M/s. ECL India Project Office, Bhubaneswar V. DDIT(Intl.Taxation),Bhubaneswar, Bhubaneswar

ITA 41/CTK/2014

• Counselvise Citation: 4122114 RSA 2014
• Duration Of Justice: 1 year(s) 6 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-08-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 27-05-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 03-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RABIN CHOUDHURI
• Assessee Lawyers: SIDDHARTHA NAUTIYAL
• Keywords: Capital asset; Transfer pricing; Double taxation relief; Services rendered outside India; Permanent establishment; Advance ruling; Difference of opinion; Reason to believe; Change of opinion
• Section: 5(2); 234B; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CUTTACK BENCH, CUTTACK BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI. B. P. JAIN, ACCOUNTANT MEMBER ITA NO. 40 & 41/ CTK /2014 ASSESSMENT YEAR: 2008 - 09 & 2010 - 11 M/S ECL INDIA PROJECT OFFICE BHUBANESWAR V. DDIT(INTL. TAXATION) BHUBANESWAR T AN /PAN : AABCE6119L (APP ELL ANT) (RESPONDENT) APP ELL ANT BY: S/SHRI. HIMANSHU SINHA & SIDDHARTHA NAUTIYAL RESPONDENT BY: RABIN CHOUDHURI DATE OF HEARING: 27 05 201 5 DATE OF PRONOUNCEMENT: 10 0 8 2015 O R D E R PER SUNIL KUMAR YADAV: THESE APPEALS ARE PREFERRED BY THE ASSESSEE AGAINS T THE RESPECTIVE ORDERS OF THE LD. CIT(A) RAISING COMMON GROUNDS THEREIN AND FOR THE SAKE OF REFERENCE, WE EXTRACT THE GROUNDS IN I. T.A. NO. 40/LKW/2014 AS UNDER:- 1. THAT THE LEARNED CIT(A), HAS ERRED BOTH ON FACTS AN D IN LAW IN UPHOLDING THE INITIATION OF PROCEEDINGS U/S 148 OF THE INCOME TAX ACT. HE HAS FAILED TO APPRECIATE THAT IN THE AB SENCE OF SURFACING OF ANY 'FRESH MATERIAL', PROCEEDINGS U/S 148 OF THE ACT CANNOT BE VALIDLY INITIATED SINCE THERE IS NO FURTH ER MATERIAL LEADING TO A REASON TO BELIEVE THAT THE INCOME OF T HE ASSESSEE HAD ESCAPED ASSESSMENT. 1.1 THE REASSESSMENT HAD THUS BEEN INITIATED ON THE BASIS OF CHANGE OF OPINION, WHICH IS NOT PERMISSIBLE IN LAW. :-2-: 2. THAT THE LEARNED CIT(A) HAS FURTHER ERRED IN UPH OLDING TAXABILITY OF ALLEGED PROFIT ON OFFSHORE SUPPLY OF EQUIPMENT, IGNORING THE DECISIONS OF THE APEX COURT, IN THE CA SE OF ISHIKAWAJIMA, 288 ITR 408 (SO AND HYUNDAI HEAVY INDUSTRIES, 291 ITR 482 (SO WHEREIN ON IDENTICAL SET OF FACTS, IT WAS HELD THAT OFFSHORE SUPPLIES WERE NOT TAXABLE IN INDIA, I F THE PE IN INDIA HAS NO ROLE TO PLAY IN THE OFFSHORE SUPPLY OF GOODS. 3. THAT THE LEARNED CIT(A) ERRED IN HOLDING THAT CO NTRACTS ENTERED BY THE APPELLANT WITH NALCO/ VEDANTA WERE FOR TAX AVOIDANCE/PLANNING PURPOSES, WITHOUT ASSIGNING ANY REASONS THEREOF. HE HAS IGNORED THE JUDGMENT OF APEX COURT IN THE CASE OF AZADI BACHAO ANDOLAN 263 ITR 706(SC). THE L EARNED CIT(A) HAS ERRED IN NOT APPRECIATING THAT THESE CON TRACTS WITH NALCO (BEING A GOVT. BODY) AND WITH VEDANTA ARE STA NDARD CONTRACTS FOR ALL SUPPLIERS AND CANNOT BE MODIFIED, KEEPING IN VIEW THE ALLEGED TAX AVOIDANCE/PLANNING OBJECTIVES. 4. THAT THE FINDINGS AND CONCLUSIONS OF THE CIT(A) THAT THE ESTIMATED PROFIT ON OFFSHORE SUPPLIES MADE BY THE A PPELLANT FROM OUTSIDE INDIA WERE INCOME TAXABLE IN INDIA IS CONTRARY TO THE STATUTORY PROVISIONS OF LAW AND THE TAX TREATY BETWEEN INDIA AND FRANCE AND THE RELIANCE PLACED BY HIM ON THE RULINGS IN THE CASE OF WORLEY PARSONS, 179 TAXMANN 274 AND INTERNATIONAL TIRE ENGINEERING RESOURCES (AAR NO. 8 04/2009), HAVE ABSOLUTELY NO APPLICATION TO THE FACTS OF THE INSTANT CASE AND ARE ENTIRELY DISTINGUISHABLE. 5. THAT THE LEARNED CIT(A) IN HOLDING THAT 50% OF T HE GLOBAL PROFIT ON PROPORTIONATE BASIS RELATED TO INDIA AND 50% PROFIT AS RELATING TO THE COUNTRY OF ORIGIN, IS HIGHLY ARBITR ARY. HE HAS FAILED TO APPRECIATE, NO INCOME COULD BE ATTRIBUTED TO THE PROJECT OFFICE IN RESPECT OF OFFSHORE SUPPLIES. THU S ESTIMATE OF INCOME AT RS. 15,10,62,915/- AS AGAINST THE INCOME OF RS. 30,21,25,830/- ESTIMATED BY THE A.O. IS WHOLLY ARBI TRARY AND IS UNTENABLE IN LAW. :-3-: 6. THAT THE LEARNED CIT(A) HAS ERRED IN FAILING TO APPRECIATE THAT, THE BURDEN LAY UPON THE LEARNED A.O. TO BRING MATER IAL TO SUPPORT THAT AN INCOME ACCRUED TO THE ASSESSEE IN I NDIA AND THE EXTENT OF SUCH AN INCOME. THE ESTIMATE OF SUCH INCOME AS HAS BEEN HELD BY THE LEARNED CIT(A) TO BE THE 50% O F THE GLOBAL PROFIT ON PROPORTIONATE BASIS OF TURNOVER, I S BASED ON NO VALID MATERIAL OR BASIS. 7. THAT WITHOUT PREJUDICE TO GROUND NO. 5 AND 6 ABO VE, THE LD. CIT(A) HAS ERRED IN NOT ALLOWING THE APPELLANT AN O PPORTUNITY TO PRODUCE ANY SUCH EVIDENCE / TRANSFER PRICING REP ORT WHICH WOULD SUBSTANTIATE THAT NIL PROFITS IN RELATION TO OFF-SHORE SUPPLIES WOULD BE TAXABLE IN INDIA, IN ABSENCE OF A NY ALLEGED OPERATIONS IN RELATION THERETO BEING CARRIED ON IN INDIA, DESPITE A SPECIFIC REQUEST MADE IN WRITING FOR PRODUCING TH E SUPPORTING MATERIAL AS PART OF WRITTEN SUBMISSIONS AND ALSO DU RING THE COURSE OF ARGUMENTS 8. THAT THE LEARNED CIT(A) HAS FAILED TO APPRECIATE THAT UNDER THE TREATY BETWEEN INDIA AND FRANCE, PARAGRAPH 2 OF ART ICLE 7 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN IND IA AND FRANCE, CLEARLY PROVIDES THAT, WHERE AN ENTERPRISE OF ONE THE CONTRACTING STATES CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED TH EREIN, THERE SHALL IN EACH CONTRACTING STATE BE ATTRIBUTED TO THAT PERMANENT ESTABLISHMENT THE PROFITS WHICH IT MIGHT BE EXPECTED TO MAKE IF IT WERE A DISTINCT AND SEPARATE ENTERPRISE ENGAGED IN THE SAME OR SIMILAR ACTIVITIES UNDER THE SAME OR SIMILAR CONDITIONS AND DEALING WHOLLY INDEPENDENTLY WITH THE ENTERPRISE OF WHICH IT IS A PERMANENT ESTABLISHMENT . 