Income Tax Appellate Tribunal - Delhi
Technip Italy Spa,, Noida vs Assessee on 31 July, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH "H" DELHI)
BEFORE SHRI A.D. JAIN AND SHRI K.D. RANJAN
ITA NO. 434(Del)2010
Assessment year: 2002-03
M/s. Technip Italy Spa, Additional Commissioner of IT,
A-4, Sec.1, Institutional Area, v. Noida Range, Noida.
Noida.
(Appellant) (Respondent)
Appellant by: S/Shri Saurabh Sehgal & Vishal Kalra, CAs
Respondent by: Shri Ashwani Kumar Mahajan, CIT/DR
ORDER
PER A.D. JAIN, J.M.
This is assessee's appeal for the assessment year 2002-03, taking the following grounds:-
"1. That the ld. Commissioner of Income Tax(Appeals), Ghaziabad has erred in confirming the action of the AO in taxing the revenue from offshore supply of equipment to IOCL in India.
2. That the CIT(A) while upholding the action of the AO in taxing the revenue from offshore supply in India has failed to appreciate that neither the consideration has accrued or arisen in India nor the same was attributable to the activities of the project office of appellant in India and hence both under the provisions of the Act as
2 ITA 434(Del)10 well as DTAA between India and Italy, the consideration so received was not liable to tax in India.
3. Without prejudice to ground Nos. 1&2, that on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the taxation of entire income from off shore supply, i.e. 10% of gross revenue arising from such supplies though the income attributable to the project office in India was 10% of such income , i.e. 10% of 10% as stated by the AO himself."
2. Vide order dated 31.7.2009, the Tribunal, in the first round, in the assessee's appeal in ITA No. 173(Del)06, dealt with, inter alia, Ground Nos. 4&8 raised by the assessee. These grounds were as follows:-
"4. That on the facts and circumstances of the case, and in law, the CIT(A) has erred in holding that revenue arising from off shore supply of equipment to IOCL was taxable in India.
8. That on the facts and circumstances of the case and in law, the CIT(A) erred in upholding the levy of interest under sections 234B and 234D of the Act."
3. The Tribunal set aside these issues to the CIT(A), to be decided de novo, observing as follows:-
"11. Having considered the rival contentions in the light of the material placed on record, we find that the ld. CIT(A), while deciding the issue, did not have the benefit of either "Ishikawajima- Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai"(supra), rendered by the Hon'ble Supreme Court or "M/s. Ansaldo Energia Spa v. ITAT & Others" (supra), delivered by the Hon'ble Madras High Court, considering "Ishikawajima-Harima Heavy Industries Ltd. V. Director of Income Tax, Mumbai"(supra).
3 ITA 434(Del)10 Both these judgements directly impinge upon the controversy at hand. Therefore, in our consideration, it would be appropriate to remit this matter to the file of the ld. CIT(A) to be decided afresh in accordance with law, in the light of "Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai (supra) as well as "M/s. Ansaldo Energia Spa v. ITAT & Others (supra). Accordingly, this issue is remanded to the file of the learned CIT(A) to be decided de novo in accordance with law, on affording adequate opportunity of hearing to the assessee.
12. Ground No.8 has been taken without prejudice to ground No.4. Since we have remitted the issue concerning ground No.4 to the file of the learned CIT(A), this issue is also remitted to the learned CIT(A) for decision as a sequel to his decision on the issue concerning ground No.4."
4. The order presently in appeal before us has been passed by the ld. CIT(A) in pursuance of the above observations/directions of the Tribunal.
5. The facts are that as per the statement of facts filed before the ld. CIT(A), the assessee company, which is a company incorporated in Italy, was awarded a turn key contract by Indian Oil Corporation Ltd. ("IOCL", for short), in November, 1999, for the designing, construction and commissioning of a Hydro-treater and Hydrogen facility at IOCL's Guwahati Refinery. The Guwahati Refinery of IOCL refines crude oil/petroleum to obtain petrol, diesel, kerosene, naptha, etc. The Hydro- treater plant and Hydrogen facility set up by the assessee purifies such already obtained diesel/kerosene by treating it with Hydrogen to remove sulphur impurities in order to comply with emission norms. Thus, the 4 ITA 434(Del)10 Hydro-treater plant and Hydrogen facility constructed by the assessee is used for the purpose of purification of diesel/kerosene. Under the terms of the contract, the assessee company was required to supply equipment to IOCL and undertake construction/installation services and related design and engineering services, the consideration for which was denominated partly in Indian currency and partly in foreign currency. Revenues arising to the assessee from on-shore construction, on-shore design and engineering, on-shore supply, off-shore construction and off-shore design and engineering were offered by the assessee to tax in India. The assessee did not consider the revenues earned from off-shore supply of equipment to be chargeable to tax in India. The assessee had established a Project Office in India for the execution of the said contract. Since this Project Office constituted a Permanent Establishment ("PE", for short) of the assessee in India, the assessee computed its income for the year under consideration on a net income basis, at Rs.7,34,39,734/-, against which, the brought forward business loss of Rs. 7,34,39,734/- was set off in accordance with the provisions of section 72 of the I.T. Act. That being so, the assessee filed a return of income for the year declaring nil income.
