DCIT (IT) 4(3)(2), MUMBAI vs. WHESSOE OIL & GAS LTD, MUMBAI

(अपीलाथ� /Appellant) (��यथ� / Respondent) Revenue by: Shri Samuel Darse-CIT-DR Assessee by: None सुनवाई क� तारीख / Date of Hearing: 06.09.2017 घोषणा क� तारीख / Date of Pronouncement: 03.11.2017 आयकर आयकर अिधिनयम अिधिनयम,1961 क� क� धारा धारा 254(1)केकेकेके अ�तग�त अ�तग�त आदेश आदेश आयकर आयकर अिधिनयम अिधिनयम क� क� धारा धारा अ�तग�त अ�तग�त आदेश आदेश Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य सद�य राजे�� राजे�� केकेकेके अनुसार अनुसार /PER RAJENDRA, AM- लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order,dtd.30/03/2015,of CIT(A)-55,Mumbai the Assessing Officer(AO)has filed the present appeal. Assessee-company,incorporated in United Kingdom(UK), filed its return of income,30/03/2010,declaring total income of Rs. 1.53 crores.The AO completed the assessment, on 25/02/2011,u/s.144C(3)r.w.s.143 (3) of the Act,determining its income at Rs. 43.07 crores.

2.Effective ground of appeal is about deleting the addition of Rs.2.77 crores.During the assessment proceedings, the AO found that during the year under appeal,the assessee along with Punj Lloyd Ltd.(PLL)had jointly bid for a contract awarded by Ratnagiri Gas and Power Private Ltd.(RPPGL)on 08/09/06 for the completion of RGPPL’s LNG terminal at Dabhol.The work under the contract was to be completed on Engineering Procurement and Construction (EPC) basis.A complete specification and scope of work of each of the two joint ventures was described in the Detailed Letter of Acceptance (DLOA), dated/08/2006, that the DLOA also specified the total lump sum contract value for the work to be carried out under the contract,that based on the contract agreements, a sub contract agreement was entered into between the JV and the assessee on 03/10/206,that the assessee received the total sum of Rs. 16.69 crores for the work completed

4673/M/15 M/s.Whessoe Oil & Gas Ltd. during the year under appeal as per the terms and conditions of the contract, that it had bifurcated its receipts into three parts namely Engineering and Offshore Services (services rendered in UK - Rs.15.07 crores),offshore services and commissioning (services rendered in India-Rs. 24.85 crores) and offshore procurements (Rs. 27.74 crores),that it treated the offshore procurements for spare machine parts equipments as income not taxable in India, that it offered the balance income for taxation under the provisions of section 44BBB of the Act. He directed the assessee to explain as to why the gross amount,including the amount earned for offshore procurements, should not be brought to tax. After considering the submission of the assessee, dated 21/12/2010, the AO held that the contract agreement of the JV with RP PGL was a composite contract, that the total consideration received for the assignment could not be broken into watertight and independent compartments as attempted by the assessee, that Annexure 2 to the agreement clearly stated that the lump sum contract value for the work under the contract would be US dollar 52 million and Indian Rs. 1.8 billion, that the breakup of the lump sum contract price to components such as design and engineering, value of equipment and material to be imported, material to be supplied from within India and Indian transportation was not indicative that the procurement of goods had been contacted by RPPGL, that the breakup of lump sum value was merely indicative of the factors that would govern the total contract value, that the assessee was trying to colour an arrangement for operation and maintenance as a contract for procurement of goods, that it was the joint responsibility of the assessee and its co-partner to deliver the job as per terms and conditions of the contractual agreement, that RP PGL was well within its rights in specified its exact requirement both with respect of construction, commissioning, testing etc.and the specification of equipments and material to be used, that RP PGL had not entered into a contract for fulfilment of material independent of its obligation pertaining to construction and commissioning exercise, that any attempt by the assessee to discover a sub contract for purchase of goods was a mis - representation of facts,that RPPGL did not intend to prove your equipments/material is a principal independent of construction-testing-commission contract entered with the JV, that the contract was a single monoliths to achieve a specific purpose, that it was impossible to separate consumption of material and civil construction from the DLOA, that no distinction was made between the various heads of the contract, that the amount of US dollar 21.5 million and Rs. 54.2 crores was indicative of the sums against the all the services,that it was not a contract in 4673/M/15 M/s.Whessoe Oil & Gas Ltd. itself,that the supply of material for the overall scope of work was not a contract independent of the contract for completion of balance work on jetty, that the assessee had not explained as to why the expenditure in Indian rupees was taken as an exercise in procurement conducted wholly outside India, that RP PGL did not intend to procure material independent of construction contract, as per the terms of the contract RP PGL did not be at the risk on the change in the procurement value of the materials/equipment,that procurement of material was inextricably linked with the performance of the entire contract and could not be subdivided, that the stand taken by the assessee between dealing with India and dealing with India was not acceptable, that it was not the case that the procurement of equipment/spares was done for purposes unrelated to EPC contract, that exercise of civil construction and its subsequent testing and commissioning with respect to turnkey project required a complex mix of material and skill, that it could not be reduced to two separate contracts-one for supply of material and the other for application of skill, that the assessee had permanent establishment at the site of the jetty in Indian waters, that the purchase order had originated from the site of the construction, that it was immaterial whether technically sale was completed on high seas or not,that the establishment of the assessee in India was the business connection through with the assessee derived its business income, that it was not in the business of trading of equipments and material, that it was engaged in execution of construction projects and not on sale of goods, that the purchase order originated from the business connection in India, that the amount pertaining to procurement of goods accrued and arose directly/indirectly from the business connection in India, that the Duchess of equipments and space was not done independent and was not kept in an overseas warehouse,that the income received from RPPGL-a part of which was utilised in procuring materials on high seas, for completion of work awarded at an Indian site-was taxable in India. He referred to the provisions of section 44BBB of the act and held that it was only special provision for computation, that it did not determine scope of income, that the argument of the assessee,that word procurement did not appear in section 44BBB and therefore an expenditure spent for purchase was not taxable, was devoid of merits,that absence of word procurement in the section indicated that no special treatment could be meted out to the value of procure spare, material and equipments from the total contract value, that the income from such contracts was chargeable in India as per the provisions section 44BBB, that the total contractual received could not be divided into two parts, that contract for civil construction would include cost of material and men, election of plant and 4673/M/15 M/s.Whessoe Oil & Gas Ltd. machinery could not be used to procurement of material or application of manpower.Finally,he held that once the income of the assessee was chargeable to tax in India under section 44BBB the entire contractual revenue, and not a portion of it, would be taxed in India. He made an addition of Rs. 27, 74, 34, 096/-to the total income of the assessee.

