Case of Authority for Advance Rulings, June 17, 2009 (case Hyosung Corporation Vs DIT (International Taxation))
| President | P.V. Reddi, J. (Chairman), A. Sinha and Rao Ranvijay Singh, Members |
| Resolution Date | June 17, 2009 |
Judgment:
P.V. Reddi, J. (Chairman), (At New Delhi)
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The applicant which is a Company incorporated in Korea having its registered office in Seoul is engaged inter alia in the business of power stations. In the year 2005, Power Grid Corporation of India Ltd. (hereafter referred to as 'POWERGRID') invited bids for the execution of the works related to 800KV / 400KV Tehri Pooling Station Package associated with Koteshwar Transmission System. For the sake of brevity, the same has been described by the applicant as "400 KV GIS Package". The applicant who submitted the bid, became the successful bidder. As per the terms and conditions of bid, the foreign bidder was authorized to assign the whole or part of the contract to an independent contractor subject to the approval of Power Grid. In view of such provision, the applicant, pursuant to the understanding reached with L&T, requested Power Grid to award the Off-Shore Contract to it and the On-Shore Supply and Services Contract to be performed in India to L&T. This proposal was preceded by a Memorandum of Understanding dated 8/8/2005 between the applicant and the L&T. As per para 12( c) of the MOU, the applicant was permitted to assign any portion of the Contract either in full or in part to L&T, in which event L&T will be permitted to work as an independent contractor and the customer, namely, Power Grid will enter into a separate Contract with L&T. Thus, L&T was nominated as the assignee in respect of certain works in case the bid of applicant was accepted. L&T in its letter dated 8/8/2005 addressed to Power Grid confirmed this understanding and consented to work as an independent contractor as per the terms and conditions offered by Power Grid. By the Letter of Award dated 24th March 2006, (for short 'LOA) Power Grid accepted the bid proposal submitted by the applicant and awarded to the applicant the Off-Shore Contract covering all the works to be performed outside India including supply of all Off-Shore equipment and materials on CIF Indian port of disembarkation basis. (vide para 2.1 of LOA). In the LOA, Power Grid referred to the applicant's bid proposal and the post-bid discussions and stated that the On-Shore supply contract and On-shore Services contract including civil works, training in India etc. has been awarded to the applicant's assignee, namely, L&T India as per its letter of the same date. Further, it was made clear in the LOA: "Notwithstanding that the award of work under three separate contracts in the aforesaid manner, you shall be overall responsible to ensure the execution of all the three contracts to achieve successful completion of the entire scope of work under 800KV / 400KV Tehri Pooling Station package associated with Koteshwar transmission system and its taking over by Power Grid". The total contract price payable to the applicant was specified as 6,935,389 US Dollars. After the LOA was issued, a Deed of Assignment was executed by and between the applicant and the L&T on 8th May, 2006. A formal contract in terms of the LOA was entered into between Power Grid and the applicant on 27th October, 2006. Power Grid also entered into the contracts with L&T on the same day.
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It is stated by the applicant that the time for successful completion, testing and commissioning of the Power Station is 19 months from the date of LOA and the same has been extended to 24 months.
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The questions in respect of which advance ruling is sought are the following:
i. On the facts and circumstances of the case, whether the amounts received/receivable by the applicant i.e. Hyosung Corporation from Power Grid Corporation of India Limited ("PGCIL") for offshore supply of equipments, materials, etc., are liable to tax in India under the provisions of the Act and India-Korea tax treaty?
ii. If the answer to (i) is in the affirmative, in view of Explanation (a) to Section 9(1)(i) of the Act and/or Article 7(1) of the India-Korea tax treaty, to what extent are the amounts reasonably attributable to the operations carried out in India and accordingly taxable in India.
3.1. The following additional question was framed by this Authority on 19th November, 2008. Whether the applicant together with L&T Limited can be said to constitute an AOP and accordingly be assessed as such under the Income-tax Act, 1961 in relation to the contract referred to in the application?
