DIRECTOR OF INCOME TAX vs. L.S.CABLE LIMITED

>. \\ \ 'u; IN THE HIGH COURT OF DELHI AT NEW DELHI ITA No.7O6 of 2O11 ITA No.7O4 of 2O11 TA No,7O7 oJ 2OLL Reserved on: 13th September,2O!L. Pronounced on: 30th September. 2011 ITA No.7O6 ^O11 DIRECTOR OF INCOME TAX I . CABLES LTD. I . CABLES LTD. I t" I (3) ITA No.7o7 /2oLL lr IL DIRECTOR OF INCOME ITA lNo.706 , 704, 707 l2OLt OR OF INCOME T;AX Through: VERSUS Through: APPELLANT Mr. Abhishek Maratha, Sr. Standing Counsel. . . .RESPONDENT Mr. R. Satish Kumar, Advocate. APPELLANT Mr. Abhishek Maratha, Sr. Standing Counsel, . . .RESPONDENT Mr. R. Satish Kumar, Advocate. APPELLANT Mr. Abhishek Maratha, Sr. Standing Counsel. Page 1 of 14 * + o/o (1) (2) t a IThrough: 2011:DHC:11996-DB

F . , .RESPONDENT Through: Mr. R. Satish Kumar, Advocate. L.S. CABLES LTD. CORAM :- HON'BLE MR. JUSTICE A.K. SIKRI HON'BLE MR. JUSTICE SIDDHARTH MRIDUL 1., Whether Reporters of Local newspapers may be allowed to see the Judgment? 2.1 To be referred to the Reporter or not? 3, I Whether the Judgment should be reported in the Digest? I hie assessee is a company incorporated in Korea and as per th{ notes attached to the statement of the total income, during t-i------' thf vear under consideration, the company was engaged in the li expcution of the following four projects: t;- I Cil Fibre optic l,cuUting project Eastern India for tl | ', Power Grid Corporation of India Limited rllrI (hereinafter ireferred to as the pGCIL). I'l I (ii) Fibre Optic Qabling Project ' pDA -2A for pcCIL. tltlI (iii)' Fibre Optic lCabling Project Western India for IIi pccrl. I (iv)' Fibre Optic.Clabling Project - pDT - 1B for PGCIL. The Asse$sing onicer 1fo; after going through ail the four contracts and even int$racting in details with the irssessee company and PGCIL anp perusing the documents on record 'lil ,ttl No.706, 704,',,707 lzOIL ll Page 2 of L4 lll;il ll illlll llll'llttl l il 2. 2011:DHC:11996-DB

F 3. rssee had performed various activities in evant assessment year and therebY e income relatable to the operations ,th as per the provisions of Section 9 of rereinafter referred to as 'the Act') and ation Avoidance Agreement ('DTAA' for and Korea. The AO while considering ;ributed income for the taxation in India .2006, the details of pdyments received itory of India in respect of the offshore :riod 01.04.2003 to 31.03.2004 are of re TT buying rate as on 31.03.2004 was : profit taxable in India on this amount Lt,27,45,8O2/-. The AO, therefore, ted 26.L2.2006 assessed the income 3,943/-. ssessment order passed bY the AO, )e separate appeals, i.e, APPeal ' & L27/O7-OB for the Assessment r 2005-06 respectively before the CIT consolidated order dated 06.O7.2009 e assessee. Page 3 of 14 ! \ 2011:DHC:11996-DB

taxes. Astper as off-shore supply is concerned, the admitted facts are phat the cables gre manufactured in Korea and d shipped from a port in the said country. we may rirention at this stage that for each project two contracts were entered into, viz., a contract for off-shore supply of . equipments and separate supply for on-shore I supfly, viz,, custom clearance of imported equipments at Illi Indilan port, inland transportation insurance, erection and I testing, commissioning and related activities. We may also noirjt out here itself that,for on-shore activities, the assessee hadl appointed Indian a,Sent, viz., M/s. Alpasso Industries lii Pvt.l Ltd. r' This Indian agent was concerned only with rlti exefution of contract in {ndia. Ir.tt fhel nO as well as CIT ([), t'lo*ever, took the view that the tl - | to off-shdre contract and on-shore contract rssute relaung I tl betrlveen the assessee arhd PGCI had been carried out by the il ageht in Ilrdia,'income {n sale of equipment has accrued in I India and on that basis, lSection 9 of the Act was attracted in this case I In respect of off-shore lsupplies also, it was held that the assessee ;.had a busin{ss connection in India and M/s. Alpasso Industries Pvt. [td. was a permanent establishment' il o.7o6,704,707/2otL il Page 5 of 14 ill il ll ;ll .ill ;rlill Illlt[ 6,. 7. I ,} 2011:DHC:11996-DB

