10 Explanation 1(a) to section 9(1)(i) of the Act – consortium comprising non-resident foreign company and ICo is not an AOP since there was clear demarcation in the work and cost between the consortium members; contract was clearly divisible since there was no business connection in India, offshore supplies were not taxable in India.

TS-497-ITAT-2017(Mum)

Vitkovice
Machinery A.S. vs. ITO

A.Y: 2011-12                                                                      

Date of Order:
27^th October, 2017

Explanation
1(a) to section 9(1)(i) of the Act – consortium comprising non-resident foreign
company and ICo is not an AOP since there was clear demarcation in the work and
cost between the consortium members; contract was clearly divisible since there
was no business connection in India, offshore supplies were not taxable in
India.

FACTS

The Taxpayer, a
non-resident company, was engaged in the business of steel production and
supply of heavy machinery. Taxpayer formed a consortium with an Indian company
(ICo) to bid for a contract for supply and installation of certain equipment in
India. The contract was awarded to the consortium of Taxpayer and ICo. There
was a clear demarcation of work and cost between the Taxpayer and ICo and each
one was fully responsible and liable for its respective scope of work. While
the Taxpayer was responsible for design, engineering, supply, commissioning,
guarantees, supervision services of all the main and critical equipment, ICo
was responsible for supply of all indigenous equipment and auxiliaries, civil
and erection work and providing assistance during commissioning and performance
tests at the site.

During the
relevant year, Taxpayer received income from offshore supply of goods made to
the Indian entity.

The AO held
that the consortium between the Taxpayer and ICo was taxable as an Association
of persons (AOP). Further, though the contract between consortium and the
Indian entity was a composite contract, to avoid taxability in India it was
artificially divided into offshore and onshore supply and services components.

Hence, the AO
held that the income from offshore supply was also taxable in India.

On appeal,
relying on SC ruling in Ishikawajima Harima Heavy Industries (2007) 288 ITR 408
and Delhi HC ruling in Linde AG [TS-226-HC-2014(DEL)], Dispute Resolution Panel
(DRP) held that income from offshore supply was not taxable in India for
following reasons.

–  Merely
because a project was a turnkey project would not necessarily imply that the
entire contract had to be considered as an integrated one for taxation
purposes.

–    As per
Explanation 1 to section 9(1)(i) only income attributable to operations in
India is taxable in India.

–  Where
equipment and machinery is manufactured and procured outside India, such income
cannot be taxed in India in absence of a business connection in India.

–   Mere
signing of a contract in India would not constitute a business connection in
India.

 Aggrieved, AO appealed before the
Tribunal.

HELD

–   The purpose
of the consortium was to procure the contract jointly. However, there was a
clear demarcation of work and cost between the Taxpayer and ICo. Each of them
was fully responsible and liable for their respective scope of work. While the
Taxpayer was responsible for design, engineering, supply, commissioning,
guarantees, supervision services of all the main and critical equipment, ICo
was responsible for supply of all indigenous equipment and auxiliaries, civil
and erection work and providing assistance during commissioning and performance
tests at the site.

–   The
contract between the consortium and the Indian entity specifically provided for
a break up of consideration payable to each party as well as for each activity
to be carried on by the parties. Segregation of the contract revenue was agreed
upon at the stage of awarding the contract and not after awarding the contract.
Thus, the contract was clearly divisible. The consideration was also paid
separately to the Taxpayer and ICo against separate invoices raised by them in
relation to their respective work.

–   Both ICo
and Taxpayer incurred expenditure only in relation to their specified area of
work. Taxpayer and ICo incurred profit or loss depending on performance of
their share of work under the contract. There was no joint liability between
the Taxpayer and ICo. Also, liquidated damages, if any, under the contract was
deductible from the contract price of defaulting party alone.

–  Having
regard to the above, it was clear that the contract was divisible.

–  Taxpayer
was responsible for offshore supply of equipment and material. The equipment
and material were manufactured, procured and supplied outside India. Thus,
income from offshore supply was not taxable in India in absence of a business
connection in India. Reliance in this regard was placed on SC decision in the
case of Ishikawajima Heavy Industries Limited (2007) 288 ITR 408.