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2016 (9) TMI 164 - AUTHORITY FOR ADVANCE RULINGS NEW DELHI

2016 (9) TMI 164 - AUTHORITY FOR ADVANCE RULINGS NEW DELHI - [2016] 387 ITR 274 - Taxability in India - amounts received/receivable by the applicant from Larsen & Toubro towards offshore supply of goods and materials - DTAA between India and Singapore - whether the contract is divisible into offshore supply of goods and materials and services rendered, whether obligations under the work as per the contract are distinct, i.e. whether off shore supply is an independent scope of work in the contrac .....

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one and offshore supplies are not an independent scope of work. - All parts of the transaction relating to sale of goods to L & T were not completed outside India. - No separate price of goods supplied by way of offshore supply or sale of goods to L & T outside India is specified in the contract. - PE played a role in design, selection and procurement of materials to be used in the fagade related work. - The fact pattern of this case is not at all similar to that of Ishikawajima .....

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Kumar RULING A.K Tewary, Revenue - The applicant has sought ruling on the following questions:- (1) On the facts and circumstances of the case, whether the amounts, received/receivable by the applicant from Larsen & Toubro towards offshore supply of goods and materials are liable to tax in India under the provisions of the Indian Income Tax Act read with the Agreement for the Avoidance of Double Taxation between India and Singapore? (2) If the answer to (1) is in the affirmative, to what ex .....

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ing 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) .....

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nt is Delhi and pursuant to an option given the payment is also made in Singapore dollar in Singapore. The contract was to be completed by 26/03/2010. 2.2 Appendix 2A to the agreement is sub-contractor's responsibilities and the scope of subcontract works is set out in Appendix 2A to the agreement. The applicant has referred to this appendix and stated that the scope of work can be broadly divided into: (i) Off-shore supply of goods. (ii) Installation and other works to be executed in the ai .....

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including all the necessary enabling and allied activities for the entire subcontracts works. 2.4 According to the applicant's counsel 'supply of all materials, shipment and/or transportation, prefabrication/fabrication' may be treated as separate and considered as part of offshore supply of goods. The applicant has heavily relied upon the judgment of Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd v. DIT (288 ITR 408) saying that the present contra .....

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e issue of offshore supplies: "In case of sale of goods simpliciter by a non-resident in India, if the consideration for sale is received abroad and the property in the goods also passes to the purchaser outside India, no income accrues or arises or is deemed to accrue or arise to the seller in India." Other cases relied upon by the applicant are Hysoung Corporation, In re (314 ITR 343), DIT v. Linde AG, Linde Engineering Division [2014] 44 Taxmann.com 244 (Delhi), DIT v. Nokia Network .....

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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 in .....

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as follows: ARTICLE 7: Business Profits - (1) 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 situated therein. The applicant has submitted that if the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other state but only so much of them as it is directly/ indirectly attributable to that permanent establis .....

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works and wall cladding works for the Delhi International Airport and has no connection, whatsoever, directly or indirectly in the offshore supplies and the off-shore supplies executed by the Applicant are an independent scope of work. 3. During the course of hearings spread over a long period both the Department of Revenue and the applicant have given several submissions and counter-submissions. These are contained in Department's letter dated 3/9/13, 2/4/14, 4/9/15 and 9/10/15. The applic .....

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the 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 Art .....

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sue 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 composite one and the responsibility on the sub-contractor applicant is wholesome. (e) The Department has further submitted that payment in both currencies relate to the single composite work and is evidenced by the fact that the payment schedule does not show any such divisions. The payment schedule talk .....

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on site. (g) The Department has drawn attention to the resource material Vision No.42 2009-10 of the applicant which reads as under: 'Delhi will be hosting the Commonwealth Games in October 2010 and the modernization and expansion plans for the airport are slated for completion before the Games. The clients and main contractor for the Airport are GMR and L&T respectively. Having successfully worked with both parties on the New Hyderabad Airport, MAPL was awarded the facade contract for .....

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-team designed and engineered a system that would be completely fabricated in factory and delivered to site as a finished product, ready to be lifted and instilled into its final position. The project is now in the completion stages. Once fully completed, the airport will be the biggest and most modern in India which will definitely impress visitors and athletes participating in the 2010 Commonwealth Games." (h) The Department has submitted that the statement that goods have been sold on Hi .....

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d 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 ar .....

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he income as is reasonably attributable to the operations carried out in India; ** ** ** Explanation 4 - For the removal of doubts, it is hereby clarified that the expression "through" shall mean and include and shall be deemed to have always meant and included "by means of, "in consequence of" or "by reason of". (j) The Department has pointed out that the computation of business profits of the permanent establishment is under Article 7 of the DTAA between Indi .....

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directly with the overseas head office of the enterprise rather than with the permanent establishment. (k) The Department has relied upon on the judgement by Hon'ble Madras High Court in the case of Ansaldo Energia SPA [310 ITR 237 (Mad)] saying that, "it is not just where the title passed, but also whether there was a crucial and intimate relation, whether there was an element of continuity between the business of the non-resident and the activity within the taxable territories". .....

