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TMI Blog2021 (2) TMI 992X X X X Extracts X X X X X X X X Extracts X X X X ..... ercial offer letter dated 28th May, 2010 and price proposals for execution of the scope of work mentioned in the tender floated by OPAL The bid of the Applicant was accepted by OPAL and contract was awarded to it vide Notification of Award ('NOA') dated April 15, 2011. Pursuant to the NOA, the Contract Ref No. OPAL/BDA/MM/CTS/275/11-12 dated 21 st November, 2011 was signed between OPAL and the Applicant. The Plant was to be setup using proprietary technology owned by a non-resident, namely, Axens, France, which was an international provider of established technology to the hydrocarbon industry. The Applicant's scope of work and corresponding price payable by OPAL under the contract was stated to be as under: Particulars Consideration payable in EURO INR Offshore scope of work 1. Offshore supply of equipments 2,779,595 - 2. Engineering License Fee * Offshore services for basic engineering design in relation to setting up of the Plant at site. * Assistance in detailed engineering * Technology Licensing 747,985 106,172 5,322,936 - - - 3. Amounts paid/payable to TPI agency for inspection of offshore suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of the Act, whichever was beneficial to it. It was stated that a non-resident is liable to tax in India only in respect of the income that is 'received' or 'deemed to be received' in India and the income that 'accrues or arises' or is 'deemed to accrues or arises in India', as stipulated under section 5(2) of the IT Act. The consideration for offshore supplies was remitted to the Applicant directly outside India and, therefore, it was received outside India. As regarding 'accrual or arising' of income in India, it was submitted that the Apex Court in the case of Ishikawajima-Harima Heavy Industries Limited Vs. DIT (288 ITR 408) (SC) has held that separate and identified scope of work under a composite contract for offshore and onshore supplies and services is to be viewed separately for tax purposes. Applying the ratio of this decision to the composite transactions, which had some operations in one territory and some in others; it was essential to determine the taxability of various operations. It was submitted that no income can be said to accrue or arise in India, if the title of such goods / equipment was transferred outside India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. 5. On the taxability of offshore engineering design services in relation to setting up of the Plant at site, it was submitted that the taxability of this consideration has to be considered either as Fee for Technical Services (FTS) or as business profit, under Article 13 or Article 7 of the India-France DTAA respectively. The Applicant drew our attention to definition of FTS under India-France DTAA, India-Portugal DTAA and India-Finland DTAA. It was submitted that DTAA with Portugal and Finland were signed afterwards wherein the scope of FTS was more restricted and narrower as compared to Article 13 of India-France DTAA and, therefore, the restricted and narrower definition of FTS has to be imported to India-France DTAA. According to the Applicant, the consideration for services shall be construed as FTS under Article 13 of India-France DTAA only if the managerial, technical or consultancy service as provided 'makes available' technical knowledge, experience, skill, knowhow or process; or consists of the developments and transfer of a technical plan or technical design which enables a person acquiring the services to apply the technology contained therein. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 7. The Revenue submitted that the contract was for setting up Butene-l plant at Dahej Petro Chemical Complex on a lump-sum turnkey basis, which was a composite works contract and the so-called supply element was only a part of the overall work contract for Butene-l plant. Most of the activities, starting from project conceptualization, gathering and analysis of data for preparation of bids, preparation of designs etc. could have been carried out only at site in India. Considering the nature of works contract, which was heavily engineered project constructed according to the local / customized requirement, even the so-called offshore supply and services could not have been carried out without first carrying out detailed pre-engineering surveys, gathering of data etc. The contract price itself showed that contract was on lump-sum basis which included collection of data required to complete the basis of design, preparation of front-end engineering and design, detailed engineering, project management, etc. Therefore, the entire contract revenue, including the payment for the so-called offshore supplies as well as offshore services was taxable in India as the contract was negot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p / dissected for taxation purpose and that it has to be looked up rather than looked through. In this regard, reliance was placed on the following decisions: i. Vodafone International Holding BV Vs. Union of India (341 ITR 1) (SC). ii. Roxar Maximum Reservoir Performance WLL (349 ITR 189) (AAR). iii. Alstom Transport SA (AAR No. 958 of 210). iv. Samsung Heavy Industries co. Limited vs. ADIT (ITA No. 5237/Del/2010). 