TMI Blog2009 (3) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... Reliance, ONGC, Sterlite and GAIL. This application is in respect of the contract entered into with Sterlite Industries (I) Limited (hereafter referred to as Sterlite) in connection with the setting up of an Alumina Refinery in Orissa. The contract entered into with Reliance Petroleum Limited was in connection with the pipeline project and it is the subject matter of another application AAR/747/2007, which has been disposed of today. 1.1. We are concerned here with the contract entered into between Sterlite and the applicant evidenced by the Agreement executed by and between the said parties on 1st August, 2003. The services required to be performed by the applicant under the Agreement are broadly engineering services and to be more specific, they are conceptual and basic engineering services and providing deliverables as set out in Annexure-I and IV to the agreement for the design of an Alumina Refinery with a capacity of 1.4. million tonnes per year. The next stage in the execution of engineering services is known as Detailed Engineering. The detailed engineering services were not done by the applicant. 1.2. Before we refer to some relevant clauses in the Agreement, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of this contract? (c) If answers to (a) and (b) are in affirmative, the receipts from this contract are chargeable at the rate of 15%? 2.1. However, the applicant in the written submissions filed on 13.10.2008 sought to amend the question (c ) as follows: (c) If answers to (a) and (b) are in affirmative, the receipts from this contract are taxable only to the extent of services utilized as well as rendered in India and, therefore, the services outside India is not to be taxed." The amended question has been raised placing reliance on the decision of the Supreme Court in the case of Ishikawajima- Harima Heavy Industries vs. DIT^ (for short Ishikawajima). Relying on the said decision, the applicant submits that the receipts related to the operations carried out in Australia cannot be taxed in India. However, according to the applicant, the amount worked out on the basis of man-hours spent by the applicant's personnel in India can be taxed in India. We have permitted arguments on the amended question. 3. We shall now refer to the relevant clauses in the Agreement. Art. 2 bears the heading 'Scope of Work'. Art.2.1 reads thus : "2.1 Engineering Services WORLEY shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uiries relating to long-lead equipment items, providing assistance to Sterlite and the Detail Design Engineer in the development of capital estimates, estimating all operating unit consumptions for process plant, providing operating and training manual for the entire project etc. Under the head 'implementation strategy', it is stated that the preliminary phase of the project will involve the collection and verification of available data and consolidation of information that is available. From this information, a generic process block-diagram will be proposed for the purpose of selection of the particular unit operations that will be required. Upon the selection of appropriate technologies, a more detailed process block-diagram would be developed. Then, the inputs required from Sterlite during conceptual Engineering phase are set out. In para 1.5 of Annex-1, it is stated that Sterlite representative with sign-off authority will be present in the Worley design office for the duration of the project and that Sterlite will provide at least one engineering person to the Worley team. 3.2 Annex-4 refers to 'deliverables' and the details thereof are set out in a Table. Broadly it is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ggregate period that they spent in India was for 24 days in the first year and 70 days in the next year as per the details given. Two or three employees of the applicant stayed in India for considerable time i.e. about a month. But, that by itself does not give rise to an inference that the applicant had set up a fixed establishment in India. Having regard to the nature of services involving preparation and transfer of various plans, designs and drawings connected to conceptual and basic engineering services, it can be said as submitted by the applicant, that most of the work and services could be done from the applicant's office abroad i.e. at Perth. The deemed provision in Art. 5.3 (c), is not applicable here. We, therefore, accept the contention of the applicant that no permanent establishment was set up by the applicant to perform the services under the contract with Sterlite. The Revenue, as already stated, has not refuted the applicant's contention as regards the PE. 5. The only question that was debated before us was that related to the amended question for which the applicant seeks support from the decision of the Supreme Court in Ishikawajima case. Based on that decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices undertaken in India, the reasoning therein would apply a fortiori to the present case. It is the admitted case of the applicant that its personnel came to and stayed in India for collecting data and information from Sterlite which was done at 'ground level'. Further, as stated by the applicant, transfer of deliverables took place in India and the staff of the applicant visited India for 'transferring and testing' the basic engineering deliverables under the Contract. We have already noted the details of visits and the duration of stay of the applicant's personnel in India. Though as stated by