6. Vide the assessment order dated 31.3.2005, passed u/s 143(3) of the I.T. Act, the AO rejected the books of account of the assessee and 5 ITA 434(Del)10 estimated its profits, invoking Rule 10 of the I.T. Rules, 1962 and Article 7(2) of the Double Taxation Avoidance Agreement or Treaty between India and Italy.
7. Of the various issues arisen, the only issue surviving hitherto is that of taxability of off shore supply of equipment made by the assessee to IOCL.
8. The AO taxed the income from off-shore supply of equipment by the assessee to IOCL. It was observed that the contract between the assessee and IOCL was a Turn-Key Contract and the supply was an integral part of the contract and the prices were defined on a long term basis. It was observed that the contract was on a CIF basis and not on an FOB basis. It was observed that the off-shore supply of equipment could not be separated from successful completion of the Turn-Key Contract. It was observed that the supplies made by the head office of the assessee were integrated into the business operations of the assessee's PE in India in setting up the plant in India. It was observed that the title and custody of the equipment did not pass on despatch, but was also subject to successful installation. It was observed that the off-shore supply revenue was taxable in India as per clause (1)(b) of Article 7 of the DTAA between India and Italy. It was also observed that the AO, while deciding the matter, placed 6 ITA 434(Del)10 reliance on the decision of the Authorities for Advance Rulings ('AAR', for short) in the case of "Ishikawajina Harima Heavy Industries Co. Ltd." (A.A.R. No. 618 of 2003).
9. The ld. CIT(A) vide order dated 30.11.2005, passed in the first round, i.e., in appeal No. 24/2005-06/GZB - Noida, upheld the taxability of the revenue from off-shore supply of equipment. It was held that off- shore supply of equipment could not be equated with the work carried out outside India. It was observed that nothing had been mentioned in the agreement that title would pass outside India. It was observed that the bill of lading showed that the owner of the equipment was IOCL at the time of shipment. It was observed that the whole work was computed to the single contract. It was observed that just by managing the owner of the goods to be IOCL, it would not lead to the inference that the sale had taken place outside India. It was also observed that the selling of equipment was an integral part of the contract. Reference was also made to the CIT(A)'s order in the assessee's case for assessment year 2001-02.
10. The Tribunal, as seen above, remitted the matter to the file of the ld. CIT(A), to decide it afresh in the light of "Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai", [2007] 288 ITR 408 (SC), wherein, as per the assessee, the Hon'ble Supreme Court has held 7 ITA 434(Del)10 that in the case of an offshore supplier, since the entire transaction is completed on the high seas, the profits on such sale do not arise in India and they are not taxable in India, and in the light of "M/s. Ansaldo Energia Spa v. ITAT & Others" [2009] TIOL - 62-HC-MAD-IT, wherein, according to the Department, the Hon'ble Madras High Court has, on having considered "Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai" (supra), held that if a contract is composite in spite of the apparent demarcations into separate parts, the mere fact that for offshore supply the title passed outside India alone will not decide the taxability.
11. While passing the impugned order, the ld. CIT(A) has observed that in the case of " M/s. Ansaldo Energia Spa" (supra), the Hon'ble Madras High Court has held that if a contract is composite in spite of the apparent demarcation into separate parts, the mere fact that for off-shore supply the title passed outside India alone will not decide taxability. He has also observed that the Hon'ble Supreme Court in "Ishikawajima-Harima Heavy Industries Ltd."(supra), does hold that the entire transaction of off-shore supply took place outside India and no taxable event took place in India, but it said so after looking at the entire contract and the terms of the contract necessary to determine whether all parts of the off-shore 8 ITA 434(Del)10 transaction took place off-shore and it did so after looking into whether the PE in India had anything to do with the off-shore supply and also whether the contract was split up or a composite one. The CIT(A) has held that the AO was justified in holding that the revenue arising from off-shore supply of equipment to 'IOCL' was taxable in India on account of the following reasons:-
1. In the assessee's case there was a composite contract which mentions 'Turn-key basis';
2. Whereas in the case of Ishikawajima-Harima Heavy Industries Ltd. everything was done outside India and there was no PE in India;
3. The delivery of the equipment is 'CIF Job Site' and thus the title of the goods was to be considered as passing in India on delivery.
