POSCO Engineering & Construction Co Ltd vs. ADIT (ITAT Delhi)

Entire law on taxability of “composite” contracts for supply of offshore & onshore supply & services under Act & DTAA explained

(i) The first question which requires to be decided is whether it is a case of composite contract? In our considered opinion, the AO was initially not correct in holding that the contract was a composite one devoid of any bifurcation towards onshore and offshore supplies and services, which stand was subsequently altered to the correct position. We, therefore, hold that it is wide off the mark to categorize the present contract agreement as a composite one since all its major four components are distinctly identifiable with separate consideration for each. There is a separate mention of consideration for supply of equipments and for rendition of services. Simply because the supply of equipment and the rendition of services is to one party and for a common purpose, we are unable to find any logic in treating the entire amount as one composite payment attributable commonly both to the supply of equipment and rendering of services, more so when there is a specific identifiable amount relatable to these segments;

(ii) Title to goods shall be considered to have passed outside India when delivery was made on high sea and the payment was also received outside India. Merely because the risk passed in India, it cannot be said that the sale took place in India. Therefore, no income can be said to have arisen in India;

(iii) Once the foreign supervision is found to have been exclusively charged and our attention has not been drawn towards any material to indicate that the charge for training was embedded in any other component of price charged, the natural corollary which follows is that the Training charges are `Included’ in the sale price of equipments. It is simple and plain that if a seller has to incur training expenses or repair cost during the warranty period, then either there is a specific consideration for the same and if it is not there, then such costs are to be considered as in-built in the price of equipment. Ordinarily, when any product is sold with warranty, the price charged by the seller always includes compensation for the repairs cost to be incurred during the warranty period. In contrast to that, if there is no warranty clause and similar product is sold by another seller, the sale price is bound to be at a lower level vis-a-vis the seller who sells its products with warranty. This leads us to the irresistible conclusion that when the assessee has undertaken to bear training costs at its own and there is no separate compensation for that, which is `Included’, then such compensation is included in the sale price charged for offshore supply of equipments. In such a case, the sale price so charged is required to be split towards the price of goods simplicitor and compensation for training and other charges which the seller has undertaken to bear.

(iv) In so far as the price for offshore supply of equipment simplicitor is concerned, profit from the same cannot be charged to tax as the assessee is a non-resident and there is absence of territorial nexus of such income with India.