TMI Blog2014 (4) TMI 975X X X X Extracts X X X X X X X X Extracts X X X X ..... MOU. The consortium of Linde and Samsung constitutes an AOP - Linde and Samsung are jointly and severally liable to OPAL for due performance of the Contract dated 10.02.2009 - in terms of the Contract dated 10.02.2009, Linde and Samsung were described as a “contractor” and for the purpose of the obligations under the Contract were considered as a Consortium - the agreement between the parties provided for certain level of cooperation by way of appointing Project Directors and Manager for execution of the project - Linde and Samsung shared neither the costs nor risks - Both Linde and Samsung managed their own deliverables - the facts of the case do not indicate a sufficient degree of joint action between Linde and Samsung either in execution or management of the project to justify a conclusion that they had formed an Association of Persons and in our view, the Authority erred in concluding so - Relying upon In re: M/s Hyundai Rotem Co., and Mitsubishi Co. [2010 (3) TMI 119 - Authority for advance ruling] - DTAA recognises that the laws of each of the Contracting State may define a tax entity - Section 2(31) of the Act defines a ‘person’ to include an ‘Association of Persons’ - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion in view of its conclusion that Linde and Samsung had constituted an Association of Persons which was a tax resident entity in India for the purposes of the Act. The question at what stage Linde’s permanent establishment came into existence would have to be examined by the Authority. Thus, the order is set aside and the matter is remitted back to the Authority for fresh adjudication – Decided in favour of Assessee. - W. P. (C) No. 3914/2012 & CM No. 8187/2012 - - - Dated:- 23-4-2014 - Badar Durrez Ahmed And Vibhu Bakhru,JJ. For the Petitioners : Mr. S. Ganesh, Sr. Adv. with Mr. R. P. Garg, Mr. V. S. Wahi, Mr. Rupesh Jain Mr. Vaibhav Kulkarni For the Respondent : Mr Sanjeev Sabharwal JUDGMENT Vibhu Bakhru,J 1. The petitioners have filed the present petition under Articles 226/227 of the Constitution seeking quashing of the ruling dated 20.03.2012 passed by the Authority for Advance Rulings (hereinafter referred to as the Authority ). By the said ruling dated 20.03.2012, the Authority has disposed of the application (AAR No.962 of 2010) filed by the petitioner under section 245Q of the Income Tax Act, 1961 (hereinafter referred to as the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fication of Award on 23.12.2008 awarding the work of executing the project on a turnkey basis to the Consortium. 23.12.2008 was also fixed as the effective date. 4.4 Thereafter, OPAL (referred in the Contract as the Company ) and the Consortium (referred in the Contract as the Contractor ) entered into a definitive agreement on 10.02.2009. As per the said agreement, OPAL awarded the contract for carrying on 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, to the Consortium. The Consortium agreed to perform the work in conformity with the terms of the agreement and OPAL agreed to pay the consideration in the manner as specified in the contract. The agreement included various annexures, viz.: the General conditions of contract as amended, Technical documents, Agreed clarifications, contract price schedule, construction schedule, Project instructions, Milestone payment formula, Notification of award, Letter of acknowledgement of notification of award from the Consortium, Integrity pact and the MOU execu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms of the Contract, the amount receivable by the applicant for supply of equipment, material and spares, outside India are liable to tax in India, under the provisions of the Income-tax Act, 1961 or under the DTAA read with Protocol? (v) If the answer to (iv) is in the affirmative, to what extent are the profits from supply of plant and equipment taxable in India? (vi) Whether in terms of the Contract, consideration for onshore services comprising supervision of installation, testing, commissioning and construction, management/ supervision is liable to tax on the profits of the PE, as may be deemed to exist in India, in terms of Section 44DA of the Act read with the provision of the DTAA? (vii) If the answer to question No. (vi) is in the affirmative, whether for the purpose of determining the profits of the PE in India, the actual expenditure incurred by head office exclusively and specifically in relation to onshore activities of the PE (not being general administrative/executive expenses) and reimbursed to it, are allowable in full and not subject to limits in Section 44C of the Income-tax Act, 1961? 6. The said application (AAR No.962 of 2010) was disposed of by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied portion of the Contract separately. The learned counsel for Linde referred to various clauses of the MOU, the Internal Consortium Agreement as well as the Contract and submitted that Linde and Samsung were responsible for performing separate items of work. Both Linde and Samsung were responsible for their respective profits and liabilities and there was no sharing of risks, expenses or profits. The expenses or the costs incurred by each member, for the part of the work performed by it, was also borne exclusively by that member. There was also no sharing of assets or resources employed by each of them. The scope of the work to be performed under the Contract by both the parties was clearly demarcated and separately identified. The considerations payable to Linde and Samsung for the respective items of work to be performed by them were separately specified and the amounts payable by OPAL under the Contract were also paid directly to each member of the Consortium. It was also pointed out that the Performance Bank Guarantee was also required to be submitted by the members of the Consortium separately. It was submitted that in these facts, no joint management or joint action or com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same. It was submitted that as per the Contract, the petitioner was obliged to perform, broadly, the following activities, viz.: (i) basic and detailed engineering and drawings; (ii) procurement and offshore supply of