PRESENT
Hon'ble Mr. Justice Syed Shah Mohammed Quadri (Chairman)
Mr. K.D. Singh (Member)
A.A.R. NO. 618 OF 2003
Name and Address of Applicant
Ishikawajima-Harima Heavy Industries Co.Ltd
2-1, Ohtemachi 2-Chome, Chiyoda-ku, Tokyo Japan
Commissioner concerned
Director of Income-tax (International Taxation) Mumbai
Present for the Department
Mr. Pradip Mehrotra Addl. CIT (International Taxation) Range-3, Mumbai
Present for the Applicant
Mr. Pranav Sayta and Mr. Bijal Doshi
RULING
(By Mr. Justice Syed Shah Mohammed Quadri)
This application, under section 245Q(1) of the Income-tax Act, 1961 (for short the Act), is by a non-resident company, incorporated in and a tax resident of Japan . The applicant along 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 applicant is categorized thus: (1) offshore supply, (2) offshore services, (3) onshore supply, (4) onshore services and (5) construction and erection. The price is payable for offshore supply and offshore services [(1) and (2)] in US dollars, for onshore supply(3) in Indian rupees and for two items [(4) and (5)], namely, onshore services and construction and erection partly in US dollars and partly in Indian rupees. The price of offshore supply of equipment and material (including cost of engineering, if any, involved in the manufacture of such equipment and material), supplied from outside India on CFR basis, was received by the applicant by credit to its bank account in Tokyo and the property in the goods passed to the Petronet on high seas outside India (Ex.D2.1). Though the applicant unloaded the goods, cleared them from Customs and transported them to the site, it was for and on behalf of the Petronet and the expenditure including custom duty was re-imbursed to it. The price of offshore services for design and engineering including detail engineering in relation to supplies, services and construction & erection and the cost of any other services to be rendered from outside India , was also paid in US dollars in Tokyo . The Government of Republic of India concluded a Convention with the Government of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income which was notified on March 1, 1990 (hereinafter referred to as “ Treaty), was given effect to from 29 th December, 1989 . On these facts, the applicant proposed the following five questions for pronouncement of rulings by the Authority:
• On the facts and circumstances of the case, whether the amounts received/receivable by the applicant from Petronet LNG for offshore supply of equipments, materials, etc. are liable to tax in India under the provisions of the Act and India-Japan tax treaty?
• If the answer to (1) is in the affirmative, in view of Explanation (a) to section 9(1)(i) of the Act and/or Article 7(1) read together with the protocol of the India-Japan tax treaty, to what extent are the amounts reasonably attributable to the operations carried out in India and accordingly taxable in India?
• On the facts and circumstances of the case, whether the amounts received/receivable by the applicant from Petronet LNG for offshore services are 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, 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 when they arrive in India, pay Customs duty and take the same to the project site; the Customs duty is, however, reimbursable to the applicant. It is not correct to say that the property in goods passed to the Petronet at high seas as the applicant itself is taking actual delivery of the goods and not the Petronet. There is business connection between the applicant and the Petronet. The project which involves numerous activities is to be completed in 41 months and it is yielding profits to the applicant. It is disputed that the sale of the equipment and machinery has taken place outside India . It is stated that the payment of consideration for the goods outside India would have a bearing where except the sale of goods nothing else is involved. In the present case there is a composite contract of which offshore supply is a small ingredient and the bifurcation of the contract into offshore and onshore is not relevant in the present case and the profits from offshore supply and services are taxable in India. It is added that the income from offshore supply would be governed by article 7 of the Treaty which deals with business profits. There is no denying of the fact that the applicant has been in India since January, 2001 and has been offering its business income from onshore supply, onshore services, construction and erection. The offshore supply is also inextricably linked to the PE. The applicant and the consortium are responsible for setting up the plant in its entirety, which involves bringing in equipment and material, spare parts and men etc. In the turnkey project, the offshore supply cannot be treated as a sale of goods so the bifurcation of price is not proper. The entire income of the applicant is deemed to accrue in India by virtue of section 9 but in view of the Explanation appended to clause (i) of sub section (1) only so much income would be taxable which is reasonably attributable to the operations carried out in India . In case of offshore supply, the cost of goods including the cost of manufacturing and profits would accrue at the site of manufacturing, therefore, major part of the profit would arise at the place of sale or where the contract is executed. It is submitted that conservative estimate is that almost 80% of the profit would be attributable to the PE and only 20% can be said to accrue in Japan .