a I It is on this ground that income from off-shore contacts had accrued in India and was held liable for tax, It is a matter of record that the Assessment Year 2002-03, identical issue had cropped up and the Tribunal had taken the view that off- shore/overseas contract was totally incumbent on on-shore serlvice contract and in respect of off-shore contract, no work I wab entrusted by the assessee to its Indian agent, M/s' Alflasso Industries Pvt. Ltd. On this basis, it was held that I Seftion 9" of the Act had no application and in respect of th{se off-shore supplies, the Indian agent did not constitute t, a $usiness connection and the following two conditions which t; t-l ar{ necessary for invogation of Section 9 of the Act are not ti sa{isrieo' I .l I fil Business conlnection in India; or li, | (iil Attributing iricome earned by the assessee from the | .r I saro suppliesl, were not satisfied' lr I Fol'lowing the decision r{ndered in respect of Assessment Year ZOOZ-OS, the Tribunal hiis allowed the appeals partly' It iryould be relevant to lpoint out that against the order of the 9. t 10,. t Tribunal pertaining to had preferred aPPeal u ment Year 2OO2-O3, the Revenue r Section 260A of the Act, which was No.706, 7O4,7O7/2017 Page 6 of 14 IT 2011:DHC:11996-DB

s premise that A No.706, 704,707lz0tL It was admitted on the not in dispute that the title in the ed was to stand transferred upon utside India on high-seas basis as on the basis that supplies had taken however, rendered its opinion on the supplies or offshore services PageT ofL4 @ 11. registereb as ITA No.703 of 2009. following substantial question of : "(1) Whether the Income Tax Appellate Tribunal is justified in not holding that the contract in question is not L ccjmposite one and, therefore, the assessee is not liable ' to pay tax in India in respect of offshore service? (2)Whetherthe|evyofinterestunderSection2348for ihort deduction of TDS is mandatory and is leviable ; extracted below: . "25. Since it eqUipments suPP delivery thereof provided for in A le 22(t), the AuthoritY for Advance ( -6 Rulings proceedec pldce offshore. It, il 2011:DHC:11996-DB

F t- i were intimately connected with the turnkey project and proceeding on that basis the Authority, as already ltutuA, op'ined that the assessee company was liable to pay-iix'in India though the property in the goods which were subject niatter of the offshore supply puitua outside tndia, in view of-the fact that it had a business connection in India. It further opined that if a contract envisaged a composite compensation for the various obligat'rons to be performed and if certain operations are to be performed by or through a business connection then, profits would be deemed to have accrued in India' The petitioner had a permanent establishment in India within the meaning of the said t";t i; taragraph 3 in Article 5 of the Double Taxation AVoidance Agreement entered into between the Goveriments of India and JaPan' 26.ReversingtheaforesaidfindingoftheAuthorityfor Advance Rulings, the Supreme Court in respect of the otfshore supply and equipments held as under: - "Re: Offshore SuPPIY: (1) That only such part of the incom!, as o 3lttl?ylibl: to the oPeration,sb carried out in India can be taxed in India, i I I -.t. (2) since all paits of the transactiorr i1 l:::ti"^:' iii6 ituntfer 'ofi property in goods a,s well as i puY-uni. were farrieC on.outsid-" !1",lilian soil' i''ansuctibn coul{ not have been taxed in India' (3) The Princi territorial juri its caPacitY to an event, has to be followed' ( ) The fact tha the contract was signed in India is of no material c€, since all activities ..in e of aPPortionment, wherein.the :ion of a particular state determines oifthotu supply were outside India, nnot be deemed to accrue or arise in s a distinction between a business ; permanent establishmelt', As ,th1 ish'ment cannot be said to be involved n. the aforementioned provision will i.e. the the Page 8 of 14 gonnection with and therefore c the countrY. (5) There exi connection an permanent in the tr I ITA No.706 , .704,707lzOIL I have no 'a t -"- ion. The Permanent establishment 2011:DHC:11996-DB