equipment and material; and, (iii) onshore services such as supervision during pre-commissioning, construction, post-commissioning, training of personnel, etc. While activity (iii) had to be performed in India, activities (i) and (ii) were required to be performed entirely outside India. As per the Contract, the consideration/price for the offshore and onshore transactions was also separately provided. Whilst, the considerations for the offshore transactions were also to be paid in foreign currency (i.e. Euros), the considerations for the onshore transactions were to be paid in Indian currency. It was pointed out that in terms of Clause 7 of the Contract, the equipments, materials and spares were to be supplied on FOB basis. It was submitted that this meant that the title to the said equipment, materials and spares was transferred to OPAL outside the territory of India. The offshore services were stated to be inextricably linked to the supply of equipment and had a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended that the impugned ruling was liable to be set aside as the Authority had not considered the judgments in Ishikawajima-Harima Heavy Industries (supra) and Hyundai Heavy Industries Co. Ltd. (supra). It is contended that the Authority had erred in referring to the judgment of the Supreme Court in the case of Vodafone International Holdings B.V. v. Union of India (UOI) and Anr.: (2012) 6 SCC 613 as the same was not applicable to the facts of the present case. 17. The learned counsel for the petitioner also referred to Instruction No.1829 dated 21.09.1989 issued by the Central Board of Direct Taxes in respect of taxability of income of non-residents arising from the execution of power projects on turnkey basis involving activities to be carried out in India as well as outside India. It was submitted by the petitioner that the said instruction indicated a correct understanding of law. The said Instruction has been withdrawn subsequently by the Board by an Instruction No.5/2009 dated 20.07.2009. However, it was submitted by the petitioner that the withdrawal of the Instruction was prospective in nature as held by this Court in the case of DIT v. Ericsson AB: 343 ITR 470 and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract and as such the same was not divisible. The certificate of completion and acceptance of work was to be given to the Consortium and not to individual members. The Consortium was liable to OPAL for consequential and liquidated damages and Linde and Samsung being members of the Consortium were both jointly and severally liable for the same. It is submitted that Linde and Samsung submitted their bid as one and the Contract is indivisible. It was further submitted that the object and purpose of the Contract was to set up the Dual Feed Cracker and Associated Units of the Petrochemical Complex. The activities required for the execution of the Contract could not be considered as independent transactions. Linde and Samsung had joined for the said common purpose of bidding and execution of the contract and thus any income arising therefrom was assessable in their hands as an unregistered association i.e. an Association of Persons. The counsel for the respondent relied upon the ruling passed by the Authority in the case of Geoconsult ZT GmbH v. Director of Income Tax (International Taxation): [2008] 304 ITR 283 (AAR) in support of his contentions. The counsel for the respondent has also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Contract specified that the contract price/consideration was payable by OPAL to the Consortium for the whole of the Contract and the entire work was to be executed by the Consortium. 22. In response to the submission made on behalf of the petitioner that the petitioner did not have any permanent establishment in India at the material time when the offshore transactions were performed, it was contended that Linde had a direct subsidiary in India and the same was involved in pre-bidding negotiations. Thus, Linde had a permanent establishment in India even prior to the Contract being signed. It was further submitted that the Contract entailed execution of the project on a turnkey basis and the ground work for the same commenced shortly after execution of the Contract. The same also implied that Linde had its permanent establishment in India. It was contended that the Consortium was liable to be taxed as a tax resident entity in India and to that extent the DTAA between India and Federal Republic of Germany did not apply. 23. With regard to the contention of the petitioner on the application of Instruction No.1829 dated 21.09.1989 in the present case, it is submitted by the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not been used in any technical sense and the expression has to be construed as per the plain ordinary meaning of the words used. Given the wide definition of the word person , the meaning of the expression Association of Persons would also be of wide import. The Supreme Court in the case of Indira Balkrishna (supra), taking cue from the dictionary meaning of the word associate , interpreted the said expression and held as under:- 9. In B.N. Elias [(1935) 3 ITR 408] Derbyshire, C.J., rightly pointed out that the word associate means, according to the Oxford dictionary, to join in common purpose, or to join in an action . Therefore, an association of persons must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. This was the view expressed by Beaumont, C.J. in CIT v. Laxmidas Devidas [(1937) 5 ITR 548] at page 589 and also in Re. Dwaraknath Harishchandra Pitale [(1937) 5 ITR 716] . (emphasis supplied) 29. The Supreme Court in the case of G. Murugesan and Brothers v. Commissioner o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the receivers. That control and management was a unified one. The receivers had joined in a common purpose and they acted jointly. When they did so they acted on behalf of the persons who were the owners of the business. The receivers did not and could not have represented the individual interest of the various owners of the business. If they had done so there would have been chaos in the business. The profits to which those owners lay claim and which they were not averse to pocket, were earned on