Authority for Advance Ruling
224 CTR 329 (AAR)
Dated : 17-6-2009
Facts :
The applicant, a company incorporated in Korea, is engaged
in the business of setting up of power stations. The applicant successfully
bid for the contract awarded by Power Grid Corporation of India Ltd. (PGCIL)
for execution of works related to 800KV/400KV Tehri Pooling Station Package
associated with Koteshwar Transmission System (Project).
According to the terms and conditions of the bid and with
PGCIL’s approval, the applicant assigned a part of the contract related to
onshore supply/ services to Larsen & Toubro (L&T). The overall responsibility
for successful performance of the project continued to be on the applicant.
The applicant gave guarantee to PGCIL for successful completion of the project
and in turn, the applicant obtained a counter-guarantee from L&T for the part
assigned to L&T.
PGCIL entered into 3 separate contracts in the following
manner :
-
Contract no. 1 : Offshore supply contract with the applicant for design,
engineering, manufacture, testing at manufacturer’s works, Free-On-Board
(FOB) dispatch, shipment, marine transportation and insurance and CIF supply
of all offshore equipment and materials, including mandatory spares from
countries outside India and testing and training to be conducted outside
India.
-
Contract no. 2 : Onshore supply contract with L&T for supply of certain
equipment and materials in India.
-
Contract no. 3 : Onshore service contract with L&T for inland
transportation, insurance, storage, erection including associated civil
works, testing and commissioning of all equipment and materials, including
offshore equipments.
On the aspect of taxation of offshore supply, the applicant
argued that the title to the equipment and material was passed outside India
and the payment for offshore supply was also received in foreign currency
outside India. Therefore, no income accrued or arose to the applicant in India
in respect of the offshore supply contract.
The tax authorities argued that as the applicant had to
bear the overall responsibility of commissioning the project, the transfer of
property in goods and sale can be regarded completed in India. Accordingly,
part of the profits from supply of equipment was taxable in India.
In the background aforesaid, the following issues were
raised before the AAR :
-
Whether
the applicant, along with L&T, can be said to constitute an AOP and,
accordingly, be assessed as an AOP in relation to all the 3 components of
the contract of the project.
-
Whether
the consideration for offshore supply of equipment, materials, etc., is
taxable in India under the provisions of the domestic law and the applicable
Treaty between India-Korea (Treaty).
Ruling of AAR :
On the point of AOP emergence :
Based on the Memorandum of Understanding (MOU) entered into
between the parties, the Tax Department contended that the arrangement between
the applicant and L&T constituted an AOP. For this, the Tax Department relied
on the recitals of the MOU which stated that the parties desired to co-operate
with each other for the purpose of submitting a single bid for the project and
in the event of the bid being accepted, the parties would be jointly and
severally responsible for execution of the contract. The Tax Department also
referred to other clauses dealing with joint and several responsibility,
possibility of applicant paying liquidated damages for the fault of L&T, etc.
The AAR held that on the facts of the case, the
relationship did not give rise to AOP. The AAR noted that separate contracts
were entered into by PGCIL with the applicant and L&T. The assignment of
onshore supply/services by the applicant was as permitted in the bid and there
was a separate contract directly between L&T with PGCIL. L&T had worked as an
independent contractor and was entitled to separately raise and realise the
bills for the work L&T carried out for PGCIL. The individual identity of each
party, in doing the part of the work entrusted to it was preserved despite the
co-ordination between them and the overall responsibility of the applicant.
The AAR concluded that :
(a) Mere collaborative effort and the overall
responsibility assumed by the applicant for the successful performance of
the project was not sufficient to constitute an AOP.
(b) The requirement for the applicant to provide
performance guarantees for all the 3 contracts was not in furtherance of a
joint venture or a common design to produce income, but it was a special
stipulation insisted by PGCIL in the overall interest of the project. The
requisite cohesion, unity of action and the common objective of sharing the
revenue or profit were lacking and hence there was no PE.
The facts in the case of Geoconsult (304 ITR 283), wherein
the parties had entered into an arrangement as a ’consortium’ which was held
by the AAR to meet the requisites of an AOP, was held distinguishable from the
facts in the present case.