12. Aggrieved, the assessee is again in appeal before us.
13. Challenging the impugned order, the learned counsel for the assessee has contended that a finding to the effect that whether a contract is a composite/turn-key contract is not of much significance for determining the taxability of off-shore supply under the provisions of the Income Tax Act. Reference is invited to the judgment of the Hon'ble Supreme Court in 'Ishikawajima' (supra) wherein it has been concluded that the fact that a contract is a turn-key contract, by itself, is not of much significance and for the purpose of taxability, it is not necessary that the contract is to be considered as an integrated one so as to make the assessee pay tax in India.
9 ITA 434(Del)10 The learned counsel for the assessee has submitted that the taxability of a particular stream of income under the Act is to be determined on the basis of accrual of income.
14. The learned counsel for the assessee has contended that thus, merely because the contract is a composite contract, the same does not lead to the conclusion that the off-shore supply portion of the contract is to be taxed in India, specifically when the consideration for the same has been separately determined in the contract and all parts of the transaction have taken place outside India.
15. Apropos the CIT(A)'s observation that in the case of 'Ishikawajima' (supra), everything was done outside India and there was no PE of the assessee in India, the learned counsel for the assessee has submitted that the said finding of the CIT(A) is contrary to the facts in the case of 'Ishikawajima'(supra), wherein there is a clear cut undisputed finding of the AAR that the assessee in the case of Ishikawajima had a permanent establishment in India which finding has been endorsed by the Hon'ble Supreme Court.
16. The learned counsel for the assessee has submitted that the ld. CIT(A) has erred in holding that the delivery in the assessee's case was 'CIF Jobsite' and that accordingly, it is to be considered that the title had 10 ITA 434(Del)10 passed on to 'IOCL' on delivery of the jobsite. It has been contended that in the assessee's case, it is an undisputed fact that the bill of lading was prepared in the name of IOCL and was handed over to its nominee, i.e., the banker, in Rome, i.e., outside India. It has been argued that further, merely on the basis that because the supplier of equipment takes responsibility for transportation or delivery, it cannot be held that the title has been transferred later.
17. The learned counsel for the assessee has further submitted that a finding to the effect that the contract is 'CIF', is not relevant as already held by Supreme Court in 'Mahabir Commercial Co. Ltd.v. CIT' 86 ITR
417.
18. Regarding the judgment of the Madras High Court in the case of 'Ansaldo' (supra) which is reported in 222 CTR 55, the learned counsel for the assessee has submitted that the said judgment is on a totally different footing and is not at all applicable to the present case.
19. The learned counsel for the assessee has sought to place reliance on the decision of the Advance Ruling Authority in the case of 'Joint Stock Company Foreign Economic Association Technopromexport' rendered on 25.2.10 in AAR No. 827 of 2009 (copy at pages 80-103 of the Case Laws Paper Book), wherein, as per the assessee, on facts almost similar to those 11 ITA 434(Del)10 of the assessee, it has been held that the off-shore supply transaction is not taxable in India in the light of the judgment of the Supreme Court in the case of 'Ishikawajima'(supra).
20. Reliance has also been placed on the judgment of the Delhi Bench of the ITAT in the case of 'LG Cable Ltd. v. DDIT', 119 TTJ 34, wherein, on similar facts, the off-shore supply transaction was held to be not taxable in India.