behalf of an association of persons . The profits were earned on behalf of the persons who had a common interest created by the order of the Court and were on that account of an association of persons . The existence of specific or defined interest in the profits did not make the earning any the less by an association of persons . Liability to tax depends upon the earning of profits by a unit and not upon the ultimate division of the profits .. (emphasis supplied) 31. It is also relevant to refer to the decision of the Calcutta High Court in the case of B. N. Elias and others, In Re.: (1935) 3 ITR 408 (Cal). The Supreme Court in the case of Indira Balkrishna (supra) cited th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gaged together in some joint enterprise but did not in law constitute partnerships, as a separate taxable entity. It is, thus, essential that an Association of Persons has the trappings of a partnership for conducting the joint enterprise which makes it amenable to be treated as a separate taxable entity. A person carrying on business may in the usual course cooperate with others for a common purpose. In many instances, the test of common purpose and common action, if literally applied, may also hold true. However, treating every instance of such cooperation between two or more persons as resulting in an Association of Persons would militate against the purpose of considering an association as a separate tax entity. Whether an arrangement or collaborative exercise between two or more persons results in constituting an Association of Persons as a separate taxable entity would depend on the facts of each case including the nature and the extent of collaboration between them. The Supreme Court in Indira Balkrishna (supra) had also clarified that:- there is no formula of universal application as to what facts, how many of them and of what nature are necessary to come to a conclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and AU, Supply of Equipment, Construction, Erection and Pre-Commissioning of DFCU and AU and Parts of Technical Supervision Services of the PROJECT. WHEREAS, PARTIES intend to jointly cooperate as consortium (hereinafter referred to as CONSORTIUM ) in order to prepare and submit a joint proposal as a consortium for the PROJECT, (hereinafter referred to as BID ) and if the BID is accepted by ONGC/OPaL to perform the contract (hereinafter referred to as CONTRACT ) for the execution of the PROJECT. NOW THEREFORE the PARTIES agree as follows: 1. AGREEMENT TO COOPERATE xxxx xxxx xxxx xxxx xxxx As far as the CONSORTIUM MEMBERS are concerned, this AGREEMENT is signed only for the purpose of bidding and, if awarded, as a basis for a consortium agreement ( CONSORTIUM AGREEMENT ) in order to execute the CONTRACT. 2. CONSORTIUM 2.1 The PARTIES agree to cooperate on the basis of the CONSORTIUM AGREEMENT with joint and several responsibility/liability towards ONGC/OPaL for execution of the entire works and discharging all obligations under the CONTRACT. xxxx xxxx xxxx xxxx xxxx The overall responsibility of the project management of the entire project shall be th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tnership joint venture or formal or informal business entity of any kind (incorporated or not incorporated). Nothing shall be construed as providing for common management and the sharing of profits or losses arising out of the Project. Both parties shall file their respective tax returns and be assessed separately. Each of the Parties expressly agrees that it is not their intention through the joint venture to carry on business in common with the other PARTIES with a view to profit. Each party shall bear its own losses and retain all profits arising from the performance of its respective scope of work. The CONSORTIUM Linde Samsung is a nonincorporated one-time co-operation of two individual, independent and separate legal entities with a defined split of scope of work under this CONTRACT. Individual payments will be released by ONGC/OPaL to the members of the CONSORTIUM as per their separate invoices. 38. The intention of the members of the Consortium is discernable from the various clauses of the MOU which are quoted above. Clause 4.8 of the MOU expressly provided that the CONSORTIUM shall constitute an unincorporated arrangement established for the limited purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject where multiple agencies are involved. Even in cases where the agencies involved in execution of a project are not related, it would be necessary that they cooperate with each other in providing information so that each agency can work in a coordinated manner. The said MOU formed an integral part of the Contract entered into between Linde, Samsung and OPAL and was appended as Annexure J to the said Contract. And, to that extent OPAL also recognized the relationship between Linde and Samsung. 41. Subsequent to the MOU, Linde and Samsung entered into an Internal Consortium Agreement. This agreement also clearly specified that the scope of works of Linde and Samsung were separate and independent. Each of the members was responsible for its own scope of work. The annexures to this agreement included a Gantt Chart which indicated the schedule for execution of the project. This schedule clearly specified the separate tasks/work to be executed by the Linde and Samsung. The agreement also made a specific provision in case the scope of work of the respective members was altered and either of the members was required to execute additional work. It was agreed that in such case, the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly liable to OPAL, the members had internally agreed that each of them would be responsible and liable for performance and completion of their scope of work. Clauses 9.1 and 9.2 of the said agreement are relevant and are quoted below:- 9.1 Notwithstanding Linde s and SECL s liability towards the COMPANY as per Contract, it is agreed that internally the Parties shall each be responsible and liable for the performance and completion of their Scope of Work for the Project according to the requirements and stipulations of the Contracts and this Agreement. 