TMI Blog2008 (8) TMI 406X X X X Extracts X X X X X X X X Extracts X X X X ..... x in India. In fact there was no income and the loss returned by the assessee from onshore operation carried in India has been accepted by the Revenue. Even in respect of offshore supply of equipment, the department has accepted that all operations relating to supply were not carried in India. Its case is that 10 per cent of amount paid for offshore supply should be deemed to have accrued and chargeable to tax in India. Whether 10 per cent of income from supply of equipment can be reasonably attributable to operations carried out in India in terms of Explanation 1(a) of sub-section (1)(i) of section 9 of the Income-tax Act - HELD THAT:- For justifying assessment of 10 per cent, it is the case of the revenue that agreements between the assessee and PGCIL were not merely for supply of equipment but also for erection and commissioning of the equipment and its satisfactory performance in accordance with provisions of the agreement. In terms of Article 6 of both the Agreements, default in supply or in erection would be taken as a default in the other agreement and the two being so intricately linked with each other that one agreement could not work without the other. In view of clo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that ownership is intended to pass to PGCIL as soon as goods are loaded and in this case were put on the ship and documents were handed to the nominated bank where letter of credit was opened. Section 23(1) is independent of section 23(2) of the Sale of Goods Act . Section 23(1) does not contemplate unconditional appropriation in pursuance of a contract. It refers to unconditional appropriation with the assent of the parties. Whereas in section 23(2) it is delivery to a carrier in pursuance of a contract which operates as an unconditional appropriation and is, therefore, deemed to be unconditional appropriation. As the goods were delivered in accordance with agreement, the property in goods was transferred to the buyer and a sale did take place. Rules laid down in sections 20 to 24 of Sale of Goods Act are applicable only when intention of the parties is not clear. But here as noted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied upon the decision in the case of Motorola Inc [ 2005 (6) TMI 226 - ITAT DELHI-A] . We further agree that said decision should have been followed by the learned CIT (Appeals) unless he could cite some decision taking a contrary view. That is not the case here. Even otherwise in the light of our decision on above issue, the assessee is not liable to pay any interest u/s 234B. Therefore, the appeal of the assessee is allowed. - Vimal Gandhi President And Mehar Singh A.M. For the Appellant : H. P. Aggarwal For the Respondent : Devendra Shanker ORDER PER VIMAL GANDHI, PRESIDENT.- 1. This appeal by the assessee for assessment year 2002-03 is directed against order of CIT (Appeals) upholding addition of Rs. 1,05,48,950 made on account of profit for offshore supply of equipment, held to be taxable in India. 2. The facts are that the appellant, LG Cable Limited ( LGCL ) is a company incorporated under the laws of South Korea having its registered office at ASEM Tower (19-20F), 159-Samsung Dong, Gangnam-gu, Seol-135-090, Korea. During the financial year 2001-02, LGCL had set up a project office in India after obtaining requisite approval from Res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supply was carried out by LGCL in Korea and was subject to income-tax in Korea. (c) The consideration for supply of equipments was remitted directly outside India through the mechanism of letter of credit and, therefore, the same was received outside India. 2.5 The sale transaction had taken place outside India since property in goods (equipment) was transferred outside India. This claim was based on the following circumstances: (i) The bill of lading in respect of equipment sold was issued in Korea in favour of PGCIL, i.e., the buyer and the notified party was also PGCIL; (ii) The bill of entry clearly showed that the importer was PGCIL and the goods were directly transported to the site of PGCIL and not to that of LGCL; (iii) As per terms of the contract, PGCIL was co-insured under the insurance policies; (iv) In terms of the contract, the ownership of equipment and materials supplied from outside India was transferred to PGCIL in the country of origin i.e. in Korea. 3. The Assessing Officer did not accept above claim of the assessee relating to offshore supply of equipment in the light of decision of Authority for Advance Ruling in the case of Ishikawajima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, even if a business connection in India is deemed to exist, no part of income could arise in India as no operation relating to supply of material was carried in India. Assessee in support of above plea, place reliance upon the following decisions: (i) CIT v. R.D. Aggarwal Co. [1965] 56 ITR 20 (SC), (ii) Addl. CIT v. Skoda Export Prabha [1988] 172 ITR 358 (AP). 