M/S Yongnam Engineering and Construction (Pte.) Ltd Vs. Director of Income-tax (international Taxation) Chennai - Court Judgment

Honble Chairman

1. The applicant is a company incorporated under the laws of Singapore and is a tax resident of Singapore. The relevant facts stated in the application are as follows:

1.1 The Delhi International Airport Pvt. Ltd. (for short “DIAL”) is putting up a new Passenger Terminal Building (PTB – T-3) at the Indira Gandhi Airport at Delhi. DIAL appointed M/s Larson and Toubro Ltd. (LandT) as an EPC contractor in the entire project. On 27^th Feb. 2008, LandT entered into a contract with the applicant for the structural steel work of T 3 at PTB and Fore Court structural steel work. Thus, the applicant became the sub-contractor under the Agreement dated 27.2.2008. The scope of work as per this Agreement comprises of:

(a) off shore supplies from outside India;

(b) on shore supplies from India; and

(c) design, detailing, painting and erection of the PTB and Fore Courts.

Off shore supplies relate to overseas fabricated items and according to the applicant, the contract envisages supply, fabrication and delivery by the applicant outside India.

1.2 The applicant states that it sub-contracted the other two items i.e. on shore supplies and design, painting, erection etc. to its sub-contractor - Geodesic Techniques Pvt. Ltd. Bangalore, with the consent of LandT and DIAL. LandT, by its letter dated 26^th May 2008 informed the applicant of exercising the election and deletion of the structural steel works in relation to the Fore Court area from the scope of work and the consequential reduction in the value mentioned in Appendix 5.2. Thus, the Agreement dated 27/2/2008 entered into with the LandT stands amended and the scope of work to be carried out by the applicant is now confined only to PTB and to the off shore supplies connected therewith.

1.3 The applicant submits that a cumulative reading of the relevant clauses in Appendix 5 of the Agreement reveals the following :

(a) the off shore supplies, i.e., over-seas fabricated items and materials are sold outside India and the property passes outside India on high-seas.

(b) The consideration is payable at Singapore in Singapore dollars.

(c) The applicant would facilitate the clearance of the goods through the Indian port on behalf of LandT after paying appropriate customs duty and in doing so, the applicant acts as an agent of LandT.

1.4 It is further submitted that the applicants project office is sharing the space of 264 sq. feet with Geodesic Techniques Pvt.Ltd., in New Delhi. This project office merely receives communications and handle the calls. There are two site engineers of the applicant visiting the site at IGI airport and monitoring the progress of the activity. It is contended that the project office is not a permanent establishment and it has not played any role in connection with off shore supplies from out of India. The applicant also points out that it has no business connection out of which any income accrues or arises.

2. The following two questions are formulated by the applicant for the purpose of seeking advance ruling :

Question No.1:

Whether in the case of a sale of goods simplicitor (off shore sale) by a non-resident to a resident in India, if the consideration for sale is received abroad and the property for the goods passes from the non-resident to the resident outside India, the income accrues or arises or deemed to accrue or arise to the non-resident in India?

Question No.2:

Whether in a case of transaction of sale of goods, by the non-resident to an Indian resident as a part of composite contract involving various operations within India and outside India, the income from such a sale of goods by the non-resident (off shore) shall be deemed to accrue or arise in India or accrues or arises through or from any business connection in India?

3. Before proceeding further, we may at this juncture briefly comment on the questions posed for consideration. The first question is general in nature and it sounds like a legal proposition culled out from decided cases. If, as pointed out by the applicant, the sale of goods in fact took place outside India and the title to the goods passed at the port of shipment or while the goods were on high-seas and the consideration was also received abroad, it could then be said that the income does not accrue or arise or is deemed to accrue or arise in India to the non-resident who is the seller of the goods. In Ishikawajima-Harima Heavy Industries Ltd. vs DIT (Mumbai) ((2007) 288 ITR, 408), the Supreme Court while dealing with off shore supplies forming part of a turn-key project/contract observed that “the entire transaction have not been completed on the high-seas, the profits on sale did not arise in India as has been contended by the applicant”. Propositions 2 and 4 laid down in the concluding part of the judgment may be noted:

“(2) Since all parts of the transaction in question, i.e., the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India.