9. THAT THE LD. CIT(A) HAS ERRED IN LAW IN HOLDING THAT SINCE THE SELLER WAS RESPONSIBLE FOR SUCCESSFUL INSTALLATION AND COMMISSIONING OF THE EQUIPMENT, THE OFF-SHORE SUPPL IES ARE TAXABLE IN INDIA. THE LD. CIT(A) HAS ERRED IN IGNOR ING PLETHORA OF RULINGS WHICH HAVE HELD THAT THE FACT THAT SELLE R IS :-4-: RESPONSIBLE FOR SUCCESSFUL INSTALLATION OF THE EQUI PMENT WOULD NOT MAKE THE OFF-SHORE SUPPLIES TAXABLE IN INDIA. 10. THAT, IN VIEW OF THE AFORESAID, THE LEARNED CIT (A) HAS FAILED TO APPRECIATE, ON MERE SUPPLY (ASSUMING THAT THE PROJE CT OFFICE HAD ANY ROLE TO PLAY IN INDIA WHICH IS SERIOUSLY DI SPUTED) THE ASSUMPTION OF THE LEARNED CIT(A) THAT THE ASSESSEE HAD EARNED 50% OF THE ESTIMATED PROFIT EARNED BY THE AS SESSEE GLOBALLY ON PROPORTIONATE BASIS OF THE ENTIRE TURNO VER, IS NOT ONLY ARBITRARY BUT IS HIGHLY VINDICTIVE AND IS WHOL LY UNSUSTAINABLE BOTH ON FACTS AND IN LAW. 11. THAT EVEN OTHERWISE THE LEARNED CIT(A) HAS ERRE D THAT, IN FAILING TO COMPREHEND, EXPLANATION L(A) TO SECTION 9(1) OF THE ACT, WHICH PROVIDES THAT IN CASE OF A BUSINESS OF W HICH ALL OPERATIONS ARE NOT CARRIED ON IN INDIA, ONLY SO MUC H INCOME WOULD BE TAXED, AS MAY BE REASONABLY ATTRIBUTABLE T O OPERATIONS CARRIED OUT IN INDIA. 12. THAT THE LEARNED CIT(A) HAS THUS ERRED IN ARBIT RARILY ATTRIBUTING 50% OF THE ALLEGED PROFITS TO INDIA, WHICH CANNOT B E TERMED AS 'REASONABLE' BY ANY STRETCH OF IMAGINATION AND HENC E IS LIABLE TO BE SET ASIDE BEING ARBITRARY. 13. THAT THE LEARNED CIT(A) HAS FAILED TO APPRECIAT E THAT, WHILE FRAMING THE ASSESSMENT FOR IMMEDIATELY PRECEDING YE AR, THE A.O. HAD HIMSELF ADMITTED IN HIS ORDER THAT THE PRO JECT OFFICE HAS A NON-EXISTENT ROLE AND WORKS COMPLETELY AS PER THE DIRECTIONS OF ECL FRANCE AND THAT CONTRACT NEGOTIAT IONS, SIGNINGS ETC. WERE PERFORMED BY ECL FRANCE OUTSIDE INDIA AND THAT THE OVERALL ACTIVITY OF THE PROJECT OFFICE IS OF ANCILLARY/ AUXILIARY CHARACTER (AS PROVIDE IN PARA 4(F) OF ART ICLE 5 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA A ND FRANCE.) 14. THAT THE LEARNED CIT(A) ERRED IN HOLDING THAT O FFSHORE SUPPLIES WERE TAXABLE SINCE TENDERS FLOATED BY VEDANTA/NALCO WERE NOT FLOATED SEPARATELY FOR SUPPLY OF MATERIALS FOR OVER SEAS AND :-5-: SUPPLY OF ONSHORE MATERIALS OR FOR ONSHORE SERVICES BUT COMPOSITE TENDERS FOR PROCUREMENT AND INSTALLATION. 15. THAT THE LEARNED CIT(A) HAS FAILED TO COMPREHEN D THAT, THE ASSESSEE HAD ENTERED INTO INDEPENDENT AND SEPARATE CONTRACTS, FOR EACH OF THE ACTIVITY PERFORMED BY IT FROM OUTSI DE INDIA AND IN RESPECT OF THE SUPPLIES AND SERVICES RENDERED FR OM WITHIN INDIA, WHERE SEPARATE CONTACTS HAD BEEN ENTERED INT O AND WERE INDEPENDENT AND SEPARATE CONTRACTS. 16. THAT WITHOUT PREJUDICE, THE LEARNED CIT(A) HAS ERRED BOTH ON FACTS AND IN LAW IN NOT DIRECTING THE A.O. TO SET O FF THE LOSS OF THE PRECEDING YEAR, FROM THE INCOME DECLARED BY THE ASSESSEE WHILE COMPUTING THE TOTAL INCOME OF THE ASSESSEE. 17. THAT, BASED ON THE FACTS AND CIRCUMSTANCES OF T HE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN NOT DIRECTING THE A.O. TO ALLOW FULL CREDIT OF TAXES AS CLAIMED BY THE APPELL ANT IN ITS RETURN OF INCOME. 18. THAT, BASED ON THE FACTS AND CIRCUMSTANCES OF T HE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT I NTEREST U/S 234B AND 234C OF THE ACT ARE CONSEQUENTIAL TO THE DETERMINATION OF TOTAL INCOME. THE LEARNED CIT(A) E RRED IN IGNORING CATENA OF DECISIONS QUOTED BY THE APPELLAN T WHICH HAVE HELD THAT A FOREIGN COMPANY IS NOT LIABLE TO INTEREST U/S 234B/234C OF THE ACT. 19. THAT THE LEARNED CIT(A) ERRED IN NOT ASSIGNING ANY DECISIONS/ BASIS FOR HOLDING THAT INTEREST U/S 234B AND 234C O F THE ACT ARE CONSEQUENTIAL IN NATURE. 2. DURING THE COURSE OF HEARING OF THE APPEALS, THE LD . COUNSEL FOR THE ASSESSEE HAS OPTED NOT TO PRESS GROUNDS NO.1, 16 AN D 17. ACCORDINGLY THESE GROUNDS ARE DISMISSED BEING NOT PRESSED. 3. THOUGH VARIOUS GROUNDS ARE RAISED IN THESE APPEALS, BUT THEY ALL RELATE TO THE TAXABILITY OF OFFSHORE SUPPLIES IN IN DIA EXCEPT GROUNDS NO.18 & :-6-: 19 WHICH RELATE TO THE CHARGING OF INTEREST UNDER S ECTION 234B AND 234C OF THE INCOME-TAX ACT, 1961 (HEREINAFTER CALLED IN SHO RT THE ACT') CONSEQUENT TO THE DETERMINATION OF THE RETURNED INCOME. 