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TMI Blog2016 (9) TMI 164X X X X Extracts X X X X X X X X Extracts X X X X ..... acific Pte Ltd. (MAPL) is a company registered under the Laws of Singapore and is engaged in the business of executing contracts in relation to structural glazing and wall cladding works. It has set up project Offices in India for the purpose of executing the contract works awarded to the company. Delhi International Airport Private Limited (DIAL) entered into operations, management and Development Agreement (OMDA) on 4/4/2006 with the Airports Authority of India. DIAL floated a global tender for various works in connection with the development of T3 terminal in Delhi Airport. Larsen & Toubro (L&T) won the contract involving design and construction of a state of art passenger terminal. The main contract was awarded by DIAL (Employer) to L&T (contractor) and L&T, in turn, awarded the contract for entire external and internal facade for the glazing and cladding systems for Piers, fixed link bridges and nodes to the applicant (sub-contractor) for which an agreement was entered into on 23rd April, 2008. The applicant was to design the curtain wall and facade, supply all materials, erect, install, inspect, test and commission the entire sub contact works. The currency of the contract is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poration, In re (314 ITR 343), DIT v. Linde AG, Linde Engineering Division [2014] 44 Taxmann.com 244 (Delhi), DIT v. Nokia Networks OY [2012] 25 Taxmann.com 225 (Delhi) and Joint Stock Company Foreign Economic Association Technopromo Expert (322 ITR 409). 2.5 The applicant has further mentioned that with regard to the off-shore supply of goods, it negotiated and concluded the supply of goods and materials from various third party suppliers/manufacturers outside India and, therefore, all the activities in connection with the offshore supply were carried outside India. The suppliers/manufacturers fabricated and manufactured the goods and materials based on the specifications stipulated by the applicant. The goods were sold by the Applicant from outside India to L & T and the consideration was paid by M/s L & T to the Applicant in Singapore Dollars by way of a transfer of funds to the bank account of the Applicant in Singapore. M/s L & T thereafter sold the consignments to DIAL on a "high sea sale" basis against transfer of bill of lading. L & T issued a high sea sale invoice and entered into an agreement with DIAL where under the ownership in the consignment was transferred to DIAL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he project office situated in India, a Permanent Establishment for the non- resident company MAPL in India gets established. (b) The Department has submitted that MAPL had conducted its business operations in India through its Project Office in India and this establishes a business connection within the meaning of Explanation 2 and 3 to clause (i) of subsection 1 of Section 9 of the Income-tax Act, 1961. A Permanent Establishment of the Non- resident Company is established in India, as per Article 5(3) of the India-Singapore DTAA also. (c) According to the Department there is no separate or exclusive contract of offshore supply of materials. The contract comprises of both supply of goods and rendering of services which includes erection, installation, commission and completion of work. (d) The Department has submitted that the contractor did not want to split the risk and has kept the risk factor/liability for the entire sub- contract as a whole on the applicant. It means that any issue which involves risk at any part or time of the execution of the work will have the impact on the whole project. This demonstrates that the contract cannot be dissected in any way as it is a compo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was not a sale at all. The goods in question, though claimed as sold offshore, finally arrived at the destination in India, and were used by the applicant itself in the contract works. (i) The Department has further submitted that there can be no dispute ' that there is a business connection for the applicant MAPL in India for the relevant transaction. The business connection is the subcontract awarded to MAPL by L&T and executed by it in Terminal 3 of the Delhi International Airport. Income arising directly or indirectly through this business connection is deemed to arise in India. The Department has relied on the language of expression "through" as clarified in Explanation 4 to section 9(1)(i) which is extracted below: (i) Income deemed to accrue or arise in India. (i) 9. (1) The following incomes shall be deemed to accrue or arise in India:- (i) (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situated in India. (i) Explanation 1- For the purposes of this cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... side India. For the reasons given above, we confirm the findings that, (a) the foreign company and the activities rendered by it under contract No. 1 and the other three contracts are inextricably linked and it was a composite contract, (b) all responsibility from the beginning to the end rested on the assessee, (c) there is an intimate, real and continuous relationship with the subsidiary company, and (d) that the price of other contract was loaded on to Contract No. 1. During the course of arguments, the Department was asked by us to compare the rates of goods involved in offshore supply with other similar parties to see if there is a possibility of loading the so called offshore supply with disproportionately higher value in order to avoid taxation in India. The Department has mentioned that despite issuing letters to some international parties and making repeated attempts, no response was received from them. They are of the view that since the applicant is seeking the ruling, the onus is on the applicant to substantiate that the price of the contract was not loaded to its offshore supply of