TMI Blog2007 (5) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... s installation and commissioning of the said platform in South Bassein Field. In these civil appeals we are concerned with the assessment years 1987-88 and 1988-89. The assessee is incorporated under the laws of Republic of Korea. Its registered office is in Korea. As regards assessment year 1988-89, asseessee filed its return of in come on 3-8-1988. The return indicated 'nil income. In response to notices under Section 143(2) of the Income-tax Act, 1961 (for short, 'the Act'), the assessee stated that it did not have a PE in India and, therefore, it was not assessable to tax in India; that its Indian Operations consisting of installation and commissioning of the platform commenced in the taxable territory of India on 1-11-86 and got completed on 12-4-87 and, therefore, the duration of the Project was less than nine months; that it was entitled to exemption under Article 7 of the Convention for Avoidance of Double Taxation (for short, 'CADT'); that in the alternative it was liable to be assessed on the basis of the accounts annexed to the returns; that the accounts were based on the Completed Contract Method in its worldwide accounts; that the accounts of its PE can be accepted on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, procurement of material etc. was partly attributable to the PE of the assessee in India on the ground that designing, fabrication and procurement of material were activities having nexus/linkage to the ultimate activity of installation and commissioning. of plat form in Bombay High and, therefore, income to that extent from the Korean Operations was taxable in India. According to the A.O., the contract was not divisible. According to the A.O., the contract was in respect of the Turnkey Project; that the consideration in the contract was of lump sum price; that even when the fabricated structure was delivered for transportation to the representative of ONGC the accounts between the parties remained to be settled; and since designing and fabrication of the platform had an application in Bombay High, (where the platform was to be come into operation), a part of the profits arising even from Korean operations was taxable in India as such portion of the profits was attributable to the work of installation and commissioning of the platform in Bombay High. Accordingly the A.O. estimated the net profit of the assessee under the contract at 20% of the gross receipts. Consequently, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... butable to the PE in Bombay High. For the aforestated reasons, the CIT(A) held that though the actual receipt on fabrication operations in Korea was not taxable under the Income-tax Act, the work of designing and engineering of platforms was taxable under the CADT read with Section 9(1) of the Act. 4. On the question of quantum of profits embedded in the Korean Operations, the A.O. was of the view that since the assessee had invoked Article 7 of the CADT, the assessee was not entitled to compute its income under Section 44BB or under Instruction No. 1767 dated 1-7-87 issued by CBDT as urged on behalf of the assessee. On this point, CIT(A) took the view that the operations, namely, installation and commissioning of platform in Bombay High gave rise to profits and, therefore, those profits were attributable to the PE of the assessee in India and they were taxable at the rate of 10% of the payments received by the assessee in respect of the Indian Operations from ONGC on the basis prescribed in Section 44BB as also under Instruction No. 1767. Consequently, the CIT(A) directed the A.O. to compute the profits of the assessee at the rate of 1% on receipts in respect of the Korean Ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Section 4 of the Act it is the total income of every "person" which is taxable. A foreign company which is not wholly controlled or managed in India is a non-resident so far as its residential status is concerned. Section 5(2) of the Act lays down that as far as a non-resident assessee is concerned scope of total in come of such an assessee is confined to an income which accrues or arises in India or is deemed to accrue or arise in India and which income is received or deemed to be received by such foreign company. Therefore, it is clear that under the Act, a taxable unit is a foreign company and not its branch or PE in India. A non-resident assessee may have several incomes accruing or arising to it in India or outside India but so far as taxability under Section 5(2) is concerned, it is restricted to incomes which accrue or arise or is deemed to accrue or arise in India. The scope of this deeming fiction is mentioned in Section 9 of the Act. Therefore, as far as the income accruing or arising in India, an income which accrues or arises to a foreign enterprise in India can be only such portion of income accruing or arising to such a foreign enterprise as is attributable to it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ming to the present case, the main argument advanced on behalf of the Department was that the assessee was in receipt of consideration which formed part of execution of Turnkey Project with ONGC; that there was one integrated contract; that the contract was not divisible in terms of separate activities and, therefore, the Tribunal had erred in holding that profits accruing to the assessee from activities performed outside India were not chargeable to tax in India. According to the Department, the work of designing and fabrication under the Turnkey Project was totally interlinked with installation and commissioning and, therefore, there was no merit in the assessee's claim in respect of receipts attributable to the activities performed outside India as not chargeable to tax in India. According to the Department, the assessee was required to execute turnkey work, that is, to supply certain equipments and install the same in India. According to the Department, the supply of fabricated platform was essentially linked to installation of the platform in the Bombay High. Thus, according to the Department, there was a business connection and the supplies were linked to the Project in Bomba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receding paragraphs, the profits to be attributed to the permanent establishment shall be determined by he same method year by year unless there is good and sufficient reason to the contrary. 6. Where income or profits include items of income which are dealt with separately in other articles of this Convention, then the provisions of those articles shall not be affected by the provisions of this article." 11. On reading Article 7 of the CADT, it is clear that the said Article is based on OECD Model Convention. Para (1) of Article 7 states the general rule that business profits of an enterprise of one Contracting State may not be taxed by the other Contracting State unless the enterprise carries on its business in the Other Contracting State through its PE. The said Para (1) further lays down that only so much of the profits attributable to the PE is taxable. Para (1) of Article 7 further lays down that the attributable profit can be determined by the apportionment of the total profits of the assessee to its various parts OR on the basis of an assumption that the PE is a distinct and separate enterprise having its own profits and distinct from GE. Applying the above test to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Project, the PE is set up at the installation stage while the entire Turnkey Project, including the sale of equipment, is finalized before the installation stage. The setting up of PE, in such a case, is a stage subsequent to the conclusion of the contract. It is as a result of the sale of equipment that the installation PE comes into existence. However, this is not an absolute rule. In the present case, there was no allegation made by the Department that the PE came into existence even before the sale took place outside India. Similarly, in the present case, there was no allegation made by the Department that the price at which ONGC was billed/invoiced by the assessee for supply of fabricated platforms included any element for services rendered by the PE. In the present case, we are concerned with assessment years 1987-88 and 1988-89. Therefore, we are not inclined to remit the matter to the adjudicating authority. We reiterate, in the circumstances, not all the profits of the assessee company from its business connection in India (PE) would be taxable in India, but only so much of profits having economic nexus with PE in India would be taxable in India. To this extent, we find no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ross receipts in respect of the activities of installation commissioning etc. performed in India. In the present case, no reasons have been given by the Tribunal for reducing the rate from 10% to 3%. Fourthly, it is important to note the scope of Section 44BB of the Act. Once that section applies then two conclusions follow. The first is that 10% of the receipts by the foreign resident is chargeable to tax and the other conclusion is that 90% of the receipts of that foreign resident as well as receipts/gains, other than those mentioned in Section 44BB, is also not chargeable to tax. Lastly, there is a concept in accounts which called as the concept of Contract Accounts. Under that concept, two methods exist for ascertaining profit for contracts, namely, "Completed Contract Method" and "Percentage of Completion Method". To know the results of his operations, the contractor prepares what is called as Contract Account which is debited with various costs and which is credited with revenue associated with a particular con tract. However, the rules of recognition of cost and revenue depend on the method of accounting. Two methods are prescribed in Accounting Standard No. 7. They are - "C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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