9.2 Linde s Liabilities 9.2.1 Licensing and Engineering (1) In case of deficiencies in Linde s engineering work defined in Article 4.1.1(1) and (2) above, Linde will perform the necessary corrective engineering work at its own expense. 9.2.2 Equipment If for reasons attributable to Linde the equipment supplied by Linde as per Article 4.1.1(10) above is found defective by COMPANY prior to the expiration of the warranty period as per Contract, Linde will, at its cost, repair or replace such defective equipment including related CIF transportation, as well as any import duties and any taxes or expenses according to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all remain responsible to Linde and SECL respectively and shall regularly report to Linde and SECL with respect to any matters concerning the Consortium. For the avoidance of doubt, Project Directors responsibility towards Linde and/or towards SECL shall not constitute a personal financial liability of the Project Directors. The Project Managers shall discuss all important matters related to the Project and shall make best efforts to reach agreement on all issues. In order to achieve a successful implementation of the Project in accordance with the provisions of the Contract, un-resolvable disagreements between the Project Managers shall be referred to the Project Directors. In addition to representing the Consortium towards COMPANY, the Project Directors shall receive unresolvable disagreements between the Project Managers and make best efforts to facilitate a consensus with regard to such disagreements. Should no consensus be reached, despite best efforts of the Project Directors and the Project Managers, the Project Directors shall refer such unresolved disagreements to the Steering Committee for further action. 45. Subsequent to executing the Internal Consortium ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... successors or permitted assignees. 1.1.11 Contract Price means the total amount specified in the substantive article in the contract (i.e. Section 3.1) subject to any additions thereto, or deductions there from which may be made through applications of the relevant provisions of the Contract. xxxx xxxx xxxx xxxx xxxx 1.2.5 Entire Agreement The Contract constitutes the entire agreement between the Company and the Contractor with respect to the subject matter of the Contract and supersedes all communication, negotiations and agreement (whether written or oral) of the parties with respect thereto made prior to the date of this Agreement. xxxx xxxx xxxx xxxx xxxx 2.4 Scope of Works for each discipline The Scope of work for the tender shall include in general but not be limited to the following, as defined by Annexure - B and Annexure - E of the Contract. In case of any contradiction, scope of Work described in Annexure - B of the Contract shall prevail over the scope of Work outlined in the GCC (Annexure - A) of the bidding document. xxxx xxxx xxxx xxxx xxxx 3.0 PAYMENT 3.1 Contract Price The Company shall pay to the Contractor in consideration of sat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt shall be done to each member of the Consortium individually as per each member s detailed price break down as indicated under Annexure -C to the Agreement to be authorized by the leader of the Consortium. 3.2.3 The Company shall arrange approval of the invoice (undisputed amount) and payments within 15 (fifteen) working days of receipt thereof by the Company. In the event of the Company objecting to any portion of Work covered by the said invoice, such objection shall be communicated to the Contractor within 10 working days from the date of receipt of invoice by the Company at its office. The Contractor shall have the right to claim the payment of such amounts objected by the Company in subsequent invoice after removal of cause of such objection. 3.2.4 The payment against clear (undisputed) bills/invoices submitted by the Contractors will be made by Company within 15 (Fifteen) working days from the date of submission of bill/invoices complete in all respects. However, in case of payment to non-resident contractors, the time required for obtaining NOC and / or RBI permit for release of subject payment shall be in addition to 15 working days (normally applicable for first pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Guarantees shall be drawn in favour of the Company and shall be valid upto a period of Scheduled Completion Date for the Works of the Contract and warranty period plus sixty (60) days. The aggregated value of Performance Bank Guarantees for warranty period shall be reduced from 10% to 5% of Contract value. xxxx xxxx xxxx xxxx xxxx 3.3.4 The Contractors will submit individually irrevocable and unqualified bank guarantees issued by Hypovereinsbank / Germany and K-EXIM Bank (Korean Export and Import Bank) / Korea (or any other bank as listed in the ITB) in the aggregate sum equivalent to 10% (ten percent) of the Contract Price. 5.2.1 Assignment The Contractor shall not, except with the explicit prior approval in writing of the Company, transfer, subcontract or assign his obligations or any benefit or interests in the Contract or any part thereof in any manner whatsoever. Any such assignment shall not absolve the Contractor from his obligations and responsibilities under this Contract. 5.10.2 If the Company is satisfied that the entire Works have been completed as specified in 5.10.1 above and have successfully passed all tests provided in the Contract then the Company s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or its other contractors or their personnel shall in no event be responsible for or liable to the Contractor or his Sub-contractor for consequential damages suffered by the contractor or his sub-contractor including without limitation to business interruption or loss of profits etc. 6.3.2 Liquidated Damages If the Contractor, due to reasons not solely attributable to Company, fails to achieve the date of Ready for Start-Up (RFSU) on or before 44 (Forty four) months from the date of issue of NOA or the extended date for Ready for Start- Up (RFSU) or if Contractor repudiates the Contract before completion of the Works related to Ready for Start Up (RFSU), the Company may without prejudice to any other right or remedy available to the Company as under the Contract. i) recover