3.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA) and made elaborate submissions. It also relied upon certain case laws.He called for a remand report from the AO with regard to the additional evidences filed before him for the first time. Referring to the judgments of honorable Supreme Court in the cases of Ishikawajima Harima Heavy Industries Ltd. (282 ITR 482) and Hundai Heavy Industries Company Ltd. (291 ITR 482), he held that entire contractual revenue on account of offshore procurement could not be brought to tax under section 44BBB of the Act, that the consideration received by the assessee for offshore supply of equipment was not chargeable to tax in India, that the AO was not justified in making addition of Rs. 27.74 crores on account of offshore procurement.

4.During the course of hearing before us,the Departmental Representative (DR) argued that that the contract agreement was a composite contract, that the total consideration received for the assignment could not be broken into watertight and independent compartments as attempted by the assessee,that the breakup of lump sum value was merely indicative of the factors that would govern the total contract value,that the assessee was trying to colour an arrangement for operation and maintenance as a contract for procurement of goods,that the contract was a single event to achieve a specific purpose, that it was impossible to separate consumption of material and civil construction from the DLOA,that the supply of material for the overall scope of work was not a contract independent of the contract for completion of balance work on jetty,that the income from such contracts was chargeable in India as per the provisions section 44BBB of the Act. 5.We have perused the material available on record.We find that assessee and PLL had entered into a JV, that they were awarded a contract by RGPPL,that they entered into a separate sub contract for exhibiting the work,that the contract entered into was on EPC basis,that the assessee did not offer the income arising out of procurement of offshore equipments for taxation, that the AO held that provision of section 44BBB were applicable to the assessee on the amount of offshore procurement as well, as it was the part of same EPC contract, that the F AA deleted the 4

