Ita/704/2011 Of Director Of Income Tax v. L.s.cable Limited

* IN THE HIGH COURT OF DELHI AT NEW DELHI ITA No.7O6 of 2O11ITA No.7O4 of 2O11TA No,7O7 oJ 2OLL + Reserved on: 13th September,2O!L.Pronounced on: 30th September. 2011 o/o (1) ITA No.7O6 ^O11 DIRECTOR OF INCOME TAXAPPELLANTThrough:Mr. Abhishek Maratha, Sr.Standing Counsel.IVERSUS. CABLES LTD.. . .RESPONDENTThrough:Mr. R. Satish Kumar,Advocate.(2)OR OF INCOME T;AXAPPELLANTThrough:IMr. Abhishek Maratha, Sr.Standing Counsel,I. CABLES LTD.. . .RESPONDENTMr. R. Satish Kumar,It"Advocate.(3) ITA INo.7o7 /2oLLlrILDIRECTOR OF INCOMEAPPELLANTMr. Abhishek Maratha, Sr.Standing Counsel. t a ITA lNo.706 , 704, 707 l2OLt Page 1 of 14 Signature Not VerifiedDigitally Signed By:AMULYACertify that the digital file andphysical file have been compared andthe digital data is as per the physicalfile and no page is missing. \\ \ . , .RESPONDENT L.S. CABLES LTD. Through: Mr. R. Satish Kumar,Advocate.Advocate. CORAM :-HON'BLE MR. JUSTICE A.K. SIKRIHON'BLE MR. JUSTICE SIDDHARTH MRIDUL 1., Whether Reporters of Local newspapers may be allowedto see the Judgment?to see the Judgment? 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 perth{ t-i------'notes attached to the statement of the total income, duringthf vear under consideration, the company was engaged in thelith{ t-i------'notes attached to the statement of the total income, duringthf vear under consideration, the company was engaged in theliexpcution of the following four projects:t;-t;- I [Cil ][Fibre ][optic ]l,cuUting [project ][Eastern ][[India ][for]][[for]]tltl l,cuUting [[Eastern ]][[India ][for]][[for]]tl| rl', [Power ]Grid Corporation of India LimitedlrI I'l(hereinafter ireferred to as the pGCIL).I [(ii) ][Fibre ][Optic ]Qabling [Project ]' [pDA ]-2A [for ][pcCIL.]tltlI (iii)' Fibre Optic lCabling Project Western India forIIi pccrl. I| rl', [Power ]Grid Corporation of India LimitedlrI I'l(hereinafter ireferred to as the pGCIL).I [(ii) ][Fibre ][Optic ]Qabling [Project ]' [pDA ]-2A [for ][pcCIL.]tltlI (iii)' Fibre Optic lCabling Project Western India forIIi pccrl. I (iv)' Fibre Optic.Clabling Project - pDT - 1B for PGCIL. 2.The Asse$sing onicer 1fo; after going through ail the fourcontracts and even int$racting in details with the irssesseecompany and PGCIL anp perusing the documents on record'lil,ttlNo.706, 704,',,707 lzOIL ll Page 2 of L4lll;illlilllllllll'llttl-l--ill,llrl ! \ rssee had performed various activities inevant assessment year and therebYe income relatable to the operationsevant assessment year and therebYe income relatable to the operations,th as per the provisions of Section 9 ofrereinafter referred to as 'the [Act') ][and]ation Avoidance Agreement ('DTAA' forand Korea. The AO while considering;ributed income for the taxation in India.2006, the details of [pdyments ]receiveditory 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/-.rereinafter referred to as 'the [Act') ][and]ation Avoidance Agreement ('DTAA' forand Korea. The AO while considering;ributed income for the taxation in India.2006, the details of [pdyments ]receiveditory 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 ] consolidated order dated 06.O7.2009e assessee. 5. ssessment order [passed ]bY the [AO,])e separate appeals, i.e, [APPeal]' & L27/O7-OB for the [Assessment]r 2005-06 respectively [before ][the ] consolidated order dated 06.O7.2009e assessee. 5. Not satisfied with the order of the CIT (A), the assesseepreferred three separate appeals, i.e., ITA Nos.3634/Del/ZOO9,3635/Del/2OO9 & 3636/Del/2OO9 before the Income TaxAppellate Tribunal (hereinafter referred to as 'the Tribunal).Lear;red Tribunal, however, vide common orders datedI ,} 7. taxes. Astper as off-shore supply [is ][concerned, ][the ][admitted]facts are phat the cables gre manufactured [in ][Korea ][and]dshipped 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]Isupfly, viz,, Illicustom clearance [of ][imported ][equipments ][at]Indilan port, inland transportation [insurance, ][erection ][and]Itesting, 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]liiPvt.l