10. It was further submitted by the Revenue that the responsibilities of the Applicant did not end with simply handing over the equipments of offshore supply to OPAL, rather the responsibilities were not discharged till the works contract was executed to the satisfaction of OPAL. It was contended that passing of title and passing of risk can take place separately as held by Ld. ITAT, Delhi in the case of Baker Hughes Asia Pacific Limited vide order dated 11.07.2014. The Revenue submitted that the contention of the Applicant that its responsibility was over at the time of loading of the offshore goods on the vessel at the port of shipment was also not correct. Not only these goods were manufactured as per the requirements of the sit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was satisfied in this case as the Applicant had imparting technical knowledge by way of a technology license. It was pointed out that out of the total payment of Euro 61,77,093 for Engineering and Design Services, payment of Euro 53,22,963 was on account of Technology licensing, which was for Licensing and Use of Technology of the Applicant by OPAL and which was also evident from the overall tenure of contractual terms. In this regard our attention was drawn to Para 1.2 of Annexure - E (Project Instructions), which specifically provided that the Contractor shall provide Technology License and carry out Process design and all engineering and design requirements to completely design and engineer these facilities. It was submitted that apart from FTS the consideration for Engineering / Designs Services also qualified as Royalty. Rejoinder or the Applicant 12. In rejoinder, the Applicant denied the contention of the Revenue that it had a fixed place P.E. It was submitted that pre-designing or pre-engineering survey for the purpose of bidding are necessary and such activities do not per-se generate any profit and cannot give rise to P.E. of the Applicant in India. It was cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaken in India were engaged in the offshore scope work of the present contract. 14. In respect of offshore supply, it was submitted that the contract entered into by the Applicant provided break up of onshore and offshore components, in line with the draft bid documents defining scope of work against each payment. Further, the ownership of offshore supplies was transferred to OPAL on FOB shipment basis when goods were placed on board the vessel at the port of shipment. The bill of lading, invoices, certificate of origin indicated that ownership was transferred out of India. The Ld. A.R. submitted that merely because Applicant continued to resume responsibility, which was a commercial requirement, it does not postpone the transfer of title of the goods till that time. It was contended that activities relating to offshore supply were completed by the Applicant much before the P.O. came into existence. 15. The Ld. A.R. reiterated that activities relating to designing and manufacturing were carried from outside India and the P.E. of the Applicant had no role whatsoever in the design, fabrication and manufacture of the equipment. The Applicant has clarified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f provisions of section 245RR of the Act. We, therefore, don't deem it necessary to accede to the request of the Revenue as those details are not necessary to decide the issues before us. Issue of PE in India 17. In order to answer the questions as raised it will be necessary to examine the role of the PE of the Applicant in India. The Revenue has contended that in view of the continuity of the activities and the onus cast on the Applicant for successful completion of the performance guarantee tests, it had the permanent establishment (PE) in India. It was submitted that elaborate pre-bid work was done which involved site visits, inspection at site through its employees, pre-bid discussions etc. and, therefore, the Applicant had a Fixed Place PE. Further that the Applicant had a business connection as stipulated u/s 9(1)(i) of the Act. As per Article 5.1 of Indo-France DTAA the term 'permanent establishment' means a fixed place of business through which the business of enterprise is wholly or partly carried on. The Applicant has admitted that it had a fixed place of business in the form of Project Office (PO) in India through which its business was carried on and whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Providing Licenses * Preparation of the Process Design Package * FEED & Basic Engineering * Detailed Engineering * Management Control of all procurement activities of all materials * Fabrication, construction, installation, testing etc. * Trial run, pre-commissioning and commissioning * Obtaining statutory approvals * Supply of CRWS system and hardware for Emergency HT Power * Project Management and Support Services * Carrying out of performance tests * Preparation of start-up and operating manuals. * Training of operators * Post commissioning services for six months * Providing as built drawings * Supply of all test reports * Management of HSE including Hazop, DMT etc, * Fulfilling all warranty obligations Undoubtedly, the contract was a composite contract for setting up Butene-l plant at Dahej and the scope of work included all activities and services from Project Management, Technology License, Process Guarantee, Preparation of process package, review and confirmation of basic project data, Process design, preparation of engineering and design, Detailed engineering, third party inspection, obtaining statutory approvals, Procuremen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ller retains control over the goods by either obtaining a bill of lading in his name or to his order, the property in the goods does not pass to the buyer until he endorses the bill to the buyer and delivers the document to him. From the materials brought on record, it is found that the invoice and the bill of lading in respect of offshore supply was in the name of OPAL and not in the name of the Applicant or any other agent. Therefore, the title to and property in the goods shipped by the Applicant at the foreign port was transferred at the port of shipment itself This event took place outside the territory of India and the income arising out of such sale transaction cannot be said to have accrued or arisen in India. The Applicant did not reserve the right of disposal of goods during transit or otherwise. The Revenue has contended that it was the responsibility of the Contractor to cover the loss or damage of materials forming part of the works, occurring while in transit from the Contractor's work until arrival at the site for the materials. As per terms of contract the entire project was insured in the joint name of the Contractor and the company. Even if the goods were in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upply", break up of "Imported component" (Euro) and "Indian component" (INR) was mentioned in respect of each item in the contract document itself. Such breakup was also available in respect of 'spares & consumables' and 'catalysts'. Thus, the entire requirement of imported components of supply was identified at the time of preparation of bid document itself and included in the contract document. It is not that the imported components of supply were identified in the course of execution of the contract and ordered at the instance of the PE. We, therefore, do not see any role of PE in the offshore supply part of the contract. 