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February 17, 2011 No
tax on LG Cables for the offshore component of turnkey project: Ishikawajma’s ruling echoed In a recent ruling, the Delhi High Court (“High Court”) reaffirmed the principle laid down by the Supreme Court
in Ishikawajma-Harima Heavy Industries
Co. Ltd.1 While dealing with the question as
to the levy of tax on the profits earned by LG Cable Ltd. (“LGCL” or “Tax Payer”) in relation to the offshore supply of equipment, the
High Court ruled that such profits were not taxable in India even though the
equipment was supplied for implementing a turnkey
project situated in India. Facts The Tax Payer, a Korean company, entered
into two contracts with Power Grid Corporation of India Limited (“PGCIL”) in connection with the supply
and installation of “fibre optic cables” in India. One contract was for onshore execution, installation and
erection of the cables (“Onshore
Supply”) and the second contract was for offshore supply of equipment and related services (“Offshore Supply”). In
order to facilitate the Onshore Supply, the Tax Payer set up a project office
in India. The Tax Payer offered its profits earned in
connection with the Onshore Supply to tax in India under Articles 5 and 7 of
the India Korea Double Tax Avoidance Agreement (“DTAA”). As regards the income from Offshore Supply, it was the
Tax Payer’s claim that the same was not subject to tax in India as the entire
contract was carried out in Korea. However, during the assessment
proceedings, the Tax Officer (“Tax
Department”) held that the profits accruing to the Tax Payer as a result
of the Offshore Supply were also taxable in India having regard to the fact
that the Offshore Supply and Onshore Supply were inextricably linked and the
two contracts formed a composite contract for supply of equipment and its
installation in India. Pursuant to the Commissioner of Income Tax (Appeals)
dismissing the Tax Payer’s appeal, the Tax Payer filed a second appeal before
the Income Tax Appellate Tribunal (“Tax
Tribunal”). Much to the Tax Payer’s relief, the Tax Tribunal ruled in
favour of the Tax Payer and held that the profits attributable to the
Offshore Supply were not taxable in India. Aggrieved by the Tax Tribunal’s
decision, the Tax Department filed an appeal before the High Court. The Ruling The entire dispute before the High Court
boiled down to one single issue, namely, whether the two contracts (Offshore
Supply and Onshore Supply) could have been regarded as a single composite
contract, the consideration for which was attributable to India. The Tax
Department argued that the two contracts were inextricably linked and
performance of one was dependant on the successful performance of the other.
Thus, they claimed that the Tax Payer’s income from the entire project was
deemed to accrue or arise in India and was therefore taxable in India to the
extent it was attributable to India. The High Court rejected the Tax
Department’s arguments and dismissed the appeal. In order to arrive at its
decision, it thoroughly examined the provisions of both contracts and
inferred that, contrary to what the Tax Department had claimed, the
performance of one contract was not dependant on the successful performance
of the other. The High Court observed that the contract for Offshore Supply
was successfully performed as soon as the property in the goods / equipment
was transferred to PGCIL, which performance had taken place outside India.
The High Court also observed that “the
fact situation in the instant case is almost identical to that in the case of
Ishikawajma and the law as enunciated by the Supreme Court in the said case
will squarely apply to the facts of the present case.” Thus, the High
Court relied on the law laid down by the Supreme Court in Ishikawajma and held that-
Conclusion The law laid down
by the Supreme Court in Ishikawajma has been echoed in this case. Income from
the offshore supply of equipment and services by an entity outside India
under a separate and distinct contract is not taxable in India merely because
the equipment was supplied in relation to a turnkey project situated in
India. Where the contract for such offshore supply of equipment and services
is separate and distinct from the contract for onshore services, the profits
earned as a result of offshore services cannot be taxed in India if it is not
attributable to India. Thus, in case of
turnkey projects involving an offshore component, it is important to ensure
that the offshore supply of goods and services is kept separate and distinct
from the onshore services. Moreover, the manufacture and delivery of goods
must take place outside India and the title in the goods should pass on to
the buyer outside India itself. 1271 ITR 193 2Ansaldo Energia SPA represented by its
Authorised Signatory Mr. Lorenzo Pesenti v. The Income Tax Appellate Tribunal
Chennai Bench (2009) 310 ITR 237 You
can direct your queries or comments to the authors |
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