Ltd. [r' ]This Indian [agent ][was ][concerned ][only ][with]rltiexefution of contract in Ir.tt{ndia.fhel nO as well as CIT [([), ][t'lo*ever, took ][the ][view ][that ][the]tl- | rssute to off-shdre contract [and ][on-shore ][contract]tlrelaung Ibetrlveen ilthe assessee arhd PGCI [had ][been ][carried ][out ][by the]ageht in Ilrdia,'income {n [sale ][of ][equipment has ][accrued ][in]IIndia and on that basis, lSection [9 ][of ][the ][Act ][was ][attracted ][in]this case IIn of respect 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'] t a t 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]wab entrusted Iby the [assessee ][to ][its ][Indian agent, ][M/s']Alflasso Industries Pvt. Ltd. [On ][this ][basis, ][it ][was ][held ][that]ISeftion 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-lfor [invogation ][of ][Section ][9 ][of the ][Act are ][not]ar{ necessary tisa{isrieo' I .lI fil Business conlnection in India; orli,| [(iil ][Attributing ][iricome earned by ][the ][assessee ][from ][the]| .rI saro suppliesl, were [not satisfied']lr9.Fol'lowing Ithe decision [r{ndered ][in ][respect ][of ][Assessment ][Year]ZOOZ-OS, the Tribunal [hiis allowed ][the ][appeals ][partly']10,.It iryould be relevant to lpoint [out ][that ][against ][the ][order ][of ][the]Tribunal [pertaining ]toment Year 2OO2-O3, the [Revenue]had preferred aPPeal [u]r Section 260A [of ][the ][Act, which ][was] ITNo.706, 7O4,7O7/2017 ( -6 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|evyofinterestunderSection2348forihort deduction of TDS is [mandatory ][and ][is ][leviable] 11. extracted ;below: ITNo.706, 7O4,7O7/2017 ( -6 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|evyofinterestunderSection2348forihort deduction of TDS is [mandatory ][and ][is ][leviable] 11. extracted ;below: ."25. Since itnot in dispute that [the ][title ][in ][the]eqUipments suPPed was to stand transferred [upon]delivery thereofutside India on [high-seas basis ][as]eqUipments suPPed was to stand transferred [upon]delivery thereofutside India on [high-seas basis ][as]provided for in Ale 22(t), the AuthoritY [for ][Advance]Rulings proceedecon the basis that [supplies had taken]pldce offshore. It,however, rendered [its ][opinion on the]premise thatsupplies or offshore [services]Rulings proceedecon the basis that [supplies had taken]pldce offshore. It,however, rendered [its ][opinion on the]premise thatsupplies or offshore [services] PageT ofL4 ilA No.706, 704,707lz0tL @ i 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.ReversingtheaforesaidfindingoftheAuthorityforAdvance 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,s[b carried ][out ][in ][India ][can be ][taxed ][in]India, iI -.t.Ii.e.(2) since all [paits of the ][transactiorr ]i1 l:::ti"^:'theiii6 ituntfer ['ofi ][property ][in ][goods ][a,s ][well ][as]thepuY-uni. were farrieC [on.outsid-" ]!1",lilian [soil']i''ansuctibn [coul{ ][not ][have ][been ][taxed in India'](3) The Princie of aPPortionment, [wherein.the]territorial [juri]:ion of a [particular ][state ][determines]its caPacitY [to]an event, [has ][to ][be ][followed']The fact tha[the ][contract ][was ][signed ][in ][India ][is ][of]( no ) materialc€, since all [activities ]..inoifthotu [supply ][were ][outside ][India,]gonnection withand therefore [c]nnot be deemed [to ][accrue ][or ][arise ][in]the countrY. (5) There exis a distinction [between ][a ][business]connection [an]; permanent [establishmelt', ][As ],th1ish'ment [cannot be ][said ][to ][be involved]permanentin the trn. t -"-the aforementioned [provision ][will]have no ['a]ion. The Permanent [establishment] Page 8 [of ][14] L 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 thatonly guch part of the income [as ][is ][attributable ][to ][the]operations carried out [in India, ][are ][taxable in India'] I (5) There exis a distinction [between ][a ][business]connection [an]; permanent [establishmelt', ][As ],th1ish'ment [cannot be ][said ][to ][be involved]permanentin the trn. t -"-the aforementioned [provision ][will]have