cannot be equated to a business connection, since the forme'r is for the purpose of assessment of income of a non-resident under a Double Taxation Avoidance Agree,ment, and the latter is for the application of Section 9 of the Income Tax Act. (6) Clause (a) of Explanation 1to S. 9(1)(i) states that only guch part of the income as is attributable to the operations carried out in India, are taxable in India' I (7) The existence of a permanent establishment would not constitute sufficient ,,business connection" and the perm$nent establishment would be the taxable entity. The fiscal jurisdiction of a country would not extend to the taxingientire income attributable to the permanent establishm,ent. (8) There exists a difference between the existence of a bubiness connection and the income accruing or arising out of such business connection. (9) P,aragraph 6 of the Protocol to the DTAA is not applicable, because, lfor the profits to be ,,attributable directly or indirectly" the permanent establishment mustr,be involved ih the activity giving rise to the profits. " 27. Applying the iforesaid law enunciated by the Suprelme Court in e case of Ishikawaima (suPra), there can be no m nner of doubt that the offshore supplies in the insta case are not chargeable to tax in India. The instant ca , in fact, in our view stands on a separate contracts have been the parties, albeit on the same day, one for the supply and the other for the onshore services, b t even assuming that both these i contracts need to read together as a comPosite in controversY is nevertheless contract, the issue squa1ely covered bY decision of the SuPreme Court in Ishikawaima ( ra). It is beYond disPute that ocable letter of credit in favout' ssessee and in ParagraPh 3L.2 in the goods will Pass to the buyer (PGCIL) as a d when the resPondent-assessee onto the mode of transPort for the cou ntrY of origin. The loads. the equiPm transportation fro agreement ( Erection Contract) L better footing as enterbd into betra PGCIL had issued of th,e respondent agreed that the pr< ITA stipulation in the t .706,7O4t 7Ci7l2}rr Page 9 of 14 2011:DHC:11996-DB

L2. relating to certain pedormances by the respondent- assessee including poft handling, custom clearance, tranqportation, insurance, handling on site, unloading at transportation site, testing and commissioning to the satisfaction of the buyer are in a separate agreement for a separate consideration which is clearly enunciated in tfi'e second agreement as follows: - "Whereas the employer desires to engage the contractor for peformance of all activities within India........ subject to the terms and conditions hereinafter appearing." I I Mr.l Abhishek iMaratha, learned counsel appearing for the lr Revlenue, could not dispute that the identical issue was decided lli by ihe Tribunal, earlier, which view was upheld by this Court in tt Lhel case of Director of Income Tax, New Delhi Vs' LG caQle Ltd. (in ITA No.703l2009 decided on 24.L2.2oLo). nacbd witfi this, his only submission was that even in respect of tl I off-$hore qupply in the instant case, the AO had found that the lii t .r. contract between the adsessee and PGCI even for off-shore rl suppty provided that thg assessee had appointed an Indian tl aOelnt, viz., M/s. AlRa{so Industries Pvt' Ltd. who was l:l woriking for the assessele in India. Therefore, this contract I I vrr.l nUnishek iMaratha, learned counsel appearing for the Revlenue, could not dispute that the identical issue was decided lli by ihe Tribunal, earlier, which view was upheld by this Court in tt thel case of Director of Income Tax, New Delhi Vs' LG Ltd. (in ITA No.703l2009 decided on 24.L2.2OLO). t nacbd witfi this, his only submission was that even in respect of lr off-$hore qupply in the instant case, the AO had found that the demonstrated that the lassessee was to be represented by the:Indian agent in Indip, from which it should be discerned I that the operation in r$spect of off-shore had been carried out through India by pn agent. This contention of the learned counsel does I o.706, 704, 7O7 lzotl cut much ice. Construing this verY Page 10 of 14 'l I (I ITA 2011:DHC:11996-DB