The offshore services rendered by the 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, the sale was completed outside India , as such the profit arising to the applicant on the offshore supply of equipment and machinery would not be taxable in India .
4. Mr. Pradip Mehrotra, Addl. CIT, who appeared for the Commissioner, submitted that the procurement of equipment and the machinery was not a case of sale of goods but was a part of turnkey project so the principles governing the sale of goods would not apply; all the profits accruing to the applicant from the execution of the contract including procurement of offshore supply and services would be taxable in India both under section 9 of the Act as well as under Article 7 of the Treaty.
5. First we shall take up questions 1 and 2 which go together. Question no. 1 is the main question and question no. 2 is consequential. Question no. 1 is in two parts. The first part relates to applicant's tax liability under the provisions of the Act and the second part relates to applicant's tax liability under the provisions of the Treaty.
6. It may be apt to mention that Section 5 of the Act deals with the scope of total income of any previous year of a person on which income tax is chargeable under Section 4 of the Act. Sub-section (1) of Section-5 relates to total income of a resident. The applicant is a non-resident in India so sub-section (2) thereof will be attracted. It contains two clauses – (a) and (b) and two explanations. Clause (a) says that the total income of a non-resident shall include all income from whatever source derived, which is received or deemed to be received in India in any previous year by or on behalf of such person. The import of clause (b) is that the total income of a non-resident includes all income, from whatsoever source derived which accrues or arises or is deemed to accrue or arise to him in India during any previous year. This takes us to Section 9(1)(i) and the explanation thereto which are pertinent here and read as follows:-
“9. (1) The following incomes shall be deemed to accrue or arise in India :-
• all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, [ * ] or through the transfer of a capital asset situate in India.
Explanation – For the purposes of this clause-
• in the case of a 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 (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 reasonably attributable to the business operations carried out in India .
7. It is a common ground that the applicant has business connection in India . In regard to requirement (ii), there can be no denial of the fact that income accrues to the applicant from offshore supply. The moot point is whether such income accrues from business connection in India . The turnkey project contract dated January 19, 2001 entered into between the Petronet and the consortium of which the applicant is a member, involves business operations within and outside India . In so far as the applicant is concerned Table B furnishes the description of the work and the contract price, which reads as follows:
TABLE B (Break-up of the contract price of IHI)
Description
Amount in INR
Amount in USD
Offshore supply
Nil
3,37,93,325
Offshore services
Nil
1,34,94,577
Onshore supply
23,80,14,658
Nil
Onshore services
10,13,18,102
1,09,10,760
Construction & Erection
1,51,13,91,702
70,48,987
Total
1,85,07,24,462
6,52,47,649
We are concerned here with offshore supply, the price of which is payable in US dollars. Mr. Sayta's contention is that no profit from the offshore supply can be deemed to accrue or arise in India as the sale of equipment was effected outside India in which the PE had no part to play. Mr. Mehrotra submitted that profit should be deemed to accrue to the applicant in India from the sale of goods which is part of the composite contract through business connection and that it could not be treated as a case of goods outside India ; that in any event there was no transfer of property in the goods outside India .
