Contracts for offshore supply of equipments where title of goods passes outside India, sale is concluded outside India and payments are received outside India in foreign currency, do not give rise to taxable income in India.

Applicant, a Korean company (FCO), is engaged in the business of manufacturing of electric wires and cables for purpose of power distribution. FCO was successful bidder in bids invited by an Indian company (ICO) for four different projects which involved supplying, laying, jointing, testing and commissioning of power cables. In respect of each of the projects, FCO entered into separate contracts with ICO viz.

(i) for offshore supply of equipments and material including mandatory spares on CIF basis, and (ii) contracts for onshore supply of material. FCO applied to AAR to determine whether consideration received from contract relating to offshore supply is taxable under Income-tax Act as also under India-Korea DTAA. FCO contended that as title to material and equipment passed outside India and as payment for offshore supply was also received outside India, no income accrued or arose to FCO by virtue of offshore supply contract in India. Reliance placed on SC ruling in the case of Ishikawajima Harima Heavy Industries2. The Tax Authority rejected the contention of FCO and held that the income from offshore supply contract was liable to tax in India on account of the following reasons:

? The separate contracts entered into by FCO with ICO were in effect part of composite contract and none of the contracts can exist without each other as breach of one is deemed to be breach of the other contracts as well. Also, all contracts were signed on the same date by FCO.

? The entire activity of onshore and offshore contracts was undertaken by the FCO itself. The offshore contract does not pertain to a case of only sale. This is supported by the fact that FCO was also responsible for activities such as insurance in respect of cargo, workers, compensation, etc.

? Delivery of equipment was not complete until the same is commissioned at the site of ICO. Further full payments against offshore contracts were payable only after successful demonstration of the equipment by FCO. The nature of the contract entered into was a turnkey project and therefore FCO had PE in India.

AAR Ruling

The clauses in the offshore supply contract regarding the transfer of ownership, payment mechanism in the form of letter of credit, etc. establish that the transaction of sale took place outside India. As consideration for offshore supply has separately been defined in the contract, it could be safely separated from the entire project consideration.

Reliance was placed on SC ruling in the case of Ishikawajima Harima (supra) and earlier AAR ruling in the case of Hyosung Corporation3 to support that incomes from offshore supply contracts are not taxable in India.

The Madras High Court decision in the case of Ansaldo Energia SPA4 relied on by the Tax Authority is distinguishable as in the facts of that case the entire turnkey project was awarded to the taxpayer as a whole and thereafter the consideration was split. In that case it was found that there was a façade created for the purpose of avoiding tax and that there was a price imbalance in the contracts which was skewed in favour of the offshore supplies contract, in order to minimise the tax liability. Subsequently it was held that consideration for offshore supply was taxable in India. In the current facts nothing in law prevents parties from entering into contract which provides for sale of equipment for a specified consideration although it is meant to be used in the fabrication and installation of a complete plant.

Even if FCO has a PE in India, the same would be for the purpose of carrying out contract for onshore supplies and the same would have no role in offshore supplies/services. Even though PE is involved in carrying out incidental activities relating to offshore supply, it cannot be said that it is involved in offshore activities.

Accordingly, FCO has no liability to tax in India on account of contract for offshore supply. 2 288 ITR 408 3 314 ITR 343 4 310 ITR 237