from the Contractor as ascertained and agreed liquidated damages and not by way of penalty, sum equivalent to % (Half percent) of the total Contract Price for each week of delay or part thereof beyond the date of Ready for Start-Up (RFSU) subject to a maximum of 5% (Five percent) of the total Contract Price even though the Company may accept delay for the date of Ready for Start-Up (RFSU) after the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 621.209 TOTAL LINDE INR PORTION IV. (INR x 1000) 621.209 Overall split of prices for the work to be performed by SAMSUNG (excluding service tax) DESCRIPTION OF THE SCOPE OF WORK TO BE PERFORMED BY THE SAMSUNG Total Amount to be Paid I. Design and Engineering rendered by SAMSUNG (Detailed Engineering) [USD x 1000] 53.800 II. Design and Engineering rendered by SAMSUNG (Detailed Engineering) [EUR x 1000] 4.500 III. Supply - DDU (i.e FOT) Dahej site rendered by SAMSUNG (Mechanical, Electrical, Instrumentation, Civil/Structural and Architectural) [USD x 1000] 293.909 IV. Supply - DDU Dahej - rendered by SAMSUNG (Mechanical, Electrical, Instrumentation, Civil/Structural and Architectural) [EUR x 1000] 12.158 V. Supply DDU Dahej - rendered by SAMSUNG (Mechanical, Electrical, Instrumentation, Civil/Structural and Architectural) [INR x 1000] 18.550.258 VI. Services rendered by SAMSUN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r inter se coordination and execution of the project. However, in all other respects, both Linde and Samsung were independent of each other and were responsible for their own deliverables under the Contract, without reference to each other. 49. In the aforesaid facts, the substratal controversy to be addressed is whether the following features of the agreement between Linde and Samsung and their contract with OPAL would lead to a conclusion that the consortium of Linde and Samsung constitutes an AOP :- (a) That Linde and Samsung are jointly and severally liable to OPAL for due performance of the Contract dated 10.02.2009. (b) That in terms of the Contract dated 10.02.2009, Linde and Samsung were described as a contractor and for the purpose of the obligations under the Contract were considered as a Consortium. (c) That the agreement between the parties provided for certain level of cooperation by way of appointing Project Directors and Manager for execution of the project. 50. The Contract defines the contractor to mean the Consortium of Linde and Samsung. The learned counsel for the respondent has, thus, contended that insofar as OPAL was concerned, the consorti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the members as one consortium cannot be the determinative factor in considering whether the members constitute an Association of Persons for the purposes of being assessed for taxation. Both the consortium members had agreed to present a common face. However, the agreement inter se between the members clearly spelt out that except for presenting a common face and complying with the conditions as imposed by OPAL, the members would conduct their business independently with no interference from the other. This, in our view, clearly indicates that Linde and Samsung had no intention to form an Association of Persons. Clause 4.8 of the MOU and 16 of the Internal Consortium Agreement expressly recorded that the members did not have any intention to form an association. 53. We are also unable to accept the contention that the fact that Samsung and Linde had agreed to be jointly and severally liable for performance of the contract, would be sufficient to hold that they constituted an Association of Persons for the purposes of the Act. Linde and Samsung agreeing to be jointly and severally liable to OPAL for due performance of the Contract only indicates that Linde and Samsung had accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... personnel and through their independent resources. There was no pooling of resources to form a common management. Each of the parties conducted its business independently. However, in terms of the MOU, Linde and Samsung had agreed to share information and material to enable the other member to perform its work. The Gantt chart annexed to the Contract indicated the schedule in accordance with which each member was expected to complete the various tasks and works within their respective scope of works. This would undoubtedly, require co-ordination between Linde and Samsung. 55. In every project which is executed by multiple independent agencies, a certain level of cooperation and coordination is required to ensure that the agency involved performs its work in a timely manner as per a predetermined schedule in order to enable the other agency to commence and complete its portion of work. The level of cooperation as agreed between Linde and Samsung was also akin to the level of cooperation as expected from independent agencies executing a project. This can be understood by taking an illustration of a simple project for construction of a building. It is only after an Architect or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the project to take complete responsibility of the entire project. It is noted in the circular that the projects may involve a Consortium of companies where one company may be designated as a leader for the purposes of ensuring coordination of the inter-related tasks. The said Instruction explains that in such cases, the foreign companies forming a Consortium would not constitute an Association of Persons under the Act and each foreign company would be individually liable for taxation as a separate entity. The learned counsel for the petitioners had relied upon the said Instruction in support of its contention that foreign companies forming a Consortium to execute large projects on turnkey basis would not constitute an Association of Persons. Admittedly, the said Instruction had been withdrawn by Instruction No. 5 dated 20.07.2009. However, it is contended that the said instruction would be applicable as the Contract had been entered into prior to the withdrawal on 20.07.2009. This contention cannot be accepted as the applicability of the Instruction/Circular would have to be viewed in relation to the relevant assessment years during which the same was in force. Merely because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the earlier decision, was not warranted. 