Where in connection with the execution of a contract, the contractor undertakes to procure/supply any goods for consideration from outside India (to the owner of the project) for use in the project, a question often arises whether on such procurement/supply of goods, when property in the goods passes to owner outside India, profit on such sale of goods would be deemed to accrue or arise in India. There can be no doubt that this is a ticklish question. It is a question of fact and has to be determined on the facts of each case. It appears to us that when the consideration represents only the price of the goods and the transaction 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 Petronet. We are afraid we cannot accede to the contention of Mr. Mehrotra. It is the settled position in law that property in the goods passes to the purchaser when the goods are dispatched and documents of title are handed over or sent by post to the purchaser unless the parties expressed a different intention in the contract. On the facts of this case, it is clear that the price of the goods was paid in Japan; the document of title were dispatched two weeks before loading of the goods on ship and while the goods were on high seas, the document were with the purchaser. Indeed, the insurance for transportation of the goods was also borne by the Petronet. We have no hesitation in holding that property in the goods passed to the Petronet while the goods were on high seas. In so far as the activities of the applicant for taking delivery of the goods from the ship, payment of custom duty and transportation of the goods to the site, are concerned, the applicant can be said to be acting as an agent of the Petronet as per the term of the contract. It is a common ground that the applicant is re-imbursed the expenses incurred including the custom duty paid, in getting the goods cleared from the Customs. In any event these facts do not mitigate against the property in the goods passing to the applicant.
On this aspect we shall refer to the decisions cited by Mr. Sayta.
In Mahabir Commercial Co. Ltd. v. CIT, West Bengal [86 ITR 417] (1), the appellant was a dealer in jute in erstwhile East Pakistan , which executed certain c.i.f. contracts with certain buyers in Calcutta . It was provided therein that the delivery of the goods would be free to the buyer's mill siding or at ghat in India . The buyers opened letters of credit with banks at Calcutta , which had branches in Pakistan . On presentation of the shipping documents the bank in Pakistan under the irrevocable letter of credit was to make payment of the invoice value to the appellant in equivalent Pakistan currency. The appellant placed the contracted goods on board the steamer in Pakistan and obtained the bills of lading in the name of buyers. The bills of exchange together with bills of lading and the invoices were negotiated with the bank in Pakistan and the bank forwarded the documents to its office in Calcutta which in turn sent the documents to the purchasers. The question was whether on the basis of transactions 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 appropriation made by the seller”
CIT, Delhi vs. Mewar Textile Mills Ltd.[91 ITR 542] (2). In that case the assessee put on rails in Bhilwara (outside British India ), certain bales of cloth and took the railway receipts in the names of consignees who were dealers in British India and sent the railway receipts to them by post. The purchasers paid the sale price to a banker in British India who was also the banker of the assessee. The Tribunal found that the banker acted as agent of the purchasers and not of the assessee. The question for consideration of the Hon'ble Supreme Court was, whether the profits earned by those sales were taxable in British India . It was held that the property in the goods passed to the purchasers in Bhilwara outside British India and the income from the sales did not accrue in British India and that since the banker functioned only as the agent of the purchasers no part of the income was realized in British India .
These decisions support our conclusion, noted above. But this disposes of only a miscellaneous issue and does not answer the point in regard to accruing/arising of profit through or from business connection and whether any operations of the business are carried out in India . For this purpose we have to look to the terms of the contract. It is not just a case of the Petronet purchasing certain goods from the applicant outside India . In connection with the offshore supply on sale, certain operations are inextricably linked in India – signing of contract in India which imposes liability on the applicant to procure equipment and machinery in India , receiving, unloading, storing and transporting, paying demurrage charges and other incidental charges on account of delay in clearance. The price aforementioned covers not only the price of the goods but also of all the aforementioned operations which are carried out in India and from which income accrues to the applicant. It follows that income accrued to the applicant from offshore supply through business connection in India and that some operations of the business were carried out in India .
It will be apposite to refer to the following cases:-
The decision in Additional CIT vs. Skoda Export, Praha [172 ITR 358] (3) was rendered by a division bench of the Andhra Pradesh High Court. There the assessee was a Government of India undertaking (for short the “undertaking”). The assessee 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 not an independent or isolated transaction and that it was a part and parcel of the business venture or business connection between the assessee and the non-resident.