4.3 It was further contended that Article 7 of the DTAA had no application here as that Article can apply only if the assessee had carried on business in India through a PE and only to the extent profits attributable to the PE, could be taxed in India. In the instant case, the offshore supply had been executed by the head office and, there was no role of project office set up in India in respect of these supplies. The assessee placed reliance on Special Bench decision of Income-tax Appellate Tribunal in the case of Motorola Inc. v. Dy. CIT [2005] 95 ITD 269 (Delhi). The summarized finding of ITAT in above case was submitted to be as under: (a) Mere signing of contract in India does not give rise to any income in India; (b) Based on the terms of the contracts, the title and risk in the equipment passes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n contract it is the responsibility of the appellant that the materials/equipment supplied by it under the offshore equipment supply contract shall give satisfactory performance. The same responsibility has been cast on the appellant in Article 6 of the offshore supply of equipment also. (4) Notwithstanding the award of contract under two separate agreements, the contractor (appellant) shall achieve successful completion of the project under both contracts and successful taking over the project by PGCIL. 5. On consideration of above facts and the agreements, the learned CIT (Appeals) held that two contracts are not independent of each other as had been made out by the appellant. They were dependent and one cannot be completed without the other. Even in respect of offshore equipments supply contract, the responsibility of the appellant does not stop at the point of delivering the equipment to the appellant outside India, but is much more as is clear from the terms of Article 6 of the Agreement. The responsibility continues till the successful completion of the project because unless the equipment supplied under the offshore agreement is erected and commissioned successfully i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ima Harima Heavy Industries Co. Ltd. The said decision has been reversed on the issue in dispute by their Lordships of Supreme Court in the case of Ishikawajima Harima Heavy Industries Co. Ltd. v. DIT [2007] 288 ITR 408. The ld. counsel argued that facts in the decided case and in the case in hand are identical. In fact, in the aforesaid case decided by the Supreme Court, there was only one contract relating to offshore supply of equipment and its erection in India. The other terms and conditions of agreement were also similar, yet their Lordships have held that income from offshore supply of equipment was not taxable in India as activities generating profits were carried wholly outside India. In such a situation, section 9(1)(i) of the Income-tax Act has no application even if there is a Permanent Establishment (P.E.) in India. Income cannot accrue or arise in India unless income is attributable to such P.E. It is necessary that services rendered have territorial nexus within the limits of India to make Income-taxable. Section 9(1)(vii), even after amendment, cannot be given a wider meaning so as to include the income of non-resident taxpayers received by them outside India from I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the levy of interest under section 234B, the ld. counsel contended that reliance before the ld. CIT(A) was placed by the appellant on decision of Special Bench in the case of Motorola Inc. The CIT(A) has disagreed with the said decision. According to the ld. counsel, ld. CIT(A) was bound to follow the decision of the Tribunal for the sake of judicial discipline. In this connection, ld. counsel cited and relied upon the decision of Supreme Court in the case of Asstt. Collector of Central Excise v. Dun lop India Ltd. [1985] 154 ITR 172 to contend that the ld. CIT(A) was wrong in disregarding direction of the Apex Court in the above case. He again submitted that as income of the assessee was liable to advance tax under section 208/209 of the Income-tax Act, the assessee was not liable to pay interest under section 234B. Interest levied under section 234D was claimed to be consequential. 9. Ld. DR opposed above submissions. He drew our attention to two contracts entered into by the appellant with Power Grid Corporation of India Ltd. (PGCIL). He read out Article 6 of the contracts to contend that any default or breach in one contract shall not relieve the contractor assessee of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argo insurance covering loss or damage occurring whilst transit from the suppliers or manufacture works until at site to the facilities. (b) Covering installation and risk insurance up to the defect liability period. (5) The project completion schedule is given in Appendix-IV which is part of offshore contract which includes provision for implementation of Fibre Optic Cabling System under the project. (6) Functional guarantees in terms of Appendix-VIII as follows:- Under the provisions of the Conditions of Contract, M/s. LG Cable Ltd., South Korea shall guarantee that the system offered shall meet the technical specification requirement of continuous availability of the system at 99.9 per cent for a period of one year commencing from the date of Operational Acceptance by Powergrid. In case the actual availability falls short of the above-said guaranteed availability, it would be considered as Contractor's default under the provisions of Clause GC 42.2 of conditions of Contract. However, before declaring the Contractor's default under clause 42.2 the employer shall negotiate for reaching a mutually acceptable agreement. It was, accordingly, contended by Depar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax liability where the liability is not imposed by the Act. If a tax liability is imposed by the Act, the Agreement may be resorted to for negativing or reducing it; and, in case of difference between the provisions of the Act and the agreement, the provisions of the agreement would prevail over the provisions of the Act and can be enforced by the appellate authorities and the court. 