,900.00). Contract III dealt with the onshore supply of equipments executed by ASPL (contract price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or consolidating the four contracts." 7. The Tribunal, however, did not agree with CIT in its estimation of profits. The Tribunal held that for the activities which are not conducted in India, tax cannot be levied in India. The Tribunal agreed with the estimation made by the Commissioner of Income-tax that only 25% of activity could have been done outside India particularly in view of the various clauses of contract I indicating that many plant and equipment were fabricated in India also. Then by taking into account the profit margins of similar companies for the year 2002, the Tribunal directed that the profit shall be taxed at 7% in the context of contracts I, III and IV and that with regard to contract I, 7% profit shall be taken in relation to 75% receipts only, as balance receipts can be attributed towards activities conducted outside India. This order is under challenge here. 8. The substantial questions of law that arise for consideration in this tax case (appeal) is as follows: "1. Whether on facts and circumstances of the case, the Tribunal erred in not applying the ratio of the Honourable Apex Court in the case of Ishikawajima-Harima Heavy Industries Ltd.'s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns. In any event, when dealing with a statutory corporation like NLC the appellant cannot fix the value of the contract unilaterally and there is no scope for manipulation of the prices. Each contract was signed by the parties to the contract. The learned Senior Counsel relied on Section 114 of the Evidence Act for raising the presumption regrding official acts. 10. The learned Senior Standing Counsel submitted that the Tribunal was right in its findings. She submitted that the CIT had on the basis of the evidence concluded that "there was a permanent establishment" and a "business connection". These factual findings cannot be lightly disturbed. She also submitted that there are major differences on facts between IHHI and this case. There, the Contractor was a consortium consisting of several equal players and the consideration was fixed by the consortium. Here the second contractor namely ASPL had no independent say in settling contract III and IV and it had "signed on the dotted lines" as directed by the assessee. What was conceived was a single contract. There was only a single bidder. There would have been only a single contract with, may be sub-contractors, but for tax pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 (288) ITR 408 (SC) was relied on, we will extract the relevant paragraphs. "The appellant there was a Company incorporated in Japan, a resident of the country, and assessed to tax in that country. It was engaged, inter alia, in the business of construction of storage tanks as also engineering etc. It formed a consortium along with other Corporations and entered into an agreement with Petronet LNG Limited for setting up a LNG storage and degasification facility at Dahej. The role and responsibility of each member of the consortium was specified separately. Each of the members of the consortium was also to receive separate payments. The project was to be completed in 41 months. The contract indisputably involved: (i) offshore supply, (ii) offshore services, (iii) onshore supply (iv) onshore services and (v) construction and erection. The price was payable for offshore supply and offshore services in US dollars, whereas for onshore supply and also onshore services and construction and erection partly in US dollars and partly in Indian rupees. .........Before the Authority the issue raised was not with regard to the on-shore components but only with regard to the off shore componen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to income may take place partly in one territory and partly in another. The question which would fall for our consideration is as to whether the income that arises out of the said transaction would be required to be proportioned to each of the territories or not. ... 40. Income arising out of operation in more than one jurisdiction would have territorial nexus with each of the jurisdiction on actual basis. If that be so, it may not be correct to contend that the entire income "accrues or arises" in each of the jurisdiction. The Authority has proceeded on the basis that supplies in question had taken place offshore. It, however, has rendered its opinion on the premise that offshore supplies or offshore services were intimately connected with the turnkey project. ... 62. In CIT v. Mitsui Enggineering and Ship Building Co. Ltd. [2003] 259 ITR 248 (Delhi) on which reliance was placed, the contention was that the finding that the contract for designing, engineering, manufacturing, shop-testing and packing up to f.o.b. port of embarkation could not be split up since the entire contract was to be read together and was for one complete transaction. It was in the said fact situati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permanent establishment. All income arising out of the turnkey project would not, therefore, be assessable in India, only because the assessee has a permanent establishment. ... 