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It is the contention of the applicant that no income accrues or arises in India under Section 5 of the Income-tax Act, 1961 (for short, the Act') in respect of offshore supply contract undertaken by it inasmuch as the property in the goods and title passes outside India and the payment is received outside India. Overall responsibility for the successful completion of the contract undertaken by the applicant is not incompatible with the contention that the income does not accrue or it receives in India. Reliance has been placed on the decision of the Supreme Court in Ishikawajima - Harima Heavy Industries 1 (hereinafter referred to as 'Ishikawajima'). Viewed from the angle of the Treaty provisions, the applicant has no PE in India in connection with the contract and in any case no profits can possibly be attributed to the PE in the case of offshore supply. Article 7.1 of the DTAA between India and Korea has been referred to in this connection.
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The Revenue has taken the stand that the applicant and the L&T have executed the contracts as Association of Persons (AOP) and the amount received by L&T and the applicant from Power Grid is assessable in the status of AOP as per the provisions of the I.T. Act. Reliance has been placed on the ruling of this Authority in the case of Geoconsult - AAR/745/20072. As regards the supply of goods, it is contended that notwithstanding the nomenclature of 'offshore supply', in reality, the transfer of property in goods took place and the sale completed within India. It is then contended that quite a number of activities related to offshore supplies have taken place in India and that part of the profits therefrom arose in India. As regards PE, it is contended that the applicant has office in India since 17th October, 2007 that the supervisory activities are of more than 9 months' duration and in any case L&T being sub-contractor of the applicant, the activities carried out by L&T should also be taken into account for counting the period of 9 months under Article 3.5 of the Treaty.
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Before considering the contentious issues, we would like to refer to some more details relating to the contract. The offshore supply contract was entered into between Power Grid and the applicant on 17th October, 2006. It is recited therein that Power Grid agreed to the proposal of the applicant for awarding the total scope of work under three distinct contracts subject to the overall responsibility for successful performance of the project resting with the applicant. The three distinct contracts are (a) offshore supply contract in favour of the applicant for supply of equipment and materials on CIF Indian Port of Disembarkation basis, (b) onshore supply of equipments and materials on Ex-Works basis, and (c) Onshore Service Contract for Port handling and clearance, Inland Transportation, Insurance, delivery on FOR destination basis, storage, erection including associated civil works, testing and commissioning of all equipment and materials including offshore equipment. As per the Letter of Award dated 24.3.2006, the Special and General Conditions of Contract among others shall be deemed to form part of the Agreement.
6.1 The scope of work under the offshore supply contract as set out in the LOA is as follows:
Design, engineering, manufacture, testing at manufacturer's works, FOB dispatch, shipment, marine transportation and insurance and CIF supply of all off-shore equipment and materials including mandatory spares from country(ies) outside India, and testing & training to be conducted outside India, required for the complete execution of 800KV (F)/400KV Tehri Pooling Station (GIS) Package associated with Koteshwar Transmission System, as set forth in the bidding documents.
The detailed list of equipment and materials to be supplied was appended to the Letter of Award.
6.2 The contract price is specified to be US # 6,935, 389 and the break-up thereof was given under four heads viz. (i) CIF price {US # 6,495,564}, (ii) Indian agent commission, (iii) type testing charges for tests conducted abroad, and (iv) charges for training imparted abroad. The break-up of contract price for the purpose of on account payments is given in Annexures to the LOA. The contract price as regards the offshore supply is payable in three instalments i.e. (i) 70 per cent of the CIF price of each shipment shall be paid through irrevocable Letter of Credit established in favour of the applicant after dispatch of the equipment/materials and on presentation of supplier's invoice, clean on board bill of lading marked 'freight pre-paid', Insurance policy certificate, test certificate, etc. (ii) 20 per cent of CIF price of each shipment of main equipment excluding mandatory spares to be made on the receipt of materials and equipment at the storage points at site after physical verification by Power Grid and (iii) balance 10 per cent of CIF price to be paid on successful completion of erection, testing and commissioning of the GIS sub-station. As far as mandatory spares are concerned, the balance 30 per cent was payable on receipt of material at destination and physical verification. It is not in dispute that the entire consideration for offshore supply of equipments was payable outside India.
6.3 The time schedule for performance of the contract is set out in an Annexure. The time for successful testing and commissioning of the Tehri Pooling Station (GIS) Package is stated to be 19 months from the date of LOA. It appears that the time was extended later on by mutual agreement.
Addl. Question reg. A.O.P
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In view...
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