the applicant, the core activities of preparation of designs and plans took place in Australia, the activities and services undertaken by the applicant at various stages (both before and after the preparation of designs and other deliverables) are by no means negligible or insufficient. In fact, they were essential to carry out the obligations under the Contract. Hence, it cannot be said that there is no sufficient territorial nexus for the levy of tax under the Act read with the provisions of the DTAA. We would like to state in reiteration of what we said in AAR/747.2007 that in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of operations in more than one jurisdiction would have territorial nexus with each of the jurisdictions on actual basis." If that be so, it may not be correct to contend that the entire income accrues or arises in each of the jurisdictions. To understand the implications of this observation, we have to advert to the statement of law in the later paragraphs. At page 445, it was observed "in a case of this nature, interpretation with reference to the nexus to tax territories will also assume significance ……………. Having regard to the internationally accepted principle and DTAA, it may not be possible to give an extended meaning to the words "income deemed to accrue or arise in India" as expressed in section 9 of the Act. ……………….. whatever is payable by resident to a non-resident by way of fee for technical services (FTS), thus, would not always come within the purview of Section 9(1)(vii). It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax". Then, it was observed that "services of a non-resident utilized in India may not have much relevance in determining whether the income of the non-resident accrues or arises in India". However, the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied, to determine which fiscal jurisdiction can tax that particular part of the transaction.) Applying the principle of apportionment to composite transactions which have some operations in one territory and some in others, is essential to determine the taxability of various operations." (p.443) Then, at page 445, it was stated: "Thus, if any services have been rendered by the head office of the appellant outside India, only because they were connected with permanent establishment. Even in relation thereto, principle of apportionment shall apply. (sic) (at p.445) The Authority, in our opinion, has committed an error in this behalf, as if services rendered by the head office are considered to be the services rendered by the permanent establishment, the distinction between Indian and foreign operations and the apportionment of the income of the operations shall stand obliterated." (at p.446) 8.2. It appears that the observations of the Supreme Court on the aspect of apportionment of income are based on the decision in Anglo-French Textiles Co. vs. CIT (1952) 25 ITR 27. The proposition stated in the earlier decision of CIT vs. Ahmedbhai Umarbhai Co., Bombay which arose un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he income, profits or gains arose or accrued within the taxable territories or without the taxable territories would have to be decided having regard to the general principles as to where the income, profits or gains could be said to arise or accrue. Section 42 of the Indian Income-tax Act has no relevance to the determination of this question because it is mainly concerned with income which is deemed to have arisen or accrued and not with income which actually arises or accrues within the taxable territories. Section 42(3) also is a part of the scheme which is enacted in Section 42 and cannot help in the determination of the question before us." "If therefore Section 42(3) has nothing to do with the determination of the income arising in the taxable territories as distinguished from the income arising without the taxable territories as understood in Section 4A(c)(b) of the Act what we have got to consider is whether there is anything in the Act which prevents the application of the general principle of apportionment of income, profits or gains between those which are derived from business operations carried on within the taxable territories and those which are derived from busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices and onshore supplies/services. Regarding the latter, there was actually no dispute. The Supreme Court was not concerned with a situation where in respect of a distinct segment of the contract, for e.g, offshore services, part of the work was done in India and part of it was done outside the territory of India. We cannot understand the observations of the Supreme Court as extending the principle of apportionment to a situation where there is a single Agreement covering only one particular type of work/services, as in the present case. It does not follow from what has been stated by Supreme Court that the services or work covered by such agreement should be split up depending on the actual place of performing them and the profits should be apportioned accordingly. Proportionate deemed income in respect of a single agreement which does not have severable elements was not contemplated by the Supreme Court as a concomitant of the principle of apportionment. We do not think that S.9(1)(vi) can be interpreted in that manner. 10. In the light of above discussion, the questions are answered as follows: The questions (a) (b) are answered in the affirmative, agreeing with the con ..... X X X X Extracts X X X X X X X X Extracts X X X X
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