21. The ld. DR, on the other hand, has duly and forcefully supported the order under appeal. It has been contended that the issue has correctly been considered by the ld. CIT(A) in the light of the decision of the Hon'ble Apex Court in the case of 'Ishikawajima'(supra), and that of the Hon'ble Madras High Court in the case of 'M/s. Ansaldo Energia Spa'(supra). It has been contended that the decision of the Hon'ble Madras High Court in the case of ' Ansaldo' (supra) has been rendered after considering the decision of the Hon'ble Supreme Court in the case of 'Ishikawajima'(supra). It has been contended that the Hon'ble Madras High Court, while delivering the decision in the case of ' Ansaldo' (supra) has distinguished the facts in 'Ishikawajima' (supra) with those of 'M/s. Ansaldo Energia Spa'(supra); that it has been held by the Hon'ble Madras High Court, that if a contract is composite in spite of the apparent 12 ITA 434(Del)10 demarcation into separate parts, the mere fact that for off-shore supply, the title passed outside India, alone will not decide taxability; that 'Ishikawajima' (supra), does hold that since in that case, the entire transaction took place outside India, no taxable event took place in India, but it said so after looking at the entire contract and the terms of the contract necessary to determine whether all parts of the off-shore transaction took place off-shore and it did so after looking into whether the PE in India had anything to do with the offshore supply and also whether the contract was split up or a composite contract; that it was in that context that in 'Ishikawajima' (supra), the Supreme Court had said that all parts of the transaction in question, that is, transfer of properties in goods, as well as payment were carried on outside India 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; that the Supreme Court also held that the contract has to be read as a whole and not in parts; that it also held that the PE had no role to play in the transaction; that so, it was not only the situs of the transfer of title which was the sole criterion to determine taxability; that therefore, what follows is that if a contract is a composite contract in spite of the apparent demarcation into separate parts, 13 ITA 434(Del)10 the mere fact that for off-shore supply the title passed outside India alone will not decide taxability; that in 'Ishikawajima' (supra), both the title and the consideration passed outside the taxable territory and very importantly, it was found that it was not a composite contract, nor was there any involvement of the PE in the transaction; and that it was further factually found therein, that the contract was a divisible one, segregating the supply segment and the service segment, and that by agreement the parties had decided when the title passed.
22. The learned DR has contended that as per the Preamble of the contract, as has been discussed by the AO at page 10 of the assessment order, in the case of the assessee, the contract is in fact, a composite contract, which mentions 'Turn-key basis'; that in the case of 'Ishikawajima'(supra), everything was done outside India and there was no PE of the assessee in India; that this is not so in the assessee's case; that as has been observed by the AO in the assessment order, the delivery was to be 'CIF Jobsite', i.e., the purchase was not freight on board, i.e., the title of the goods would pass to the purchaser not abroad, as claimed by the assessee, but on delivery of the jobsite, i.e., in India; that in view of these facts, the judgment in the case of 'Ishikawajima'(supra), is not applicable to the facts of the assessee's case; that in the assessee's case, the judgment 14 ITA 434(Del)10 of Hon'ble Madras High Court in the case of 'Ansaldo'(supra) is squarely applicable; that the AO was justified in holding that the revenue arising from off-shore supply of equipment to IOCL, was taxable in India as has rightly been held by the ld. CIT(A); that the ld. CIT(A) has committed no error in confirming the action of the AO; and that for these reasons, there being no merit in the appeal filed by the assessee, the same be ordered to be dismissed.
23. We have heard the parties and have perused the material on record. The issue herein is as to whether the ld. CIT(A) has rightly confirmed the action of the AO in bringing to tax the revenue arising to the assessee from offshore supply of equipment to IOCL in India.
24. The assessee, an Italian Company, under the terms of the contract awarded to it by IOCL , supplied equipment to IOCL and undertook construction/installation services. The assessee did not offer to tax in India, revenues arising to it from off-shore supply of equipment.
25. The AO brought to tax the assessee's income from off-shore supply of equipment to IOCL. In doing so, the AO relied on the decision of the AAR in the case of 'Ishikawajima Harima Heavy Industries Co. Ltd.' (AAR No. 618 of 2003).
15 ITA 434(Del)10
26. In the impugned order, the CIT(A), on remand from the Tribunal, considered 'Ishikawajima' (supra) handed down by the Hon'ble Supreme Court and 'Ansaldo' (supra) pronounced by the Hon'ble Madras High Court, both of which had not been rendered by the time the CIT(A)'s order in the first round was delivered on 30.11.05.
27. The ld. CIT(A) upheld the action of the AO. Relying on 'Ansaldo'(supra), it was held that the contract in the assessee's case was a composite contract and so, in keeping with 'Ansaldo'(supra), the mere factum of the title qua off-shore supply having passed outside India would not decide taxability. It was held that the contract as a whole was to be booked into, as was done in 'Ishikawajima'(supra). It was held that in 'Ishikawajima'(supra), everything was done in India and the assessee did not have any Permanent Establishment in India. It was held that the delivery of the equipment was 'CIF jobsite' and therefore, the title of the goods was to be considered as having passed in India on delivery.
