Case nº A.A.R. No. 981 of 2010 of AAR Cases, August 17, 2016 (case In Re: MERO Asia Pacific Pte. Ltd. Vs)

JudgeFor Appellant: Anita Sumanth, Advocate and R. Venkataramani, FCA
PresidentV.S. Sirpurkar, J. (Chairman) and A.K. Tewary, Member (R)
Resolution DateAugust 17, 2016
Issuing OrganizationAAR Cases


A.K. Tewary, Member (R)

  1. The applicant has sought ruling on the following questions:--

    (1) On the facts and circumstances of the case, whether the amounts, received/receivable by the applicant from Larsen & Toubro towards offshore supply of goods and materials are liable to tax in India under the provisions of the Indian Income Tax Act read with the Agreement for the Avoidance of Double Taxation between India and Singapore?

    (2) If the answer to (1) is in the affirmative, to what extent are the amounts reasonable attributable to the operations carried out in India and accordingly taxable in India by virtue of Explanation (a) to Section 9(1)(i) of the Act and/or Article 7(1) of the India-Singapore tax Treaty?

    2.1 MERO Asia Pacific Pte Ltd. (MAPL) is a company registered under the Laws of Singapore and is engaged in the business of executing contracts in relation to structural glazing and wall cladding works. It has set up project Offices in India for the purpose of executing the contract works awarded to the company. Delhi International Airport Private Limited (DIAL) entered into operations, management and Development Agreement (OMDA) on 4/4/2006 with the Airports Authority of India. DIAL floated a global tender for various works in connection with the development of T3 terminal in Delhi Airport. Larsen & Toubro (L&T) won the contract involving design and construction of a state of art passenger terminal. The main contract was awarded by DIAL (Employer) to L&T (contractor) and L&T, in turn, awarded the contract for entire external and internal facade for the glazing and cladding systems for Piers, fixed link bridges and nodes to the applicant (sub-contractor) for which an agreement was entered into on 23rd April, 2008. The applicant was to design the curtain wall and facade, supply all materials, erect, install, inspect, test and commission the entire sub contact works. The currency of the contract is in Indian Rupees and place of payment is Delhi and pursuant to an option given the payment is also made in Singapore dollar in Singapore. The contract was to be completed by 26/03/2010.

    2.2 Appendix 2A to the agreement is subcontractor's responsibilities and the scope of subcontract works is set out in Appendix 2A to the agreement. The applicant has referred to this appendix and stated that the scope of work can be broadly divided into:

    (i) Off-shore supply of goods.

    (ii) Installation and other works to be executed in the airport.

    2.3 In the application the applicant has not specified the clause of the Appendix on the basis of which the scope of work can be broadly divided in two parts. However, during the course of arguments she mentioned that clause 1.1.4 of Appendix 2A may be treated as comprising of two different scope of work. Clause 1.1.4 reads as under:

    1.1.4 Supply of all the materials, shipment and/or transportation, prefabrication/fabrication, erection, installation, inspection, testing and commissioning, including all the necessary enabling and allied activities for the entire subcontracts works.

    2.4 According to the applicant's counsel 'supply of all materials, shipment and/or transportation, prefabrication/fabrication' may be treated as separate and considered as part of offshore supply of goods. The applicant has heavily relied upon the judgment of Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DIT (288 ITR 408) saying that the present contract was an offshore supply contract in respect of supply of goods, the title to the goods passed to L&T Offshore, that the payment for the same was received in Singapore and, therefore, the said judgment is applicable and no income accrues or arises or is deemed to accrue or arise in India. The applicant has further pointed out that the Hon'ble Supreme Court in the case of Ishikawajima harima has noted the following proposition of law that emerges from the decision of various Courts on the issue of offshore supplies:

    "In case of sale of goods simpliciter by a non-resident in India, if the consideration for sale is received abroad and the property in the goods also passes to the purchaser outside India, no income accrues or arises or is deemed to accrue or arise to the seller in India."

    Other cases relied upon by the applicant are Hysoung Corporation, In re (314 ITR 343), DIT v. Linde AG, Linde Engineering Division (2014) 44 244 (Delhi), DIT v. Nokia Networks OY (2012) 25 225 (Delhi)and Joint Stock Company Foreign Economic Association Technopromo Expert (322 ITR 409).

