TMI Blog2004 (10) TMI 87X X X X Extracts X X X X X X X X Extracts X X X X ..... with five other enterprises formed a consortium which was awarded by Petronet LNG Limited (for short the "Petronet") a contract of turnkey project for setting up Liquefied Natural Gas (LNG) receiving, storage and regasification facility at Dahej, Gujarat. The contract specified the role and responsibility of each member of the consortium and the consideration to be paid separately for the respective work of each member. The project work which fell to the share of the applicant involves to develop, design, engineer, procure equipment materials and supplies; to erect, construct storage tanks of a 5 MMTPA capacity with potential expansion to a 10 MMTPA capacity at the specified temperatures (-200 degrees Celsius) including marine facilities (jetty and island break water) for transmission and supply of the LNG to purchasers; to test and commission the facilities relating to receipt and unloading, storage and regasification of LNG and to send out of regasified LNG by means of a turnkey fixed lump-sum price time certain engineering procurement, construction and commission contract. The project is required to be completed in 41 months. The description of the work allotted to the applican ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax in India under the Act and/or the India-Japan tax treaty? If the answer to (3) above is in the affirmative, to what extent would the amounts received/receivable for such services be chargeable to tax in India under the Act and/or the India-Japan tax treaty? If the answer to (3) above is in the affirmative, would the applicant be entitled to claim deduction for expenses incurred in computing the income from offshore services under the Act and/or the India-Japan tax treaty? 2. The Director of Income Tax (International Taxation), Mumbai (referred in this ruling as the Commissioner) submitted the following comments. There is no dispute with regard to the particulars of the contract between the Consortium and the Petronet which was signed in India. In regard to offshore supply, it is stated that though the income is not received in India, it is definitely taxable as it is deemed to accrue or arise in India under sec. 9 of the Act. The applicant has entered into a contract of a turnkey project which has been signed in India. The project is one composite whole. The applicant is not only to procure the goods from outside India but also to have them unloaded at the port ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicant are in the nature of technical services chargeable to tax under section 9(1)(vii) of the Act and article 12 of the Treaty. The services are performed outside India and are not connected with the PE so article 12 of the Treaty will govern the taxability of the services; clause (5) of article 12 will not be attracted because the services are not related to the PE. Article 7 is applicable only when the technical services are performed by the PE or persons employed by it. Therefore, under both the Act and the treaty, the entire amount received by the applicant as fees for technical services shall be taxable at the rate prescribed in section 115A(1)(b)(B) and in article 12(2) i.e. 20% of the gross amount. 3. Mr. Pranav Sayta, who presented the case of the applicant, has submitted that as far as the income from onshore supply and onshore services is involved in the questions; the applicant has offered and is paying income tax under the Act in respect of onshore supply, onshore service, construction and erection. He argued that the price of the equipment and the machinery was paid outside India and the property in the goods passed to the Petronet at high seas, therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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; to (d) xxxxxxx A perusal of the provisions extracted above shows that all income accruing or arising whether directly or indirectly, inter alia, through or from any business connection in India shall be deemed to accrue or arise in India. Explanation (a) indicates that for the purpose of the 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. To attract the provisions referred to above, it must be shown that (i) the applicant has 'business connection' in India; and (ii) income accrues or arises (whether directly or indirectly) from such business connection in India. In such a situation explanation (a) limits the quantum of taxable income deemed to accrue or arise only to such part of the income as is reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action of sale is completed outside India, and not by or through the business connection in India, the profit cannot be deemed to accrue or arise on the sale of the goods in India . But where the consideration is composite and covers not only the price of the goods but also the costs of other operations to be performed by or through the business connection in India in regard to the sale of goods, the profit accruing or arising therefrom would be deemed to accrue or arise in India. It is not in dispute that in terms of the contract the equipment and the machinery have to be procured by the applicant for use in the project in India for which the price was paid by the Petronet through bank in Japan to the applicant; the documents of title were sent to the Petronet two weeks before the dispatch of the goods by sea and while the goods were on high seas, the property in the goods passed to the Petronet. The plea advanced by Mr. Mehrotra, however, is that as the applicant and not the Petronet took delivery of the goods by unloading them from the ship, got them cleared from Customs by paying duty and transported them to the site, therefore, the property in the goods did not pass to the Pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions the property in the goods passed to the assessee in India. The Tribunal held that the sales took place in Pakistan and the income therefrom accrued to the appellant there. On reference, the High Court of Calcutta held that unconditional appropriation of the goods took place in India notwithstanding c.i.f. terms and the profits from the sales accrued in India. On appeal to the Hon'ble Supreme Court the decision of the High Court was reversed holding that the sales took place in Pakistan and therefore the profits derived therefrom arose outside India. It was observed, "where in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee whether named by the buyer or not for the purposes of transmission to the buyer and does not reserve the right of disposal, he is deemed to have unconditionally appropriated the goods to the contract. The buyer's assent to the passing of the property in the said circumstances is implied and, when the seller despatches the goods and delivers them to the common carrier for purposes of transit to the buyer, the common carrier not only receives the goods as agent of the buyer but also assents to the approp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee entered into two agreements with the non-resident; the first agreement provided for training of personnel in Czechoslovakia, rendering of consultancy activities and supply of technical documentation and the second agreement related to delivery of machinery and equipment to FOB European port (the time for fulfillment of delivery was the date of bills of lading). The 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. The question referred to the High Court was: whether profits and gains accrued or arisen to the non- resident in India on account of supply of machinery and documentation to the said undertaking. The High Court held that: it was clear from the agreement that the insurance risk during the course of the journey was that of the assessee and it paid