materials. Having said this, the Department of Revenue has compared the prices ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icant's case, the materials imported are insured in the name of the sub-contractor applicant and it is required to bear the risk and responsibility for the goods at all times. Although a paper trail is created to appear as if the materials are transferred to the contractee on the high seas, in effect there is no change to the risk and responsibility of the sub-contractor applicant. (v) In Ishikawajima Harima case, it was found that the PE of the foreign company had no role to play in the offshore supply of equipments, materials, etc. In the applicant's case, the procurement of material outside India to suit the specific requirement of the subcontract work in India could not have been done without technical, engineering inputs from the MAPL's personnel at its project office in India, which is its PE. Thus, there was an organic link between the activities in India and outside India. 5. The applicant, in its response, emphasized as under: a. Two transactions and its consideration have been bifurcated contractually into supplies effected and services rendered. The aspect of supply is dealt with separately in the agreement. b. Para 5.1.4.5 shows that payment towards shi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... metal baking panels, vision and spandrel panels, shadow box for spandrel panels, modular metal panels, fire/smoke stops, composite metal panels, louvered panels, external entrance doors, windows & other openings, all hardware & fixtures, miscellaneous metal claddings (like cornices, copings, fascias, casings, etc.), acoustic attenuation, thermal insulation, flashings and all necessary fittings & accessories and the like to complete the system, with all the appropriate provisions for MEP and other services. ** ** ** ** ** ** 1.1.2 Design and engineering of the curtain wall, facade, accommodating subcontract works (the sub-contractor shall interpret the drawings & specification supplied as App 1.1 as minimum performance requirement and formulate his own functional, efficient & preeminent design and engineering to meet the functional, aesthetic, structural, utility, interfacing and performance requirements.) 1.1.4 Supply of all the materials, shipment and/or transportation, prefabrication/fabrication, erection, installation, inspection, testing and commissioning, including all the necessary enabling and allied activities for the entire subcontracts works. 1.1.5 Interfacing with o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to option X3, the Contractor also pays the Sub-contractor. 1.1.1 In S$ paid in Singapore 5.1.4 The Sub-contractor pays all other Taxes including all duties and like Government impositions arising from this Subcontract, and indemnifies the Contractor and the Employer against same. For Indian Customs Duty upon Plant and Materials imported into India for the subcontract works: 5.1.4.1 prior to Subcontract Key Dates T3-04.1-07, the Sub-contractor provides to the Contractor priced lists of the corresponding Plant and Materials to be imported into India for the subcontract works, being consistent with Appendix 5s.App5.7 5.1.4.2 within 6 Business Days of any such Plant and/or Materials leaving the port of shipment outside of India, the Subcontract provides to the Contractor all of the following documents for the shipment: 1.4.2.1 Clean (on board) Bill of Lading 1.4.2.2 Commercial Invoice 1.4.2.3 Packing List 1.4.2.4 Certificate of Origin at source (if required) 5.1.4.3 within 6 Business Days of the Sub-contractor having complied with s.App 5.1.4.2 in relation to a shipment: 1.4.3.1 The Contractor and the Employer execute a "high seas purchase contract" for that shipment pursuan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contract started in June 2008 without any separate reference to offshore supply and onshore services. 6.10 The import of Plant and Materials as per Appendix 5.7 is according to INCOTERMS 2000. The payment schedule shows that the payments are to be made as per overall schedule of key dates and Appendix 5.6.2.1 shows that when the Sub-contractor has achieved the stated Subcontract Key Date, it becomes eligible for payment of the corresponding percentage of that Cost Centre's Value stated in s.App5.6. 6.11 Sample invoices & other documents furnished by the applicant show that: a. Invoice dated 10/10/2009 has been issued by Mero Asia Pacific Re Ltd to L&T for sale of Aluminum glass panels - for shipment from Shanghai to New Delhi on CIF basis. b. Bills of Lading show Mero Asia Pacific Re Ltd as shipper and L&T as consignee. c. Certificate of Insurance dated 12/10/2009 issued by Axa Insurance Singapore Pte Ltd shows that insured person is Mero Asia Pacific Re Ltd till the goods reach delivery site in India. d. High sea sale invoice dated 22/10/2009 shows that L&T has made high sea sale for same Aluminum glass panels to DIAL. 6.12 The applicant made an application with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocated abroad although they have compared the prices obtained with that of Indian companies for similar materials and has concluded that prima facie loading of value towards offshore supply cannot be ruled out. However, such conclusion is flawed because rates from offshore suppliers located abroad could not be obtained. Since no reply to the letters sent by them to offshore suppliers abroad has been received, their conclusion cannot be relied upon. In these circumstances the reliance of the Department on Ansal do cannot be accepted by us. 7.3 Therefore, we have to address the issues formulated by us as above on the basis of the facts from the contract agreement and appendices as under: (a) There is only one contract agreement (T3-04.1 Facade & Associated Works) for the contract to be executed by the applicant for the entire external and internal facade for the glazing and cladding systems for Piers, fixed link bridges and nodes. The