84. The distinction between the existence of a business connection and the income accruing or arising out of such business connection is clear and explicit. In the present case, the permanent establishment's non-involvement in this transaction excludes it from being a part of the cause of the income itself, and thus there is no business connection. 85. Article 5.3 provides that a person is regarded as having a permanent establishment if he carries on construction and installation activities in a contracting State only if the said activities are carried out for more than six months. Para 6 of the Protocol to India-Japan Tax Treaty also provides that only income arising from activities wherein the permanent establishment has been involved can be said to be attributable to the permanent establishment. It gives rise to two questions, firstly, offshore services are rendered outside India; the permanent establishment would have no role to play in respect thereto in the earning of the said income. Secondly, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country. (5) There exists a distinction between a business connection and a permanent establishment. As the permanent 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 accru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India can be only such portion of income accruing or arising to such a foreign enterprise as is attributable to its business carried out in India. This business could be carried out through its branch(s) or through some other form of its presence in India such as office, project site, factory, sales outlet etc. (hereinafter called as "permanent establishment of foreign enterprise"). It is, therefore, important to note that under the Act, while the taxable subject is the foreign general enterprise (for short, "GE"), it is taxable only in respect of the income including business profits, which accrues or arises to that foreign general enterprise in India. The Income-tax Act does not provide for taxation of permanent establishment of a foreign enterprise, except taxation on presumptive basis for certain types of income such as those mentioned under Section 44BB, 44BBA, 44BBB etc. Therefore, since there is no specific provision under the Act to compute profits accruing in India in the hands of the foreign entities, the profits attributable to the Indian permanent establishment of foreign enterprise are required to be computed under normal accounting principles and in terms of the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o allegation made by the Department that the price at which ONGC was billed/invoiced by the assessee for supply of fabricated platforms included any element for services rendered by the permanent establishment. ... ...We reiterate, in the circumstances, not all the profits of the assessee company from its business connection in India permanent establishment would be taxable in India, but only so much of profits having economic nexus with permanent establishment in India would be taxable in India. 13.....Therefore, since there is no specific provision under the Act to compute profits accruing in India in the hands of the foreign entities, the profits attributable to the Indian permanent establishment on foreign enterprise are required to be computed under normal accounting principles and in terms of the general provisions of the Income-tax Act. Therefore, ascertainment of a foreign enterprise's taxable business profits in India involves an artificial division between profits earned in India and profits earned outside India." 16. So in Ishikawajima-Harima Heavy Industries Ltd., case 2007 (288) ITR 408 (SC), "the permanent establishment's non-involvement in this transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufactured and sent from abroad. Associated Engineering Services are also to be supplied from abroad. The turnkey responsibility is with the appellant till local parts and foreign parts are fused together." (b) There is the assessee's letter dated 08-08-1997 by which this splitting up of contracts into four contracts was first suggested by the assessee, which in the same breath, also guaranteed the satisfactory execution of the contract as if it was one single contract. (c) There is a letter dated 01-09-1998 which reads as follows: "Ansaldo Energia confirms and guarantees that Ansaldo Services (P) Ltd., will execute the contracts with full knowledge and expertise for the proper and timely implementation of the works, under Ansaldo Energia management control and full financial support." (d) NLC's letter dated 26-09-1998 reads as follows: "As desired by Ansaldo Energia, four separate contracts shall be concluded, encompassing the complete scope of work, namely contract numbers I and II between NLC and Ansaldo Energia Spa Contract Nos. III and IV between NLC and Ansaldo Services P. Ltd., III floor, Gupta Towers, 50/1 Residency Road, Bangalore-506 025, a subsidiary compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision, Testing and Commissioning. They were present at site along with the staff of M/s.Ansaldo, Bangalore. A.54: M/s. Ansaldo, Italy carried out the Testing, Commissioning Performance Tests-NLC MECON witnessed the above. Ans: M/s. Ansaldo, Italy and M/s. Ansaldo Bangalore utilised the site office. Ans: The Principal Contractor used this site office." (k) 23.6. Thus