November 2008
Income from offshore supply of equipment not taxable in India if property in equipment passes outside India.
By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
Reading Time 4 mins
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New Page 33 LG Cable Ltd. v.
DDIT
(2008) 113 ITD 113 (Del.)
S. 5, S. 9, S. 90, Income-tax Act, Articles 5, 7, India-Korea
DTAA
A.Y. : 2002-2003. Dated : 8-8-2008
Issue :
Income from offshore supply of equipment not taxable in India
if property in equipment passes outside India.
Facts :
The assessee was a Korean Company (‘KorCo’). KorCo had set up
a project office in India after obtaining approval of RBI. In 2001, it was
awarded two contracts by PGCIL. One contract was for onshore execution of fibre
optic cabling system package project (‘onshore contract’). The other contract
was for offshore supply and offshore services (‘offshore contract’). KorCo
rendered the services under the onshore contract through its project office, for
which it maintained separate books of account since the project office
constituted a PE in India under Article 5 of DTAA. Income attributable to
onshore contract was offered for tax. However, income attributable to offshore
contract was not offered for tax on the ground that as property in equipment was
transferred outside India, sale transaction of offshore supply of equipment had
also taken place outside India. KorCo supported its contention with the
following facts :
(i) The bill of lading in respect of equipment sold was
issued in Korea in favour of the PGCIL (buyer) and the notified party was also
PGCIL;
(ii) The bill of entry clearly showed that the importer was
PGCIL and the goods were directly transported to the site of PGCIL and not to
that of KorCo;
(iii) As per terms of the contract, PGCIL was co-insured
under the insurance policies;
(iv) In terms of the contract, the ownership of equipment
and materials supplied from outside India was transferred to PGCIL in the
country of origin, i.e., in Korea.
The AO did not accept KorCo’s contention and held that income
from offshore contract was taxable in India. He determined 10% of the contract
value as the income chargeable to tax in India.
In appeal, CIT(A) after considering particular article of
both the contracts, held that: the two contracts were dependent on each other
and one cannot be completed without completing the other; KorCo’s responsibility
does not end merely upon delivery of equipment, but it continues till the
successful completion of the project as otherwise both contracts could be
cancelled; thus, there is interrelation and interdependence of both contracts
and it was a composite contract; it was a colourable device adopted by KorCo;
and hence, the income was taxable in India in terms of S. 9(1)(i) as well as
under Article 7 of DTAA.
Held :
The Tribunal observed and held on the various aspects as
follows :
(i) U/s.90(2) of Income-tax Act, KorCo is entitled to more
beneficial of the treatments under DTAA or under Income-tax Act. However, this
question would arise only if provisions of Income-tax Act are applicable. If
they are not, question of applicability of DTAA would not arise. As held by
the Supreme Court in Union of India v. Azadi Bachao Andolan, (2003) 263
ITR 706 (SC), no provision of DTAA can possibly fasten a tax liability where
the tax liability is not imposed by the Income-tax Act.
(ii) While considering almost identical facts and
circumstances and even where there was a single agreement for both supply and
erection of equipment, the Supreme Court [in Ishikawajima-Harima Heavy
Industries Ltd. v. DIT, (2007) 288 ITR 408 (SC)] had held that income from
offshore supply of material/equipment did not arise in India and was not
taxable in India. It was not open to the Revenue to contend that this decision
was not applicable to the facts of the case.
(iii) Under the Sale of Goods Act, 1930, the property in
goods passes to the buyer as per the intention of the parties, which is
gathered from the facts and circumstances. The offshore contract specifically
provided that property would pass to PGCIL when KorCo loaded the goods and
handed over the documents (including bill of lading) to the nominated bank.
The payment was also received outside India. Thus, the property in goods was
transferred outside India. Merely because certain terms intended to protect a
buyer’s interest are included, it cannot be construed that the property in
goods had not passed or that it had passed conditionally.
(iv) Since delivery of goods, documents and receipts of
substantial part of sale consideration had taken place outside India, the sale
took place outside India and such income would not be taxed under Indian law.
The income from offshore contract was not taxable in India.