28. The question up for consideration is as to whether 'Ansaldo'(supra), has been rightly applied and as to whether 'Ishikawajima'(supra), has wrongly been brushed aside.
16 ITA 434(Del)10
29. The assessee in 'Ishikawajima'(supra), was a Japanese company, engaged in the business of construction of storage tanks and engineering, etc. It formed a consortium with various other companies. The members of the consortium entered into an agreement with Petronet LNG Limited, for setting up a Liquefied Natural Gas ('LNG' for short) receiving storage and regasification facility at Dahej in Gujarat. Later on, a supplementary agreement was also entered into. The project envisaged by the contract was a turnkey project specifying the role and responsibility of each member of the consortium. It was the assessee's responsibility to develop, design, engineer and procure equipment, materials and supplies to erect and construct storage tanks of definite specifications. The arrangement was also to include marine facilities for transmission and supply of the LNG to purchasers, to test and commission the facilities relating to receipt and unloading, storage and re-gasification of LNG and to send out re- gasified LNG by means of a turnkey fixed lump-sum price time certain engineering procurement, construction and commission contract. The project was to be completed in 41 months. The contract involved, inter alia, off-shore supply. Feeling the liability to pay Income Tax in India to be doubtful, the assessee filed an application before the Authority for Advance Rulings ('AAR' for short), referring the matter for determination.
17 ITA 434(Del)10 The AAR, inter alia, opined that in a case of transaction of sale of goods by the non-resident to an Indian resident which is a part of a composite contract involving various operations within and outside India, income from such sale shall be deemed to accrue or arise in India if it accrues or arises through or from any business connection in India. The findings of the AAR which travelled as such upto the Hon'ble Supreme Court were, that the assessee had a business connection in India; that if consideration accrues only for supply of goods and the sale is completed outside India, no profits can accrue in India; that however, if a contract envisages a composite consideration for the various obligations to be performed and if certain operations are to be performed by or through the business connection, then, profits would be deemed to accrue in India; that property in the goods, which were, the subject matter of the offshore supply, passed outside India; and that the assessee had a PE in India within the meaning of the Double Taxation Avoidance Agreement ('DTAA' for short), entered into between the Governments of India and Japan.
30. Before the Hon'ble Supreme Court, the case of the Department was that the contract involved was a composite contract, involving execution of the turnkey project; that the "offshore" and "onshore " elements of the contract was so inextricably linked that the breach of the 'offshore' 18 ITA 434(Del)10 element would result in the breach of the whole contract ; that the dominant object of the contract was the execution of a turnkey project and the question as to whether the title to the goods supplied offshore or within India was secondary to the execution of the contract; that each of the components of the contract was directly relatable to the performance of the integrated contract, as violation and/or breach on the part of the parties thereto would affect the entire contract; that since the contract itself provided for milestone dates, the breach of any of the terms thereof would result in the breach of the entire contract and not just the particular obligation; that the turnkey project contemplated a permanent establishment and therefore, the Explanation to Section 9(1)(i) of the Act was directly applicable; that the assessee had a business connection in India and so, the casual connection between the offshore supply and the offshore services being interlinked with the entire project, the opinion of the AAR was proper; that by reason of DTAA, the parties thereto could always allocate the jurisdiction to tax the entire income attributable to such permanent establishment to the country in which it was established ; and that the supply of goods offshore as well as the rendition of service offshore were attributable to the turnkey project and therefore, it was 19 ITA 434(Del)10 wrong to state that no tax could be levied on the assessee in terms of DTAA.
31. From the terms of the contract, it was seen by the Hon'ble Supreme Court that it involved a turnkey contract concerning various activities for a lump-sum firm fixed price, even though the break down of the contract price for various activities was specified thereunder.
32. On a detailed appreciation of the entire matter, the Hon'ble Supreme Court held, inter alia, as follows:-
"23. For the purpose of taxation, the Authority had proceeded on the basis that the element of tax consisted of : (i) onshore supply and onshore services; and (ii) construction of offshore supply and offshore services. It is not denied or disputed, as indicated hereinbefore, that in respect of the first element of onshore supply and onshore service, and construction tax would be payable in India.
Two basic issues which, thus, arise for our consideration are: (a) the taxation of the price of goods supplied, by way of offshore supply price of which is specified in Ex.D, cl. 2.1; and (b)the taxation of consideration paid for rendition of services described in the contract as offshore services at Ex.D.