all these clearly establish that there was a Permanent Establishment with respect to the contract of the appellant. No doubt, the appellant disputed the existence of Permanent Establishment. It is interesting to note that the appellant in the later submissions stated that Permanent Establishment" (if any)" existed for the purposes of supervisory functions only. This shows the change in the stand of the appellant. This concept of limited Permanent Establishment is a strange argument now put forth by the appellant for the first time. Appellant has not substantiated this argument with support of case law nor the legal provisions under which such claim is made. Either a Permanent Establishment exists or it does not exist. There cannot be an intermediate situation. (l) 23.8. Managerial activities lead to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall pass to the purchaser in accordance with the INCOTERMS 1990 and transfer of ownership and property to the Purchaser shall be simultaneous at the time of delivery to the carrier, provided however, such passing of title of ownership and property to the purchaser shall not in any way absolve, or dilute of diminish the responsibility and obligations of the Contractor under this Contract including loss or damage and all risks, which shall vest with the Contractor till the successful commissioning as per this Contract. " 20. According to the assessee the clauses relating to passing of title in Clause 10.55.1 is identical to the clause relating to passing of title in IHHI in Exhibit D, Clause 2.1, and the words "the contractor shall retain care, custody and control" used in the IHHI contract means the same as the terms used in the present case which relate to loss, damage and risks. According to the learned Senior Counsel, when Parliament had not determined the situs where title got transferred for fixing taxability, one has to rely only on judge-made law and that IHHI lays down the law that passing of title alone fixes the situs for deciding the taxability and for this referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer of properties in goods as well as payment were carried on outside the Indian soil and therefore, the transaction could not have been taxed in India and that, even though the contract was signed in India that is of no material consequence since all activities in connection with off-shore supply were outside India. The Supreme Court also held that the contract is not a complete one which has to be read as a whole and not in parts. It also held that the permanent establishment had no role to play in the transaction. So it was not only the situs of transfer of title which was the sole criterion to determine taxability. So though we are of the opinion that the clause relating to passing of title in IHHI, Further the words "care and custody" used in the IHHI contract and the words "loss", "risk" and "damage' used in this contract have different connotation and are not identical, we are not going into it since on other grounds; we find this case differs from Ishikawajima-Harima Heavy Industries Ltd., case 2007 (288) ITR 408 (SC). 23. We again go back to the Ishikawajima-Harima Heavy Industries Ltd., case 2007 (288) ITR 408 (SC). The Supreme Court said in Clause 1 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upply of fabricated platforms could be attributed to the independent permanent establishment unless the Department had proved that the supplies were not at arm's length price. Further sales were directly billed to the Indian customer (ONGC) and above all there was no allegation that the price at which billing was done included any element for the services rendered by the permanent establishment and in view of all these facts, the Supreme Court held that the profits that accrued to the Korea GE for the Korean operation no tax could be levied. (iv) The following facts distinguish Hyundai from the present case. (a) In Hyundai, the platform itself was delivered in Korea to the agents of ONGC. Here, the ASPL acted as clearing agent. (b) The Department did not establish that the supplies were not at arm's length price. (c) There was no allegation that the price at which billing was done for the supplies included the services rendered by permanent establishment. Whereas here the Revenue had made clear allegations regarding price fixation and price imbalance. 24. In Hyundai, the finding of the authorities was that there was no allegation that the price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liases of Sampathkumar. It is only as an afterthought that they have come forward with the said plea. The assessing officer also found that the gifts were not real in nature. Various surrounding circumstances have been relied upon by the assessing officer to reject the explanation offered by the assessees. The Commissioner of Appeals confirmed the findings and conclusion drawn by the assessing officer. The Tribunal speaking through its Senior Vice-President concurred with the findings of fact. The findings in our considered opinion are based on the material available on record and not on any conjectures and surmises. They are not imaginary as sought to be contended....... 