TMI Blog2012 (3) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... rtium and not to the two members individually. Also, price schedule and payment also deals with the entire gamut of works to be performed under the contract. Therefore, this is a case of the applicant and Samsung forming an AOP in respect of the work undertaken by the Consortium. Since contract is indivisible, hence if a part of the design and engineering work prepared solely for manufacture, procurement of equipment outside India, is done outside the country, even if it constitutes a significant part, the same cannot be viewed in isolation and apart from the contract as a whole and amount received/receivable against the aforesaid are liable to tax in India. Since the assessment is to be as an AOP and taxable in India, the question of existence or non-existence of a PE does not arise. - A.A.R. No.962 of 2010 - - - Dated:- 20-3-2012 - Mr Justice P.K. Balasubramanyan, Mr. V.K. Shridhar, JJ. Present for the applicant : Mr. Ajay Vohra, Advocate Mr. C.S. Mathur, CA Mr. Wolfgang Salzberger [Head of International Ataxation, Linde] Mr. Harpreet Singh, CA Mr. Amit Sachdeva, Advocate Present for the Department : Mr. Shashi Saklani, Dy. Director of Income-tax R U L I N G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position that no portion of the amount payable was liable to be withheld under section 195 of the Act, since what it performed under the contract was all off-shore and payments were received off-shore and hence not chargeable to tax in India. The Income-tax Officer did not accept the plea of the applicant and directed OPAL to withhold tax on amounts paid to the applicant in terms of the contract in question. It is in that situation that the applicant approached this Authority with its application under section 245Q of the Act. 4. The agreement dated 10.2.2009 is one between OPAL and the Consortium of LINDE AG and Samsung. Whereas OPAL has been described as the company, the Consortium consisting of the two members is described as the contractor. It is recited that the company is desirous of carrying on the work of all activities and services required for the design, engineering, procurement, construction, installation, commissioning and handing over of the plant on a lump sum turnkey basis in accordance with the bidding documents. After referring to the tender enquiries issued by the company dated 19.4.2007, it is recited that the contractor represented that it has expertise and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment and material outside India to OPAL and (iii) superivison of installation, testing and commissioning of the equipment, materials at site in India. The off-shore activities are not taxable in India. A Permanent Establishment would come into existence in India in terms of Article 5.2 (1) of Double Taxation Avoidance Convention (DTAC) between India and Germany only after the equipment reaches the site in India. 6. On considering the relevant aspects, this Authority allowed the application under section 245R(2) of the Act, for giving a ruling on the following questions: (i) Whether in terms of the Contract dated 10.2.2009 (hereinafter referreed to as the contract) between ONGC Petro Additions Limited (hereinafter referred to as OPAL) and Consortium of Linde AG, Germany, and Samsung Engineering Company Ltd., Korea (hereinafter referred to as SEC ) the applicant and SEC are taxable in the status of AOP? (ii) Whether in terms of the Contract, the amount receivable/received in respect of design and engineering, prepared solely for manufacture, procurement of equipment outside India and being inextricably linked to such equipment to be supplied, liable to tax in India, under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndered for was for the Design and Erection of a Plant and what the Consortium tendered for, was for that contract. Any splitting up of the contract would be artificial and cannot be resorted to. A lump sum turnkey contract for erection of a plant was a well understood form of contract and it would be unrealistic to split it up into parts just for the purpose of taxation alone when the rights and obligations under it are that of the Consortium that tendered for work and the work bid, was for design and erection of a plant in India. The Explanation added to Section 9(2) of the Act with effect from 1.6.1976, may also have to be kept in view. 9. Before proceeding to consider these submissions, we would like to observe that generally a contract must be read as whole to understand its purport and effect. When a tender is floated for erection and commissioning of a plant, generally, the bid is for that work and the award of contract is for that work. The various terms of the contract have to be understood in that context. A contract for sale of goods simpliciter differs from a contract for designing and erecting a plant. We feel emboldened to make these observations in the light of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the agreement cannot be understood as superseding or overriding the terms of the agreement or the main object or purpose of the agreement. 12. The MOU dated 3.3.2008 refers to the contract intended to be signed by OPAL with the Consortium. It then recites that the leader of the Consortium, the applicant will perform Basic Engineering supply of selected key equipments and Related Detail Engineering, Detail Engineering and procurement of Cracking furnaces, parts of technical supervision services, Commissioning, Testing, Conducting Performance Tests and Post commissioning services of the Project, Then it provides that Samsung, the other member of the Consortium will perform Detailed Engineering of DFCU Recovery Section and AU, Supply of Equipment, Construction, Erection and Pre-commissioning of DFCU and AU and parts of Technical Supervision Services of the Project . On a reading of the obligations assigned to each, it appears that they are complementary and not disjunctive in the context of the Tender floated and the work to be undertaken. There appears the following clause: Whereas, parties intend to jointly cooperate as Consortium (hereinafter referred to as CONSORTIUM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fication of Award notifies that the work is awarded to the Consortium. The accepted price is notified and it is stated that the lump sum contract price is for the entire scope of works as detailed in the Bidding Documents and other documents mentioned in paragraph 1 and details the entire work to be performed under the contract. It is provided that the Consortium has to furnish Bank Guarantee for due performance. 