24. The contract is a complex arrangement. Petronet and appellant are not the only parties thereto, there are other members of the consortium who are required to carry out different parts of the contract. The consortium included in Indian company. The fact that it has been fashioned as a turnkey contract by itself may not be of much significance. The project is a turnkey project. The contract may also be a turnkey contract, but the same by itself would not mean that even for the purpose of taxability the entire contract 20 ITA 434(Del)10 must be considered to be an integrated one so as to make the appellant to pay tax in India. The taxable events in execution of a contract may arise at several stages in several years. The liability of the parties may also arise at several stages. Obligations under the contract are distinct ones. Supply obligation is distinct and separate from service obligation. Price for each of the component of the contract is separate. Similarly offshore supply and offshore services have separately been dealt with. Prices in each of the segment are also different.
The very fact that in the contract, the supply segment and service segment have been specified in different parts of the contract is a pointer to show that the liability of the appellant thereunder would also be different.
25. The contract indisputably was executed in India. By entering into a contract in India, although parts thereof will have to be carried out outside India would not make the entire income derived by the contractor to be taxable in India. We would, however, deal with this aspect of the matter a little later.
26. Scope of work is contained in cl. 2.1 of Ex. A appended to the contract which includes supply of equipment, materials and facilities. The said exhibit spells out different systems to be set in place. It imposes an obligation on the contractor to supply equipments required therefore. It was to arrange for the engineering services in relation thereto. It was also required to render various other services within India. Ex. D, however, provides for the prices to be paid in respect of offshore supplies and offshore services, onshore supply and onshore services, construction and erection. Payment schedule has also been separately specified in respect of each of the components separately.
It is not in dispute that title in the equipments supplied was to stand transferred upon delivery thereof outside India on high-sea basis as provided for in art. 22.1. Similarly, art. 13.1, provides for a lump sum contract price, whereas art. 13.3.2. specifically refers to the cost of offshore supplies. The provisions with regard to offshore supplies and offshore services wee to be read with the provisions 21 ITA 434(Del)10 contained in Ex. D which formed the basis of Customs Duty, Clause 13.4 refers to Ex. D as the basis for price escalation.
The question of imposition of tax on income arising from a business connection may, thus, have to be considered keeping in view the aforementioned factual backdrop.
27. Sec. 9(1)(i) of the Act states that income accruing or arising whether directly or indirectly, through or from any business connection in India shall be deemed to accrue or arise in India. Appellant is a non-resident assessee.
Sec.9 raises a legal fiction; but having regard to the contextual interpretation and further more in view of the fact that we are dealing with a taxation statute the legal fiction must be construed having regard to the object it seeks to achieve. The legal fiction created under s. 9 of the Act must also be read having regard to the other provisions thereof. [See Maruti Udyog Ltd. v. Ram Lal & Ord.(2005) 2 SCC 638].
28. For our benefit, we may notice the provisions of s. 42 of the I.T. Act, 1922. It provided that only such part of income as was attributable to the operations carried out in India would be taxable in India.
Territorial nexus doctrine, thus, plays an important part in assessment of tax. Tax is levied on one transaction where the operations which may give rise 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.
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 22 ITA 434(Del)10 offshore supplies or offshore services were intimately connected with the turnkey project.,,,,,,,,,,,,,..............
34. In this case, we are faced with a different situation. It is only for the purpose of taxability that the terms of the contract are required to be construed. A turnkey contract may involve supply of materials used in the execution of the contract for price as also for use of the materials by works and labour; but the same may not have any relation with the taxability part of it...................................
73. We, therefore, hold as under:
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) 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 DTAA, and the latter is for the application of s. 9 of the I.T. Act.
23 ITA 434(Del)10 (6) Clause (a) of Expln. 1 to s. 9(1)(i) states that only such part of the income as is attributable to the operations carried out in India, are 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 entire income attributable to the permanent establishment.
(8) There exists a difference between the existence of a business connection and the income accruing or arising out of such business connection.
(9) Paragraph 6 of the protocol to the DTAA is not applicable, because, for the profits to be 'attributable directly or indirectly', the permanent establishment must be involved in the activity giving rise to the profits. Re: Offshore services:
(1) Sufficient territorial nexus between the rendition of services and territorial limits of India is necessary to make the income taxable.
(2) The entire contract would not be attributable to the operations in India viz. the place of execution of the contract, assuming the offshore elements form an integral part of the contract.