The bench observed;
“According to the main clause, all income accruing or arising, whether directly or indirectly, through or from any business connection in India , shall be deemed to be income accruing or arising in India . If this were the only clause, there is no doubt that the income arising by the sale of machinery would be income arising in India , notwithstanding the fact that the sale took place outside India . This is for the reason that the sale of machinery is not an independent or isolated transaction, but is part and parcel of the business venture, or business connection between the assessee and the non-resident. The sale of machinery was in pursuance and in terms of the agreements between them, which provided for setting up Plate and Vessels Plant at Visakhapatnam in India , but explanation appended to clause (i) of Section 9 (1) seeks to exclude those operations which are not carried out in India . According to this explanation, in the case of business of which some operations are carried out in India and some outside India, income of the business deemed under Section 9 (1) (i) shall be “only such part of the income as is reasonably attributable to the operations carried out in India. The explanation contemplates a business comprising several operations, some of which are carried out outside India . In such a situation, only the operations carried out within India shall be taken into account a reasonable portion thereof shall be treated as income accruing or arising in India . The operations which are carried out outside India shall not be taken into account for this purpose. [see CIT v. Toshoku Ltd.(1980) 125 ITR 525 SC at pp.530-531]”
From a careful reading of the judgement it is clear that the Tribunal recorded a finding of fact that no part of the profit could be said to arise in India from the sale of machinery which took place outside India . Further, the High Court reached the aforementioned conclusion, namely, the profit arising therefrom could not be deemed to arise in India on the basis of the wording of the explanation and on the findings that the business venture comprised of various operations, one of which being the sale of machinery which took place outside India 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 the permanent establishment of ABC company, in India.
Income Tax Officer and others v. Sriram Bearings Ltd. [224 ITR 724] (5). In that case, the respondent assessee company entered into a technical collaboration agreement with a non-resident company – Japanese company. The assessee proposed to manufacture cylindrical, spherical and tapered roller bearings in India . The said agreement was in two parts – one is to sell trade secrets (know-how) by the Japanese company relating to the products and manufacturing technique which also included the patent rights and advice of plant layout and installation. The consideration for this part of the agreement was 1,65,000 US dollars, free of Indian income tax and payable in Japan . The second part related to rendering of technical assistance and training of personnel by the Japanese company. The question for consideration was whether the income of 1,65,000 US dollars payable by the Indian company to the Japanese company could be said to have accrued to the Japanese company in India so as to deduct income tax at source. The Calcutta High Court held that the said amount did not accrue to Japanese company in India . On appeal to the Hon'ble Supreme Court by the Revenue, it was held, affirming the decision of the High Court, that there was no basis to say that any part of the sum of 1,65,000 US dollars had been earned in India.
In Horizontal Drilling International S.A. vs.CIT [237 ITR 142] (6), the appellant company was a French company. It was awarded a contract by the Gas Authority of India Limited (GAIL) for installation of gas pipeline crossing under Yamuna River with optic fibre cable for a lump sum consideration payable in U.S. Dollars. The applicant completed the work within six months. The applicant sought advance ruling on the question as to whether the amount received by it from GAIL was taxable in India . It was ruled by the Authority that the applicant was not liable for tax under the Income Tax Act on the profit arising from the contract and receivable from the GAIL in the absence of permanent establishment in India in view of article 5 and article 7 of DTAA.
A recent ruling of the Authority was pronounced in re Sutron Corporation [268 ITR 156] (7). There, the applicant was a non-resident company of USA . It was awarded contract by the Andhra Pradesh Government (GOAP) in respect of a project which, interalia, 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 providing service was received by the applicant in USA , no income would accrue or arise to the applicant in India . In regard to deemed accrual or deemed arising of income under sec. 9(1)(i) read with the explanation appended thereto, it was ruled that the business profit that could be deemed to arise/accrue to the applicant in India through business connection from the sale, installation of equipment and machinery as well as furnishing of services would be taxable in India if they are through a permanent establishment in India and only so much as is attributable to the business operations of the PE in India. On facts it was found that certain operations were carried out in connection with the sale in India .
