XYZ is engaged in the business of real estate development. In the normal course of business, it imports the various high quality equipment's and goods from outside India. Whether the title and ownership of the goods exported by exporter outside India, is occurred outside India or in India? Explanation (a) of Section 9(1)(i) of the Act: In the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India.
Section 5(2):
Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which: (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. In view of the above provisions of the Act, it can be observed that for the purpose of section 5(2), the income deemed to accrue or arise in India, shall be such part of income as is reasonably attributable to the operations carried out in India. Thus, where the operations are not carried out in India, the income from such operations cannot be liable to tax in India.
1. CIT vs. Toshoku Ltd. (SC) (1980) 125 ITR 525: In this case, the Hon'ble SC held as under:
In the instant case, the nonresident assessees did not carry any business operations outside in the taxable territories. They acted as selling agents outside India. The receipt in India of sale proceeds of tobacco remitted or caused or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by clause (a) of the Explanation to section 9(1)(i) of the Act. The commission amounts which were earned by the nonresident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the Department.
2. Hyosung Corporation, 224 CTR 329 (AAR):
NRE = Non Resident Exporter Contractor/applicant = Non Resident Exporter (NRE) The employer = Indian Importer
a) The title to the equipment and materials was transferred while the goods were outside Indian Territory.
b) By taking care of goods at the site in India till installation, the exporter had merely worked in the capacity of a bailee while the title to the goods passed to Indian Company. The stipulation that the exporter as a supplier continued to be responsible for the quality and performance of the goods until the final takeover on testing of the equipment, did not postpone the transfer of title to the goods as such covenants were more in the nature of warranty provisions. The relevant extract from the para "10.1 of the above ruling are given as under:
c) The above events would indicate that the title to goods stood transferred to Power Grid Corporation of India (Power Grid) outside the territory of India. The title passed on to Power Grid well before the goods reached the Indian Port or the territorial waters of India. The bill of lading contains the name of Power Grid as the consignee. The documents were presented to the applicant's banker for negotiation soon after the goods were shipped FOB and bill of lading was issued. Two days later, the amount equivalent to 70 per cent of the value was transferred to the applicant's account on the same day. This modus operandi is in accordance with para 2.4.4 of the LOA.
d) The bill of entry which was prepared about 15 days after shipment also shows Power Grid as the importer. Even in the insurance policy taken by the applicant Power Grid has been named as the beneficiary. The customs duty was paid by or on behalf of Power Grid before the goods was taken delivery. These facts unerringly lead to the conclusion that in accordance with the contractual stipulations, the transfer of title to the equipment and materials took place while the goods were outside the territory of India.
e) The events match with the nomenclature - 'offshore supply contract' and the express stipulation that the transfer of title to equipment and materials shall pass on to Power Grid at FOB Port of shipment with the negotiation of shipping documents.
f) It is worthy of note that the applicant has not reserved the right of disposal during transit or otherwise. The fact that the applicant is not relieved of the responsibility for loss or damage to the goods until the final take over and acceptance of the goods and that the goods are left in the custody of the applicant till the stage of erection and installation are not inconsistent with the Power Grid having already become the owner of equipment well before the goods reached the Indian Port. These are special safeguards which Power Grid wanted to have keeping in view the operational exigencies and overall obligations of the applicant under the contract. It is trite that risk need not pass simultaneously with the title to goods. There could be special stipulation between the parties in this behalf.
g) As rightly pointed out by the learned counsel for the applicant, the applicant, by taking care of goods at the site in India till installation, assumed the capacity of a bailee. As regards the stipulation that the supplier shall continue to be responsible for the quality and performance of the goods until the final take over on testing of the equipment, it cannot be construed to be a condition which postpones the transfer of title to the goods till that time. It is more in the nature of warranty provision in the contract."