23. The principle of apportionment of income on the basis of territorial nexus is well accepted. Explanation 1 (a) to section 9(1)(i) of the Act stipulates that where all the operations are not carried out in India, only that part of income which can be reasonably attributed to the operations in India, would be deemed to accrue or arise in India. It, therefore, follows that in a composite contract where only a part of the operations is to be carried out in India, the assessee would not be liable for part of income that arises from operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lected by Ansaldo, as it had no business persons in India. NLC accepted Ansaldo's request on assurance that it would take the overall responsibility of the entire turnkey contract in its capacity as a single bidder. Contracts I and Il dealt with offshore supply of equipments along with designing and engineering and offshore service of supervision of erection, testing and commissioning; and contracts Ill and IV dealt with onshore supply of equipments and onshore services. Ansaldo had offered 20 per cent of income on contracts I and Il to tax, whereas contracts Ill and IV were shown as loss making contracts. The Assessing Officer had treated the entire receipts under contract as fees for technical services and quantified tax accordingly. The Commissioner (Appeals), gave a finding that contract was split up into four contracts only for tax purpose; that there was uniformity of control in respect of all four contracts; and that price of contracts I and Il was likely to be loaded higher to take care of other responsibilities and risks of assessee with respect to contracts Ill and IV on account of single bidder re-sponsibility. He also held that Ansaldo had a PE and business connecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... j and was rendered from France. Similarly, offshore advisory services were also rendered from France in relation to detailed engineering to be done by the Applicant's PO in India for setting up of Butene-l Plant at site. According to the Applicant, these services were in the nature of FTS covered under Article 13 of India-France DTAA and not business income under Article 7 of the Treaty. It is found from the Annexure-C of the Contract document that the lump-sum consideration for complete Butene-l plant for Dahej Petrochemical Complex has two components as under: a) Imported Components : Euro 8,976,775 b) Indian Component : INR 1,412,868,258 The contention of the Applicant is that supply and services in respect of "Imported component" of Euro 8,976,775 was entirely made from outside the country. The break-up of "Design and Engineering - Butene 1 Plant" is provided in Appendix-A 3 under Annexure-C of the Contract which shows that some of the services had Indian component as well as imported component, the detail of which as under: Sr. No. Services Indian Component Rs. Imported Component (Euro) 1 Technology Licensing Nil 5,3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide Finance Act, 2010 with retrospective effect from 01.06.1976, which stipulates that such income will be deemed to accrue or arise in India irrespective of the fact whether the non-resident had a place of business or business connection in India or had rendered any service in India. The Applicant is only seeking benefit in respect of non-taxability of these amounts under the DTAA in accordance with the restricted and narrower scope of FTS in India-Finland DTAA and India-Portugal DTAA, which it has sought to be imported in India-France DTAA. 29. As per Article 13.4 of India-France DTAA, payment of any kind in consideration for services of a managerial, technical or consultancy nature qualifies as 'fees for technical services'. Thus, there is no doubt that the services rendered by the Applicant were in the nature of FTS as per Article 13.4 of the DTAA. However, the Applicant has sought to import benefit of Clause 7 of the Protocol to India-France DTAA which reads as under: 7 : In respect of articles 11 (Dividends) 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment ) if under any Convention, Agreement or protocol sign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the right, property or information for which a payment described in paragraph 3 is received, or (b) make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design which enables the person acquiring the services to apply the technology contained therein . As per India-Portugal DTAA, any technical or consultancy service must fulfil the condition of making available the technical knowledge, skill, experience, know-how or process or technical design etc. in order to qualify as FTS. Thus, we have to also examine whether the basic engineering design services and offshore advisory services were being made available to OPAL as per the terms of the Contract. 31. Before we examine the impact of the MFN clause in the Protocol of Indo France tax treaty, read with the India-Finland tax treaty and Indo-Portuguese tax treaty, which were subsequently entered into, the questions that we first need to deal with is: 1) Whether the basic engineering design services and offshore advisory services were rendered by the Applicant in France? 