Director Of Income Tax vs L.S. Cables Ltd.
2011 Latest Caselaw 4903 Del

*           IN THE HIGH COURT OF DELHI AT NEW DELHI

+                           ITA No.706 of 2011
                            ITA No.704 of 2011
                            ITA No.707 of 2011

                                 Reserved on: 13th September, 2011.
%                                Pronounced on: 30th September, 2011

(1)   ITA No.706/2011

      DIRECTOR OF INCOME TAX                            . . . APPELLANT

                                Through:   Mr. Abhishek Maratha,           Sr.
                                           Standing Counsel.

                                 VERSUS

      L.S. CABLES LTD.                                 . . .RESPONDENT

                                Through:   Mr.   R.     Satish       Kumar,
                                           Advocate.

(2)   ITA No.704/2011

      DIRECTOR OF INCOME TAX                            . . . APPELLANT

                                Through:   Mr. Abhishek Maratha,           Sr.
                                           Standing Counsel.

                                 VERSUS

      L.S. CABLES LTD.                                 . . .RESPONDENT

                                Through:   Mr.   R.     Satish       Kumar,
                                           Advocate.

(3)   ITA No.707/2011

      DIRECTOR OF INCOME TAX                            . . . APPELLANT

                                Through:   Mr. Abhishek Maratha,           Sr.
                                           Standing Counsel.

                                 VERSUS



ITA No.706, 704, 707/2011                                        Page 1 of 14
       L.S. CABLES LTD.                                  . . .RESPONDENT

                                Through:    Mr.   R.     Satish       Kumar,
                                            Advocate.

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.    To be referred to the Reporter or not?
      3.    Whether the Judgment should be reported in the Digest?

A.K. SIKRI, J.

1. The assessee is a company incorporated in Korea and as per

the notes attached to the statement of the total income, during

the year under consideration, the company was engaged in the

execution of the following four projects:

(i) Fibre Optic Cabling Project - Eastern India for

Power Grid Corporation of India Limited

(hereinafter referred to as the PGCIL).

(ii) Fibre Optic Cabling Project - PDA -2A for PGCIL.

(iii) Fibre Optic Cabling Project - Western India for

PGCIL.

(iv) Fibre Optic Cabling Project - PDT - 1B for PGCIL.

2. The Assessing Officer (AO) after going through all the four

contracts and even interacting in details with the assessee

company and PGCIL and perusing the documents on record

found out that the assessee had performed various activities in

India during the relevant assessment year and thereby

attributed 50% of the income relatable to the operations

carried out in India, both as per the provisions of Section 9 of

the Income Tax Act (hereinafter referred to as „the Act‟) and

Article7 of Double Taxation Avoidance Agreement („DTAA‟ for

brevity) between India and Korea. The AO while considering

the offshore supply, attributed income for the taxation in India

vide letter dated 05.07.2006, the details of payments received

on originating the territory of India in respect of the offshore

supplies during the period 01.04.2003 to 31.03.2004 are of

US$ 25,705,837/-. The TT buying rate as on 31.03.2004 was

`1,127,458,025/-. The profit taxable in India on this amount

@ 10% is computed at `11,27,45,802/-. The AO, therefore,

vide Assessment Order dated 26.12.2006 assessed the income

of the assessee at `7,85,16,943/-.

3. Being aggrieved by the assessment order passed by the AO,

the assessee filed three separate appeals, i.e. Appeal

No.179/06-07, 380/06-07 & 127/07-08 for the Assessment

Years 2003-04, 2004-05 & 2005-06 respectively before the CIT

(A). The CIT (A) vide the consolidated order dated 06.07.2009

dismissed the appeal of the assessee.

4. Not satisfied with the order of the CIT (A), the assessee

preferred three separate appeals, i.e., ITA Nos.3634/Del/2009,

3635/Del/2009 & 3636/Del/2009 before the Income Tax

Appellate Tribunal (hereinafter referred to as „the Tribunal).

Learned Tribunal, however, vide common orders dated

13.08.2010 partly allowed the appeals of the assessee.

5. In these appeals preferred by the Revenue against the

aforesaid orders of the Tribunal, we are concerned with the

taxability of offshore supply of the equipments. From the brief

narrations of the events stated above, it is clear that the

assessee, a company (earlier known as LG Cables Ltd.)

incorporated in Republic of Korea, is engaged in the business of

manufacture and sale of power transmission cable and related

equipments. It had entered into a series of contracts with

Power Grid Corporation (A Government of India Undertaking)

(for short „PGCI‟) with the approval of Reserve Bank of India

since 2001 for off-shore supply and on-shore erection testing,

commissioning, etc. of Fiber Optic Cabling System for power

transmission in different geographical regions of India. Four

contracts, particulars whereof are already given above, were

entered into between the assessee and the PGCI. Insofar as

on-shore erection testing, commissioning, etc. are concerned,

the assessee has been filing income tax returns and paying

taxes. As per as off-shore supply is concerned, the admitted

facts are that the cables are manufactured in Korea and

shipped from a port in the said country.