10.3 It is to be noted that the assessee never sought application of Double Taxation Avoidance Agreement (DTAA) or any beneficial treatment under the Indian Income-tax Act or the DTAA. A question of beneficial treatment can arise only where both DTAA and Income-tax Act are applicable. As directed by Hon'ble Supreme Court, DTAA cannot possibly fasten a tax liability which is not imposed by the Act. DTAA may be resorted to for negativing or reducing it. Therefore, the primary question in every case is whether the provisions of the Indian Income-tax Act are applicable in the case in hand or not. 10.4 In order to determine the question whether provisions of Indian Income-tax are applicable to the offshore supply of equipment, we would have to consider in some detail the agreement entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hundred and Seven), with a validity upto 60 days beyond the Defect Liability Period for this offshore Contract and the Performance Security for the onshore Erection Contract as mentioned in the Contract Agreement for the same. The Advance Payment Security and the Performance Securities for both the contracts, to be furnished as per the contract in the specified format, shall be kept valid initially at least up to 31-10-2003 and 30-9-2004, respectively, and shall be extended from time to time as may be required under the contract. 1.1-2 Progressive Payment-Seventy five per cent (75%) of the CIF price component (excluding IAC) for all the equipments and materials excluding 'Mandatory Spares and Tools Tackles for Off-line Maintenance' shall be paid as follows: (i) Fifty five per cent (55%) of the CIF price component (excluding IAC) for all the equipments and materials excluding 'Mandatory Spares and Tools Tackles for Off-line Maintenance' shall be paid on pro-rata basis through irrevocable confirmed Letter of Credit established in favour of contractor and on shipment of equipment and submission of documents specified in Clause SCC 18.1. (ii) Twenty per ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayable as from the end of the 15 days period on certified amount due, but not paid, at the end of the such period. Appendix 1 relates to Payment Procedures : 2.1 Method of Payment.-Payments shall be made promptly by the Employer within thirty (30) days of submission of an invoice/claim and other requisite documents as per the Contract by the Contractor. All the payments shall be released to the Contractor directly except the payment due on shipment mentioned at 1.1-2(i) and 1.2(a) above, which shall be paid through irrevocable confirmed Letter of Credit. Letter of Credit will be established approximately 30 days prior to confirmed date of shipment and shall remain valid for a period of 90 days. 2.2 The contractor shall submit a request to the employer at Powergrid, Kolkata (ERULDC), for opening the Letter of Credit, at least 60 days in advance, accompanied with details for establishment of Letter of Credit along with supporting documents, if any. A copy of the same along with supporting documents (if any) shall, however, be submitted to the Employer at Powergrid, New Delhi (International Finance Department And T CC Deptt.) 2.3 All invoices/claims for payment along wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... complete Fibre Optic system including associated equipment/civil works etc. for complete execution of the Fibre Optic Cabling System Package ('the Facilities') under Eastern Region System Coordination and Control Project, training of Employers personnel within India and maintenance of the Fibre Optic Cabling System as per technical specifications, and the Contractor has agreed to such engagement upon and subject to the terms and conditions hereinafter appearing. 10.9 The contract price and terms of payment are provided in Article 2 and is as follows:- Article 2. Contract Price and Terms of Payment 2.1 Contract Price (Reference GCC Clause I1!SCC Clause 9) The Employer hereby agreed to pay to the Contractor the Contract Price in consideration of the performance by the Contractor of its obligations hereunder. The Contract Price shall be aggregate of INR 59,982,160 (Indian Rupees Fifty Nine million Nine hundred Eighty Two thousand One hundred and Sixty only) and US $ 88,400 (US Dollars Eighty Eight thousand and Four hundred only), or such other sums as may be determined in accordance with the terms and conditions of the contract. The break-up of the contract pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Operational Acceptance along with the corresponding final payment for supply portion mentioned at clause 1-1-3 of Appendix-1 (Terms and Procedure of Payment) attached to the Contract Agreement Ref. No. C-42101/S858-1/CA-I/787 (for Off-Shore Contract) for Fibre Optic Cabling System Package under ER SC C Project. Para 1.4 is also relevant as it relates to Interest for Delayed Payment. It is similar to provision of interest of Agreement-1 quoted above. In Appendix 3, there is provision for insurances to be taken by the contractor. It is provided as under:- In accordance with the provisions of GCC Clause 34 read in conjunction with SCC, the Contractor shall at its expense take out and maintain in effect, or cause to be taken out and maintained in