Offshore supply of equipment is not liable to tax in India though it is a part of composite contract involving onshore service component.

ITAT Mumbai

Before Shri R. S. Syal (AM) and

Shri D. K. Agarwal (JM)

ITA Nos. 4107 & 4108/Mum./2002

A.Ys. : 1995-96 & 1997-98. Dated : 22-6-2009

Counsel for assessee/revenue : Percy Pardiwala/ Abhijit Patankar

Facts :

The assessee, an Australian resident, executed 3 contracts with 3 different Indian enterprises through its PE in India. Two of the contracts involved only onshore supply and services. The third contract entered into with Metro Railways, Calcutta involved offshore supply of equipment; onshore services involving supervision, installation, testing, commissioning of integrated fibre communication system between Dumdum and Tollygunj sections of Metro Railways, Calcutta (hereinafter the contract). Consideration in the contract was split into three parts :

• Imported supplies on FOB basis (offshore supply)

• Imported services (offshore services)

• Indigenous services (onshore services)

There was no dispute on taxation of onshore services and income in respect thereof was offered to tax in respect of the contract. The assessee claimed that income from offshore supply was not taxable in India since title to the goods passed outside India.

The AO rejected the contention and brought to tax the entire amount of the contract consideration including the offshore supply on the grounds that :

(a) the supply of equipment was part of single composite contract involving onshore services; and

(b) the assessee had PE in India.

On the assessee’s appeal, CIT(A) accepted the submissions of the assessee and held that the income from offshore supply was not taxable in India.

Before ITAT, the Tax Department raised the following contentions :

• The contract was a single contract. There was no scope for bifurcation of consideration towards onshore services and offshore supply of the equipment.

• The receipt towards the supply of equipment was liable to be considered as appropriation towards consideration for single contract which involved supply of the equipment with responsibility of supervision of installation work in India.

• As the assessee had PE in India, having regard to force of attraction provisions of Article 7(1)(b) of the DTAA between India and Australia, taxable income attributable to PE would also include income from offshore supply.

Held :

The ITAT held :

Though the contract is single contract; separate identifiable consideration has been mentioned towards supply and rendition of services. There is no dispute that the receipt was towards ‘offshore supply’. No income accrued to the assessee in India from the offshore supply of equipment where the title to the equipment passed outside India.

The substance of the matter rather than its form is crucial for the determination of the tax liability. If the intention of the parties to the contract is clearly flowing from the terms of the contract, then it is not permissible to negate those terms to infer to the contrary.

Reliance was placed on the Supreme Court decision in the case of Ishikawajima Harima Heavy Industries Ltd. v. DIT, (288 ITR 408) to support that in respect of a composite contract involving onshore and offshore components, consideration for offshore supply and offshore services cannot be brought to tax in India in terms of domestic law provisions. In terms of S. 9(1)(i) of the Income-tax Act, no income accrued or arose in India as the title to goods passed to the buyers outside India on payment of price abroad. Also, no operations were carried out in India and therefore there was no scope for taxation of such income.

Where the income is not taxable in terms of the domestic law, DTAA cannot be invoked to create any tax liability. The object of DTAA is not to create any fresh tax liability if it does not exist as per domestic law. DTAA can only restrict tax liability if it exists.

The contentions of the Tax Department that if the assessee has PE in India all income accrued to the assessee can be brought to tax in terms of DTAA is liable to be rejected.