Indian Kanoon - Search engine for Indian Law

Enclosure-1 to the FOB contract is as under:

Enclosure - 1 Break-up of price for design, manufacture and supply of imported plant, machinery and equipment with auxiliaries and initial fills, commissioning spares on F.O.B. basis for Sinter Plant at Kalinganagar, Orissa Sl. Item Descriptions Qty. Wt. Country Currency Fixed FOB No. Nos. MT of price, packed s Origin (Euro)

15. REPLACEMENT OF UNSERVICABLE MATERAIALS 15.1 Up to FOB, if any Contract Work including supplies perishes or becomes unserviceable, including loss or damage in transit, Contractor shall repair or replace such parts without delay at Contractor's account and shall receive possible proceeds of the settlement from insurance.

Outotec GmbH AYs 2010-11 & 2011-12 15.2 After FOB, if any Contract Work including supplies perishes or becomes unserviceable, including loss or damage in transit, due to reasons not attributable to the Contractor, Contractor shall on request by Purchaser repair or replace such parts and be entitled to payment from purchaser of the corresponding mutually agreed reasonable costs and time incurred by Contractor to do so.

"9(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 situated in India.

Explanation 1: 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 attributable to the operations carried out in India." (emphasis supplied) Sh. Khaitan explained the effect of section 5 read with section 9(1)(i) that income shall accrue or arise or deemed to accrue or arise in India if the same is earned through any business connection in India. However, Explanation 1(a) to section 9(1)(i) of the Act provides that where some operations are carried out in India then income only to that extent resulting from such operations can be taxed in India. In other words, if no operation is carried out in India, then no profit can be taxed in India. Thus, the point that merit consideration is whether the assessee has carried out any operation in India in relation to sale of equipment. According to Sh. Khaitanthe facts mentioned in above paragraphs including the clauses for TKPO project agreement clearly demonstrate that all the activities relating to designing, fabrication and manufacturing took placed outside India and 75% of the payment for each and every part of shipment becomes payable upon delivery of equipment on FOB Outotec GmbH AYs 2010-11 & 2011-12 foreign port of shipment once shipping and other documents are submitted to the customer and such payment has to be made through irrevocable letter of credit. It is needless to mention that no buyer would make the substantial payment for equipment of which the property has not been transferred to him. The irrevocable letter of credit further makes it clear that even if the ship does not sail or deliver the goods to the destination, the assessee receives payment out of L/C, guaranteed by the bank, upon FOB delivery. Therefore, it is clearly evident that the sale of equipment took place outside India on principal to principal basis and the consideration was also received outside India in foreign currency. Accordingly, it is submitted that the assessee cannot be considered to have carried out any operations in India with regard to equipment sold to the Indian customers. In view thereof, no portion of the receipts from sale of equipment can be taxed in India under the provisions of the Act. According to Ld. Counsel, since the income is not liable to tax in India under the provisions of the Act, therefore, the assessee is not required to examine the taxability under the provisions of the DTAA as mentioned by the Hon'ble Supreme Court in the judgment of Ishikawajma-Harima Heavy Industries Ltd. vs DIT (2007) 288 ITR 408 (SC) on page no. 444 of report wherein it has been held that "The entire transaction having been completed on the high seas, the profits on sale did not arise in India, as has been contended by the appellant. Thus, having been excluded from the scope of taxation under the Act, the application of the double taxation treaty would not arise."

19. In view of the above facts and legal position, we are of the view that the sale of equipment is concluded outside India because all work relating to manufacturing, designing, fabrication etc. of equipment is done outside India and sold to the assessee directly on export sale basis. The contract provides for delivery of equipment on FOB Foreign Port of Shipment majority of payments i.e. 80-85% for Outotec GmbH AYs 2010-11 & 2011-12 each and every part of shipment becomes payable upon delivery of equipment on FOB foreign Port of Shipment the above payments are through irrevocable letter of credit which makes it clear that even if the ship does not sail or deliver the goods to the destination, the assessee receives payment out of Letter of Credit guaranteed by bank upon FOB delivery. Even the customer's inspection for equipment is outside India. The buyers were Indian customers and unrelated parties and purchased equipment from assessee on their own account. Moreover, sale was on principal to principal basis and at arm's length. The assessee entered into either separate contracts each with its own scope of supply or service with separate consideration or single contract with separate scope of supply and services as well as separate consideration. The findings of DRP and that of the AO that the contracts are single contract split into separate parts is not correct. Even if the contract is considered to be integrated one, then also the taxability of each of the component has to be determined separately based on the decision of Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd., supra. Further, the reliance placed by DRP on the case of AAR of Alstom Transport SA, supra to hold that the contract for installation and commissioning of a project cannot be split up into separate parts as consisting of independent supply of goods and for installation at the work site. For reaching to the above conclusion AAR relied on the decision of Linde AG of AAR but the decision of AAR in the case of Linde AG was overruled by Hon'ble Delhi High Court, which is cited supra. The acceptance tests are merely in the nature of warranty provisions for the reason that only 15% of the payment is receivable by the assessee on completion of various tests. In case these tests are unsuccessful Tata Steel or the party concerned can claim liquidated damages not exceeding 35% of the contract price. Accordingly, the clause of acceptance tests is merely in the nature of warranty provisions. Even the reliance placed by AO on various clauses of Sales of Goods Act is misplaced. Since the Hon'ble Delhi High Court in the case of LG Cables Ltd., supra after considering the provisions of Sales of Goods Act held that such acceptance tests are merely in the nature of warranty provisions. Even there is no PE for sale of equipment in view of the decision of Hon'ble Supreme Court in the case of Hyundai Heavy Industries, supra and in addition to this, there is no concept called sale PE under DTAA. In light of the facts Outotec GmbH AYs 2010-11 & 2011-12 and legal position, we hold that the profit arising to the assessee from sale of equipment is not taxable in India. This issue of assessee's appeal is allowed.