3. Joint Stock Company Foreign Economic Association "Technopromexport", In RE. (2010-(322)-ITR -0409 - AAR):
In this case, the salient features of the contract between NRE and Indian Importer as mentioned and discussed in the AAR's judgment are reproduced as under:
a) Transportation: "The contractor (NRE) shall at its own risk and expense transport all the plant and equipment and the contractor's equipment to the site by the mode of transport that the contractor judges most suitable under all the circumstances. Upon dispatch of each shipment of the plant and equipment and the contractor's equipment, the contractor shall notify the employer (Indian Importer company) by courier, post or by telefax followed by post confirmation of the description of the plant and equipment and of the contractor's equipment, the point and means of dispatch, and the estimated time and point of arrival in the country where the site is located, if applicable, and at the site. The contractor shall furnish the employer with relevant shipping documents to be agreed upon between the parties."
b) Customs clearance: "The contractor shall, at its own expense, handle all imported plant and equipment including spares and contractor's equipment at the points of import and shall handle any formalities for customs clearance, including liability for port charges etc., if any, subject to the employer's obligations under GCC sub-cl. 14.2, provided that if applicable laws or regulations require any application or act to be made by or in the name of the employer, the employer shall take all necessary steps to comply with such laws or regulations."
c) Transfer of ownership: Ownership of plant and equipment (including spare parts) to be imported into the country where the site is located shall be transferred to the employer upon loading on the mode of transport to be used to convey the plant and equipment (including spare parts) from the country of origin to that country and upon endorsement of the dispatch documents in favour of the employer. Notwithstanding the transfer of ownership of the plant and equipment, the responsibility for care and custody thereof together with the risk of loss or damage thereto shall remain with the contractor pursuant to GCC cl. 32 (care of facilities) hereof until completion of facilities or the part thereof in which such plant and equipment are incorporated.
d) Insurance: As per Appendix 3 of the contract, the insurance is to be taken by the contractor. The employer shall be named as co-insured under all insurance policies taken out by the contractor pursuant to GCC 34.1 except for third party liability, workman's compensation and employer's liability insurances and the Contractor's sub-contractors shall be named as co-insured under all insurances policies taken out by the contractor pursuant to GCC 34.1, except for the cargo insurance during transport, workman's compensation and employer's liability insurances. All insurers rights of subrogation against such co-insured's for losses or claims arising out of the performance of the contract shall be waived under such policies. Notwithstanding the insurance requirements mentioned above, it would be the contractor's responsibility to take adequate insurance cover as may be pertinent to protect his interest and interest of the employer. If at any point of time during execution of the contract, the insurance policies are found to be inadequate, the contractor shall take fresh insurance policies meeting aforesaid requirements.
The employer reserves the right to make suitable recovery from the contractor, if any." Further, in this case, the AAR also discussed the following relevant observation of the Hon'ble Supreme Court in Ishikawajma (supra): It may be noticed that the clauses in the contract considered by the Supreme Court also contained an obligation on the part of the contractor to retain custody and control of equipment and to take due care thereof until provisional acceptance of the work. Moreover, installation of equipment was also to be carried out by the contractor. In spite of these features, the Supreme Court came to the conclusion that the offshore supply of goods which took place outside India does not give rise to any taxable income in India under the provisions of the Act. The applicant's case even stands on a better footing inasmuch there is a separate and exclusive contract with the applicant for the supply of goods offshore. The facts of the present case and the salient features of contract are almost the same and the said ruling which followed the decision of Supreme Court in Ishikawajma's case (supra) fully supports the applicant's case. In this case, the bill of lading filed by the applicant shows that the port of loading is Ilyichevsk, in Ukraine and the port of discharge at Haldia in India. The description of cargo is also indicated therein. In another bill of lading the port of loading is Novorossiysk in Russia and port of discharge at Haldia in India.
The copies of bill of entry are also filed by the applicant. These go to show that the consignee/importer is the applicant. The commercial invoice has also been filed. It shows that the invoice was raised a few days after shipment and all the material documents including sight draft, bill of lading, freight paid memo, insurance certificate were enclosed. The terms of contract and the above documents go to show that the transaction of offshore plant and equipment was completed in the high seas and the property in goods passed to the NTPC outside India. As per cl. 31 of General Conditions of Contract the ownership of plant and equipment supplied under the ownership contract No. 4520 shall pass on to NTPC upon landing on the ship and upon endorsement of the dispatch documents in favour of the NTPC. The consideration of sale of offshore was remitted to the applicant directly outside India by means of establishing L/C. Hence no portion of consideration for offshore supply was received or could be deemed to have been received in India and therefore not liable to tax. Further no income accrues or arises in India to the applicant attracting income-tax. The following passage is also important: "What is relevant is receipt or accrual of income, as would be evident from a plain reading of s. 5(2) of the Act. The legal fiction created although in a given case may be held to be of wide import, but it is trite that the terms of a contract are required to be construed having regard to the international covenants and conventions. In a case of this nature, interpretation with reference to the nexus to tax territories will also assume significance. Territorial nexus for the purpose of determining the tax liability is an internationally accepted principle. An endeavour should, thus, be made to construe the taxability of a non-resident in respect of income derived by it. Having regard to the internationally accepted principle and DTAA, it may not be possible to give an extended meaning to the words income deemed to 'accrue or arise in India' as expressed in s. 9 of the Act."
