9911796707
Advanced Search 
TMI Blog2004 (6) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... allation and commissioning of gauging equipment and associate systems and ancillary services termed as Package-3 and the second on 25.6.2002 for supply of installation and commissioning of Satellite Telemetry and associated systems and ancillary services termed as Package-2. The contracts relate to supply of foreign equipments and providing local material and services including internal insurance, custom clearance, inland transportation, civil and mechanical works, installation, commissioning, acceptance and warranty for two years and annual maintenance for a period of four years for the consideration specified in the contracts. Each contract comprises of two parts (1) supply of goods and erection of three to six specimen remote stations and on the spot training of personnel and (ii) providing local material and services etc. In regard to the first part of the contract, the goods were delivered to the AIR India in USA which was appointed as carriers on the instructions of the GOAP which borne the cost of insurance and freight. The documents of title were sent by Courier to SBH at Hyderabad. In regard to the second part of the contracts, it is stated that a Memorandum of Understandi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dice to the foregoing main contentions of the applicant company, if the applicant company is found liable to pay any tax under the Income-tax Act, 1961, what would be the proportion of the net income content in the total receipts? Q.4. Whether on the facts and circumstances of the case and without prejudice to the main contention of the non resident applicant company, Is any part of their income liable to tax deduction at source and if yes at what rates. 2. In his comments, the jurisdictional Commissioner, the Director of Income-tax (International Taxation), Delhi , states that: the applicant appointed Mr. Naresh Goel as its Country Manager in India . He collects information about the invitation of tenders by various concerned in India including the Central and the State Governments for supplying data about the environmental monitoring and control systems such as weather, floods, cyclone, forecast system; in response to the tenders floated by GOAP, he submitted proposals which were approved and prepared by the applicant at Virginia, USA; he collects information as to whether the tender is awarded to the applicant and conveys the same to the applicant; he has authorization of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of Mr. Naresh Goel, the Country Manager of the applicant, cannot be treated as permanent establishment. Mr Abidi, Additional Commissioner of the jurisdictional Commissioner submitted that Mr. Naresh Goel is the agent of the applicant in India ; he has authority to negotiate and enter into contract and, indeed, he has signed the contracts with GOAP. It is asserted that the applicant has business connection within the meaning of section 9(1)(i) of the Act and also permanent establishment in India within the meaning of Article 7(4) of DTAA. Therefore, requirements of both section 9 as well as of DTAA are satisfied. It is not a case of sale of goods and supplying services but a contract of turnkey project. 4. Before adverting to the rival contentions of the parties, it may be pointed out that the answer to the second question is germane to any ruling on the first question. The present discussion will cover both the questions. In this backdrop, the short question that needs to be addressed is: whether any income/profit accrues or arises, or deemed to accrue or arise to the applicant in India from the sale of machinery/equipment and providing of services under the contracts with GOAP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 ITR 358], in that case a Government of India Undertaking(for short "the Undertaking") entered into two agreements with the non-resident company.The second agreement was in respect of delivery of machinery and equipment F.O.B. European and the time for the fulfillment of the delivery was the date of bills lading. On consideration of the relevant clauses of the agreement the Income-tax Appellate Tribunal held that the sale of machinery took place outside India and no part of the profit arising therefrom could be said to arise in India to the non-resident company. On a reference, the A.P. High Court held that the sale of machinery was not an independent or isolated transaction. It was part and parcel of the business venture or business connection, between the "Undertaking" and the non-resident. It was observed that in such a situation one has to apply the test of predominance and decide where the sale took place. The High Court answered the question thus, " a combined reading of the clauses of the agreement, we have no doubt that the sale of machinery did take place outside India . 8. Now we shall proceed to consider whether any part of profits can be deemed to accrue to the applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuate in India, shall be deemed to accrue or arise in India. The mandate contained in the Explanation is that for the purpose of aforementioned clause where the 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. Here, for the deeming provisions to apply we need to examine whether any income accrues or arises to the applicant (whether directly or indirectly) through or from any 'business connection' in India. 