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| DATE: | May 9, 2012 (Date of publication) |
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| Click here to download the judgement (roxar-maximum-reservoir-supply_goods_composite.pdf) |
A composite contract for installation & commissioning cannot be split so as to exempt the profits from offshore supply of goods
The Applicant entered into a contract with ONGC for “services for supply, installation and commissioning of 36 manometer gauges”. The applicant claimed that the contract, though composite, had to be split into various components in line with Ishikawajima-Harima Heavy Industries 288 ITR 408 (SC), Hyundai Heavy Industries 291 ITR 482 (SC) & Hyosung Corporation 314 ITR 343 (AAR), and that the income attributable to the supply of manometer gauges was not taxable in India because the title to the goods had passed outside India & the payment was received outside India. HELD by the AAR rejecting the plea:
Though in Ishikawajima-Harima, a two judge bench of the Supreme Court had adopted a dissecting approach by dissecting a composite contract into two parts and holding one of the parts not amenable to taxation in India, this cannot be followed in view of the 3 Judge verdict in Vodafone International Holdings vs. UOI 345 ITR 1 (SC) where it was held that a transaction had to be “looked at and not looked through” and seen as a whole and not by adopting a “dissecting approach”. A contract for sale of goods differs from a contract for installation and commissioning of a project. The tests relevant for considering where the title to the equipment, passed would not be relevant while construing the terms of a supply and erection contract. On facts, the contract is for erection and commissioning of 36 manometer gauges and not one for sale of equipment or erection of the equipment. It is a composite & indivisible contract for supply and erection at sites within the territory of India and cannot be split. The income accrued in India and was assessable u/s 44BB.
Getting to the bottom of the report, to put it mildly, one is left wondering whether the view the AAR has taken is bound to have far reaching consequences.
It is observed, the view seems to mainly rely on/ follow certain observations of the SC in Voda’s case (paragraph 6). Notwithstanding that, the matrix of facts (circumstances) and the issues involved are prima facie, rather indisputably, materially different.
The question wrt the applicability of section 44BB having been answered in the affirmative, may be, it is not unlikely, the other questions may not be pursued in a further appeal.
Nonetheless, what is unclear is as to why no arguments have been put across, hence not dealt with by the Authority, with any reference to the thus far accepted, though long-established, governing strict legal principles. To briefly mention, the predominant principle of them all is that only such income, or any portion of it, of a non-resident can be taxed in India, as is / to the extent it is ‘attributable to’ activities in India. In one’ s firm conviction, the said basic proposition is amply / unmistakably borne out even by the very scheme of the deeming provisions of section 9 and related CBDT’s circulars; of course, if there be a tax treaty, the overriding implications of the ‘PE’ concept there under.
In sum, the reported ruling has, it is felt, the inescapable potentials for a new spate of long-drawn debates/ prolonged disputes.