Conclusion Point:
Then while recording the conclusion in respect of offshore supply contract, the following findings were given by the AAR: (1) 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. (2) 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. (3) There exists a distinction between a business connection and a PE. As the PE cannot be said to be involved in the transaction, the aforementioned provision will have no application. The issue raised in this matter is concluded by two decisions rendered by Hon'ble Supreme Court and this Authority which have been referred to in extenso by the learned Member. Though much can be said in favour of the view that in a composite turnkey project contract including supply of equipment, sales, assembly, erection, testing and commissioning of the project, the supply part of the contract cannot be isolated or viewed separately and that the income has in reality occurred or arisen within India notwithstanding the stipulations as to the transfer of title abroad, we have no option but to implicitly follow the binding decision of the Supreme Court in Ishikawajma case (supra). That is why in Hyosung Corporation case (supra), this Authority reached the conclusion that income of similar nature earned by the non-resident was not taxable in India. The Revenue has made yet another endeavour in this case to persuade us to take a view virtually contrary to the aforementioned decisions by projecting pointless distinctions.
It is axiomatic that this Authority is not free to disregard the law laid down by the Supreme Court and to have a fresh look into the matter. In the instant case, as pointed out by the learned Member, the clauses in the offshore supply contract agreement regarding transfer of ownership, the payment mechanism in the form of letter of credit which ensures the credit of the amount in foreign currency to the applicant's foreign bank account on receipt of shipment advice and the insurance clause would go to establish that the transaction of sale and the concomitant transfer of title took place outside the Indian territory. The documents relating to a sample transaction filed by the applicant i.e. the certificate of origin, the bill of lading, the bill of entry as well as the commercial invoice reinforces the conclusion that the ownership and property in goods passed outside India. The contractor's obligation to insure the goods to cover loss or damage during transit and the responsibility cast on the applicant to take proper care of goods till they reach the site and are inspected shall be viewed in the context of the fact that the co-insured is the applicant and moreover, the applicant has undertaken onshore services contract. Further, as pointed out in Hyosung Corporation's case (supra), the fact that the transit risk is borne by the contractor till the goods reach the site in India is not necessarily inconsistent with the sale of goods taking place outside the territorial waters of India. As observed in that case, "it is trite that risk need not pass simultaneously with the title to goods. There could be special stipulation between the parties in this behalf. Further, as held in Hyosung's case (supra), the clause that the supplier continues to be responsible for the quality and performance of the goods until the final take over at the site cannot be construed to be a condition which postpones the transfer of title to goods.
4. DIT vs. Ericsson AB (Delhi High Court) The assessee, a Swedish company, entered into contracts with ten cellular operators for the supply of hardware equipment and software. The contracts were signed in India. The supply of the equipment was on CIF basis and the assessee took responsibility thereof till the goods reached India. The equipment was not to be accepted by the customer till the acceptance test was completed (in India). High Court, HELD dismissing the appeal:
The profits from the supply of equipment were not chargeable to tax in India because the property and risk in goods passed to the buyer outside India. The assessee had not performed installation service in India. The fact that the contracts were signed in India could not by itself create a tax liability. The nomenclature of a "turnkey project" or "works contract" was not relevant. The fact that the assessee took "overall responsibility" was also not material. Though the supply of equipment was subject to the "acceptance test" performed in India, this was not material because the contract made it clear that the "acceptance test" was not a material event for passing of the title and risk in the equipment supplied. If the system did not conform to the specifications, the only consequence was that the assessee had to cure the defect. The position might have been different if the buyer had the right to reject the equipment on the failure of the acceptance test carried out in India. Consequently, the assessee did not have a "business connection" in India.