15. On a reading of the contract documents as a whole, it is not possible to accept a contention that the contract is capable being split up either component wise or member-wise of the contractor, the Consortium. Thus, on a reading of the whole agreement and gathering the intention thereform, we are of the view that the parties intended it to be an indivisible contract containing rights and obligations of OPAL and the Consortium. The fact that payments for each item of work is earmarked or that for payment the work of the individual member of the Consortium is taken cognizance of, cannot alter the nature of the contract in the context of the tender and the work undertaken. Normally, when a tender is floated, bid and accepted, the contract can only be consistent with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that ownership of materials shall be transferred to the Company (OPAL) upon FOB shipment for imported supply and FOT for local supply subject to contractor takes full responsibilities for any damage/loss during the course of transportation until acceptance of works. (emphasis supplied). It is true that in a sale of goods where the title passes off-shore or is intended to pass off-shore, the retaining of risk for safe delivery of machinery by the seller may not tilt the scale. But in a supply and erection contract, when the risk is retained not merely until delivery but until acceptance of the works by OPAL, which is after trial and commissioning of the project, the retaining of the risk by the contractor may have different implications. The undertaking of the risk cannot be explained away by saying that a seller can also undertake a risk and this would be one such case. It cannot be understood as a risk undertaken only as a bailee until delivery at the destination. Here, it continues until commissioning, testing, certification of satisfaction of OPAL and acceptance of the plant by OPAL. 20. It is also pointed out on behalf of the Revenue that the contract does not specify tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action, thereby becoming an association of individuals? He answered it by saying In my view, these persons have joined themselves together and remained joined together for the purpose of buying, holding and using that property Norton Buildings‟ in order to make gain by it. In so doing, they have become and were at the time of this assessment, an association of individuals‟ within the meaning of section 3 of the Indian Income-tax Act. Costello J. added when we find, as we do find in this case, that there is a combination of persons formed for the promotion of a joint enterprise banded together if I may so put it, co-adventures to use an archaic expression, then I think no difficulty what ever arises in the way of saying that in this particular case, these four persons did constitute an association of individuals‟ within the meaning of both Section 3 and Section 55 of the Indian Income-tax Act, 1922. 24. The Bombay High Court followed the above decision in CIT v. Laxmidas Devidas others [(1937) 5 ITR 584] and applied the principle to a case where the association consisted only of two individuals. The above two decisions were again followed by that High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , without deviating from the view taken in Geo-Consult that division of the profits and losses as in the case of partnership is not necessary to infer an AOP, we shall consider the question whether on taking stock of the other features and terms of the contract, the conclusion can be legitimately reached that there was an AOP in the present case . Thus, what emerges is that the question whether an AOP has come into existence has to be determined on the facts of the case in the light of the circumstances obtaining. 29. We may now examine the contract from this angle. The applicant emphasizes that the contract is a divisible contract which clearly identifies the scope of work and obligations of the two Consortium members and the consideration is payable by OPAL directly to each member for the work done by it. The expenses incurred by each member for the part of the work it performs is exclusively by that member. There is no sharing of costs or receipts between the two members inter se. There is also no sharing of assets employed by each of them and there is no sharing of profit or loss. There is also no common employment of capital or resources. As against this the Revenue subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire work of the project and accepted the tender, OPAL itself could not have under normal circumstances, split up the contract. That has also not happened here. The internal division of responsibility by the Consortium members and the recognition thereof by OPAL or the making of separate payments by OPAL to the two members, cannot dislodge the legal position of formation of an AOP by the applicant and Samsung. We are, therefore, of the view that an AOP has been formed in this case. 33. Question no. 2 is posed based on the assumption that the contract must receive a dissecting approach and split into various components. We have already found that the contract is an indivisible whole in this case. Even if a part of the design and engineering work prepared solely for manufacture, procurement of equipment outside India, is done outside the country, even if it constitutes a significant part, the same cannot be viewed in isolation and apart from the contract as a whole. To borrow the expression from the question itself, that work is inextricably linked with the erection and commissioning of the project, a work the Consortium has undertaken. Thus, in the face of an indivisible co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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