TMI Blog2010 (2) TMI 186X X X X Extracts X X X X X X X X Extracts X X X X ..... pply contract. - 827 of 2009 - - - Dated:- 25-2-2010 - P.V. Reddi J. (Chairman) and J. Khosla (Member) N. Venkatraman, Satish Aggarwal, Akhil Sambhar, Vikrant Suri, Atul Awasthi and Anshul Sachar for the applicant. Sushil Kumar for the Department. RULING 1. J. KHOSLA, MEMBER. - The applicant is a company incorporated in Russia and also is tax resident of that country. It is one of the leading companies in the field of power project construction and export of electric power and is further engaged in the business of construction and commissioning of power project. In response to the tender floated by the National Thermal Power Corporation (NTPC), the applicant successfully bid the tender and three separate following contracts are entered into with the NTPC: (1) Offshore supply contract - Contract No. CS-9558-102-2-FC-COA-4520 dated 25.3.2005. ('Offshore supply contract No. 4520) for design, engineering, manufacture, inspection and testing at supplier's works, packing, forwarding and dispatch from manufacturer's works to the port of disembarkation in India of all offshore plant equipment including mandatory spares. (2) Onshore supply contract - C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Schedule-1 (including due payments towards ocean freight and marine insurance). The value of L/c will be as per despatch schedule for each quarter of year and the L/C shall remain valid for one quarter of a year. It will be the responsibility of the Contractor to utilize the L/C to the fullest extent. In case L/C has been established by the Employer and not utilized fully/partially by the Contractor, for reasons of delay attributable to him, all reinstatement charges for the L/C for further period necessitated due to non-utilization of L/C will be to the account of the Contractor. 5.2 All other payments including payments for advance amount, Type Test Charges, if any, price adjustment amounts, all other supply payments and taxes and duties (wherever admissible) shall be made directly to the Contractor by the Employer and no L/C shall be established by the Employer for such payments. 5. So far as terms of payments are concerned 15% of the total FOB price component is initial advance payment on signing the contract and submission of bank guarantees and also the submission of detailed PERT network. 60% of FOB price component of the contract price for each identified equipme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the despatch documents in favour of the employer. 31.5 Notwithstanding the transfer of ownership of the Plant and Equipment, the responsibility for care and custody thereof together with the risk of loss or damage thereto shall remain with the Contractor pursuant to GCC Clause 32 (Care of Facilities) hereof until Completion of Facilities or the part thereof in which such Plant and Equipment are incorporated. Insurance As per Appendix-3 of the contract, the insurance is to be taken by the contractor. The employer shall be named as co-insured under all insurance policies taken out by the contractor pursuant to GCC 34.1 except for Third Party Liability, Workman's Compensation and Employer's Liability Insurances and the Contractor's sub-contractors shall be named as co-insured under all insurances policies taken out by the Contractor pursuant to GCC 34.1, except for the Cargo insurance during transport, Workman's Compensation and Employer's Liability Insurances. All insurers rights of subrogation against such coinsureds for losses or claims arising out of the performance of the contract shall be waived under such policies. Notwithstanding the insurance requirements mention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the applicant's banker for negotiation soon after the goods were shipped FOB and bill of lading was issued. Two days later, the amount equivalent to 70% of the value was transferred to the applicant's account on the same day. This modus operandi is in accordance with para 2.4.4 of the LOA. The bill of entry which was prepared about 15 days after shipment also shows Power Grid as the importer. Even in the insurance policy taken by the applicant Power Grid has been named as the beneficiary. The customs duty was paid by or on behalf of Power Grid before the goods were taken delivery. These facts unerringly lead to the conclusion that in accordance with the contractual stipulations, the transfer of title to the equipment and materials took place while the goods were outside the territory of India. The events match with the nomenclature - "off-shore supply contract" and the express stipulation that the transfer of title to equipment and materials shall pass on to Power Grid at FOB Port of shipment with the negotiation of shipping documents. It is worthy of note that the applicant has not reserved the right of disposal during transit or otherwise. The fact that the applicant is not reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discharge at Haldia in India. The description of cargo is also indicated therein. In another bill of lading the port of loading is Novorossiysk in Russia and port of discharge at Haldia in India. The copies of bill of entry are also filed by the applicant. These go to show that the consignee/importer is the applicant. The commercial invoice has also been filed. It shows that the invoice was raised a few days after shipment and all the material documents including sight draft, bill of lading, freight paid memo, insurance certificate were enclosed. 13. The terms of contract and the above documents go to show that the transaction of offshore plant and equipment was completed in the high seas and the property in goods passed to the NTPC outside India. As per clause 31 of General Conditions of Contract the ownership of plant and equipment supplied under the ownership contract No. 4520 shall pass on to NTPC upon lading on the ship and upon endorsement of the dispatch documents in favour of the NTPC. The consideration of sale of offshore was remitted to the applicant directly outside India by means of establishing L/C. Hence no portion of consideration for offshore supply was recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IMA-HARIMA HEAVY INDUSTRIES LTD. also there is a clause which refers to the total price, yet, the Supreme Court held that the price for each component was compartmentalized and so for the supplies made on high seas there was no tax liability. But, in ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD., there was no factual finding that there was price imbalance in the four contracts and it was skewed in favour of the off-shore supply contract, nor was there any finding that the entity which executed the contracts for the on shore supply and the on shore services were mere facades. In this case these are all factual findings for which there is basis on the materials on record." 