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.
