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TMI Blog2009 (6) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... . V. Reddi (Chairman), Mr. A. Sinha (Member) and Mr. Rao Ranvijay Singh (Member) Present for the Department Mr. Sanjeev Sharma, Addl. DIT (Intl. Taxation) Delhi Present for the Applicant Mr. N. Venkataraman, Sr. Advocate RULING [By Hon'ble Chairman] - The applicant which is a Company incorporated in Korea having its registered office in Seoul is engaged inter alia in the business of power stations. In the year 2005, Power Grid Corporation of India Ltd. (hereafter referred to as 'POWERGRID') invited bids for the execution of the works related to 800KV / 400KV Tehri Pooling Station Package associated with Koteshwar Transmission System. For the sake of brevity, the same has been described by the applicant as "400 KV GIS Package". The applicant who submitted the bid, became the successful bidder. As per the terms and conditions of bid, the foreign bidder was authorized to assign the whole or part of the contract to an independent contractor subject to the approval of Power Grid. In view of such provision, the applicant, pursuant to the understanding reached with L&T, requested Power Grid to award the Off-Shore Contract to it and the On-Shore Supply and Services Contract to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... months. 3. The questions in respect of which advance ruling is sought are the following: (i) On the facts and circumstances of the case, whether the amounts received/receivable by the applicant i.e. Hyosung Corporation from Power Grid Corporation of India Limited ("PGCIL") for offshore supply of equipments, materials, etc., are liable to tax in India under the provisions of the Act and India-Korea tax treaty? (ii) If the answer to (i) is in the affirmative, in view of Explanation (a) to section 9(1)(i) of the Act and/or Article 7(1) of the India-Korea tax treaty, to what extent are the amounts reasonably attributable to the operations carried out in India and accordingly taxable in India. 3.1. The following additional question was framed by this Authority on 19th November, 2008. Whether the applicant together with L&T Limited can be said to constitute an AOP and accordingly be assessed as such under the Income-tax Act, 1961 in relation to the contract referred to in the application? 4. It is the contention of the applicant that no income accrues or arises in India under section 5 of the Income-tax Act, 1961 (for short, the Act') in respect of offshore supply contract underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of the applicant for supply of equipment and materials on CIF Indian Port of Disembarkation basis, (b) onshore supply of equipments and materials on Ex-Works basis, and (c) Onshore Service Contract for Port handling and clearance, Inland Transportation, Insurance, delivery on FOR destination basis, storage, erection including associated civil works, testing and commissioning of all equipment and materials including offshore equipment. As per the Letter of Award dated 24.3.2006, the Special and General Conditions of Contract among others shall be deemed to form part of the Agreement. 6.1 The scope of work under the offshore supply contract as set out in the LOA is as follows: "Design, engineering, manufacture, testing at manufacturer's works, FOB dispatch, shipment, marine transportation and insurance and CIF supply of all off-shore equipment and materials including mandatory spares from country(ies) outside India, and testing & training to be conducted outside India, required for the complete execution of 800KV (F)/400KV Tehri Pooling Station (GIS) Package associated with Koteshwar Transmission System, as set forth in the bidding documents." The detailed list of equipme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.1 In the MOU, it is recited that parties desire to co-operate with each other for the purpose of submitting a single bid for the project and in the event of bid being accepted by the customer, to execute the contract for the project. The applicant was nominated as 'leader' during the bidding stage and thereafter as 'team leader' during the execution of contract. The distribution of works between L&T and applicant and the respective responsibilities are specified therein. The applicant has to bear the overall responsibility for commissioning of the complete 400 KV GIS Project. As per para 3 of MOU, "the parties shall be jointly and severally responsible for the execution of the contract in accordance with the contract terms". Each party agreed to "indemnify the other party against its respective parts in case of breach or default of the respective party in performance of the contract works" (vide para 4 of MOU). 