4673/M/15 M/s.Whessoe Oil & Gas Ltd. addition relying upon two Supreme Court judgments. In our opinion, short issue to be decided is as to whether the amount received by the assessee on account of was taxable in India as per the provisions of section 44BBB of the Act ? The contract entered into with RPPGL,in its consideration clause,had separately identified the aggregate consideration payable in respect of the different components of the contract namely design and engineering services (onshore/offshore), import of equipment/material as well as equipment/material to be procured from within India. The assessee had offered offshore/offshore services for taxation under section 44BBB.It is a fact that offshore procurement was being handled entirely from outside India. The AO has not brought anything on record that purchase of material,made by the assessee,was linked to its PE in India.The establishment of the assessee was not a business connection,as alleged by the AO,through which it had derived its income.Therefore,the sums included under the head offshore procurements included the sums payable towards supply of equipment and machinery procured from outside India.There is no doubt that there was a clear demarcation in the work and cost between the members of the JV i.e.the assesse and PLL.We find that in the case of Ishikawajima Harima Heavy Industries Ltd. (supra),the Hon’ble Apex court has dealt with the similar issue, where agreement had two parts. Fact of the Ishikawajima were that the assessee, a non-resident company incorporated in Japan, along with five other enterprises formed a consortium.The consortium was awarded by Petronet a turnkey project for setting up a liquefied natural gas (LNG) receiving, storage and regasifi - cation facility in Gujarat.The contract specified the role and responsibility of each member of the consortium and the consideration to be paid separately for the respective work of each member. The appellant was to develop,design,engineer, procure equipment, materials and supplies to erect and construct storage tanks including marine facility (jetty and island breakwater) for transmission and supply of LNG to purchasers, to test and commission the facilities, etc. The contract involved : (i) offshore supply, (ii) offshore services, (iii) onshore supply, (iv) onshore services and (v) construction and erection. The price for offshore supply and offshore services was payable in US dollars, that for onshore supply and onshore services and construction and erection partly in US dollars and partly in Indian rupees. The payment for offshore supply of equipment and materials supplied from outside India was received by the appellant by credit to a bank account in Tokyo and the property in the goods passed to Petronet on the high seas outside India.Though the appellant unloaded the goods, cleared them from Customs and transported

4673/M/15 M/s.Whessoe Oil & Gas Ltd. them to the site, it was for and on behalf of Petronet and the expenditure including the customs duty was reimbursed to it. The price of offshore services for design and engineering including detailed engineering in relation to the supplies, services and construction and erection and the cost of any other services to be rendered from outside India, was also paid in US dollars in Tokyo. On these facts the appellant applied to the Authority for Advance Rulings (Income-tax) for a ruling on the following points : (a) whether the amounts received/receivable by the appellant from Petronet for offshore supply of equipment, materials, etc., were liable to tax in India under the provisions of the Act and the Double Taxation Avoidance Convention between India and Japan ;(b) whether the amounts received/receivable from Petronet for offshore services were chargeable to tax in India under the Act and the Convention ; and (c) would the appellant be able to claim deduction for expenses incurred in computing the income from offshore services.The Authority ruled (i) that, though property in the goods passed to Petronet while the goods were on the high seas, and in so far as the activities of the appellant for taking delivery of the goods from the ship, payment of customs duty and transportation of the goods to the site were concerned, the applicant could be said to be acting as an agent of Petronet, these facts did not militate against the property in the goods passing to the appellant.In connection with the offshore supply, certain operations were inextricably interlinked in India, such as, signing of the contract in India which imposed liability on the appellant to procure equipment and machinery in India and receiving, unloading, storing and transporting, paying demurrage and other incidental charges on account of delay in clearance.The price of the goods covered not only their price but also of all these operations which were carried out in India and from which income accrued to the appellant.Therefore, income accrued to the appellant from the offshore supply through business connection in India and some operations of the business were carried out in India. Profits were deemed to accrue/ arise to the applicant in India from offshore supply of equipment/machinery but the profits deemed to accrue/arise in India would be only such part of the profits as was reasonably attributable to the operations carried out in India. (ii) That having regard to article 7(1) of the Convention for Avoidance of Double Taxation and Fiscal Evasion with respect to Taxes on Income between India and Japan read with paragraph 6 of the Protocol supply of equipment or machinery (sale of which was completed abroad, the order having been placed directly by the overseas office of the enterprise) would be within the meaning of the phrase “directly or indirectly attributable to that permanent establishment” and, therefore, so 4673/M/15 M/s.Whessoe Oil & Gas Ltd. much of the amount received or receivable by the appellant as was directly or indirectly attributable to the permanent establishment as postulated in paragraph 6 of the Protocol would be taxable in India. The price of the offshore services would be deemed to accrue or arise u/s. 9(1) (vii)of the Act.And inasmuch as fees for technical services were specifically provided in article 12 of the Convention, they would not fall under article 7. Therefore, the price of the offshore services was taxable in India under the Act as well as the Convention. (iii) That, however, in view of section 115A(1)(b)(B) of the Act and article 12(2) of the Convention, tax was payable at the fixed rate of 20% of the gross amount of fees for technical services and the applicant would not be able to claim any deduction from the gross amount. The appellant preferred an appeal by way of special leave to the Supreme Court.Deciding the matter the Hon’ble Court held as under : “…..section 9 of the Income-tax Act, 1961, raises a legal fiction ; but, having regard to the contextual interpretation and in view of the fact that the court is dealing with a taxation statute, the legal fiction must be construed having regard to the object it seeks to achieve. The legal fiction created under section 9 must also be read having regard to the other provisions thereof. (ii) That since the appellant carried on business in India through a permanent establishment it would clearly fall out of the applicability of article 12(5) of the Convention and fall within the ambit of article 7. In the Protocol to the Convention it was stated that the term “directly or indirectly attributable” indicated the income that should be regarded on the basis of the extent appropriate to the part played by the permanent establishment in those transactions. The permanent establishment in this case had no role to play in the transaction of offshore supply, sought to be taxed, since the transaction took place abroad. (iii) That the second sentence of article 7(1) which allowed the State of the permanent establishment to tax business profits, but only so much of them as was attributable to the permanent establishment excluded the applicability of the principle that where there was a permanent establishment, the State of the permanent establishment should be allowed to tax all income derived by the enterprise from sources in the State irrespective of whether or not such income was economically connected with the permanent establishment. The State of the permanent establishment was allowed to tax only those profits which were economically attributable to the permanent establishment, i.e., those which resulted from the permanent establishment’s activities, which were economically from the business carried on by the permanent establishment. In this case, the permanent establishment’s non-involvement in the transaction of offshore supply, excluded it from being a part of the cause of the income itself and thus there was no business connection. (iv) That for attracting the tax there had to be some activities through the permanent establishment. If income arose without any activity of the permanent establishment, even under the Convention the taxation liability in respect of overseas services would not arise in India. Section 9 spelled out the extent to which the income of a non-resident would be liable to tax in India. Section 9 had a direct territorial nexus. Relief under a Double Taxation Avoidance Treaty, having regard to the provisions contained in section 90(2), would arise only in the event taxable income of the assessee arose in one Contracting State on the basis of accrual of income in another Contracting State on the basis of residence. So far as accrual of income in India was concerned taxability must be read in terms of section 4(2) read with section 9, where-upon the question of seeking assessment of such income in India on the basis of the Double Taxation 7