61. In the case of Hyosung Corporation (supra), the applicant therein - Hyosung Corporation (Hyosung) submitted a bid for execution of the works relating to 800 KV/400KV Tehri Pooling Station which was floated by Powergrid Corporation of India Limited (Powergrid). The applicant was successful and its bid was accepted. As per the terms and conditions of the bid, the applicant could assign the whole or part of the work to an independent contractor subject to the approval of Powergrid. In terms of this provision, the applicant requested that part of the contract relating to onshore supply and services be assigned to M/s L T. Accordingly, Powergrid entered into a separate contract for onshore supplies and services with M/s L T. Although, Hyosung continued to be responsible for the overall execution of the project, the scope of work of Hyosung was limited to the offshore portion of the contract. It is apparent from the above that the facts of the present case are not entirely similar with the facts of the Hyosung Corporation (supra). First of all, there is no separate contract entered into between OPAL and each of the consortium members a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t would be construed as creating a partnership, joint venture or any other legal entity with the other parties to the said agreements. (f) The profit and losses were borne by individual members and there was no common expenditure to be incurred by the members jointly. 63. The facts in case of Hyundai Rotem (supra) are similar in all material aspects with the facts of the present case. In absence of any material change in law, the Authority was bound to follow the principle of law as applied in the earlier ruling. The Supreme Court in the case of Columbia Sportswear (supra) had after examining the powers exercised by the Authority held as under:- 10. .....We have, therefore, no doubt in our mind that the Authority is a body exercising judicial power conferred on it by Chapter XIX-B of the Act and is a Tribunal within the meaning of the expression in Arts. 136 and 227 of the Constitution. 64. The Supreme Court had noted that, although, a ruling would be binding only on the applicant and the Income-tax Authorities in respect of a transaction in relation to which the ruling had been sought. However, the Supreme Court also explained that the same did not mean that the prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith another entity for conduct of a business venture in India, there is no doubt that the said association would be assessed to tax in India and the same is not proscribed by the provisions of the DTAA. In this regard, it is also apposite to refer to certain provisions of the DTAA. 67. The expression enterprise of a contracting state is used at several places in the DTAA including in Article 7 of the DTAA (which deals with Business profits). The said expression is defined by Clause (g) of Article 3 as under:- (g) the terms enterprise of a Contracting State and enterprise of the other Contracting State mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State. The expression resident of a Contracting state is defined under paragraph 1 of Article 4 as under:- For the purposes of this Agreement, the term resident of a Contracting State means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any criterion of a similar nature. But this term does not include any person who is liable to ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the outflow of funds. We do not propose to consider this submission for the following reasons: First of all, this contention was not canvassed by the petitioner before the Authority and Secondly, that the quantum of income that may be assessed in the hands of an Association of Persons is not relevant for the purpose of determining whether in given facts an Association of Persons had been formed. Whether Linde s income is taxable under the Act and DTAA 71. The next question to be considered pertains to the taxability of income received and/or receivable by Linde for: (a) design and engineering, prepared solely for manufacture and/or procurement of equipment outside India; (b) supply of equipment, material and spares, outside India. 72. The relevant questions i.e. question (ii) and (iv) framed for consideration of the Authority are quoted below:- (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 the provisions of the Income-tax Act, 1961 ( t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls Fabrication, construction, installation, testing etc. Trial run and Pre-commissioning Obtaining statutory approvals as far as in Contractor s scope and required prior to Commissioning Project Management and Support services Carrying out of function tests of individual equipment Preparation of start up and operating manuals Management of HSE including Hazop, DMP etc. Scope of EPC (LSTK) Contractors after RFSU Commissioning of the Plant Performance Test Runs for the Plants Remaining training activities Providing as built drawings Supply of all test report, Post commissioning services for six months as per Clause 2.4.11 Working for punch list item, Working for any warranty obligations Training of operators within Post Commissioning Services 75. It was submitted by Linde that the Contract entailed certain activities which were to be performed in India and certain activities which were required to be performed entirely outside India. It is stated that the procurement of equipment as well as providing basic engineering and detailed engineering and drawings were to be performed entirely overseas. As discu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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; xxxx xxxx xxxx xxxx xxxx (vii) income by way of fees for technical services payable by- a) the Government; or b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India. 78. Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia. Similarly, it would also be necessary to consider whether income from supply of equipment, materials and spares outside India can be stated to arise from any business connection in India. 