effect, during the performance of contract, the insurances set forth below in the sums and with the deductibles and other conditions specified. The identity of the insurers and the form of the policies shall be subject to the approval of the employer, such approval not to be unreasonably withheld. (a) Cargo Insurance-Covering loss or damage occurring, whilst in transit from the suppliers or manufacturers works or stores until ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arisen or received in India in the relevant period. It also include income which accrues or arises to the assessee outside India depending upon whether the assessee is a resident, non-resident or not ordinarily resident in India within the meaning of sub-section (6) of section 6. For considering whether income can be deemed to have accrued or arisen in India, we must go to provision of sub-section (1) of section 9, which is as under:- 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 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; A perusal of above pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of such income was attributable to any operation carried out in India. 12. On consideration of facts and circumstances of the case, we are of view that contentions of learned counsel for the assessee are well taken. The Assessing Officer and on appeal, the learned CIT (Appeals) have mainly relied upon the case of Ishikawajima Harima Heavy Industries Co. Ltd. decided by Authority for Advance Ruling. The decision of Authority for Advance Ruling has not been approved by Supreme Court and it has been held that income from offshore supply of goods is not taxable in India. In the light of above background, it is neither possible nor permissible for the revenue to contend that above decision of Supreme Court is not applicable to the facts of the case. The Supreme Court after considering almost identical facts and circumstances and even when there was one agreement both for supply and erection of equipment held that income from offshore supply of material/equipment did not arise in India and was not taxable. Our attention to detail of facts and finding was drawn by learned counsel for the assessee and gist of the principle laid down has already been noted. It is not necessary to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 from an integral part of the contract. (3) Section 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 taxpayers received by them outside India from Indian concerns for services rendered outside India. (4) The test of residence, as applied in international law also, is that of the taxpayer and not that of the recipient of such services. (5) For section 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 article 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) Section 9(1)(vii)(c) of the Act in this case would have no application as there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods Act, 1930. 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 that ownership is intended to pass to PGCIL as soon as goods are loaded and in this case were put on the ship and documents were handed to the nominated bank where letter of credit was opened. The other relevant provision of Sale of Goods Act is section 23, which is as under:- 23. Sale of unascertained goods and appropriation.-(1) Where there is a contract for the sale of unascertained or future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with the assent of the seller, the prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich a buyer has in a c.i.f. contract does not by itself indicate that the property in the goods has not passed to him. 13.2 All the circumstances mentioned above are fully satisfied in the present case also as goods were ascertained and delivered to ship for transportation to India, bill of lading was also handed over to the bank nominated by the assessee and payment was also received outside India. The property in goods got transferred to the buyer and sale was completed. With the completion of the sale, income accrued and that accrual was outside India. Accrual of such income was not attributable to any operation carried out in India. Therefore, contention of the assessee that income from offshore contract for supply etc., did not arise in India and provisions of Indian Income-tax Act had no application is well founded and is required to be accepted. The Revenue in support of its contention that part of income accrued in India had referred to and relied upon the following circumstances: (i) That the assessee had an office and, therefore, PE in India which was also responsible for offshore supply of equipment. (ii) That assessee did not receive entire payment outside In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no such condition in the agreement and, therefore, sale of goods as for as buyer was concerned, was complete and unequivocal. The property in the equipment passed to the buyer as stipulated in para 31.2 of the agreement. Stipulation in the second agreement (erection contract) relating to certain performances by the assessee including port handling, custom clearance, transportation, insurance, handling on site, unloading at transportation site, testing and commissioning to the satisfaction of the buyer are under a separate agreement for a separate consideration. It is clear from the second agreement wherein it is provided, Whereas the employer desires to engage the contractor for performance of all activities within India. Subject to the terms and conditions hereinafter appearing. 