16. The main distinction is that in Ishikawajma-Harima Heavy Industries's case [2007] 288 ITR 408 (SC)the appellants are members of the consortium wherein in the case of Ansaldo Energia [2009] 310 ITR 207 (Mad) there is only party, although both relate to the turnkey project. The distinction enumerated by the Madras High Court in Ansaldo's case [2009] 310 ITR 237 (Mad) is not applicable to the present facts of the case and therefore the contention of the Revenue in this regard cannot be accepted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a building contract, which is a one, entire and indivisible, there is no sale of goods, and is not within the competence of the provincial legislature under Entry 48 to impose a tax on the supply of materials used in such a contract, treating it as a sale. This case is clearly distinguishable from the case in hand as this is an offshore supply contract which was executed entirely outside India and there are two different contracts and therefore this case does not come to the aid of the Revenue. In Hindustan Shipyard Ltd. vs. State of Andhra Pradesh [2000] 199 STC 533, the Supreme Court has dealt with Andhra Pradesh General Sales Tax Act, 1957. The terms of agreement are different in that case and the issue was different and therefore, it has no semblance with the present case. In Sentinel Rolling Shutters Engineering Co. (P) Ltd. vs. Commissioner of Sales Tax, Maharashtra [1978] 4 SSC 260 the Supreme Court has held that the contract was a contract for work and labour and not a contract of sale. The contract is one single and indivisible contract and the erection and installation of the rolling shutter is as much a fundamental part of the contract as the fabrication and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t including supply of equipment, sales, assembly, erection, testing and commissioning of the project, the supply part of the contract cannot be isolated or viewed separately and that the income has in reality occurred or arisen within India notwithstanding the stipulations as to the transfer of title abroad, we have no option but to implicitly follow the binding decision of the Supreme Court in Ishikawajma case [2007] 288 ITR 408. That is why in Hyosung Corporation case [2009] 314 ITR 343 (AAR), this Authority reached the conclusion that income of similar nature earned by the non-resident was not taxable in India. The Revenue has made yet another endeavour in this case to persuade us to take a view virtually contrary to the aforementioned decisions by projecting pointless distinctions. It is axiomatic that this Authority is not free to disregard the law laid down by the Supreme Court and to have a fresh look into the matter. In the instant case, as pointed out by the learned Member, the clauses in the offshore supply contract Agreement regarding transfer of ownership, the payment mechanism in the form of letter of credit which ensures the credit of the amount in foreign cur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified and therefore it can be separated from the whole. This Authority cannot take a different view in the matter. However, I would like to analyze the decision of the Supreme Court in Ishikawajma in some detail so that the ratio of that decision in so far as it has relevance to the present case could be appreciated better. 28. Under the heading "material part" of the contract, clause 2.1, which sets out the scope of work, has been extracted. It requires the contractor to provide, furnish and perform on a turnkey basis all necessary design, engineering, procurement, supplies, installation, erection, construction, testing, commissioning, operation and turning over services, activities and work for the Equipment and Materials and the Facilities in accordance with the scope of work and the other terms. The paragraph which says that the parties acknowledge and agree that this contract is lump-sum firm fixed price time certain turnkey contract has also been referred to. Clause 7.1 which provides for shipment has been extracted. The contractor is required to notify the employer setting forth all the material information concerning the shipment including the date of embarkation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the "taxation of consideration paid for rendition of offshore services". Then, the following observations were made (PAGE 429 OF 288 ITR): "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. 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." 31. Then the importance of territorial nexus doctrine was stated. 32. While disapproving the view taken by AAR in that case, the Supreme Court observed thus (page 430 of 288 ITR): "Income arising out of operation in more than one jurisdiction would have territorial nexus with each of the jurisdiction on actual bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Then while recording the conclusion in respect of offshore supply contract, the following findings were given: (1) 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. (2) 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. (3) 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…. (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." 35. These propositions equally apply to the instant case. The legal position enunciated in Ishikawajma case applies in all fours to the present case. The stipulations in the contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... separate parts, the mere fact that for offshore supply the title passed outside India alone will not decide taxability. In Ishikawajima-Harima Heavy Industries Ltd. [2007] 288 ITR 408, both the title and 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 permanent establishment in the transaction (underlined for emphasis). It was further factually found that the contract was a divisible one segregating the supply segment and service segment, and that by agreement the parties had decided when title passed." 37. Thus, the decision in the case of Ishikawajma [2007] 288 ITR 408 was distinguished by the learned judges of Madras High Court. It is of course debatable whether the points of distinctions made out are correct. But, the fact situation in the present case is quite different. Firstly, at the initial stage itself, the bids were invited by NTPC for three separate works viz. offshore supply, onshore supply and onshore services. Three separate contracts were executed. There is no basis to think nor is there any allegation that the contracts were split up at the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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