4. THE BRIEF FACTS RELATING TO THE CONTROVERSY INVOLVE D IN THESE APPEALS ARE THAT THE ASSESSING OFFICER FOUND THAT THE ASSES SEE, M/S ECL-PO HAS DISCLOSED INCOME OUT OF ONSHORE SUPPLY AND ONSHORE SERVICES DONE BY THE ASSESSEE. HOWEVER, THE CONTRACTS ENTERED BY ECL/EC L-PO WITH NALCO/VEDANTA ARE IN THE NATURE OF COMPOSITE CONTRA CTS. IN THE CONTRACT BETWEEN ECL, FRANCE AND NALCO/VEDANTA, ECL IS DESCR IBED AS PRINCIPAL CONTRACTOR AND NALCO/VEDANTA IS DESCRIBED AS OWNER. FROM THE TERMS AND CONDITIONS OF THE CONTRACTS BETWEEN ECL AND NALCO/V EDANTA, THE ASSESSING OFFICER HAS FOUND THE SAME AS COMPOSITE C ONTRACTS OR INDIVISIBLE CONTRACTS, ENTERED FOR SPECIFIC PURPOSE OF SETTING UP OF SMELTER PLANT AND ECL-PO, THE ASSESSEE, WAS ESTABLISHED IN BHUBANESWA R FOR SUCCESSFUL COMPLETION OF THE CONTRACTS. THE ASSESSING OFFICER FURTHER OBSERVED THAT ECL-PO, THE ASSESSEE, WAS ESTABLISHED TO CARRY OUT THE WORK WITH REGARD TO CONTRACTS SIGNED BY ECL, FRANCE AND NALCO/VEDANTA. IT WAS FURTHER OBSERVED BY THE ASSESSING OFFICER THAT ECL IS PERFO RMING EACH AND EVERY WORK UNDER THE DIRECT CONTROL AND SUBVERSION OF ECL , FRANCE AND BOTH ELC, FRANCE AND ECL-PO ARE EQUALLY AND JOINTLY RESP ONSIBLE FOR SUCCESSFUL COMPLETION OF THE WORKS. 5. HAVING ANALYZED THE AGREEMENTS, THE ASSESSING OFFIC ER FOUND THAT THE SCOPE OF WORK DEFINED IN THE CONTRACT BETWEEN, ECL, FRANCE AND NALCO/VEDANTA INCLUDES SUPPLY OF EQUIPMENTS AND INS TALLATION SERVICES AND ECL, FRANCE IS MADE RESPONSIBLE FOR THE OVERALL PRO JECT. ACCORDINGLY THE ASSESSING OFFICER HAS FOUND THAT THE CONTRACT BETWE EN ECL AND NALCO/VEDANTA WAS FOR PROCUREMENT AND INSTALLATION OF DIFFERENT EQUIPMENTS FOR ALUMINIUM SMELTER OR FACILITY. THER EFORE, THE CONTRACT WAS NOT FOR SALE OF EQUIPMENTS ONLY BUT A COMPOSITE CON TRACT FOR SUPPLY AND :-7-: INSTALLATION OF FACILITY AT SITES OF NALCO/VEDANTA THROUGH ITS PROJECT OFFICE I.E. ECL-PO, THE ASSESSEE. THE AMOUNT PAID BY NALC O/VEDANTA WAS FOR SUPPLY AND INSTALLATION DONE IN INDIA AND THE PAYME NTS WERE RECEIVED BY ECL, FRANCE FOR THE PERFORMANCE OF CONTRACTS AS A W HOLE IN INDIA. THE SUPPLY OF EQUIPMENTS WAS CONSIDERED CONCLUDED ONLY AFTER INSTALLATION OF FACILITY AND SUCCESSFUL HANDING OVER OF THE SAME TO NALCO/VEDANTA. THEREFORE, THE AMOUNT PAID FOR OFFSHORE SUPPLY ATTR ACTS TAX LIABILITY AS PER INDIAN INCOME-TAX LAWS. 6. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) WITH THE SUBMISSION THAT ECL, FRANCE IS A TAX RESID ENT OF FRANCE AND IS ELIGIBLE FOR BENEFICIAL PROVISIONS OF INDIA-FRANCE TAX TREATY (DTAA/TREATY). ECLS BUSINESS IS AIMED AT FACILITATING ITS CUSTOME RS IN SETTING UP ALUMINIUM MANUFACTURING PLANTS USING ECLS OWN DESIGN TECHNOL OGY, MANUFACTURING AND HIGH QUALITY EQUIPMENT IN SMELTERS FOR THE ALUM INIUM INDUSTRY. FOR THIS PURPOSE, ECL SELLS EQUIPMENT TO ITS CUSTOMERS AND A LSO ASSISTS IN INSTALLING THE SAME. DURING THE RELEVANT YEAR, ECL, FRANCE EN TERED INTO CONTRACTS WITH NALCO, INDIA AND WITH VEDANTA ALUMINA LTD., IN DIA. THE CONTRACT WITH NALCO WAS FOR SUPPLIES AND SERVICES IN CONNECTION W ITH NALCOS PLANNED EXPANSION OF ITS SMELTER AT ORISSA. THE CONTRACT C ONSISTS OF FOLLOWING THREE MAIN COMPONENTS:- (1) OFFSHORE SUPPLY OF EQUIPMENT I.E. SALE OF EQUIPMENT FROM OUTSIDE OF INDIA BY ECL, FRANCE. (2) ONSHORE SUPPLY OF GOODS I.E. SUPPLY OF LOCAL SPARE PARTS REQUIRED IN CONNECTION WITH EQUIPMENT INSTALLED AND (3) ONSHORE SERVICES AND COMMISSION OF THE PROJECT. 7. IT WAS FURTHER CONTENDED THAT ECL WAS INVOLVED ONLY IN SELLING THE EQUIPMENT SYSTEM TO NALCO/VEDANTA. THE INSTALLATIO N WORK WAS CARRIED OUT BY THE ECL-PO AND THE INCOME FROM THE SAME WAS ALSO ASSESSED IN ITS :-8-: HANDS. THE SUPPLY AND INSTALLATION ARE SEPARATE, D IFFERENT AND INDEPENDENT RESPONSIBILITIES AND CANNOT BE VIEWED AS A ONE SING LE INTEGRATED CONTRACT FOR TAXATION PURPOSES. THE SUPPLY OF EQUIPMENT HAS BEE N AFFECTED ON A PRINCIPAL TO PRINCIPAL BASIS AND ON AN ARMS LENGTH BASIS. HE HAS ALSO PLACED RELIANCE UPON THE JUDGMENT OF THE HON'BLE AP EX COURT IN THE CASE OF ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD. VS. DTI, 288 ITR 408 AND CIT VS. HYUNDAI HEAVY INDUSTRIES LTD., 291 ITR 482 AND ALSO INCOME TAX OFFICER VS. SRIRAM BEARINGS LTD., 224 ITR 724 WHICH SUGGEST THAT WHERE THE TRANSFER OF THE PROPERTY IN GOODS AS WELL AS THE PA YMENT WERE RECEIVED OUTSIDE INDIA, THE TRANSACTION IS NOT LIABLE TO INC OME TAX IN INDIA. 8. IT WAS FURTHER CONTENDED BEFORE THE LD. CIT(A) THAT ECLS INDIA PO, I.E. ECL-PO HAD NO ROLE TO PLAY IN CONCLUSION OF TH E SUPPLY CONTRACT BETWEEN ECL AND VEDANTA AND NALCO RESPECTIVELY, BUT WAS SET UP ONLY TO GIVE EFFECT TO THE ARRANGEMENT AGREED UPON BETWEEN ECL A ND VEDANTA/NALCO TO ASSIST THEM IN SETTING UP THEIR PROJECTS IN INDI A PRIOR TO SET UP OF THE ECLS INDIA PO. THE INDIA PO WAS SET UP ONLY TO EF FECTUATE THE AGREEMENT BETWEEN ECL, FRANCE AND NALCO/VEDANTA IN CONNECTION WITH THE LATTERS EXPANSION PLANS AND CLEARLY THE INDIA PO HAD NO ROL E IN NEGOTIATING THE CONTRACT OF OFFSHORE SUPPLY OF EQUIPMENT WITH THE I NDIAN CUSTOMERS. THE ECL-PO WAS SET UP IN ORDER TO EXECUTE THE INDIA PAR T OF THE PROJECT ENTERED INTO BY ECL, FRANCE RELATING TO INSTALLATION AND CO MMISSION. IT WAS FURTHER CONTENDED THAT THE CONTRACT HAS BEEN FASHIONED AS A TURNKEY CONTRACT BY ITSELF BUT IT DOES NOT MEAN THAT EVEN FOR THE PURPO SE OF TAXABILITY THE ENTIRE CONTRACT