6. We may mention 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

supply, viz., custom clearance of imported equipments at

Indian port, inland transportation insurance, erection and

testing, commissioning and related activities. We may also

point out here itself that for on-shore activities, the assessee

had appointed Indian agent, viz., M/s. Alpasso Industries

Pvt. Ltd. This Indian agent was concerned only with

execution of contract in India.

7. The AO as well as CIT (A), however, took the view that the

issue relating to off-shore contract and on-shore contract

between the assessee and PGCI had been carried out by the

agent in India, income on sale of equipment has accrued in

India and on that basis, Section 9 of the Act was attracted in

this case.

8. In respect of off-shore supplies also, it was held that the

assessee had a business connection in India and M/s.

Alpasso Industries Pvt. Ltd. was a permanent establishment.

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

service contract and in respect of off-shore contract, no work

was entrusted by the assessee to its Indian agent, M/s.

Alpasso Industries Pvt. Ltd. On this basis, it was held that

Section 9 of the Act had no application and in respect of

those off-shore supplies, the Indian agent did not constitute

a business connection and the following two conditions which

are necessary for invocation of Section 9 of the Act are not

satisfied:

(i) Business connection in India; or

(ii) Attributing income earned by the assessee from the

said supplies, were not satisfied.

9. Following the decision rendered in respect of Assessment Year

2002-03, the Tribunal has allowed the appeals partly.

10. It would be relevant to point out that against the order of the

Tribunal pertaining to Assessment Year 2002-03, the Revenue

had preferred appeal under Section 260A of the Act, which was

registered as ITA No.703 of 2009. It was admitted on the

following substantial question of :

"(1) Whether the Income Tax Appellate Tribunal is justified in not holding that the contract in question is not a composite one and, therefore, the assessee is not liable to pay tax in India in respect of offshore service?

(2) Whether the levy of interest under Section 234B for short deduction of TDS is mandatory and is leviable automatically?"

11. The aforesaid appeal was finally heard and decided on

24.12.2010, deciding the question of law (1) in favour of the

assessee and against the Revenue and question of law (2) was

rendered as infructuous. In the aforesaid judgment delivered

by this Court, the terms and conditions of the two contracts for

each project, viz., one for the off-shore supplies and other

relating to on-shore service were minutely gone into and

threadbare discussed. Reliance was placed on the question of

law laid down by the Authority for Advance Ruling in the matter

of Inshikawajma-Harima Heavy Industries Co. Ltd. [271

ITR 193]. Principle of law laid down by the AAR was applied on

those facts. Relevant portions of the said judgment are

extracted below:

"25. Since it was not in dispute that the title in the equipments supplied was to stand transferred upon delivery thereof outside India on high-seas basis as provided for in Article 22(1), the Authority for Advance Rulings proceeded on the basis that supplies had taken place offshore. It, however, rendered its opinion on the premise that offshore supplies or offshore services

were intimately connected with the turnkey project and proceeding on that basis the Authority, as already stated, opined that the assessee company was liable to pay tax in India though the property in the goods which were subject matter of the offshore supply passed outside India, 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 obligations 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 term in paragraph 3 in Article 5 of the Double Taxation Avoidance Agreement entered into between the Governments of India and Japan.

26. Reversing the aforesaid finding of the Authority for Advance Rulings, the Supreme Court in respect of the offshore supply and equipments held as under: -

"Re: Offshore Supply:

(1) That only such part of the income, as is attributable to the operations carried out in India can be taxed in India.

(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.

(3) The principle of apportionment, wherein the territorial jurisdiction of a particular state determines its capacity to tax an event, has to be followed.

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

(5) There exists a distinction between a business connection and a permanent establishment. As the permanent establishment cannot be said to be involved in the transaction, the aforementioned provision will have no application. 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.

(6) Clause (a) of Explanation 1 to S. 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.

(7) 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 the taxing entire income attributable to the permanent establishment.

(8) There exists a difference between the existence of a business connection and the income accruing or arising out of such business connection.

(9) Paragraph 6 of the Protocol to the DTAA is 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."

