|
|
|
June 25, 2009
AAR Opines on Indian Taxation of Off-Shore Contracts and Related
‘Association of Persons' Issues In a case involving off-shore and on-shore contracts amongst three entities, the Authority for Advance Ruling (“AAR”) has in the case of Power Grid Corporation of India Ltd (“Power Grid”)1 followed the judgment of the Supreme Court of India in the case of Ishikawajma2 and held that amounts paid to non-residents for off-shore contracts taking place outside India are not taxable in India. Interestingly, an aspect of this ruling which makes it unique is that the AAR has also examined whether or not such contracts with two separate entities may constitute an Association of Persons (“AOP“). Facts Power Grid invited bids for execution of
works related to a certain project in 2005. M/s Hyosung
Corporation (“Applicant”),
a Korean company, was the successful bidder for this project.
The terms and conditions of the bid allowed the Applicant to
assign whole or part of the project to an independent contractor
subject to approval of Power Grid.
Power Grid accepted the bid proposal submitted by the Applicant
and vide a Letter of Award (“LOA”)
awarded the Off-Shore Contract to be performed outside India to
the Applicant. The On-Shore Supply Contract and On-shore
Services Contract was awarded to the Applicant’s assignee,
namely, L&T. The LOA gave the Applicant the overall
responsibility to ensure execution of all the three contracts to
achieve successful completion of the entire project. A Deed of
Assignment was executed between the Applicant and L&T.
Thereafter, in terms of the LOA, Power Grid entered into three
separate contracts viz. the Off-Shore Contract with the
Applicant and the On-Shore Supply Contract and the On-Shore
Services Contract with L&T.
Issue
With this background, the Applicant approached the AAR to
determine whether the amounts receivable by the Applicant under
the Off-Shore Contract are taxable in India and if yes, to what
extent could they be attributed to the operations of the
Applicant in India in terms of Section 9(i) of the Income Tax
Act, 1961 (“ITA”) and
Article 7 of the India-Korea Double Taxation Avoidance Agreement
(“DTAA”). The AAR
also framed an additional question as to whether the Applicant
together with L&T would constitute an AOP and accordingly should
be assessed as such under the ITA in respect of all three
contracts. Ruling
and Analysis
The AAR analysed the provisions of the LOA and the Off-Shore
Contract in detail and determined that the title of the goods
passed on to Power Grid well before the goods reached the Indian
port and Power Grid was the beneficiary in the insurance policy
taken by the Applicant. Further, the AAR relied on the CBDT
circular dated September 21, 1989 which states that profits from
sale of equipment and materials on FOB basis would not be deemed
to accrue or arise in India under section 9(1)(i) of the
ITA as the title of the goods is passed outside India and the
payments are also made outside India. The AAR also relied on the
Supreme Court judgment in
Ishikawajma and held that the amounts received under the
Off-Shore Contract would not be taxable in India for want of
territorial nexus.
The Revenue’s contention that
the Applicant has a permanent establishment (“PE”)
in India was not accepted by the AAR. Instead, the AAR ruled
that based on the facts of the case, the Applicant did not have
a PE in India. The AAR stated that if on further inquiry that
may be made by the tax assessing officer it is found that a PE
exists, then the profits attributable and confined to the
operations of the PE have to be estimated and subjected to
income-tax in India. Having said that, the AAR
clarified that activities incidental to the supply of imported
goods such as transportation, storage and delivery should not be
attributed to the PE. The AAR also explored the possibility of whether or not the Applicant
and L&T would constitute an AOP. The AAR ruled that mere
collaborative effort and overall responsibility assumed by the
Applicant for successful performance of the project is not
sufficient to constitute an AOP in the eyes of law. The AAR
determined that the present case lacked an essential feature of
an AOP namely, the element of common intention to earn income.
The AAR also determined that the individual identity of each
party in doing the part entrusted to it is preserved,
notwithstanding the coordination between the two and the overall
responsibility of the Applicant. While the Revenue relied on the
Geoconsult3
AAR Ruling and contended that the present arrangement between
L&T and the Applicant would amount to an AOP, the AAR
categorically stated that the facts involved in
Geoconsult were vastly
different from the facts of the present case. Ironical indeed is the world of taxation It
is pertinent to
note that the same AAR had has recently also questioned the
Supreme Court’s judgment in
Ishikawajma in the
case of
Worley Parsons4.
In Worley Parsons on
account of the distinctive feature of the services performed in
India under an agreement, which were the pre-requisite for the
services which were performed outside India, the AAR had ruled
that services rendered inside and outside India had a
territorial nexus with India and were therefore liable to tax in
India. Now with this ruling where the same AAR has to a great
extent relied on
Ishikawajma, the uncertainty with respect to taxation of
income earned from off-shore contracts has been clarified to a
great extent. It is important to note that rulings
pronounced by the AAR are private in nature and are binding only
on the Applicant and the tax authority with respect to the
particular issue before it. Though such rulings do not have
precedent value for other tax payers, they do have a persuasive
value.
1 Ruling delivered on June 17, 2009.
2
Ishikawajma-Harima Heavy Industries Ltd. v. DIT,
(2007) 288 ITR 408 (SC) wherein it was
held that the consideration received by the non-resident
under a contract for the supply of goods by means of
transfer outside the territory of India cannot be
subjected to tax in India. 3 Geoconsult ZT GmbH Vs. DIT, Mumbai (AIT-2008-260-AAR)
4 WorleyParsons
Services Pty. Ltd. dated March 30, 2009
|
|
|
Disclaimer: The contents of this hotline should not be construed as legal opinion. View detailed disclaimer. |
This hotline provides general information existing at the time of preparation. The hotline is intended as a news update and Nishith Desai Associates neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this hotline. It is recommended that professional advice be taken based on the specific facts and circumstances. This hotline does not substitute the need to refer to the original pronouncements. This is not a Spam mail. You have received this mail because you have either requested for it or someone must have suggested your name. Since India has no anti-spamming law, we refer to the US directive, which states that a mail cannot be considered Spam if it contains the sender's contact information, which this mail does. In case this mail doesn't concern you, please unsubscribe from mailing list. |
NDA |