2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with Addendum, Drawings etc . exclusively for the Company's engineering team at the design review centre. 2.2.2 Engineering Reviews The Company and/or its representative will formally review for approval including, but not limited to, the following items, utilizing procedures set out in these instructions a) Designs, plans, elevations, material selection etc. to the extent these are modified / supplemented by the Contractor . b) Design data sheets and/or drawings. c) Installation procedures including all analysis, design and detailing connected with fabrication, transportation and installation. d) Design and Installation Analysis. e) All purchase specifications. f) All engineering connected with vendor drawings checking . g) Process package. 2.2.3. : Design Verification As part of the design verification, Contractor shall conduct formal design review meetings for HAZOP studies, hazardous area classification, layout/plot plan, model/ safety, etc at their design office. The Company and/or its representative (s) will attend such meetings. 2.3 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctor will forward copies of all preliminary drawings and specifications in accordance with the correspondence schedule and procedure . Distribution of a 11 documents etc . is the responsibility of the Contractor . b) Company will review these drawings and specifications and advice Contractor as soon as possible if there are any comments or suggestions, returning a marked-up print or copy, if required. In the event that Contractor does not receive Company' s comments on items within 14 working days from the date of the receipt by the Company/Company's Consultant then it may be assumed that there are no comments and the items may be issued for construction. c) Where marked-up drawings or comments on drawings and specifications are returned, Contractor shall make the corrections and obtain Company's approval before issuing the same for construction, transmitting copies in accordance with the correspondence procedure . All changes shall be identified by revision marks. d) Should any item shown on plans issued for construction be changed due to any reason whatsoever after the plans have been approved, new or corrected plans sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he entire process has been set out in detail earlier in this order and we find that these services enabled the recipient of these services to perform the same services, in the future, without recourse to the assessee. Thus the condition of "make available" of the services is found satisfied from the terms of the contract. As the services are not found rendered directly from France and the services rendered are also being "made available", the reliance of the Applicant on the MFN clause in the Protocol, India Finland treaty, India-Portugal treaty and the connected case laws in this regard, all becomes otiose. 35. As the basic engineering design services and offshore advisory services were rendered in India and these services were also made available to OPAL, they are taxable not only in accordance with the provisions of the Act but also under India-France DTAA. According to the Applicant, these services are taxable as FTS and not as business income. No cogent reason has been given as to why these services can't be business income except that the PE had no role in rendering thereof. However, the question no. 3 of the application is in respect of "offshore advisory ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto account the local factors and could not have been delivered exclusively from France. The involvement of the PE of the Applicant in such designing process was inevitable. The Applicant has contended that such services were not attributable to the PE of the Applicant in India. However, the service pertaining to construction, erection, installation, commissioning and testing of the plant could not have been rendered from France without the involvement of the PE. In fact, the Applicant has also admitted in the application that all "Such engineering, drawings, designs, etc. will only by used by the Project office of the Applicant for setting up a Plant at site; OPAL will not be able to independently use the technology that goes in the drawings, designs documents, etc." Thus, it is crystal clear that even if the part of design services were developed in France such engineering, drawings, designs, etc. were used by the Project office of the Applicant for setting up the Plant at site. As discussed earlier the offshore advisory services in relation to detailed engineering were to be done only by the Applicant's project office in India. Thus the actual rendering of the basic engineer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The contract was in two parts. One was for fabrication of platform in Korea and other was installation and commissioning of said platform in Bombay High. It was held by the Apex Court that since installation PE in India came into existence only on conclusion of transaction giving rise to supply of fabricated platforms and that the fabricated platform was delivered in Korea to agents of ONGC, the profit for Korean operations was not taxable in India. The facts of that case are found to be distinct from the fact of the present case. In the present case not only the PE was established from the very beginning but the delivery of services was made in India. Only exception in the contract was for delivery of offshore supply of equipments & materials, which have been dealt appropriately. Therefore, the ratio of this decision is not found applicable in respect of the services as rendered in this case. 41. Reliance has also been placed on the decision of Hon'ble Delhi High Court in the case of CIT VS Mitsui Engg. & Ship Building (259 ITR 248) (Delhi). It was held in that case that it was not possible to apportion the consideration for design on one part and engineering, manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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