no ['a]ion. The Permanent [establishment] Page 8 [of ][14] L 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 thatonly 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 ],,attributabledirectly 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 ine case of Ishikawaima [(suPra),]there can be no m nner [of ][doubt ][that ][the ][offshore]supplies in the instacase are not chargeable [to tax ][in]India. The instant ca, [in ][fact, ][in our view ][stands ][on ][a]better footing asseparate contracts have [been]enterbd into betrathe [parties, ]albeit [on ][the ][same]day, one for thesupply and the other [for ][the]onshore services, [b] t [even ][assuming ][that ][both ][these]i contracts need toread together as [a ][comPosite]contract, the issuein controversY is [nevertheless]squa1ely covered [bY]decision of the SuPreme [Court]in Ishikawaima [(]ra). It is beYond [disPute that]PGCIL had issuedocable letter of credit [in ][favout']of th,e respondentssessee and in ParagraPh [3L.2]agreed that the [pr<]in the [goods ]will Pass [to ][the]buyer (PGCIL) as [a] d [when ][the ][resPondent-assessee]loads. the [equiPm]onto the mode of [transPort for]the cou ntrY of [origin. ][The]transportation [fro]stipulation in theagreement [( ]Erection [Contract)] tITA.706,7O4t 7Ci7l2}rr Page 9 of [14] I (I L2. ITA relating to certain pedormances by the respondent-assessee including poft handling, custom clearance,tranqportation, insurance, handling on site, unloadingat transportation site, testing and commissioning [to ][the]satisfaction of the buyer are in a separate agreementfor a separate consideration which is clearly enunciatedin tfi'e second agreement as follows: - "Whereas theemployer desires to engage the contractor forpeformance of all activities within India........subject to the terms and conditions hereinafterappearing." I tITA.706,7O4t 7Ci7l2}rr Page 9 of [14] I (I L2. ITA relating to certain pedormances by the respondent-assessee including poft handling, custom clearance,tranqportation, insurance, handling on site, unloadingat transportation site, testing and commissioning [to ][the]satisfaction of the buyer are in a separate agreementfor a separate consideration which is clearly enunciatedin tfi'e second agreement as follows: - "Whereas theemployer desires to engage the contractor forpeformance of all activities within India........subject to the terms and conditions hereinafterappearing." I IvrMr.l IAbhnUnishek [iMaratha, ]learned counsel appearing for [the]lrRevlenue, could not dispute that the identical issue was [decided]lliby ihe Tribunal, earlier, which view was upheld by this Court inttthel Lhel case of Director of Income Tax, New [Delhi ][Vs' ] caQle Ltd. (in ITA No.703l2009 decided on [24.]L2.2OLO[L2.2oLo][).]tnacbd witfi this, his only submission [was ]that [even ][in ][respect ][of]tlIlroff-$hore qupply in the instant case, the AO had found [that ][the]liicontract t between .r.the adsessee and PGCI even for [off-shore]rlassessee had [appointed ][an ][Indian]suppty provided that thg tlaOelnt, viz., M/s. AlRa{so Industries Pvt' [Ltd. ][who ][was]l:lworiking for the assessele in India. [Therefore, ][this ][contract]IIdemonstrated that the lassessee was to be [represented ][by]the:Indian agent in Indip, from [which ][it ][should be ][discerned]Ithat the operation in r$spect of off-shore [had ][been ][carried]out through India by [pn ]agent. This contention [of ][the]learned counsel doescut much ice. Construing [this ][verY] I o.706, 704, 7O7 lzotlPage 10 of 14 'l \ l7 r\ ITA N agreementl it has also been held that two contract, one forioff-shore and other for on-shore service are.rupply indepqndent of each other. Again, a finding of fact wasarrived at' viz M/s. Alpasso Industries Pvt, Ltd. wasconcerned bnly with on-shore contract and had no any other.