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ima harima Heavy Industries Ltd.'s case (supra). On the other hand, it has applied the ratio in that case, but, has held, for reasons given in its order that the entire profits of Contact No. 1 cannot be segregated and dealt with as if they arose outside 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 r .....

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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 obtained from domestic/Indian companies for supply of s .....

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not expressly, and that composite contracts should not be dissected, and they must be 'looked at' and not 'looked through'. The AAR held that a contract had to be read as a whole and the purpose of the contract is to be ascertained from the terms of the contract. (l) According to the Department the factual matrix in Ishikawajima harima case is contrasted with the facts of the applicant's case as under: (i) In Ishikawajima Harima case, there is a consortium of various entitie .....

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s. The price for each component was also specified separately. In the applicant's contract with L&T there is no such specification. The division of the total value of contract into Indian rupees and Singapore dollars is not spelt out in the contract as attributable to different distinct components of the contract and no basis for the division into two currencies is available in the contract document itself. (iii) The contract document in Ishikawajima Harima categorically spells out that .....

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y 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 .....

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. Para 5.1.4.5 shows that payment towards shipment of goods is effected upon receipt of shipment. The transaction of supply is complete upon the consignment leaving the factory of manufacture. As regards continuance of risk, the applicant assumes risk towards quality, quantity and standard of materials supplied, the risk assumed towards the aspect of service is assumed by parties rendering the service. c. As regards comparison of prices of offshore supply of goods, the applicant submits that the .....

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PA [310 ITR 237 (Mad)], the applicant has mentioned that this decision is distinguishable on facts and is pending before the Hon'ble Supreme Court for final hearing. Contract 6.1 Before taking up these issues, it is necessary to set out the important portions of the contract/appendices for two reasons: one, the issues can be considered only on the basis of contracts, clauses and respective contentions and, second, quoting one portion of the clause from here and one from there on selective ba .....

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b-contractors responsibilities" which are as under:- App 2A1 Sub Contract works 1.1.1 The entire external and internal Facade for the glazing and cladding systems for Piers, fixed link bridges and nodes as indicated below to provide a watertight and weather proof enclosure & all the associated works forming part of the Works including without limitation of all double and/or single skinned factory prefabricated exterior cladding and curtain walling, metal baking panels, vision and spandr .....

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** 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, erec .....

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o all the supporting structural steel framing work including design, engineering, supply, fabrication, assembly, surface treatment, storage, delivery and erection of all the steelwork required to support the building envelope as part of the subcontract works and also incorporation of all the supply and installation of all cast-in items used to support the steelwork, the grouting of base plates, the provision of cleats and drilling of holes for the attachment of the glazing and cladding system, a .....

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under:- The Sub-contractor is responsible for the general arrangement, detailed design, technical specification, adequacy and contractual and legal compliance of the whole subcontract works, including all of their interfaces, and leading the design and specification aspects of their testing, commissioning, trials and defect remediation, and including obtaining the endorsement of the Employer's Representative and the consent/approval of all Relevant Authorities thereto. 6.5 Appendix 2B, Claus .....

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Indian rupee (INR) and the place of payment is Delhi India. Pursuant 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, th .....

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cate 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 pursuant to MCoC 30.1.1. at the price shown on the Sub-contractor's Commercial Invoice plus a Loading Fee Margin. 1.4.3.2 The Contractor provides to the Sub-contractor such documentation from the Employer as is needed for the Sub-cont .....

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e Sub-contractor pays the Indian Customs duty upon that shipment and clears it through Indian Customs, as the agent of the employer; subject to all additional Employer's documentation regarding any concessional rate of Customs duty as App5.1.4.3.3 complying with all Applicable Law:- 1.4.5.1 the Sub-contractor pays only that concessional Rate of Customs duty upon that shipment. 1.4.5.2 the Total Value of the Subcontract is reduced by the amount of Customs duty so saved. 5.1.4.6 subject to s.A .....

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65,405 Conversion to INR 1 28 INR Equivalent 847,761,910 1,158,231,343 Total Value, INR 2,005,993,253 Two thousand and five million, Nine hundred and ninety three Thousand Two hundred and fifty three INR only 6.8 Appendix 3C to the agreement is Sub-contractor's deployment schedule which shows that it deployed one design manager, one design team leader, 3 designers on site full time with effect from May 2008, i.e. much before goods and materials started being delivered to the site. 6.9 Append .....

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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 Singapo .....

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ility in India The order u/s 195 of the Act passed on 16/4/2009 in which it was held that the supply of plant and materials form part of the composite contract and the request for a certificate for NIL deduction of tax was not acceptable. Inferences & Conclusions 7.1 The contentions of both the applicant and the department have been broadly summarized in earlier paragraphs. The question revolves around the fact as to whether the amount received by the applicant from L&T pursuant to the c .....

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mp; T, i.e. transfer of property in goods as well payments, were carried outside India and sale of goods can be treated as completed outside India? III. Whether price of goods supplied by way of offshore supply and separate payments for that are specified in the contract? IV. Whether PE has a role in execution of supply, procurement of goods and materials from abroad into India? V. Whether fact pattern is identical or almost identical to the case of Ishikawajima Harima and the law as enunciated .....