MUST BE CONSIDERED TO BE AN INTEGRATED ONE SO AS TO MAKE THE TAXPAYER LIABLE TO TAX IN INDIA EVEN ON THE OFFSHOR E SUPPLY PORTION. IT WAS FURTHER CONTENDED THAT THE PROFITS EARNED BY AN ASS ESSEE FROM PURE SALE/SUPPLY OF EQUIPMENT FROM OUTSIDE INDIA IS REQU IRED TO BE TREATED AS BEING SEPARATE FROM THE ACTIVITY OF INSTALLATION/TE STING OF SUCH EQUIPMENT AS SUCH PROFITS FROM SALE OF EQUIPMENT CANNOT BE SAID TO BE ATTRIBUTABLE TO THE :-9-: ACTIVITY OF INSTALLATION/LEASING CARRIED OUT IN IND IA BY THE PE, WHICH ACTIVITIES TAKE PLACE AFTER THE SUPPLY HAS BEEN MADE. EVEN IF THE SUPPLIES ARE CLOSELY INTERLINKED TO THE ACTIVITY OF INSTALLATION OF EQUI PMENT CARRIED ON WITHIN INDIA, NO PROFITS ON SUCH SUPPLIES COULD BE ATTRIBU TED TO INDIA TAX UNLESS IT CAN BE ESTABLISHED THAT THE SUPPLIES WERE NOT ON AR M'S LENGTH BASIS. 9. IT WAS FURTHER CONTENDED THAT THE CONTRACTS WOULD C LEARLY DEMONSTRATE THAT THE SCOPE OF OFF-SHORE PART AND ON -SHORE PART, AND THE RESPECTIVE CONSIDERATION FOR THE SAME WAS CLEARLY D EMARCATED, SEPARATE AND IDENTIFIABLE IN THE RELEVANT CONTRACT ENTERED INTO BY THE ASSESSES WITH ITS CUSTOMERS. IT WAS FURTHER ASSERTED THAT THE TITLE OF THE PROPERTY TO THE EQUIPMENT SHALL PASS ON TO THE CUSTOMER WHEN DELIVE RED OVER THE SHIPS RAIL AT THE PORT OF EXPORT IN THE COUNTRY OF ORIGIN. CU STOMER WOULD BE RESPONSIBLE FOR OCEAN TRANSPORTATION, PORT AND CUST OMS CLEARANCES AT PORTS OF DISCHARGE, INLAND TRANSPORTATION IN INDIA UP TO THE PROJECT SITE. IT WAS FURTHER CONTENDED THAT THE ASSESSEE HAS ALREADY OFF ERED TO TAX THE INCOME FROM ONSHORE SERVICES AND SUPPLY TO ELC. IT IS ONL Y OFFSHORE SUPPLY OF EQUIPMENT WHICH WAS NOT OFFER TO TAX BEING UNRELATE D TO THE PE OR PO AS THE SALE HAS BEEN AFFECTED OUTSIDE INDIA. 10. THE LD. CIT(A) RE-EXAMINED THE CLAIM OF THE ASSESSE E BUT WAS NOT CONVINCED WITH IT AND HE ACCORDINGLY HELD THAT THE CONTRACT WAS CLEARLY NOT ONE FOR SALE OF EQUIPMENTS NOR WAS THE SAME FOR MER E ERECTION OF THE EQUIPMENT. IT IS A COMPOSITE CONTRACT FOR SUPPLY A ND INSTALLATION AT SITES WITHIN THE TERRITORY OF INDIA THROUGH A PROJECT OFF ICE (ECL-PO) AND WHAT IS PAID FOR BY NALCO/VEDANTA IS FOR THE SUPPLY AND INS TALLATION DONE IN INDIA. THEREFORE, THE PAYMENT WAS RECEIVED BY ECL, FRANCE FOR THE PERFORMANCE OF THE CONTRACT AS A WHOLE IN INDIA. HE ACCORDINGL Y CONFIRMED THE ORDER OF THE ASSESSING OFFICER. 11. WHILE APPROVING THE VIEW OF THE ASSESSING OFFICER, THE LD. CIT(A) HAS HELD THAT SOME PORTION OF THE PROFIT DEFINITELY REL ATES TO THE COUNTRY WHERE :-10- : THE SALES ORIGINATED. HE ACCORDINGLY DIRECTED THE ASSESSING OFFICER TO CONSIDER 50% OF THE PROFIT AS RELATED TO INDIA AND 50% OF THE PROFIT AS RELATED TO THE COUNTRY OF ORIGIN. ACCORDINGLY THE ASSESSING OFFICER WAS DIRECTED TO CONSIDER ADDITION OF RS.15,10,62,915/- INSTEAD OF RS30,21,25,830/- ON ACCOUNT OF OFFSHORE SUPPLY. TH E RELEVANT OBSERVATIONS OF THE LD. CIT(A) IN THIS REGARD ARE EXTRACTED HERE UNDER FOR THE SAKE OF REFERENCE:- 6.1. I HAVE CONSIDERED THE MATTER CAREFULLY. THE A O HAS CONSIDERED THE ENTIRE PROFIT WHICH WAS ESTIMATED FO R TAXATION IN INDIA WHEREAS SOME PORTION OF THE PROFIT DEFINITELY RELATES TO THE COUNTRY WHERE THE SALES ORIGINATED. THOUGH THE AO I S CORRECT IN ESTIMATING THE PROFIT ON THE SALES AT THE AVERAGE RATE SHOWN BY THE APPELLANT, THE AO IS NOT CORRECT TO CONSIDER TH E ENTIRE PROFIT AS RELATED TO THE SALES AND SERVICES IN INDIA, IN VIEW OF THE SAME, UNDER THE FACTS AND CIRCUMSTANCES, AND IN ABSENCE O F DETAILED DATA FOR APPORTIONMENT OF PROFIT BETWEEN INDIA AND THE C OUNTRY OF ORIGIN AND IN THE INTEREST OF JUSTICE, THE PROFIT EARNED N EED TO BE APPORTIONED EQUALLY BETWEEN THE COUNTRY OF SOURCING OF SUPPLY OF EQUIPMENTS AND THE COUNTRY WHERE SUCH EQUIPMENTS WE RE INSTALLED, ACCORDINGLY, THE AO IS DIRECTED TO CONSIDER 50% OF THE PROFIT AS RELATED TO INDIA AND 50% PROFIT AS RELATING TO THE COUNTRY OF ORIGIN. THUS, THE AO IS DIRECTED TO CONSIDER THE ADDITION O F RS, 15,10,62,915/- INSTEAD OF RS.30,21,25,830/- ON ACCO UNT OF OFF-SHORE SUPPLY. 12. AGGRIEVED, THE ASSESSEE HAS PREFERRED THE PRESENT A PPEALS BEFORE THE TRIBUNAL. BESIDES REITERATING THE CONTENTIONS AS R AISED BEFORE THE LD. CIT(A), THE LD. COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE UPON THE JUDGMENTS OF THE HON'BLE APEX COURT IN THE CASES OF ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD. VS. DTI (SUPRA); CIT VS. HYUN DAI HEAVY INDUSTRIES LTD. (SUPRA) AND INCOME TAX OFFICER VS. SRIRAM BEAR INGS LTD. (SUPRA) IN SUPPORT OF HIS CONTENTION THAT OFFSHORE SUPPLIES I. E. SALE OF GOODS CONCLUDED :-11- : OUTSIDE INDIA CANNOT BE TAXED IN INDIA EVEN WHEN TH EY FORM PART OF COMPOSITE CONTRACTS I.E. CONTRACTS HAVING COMPONENT S OF SALE CONCLUDED OUTSIDE INDIA AND ERECTION AND COMMISSION OF PROJEC TS USING SUCH GOODS INSIDE INDIA, AS LONG AS THE TITLE IN THE GODS PASS ES OUTSIDE INDIA AND THE CONSIDERATION FOR THE GOODS ARE CLEARLY IDENTIFIABL E. THE CONTRACT/AGREEMENT EXECUTED WITH NALCO/VEDANTA CLEA RLY EARMARKED THE SCOPE OF SERVICE AND CONSIDERATION FOR OFFSHORE