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| DATE: | September 1, 2011 (Date of publication) |
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| Click here to download the judgement (samsung_offshore_supply_composite_contract.pdf) |
Important principles on “splitting of turnkey contracts”, role of PE & taxability of profits from offshore supply laid down
The assessee, a Korean company, entered (together with L&T) into a contract dated 28.2.2006 with ONGC for the “surveys, design, engineering, procurement, installation” etc of a project on turnkey basis. On 24.5.2006, the assessee opened a Project Office which constituted a ‘Permanent Establishment’. The assessee claimed, relying on Ishikawajima-Harima 288 ITR 408 (SC) & Hyundai Heavy Industries 291 ITR 482 (SC) that the revenue from “offshore supply” and “offshore services” was not assessable to tax in India as no part of it was attributable to the PE. The AO & DRP rejected the claim on the basis that (i) the assessee had actively participated in pre-bid meetings and the project office was in existence even at the stage of the “kick-off” meeting, (ii) the contract was a “works contract” and did not contemplate a “sale” of material, (ii) the assessee was responsible for transportation and insurance and title in the goods was to pass to ONGC only after the completion of the project and successful acceptance by ONGC in India, (iii) the contract, being “turnkey“, could not be split into one for supply of material and the other for installation & commissioning. 25% of the said offshore revenue was held assessable in India. On appeal by the assessee to the Tribunal, HELD:
(i) The contract was not divisible into one part for the fabrication of platform and the other for installation & commissioning. Its terms showed that it was a composite contract from surveys of pre-engineering to start-up and commissioning of the entire facilities;
(ii) The opening of the Project Office was a condition precedent before the commencement of the activity of the contractor. The scope of the Project Office was not restricted either by the assessee or by the RBI. Also, the resolutions of the assessee showed that the Project Office was opened for coordination and execution of project. It was clear that all the activities to be carried out in respect of the contract were to be routed through the Project Office;
(iii) Hyundai Heavy Industries 291 ITR 482 (SC) is not applicable because there (a) the project office was to work only as a liaison office and was not authorized to carry on any business activity and (b) the contract was divisible into two parts and so the argument that the PE does not come into existence till the fabrication work is done was accepted;
(iv) The argument that if an “installation PE” is to come into existence under Article 5(3), one cannot have regard to the PE under Articles 5(1) & 5(2) is not acceptable. The Project Office constituted a PE under Article 5(1) and an “Installation PE” was not necessary;
(v) The argument that the Project Office was only carrying out “preparatory or auxiliary” activity and not core activity on the basis that no expenditure was incurred on the project and no technical employees were posted there is not acceptable. The onus is on the assessee to show that office did not play a role in the project. On the other hand, the contract proceeds on the basis that the PO played a vital role in the execution of the project;
(vi) The attribution to India of profit from off-shore supply has to be based on material and done based on the extent of activity done by the PO (matter remanded).
This order, though has not decided any of the primary issues for or against the assessee, being a non-resident, is worth a closer study / valid critique for more than one reason:
The assessee has been pushed back to the proverbial ‘square one’, that too as late as at the second appeal stage; for which the entire blame seemingly rests with the Revenue. In that, – it has failed miserably to appreciate and follow the literature galore available in the form of inter alia ‘precedents’ squarely covering the crucial aspects of the dispute. Further, the resulting multiplicity of proceedings and the unwarranted labor and cost involved,- though , of course, so far as the Revenue is concerned, neither the Revenue as such nor anyone of its responsible officers personally, has anything to loose; for, in the ultimate analysis,the whole of the cost of litigation goes to the government’s exchequer, so much so, in turn, to the account of/borne by the taxpayers at large. Such a detestable eventuality could, in one’s conviction, have been conveniently avoided, had the Revenue acted prudently by not overlooking or by passing the reality that in any view, this is not a fit case for resorting to an ‘estimation’ , without calling for and proceeding on the basis of the obtaining /attendant actual and factual data.
WHAT NEEDS TO BE TAKEN A CONSCIOUS NOTE OF IS, – ANY SUCH RECOURSE TO ‘ESTIMATION’ OR APPLICATION OF ‘RULE OF THUMB’, THOUGH REALLY MEANT AS A LAST RESORT, IF RESORTED TO AS A MATTER OF ROUTINE, GOES AGAINST THE VERY GRAIN OF WHAT THE IT ACT OR THE TAX TREATY, IN TERMS, CLEARLY PROVIDES.