design, engineering, supply, fabrication, assembly, erection and installation are interlinked and everything culminates into one system. (b) The applicant has to formulate its own design and engineering based on which plants and materials are procure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a. If the sale to L&T is complete in Singapore and it is L&T which is making high sea sale to DIAL as claimed by the applicant, then how the applicant is paying customs duty in India and delivering the same to its project site? (i) SD 8 - Risks & Inference - show that the applicant is bearing risk & insurance in respect of plants and materials until completion and insurance covers entire replacement cost, including the removal of debris and making good of affected works. If the sale in Singapore is considered to be complete, there is no reason to provide such insurance cover until the completion of entire sub-contract works. Marine cargo insurance is also in the name of applicant and not in the name of L&T or DIAL. (j) The currency to this contract is Indian rupees and the place of payment is Delhi. It is only as an option given to the applicant to receive certain payments in Singapore dollars as a result of which certain payment has been made in Singapore dollar. Such payment amounting to Singapore $ 41365405 (INR 1158231343/-) is for total cost of Pier AB, Pier CD and fixed link bridges & nodes & remainder of sub- contract works as clearly mentioned in App. 5.2. This is not rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 1.1.1 is the main sub-contract works descriptions. It is incorrect to pick up one portion of a clause (1.1.4) selectively to show that it represents independent scope of work. This clause is not divisible in two parts. The applicant is relying on one portion of one sentence of the clause. Such division is imaginary and artificial. (b) The applicant further states that para 5.1.4.5 shows that payment towards shipment of goods is effected upon the receipt of the shipment. This para does not even mention this as it talks about payment of customs duty by the applicant and clearing of goods through customs in India. In fact as mentioned elaborately above, the payment schedule depends upon stages of completion of the project and not at all on shipment of goods or completion of services. (c) According to the applicant's assertion, the parties agree that the cost relating to the aspect of supply would be incurred in foreign currency. Nowhere such agreement between parties is found. The cost center value shown in Appendix 5.2 is for working out the cost. There is indeed an option that has been given to receive payments in foreign currency even though the currency of the entire cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insurance till completion of sub-contract works. DIAL and L & T never intended to buy materials on standalone basis. The undertaking of all these responsibilities, even after making sale to L&T outside India, shows the intention. In this case there is continuity from preparation of invoice in the name of L&T of the goods supplied till the same reached the contract site. The buying of insurance in the name of the applicant instead of L& T till it reaches the site in India is a clear proof that risk does not pass to L&T/DIAL till the goods are not used for the works as per the contract. 7.5 The applicant has relied on the judgments in the case of Ishikawajma harima (supra), Linde AG (supra), Nokia Networks (supra) as regards the facts relating to the contract, responsibilities of suppliers, and role of PE. The facts involved, in brief, in these cases are as under:- A. In the case of Ishikawajma harima the supply segment and service segment were specified in different parts of the contract. The equipment supplied stood transferred upon delivery thereof outside India on high sea basis. All parts of the transaction in question, i.e. the transfer of property in goods as well as the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which covered all the stages involved in the supply of machinery. The Hon'ble Court noted that the case of Ishikawajima harima was clearly distinguishable from the facts of Mitsui since the payments for offshore and on shore supply of goods and services was in itself clearly demarcated and cannot be held to be a complete contract that had to be read as a whole and not in parts. B. In the case of LG Cables there were two separate contracts, one for offshore supply and other for onshore services. The property in the goods would pass on to the buyer as and when the seller loads the equipment on to the mode of transport for transportation from the country of origin. The PE had no role to play in the execution of offshore supply contract and as a matter of fact was set up for sole purpose of enabling the purpose of the onshore services contract, which was a separate one. C. In the case of Nokia GSM equipment manufactured in Finland was sold to Indian Telecom Operators from outside India on a principle to principle basis, under independent buyers and sellers arrangement. Installation activities were undertaken by Indian subsidiary under its independent contracts with Indian Telecom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unkerley case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366 (29-A) continues to be: Did the parties have in mind or intend separate rights arising out of the sale of goods? If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is "the substance of the contract'. We will, for the want of a better phrase, call this the dominant nature test. (Emphasis Supplied) 7.8 The substance of the present contract very clearly shows that it is composite in form as there is no division in the contract on the basis of supply and services, payment is not separately linked with services and supply but is to be made on the basis of stages of completio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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