AND ONSHORE PART OF CONTRACT. CONSIDERATION FOR OFFSHORE SALES AND ONS HORE WORK WERE SEPARATELY IDENTIFIABLE. OUR ATTENTION WAS INVITED TO THE RELEVANT CLAUSES OF THE CONTRACT EXECUTED BETWEEN THE ASSESSEE AND NALC O/VEDANTA. THE ASSESSING OFFICER HAS IGNORED THE WELL ESTABLISHED LEGAL PRINCIPLES THAT THE PERFORMANCE WARRANTIES AND ACCEPTANCE TESTING INCLU DING INSTALLATION DO NOT DETERMINE WHERE THE TRANSFER OF PROPERTY IN GOODS A ND CONSEQUENTLY SALE OF GOODS TAKE PLACE. THE TRANSFER OF TITLE TO THE GOO DS SINCE PASSING OUTSIDE OF INDIA CANNOT BE SUBJECTED TO TAX IN INDIA. IN SUPP ORT OF THIS PROPOSITION OF LAW, THE LD. COUNSEL FOR THE ASSESSEE HAS PLACED RE LIANCE UPON THE JUDGMENT OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF DIRE CTOR OF INCOME-TAX VS. ERICSSON A.B., 16 TAXMANN.COM 371. 13. THE LD. COUNSEL FOR THE ASSESSEE HAS FURTHER CONTEN DED THAT PE OF ECL, FRANCE I.E. THE ECL PROJECT OFFICE DID NOT HAV E ANY ROLE IN RESPECT OF OFFSHORE SUPPLIES INTO INDIA. THE CONTRACTS WERE C ONCLUDED DIRECTLY BETWEEN ECL, FRANCE AND NALCO/VEDANTA. THE PO WAS FORMED ONLY WITH THE OBJECT OF CARRYING OUT EXECUTION OF THE INDIA P ORTION OF THE PROJECT. SINCE THE INDIAN PE HAD NO ROLE TO PLAY IN RESPECT OF OFFSHORE SUPPLIES, THERE IS NO OCCASION TO TAX ANY PORTION OF THE OFFS HORE SUPPLIES IN INDIA. 14. OUR ATTENTION WAS ALSO INVITED TO THE VARIOUS JUDGM ENTS IN SUPPORT OF HIS PROPOSITION THAT DELIVERY OF GOODS IS DISTINCT FROM TRANSFER OF PROPERTY IN GOODS. DELIVERY DOES NOT MEAN TRANSFERRING THE OWN ERSHIP IN GOODS BUT MERELY IMPLIES TRANSFER OF POSSESSION OF GOODS. TH EREFORE, THE TRANSFER OF :-12- : PROPERTY IN GOODS CAN TAKE PLACE BEFORE OR AFTER TH E DELIVERY OF GOODS. THUS PERFORMANCE OF FUNCTIONS AFTER DELIVERY IS NOT A RELEVANT CIRCUMSTANCE TO DETERMINE TAXABILITY OF OFFSHORE SUPPLIES. THE LD. CIT(A) HAS MISDIRECTED HIMSELF BY CONFUSING THE TAXABILITY OF OFFSHORE SER VICE WITH ONSHORE SUPPLIES. THE CASE LAWS RELIED UPON BY THE LD. COU NSEL FOR THE ASSESSEE ARE AS UNDER:- 1. NOKIA NETWORKS OY, 25 TAXMANN.COM 225 2. LG CABLE LTD., 197 TAXMANN 100 3. ERICSSON-AB, 246 CTR 422 4. LS CABLE (AAR), 12 TAXMANN.COM 362 5. MAHABIR COMMERCIAL CO. LTD. V CIT, 86 ITR 417 6. SETH PUSHA LAL MANSINGHA PVT. LTD. V CIT, 66 ITR 15 9 7. CIT V ANA MALLAIS TIMBER TRUST LTD., 18 ITR 333 15. IN THE CASE OF ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD. VS. DTI (SUPRA), THE HON'BLE APEX COURT HAS HELD, WHILE DEA LING WITH THE ISSUE ON TAXABILITY OF OFFSHORE SERVICES, THAT OFFSHORE SERV ICES CANNOT BE TAXED IN INDIA UNLESS THEY ARE RENDERED FROM WITHIN INDIA. HOWEVER, SUBSEQUENTLY, THE ACT WAS AMENDED TO TAX TECHNICAL SERVICES IRRES PECTIVE WHETHER THEY WERE RENDERED FROM WITHIN OR OUTSIDE INDIA. 16. IN THE CASE OF ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD. VS. DTI (SUPRA), THE HON'BLE APEX COURT HAS ALSO HELD THAT OFFSHORE SUPPLIES CANNOT BE TAXED IN INDIA IF TITLES TO THE GOODS HAVE PASSE D OUTSIDE INDIA AND THE POSITION IN THIS REGARD REMAINS UNCHANGED. THE COP IES OF THE CONTRACT ARE FILED BEFORE US FOR OUR PERUSAL. THE LD. COUNSEL F OR THE ASSESSEE HAS FINALLY CONTENDED THAT IN THE LIGHT OF THE AFORESAID POSITI ON OF LAW, THE PROFIT EARNED ON OFFSHORE SUPPLIES CANNOT BE TAXED IN INDI A. :-13- : 17. THE LD. D.R., BESIDES PLACING RELIANCE UPON THE ORD ER OF THE LD. CIT(A), HAS CONTENDED THAT THE SCOPE OF ABOVE CONTR ACT CLEARLY INDICATE THAT OFFSHORE SUPPLIES UNDER DISPUTE WERE NOT OF SALE OF EQUIPMENT SIMPLICITER AND THE SALES DEFINITELY INCLUDED WITHIN THEIR SCOP E TO RENDER SERVICES REQUIRED FOR SUCCESSFUL SET-UP, COMMISSIONING, INST ALLATION, TESTING, PERFORMANCE GUARANTEE, ETC. IN RELATION TO THE EQUI PMENT. THE COMMISSIONING SUPERVISION & TRAINING SERVICES WERE UTILIZED ON SITE IN INDIA FOR WHICH PRICE WAS INCLUDED IN THE TOTAL CONTRACT PRICE AND NOW PURPORTED TO BE LINKED WITH THE SALE OF EQUIPMENT SIMPLICITER BY THE ASSESSEE. IT WAS FURTHER CONTENDED THAT THE PREAMBLE TO THESE CONTRA CTS DO SUGGEST AND IT CANNOT BE DENIED THAT THROUGH ECL INDIA PROJECT OFF ICE WHICH CONSTITUTED A PE IN INDIA, THE ASSESSEE HAD UNDERTAKEN THE WORK O F SETTING UP, COMMISSIONING, INSTALLATION OF THE PLANT AND PERFOR MED ALL OTHER SERVICES REQUIRED FOR SUCCESSFUL COMPLETION OF THE PROJECTS UNDER CONSIDERATION. THESE CONTRACTS ARE IN FACT INDIVISIBLE CONTRACTS O R COMPOSITE CONTRACTS IN VIEW OF THE OBJECTS OF CONTRACTS/TENDERS. THEREFOR E, THERE IS ADEQUATE EVIDENCE TO PROVE THE EXISTENCE OF PE IN INDIA THRO UGH WHICH THE ASSESSEE UNDERTOOK ITS CONTRACTUAL OBLIGATION AND CARRIED OU T THE ACTIVITIES OF COMMISSION SUPERVISION, ERECTION, START-UP, TESTING , PERFORMANCE GUARANTEE TESTS, ETC. ON SITES IN INDIA. THEREFORE, THE ENTI RE TRANSACTION ATTRACTS TAX AS PER INDIAN LAWS. 18. HAVING CAREFULLY EXAMINED THE ORDERS OF THE LOWER A UTHORITIES AND THE JUDGMENTS REFERRED TO BY THE PARTIES IN THE LIGHT O F THE RIVAL SUBMISSIONS, WE FIND THAT THERE IS NO DISPUTE WITH REGARD TO THE TAXABILITY OF INCOME ACCRUED ON ONSHORE TRANSACTIONS. THE DISPUTE WAS R AISED WITH REGARD TO THE TAXABILITY OF OFFSHORE TRANSACTION IN INDIA. T HEREFORE, WE ARE REQUIRED TO ADJUDICATE THE NATURE OF CONTRACT EXECUTED BETWE EN THE ASSESSEE AND NALCO/VEDANTA FOR SUPPLY OF EQUIPMENTS AND SERVICES TO SET UP AND OPERATE ALUMINIUM SMELTER PLANT OR EXPANSION OF SME LTER PLANT. IT IS ALSO :-14- : AN UNDISPUTED FACT THAT FOR THE PURPOSE OF COMPLETI ON OF THE WORK, THE APPELLANT, ECL, FRANCE HAS ESTABLISHED ITS PROJECT OFFICE IN INDIA NAMELY ECL-PO ON 26.6.2006. 