80. The Authority has held, by the impugned ruling, that the Contract entered into by the Consortium with OPAL is a composite contract and cannot be split for the purposes of tax. It is contended that this view is erroneous as Annexure C to the Contract provides for the break-up of the lump sum consideration as agreed under the Contract and separate value is allocated to various items of work. It is further contended that the title to the equipment and material supplied offshore was also transferred to OPAL outside India and the basic and detailed engineering is inextricably linked with the equipment supplied overseas. 81. At this stage, it is apposite to refer to the judgment of the Supreme Court in the case of Ishikawajima-Harima Heavy Industries (supra) as the issues raised and considered in that case are similar to the issues in the present case. In that case, Petronet LNG Limited, on the one hand, and five members of the consortium, on the other hand, entered into an agreement for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omponent 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. 31. 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. 32. 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. xxxx xxxx xxxx xxxx xxxx 39. The 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 apportioned to each of the territories or not. 40. Income arising out of op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exists a difference between the existence of a business connection and the income accruing or arising out of such business connection. (9) Para 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. (B) 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) 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 serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the decision of the Supreme Court in Ishikawajima-Harima Heavy Industries (supra), it would not be apposite to consider the contract as a composite one for the purposes of imposition of tax under the Act. 83. The Authority concluded that although, payments for each item or work were specified or that the amounts payable for the work to be performed by individual members of the Consortium was recognized under the Contract, the same would not alter the nature of the Contract in any manner. The Authority concluded that the Contract would have to be considered as one indivisible contract and the income from the same would be taxable in India as the object of Contract was to set up a facility in India. The Authority further held that the MOU entered into between Linde and Samsung could not be understood to be overwriting the Contract or the object of the Contract. With respect to the Internal Consortium Agreement, the Authority held that the same was at best only an internal arrangement between Linde and Samsung and could not be referred to for determining the nature of the Contract. The Authority was of the view that the Contract being a composite contract, a dissecting approac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions conducted outside India. In such a case, the income from the venture would have to be appropriately apportioned. The Supreme Court in the case of Ishikawajima-Harima Heavy Industries (supra) had considered this aspect and held that merely because a project is a turnkey project would not necessarily imply that for the purposes of taxability, the entire contract be considered as an integrated one. The taxable income in execution of a contract may arise at several stages and the same would have to be considered on the anvil of territorial nexus. The decision in the case of Ishikawajima-Harima Heavy Industries (supra) is clearly applicable to the facts of the present case as in that case also the contract in question was for a turnkey project where the object was to setup a Liquefied Natural Gas (LNG) receiving, storage and degasification facility. Indisputably, insofar as obligations of parties are concerned, this contract was also an indivisible contract. The Supreme Court held that for the purposes of determining the taxability, it was necessary to enquire as to where the income sought to be taxed had accrued or arisen. The impugned ruling is thus clearly contrary to the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital assets. 91. For the above reason, Section 9(1)(i) cannot by a process of interpretation be extended to cover indirect transfers of capital assets/property situate in India. To do so, would amount to changing the content and ambit of Section 9(1)(i). 87. In the present case also, Linde has contended that it being a nonresident is not liable to pay tax in India and the sweep of Section 9(1) of the Act cannot be extended to income which has not accrued or arisen in India. 88. The Supreme Court also reiterated the look at principle as was enunciated in W.T. Ramsay Ltd. v. IRC: (1981) 1 All ER 865 (HL). That matter related to a combination of transactions where gains in one transaction were sought to be counteracted by another, so as to avoid tax. The set of transactions was designed to create an artificial loss in one transaction which was counteracted by a gain in another. The House of Lords dismissed the appeal of the tax payer by holding that the Courts would look at the entire combination of transactions. It was held that the Revenue or the Courts were not limited to consider the genuineness or otherwise of each individual transaction in the scheme but could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s transferred to OPAL overseas. The petitioner has also submitted that the payment for design and engineering, supply, insurance and spares and consumables was to be paid to Linde in Euros and for the balance onshore work the payments were to be made in INR. According to the petitioner, this also indicated the portion of work that was required to be done overseas. 91. In the case of Ishikawajima-Harima Heavy Industries (supra) also the applicant therein, continued to be responsible for the equipment and material till the acceptance of the project. The relevant Clause which was considered by the Supreme Court in that case is quoted below:- 22.1 Title to equipment and materials and contractor s equipment: Contractor agrees that title to all equipment and materials shall pass to the owner from the supplier or subcontractor pursuant to section E of exhibit H (General Project Requirements and Procedures). Contractor shall, however, retain care, custody, and control of such equipment and materials and exercise due care thereof until (a) provisional acceptance of the work, or (b) termination of this contract, whichever shall first occur. Such transfer of title shall in no way af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d through the Indian Customs. No customs duty was payable being a SEZ, project. 