(3) Sec.9(1)(vii) of the Act read with memo cannot be given a wide meaning so as to hold that the amendment was only to include the income of non-resident tax payers received by them outside India from Indian concerns for services rendered outside India.
24 ITA 434(Del)10 (4) The test of residence, as applied in International Law also, is that of the tax payer and not that of the recipient of such services.
(5) For s.9(1)(vii) to be applicable, it is necessary that the services not only be utilized within India, but also be rendered in India or have such a 'live link' with India that the entire income from fees as envisaged in art. 12 of DTAA becomes taxable in India.
(6) The terms 'effectively connected' and 'attributable to' are to be construed differently even if the offshore services and the permanent establishment were connected.
(7) Sec. 9(1)(vii)(c) of the Act in this case would have no application as there is nothing to show that the income derived by a non-resident company irrespective of where rendered, was utilized in India.
(8) Article 7 of the DTAA is applicable in this case, and it limits the tax on business profits to that arising from the operations of the permanent establishment. In this case, the entire services have been rendered outside India, and have nothing to do with the permanent establishment, and can thus not be attributable to the permanent establishment and therefore not taxable in India.
(9) Applying the principle of apportionment to composite transactions which have some operations in one territory and some in others, is essential to determine the taxability of various operations.
(10) The location of the source of income within India would not render sufficient nexus to tax the income from that source.
(11) If the test applied by the Authority for Advanced Rulings is to be adopted here too, then it would 25 ITA 434(Del)10 eliminate the difference between the connection between Indian and foreign operations, and the apportionment of income accordingly.
(12) The services are inextricably linked to the supply of goods, and it must be considered in the same manner."
33. From the above, it can be seen that the Hon'ble Supreme Court concluded that the fact that a contract is a turnkey contract, by itself, is not of much significance and for the purpose of taxability, it is not necessary that the contract be considered as an integrated contract so as to make the assessee pay tax in India. This is also the ratio of "ITO v. Shreeram Bearings Ltd." 224 ITR 724 (SC), which was taken note of by the Hon'ble Supreme Court. Rather, it is the accrual of income which determines the taxability of the income. The territorial nexus doctrine, as observed by the Hon'ble Supreme Court, has an important role to play in the assessment of tax. Income arising out of the operations in more than one jurisdiction would have territorial nexus with each of the jurisdiction, on actual basis and if that is so, the entire income cannot be said to accrue or arise in each of the jurisdictions. In the case of 'Ishikawajima' (supra), the Hon'ble Supreme Court observed that it was only for the purpose of taxability that the terms of the contract were required to be construed. It was observed that a turnkey contract may involve supply of materials used in the execution of the contract, as also for the use of the materials by works and 26 ITA 434(Del)10 labour, but the same may not have any relation with its taxability part. It was held, inter alia, that sofaras regards offshore supply, only such part of the income, as was attributable to the operations carried out in India, could be taxed in India; and that since all parts of the transaction, i.e., the transfer of property in goods, as well as the payment, were carried on outside India, the transaction could not have been taxed in India; that the principle of apportionment, wherein, the territorial jurisdiction of a particular State determines its capacity to tax an event, has to be followed; that the fact that the contract was signed in India was of no material consequence, since all activities in connection with the offshore supply were outside India and, therefore, could not be deemed to accrue or arise in the country; that there is a distinction between a business connection and a PE; that a business connection is for the purpose of assessment of income of a non-resident under DTAA, whereas PE is for the application of section 9 of the I.T. Act; that the existence of a PE would not constitute sufficient 'business connection', and the PE would be the taxable entity; that the fiscal jurisdiction of a country would not extend to taxing of the entire income attributable to the PE; that there is a difference between the existence of a business connection and the income accruing or arising out of such business connection; that sofaras regarding the off-shore services, 27 ITA 434(Del)10 sufficient territorial nexus between the rendition of services and the territorial limits of India is necessary to make the income taxable ; that the entire contract would not be attributable to the operations in India, namely, the place of execution of the contract, assuming the offshore elements of an integral part of the contract; that the test of residence, as applied in International Law also is that of the tax payer and not that of the recipient of such services; that for section 9(1)(vii) of the Act to apply, it is necessary that the services not only be utilized within India, but also be rendered in India or have such a live-link with India that the entire income from fees becomes taxable in India; that the terms 'effectively connected', and 'attributable to' are to be construed differently, even if the offshore services and the PE were connected; that applying the year of apportionment to composite transactions which have some operations in one territory and some in others, is essential to determine the taxability of various operations; that the location of the source of income within India would not render sufficient nexus to tax the income from that source; and that the services were inextricably linked to the supply of goods and they were to be considered in the same manner.