7.2 In addition to the MOU, the Revenue has drawn our attention to the following terms and conditions set out in LOA and the Deed of Assignment: 1. The overall responsibility for the successful completion of the three contracts rested with the applicant in line with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portance is that Power Grid awarded separate contracts to both the contractors - the first to the applicant and the other two to L&T. The assignment which was in terms of the MOU paved the way for such separate contracts and the same was accepted and acted upon by Power Grid. Each party performs the obligations under the respective contracts awarded to them separately and receives the monies payable under the contracts independent of each other. L&T, which was not a party to the bid, is recognized as an independent contractor in various documents. L&T is entitled to raise the bills for the work carried out by it separately and such bills shall be payable by Power Grid directly to L&T without recourse to the applicant (vide para 3 of Assignment Deed). Thus, the individual identity of each party in doing the part of work entrusted to it is preserved, notwithstanding the coordination between the two and the overall responsibility of the applicant. It cannot therefore be said that the two contractors have promoted a joint enterprise with a view to earn income (vide the dicta in CIT vs. Karunakaran*) 7.4 The applicant being the supplier of crucial equipments imported from abroad and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t page 303 of ITR spells out the distinctive features which weighed with this Authority in arriving at the finding that there was an AOP: Thus, it is seen that the client, HPRIDC has entered into the contract with a "consortium" of three companies, and it looks to that joint enterprise for the due execution of work and the contract price is stipulated to be made to the joint venture as a unit. The contract between HPRIDC and the joint venture gives sufficient indication of a combination of three entities into one with the common purpose of executing the work entrusted to the joint venture. That each member is made jointly and severally liable for performance of work is another important stipulation which points to the existence of an AOP." The facts here are vastly different. 7.7 We are, therefore of the view that the applicant and L&T cannot be treated as AOP falling within Section 2(31) of the Income-tax Act, 1961. Accordingly, we overrule the contention of the Revenue and hold that the applicant in conjunction with L&T cannot be treated and assessed as an 'association of persons' under the Income-tax Act, 1961. Question No. 1 and 2: 8. The contention of the learned senior ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x income would be lacking for want of territorial nexus, as clarified by the Supreme Court in the said case. 9. Now let us look to the relevant clauses in the off-shore supply contract to which reference has already been made. The opening clause of the Agreement dated 27/10/2006 states that the off-shore contract has been entered into "for supply of equipment and materials at CIF Indian Port of disembarkation basis for 800 KV/400 KV Tehri Pooling Station (GIS Package) in the sum of US Dollar 6,935,389." 9.1 The relevant stipulations in the Letter of Award dated 24th March, 2006 which is deemed as part of the Agreement are : "2.4.4 The transfer of title of the equipment and materials to be supplied by you shall pass on to POWERGRID at FOB Port of shipment with negotiation of shipping documents. This transfer of title shall not relieve you from the responsibility for all risks of loss or damage to the equipment and materials until taking over, as specified in the bidding documents." "4.3 Indian Customs duty or levies including the Stamp Duty and Import License Fee levied by the Government of India or any State Government in India on the equipment, materials and spare parts cover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age sites in India on physical verification thereof by Power Grid's Engineer and the balance 10% is payable on successful completion of erection/testing and commissioning of the GIS sub-station and the issuance of Taking Over Certificates. 9.3 One more clause in LOA that deserves reference is that contained in para 2.4.3. It says : "It is your overall responsibility to ensure that the equipment/materials being supplied by you under this Contract and by L&T INDIA under 'Second Contract', when erected and commissioned under 'Third Contract' by L&T INDIA, shall give satisfactory performance in accordance with the provisions of the Contract(s)." 10. The applicant has furnished a chart sequencing the events in relation to a typical transaction along with written submissions filed on 16/12/2008. They are as follows: Particulars Letter of Credit ('LC') opened 24 April 2007 LC opened in India by Power Grid with Indian Overseas Bank Commercial invoice 30 July 2007 For determination of price for custom clearance Insurance policy 10 August 2007 Marine Cargo Insurance Policy taken for goods to be exported by Hyosung from Korea. PowerGrid named as the beneficiary in the policy Bill of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anted to have keeping in view the operational exigencies and overall obligations of the applicant under the contract. It is trite that risk need not pass simultaneously with the title to goods. There could be special stipulation between the parties in this behalf. As rightly pointed out by the learned counsel for the applicant, the applicant, by taking care of goods at the site in India till installation, assumed the capacity of a bailee. As regards the stipulation that the supplier shall continue to be responsible for the quality and performance of the goods until the final take over on testing of the equipment, it cannot be construed to be a condition which postpones the transfer of title to the goods till that time. It is more in the nature of warranty provision in the contract. 