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loaded in this case also, by comparing the rates of goods involved in offshore supply with that of other similar parties. The Department could not obtain rates from offshore suppliers located 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 obt .....

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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 procured. (c) The permanent establishment, which is its project office, had come into existence long before the design of .....

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red. The goods have been cleared from customs in India by the project office and customs duty has also been paid by the project office. In these circumstances, to say that PE had no role in respect of supply of goods and materials is incorrect. (d) There is no bifurcation between supply and erection/installation in the contract. In fact, in the entire contract there is no such bifurcation, either in the context of sub-contractor's works and responsibilities or with reference to cost center w .....

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e, the agreement shows that the applicant at its own expenses delivers the materials to the site in India. (f) The applicant is to ensure deliveries of materials at site and store them there. (g) The invoices show sale of materials by the applicant to L&T outside India by raising invoice on L&T and L&T, in turn, has made high sea sale to DIAL. The High Sea Sale contract is between L&T and DIAL and the applicant is not involved in this. (h) Even though the sale of materials was co .....

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ering 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 appli .....

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App. 5.2. This is not relatable to offshore supply of plant & materials as being projected by the applicant. Nowhere in the contract is it specified that payment for supply of goods & materials will be in Singapore dollars and in Singapore. The cost centre, which shows cost in Singapore dollars & Indian Rupees, is only for working of the cost and conversion in Indian rupees thereof and it says that total amount (shown in Indian rupees) will become due to the applicant in his final a .....

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mise 3% - Prototype complete 7% - on plants and materials shipped to site 26% - on plant & materials assembled and/or Fabricated units delivered to site with Custom Duties paid. 27% - on plant & materials assembled and/or Fabricated units installed at site. 3% - Test being successful. 2% - On obtaining completion certificate. (I) The major milestone schedule in Appendix 3A1 does not mention about supply/sale of plant and materials and recognizes architectural works, testing of IT and oth .....

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e applicant asserts that two transactions and its considerations have been bifurcated contractually into supplies effected and services rendered. Nowhere in the agreement is such contractual bifurcation available. There is no mention of two transactions. According to the applicant Clause 1.1.4 of appendix 2A is the scope of work and is divisible into two portions. The fact is that appendix 2A.1, in full, describes sub- contract works and clause 1.1.1 is the main sub-contract works descriptions. .....

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ty 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 .....

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he transaction of supply is completed upon the consignment leaving the factory. The applicant has stated that the sale to L&T was done outside India. This leads to a major question whether on the basis of facts the sale to L & T could be considered to be completed outside India. Under the Sale of Goods Act, Section 19 of the Sale of Goods Act makes it clear that property in goods passes when the parties intend it to pass. Section 19 is reproduced as under: (1) Where there is a contract f .....

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which the property in goods is to pass to the buyer. Clause (2) of this section states that for the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. In any sale transaction, risk passes with property. Thus, the goods agreed to be sold remain at the seller's risk until the property in goods passed to the buyer. When property or risk is to pass is, therefore, a question that de .....

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duty for that, bearing the risk and covering 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& .....

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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 payments, were carried outside India. The permanent establishment was not involved in the transactions. As regards offshore supply it was held that since all parts of the transaction in question, i.e., the transfer of property in goods as w .....

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engineering, if any, involved in the manufacturing of such Equipment & Material) supplied from outside India on CFR basis. Exhibit D-2.2 was for offshore services, Exhibit D-2.3 was for onshore supply and Exhibit D-2.4 was for onshore services. Article 13.3.2 specifically referred to the cost and offshore supplies. The insurance was in owner's name. Then the Court concluded "obligations under the contract are distinct one. Supply obligation is distinct and separate from service obl .....

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the taxation of price of goods supplied, by way of offshore supply price of which is specified in Ex. D, clause 2.1; and (b) the taxation of consideration paid for rendition of services in the contract as offshore services at Ex. D. There was clear and distinct bifurcation in the contract between offshore and onshore works based on which issues were decided. The Hon'ble Court had also noticed that in CIT v. Mitsui Engineering and Shipping Building Company (2003) 259 ITR 2458 Delhi it was he .....

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mplete 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 purpo .....

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e of work to be performed under the contracts 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. The permanent establishment of Linde did not come into existence till the commencement of installation stage which was subsequent to Linde provi .....

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cified. However, cost value centre in the present case mentions the price of entire contract. (c) In all these cases all parts of transactions were completed outside India but in the present case the sale was not completed outside India. (d) In Ishikawajima Harima the insurance for goods supplied was in owner's name whereas in this case the insurance was in applicant's name, covering the risk till completion. (e) In all these cases PE had no role to play in offshore supply whereas in thi .....

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me Court in the case of BSNL v. Union of India & Oths (2006) 3 SCC are relevant. The reason why these services do not involve a sale for the purposes of Entry 54 of List - II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley 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 contra .....

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act 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 completion of the contract irresp .....

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