From the above discussions, the following principles emerge:-
• In a case of sale of goods simpliciter by a non-resident to a 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 deemed to accrue or arise to the seller in India .
• In a case of transaction of sale of goods by the non-resident to an Indian resident which is a part of a composite contract involving various operations within and outside India , income from such sale shall be deemed to accrue or arise in India if it accrues or arises through or from any business connection in India .
• In the case of a business of which all operations are not carried out in India, the deemed accrual or arising of income shall be only such part of the income as is reasonable attributable to the operations carried out in India.
• Whether there is business connection in India or/and whether all operations of the business are not carried out in India are questions of fact which have to be determined on the facts of each case.
On the facts of this case, discussed above, and bearing in mind the aforementioned principles it cannot but be concluded that profit shall be deemed to accrue/arise to the applicant in India on offshore supply of equipment/machinery but the profit deemed to accrue/arise in India shall be only such part of profit as is reasonably attributable to the operations carried out in India.
8. Tax liability under the Treaty
By virtue of article 1 of the Treaty, the applicant being a tax resident of Japan , is entitled to the benefit of the Treaty. Article 7 of the Treaty 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 contracting state (Japan) shall be taxable only in that contracting state (Japan) unless the enterprise (applicant) carries on business in the other contracting state (India) through a permanent establishment situated therein (India). If the enterprise (applicant) so carries on business the profits to the enterprise (applicant) may be taxed in the other contracting state ( India ) but only so much of them as is directly or indirectly attributable to that permanent establishment. The principles for apportioning profits attributable to the permanent establishment are outlined in para 2 of article 7.
10. Article 5 of the Treaty defines the term “permanent establishment”. Para 3 of article 5 provides that a building site or construction, installation or assembly project constitutes a permanent establishment only if it so used for last more than six months. It is an admitted case that the applicant has permanent establishment in India within the meaning of article 5(3) of the Treaty. It is, therefore, unnecessary to refer to other paras of this article. However, it is necessary to refer to para 6 of the protocol which is in the following terms:-
“With reference to paragraph 1 of article 7 of the Convention, it is understood that by using the term “directly or indirectly attributable to that permanent establishment', profits arising from transactions in which the permanent establishment has been involved shall be regarded as attributable to the permanent establishment to the extent appropriate to the part played by the permanent establishment in those transactions. It is also understood that profits shall be regarded as attributable to the permanent establishment to the above mentioned extent, even when the contract or order relating to the sale or provision of goods or services in question is made or placed directly with the overseas head office of the enterprise rather than with the permanent establishment”.
The substance of the protocol quoted above, represents the consensus reached between the parties to the treaty in regard to the meaning of the phrase “directly or indirectly attributable to that permanent establishment” employed in paragraph 1 of article 7. Further, profits shall also be regarded as attributable to the permanent establishment to the extent indicated in the said protocol even when the contract or order relating to the sale or provision of goods 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 relation to the supply, services, construction and erection and any other services rendered outside India . It is submitted by Mr. Sayta that the said services fall under clause (vii) of sub-section (1) of section 9 of the Act but are covered by the exclusionary clause of the definition of the expression ‘fee for technical services' in explanation 2 to the said provision. So they are not taxable; it is also stated that the explanation to clause (i) of sub-section (1) of section 9 is not attracted. We are afraid we cannot accept the contention of Mr. Sayta.
The relevant provisions of clause (vii) of sub-section (1) of section 9 are in the following terms:
Income deemed to accrue or arise in India
9. (1) The following incomes shall be deemed to accrue or arise in India :
• to (iii) xx
• Income by way of fees for technical services payable by -
• the Government; or
• a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or
• a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India ;
Provided that x xx
Explanation 1 xx xx
Explanation [2] : [For the purposes of this clause, “fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services(including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “salaries”.]
A plain reading of provisions quoted above, shows that income by way of ‘fees for technical services' payable by any of the entities specified in the clauses (a) to (c) shall be deemed to accrue or arise in India and that for purposes of clause (vii) ‘fee for technical services' means any consideration (including any lump sum consideration) for rendering any managerial/technical or consultancy services including the provisions of services of technical or other personnel but 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 article 12 and in so far as it is relevant for our purpose, runs thus:
Article 12
• Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State .