10.2 As seen earlier, the Agreement dated 27/10/2006 refers to supply of equipment on "CIF Indian Port of disembarkation basis". The letter of award also refers to "CIF supply of all off-shore equipment and materials". The price is also noted as 'CIF Price' (vide para 3.1 of LOA). The Supreme Court in the case of Mahabir Commercial Co. Ltd. vs. CIT, West Bengal* discussed the features and legal incident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the title to and property in the goods shipped by the applicant at the foreign port stood transferred at the port of shipment or while the goods were on high-seas. The event of sale took place clearly outside the territory of India. The income arising out of such sale cannot be said to have accrued or arisen in India. The accrual of income derived from the sale price of the off-shore supplies cannot be attributed to any operation in India. It is not possible to accept the contention of the Revenue that the transfer of title/property in the goods must be deemed to have taken place in India on testing and successful commissioning of the project cannot be upheld. 10.4 We are fortified in our view by the decision of the Supreme Court in Ishikawajima case. The legal position stated and the reasoning adopted therein applies a fortiori to the facts of the present case. In Ishikawajima, a similar question arose whether the amounts received / receivable by the applicant - a foreign company, for the off-shore supply of equipment and materials supplied to Petronet L&G Ltd. (Indian Company) was liable to be taxed in India under the provisions of the Act or the India-Japan Tax treaty. That w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the scope of taxation under the Act, the application of the double taxation treaty would not arise…... [vide page 444]." Then, in the concluding part of the judgment, the following propositions concerning 'offshore supply' have been stated at page 446: Re: Offshore supply: (1) That only such part of the income, as is attributable to the operations carried out in India can be taxed in India. (2) Since all parts of the transaction in question, i.e. the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India. (3) The principle of apportionment, wherein the territorial jurisdiction of a particular State determines its capacity to tax an event, has to be followed. (4) The fact that the contract was signed in India is of no material consequence, since all activities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country. (5) xx xx xx xx xx xx xx xx Earlier, at page 445, while dealing with 'offshore services,' it was observed: "in a case of this nature, interpretation with reference to the nexus to tax territories will also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India. The department took the stand that in view of the close connection between two contracts, 10% of the income from offshore supply of equipment can be reasonably attributed to the operations carried out in India and to that extent, it was liable to be taxed under section 9(1)(i) of the Act. The department also took the stand that the transfer of property in the goods supplied under the first contract took place within India in view of the stipulations similar to those contained in the contract with which we are concerned. These contentions were rejected by the Tribunal. As regards the passing of property, the Tribunal observed thus: "Under the Sales of Goods Act, the property in goods will pass to the buyer as per the intention of the parties. Such intention is to be gathered from the facts and circumstances of the case. In the present case as per para 31.2 quoted above, there is specific agreement between the parties that property would pass to the buyer as and when the assessee loads the equipment on to the mode of transport to be used to convey from the country of origin. There is no other term, which would convey a contrary intention. It is, therefore, clear from above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aspect. Question No.2 11. Now we turn our attention to the question whether any part of the income could be attributed to the operations carried out and the activities undertaken in India pursuant to the terms of the contract. There are two ways of looking at it : (i) from the stand point of section 9(1)(i) and the Explanation thereto, and (ii) from the point of view of the provisions in the DTAA. We may refer to those provisions in the Act and DTAA for ready reference: Section 9 of the Income-tax Act,1961 (the 'Act') 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: For the purposes of this clause - (a) in the case of a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at no tax liability can be fastened under the Act by virtue of Art. 7 of the Treaty read with Art. 5. Under Art. 7, the business profits can only be taxed in Korea which is the State of residence unless the business is carried on through a PE in India. If the enterprise carries on business through the PE, then the profits can be taxed in India to the extent they are attributable to the PE. The applicant seeks to draw support from the first part of Art. 7(1) and contends that it has or will not have a permanent establishment in India. Therefore, we must focus our attention on the question whether the PE exists or will come into being at the appropriate time. In this connection, we have to refer to the definition of 'permanent