for the same and even the freight charges from the European port to the place of destination were paid by the assessee; the sale of the machinery which were goods within the meaning of the Sale of Goods Act was completely outside India and the sale of machinery though completed outside India, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia and that no operation regarding the sale was carried out in India. (emphasize supplied) Advance Ruling P. No. 13 of 1995 in re [228 ITR 487] (4) is a ruling of this Authority. ABC, the applicant was a company incorporated in France. It was engaged in the execution of large infrastructure project, particularly refineries, pipelines, chemical or petro-chemical plants etc. It entered into a contract with 'X and Y', sister concerns Indian companies for rendering engineering and other services. The duration of the contract was between 28 to 30 months. The contract was on turnkey basis. The project head office and the project site office of ABC were situated in India, which constituted its permanent establishment in India. One of the questions on which ruling was sought was, whether the payments under the agreement were taxable under article 13 and article 7 of the Treaty. It was ruled that the net effect of application of the treaty would practicably be the same as of the application of Section 9 (1) (i) read with the explanation and in the result the assessment should be restricted only to such part of the business profits as are attributable to the actual operation conducted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , inter alia, required installation of remote stations. The applicant was having a Country Manager at Hyderabad which was held to be its permanent establishment. The contract comprised of two parts. The first part related to supply of goods and erection of 3 to 6 specimen remote stations and on the spot training of personnel, and providing local material and services, etc. In regard to supply of the goods to the Government, it was found that the goods were delivered in the USA to the Air India which was appointed as carrier on the instruction of GOAP which was to bear the cost of freight and insurance. The consideration was paid in US Dollars in USA. The documents of title were sent to the GOAP by courier. One of the questions addressed to the Authority for Advance Rulings, was whether on the facts and circumstances of the case any income would accrue or arise under the Income Tax Act or can be deemed to accrue or arise under the Act to the non resident- Company in India. It was opined that though the contract was executed in India , the goods were delivered to carrier appointed by the purchaser in USA and consideration for sale of and installation of the machinery and for providin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deals with "business profits" and the relevant provisions read as follows:- Article - 7 The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise 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 that other Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. (3) to (7)xxxxxxxxx 9. Para 1 of article 7 provides that profit by an enterprise (applicant) of a contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods or services in question is made or placed directly with the overseas head office of the enterprise rather than with the permanent establishment. It would be clear that having regard to provisions of article 7 (1) of the Treaty read with para 6 of the protocol, supply of equipment of machinery (sale of which was completed abroad, having placed the order directly overseas office of the enterprise) the same should be within the meaning of the phrase directly or indirectly attributable to that permanent establishment. It follows that only so much of the amount received or receivable by the applicant shall be taxed in India as is directly or indirectly attributable to the permanent establishment as postulated in para 6 of the protocol. Inasmuch as the parties did not address in regard to the actual apportionment of the profits, we decline to pronounce ruling on the aspect of the apportionment of profits. Question No.3 relates to taxability, under the Act and /or the Treaty, of the amount received/receivable by the applicant from Petronet for offshore services. It has already been noticed that offshore services comprise of design, engineers including detail engineering in rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be the income of the recipient chargeable under the head "salaries'. From the description of the offshore services, referred to above, it is evident they fall within the main clause and it is nobody's case that they relate to construction, assembly, mining or like projects undertaken by the applicant nor is the income of the applicant from 'offshore services' chargeable under the head "salaries'. It follows that the price of offshore services would be deemed to accrue or arise in India under clause (vii) of sub-section (1) of section 9 of the Act. Faced with this situation Mr. Satya made a faint attempt to contend that the offshore services are part of the gamut of activities under the EPC contract, therefore, the income has to be treated as part of the business income and not as 'fee for technical services'. We would only say that this is an argument in despair and is wholly untenable for reasons which are too obvious to merit enumeration. 11. We shall now examine the position under the Treaty. The relevant clause of the Treaty is art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss amount of royalty or fee for technical services, is imposed. The expression "fee for technical services" is defined in para 4. In a case where the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein or and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with permanent establishment or fixed placed, para 5 excludes provisions of para 1 and 2 and applies provisions of article 7 or article 14, as the case may be. However, the case of the applicant that services are effectively connected with the PE but the price received therefor cannot be said to be directly or indirectly attributable to such PE of the applicant in India is on the face of it untenable. In our view, Article 12(5) is not attracted. Further, it is specifically provided by para 7 of article 7, that where income which is dealt with separately in other article of the treaty, the provisions of other articles shall n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the above discussions we rule on:- (i) Question No.1 that on the facts and in the circumstances of the case, the amounts received/ receivable by the applicant from Petronet LNG in respect of offshore supply of equipment and materials is liable to be taxed in India under the provisions of the Act and the Indian-Japan Treaty. (ii) Question No.2 that in view of the Explanation (a) to section 9(1)(i) of the Act, and/or Article 7(1) read with the Protocol of the India-Japan Treaty, the amount that would be taxable in India is so much of the profit as is reasonably attributable to the operations carried out in India; we decline to answer the other part of the question in regard to quantification of the amount taxable in India as the parties produced no evidence and did not address in this regard. (iii) Question No.3 that the amount received/receivable by the applicant from Petronet LNG for offshore services is liable to be taxed in India both under the provisions of the Act as well as under Indo-Japan Treaty. (iv) Question No. 4 that the entire amount received for offshore services is chargeable to tax under the Act and under the Treaty but at the rate not more than 20% ..... X X X X Extracts X X X X X X X X Extracts X X X X
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