19. FROM A CAREFUL PERUSAL OF THE CONTRACT EXECUTED BET WEEN THE ASSESSEE AND VEDANTA WHICH IS APPEARING AT PAGES 9 TO 149 OF THE SECOND COMPILATION OF THE ASSESSEE, WE FIND THAT ARTICLE 3 DEALS WITH THE SCOPE OF WORK TO BE CARRIED OUT BY THE CONTRACTOR-ASSESSEE P URSUANT TO THE TERMS OF THIS CONTRACT INCLUDES, BUT IS NOT LIMITED TO DESIG N AND ENGINEERING OF THE FACILITY AS WELL AS PROCUREMENT, MANUFACTURING, SHO P INSPECTION, TESTING, SEAWORTHY/ROADWORTHY PACKING, FORWARDING, MARINE TR ANSPORTATION, TRANSIT INSURANCE AND DELIVERY OF EQUIPMENT AND OTHER RELAT ED AUXILIARIES, INCLUDING COMMISSIONING SPARES AND SPECIAL TOOLS AND TACKLES, AS REQUIRED FOR THE FACILITY ON CIF INDIAN SEAPORT BASIS. THE SUPERVIS ION OF THE ACTIVITIES OF HIS INDIAN ASSOCIATE (INCLUDING ERECTION AND COMMISSION ING ACTIVITIES) AND DEMONSTRATION OF PERFORMANCE GUARANTEES AS SPECIFIE D IN ANNEXURE 2 OF THE CONTRACT. 20. ARTICLE 6 RELATES TO THE CONTRACT PRICE. THE PRICE BREAKUP AND FOR SUPPLY OF EQUIPMENTS AMOUNT WAS STIPULATED TO BE OF 3,43,75,053/- EURO AND FOR SUPERVISION AND TRAINING SERVICES THE AMOUN T WAS STIPULATED TO BE AT 18,43,973 EURO. IN THIS PRICE BREAKUP, THE COST OF DIFFERENT EQUIPMENTS AND DIFFERENT SERVICES ARE ALSO SPECIFICALLY MENTIONED. THEREFORE, IN THIS CONTRACT THE COST OF EQUIPMENTS FOR SERVICES IS CLE ARLY IDENTIFIABLE AND SEPARABLE. AS PER THIS CONTRACT, THE PRINCIPLE I.E . ASSESSEE FOR THE SAKE OF OPERATIONAL CONVENIENCE PROPOSED THE OWNERS TO INDI GENOUSLY PROCURE PART OF THE ABOVE ACTIVITIES TO BE CARRIED OUT ON THE BA SIS OF PRINCIPAL CONTRACTORS INDIAN ASSOCIATE WHO WOULD ACT UNDER PRINCIPAL CONT RACTORS SUPERVISIONS AND IN ACCORDANCE WITH THE DECISIONS, INSTRUCTION, DRAWINGS AND APPROVALS OF THE PRINCIPAL CONTRACTOR AND IS EQUALLY EQUIPPED WITH THE EXPERIENCE, EXPERTISE, CAPACITY AND RESOURCES REQUIRED TO EXECU TE THE SAID ACTIVITIES. :-15- : ACCORDINGLY, THE PRINCIPAL CONTRACTOR HAS ADVISED T HE OWNER TO ENTER INTO, APART FROM CONTRACT WHICH THE OWNER HAS AGREED TO E NTER WITH HIM FOR CARRYING OUT THE DESIGN AND ENGINEERING OF THE FACI LITY ALONG WITH PROCUREMENT, MANUFACTURING, TESTING AND SUPPLY OF E QUIPMENT AND OTHER RELATED AUXILIARIES REQUIRED FOR THE FACILITY AND T HEIR SUBSEQUENT PERFORMANCE GUARANTEE TESTS AS WELL AS SUPERVISION OF ACTIVITIE S OF THE INDIAN ASSOCIATE, ANOTHER CONTRACT WITH HIS INDIAN ASSOCIATE, NAMELY M/S ECL PROJECT OFFICE INDIA (THE INDIAN ASSOCIATE) FOR CARRYING OUT THE C USTOM CLEARANCE, INLAND TRANSPORTATION, UNLOADING, STORAGE, HANDLING, ERECT ION AND COMMISSIONING OF EQUIPMENT AND OTHER RELATED AUXILIARIES REQUIRED FO R THE FACILITY. 21. AS PER ARTICLE 16.4.1, THE TITLE OF THE EQUIPMENT S HALL PASS ON TO THE OWNER WHEN DELIVERED OVER THE SHIPS RAIL AT THE POR T OF EXPORT IN THE COUNTRY OF ORIGIN I.E. FOB DELIVERY IN ACCORDANCE W ITH THE PROVISIONS OF INCOTERMS 2000, THOUGH PASSING OF TITLE OF OWNERSHI P TO THE OWNER SHALL NOT IN ANY WAY ABSOLVE, DIMINISH OR DILUTE THE RESP ONSIBILITIES AND OBLIGATIONS OF THE CONTRACTOR UNDER THE CONTRACT. 22. WE HAVE ALSO CAREFULLY PERUSED THE OTHER CONTRACT E XECUTED WITH THE NALCO BY THE ASSESSEE WHERE SIMILAR TYPES OF CLAUSE S ARE ALSO AVAILABLE. THE COPIES OF THE CONTRACTS WITH NALCO/VEDANTA ARE AVAILABLE AT PAGES 329 TO 347 OF THE SECOND COMPILATION OF THE ASSESSEE. 23. THE FACTS EMERGED FROM THESE CONTRACTS ARE THAT THE SE CONTRACTS ARE COMPOSITE CONTRACTS IN WHICH RESPONSIBILITIES OF TH E ASSESSEE/APPELLANT ARE TO SUPPLY EQUIPMENTS ALONG WITH SERVICE FOR ITS INS TALLATION, SUPERVISION AND TRAINING SERVICES, ETC. FOR WHICH THE COST IS SEPAR ATELY IDENTIFIABLE IN THESE CONTRACTS THOUGH THROUGH ITS INDIAN ASSOCIATE I.E. ECL-PO. THERE IS NO DISPUTE WITH REGARD TO THE TAXABILITY OF THE RECEIP TS IN RESPECT OF INSTALLATION AND SUPERVISION SERVICES, ETC. IN INDIA. THE SOLE DISPUTE IS WITH REGARD TO THE TAXABILITY OF THE SALE PROCEEDS OF THE EQUIPMEN TS SOLD TO NALCO/VEDANTA. WHETHER IT IS TO BE TAXED OUTSIDE I NDIA OR IN INDIA, AS THE :-16- : TRANSACTION OF SALE OF EQUIPMENTS IS COMPLETED OUTS IDE INDIA AND THE COST WAS ALSO PAID OUTSIDE INDIA? FROM THE AFORESAID CO NTRACT, IT IS ALSO EMERGED THAT THE PROPERTY/TITLE IN EQUIPMENTS WAS A LSO TRANSFERRED IN FAVOUR OF THE INDIAN OWNER WHEN EQUIPMENT WAS DELIV ERED OVER THE SHIPS RAIL AT THE PORT OF EXPORT IN THE COUNTRY OF ORIGIN . 