28 ITA 434(Del)10
34. Thus, it is seen that the factum of the contract involved being a composite contract, of itself, per se, is not conclusive of the offshore supply portion thereof being taxable in India. This, particularly so, when undisputedly, the consideration for the offshore supply stands separately determined in the contract. It may be underlined that herein, undisputedly, all parts of the transactions have taken place outside India.
35. Sofaras regards 'Ansaldo'(supra), therein, the offshore supply transaction in India was taxed basically for the reason that the contract involved therein was a single bidder contract. The contract was split up on the asking of the foreign party. This to start with, was not accepted by ASPL - NLC, a company set up in India by the assessee therein. The finding of fact recorded was that the four concerned contracts were planned in such a manner as resulted in loss in India and the major part of the profits was shown towards the offshore supply transaction. The split up of the contract was held to have been brought about only for tax purposes, the imbalance of price being evident.
36. The ld. DR has contended that 'Ansaldo'(supra), has duly taken into consideration 'Ishikawajima' (supra), to hold that if a contract is composite inspite of apparent demarcation into separate parts, the mere factum of title having passed outside India for offshore supply, would not, by itself, 29 ITA 434(Del)10 be determinative of the taxability. Now, 'Ansaldo'(supra), turns on its own facts. Therein, it was found, inter alia, that the assessee was not just the return of the two companies which executed the contracts, namely, the assessee and ASPL. ASPL just spoke 'Master's voice' . These are not the facts before us. Herein, no finding of price imbalance stands recorded. The contract involved found clear recital of separate considerations for various activities. This has gone undisputed. In 'Ansaldo'(supra), the Indian entity was found to have been put up merely as a fusel. This is also not the fact situation present before us. The ratio of 'Ishikawajima' (supra), is, thus, in our considered opinion, squarely applicable to the facts of the present case.
37. The objection of the Department is that in the present case, the contract involved is a composite contract, despite the fact that it has apparent demarcations into separate parts. It has been submitted that herein, the delivery was to be 'CIF jobsite' and therefore, the purchase was not freight on board, meaning thereby, that the title of the goods was to pass to the purchaser on delivery of the jobsite, in India, and not abroad. However, it remains unrebutted that the bill of lading was prepared in the name of IOCL. It was handed over to its nominee in Rome and not in India. Now, just because the supplier took responsibility for transportation 30 ITA 434(Del)10 or delivery, it cannot be said that the title passed on later. Moreover, as rightly contended, in 'Mahabir Commercial Co. Ltd.'(supra), the Hon'ble Supreme Court has held that even though the property in the goods may pass to the buyer when the documents are handed over, the buyer may yet retain the right to examine and repudiate the goods, but this right does not by itself indicate that the property in the goods has not passed to him. Thus, merely because the delivery was to be 'CIF jobsite', this fact, on a stand alone basis, is not of much reliance, in accordance with 'Mahabir Commercial Co. Ltd.'(supra).
38. In view of the above, we hold that the ld. CIT(A) erred in confirming the action of the AO, relying on 'Ansaldo'(supra), which is not applicable. It is 'Ishikawajima' (supra), whose ratio is directly applicable hereto and as such, the grievance of the assessee in this regard is justified.
39. The ratio in 'Ishikawajima' (supra), has also been followed in 'LG Cable Ltd.'(supra), wherein, under similar circumstances, it was held that the offshore supply transaction was not taxable in India.
40. Hence, the grouse of the assessee is well founded. For the above discussion, the same is accepted. We accordingly hold that the ld. CIT(A) fell in error in confirming the taxation of the revenue earned from offshore supply of equipment to IOCL in India, even though such revenue had 31 ITA 434(Del)10 neither accrued or arisen in India, nor was it attributable to the activities of the assessee's project office in India.
41. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 30.09.2010.
Sd/- sd/-
(K.D. Ranjan) (A.D. Jain)
Accountant Member Judicial Member
Dated: 30.09.2010
*RM
copy forwarded to:
M/s. Technip Italy Spa,
A-4, Sec.1, Institutional Area,
Noida.
2. ACIT, Noida Range, Noida.
3. CIT
4. CIT(A)
5.DR
True copy
By order
Deputy Registrar
32 ITA 434(Del)10