27. Applying the aforesaid law enunciated by the Supreme Court in the case of Ishikawajma (supra), there can be no manner of doubt that the offshore supplies in the instant case are not chargeable to tax in India. The instant case, in fact, in our view stands on a better footing as two separate contracts have been entered into between the parties, albeit on the same day, one for the offshore supply and the other for the onshore services, but even assuming that both these contracts need to be read together as a composite contract, the issue in controversy is nevertheless squarely covered by the decision of the Supreme Court in Ishikawajma (supra). It is beyond dispute that PGCIL had issued irrevocable letter of credit in favour of the respondent-assessee and in paragraph 31.2 agreed that the property in the goods will pass to the buyer (PGCIL) as and when the respondent-assessee loads the equipment onto the mode of transport for transportation from the country of origin. The stipulation in the second agreement (Erection Contract)

relating to certain performances by the respondent- assessee including port handling, custom clearance, transportation, 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 the second agreement as follows: - "Whereas the employer desires to engage the contractor for performance of all activities within India.................. subject to the terms and conditions hereinafter appearing."

12. Mr. Abhishek Maratha, learned counsel appearing for the

Revenue, could not dispute that the identical issue was decided

by the Tribunal earlier, which view was upheld by this Court in

the case of Director of Income Tax, New Delhi Vs. LG

Cable Ltd. (in ITA No.703/2009 decided on 24.12.2010).

Faced with this, his only submission was that even in respect of

off-shore supply in the instant case, the AO had found that the

contract between the assessee and PGCI even for off-shore

supply provided that the assessee had appointed an Indian

agent, viz., M/s. Alpasso Industries Pvt. Ltd. who was

working for the assessee in India. Therefore, this contract

demonstrated that the assessee was to be represented by

the Indian agent in India, from which it should be discerned

that the operation in respect of off-shore had been carried

out through India by an agent. This contention of the

learned counsel does not cut much ice. Construing this very

agreement, it has also been held that two contract, one for

off-shore supply and other for on-shore service are

independent of each other. Again, a finding of fact was

arrived at viz M/s. Alpasso Industries Pvt. Ltd. was

concerned only with on-shore contract and had no any other

role to play in respect of off-shore/overseas supplies. In the

agreement relating to off-shore supply between the assessee

and the PGCI, no doubt, PGCI had agreed to pay 1.01%% of

the CIF price of the goods as the Indian agent‟s commission

to M/s. Alpasso Industries Ltd. as a part of contract process

for overseas supply. In fact, M/s. Alpasso Industries Ltd.

was engaged by other foreign companies also as their Indian

agents while entering into similar contacts for overseas

supply with PGCI. M/s. Alpasso had filed an affidavit that it

was an independent entity working for several clients. As

per the off-shore contract for overseas supply, the goods

were manufactured by the assessee overseas in its

establishment and dispatched from abroad. The property in

the goods passed into purchaser on delivery at the foreign

port. The on-shore erection contract was in respect of the

service of customs clearance, inland transportation and

erection of commissioning of transmission cables. The

above work was attended to by the project office, which

constituted permanent establishment of the assessee

company in India. In view of the above, the only work

which could be entrusted by the assessee to its Indian

agent, M/s. Alpasso was general administrative coordination

and liaison with PGCI and nothing else.

13. Therefore, we are of the view that all the aspects are duly

considered by the Tribunal in the light of provision of Section

9 (1) of the Act. The Tribunal had pointed out that clause (i)

of sub-section (1) of Section 9 is very wide whereas

Explanation 1(a) is restrictive and provides that in case of a

business where all operations are not carried out in India

shall be only such part of income as is reasonably

attributable to operations carried out in India would accrue

in India. The ITAT had categorically held that the delivery of

goods, documents and receipt of substantial part of sale

consideration did take place outside India and hence income

relatable to sale outside India had not accrued in India.

Such income could only be taxed outside India and not

under Indian law. Further, there cannot be a business

connection between a seller and purchaser (Hindustan

Shipyard Ltd. - 109 ITR 158). The income from onshore

services was taxable in India, simply because such income

accrued in India from services rendered in India. One need

not look for business connection to tax such income. The

assessee company had shipped the goods from abroad with

the bill of lading in the name of Power Grid Corporation

against a irrecoverable letter of credit. The assessee had

assumed, under the onshore contract, the responsibility of

customs clearance on behalf of Power Grid Corporation as an

agent only and it would be wrong to assume that the

ownership of the goods did not. The Tribunal has rightly

held that the property in the equipment had passed to the

buyer as stipulated in para 31.2 of General Conditions of the

Contract. Stipulation in the on-shore contact relating to

certain performances by the assessee including port

handling, customs clearance, transportation, insurance,

handling on site, unloading at transportation site, testing

and commission to the satisfaction of the buyer are under a

separate agreement for a separate consideration.

14. Thus, the aforesaid arguments of the learned counsel for the

Revenue is not acceptable and there is no reason to change

the decision arrived at in the case of LG Cable Ltd. (supra)

in ITA No.703 of 2009.

15. No question of law arises. These appeals are, accordingly,

dismissed.

(A.K. SIKRI) JUDGE

(SIDDHARTH MRIDUL) JUDGE SEPTEMBER 30, 2011 pmc