24. ON THIS ISSUE WE HAVE BEEN CARRIED THROUGH VARIOUS JUDICIAL PRONOUNCEMENTS AND A STRONG RELIANCE WAS PLACED UPO N THE JUDGMENT OF THE ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD. VS. D TI (SUPRA), IN WHICH THE HON'BLE APEX COURT HAS HELD THAT IN CONSTRUING A CONTRACT, THE TERMS AND CONDITIONS THEREOF ARE TO BE READ AS A WHOLE. A CONTRACT MUST BE CONSTRUED KEEPING IN VIEW THE INTENTION OF THE PART IES. NO DOUBT, THE APPLICABILITY OF THE TAX LAWS WOULD DEPEND UPON THE NATURE OF THE CONTRACT, BUT THE SAME SHOULD NOT BE CONSTRUED KEEPING IN VIE W THE TAXING PROVISIONS. IT WAS FURTHER HELD THAT WHERE DIFFERE NT SEVERABLE PARTS OF A COMPOSITE CONTRACT WERE PERFORMED IN DIFFERENT PLAC ES, THE PRINCIPLE OF APPORTIONMENT COULD BE APPLIED TO DETERMINE WHICH F ISCAL JURISDICTION COULD TAX THAT PARTICULAR PART OF THE TRANSACTION. THIS P RINCIPLE HELPS TO DETERMINE WHERE THE TERRITORIAL JURISDICTION OF A PARTICULAR STATE LAY AND TO DETERMINE ITS CAPACITY TO TAX AN EVENT. APPLYING IT TO COMPOS ITE TRANSACTIONS, WHICH HAD SOME OPERATIONS IN ONE TERRITORY AND SOME IN TH E OTHER, WAS ESSENTIAL TO DETERMINE THE TAX-ABILITY OF VARIOUS OPERATIONS. AS REGARDS DIVISION OF TAXABLE INCOME OF OFFSHORE SERVICES, THE HON'BLE AP EX COURT HAS HELD THAT THE PARTIES WERE AD IDEM THAT THERE EXISTED A DISTI NCTION BETWEEN ONSHORE SUPPLY AND OFFSHORE SUPPLY. THE INTENTION OF THE PA RTIES, THUS, MUST BE JUDGED FROM DIFFERENT TYPES OF SERVICES, DIFFERENT TYPES OF PRICES, AS ALSO DIFFERENT CURRENCIES IN WHICH THE PRICES ARE TO BE PAID. IN THAT CASE, THE CONTRACT WAS A COMPLEX ARRANGEMENT AND THE PROJECT WAS A TURNKEY PROJECT IN WHICH DIFFERENT MEMBERS OF THE CONTRACT WERE REQ UIRED TO PERFORM DIFFERENT ACTIVITIES. THE OBLIGATIONS UNDER THE CO NTRACT ARE DISTINCT ONES. :-17- : THE SUPPLY OBLIGATION IS DISTINCT AND SEPARATE FROM THE SERVICE OBLIGATION AND THE PRICE FOR EACH OF THE COMPONENT OF THE CONT RACT IS SEPARATE. SIMILARLY OFFSHORE SUPPLY AND OFFSHORE SERVICES HAV E SEPARATELY BEEN DEALT WITH. THE HON'BLE APEX COURT HAS EXAMINED ALL THESE ASPECTS BEFORE CONCLUDING THAT OFFSHORE SUPPLY AND OFFSHORE SERVIC ES RENDERED OUTSIDE INDIA ARE NOT TAXABLE IN INDIA. THE RELEVANT OBSER VATIONS OF THE HON'BLE APEX COURT DEALING WITH THE TAX LIABILITY OF OFFSHO RE SUPPLY AND SERVICE AND ONSHORE SERVICES ARE EXTRACTED HEREUNDER FOR THE SA KE OF REFERENCE:- 17. THE CONTRACT IS A COMPLEX ARRANGEMENT. PETRONA T AND APPELLANT ARE NOT THE ONLY PARTIES THERETO, THERE ARE OTHER M EMBERS OF THE CONSORTIUM WHO ARE REQUIRED TO CARRY OUT DIFFERENT PARTS OF THE CONTRACT. THE CONSORTIUM INCLUDED AN INDIAN COMPANY . THE FACT THAT IT HAS BEEN FASHIONED AS A TURNKEY CONTRACT BY ITSE LF MAY NOT BE OF MUCH SIGNIFICANCE. THE PROJECT IS A TURNKEY PROJECT . THE CONTRACT MAY ALSO BE A TURNKEY CONTRACT, BUT THE SAME BY ITSELF WOULD NOT MEAN THAT EVEN FOR THE PURPOSE OF TAXABILITY THE ENTIRE CONTRACT MUST BE CONSIDERED TO BE AN INTEGRATED ONE SO AS TO MAKE TH E APPELLANT TO PAY TAX IN INDIA. THE TAXABLE EVENTS IN EXECUTION O F A CONTRACT MAY ARISE AT SEVERAL STAGES IN SEVERAL YEARS. THE LIABI LITY OF THE PARTIES MAY ALSO ARISE AT SEVERAL STAGES. OBLIGATIONS UNDER THE CONTRACT ARE DISTINCT ONES. SUPPLY OBLIGATION IS DISTINCT AND SE PARATE FROM SERVICE OBLIGATION. PRICE FOR EACH OF THE COMPONENT OF THE CONTRACT IS SEPARATE. SIMILARLY OFFSHORE SUPPLY AND OFFSHORE SE RVICES HAVE SEPARATELY BEEN DEALT WITH. PRICES IN EACH OF THE S EGMENT ARE ALSO DIFFERENT. 18. THE VERY FACT THAT IN THE CONTRACT, THE SUPPLY SEGMENT AND SERVICE SEGMENT HAVE BEEN SPECIFIED IN DIFFERENT PA RTS OF THE CONTRACT IS A POINTER TO SHOW THAT THE LIABILITY OF THE APPE LLANT THEREUNDER WOULD ALSO BE DIFFERENT. 19. THE CONTRACT INDISPUTABLY WAS EXECUTED IN INDIA . BY ENTERING INTO A CONTACT IN INDIA, ALTHOUGH PARTS THEREOF WILL HAV E TO BE CARRIED OUT OUTSIDE INDIA WOULD NOT MAKE THE ENTIRE INCOME DERI VED BY THE :-18- : CONTRACTOR TO BE TAXABLE IN INDIA. WE WOULD, HOWEVE R, DEAL WITH THIS ASPECT OF THE MATTER A LITTLE LATER. 20. SCOPE OF WORK IS CONTAINED IN CLAUSE 2.1 OF EX. A APPENDED TO THE CONTRACT WHICH INCLUDES SUPPLY OF EQUIPMENT, MATERI ALS AND FACILITIES. THE SAID EXHIBIT SPELLS OUT DIFFERENT SYSTEMS TO BE SET IN PLACE. IT IMPOSES AN OBLIGATION ON THE CONTRACTOR TO SUPPLY E QUIPMENTS REQUIRED THEREFOR. IT WAS TO ARRANGE FOR THE ENGINE ERING SERVICES IN RELATION THERETO. IT WAS ALSO REQUIRED TO RENDER VA RIOUS OTHER SERVICES WITHIN INDIA. EX. D, HOWEVER, PROVIDES FOR THE PRIC ES TO BE PAID IN RESPECT OF OFFSHORE SUPPLIES AND OFFSHORE SERVICES, ONSHORE SUPPLY AND ONSHORE SERVICES, CONSTRUCTION AND ERECTION. PA YMENT SCHEDULE HAS ALSO BEEN SEPARATELY SPECIFIED IN RESPECT OF EA CH OF THE COMPONENTS SEPARATELY. 21. IT IS NOT IN DISPUTE THAT TITLE IN THE EQUIPMEN TS SUPPLIED WAS TO STAND TRANSFERRED UPON DELIVERY THEREOF OUTSIDE IND IA ON HIGH-SEA BASIS AS PROVIDED FOR IN ARTICLE 22.1. SIMILARLY, A RTICLE 13.1 PROVIDES FOR A LUMP SUM CONTRACT PRICE, WHEREAS ARTICLE 13.3 -2 SPECIFICALLY REFERS TO THE COST OF OFFSHORE SUPPLIES. THE PROVIS IONS WITH REGARD TO OFFSHORE SUPPLIES AND OFFSHORE SERVICES WERE TO BE READ WITH THE PROVISIONS CONTAINED IN EX. D WHICH FORMED THE BASI S OF CUSTOMS DUTY. CLAUSE 13.4 REFERS TO EX. D AS THE BASIS FOR PRICE ESCALATION. 