[DI v. L. G. Cable Ltd., 197 Taxman 100 (Del.)] The assessee was a Korean company. It was awarded two contracts by Indian company PGCIL; the first for onshore execution of the fibre optic cabling system package project under the system coordination and control project involving onshore services, including erection/installation, testing and communicating, etc., of the fibre of the cabling system; and the second for offshore supply of equipment and offshore services. As regards offshore supply contract, the assessee claimed that the income was not liable to tax in India as the entire contract was carried out in Korea and was subject to income-tax in Korea. The Assessing Officer did not accept the claim of the assessee and held the income accruing to the assessee from the offshore supply contract was taxable in India. The Tribunal accepted the assessee’s claim and held that the income from the offshore contract was not taxable in the hands of the assessee.
On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:
“(i) The offshore supply of equipment related to the supply of specified goods discharged from Korea for which the PGCIL had opened an irrevocable letter of credit in the name of the assessee with a bank in South Korea. The consignor of the equipment who supplied the same from Korea to Indian Port was the assessee while the importer was the PGCIL. The equipment was delivered to the shipping company named in the Bill of Lading and the Bill of Lading and other documents were handed over to the nominated bank. Accordingly, with the delivery of the Bill of Lading to the bank, the property in the goods stood transferred to PGCIL. The cargo insurance policy was obtained by the assessee and it named the PGCIL as co-insurer. The contract unequivocally clarified that the assessee and PGCIL intended to transfer the title/property in the goods as soon as the goods were loaded on the ship at the port of shipment and the shipping documents were handed over to the nominated bank where the letter of credit was opened. The sale was complete and unequivocal. There was no condition in the contract which empowered the assessee to keep control of the goods and/or to repossess the same. With the completion of the sale, the income accrued outside India. There was neither any material to show that accrual of such income was attributable to any operations carried out in India, nor any material to show that the permanent establishment of the assessee had any role to play in the offshore supply of the equipments.
(ii) Furthermore, the scope of work under the onshore contract was under a separate agreement and for a separate consideration. There was, therefore, no justification to mix the consideration for the offshore and onshore contracts. None of the stipulations of the onshore contract could conceivably postpone the transfer of property of the equipments supplied under the offshore contract, which, in accordance with the agreement, had been unconditionally appropriated at the time of delivery, at the port of shipment. When the equipment was transferred outside India, necessarily the taxable income also accrued outside India and, hence, no portion of such income was taxable in India.
(iii) The contention of the Revenue that offshore supplies were not taxable only in the case of sale of goods simpliciter, and that the contract was a turnkey contract split/divided into offshore and onshore supplies at the instance of the assessee, was not sustainable in view of the authoritative pronouncement of the Supreme Court in the case of Ishikawajma Harima Heavy Industries Co. Ltd. v. DIT, (2007) 288 ITR 408/158 Taxman 259, wherein it has been held that offshore supplies are not taxable even in the case of a turnkey contract as long as the title passes outside the country and payments are made in foreign exchange.
(iv) Applying the law enunciated by the Supreme Court in the case of Ishikawajma Harima Heavy Industries Co. Ltd., (supra), there could be no manner of doubt that the offshore supplies in the instant case were not chargeable to tax in India. The instant case, in fact, was on a better footing as two separate contracts had been entered into between the parties, albeit on the same day, one for the offshore supply and the other for the onshore services, but even assuming that both the contracts needed to be read together as a composite contract, the issue in controversy was nevertheless squarely covered by the decision of the Supreme Court in Ishikawajma Harima Heavy Industries Co. Ltd.’s case (supra).
(v) Then again, undue importance could not be attached to the fact that the agreement imposed on the assessee the obligation to handover the equipment functionally completed. That obligation had been rightly construed by the Tribunal to be in the nature of a trade warranty.
(vi) Viewed from any angle, the fact situation in the instant case was almost identical to that in the case of Ishikawajma (supra) and the law as enunciated by the Supreme Court in the said case would squarely apply to the facts of the instant case.
(vii) In view of aforesaid, the Tribunal was justified in holding that the contract in question was not a composite one and, therefore, the assessee was not liable to pay tax in India in respect of offshore services.”