94. It has been contended by Linde that the above steps are only for the purposes of manufacturing and fabricating the equipment that was to be supplied overseas. It is submitted that the work relating to design and engineering is inextricably linked with the manufacture and fabrication of the material and equipment to be supplied overseas and this work was also performed wholly outside India. These submissions have not been evaluated. Question no. (ii) framed for consideration of the Authority invites a ruling on the basis that the offshore services falling within the scope of services by Linde are inextricably linked with the Offshore supply of equipment and material and cannot be considered as technical services on a standalone basis. This is a question of fact which would have to be considered at an appropriate stage. However, if it is accepted that the services provided by Linde relating to design and engineering are inextricably linked with the manufacture and fabrication of the material and equipment to be supplied overseas and form an integral part of the said supplies, then the services ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an integral and inextricable part of equipment and material supplied, it would be necessary to examine whether any relief in respect of such income would be available to Linde by virtue of the DTAA between Germany and India. Taxability under the DTAA 97. The next question that requires to be considered is whether the amount receivable/received by Linde in respect of design and engineering and supply of equipment, material and spares outside India is liable to tax in India under the DTAA. Section 90(2) of the Act provides that where the Government has entered into an agreement with the Government of another country for granting Avoidance of Double Taxation then in relation to the assessee to whom such agreement applies, the Provisions of the Act would apply only to the extent they are more beneficial to the assessee. Article 7 of the DTAA provides that the profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment. It is further specified that only the income that is attributable to the permanent establishment would be taxed in the other contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; (f) the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. 5. Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 6 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State that enterprise shall be deemed to have a permanent establishment in the firstmentioned State, if this person,- (a) has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; (b) has no such authority, but habitually maintains in the first-mentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchandise for the enterprise. xxxx xxxx xxxx xxxx xxxx 7. Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article. xxxx xxxx xxxx xxxx xxxx ARTICLE 12 - Royalties and fees for technical services - 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or the fees for technical services. xxxx xxxx xxxx xxxx xxxx 4. The term fees for technical services as used in this Article means payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical or other personnel, but does not include pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arts i.e. the fabrication of the platform was to be performed in Korea and the installation and commissioning of the platform was to be done in India. The petitioner (therein) claimed that no tax is payable for the operations outside India as there is no permanent establishment of the petitioner (therein) in India and for Indian operations, the petitioner claimed exemption under Article 7 of the Convention for Avoidance of Double Taxation (between India and South Korea which is similar to the DTAA between India and Germany). The Assessing Officer rejected the contention of the appellant and held that the income from designing, fabrication, procurement of material etc. was partly attributable to the permanent establishment of the assessee in India. The Assessing Officer arrived at this conclusion on the ground that the contract was not divisible and the designing, fabrication and procurement of material were activities having nexus/linkage to the ultimate activity of installation and commissioning of platform in Bombay High and, therefore, income from the Korean operations was taxable in India. The Commissioner of Income Tax (Appeals) upheld the view taken by the Assessing Officer. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... country were not the real profits but hypothetical profits which the PE would have earned if it was wholly independent of the GE. Therefore, even if we assume that the supplies were necessary for the purposes of installation (activity of the PE in India) and even if we assume that the supplies were an integral part, still no part of profits on such supplies can be attributed to the independent PE unless it is established by the Department that the supplies were not at arm's length price. No such taxability can arise in the present case as the sales were directly billed to the Indian customer (ONGC). No such taxability can also arise in the present case as there was no allegation made by the Department that the price at which billing was done for the supplies included any element for services rendered by the PE. In the light of our above discussion, we are of the view that the profits that accrued to the Korean GE for the Korean operations were not taxable in India. 12. ..It is the act of setting out a PE which triggers the taxability of transactions in the source State. Therefore, unless the PE is set up, the question of taxability does not arise- whether the transactions a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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