10. The important aspect we have to consider here is whether the applicant has "business connection" in India. The expression "business connection" was not defined for the purpose of the aforementioned provision, before March 31, 2003. By Finance Act, 2003 two Explanations were inserted after the then existing Explanation which is numbered as Explanation 1 of sub-section (1) of section 9 w.e.f. 1.4.2004. Explanation 2 which is relevant for our purpose defines the expression thus: "Explanation 2 - For the removal of doubts, it is hereby declared that "business connection" shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of non-resident and the activity in the taxable territories, a stray or isolated transaction not being normally regarded as a business connection." The requirement of continuity of transactions to form 'business connection' between a non-resident and a resident was laid down by the Supreme Court as long back in 1952 in Anglo-French Textile Company Limited (23 ITR 101). Hon'ble Mr. Justice Mahajan (as he then was) speaking for the Court, observed, "an isolated transaction between a non-resident and a resident in British India without any course of dealings such as might fairly be described as a business connection does not attract the application of section 42, but when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realizes the profits, such relationship does constitute a business connection". 12. In the light of above discussion, the essential features of "business connection" may be summed up as follows:- • a real and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement was entered into between the Government of Republic of India and the Government of USA which is referred to herein as DTTA. No authority is needed for this proposition. [However, see 263 ITR 706 in the case of Union of India & Another v. Azadi Bachao Andolan & Another]. Article 7 (1) of DTAA which deals with business profits and in so far as it is evident, reads thus: Article 7: Business profits "1. The profits of an enterprise of a Contracting States shall be taxable only in that State unless the enterprises carries on business in the other Contracting State through a permanent establishment situated therein. 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 is attributable to (a) that permanent establishment; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment. 2. x x x x 3. x x x x 4. x x x x x 5. x x x x x 6. x x x x x • For the purposes of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the following: • the use of facilities solely for the purpose of storage, display, or occasional delivery of goods or merchandise belonging to the enterprise; • the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or occasional delivery; • the maintenance of a stock or goods or merchandise belonging to the enterprise solely for the purpose of providing by the another enterprises; • the maintenance of a fixed place of business solely for the purpose purchasing goods or merchandise, or a connecting information, for the enterprise; • the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise. • Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 5 applies- is acting in a Contracting State on behalf of a an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned state, if • he has and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es (d) and (e) from the scope of the expression. Para 4, which commences with nonobstante clause, says that notwithstanding the definition of the expression outlined in para 1 and 2, a person acting in contracting state on behalf of enterprise shall be deemed to have a permanent establishment in the first mentioned state, if any one of the three clauses - (a) (b) (c) thereof - applies. Clause (a) deals with a person who has and habitually exercises authority to conclude contract on behalf of the enterprise in the first mentioned state unless (i) the activities are limited to those mentioned in para 3 (excluded activities) and (ii) if they are exercised through a fixed place of business would not make that fixed place of business, a permanent establishment under the provisions of that para. Clause (b) deals with a person who act without authority, therefore, is not relevant for our purpose. Clause (c) says that the person habitually secure orders in the first mentioned state wholly or almost wholly for the enterprise. Para 5 contains an exclusionary clause and says that an enterprise of a contracting State shall not be deemed to have permanent establishment in the other contracting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the signing of the contract against bank guarantee furnished by the applicant. 20% of the contract price is required to be paid between 30% of the installation upon issue of acceptance certificate by the purchaser. • It is also evident from Annexure I that consideration for providing local material and services including internal insurance, custom clearance, inland transportation, civil and mechanical works, installation and commissioning, acceptance and warranty for 2 years, the amount is payable in Indian rupees both under Package 2 as well as Package 3. The amount payable by GOAP for annual maintenance for a period of 4 years is both in US dollars and Indian rupee ( Package 3 - US $ 820584 i.e. Rs.19246424/- and Package 2 - US $ 327960 i.e. Rs.3147030 ). It is important to note here for items 2 and 3 noted in the above statement, as per the contract form (P.I and P.II), the applicant entered into a Memorandum of Understanding with Arraycom on 19.12.2001 (Annexure P.12) which inter alia recites as under: " SUTRON will supply the Gauging Equipment - including the DCPs, INSAT Satellite transmitters, Sensors and associated ancillary equipment that will be shipped from the USA ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