(4) The fact that the contract was signed in India is of no material consequence, since all activities in connection with the off shore supply were outside India, and therefore cannot be due to accrue or arise in the country.”

Further, in proposition no.1, it was stated that “only such part of the income as is attributable to the operations carried out in India can be taxed in India”.

3.1. Though that is the legal position, the question can only be dealt with in the light of the actual facts in the applicants case especially the modalities of the off shore supply transactions. Therefore, the real question that arises for consideration is whether any part of the consideration relating to off-shore supplies of goods viz. items fabricated and procured abroad under the contract with LandT would constitute income that accrues or arises or is deemed to accrue or arise in India. This calls for examination of the material features and terms of the contract and the actual events in order to find out whether the case of the applicant falls within the ratio and reasoning of the Supreme Court in Ishikawajima case. As highlighted later, the applicant has not come forward with the details in this regard.

3.2. Coming to the second question, the question pre-supposes that there is a composite contract involving various operations within India and outside India. What are those operations in relation to the sale of goods that took place in India have not been specified. The question has been framed apparently as an alternative argument that in case the first question is answered against the applicant, even then, only the operations in India attributable to the business connection in India would be liable to be taxed, as enjoined by Explanation I to Section 9(1)(i) of the Income Tax Act 1961. At the same time, if there is no ‘permanent establishment in India to which the Indian operations can be attributed, then, under the provisions of the DTAA, even that portion of the business profits would not be liable to be taxed. In this regard, it is the case of the applicant that there is no permanent establishment in India.

4. The applicant has filed a copy of the agreement dated 27.2.2008 entered into between LandT and the applicant. LandT is the ‘Contractor and the applicant is ‘Sub-Contractor. The Employer is Delhi International Airport (Pvt.) Ltd. The agreement postulates the Employer giving written consent to the sub-contract. Along with the agreement, the applicant filed Appendix-2A containing sub-contractors responsibilities and Appendix-5 bearing the heading ‘prices, rates and taxes. The applicant has also filed a letter awarding sub-contract for design, fabrication and erection of structural steel work to GeoDesic Techniques (P) Ltd., Bangalore. In the sub-contract Agreement, inter alia, mention is made of ‘performance bond (Appendix-10), ‘Sub-contract organization (Appejdix-8), “Sub-contractors deployment schedule” (Appendix-3C). However, these annexures which may be relevant have not been filed. Be that as it may, coming to the stipulations in the Sub-contract Agreement, the following deserve mention: In Appendix 2A – ‘Sub-contractor Responsibilities – the ‘sub-contract works comprise (a) the entire structural steel works including structural steel roof for Terminal-3 and all structural supports, (b) design and engineering of structural system accommodating sub-contract works, (c) supply of all material, shop fabrication, assembling, shipment and transportation, erection, inspection, testing and commissioning (d) surface treatment and protective coating or painting for the entire sub-contract works, (e) provision of miscellaneous structural members and all allied components. We are not sure whether these responsibilities have undergone a change in view of the subsequent event of the applicant sub-contracting most of the works to Geodesic Techniques (P) Ltd.

Para 1.2 of Appendix 2A, states thus :

“The subcontractor provides the sub-contract works and assumes all the Main contract responsibilities and liabilities for the sub-contract works, on a back-to-back basis with the Main contract save where expressly varied or excluded by this sub-contract dt……..”