5. Skoda Export Prabha (1988) 172 ITR 358 (AP): The facts of this case are also similar to the above cases. In this case, the Hon'ble Andhra Pradesh High Court held as under:
The various clauses in the agreement referred to above make it clear that the sale of machinery was F.O.B., European port, and the time of fulfillment of delivery was prescribed as the date of bills of lading. The payment was also to be made outside India. The agreement further makes it clear that the insurance risk during the course of journey was that of the assessee and it paid for the same: even the freight charges from the European port to the place of destination was paid by the assessee. Thus, judged from any angle, the sale of machinery, which are "goods" within the meaning of Sale of Goods Act, was completely outside India. . In such a case, one has to apply the test of predominance and decide where the sale took place? On a combined reading of the clauses of the agreement, we have no doubt that the sale of machinery did take place outside India.
6. CIT vs. Mitsui Engg. & Ship Building; Delhi High Court (2003) 259 ITR 248:
None of the sub-clauses in and Explanation 2 under S. 9(i)(vi) would, in the circumstances of this case, be capable of being regarded as covering the design and engineering carried out by the supplier of the machinery abroad. There is no transfer of license of any patent, invention, model or design. The design referred to in the contract is only the design of the equipment required to be manufactured by the supplier abroad and supplied to the purchaser. The information concerning the working of a machine is only incidental to the supply as the machinery was tailor-made for the buyers. Unless the buyer knows the way in which the machinery has been put together, the machinery cannot be maintained in the best possible way and repaired when occasion arises. No license or any patent is involved. Sub-cl. (vi) and also (vii) of S. 9(1) would have no application as the design was only preliminary to the manufacture and integrally connected herewith. The other three sub-clauses also in the circumstances of the case are not attracted.
7. LS Cable Ltd., In re July 26, 2011 (AAR) - The question formulated by the applicant for seeking advance ruling is whether the amounts receivable by the applicant from DTL under 'offshore supply contract for offshore' supply of equipments and materials, spares are liable to tax in India. The Authority for Advance Rulings held as under: the clauses in the offshore supply contract agreement regarding the transfer of ownership, the payment mechanism in the form of letter of credit which ensures the credit of the amount in foreign currency to the applicant's foreign bank account on receipt of shipment advice and insurance clause, would go to establish that the transaction of sale and the title took place outside Indian Territory. The ownership and property in goods passed outside India. The transit risk borne by the applicant till the goods reach the site in India is not necessarily inconsistent with the sale of goods taking place outside India. The parties may decide between them as to when the title of the goods should pass. As the consideration for the sale portion is separately specified, it can well be separated from the whole. Nothing in law prevents the parties to enter into a contract which provides for sale of material for a specified consideration, although they were meant to be utilised in the fabrication and installation of a complete plant. Regarding the revenue's plea that as the applicant has a PE in India, the income arising should be taxed in India, the authority stated that the existence of PE would be for the purpose of carrying out the contract for onshore supplies and services etc. but such a PE would have no role to play in offshore supplies. Even if a PE is involved in carrying on some incidental activities such as clearance from the port and transportation, it cannot be said that the PE is in connection with the offshore supplies. Accordingly, the applicant was not liable to tax in respect of offshore supplies as per the Act. In view of the explanation
(a) of the section 9(1) (i) of the Act r. w. section 5(2) of the Act and above judicial analysis, the following conclusions can be formed: a) Under "offshore supply contract for the goods" i.e. export from foreign country to India, the title and ownership of the goods are transferred only at outside India, while transferring the bill of lading and other export documents in favour of the assessee, by the exporter.
b) The terms of the contract, that the same is on FOB basis or CIF basis, does not make any difference on the event of the transfer of the title and ownership of the goods, which is occurred at site outside India only.
c) The fact that the export company has a PE in India, also does not affect the above position of transfer of titlr and ownership of the offshore supply contract. The position could be affected, had it been an onshore supply contract.
d) Other terms and conditions as part of the contract, as insurance policy taken by the exporter, or any other services provided by the exporter on such export to ensure the delivery of the goods safely to the buyer and bearing other risks by it, does not postpone the transfer of the title and ownership of the goods in favour of the buyer, as mentioned above. Thus, on offshore supply of goods by the exporter to the Company in India, no operation can be deemed to be carried out in India as mentioned under explanation (a) of the section 9(1)(i) of the Act. Accordingly, the non resident exporter is not liable to pay tax in India on the same.
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