establishment' in Art. 5 of the Treaty. The relevant extracts from that Article are as under: Article 5: Permanent Establishment: 1. For the purposes of this Convention, the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term permanent establishment shall include especially (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a worksh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the contract. The minutes of meeting dated 25/12/2007 reveals that there were space constraints at the Koteshwar GIS-site and there was delay in transportation of equipments stored at Rishikesh storeyard of Hyosung. Moreover, as seen from the record notes of post-bid discussions on technical and other issues held on 16th and 31st January 2006, the soil investigation work was also within the scope of the applicant's contract. The applicant was further required to furnish the monthly Engineering and progress reports by 10th of every month till the commissioning of sub-station. The Revenue then pointed out, while referring to the documents appended to MOU between the applicant and L&T, that L&T will do the system testing under the supervision of the applicant and the commissioning assistance will be provided by L&T. 26 tests have to be conducted at site out of which for 6 tests, even the testing equipment has to be arranged by the applicant. The supervision of testing is the responsibility of the applicant. Therefore, having regard to the enormity of testing and commissioning work involved, there is every possibility of the duration of the project and the activities of the applican ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransportation and storage of equipment in order to ensure that no damage takes place. We do not think that this contention can be accepted. The applicant, in carrying out the equipment to the work site and in safeguarding the same from any damage, is only carrying out the contractual obligations incidental to the offshore supplies of goods. It cannot be considered to be a supervisory activity contemplated by Art.5.3 of the Treaty. Then, the Revenue's representative has drawn our attention to the stipulation in the minutes of meeting held in January 2006 that the applicant has to submit the monthly engineering and progress reports (vide para 18.0 of post-bid discussions). We do not have clear facts to know the precise role of the applicant in this behalf and the starting point of such activity. This aspect is subject to verification by the Department, if considered necessary. On the point of PE, there are two more aspects which remain in the grey area and that is about the soil investigation and revising civil foundations on the basis of soil data. In the post-bid discussions, there is also a reference to the fact that detailed engineering work in respect of GIS Pooling Station will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was any operational link and functional connection between the two project works which are located at different and distant places. If the establishment that is being maintained for the purpose of executing a different contract with a different party is separate, distinct and independent of the other contract work being executed by the applicant, it is not in our view permissible to combine the establishments of two different projects of fairly long duration for the purpose of arriving at the threshold period of 9 months. Moreover, even going by the facts placed by the Revenue in regard to Maharani Bagh sub-station project, prima facie it appears that even if both projects are taken together, the duration of supervisory activities are not likely to exceed 9 months. In the absence of better particulars, we are not inclined to delve into this aspect further. 14. In the light of above discussion, it cannot be ruled at this stage that the applicant has a PE falling within the specific description of Art.5.3 of DTAA. Though we have given a tentative finding that on the facts presented by the applicant, a PE does not exist, the factual aspects adverted to above which give rise to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant that the liaison office set up on 17/10/2007 with the permission of the Reserve Bank is not engaged in any business activity much less in the operations related to the present contract. Then, in regard to agency PE, it has been clarified by the applicant that the Indian agent Alpasso Industries Pvt. Ltd., is an independent entity working for various clients and is not a dependent agent. In the affidavit filed on behalf of Alpasso Industries Pvt. Ltd., it is stated that the company is engaged in the business of rendering consultancy / marketing services and the relationship between the applicant and the said company is purely on principal to principal basis and that of a service provider and client. On the facts stated, it is not possible to infer an agency PE. The other contention that L&T is a sub-contractor of the applicant is an extreme contention and we have no hesitation in rejecting the same. This contention has been raised by the Revenue to put forward a case that in computing the 9 month period, whatever work is done by L&T should also be taken into account. There is no legal or factual basis for branding an independent contractor described as such in the contract docum ..... X X X X Extracts X X X X X X X X Extracts X X X X
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