4.1. Now, let us advert to other relevant provisions in the Agreement in so far as they have bearing on the off-shore supplies:

Appendix 5 para 1.4.31 contemplates the Contractor (LandT) and the Employer (DIAL) executing “High-seas Purchase Contract” for the shipment at the price shown on the sub-contractors commercial invoice plus a loading fee margin. The previous para contemplates the sub-contractor providing to the contractor the documents relating to shipment i.e. (a) clean (on board) Bill of Lading (b) commercial invoice (c) packing list and (d) certificate of origin. The next para i.e. 1.4.3.2 requires the contractor to provide the sub-contractor such documentation from the Employer as is needed for the sub-contractor to import that shipment into India and to pay the Indian customs duty thereon, as the agent of the Employer. Para 1.4.2 envisages the sub-contractor filing an advance Bill of Entry for the shipment, as the agent of the Employer. Then, para 1.4.5 states that the sub-contractor pays the Indian customs duty and clears the shipment as the agent of the Employer. The break-down of the value of “Cost Centre” regarding PTB is given in App.5.7. In that the first item is over-seas fabricated items. The description given is “supply, fabrication and delivery”. The cost of imported materials, profit and customs duty is shown in the next column. The total value in INR of the over-seas fabricated items is shown as Rs.88,82,46,421/-.

5. From the above clauses in App. 5 and even from the main Agreement dated 22/7/2008, it is not clear as to who the exporter is and if the applicant is not exporter, what role it has played in the export of over-seas fabricated items. At what point of time the payment was made and the ownership of the goods passed and what are the precise modalities of the transaction are not clear. The difficulty in understanding the entire transaction in a proper perspective is heightened by the fact that App. 5 to the Agreement contemplates high-seas purchase contract being executed by and between LandT and DIAL, the applicant not being a party to such contract. The basic averment of the applicant that it effected high-sea sale of the over-seas fabricated equipment and received the payment in Singapore dollars thus remain unsubstantiated. We are at a loss to know as to what exactly happened in this case. No clarification has been given, no sequence of events have been set out and no documents relevant to the off shore supplies of goods have been furnished in spite of putting the applicant on notice. We have before us only the Sub-contract Agreement in a truncated form. As per App. 2-A 1.2, the sub-contractor assumes all the main contract responsibilities and liabilities for the sub-contract works. The ‘main contract has not been filed to understand what are those responsibilities. Some other relevant documents such as performance bond and the conditions of sub-contract, “being the “core clauses of the NEC Engineering and Construction sub-contract” (referred to in para 2.5 of the Agreement) may have to be scrutinized, but they are not placed before us.

6. Then, as regards the permanent establishment also, this Authority wanted certain facts to be brought on record especially with regard to the activities undertaken by the applicant, apart from the import of goods. But, the applicant has not chosen to avail of the opportunity given by the Authority. At no point of time, the appellants representative or the counsel was present and no written representation or clarification on facts has been furnished. In these circumstances, we are left with no option but to decline to answer the questions raised. The learned counsel for the Revenue has also expressed his inability to assist the Authority in the absence of necessary facts and documents.

7. At this juncture, we may extract the proceedings recorded by this Authority on 13^th Feb., 2009 after the first hearing of the case.

“We have gone through the contents of the application and the annexed documents. We find that the documents furnished are not in complete shape e.g. Appendix-3 and 8 which may have bearing on the case have not been furnished. Secondly, the chain of documents relating to off-shore supplies from the date of shipment upto the date of clearance from the port are not made available. Copies of the ‘High-seas purchase contract, commercial invoice, bill of lading etc. referred to in the application have also not been filed. Presumably, the applicant by now would have imported the equipment from abroad in connection with the contract. Hence, the applicant should file all the documents taking two concrete instances of import of equipment/material so that we may have clear picture of the modus operandi of the transactions. An affidavit/supplementary statement of facts shall be filed explaining those documents.”

8. The second question is inter-related to the first question. When we are not in a position to answer the first question for want of factual details, this question too defies an answer. The question refers to a “composite contract involving various operations within India and outside India”. At the same time, it is seen that the question is referable to the transaction of sale of goods. It is with reference to the income from such sale of goods that the ruling has been sought. It is not at all clear as to what exactly is the ‘composite contract that the applicant is referring to and what are the ‘various operations within India. Thus the question is riddled with ambiguity and contradiction. In view of the lack of response on the part of the applicant and in the absence of any clarification in the application, we are not in a position to give a ruling on this question also.

9. With the above observations, the application is disposed of.