13.5 In Article 2 of the contract titled Contract Price and Terms of Payment , it is provided, The Employer hereby agrees to pay to the Contractor the Contract Price in consideration of the performance by the Contractor of its obligations hereunder . For performance of activities in India contract price aggregating to INR 59,982,160 + US$ 88,400 is specifically and separately fixed. So the duties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buyer, the unpaid seller has, in addition to his other remedies, a right of withholding delivery similar to and co-extensive with his rights of lien and stoppage in transit where the property has passed to the buyer. Thus passing of the property to the purchaser has nothing to do with the payment of entire price of equipment to the seller. Even otherwise substantial amount in this case was paid to the seller outside India. 14. The Revenue authorities have also placed reliance on obligation of the seller to erect, test and commissioning of the equipment to the satisfaction of operational acceptance of package. In the first place, we have already held that obligations fixed under the second contract are obligations to be discharged by the appellant for a separate consideration. There is no dispute that income arising from activities performed in India is taxable in India. Those activities are separate and distinct and cannot be clubbed with obligations of the supplier or passing of property in the equipment. These stipulations are retained in favour of the purchaser to ensure that the equipment supplied give satisfactory performance. These obligations are nothing beyond trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied out in India, no portion of the same was taxable in India. 14.2 It may be relevant to state that in the case of Mahabir Commercial Co. Ltd., the contract under which goods were supplied by seller to the buyer, contained the following clauses: 7. Non-acceptance of documents should buyers fail to accept or pay against documents properly submitted under the terms of the contract sellers have the right to exercise any of the following options. (a) Cancelling the contract. (b) Cancelling the contract and charging buyers the market difference between the contract rate and the market rate of the date of the breach of contract. (c) Selling against buyers in the open market on the first working day following the default. 9. (3) In any case where buyers make any claim in respect of quality and/or excessive moisture and the Award on the dispute being referred to arbitration as provided for in Clause 13 provides for an allowance of not less than 50 per cent on the market difference between the grades of the goods contracted for and the goods supplied and/or finds a moisture content in the goods supplied in excess of the maximum percentage of moisture allowed under clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esumed to be finally made where by the terms of the contract the party so authorised has determined his election by doing such act or thing which cannot be done until the goods are appropriated. Generally, subject to the limitations already discussed a seller appropriates the goods by the delivery of the bill of lading-the document giving control of the goods-in exchange for payment of the price by which he that he does not intend to retain the right of disposal of the property in the goods. 14.4 In the case of Shriram Bearings Ltd., Hon'ble Supreme Court observed: The only controversy is with respect to the taxability of 165,000 US Dollars which is stipulated as the consideration for sale of trade secrets. The agreement specifically states that the said sale is effected in Japan. We are unable to see on what basis it can be said that any part of the said amount has been earned in India. 14.5 Again in the case of Mahabir Commercial Co. Ltd. the Supreme Court observed as under: Where in pursuance of the contract the seller delivers the goods to the buyer or to a carrier or other bailee whether named by the buyer or not for the purposes of transmission to the buye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der which the sellers were authorized to draw credit from the Bank. The irrevocable letter of credit in the present case after which delivery was made by the seller to the ship, is clear indication of transfer of property in goods from the seller to the buyer. None of the circumstances referred by the revenue and noted above can lead to an inference that transfer of title to the buyer was conditional or there was intention on the part of the seller retain the right of disposal of equipment. Certain circumstances like insurance of the goods, unloading of the goods, fixation of goods are only to square the contract and its performance. There is no term in the contract, which is inconsistent with the intention stated clearly in para 31.2 of the contract to pass the property in goods. Some terms intended to protect the buyers interest cannot be construed to hold that property in goods have not passed or that it had passed conditionally. The property would pass conditionally where bill of lading for goods and for purposes of better securing payment, some condition is made out in favour of the seller. But in the present case there is no such terms or conditions. The seller is entitled to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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