    2.5 The applicant has further mentioned that with regard to the offshore supply of goods, it negotiated and concluded the supply of goods and materials from various third party suppliers/manufacturers outside India and, therefore, all the activities in connection with the offshore supply were carried outside India. The suppliers/manufacturers fabricated and manufactured the goods and materials based on the specifications stipulated by the applicant. The goods were sold by the Applicant from outside India to L & T and the consideration was paid by M/s. L & T to the Applicant in Singapore Dollars by way of a transfer of funds to the bank account of the Applicant in Singapore. M/s. L & T thereafter sold the consignments to DIAL on a "high sea sale" basis against transfer of bill of lading. L & T issued a high sea sale invoice and entered into an agreement with DIAL where under the ownership in the consignment was transferred to DIAL along with the bill of lading, duly endorsed. On the arrival of the goods in India, the goods were cleared by the applicant on behalf of DIAL using the services of the Project Office of the Applicant as its agent. Custom duties were paid by the applicant.

    2.6 Article 7 of the Double Taxation Avoidance Agreement between India and Singapore deals with "business profits" and sub-clause (1) read as follows:

    ARTICLE 7: Business Profits - (1) The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein.

    The applicant has submitted that if the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other state but only so much of them as it is directly/indirectly attributable to that permanent establishment. The Applicant carries on business in India through a Project Office that constitutes its Permanent Establishment in India. However, the Project Office of the Applicant is a separate taxable entity. The Applicant submits that the profits earned by way of off-shore supplies to M/s. Larsen & Toubro Limited are not either directly or indirectly attributable to that Permanent Establishment, the permanent establishment (Project Office) in India oversees the installation of structural glazing works and wall cladding works for the Delhi International Airport and has no connection, whatsoever, directly or indirectly in the offshore supplies and the off-shore supplies executed by the Applicant are an independent scope of work.

  2. During the course of hearings spread over a long period both the Department of Revenue and the applicant have given several submissions and counter-submissions. These are contained in Department's letter dated 3/9/13, 2/4/14, 4/9/15 and 9/10/15. The applicant's responses are contained in submission dated 7/2/14, 6/5/14 and 14/10/15. The comments of the Department and response of the applicant on main relevant points of fact are summarized below.

    Department's comments

  3. The Department of Revenue has objected to the interpretation of the applicant both on facts and in law and its comments, in brief, are as under:


    1. According to the Department, considering the number of days consumed by MAPL in executing the project works in India through the project office situated in India, a Permanent Establishment for the nonresident company MAPL in India gets established.

    (b) The Department has submitted that MAPL had conducted its business operations in India through its Project Office in India and this establishes a business connection within the meaning of Explanation 2 and 3 to clause (i) of subsection 1 of Section 9 of the Income-tax Act, 1961. A Permanent Establishment of the Non- resident Company is established in India, as per Article 5(3) of the India-Singapore DTAA also.

    (c) According to the Department there is no separate or exclusive contract of offshore supply of materials. The contract comprises of both supply of goods and rendering of services which includes erection, installation, commission and completion of work.

    (d) The Department has submitted that the contractor did not want to split the risk and has kept the risk factor/liability for the entire subcontract as a whole on the applicant. It means that any issue which involves risk at any part or time of the execution of the work will have the impact on the whole project. This demonstrates that the contract cannot be dissected in any way as it is a composite one and the responsibility on the sub-contractor applicant is wholesome.

    (e) The Department has further submitted that payment in both currencies relate to the single composite work and is evidenced by the fact that the payment schedule does not show any such divisions. The payment schedule talks about the cost centre value and the percentage of payment at various stages. The cost centre value as said in the agreement in App reads as follows Cost Centre Value is the total amount of money which will become due to the subcontractor in his final account in accordance with Appendices 4 and 5, determined for the applicable Cost Centre identified in App 5.2

    (f) The Department has also submitted that delivery would not be completed till the goods are supplied and commissioned on site.

    (g) The Department has drawn attention to the resource material Vision No...

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