\ l 7 agreementl it has also been held that two contract, one for i off-shore .rupply and other for on-shore service are indepqndent of each other. Again, a finding of fact was arrived at' viz M/s. Alpasso Industries Pvt, Ltd. was concerned bnly with on-shore contract and had no any other l..{ role to play in respect of off-shore/overseas supplies. In the I aOrepmentrrelating to off-shore supply between the assessee lr and fhe PGCI, no doubt, PGCI had agreed to pay 1.OLo/oo/o of liri the Qtn priie of the goods as the Indian agent's commission li to M[s. Alpasso Industries Ltd, as a part of contract process ll for jverseds supply. In fact, M/s. Alpasso Industries Ltd. I was lengaged by other foreign companies also as their Indian l, aOerjts while entering into similar contacts for overseas i supplty with PGCL M/s. $lpasso had filed an affidavit that it I was lan inciiependent entity working for several clients. As ll per fhe off-shore contrapt for overseas supply, the goods lr werd manufactured byl the assessee overseas in its tl establishment and dispatftreO from abroad. The property in rl the goods passed into p{rrchaser on delivery at the foreign was lan ind'ependent entily working for several clients. As tltl per the off-shore contrapt for overseas supply, the goods 't..1I'l werd manufactured byl the assessee overseas in its tt establishment and dispatftreO from abroad. The property in il the goods irassed into R$rchaser on delivery at the foreign I port. The bn-shore erecfion contract was in respect of the service of customs cledrance, inland transportation and erection of commissionifrg of transmission cables. The il .706, 704, 7O7 /2O7L I Page 11 of 14 lrl I il iilll il r\ ITA N 2011:DHC:11996-DB

r .; above work was attended to by the project office, which constituted permanent establishment of the assessee compan'y in India. In view of the above, the only work which could be entrusted by the assessee to its Indian t agent, M/s. Alpasso was general administrative coordination and liaispn with PGCI and nothing else. I . Tf erefore,'we are of the view that ail the aspects are duly c{nsidered bi the Tribunal in the light of provision of section s lf'rl of the Act. The Tribunal had pointed out that ctause (i) 'i ol sub-section (1) of section 9 is very wide whereas I E>fplanation 1(a) is restrictive and provides that in case of a b{siness where all operations are not carried out in India lil sl-lall .be only such lpart of income as is reasonably rl at[ributable to operations carried out in India would accrue I'Itl in llndia. The ITAT hadl categorically held that the delivery of tllrl gopds, documents and receipt of substantial part of sale l:ltl cofrsideration did take place outside India and hence income iil relatable to sale outsilde India had not accrued in India. ; such income could orlty be taxed outside India and not under Indian law. Fllrrther, there cannot be a business I connection between 4 seller and purchaser (Hindustan ..1 shipyard'rltd. 109 ItR 158). The income from onshore ;l No.706, zo+, zbz /zott I page LZ of t4 ; .' ,rl:il tl itl 13 I I I I ? I 2011:DHC:11996-DB

F, I' .{ services wgs taxable in India, simply because such income accrued in India from services rendered in India. one need I not look f6r business connection to tax such income. The assessee company had shipped the goods from abroad with I I the bill of' lading in the name of Power Grid Corporation against a irrecoverable letter of credit. The assessee had i assJmed, under the onshore contract, the responsibility of l1 .urdomr clearance on behalf of Power Grid Corporation as an I ug"ht only and it would be wrong to assume that the owrlership of the goods did not. The Tribunal has rightly li netd ttrat the property in the equipment had passed to the nuyler as stipulated in para 31 .2 of General Conditions of the Corltract. ' Stipulation i'n the on-shore contact relating to e I I f t4 cer{ain performances IOU the assessee including port tt narldling, customs cl{arance, transportation' insurance' tl hadOting on site, unto{aing at transportation site, testing tlI .ln to the tatisfaction of the buyer are under a unl comnllssl( | ,"/urut" agreement for lu "pu'ute consideration' .\ Thus, the aforesaid arOtlrments of the learned counsel for the Revenue l's not accepta$le and there is no reason to change the decision arriveo at ifr the case of LG cable Ltd' (suPra) : in ITA No.703 of 2009. ;l No,706, 704, )07 /zotL .l tage 13 of 14 I I il it 1 iT 2011:DHC:11996-DB

- t 'l ! I i No question dismissed. I of law arises. These appeals are, accordingly, @ 15. I { ? SEPTEM pmc R 30, 2OLr ,704,7Cr7/2017 (SIDDHARTH MRIDUL) JUDGE Page 14 of 14 ,l i - I' I I I I I ; I e (A;K. SrKRr) JUDGE 2011:DHC:11996-DB