27. No question of law much less any substantial question of law had arisen for consideration of the High Court. The High Court misdirected itself and committed error in disturbing the concurrent findings of fact." 27. In this case too, the findings are based on materials available on record, and we are not persuaded to disturb the concurrent findings. The Tribunal has not in fact ignored IHHI, on the contrary it has applied Ishikawajima-Harima Heavy Industries Ltd., 2007 (288) ITR 408 to the extent it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hikawajima-Harima Heavy Industries Ltd., 2007 (288) ITR 408 the Supreme Court had held that the concept of permanent establishment is totally different from the concept of business connection; and that in this case the Commissioner of Income-tax (Appeals) had totally confused the two concepts. We have already extracted the relevant portions. We cannot reject the findings regarding the close relationship, the finding that the supplies were an ongoing process and so on. The ASPL has no doubt been in existence before this Contract. But its involvement in this whole project is only at the behest of the assessee. The findings indicate that ASPL was the equivalent of an alter ego of the assessee as far as this NLC package is concerned. 30. We will now look at some judgments on "business connection" (a) In CIT v. R.D. Agarwal and Co. (1965) 56 ITR 20 (SC) it was held that a business connection involves a relation between a business carried by a non-resident which yields profit or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It postulates a real and intimate relation between trading activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of the non-resident and the activity within the taxable territories, such transaction not being stray or isolated. Therefore, the argument that ASPL had entered into contracts with third parties before this Project with NLC is neither here nor there. In the Bharat Heavy Plate and Vessels case [1979] 119 ITR 986 (AP), the business connection was found to exist between a non-resident and a GOI undertaking, notwithstanding that the purchase of machinery took place offshore. 34. In CIT v. Fried Krupp Industries [1981] (128) ITR 27 this Court held (headnote): "that there were no operations in India which were attributable to the foreign Company which could give rise to any profits being earned in India. The terms of the agreement made it clear that none of the three types of activities of the foreign company resulted in business connection in India: (i) The supply of machinery was to be on f.o.b. Terms. The part played by the foreign company ended with putting the machinery on board and there was no operation by that company in India so as to envisage a business connection; (ii) The supply of spare parts was also to be on f.o.b. terms, and, as in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is is not an absolute rule. So obviously, the question of taxability will depend on the facts. 37. In permanent establishment' the Supreme Court referred to Instruction NO 1829 issued by CBDT dated Sept 21 1989, which interalia states that:, "(in turnkey execution) One of the companies would for this purpose act as leader to ensure supervision and co-ordination of inter-related tasks." But here the assessee is not just the leader of the two companies which executed the contracts viz; assessee and ASPL, the ASPL just speaks the "Master's Voice". The contract continued for several months. It was found that there was a permanent establishment. The clause relating to transfer of title has also been extracted and it is not identical with the terms relating to transfer of title in Ishikawajima-Harima Heavy Industries Ltd case 2007 (288) ITR 408. In Mitsui the delivery of the goods was taken by the agents of ONGC. Here the clearing agent was ASPL which had no prior experience, so the Authorities were of the opinion that this too was done only at the instance of the assessee. 38. The Commissioner of Income-tax (Appeals) also found that there is interlacing of all the contracts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Therefore, the question as to whether NLC would have agreed to such a course of action is really not relevant. NLC did not suffer in any way by splitting up and NLC was bound to pay the entire payment regardless of whether it was equally distributed among all the four contracts or whether the price was loaded on to Contract I or II. 41. Taking into account all these cumulative factors, the Tribunal agreed with the view of the CIT that only 25% of the activity could have been done outside India particularly in view of the various clauses of contract indicating that many plant and equipment were fabricated in India. The Tribunal had asked the assessee to file the profit and loss account in respect of the subsidiary but all that they supplied was the chart showing the net profit margin. The Tribunal concluded on the basis of Ishikawajima-Harima Heavy Industries Ltd., 2007 (288) ITR 408 (SC) case that activities which were not conducted in India cannot be taxed in India and on the basis of profit margins of similar companies directed the Assessing Officer to tax the profit at 7% in the context of Contract II to IV and with regard to Contract I 7%, profit shall be taken in r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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