{l.role to play in respect of off-shore/overseas supplies. In theIaOrepmentrrelating to off-shore supply between the assesseelrand fhe PGCI, no doubt, PGCI had agreed to pay 1.OLo/oo/o oflirithe Qtn priie of the goods as the Indian agent's commissionlito M[s. Alpasso Industries Ltd, as a part of contract [process]llfor supply. In fact, M/s. Alpasso Industries Ltd.jverseds was lengaged Iby other foreign companies also as their Indianl,aOerjts while entering into similar contacts for overseasisupplty with PGCL M/s. $lpasso had filed an affidavit that itIwas lan inciiependent entity working for several clients. [As]lltltlper 't..1fthe off-shore contrapt for overseas supply, the goodslrI'lwerd manufactured byl the assessee overseas in itstltestablishment and dispatftreO from abroad. The [property ][in]rlilthe goods [d'epe]passed irassed R$rchaser into p{rrchaser [l]on delivery at the foreignIport. The bn-shore erecfion contract was in respect of theservice of customs cledrance, inland transportation [and]erection of commissionifrg of transmission [cables. ][The]il.706, 704, 7O7 /2O7L I Page 11 of 14lrlIilillil:illtll'1li.t'l ? I I I I I above work was attended to by the project office, whichconstituted permanent establishment of the assesseecompan'y in India. In view of the above, the only workwhich could be entrusted by the assessee to its Indiantagent, M/s. Alpasso was general administrative coordinationand liaispn with PGCI and nothing else. ? I I I I I above work was attended to by the project office, whichconstituted permanent establishment of the assesseecompan'y in India. In view of the above, the only workwhich could be entrusted by the assessee to its Indiantagent, M/s. Alpasso was general administrative coordinationand liaispn with PGCI and nothing else. I. Tf erefore,'we are of the view that ail the aspects are dulyc{nsidered bi the Tribunal in the light of provision of sections lf'rl of the Act. The Tribunal had pointed out that ctause (i)'iol sub-section (1) of section 9 is very wide whereasIE>fplanation 1(a) is restrictive and provides that in case of ab{siness where all operations are not carried out in Indialilsl-lall .be only such lpart of income as is reasonablyrlat[ributable to operations carried out in India would accrueI'Itlin llndia. tlThe ITAT hadl categorically held that the delivery oflrlgopds, documents and receipt of substantial part of salel:ltlcofrsideration did take place outside India and hence incomeiilrelatable to sale outsilde India had not accrued in India.such ;income could orlty be taxed outside India and notunder Indian law. Fllrrther, there cannot be a businessIconnection between 4 seller and purchaser (Hindustan..1shipyard'rltd. 109 ItR 158). The income from onshore;lNo.706, zo+, zbz /zott I page LZ of t4 ;.',rl:iltlitltItlll1Ir{rl"\llliIl:lt F, e I If I' iT services wgs [taxable ][in ][India, ][simply ][because ][such ][income]accrued in India [from ][services ][rendered ][in ][India. ][one ][need]Inot look f6r [business ][connection ][to ][tax ][such ][income. ][The]assessee company [had ][shipped ][the ][goods ][from ][abroad ][with]IIthe bill of' lading [in ][the ][name ][of ][Power ][Grid ][Corporation]against a irrecoverable [letter ][of ][credit. ][The ][assessee ][had]assJmed, under i[the ][onshore ][contract, ][the ][responsibility ][of]l1.urdomr clearance [on ][behalf ][of ][Power ][Grid Corporation ][as ][an]Iit [would ][be ][wrong ][to ][assume ][that ][the]ug"ht only and of [the ][goods ][did ][not. ][The ][Tribunal ][has ][rightly]owrlership linetd 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]cer{ain [performances ]IOU [the ][assessee ][including ][port]ttcustoms [cl{arance, ][transportation' ][insurance']narldling, tlon [site, ][unto{aing ][at ][transportation ][site, ][testing]hadOting unl tlI comnllssl( .ln to the tatisfaction of the buyer are under a|consideration',"/urut" agreement [for ]lu .\"pu'ute 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 ] [cable ][Ltd' ][(suPra)]:in ITA No.703 [of ][2009. ][;l] .l tage 13 of [14]I No,706, [704, )07 ]/zotL Iilit,1 il iltl - IIII ; I iI {? i - I'e t 'l iNo questionof law arises. These [appeals ][are, ][accordingly,] 15. dismissed. I (A;K. SrKRr)JUDGE (SIDDHARTH MRIDUL)JUDGE R 30, 2OLr SEPTEMpmc I,l Page 14 of 14,704,7Cr7/2017