Even in Turnkey Contract, off-shore supply profits not taxable if transfer of title to purchaser takes place abroad
The assessee, a Korean company, was awarded two contracts by Power Grid Corporation, one for onshore execution of the Fibre Optic Cabling System Package Project and the second for offshore supply of equipment and offshore services. The assessee set up a “project office” in India for rendering the onshore services and offered the income attributable to those activities to tax under Articles 5 and 7 of the DTAA. The profits from the offshore supply contract was claimed to be not liable to tax in India on the ground that the transfer of title in the goods had passed outside India. The AO & CIT (A) rejected the assessee’s claim on the ground that there was inter-dependence between the two agreements and they formed a composite contract for supply of equipment and its installation in India. However, the Tribunal (113 ITD 113) accepted the assessee’s claim and held that the off-shore supply profits were not taxable. On appeal by the department, HELD dismissing the appeal:
(i) Though the two contracts were entered into on the same day and between the same parties, the department’s argument that they should be viewed as a composite contract is not sustainable because even assuming they should be read as one turnkey contract, offshore supplies are not taxable in India if the title passes outside India and payments are received in foreign exchange (Ishikawajima-Harima 288 ITR 408 (SC) followed; Ansaldo Energia SPA 310 ITR 237 (Mad) distinguished);
(ii) On facts, the contract provided that the supply of equipment was completed outside India and the property got transferred to PGCIL outside India. The sale was complete and unequivocal as soon as the goods were loaded on the ship & the LC handed over. There was no condition in the contract which empowered the assessee to keep control of the goods and/or to repossess the same. The fact that the assessee could have asserted the rights of an unpaid seller as per s. 46 of the Sales of Goods Act did not change the position of transfer of title;
(iii) The profits from the offshore supply of equipment accrued when the goods were sold. The fact that a part of the consideration for the supply was payable to the assessee after operational acceptance on erection and completion of the system does not mean that the title in the goods did not pass to the buyer abroad. Further, undue importance should not be attached to the fact that the assessee was obliged to handover the equipment functionally completed. Such an obligation is in the nature of a trade warranty. Likewise, the buyer’s right to examine and repudiate the goods does not by itself indicate that the property in the goods had not passed (Mahabir Commercial Co 86 ITR 417 (SC) & Shri Ram Bearings Ltd 224 ITR 724 (SC) followed);
(iv) The fact that the assessee had a “permanent establishment” with regard to the onshore activities is of no relevance because the said PE had no role to play in the execution of the offshore supply contract and was set up for the sole purpose of enabling the performance of the onshore services contract. Even under clause (a) of Expl (1) to s. 9 (i) only such part of the income as is reasonably attributable to the operations carried out in India is deemed to arise in India. As no operations qua the agreement for supply of equipment were carried out in India, no income can be deemed to have accrued or arisen in India whether directly or indirectly or through any business connection in India.