• However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 20 per cent of the gross amount of the royalties or fees for technical services.
• xxxx xxxx xxx xx xx xx xxx xxx xxx xxx xx xx xx xx xx xx
• The term “fees for technical services” as used in this article means payment of any amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred to in article 14 in consideration for the services of a managerial, technical or consultancy nature including the provisions of services of technical or other personnel.
• The provisions of paragraphs 1 and 2 shall not apply if 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 performs in that other Contracting State independent personal services from a fixed base situated therein, and the right, property, or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply.
Xx xx xx xx
Para 1, quoted above provides that ‘Royalty and fees for technical services' arising in a Contracting State and paid to a resident of the other Contracting State, may be taxed in the other Contracting State. It is, however, postulated in para 2 that ‘Royalties and fee for technical services' may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State (India), if the recipient is beneficial owner of the Royalty and fee for technical services and a ceiling of 20% on the rate of tax on the gross 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 not be affected by article 7. Inasmuch as fee for technical services is specifically provided in article 12 the same cannot be brought under article 7 of the Treaty. We are, therefore, clear that the price of offshore services is taxable under the Act as well as under the treaty.
12. Question No. 4 is a consequential question. There is nothing in clause (vii) of sub-section (1) of Section 9 of the Act or Article 12 of the Treaty which apportions the amount received by the applicant for purposes of taxability thereunder. However, in view of sec. 115A(1)(b)(B) and para 2 of article 12, tax will be payable at the fixed rate of 20% of the gross amount of fee for technical services.
Question No. 5 is also a consequential question and relates to claim of deduction of expenses incurred in computing the income from offshore services under the Act. Mr. Sayta submitted that the amount received from offshore services could not be treated as ‘fee for technical services' as defined in Explanation 2 to sub-section (1) of section 9, so section 44D should not apply.
13. It will be useful to notice that by Finance Act, 1976 special provisions including Sec. 44D were inserted in the Act for computing income by way of Royalties etc. in case of foreign companies Section 44D commences with a nonobstante clause and excludes application of sections 28 to 44C in the case of a foreign company. Clause (b) of section 44D mandates that in computing the income by way of royalty and fee for technical services received from Government or an Indian concern in pursuance of agreement made after 31 st March, 1976 but before 1 st April, 2003, no deduction in respect of any expenditure or allowances under section 28 to 44C shall be allowed. We have already held above that the amount received or receivable by the applicant from the Indian company does not fall within the exclusionary clause of the definition of fees for technical services contained in Explanation 2 to clause (vii) of sub-section (1) of section 9 of the Act, therefore section 44D cannot be excluded.
In so far as the Treaty is concerned both section 115A(1)(b)(B) and para 2 of Article 12 of the Treaty clearly indicates that the whole technical fee without any deduction is chargeable to tax, however, the tax so charged shall not exceed 20% of the gross amount of the royalty or fee for technical services.
In the light of the above discussions we rule on:-
• 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% of the gross amount.
• Question No.5 that the applicant would not be able to claim any deduction in computing the income from offshore services under the Act, and/or under the Indo-Japan Treaty.
Pronounced by the Authority in the presence of the parties on this 11 th day of October, 2004
Sd/-
(JUSTICE S.S.M. QUADRI)
CHAIRMAN
Sd/- /--
(K.D. SINGH)
MEMBER
F.No. AAR/618/2003 Dated ….
(A) This copy is certified to be a true copy of the advance ruling and is sent to:
• The applicant.
• The DIT(International Taxation), Mumbai
• The Joint Secretary (FT&TR.), M/Finance, CBDT, North Block, New Delhi .
• Guard file.
• In view of the provisions contained in Section 245S of the Act, this order should not be given for publication without obtaining prior permission of the Authority.
(Shyama S. Bansia)
Addl. Commissioner of Income Tax