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Treaty would arise. Paragraph 6 of the Protocol to the Convention was not applicable, because, for the profits to be “attributable directly or indirectly”, the permanent establishment must be involved in the activity giving rise to the profits. (v) That the fact that the contract was signed in India was of no material consequence, since all activities in connection with the offshore supply were outside India, and therefore income could not be deemed to accrue or arise in the country. (vi) That where different severable parts of a composite contract were performed in different places, as in this case, the principle of apportionment could be applied to determine which fiscal jurisdiction could tax that particular part of the transaction. This principle helped determine where the territorial jurisdiction of a particular State lay and to determine its capacity to tax an event. Applying it to composite transactions which had some operations in one territory and some in the other, was essential to determine the tax-ability of various operations. Therefore, the concepts of profits of business connection and permanent establishment should not be mixed up. Whereas business connection was relevant for the purpose of application of section 9, the concept of permanent establishment was relevant for assessing the income of a non-resident under the Convention. (vii) That in this case the entire transaction was completed on the high seas and, therefore, the profits on sale did not arise in India. Once excluded from the scope of taxation under the Income- tax Act application of the Double Taxation Avoidance Treaty would not arise. (viii) That, in relation to offshore services, section 9(1)(vii)(c) required two conditions to be met : to be taxable in India the services which were the source of the income sought to be taxed had to be rendered in India as well as utilized in India. In this case, both these conditions were not satisfied simultaneously, thereby excluding the income from the ambit of taxation in India. Thus for a non-resident to be taxed on income for services, such a service had to be rendered within India, and had to be part of a business or profession carried on by such person in India. The appellants had provided services to persons resident in India, and though they had been used here, they had not been rendered in India. (ix) That whatever was payable by a resident to a non-resident by way of technical fees would not always come within the purview of section 9(1)(vii). It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax. (x) That even in relation to such income, viz., income from offshore services, the provisions of article 7 of the Convention would be applicable, as services rendered outside India would have nothing to do with the permanent establishment in India. Thus, if any services had been rendered by the head office of the appellant outside India, only because they were connected with the permanent establishment, even in relation thereto the principle of apportionment would apply. (xi) There exists a distinction between a business connection and a permanent establishment. The permanent establishment cannot be equated to a business connection, since the former is for the purpose of assessment of income of a non-resident under a Double Taxation Avoidance Agreement, and the latter is for the application of section 9 of the Income-tax Act. Clause (a) of Explanation 1 to section 9(1)(i) states that only such part of the income as is attributable to the operations carried out in India, are taxable in India. The existence of a permanent establishment would not constitute sufficient “business connection”, and the permanent establishment would be the taxable entity. The fiscal jurisdiction of a country would not extend to taxing the entire income attributable to the permanent establishment. There exists a difference between the existence of a business connection and the income accruing or arising out of such business connection.

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