22. THE QUESTION OF IMPOSITION OF TAX ON INCOME ARI SING FROM A BUSINESS CONNECTION MAY, THUS, HAVE TO BE CONSIDERE D KEEPING IN VIEW THE AFOREMENTIONED FACTUAL BACKDROP. 23. SECTION 9(1)(I) OF THE ACT STATES THAT INCOME A CCRUING OR ARISING WHETHER DIRECTLY OR INDIRECTLY, THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA SHALL BE DEEMED TO ACCRUE OR AR ISE IN INDIA. APPELLANT IS A NON-RESIDENT ASSESSEE. 24. SECTION 9 RAISES A LEGAL FICTION; BUT HAVING RE GARD TO THE CONTEXTUAL INTERPRETATION AND FURTHERMORE IN VIEW O F THE FACT THAT WE ARE DEALING WITH A TAXATION STATUTE THE LEGAL FICTI ON MUST BE CONSTRUED HAVING REGARD TO THE OBJECT IT SEEKS TO ACHIEVE. TH E LEGAL FICTION CREATED UNDER SECTION 9 OF THE ACT MUST ALSO BE REA D HAVING REGARD TO THE OTHER PROVISIONS THEREOF. MARUTI UDYOG LTD. V. RAM LAL [2005] 2 SCC 638. :-19- : 25. FOR OUR BENEFIT WE MAY NOTICE THE PROVISIONS OF SECTION 42 OF THE INCOME-TAX ACT, 1922. IT PROVIDED THAT ONLY SUCH PA RT OF INCOME AS WAS ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT IN I NDIA WOULD BE TAXABLE IN INDIA. 26. TERRITORIAL NEXUS DOCTRINE, THUS, PLAYS AN IMPO RTANT PART IN ASSESSMENT OF TAX. TAX IS LEVIED ON ONE TRANSACTION WHERE THE OPERATIONS WHICH MAY GIVE RISE TO INCOME MAY TAKE P LACE PARTLY IN ONE TERRITORY AND PARTLY IN ANOTHER. THE QUESTION W HICH WOULD FALL FOR OUR CONSIDERATION IS AS TO WHETHER THE INCOME THAT ARISES OUT OF THE SAID TRANSACTION WOULD BE REQUIRED TO BE PROPORTION ED TO EACH OF THE TERRITORIES OR NOT. 27. INCOME ARISING OUT OF OPERATION IN MORE THAN ON E JURISDICTION WOULD HAVE TERRITORIAL NEXUS WITH EACH OF THE JURIS DICTION ON ACTUAL BASIS. IF THAT BE SO, IT MAY NOT BE CORRECT TO CONT END THAT THE ENTIRE INCOME ACCRUES OR ARISES IN EACH OF THE JURISDICT ION. THE AUTHORITY HAS PROCEEDED ON THE BASIS THAT SUPPLIES IN QUESTIO N HAD TAKEN PLACE OFFSHORE. IT, HOWEVER, HAS RENDERED, ITS OPINION ON THE PREMISE THAT OFFSHORE SUPPLIES OR OFFSHORE SERVICES WERE INTIMAT ELY CONNECTED WITH THE TURNKEY PROJECT. 34. IN THIS CASE, WE ARE FACED WITH DIFFERENT SITUA TION. IT IS ONLY FOR THE PURPOSE OF TAXABILITY THAT THE TERMS OF THE CON TRACT ARE REQUIRED TO BE CONSTRUED. A TURNKEY CONTRACT MAY INVOLVE SUP PLY OF MATERIALS USED IN THE EXECUTION OF THE CONTRACT FOR PRICE AS ALSO FOR USE OF THE MATERIALS BY WORKS AND LABOUR; BUT THE SAME MAY NOT HAVE ANY RELATION WITH THE TAXABILITY PART OF IT. 38. TAX UNDER THE ACT HAS TO BE ASSESSED UNDER DIFF ERENT HEADS. INCOME UNDER ONE HEAD MAY BE SUBJECT TO EXEMPTION; UNDER SAME HEAD, DEDUCTIONS MAY BE CLAIMED; YET UNDER ANOTHER, NO TAX MAY BE PAYABLE AT ALL. WHETHER A PART OF THE INCOME OF THE ASSESSEE WOULD BE TAXABLE OR NOT DEPENDS UPON THE FACT OF EACH CAS E. EVEN THERE IS NOTHING TO PREVENT THE INCOME ACCRUING OR ARISING A T THE SOURCES. 48. THE PRINCIPLE OF APPORTIONMENT IS ALSO RECOGNIZ ED BY CLAUSE (A) OF EXPLANATION I. THUS, IF SUBMISSION OF THE LEARNED A DDITIONAL SOLICITOR GENERAL IS ACCEPTED THAT THE CONTRACT IS A COMPOSIT E ONE, THEN OFFSHORE SUPPLY WOULD BE OF EQUIPMENT DESIGNED AND MANUFACTURED :-20- : IN ONE TERRITORY (JAPAN), AND THEN SOLD IN ANOTHER TAX TERRITORY, LEADING TO DIVISION OF PROFITS ARISING IN TWO TAX T ERRITORIES, WHICH IS NOT ENVISAGED UNDER OUR TAXATION LAW. 49. IT GIVES RISE TO THE QUESTION AS TO WHAT WOULD BE THE MEANING OF THE PHRASE BUSINESS CONNECTION IN INDIA. MERE EXI STENCE OF BUSINESS CONNECTION MAY NOT RESULT IN INCOME OF THE NON-RESI DENT ASSESSEE FROM TRANSACTION WITH SUCH A BUSINESS CONNECTION AC CRUING OR ARISING IN INDIA. 60. IN CONSTRUING A CONTRACT, THE TERMS AND CONDITI ONS THEREOF ARE TO BE READ AS A WHOLE. A CONTRACT MUST BE CONSTRUED KE EPING IN VIEW THE INTENTION OF THE PARTIES. NO DOUBT, THE APPLICA BILITY OF THE TAX LAWS WOULD DEPEND UPON THE NATURE OF THE CONTRACT, BUT T HE SAME SHOULD NOT BE CONSTRUED KEEPING IN VIEW THE TAXING PROVISI ONS. 62. THE TERM PERMANENT ESTABLISHMENT HAS NOT BEEN DEFINED IN THE INCOME-TAX ACT. SINCE THE APPELLANT CARRIES ON BUSI NESS IN INDIA THROUGH A PERMANENT ESTABLISHMENT, THEY CLEARLY FAL L OUT OF THE APPLICABILITY OF ARTICLE 12(5) OF THE DTAA AND INTO THE AMBIT OF ARTICLE 7. THE PROTOCOL TO THE DTAA, IN PARAGRAPH 6, DISCUS SES THE INVOLVEMENT OF THE PERMANENT ESTABLISHMENT IN TRANS ACTIONS, IN ORDER TO DETERMINE THE EXTENT OF INCOME THAT CAN BE TAXED . IT IS STATED THAT THE TERM DIRECTLY OR INDIRECTLY ATTRIBUTABLE INDI CATES THE INCOME THAT SHALL BE REGARDED ON THE BASIS OF THE EXTENT APPROP RIATE TO THE PART PLAYED BY THE PERMANENT ESTABLISHMENT IN THOSE TRAN SACTIONS. THE PERMANENT ESTABLISHMENT HERE HAS HAD NO ROLE TO PLA Y IN THE TRANSACTION THAT IS SOUGHT TO BE TAXED, SINCE THE T RANSACTION TOOK PLACE ABROAD. 63. CLAUSE 1 OF ARTICLE 7, THUS, PROVIDES THAT IF A N INCOME ARISES IN JAPAN (CONTRACTING STATE), IT SHALL BE TAXABLE IN T HAT COUNTRY UNLESS THE ENTERPRISE CARRIES ON BUSINESS IN THE OTHER CON TRACTING STATE (INDIA) THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN. WHAT IS TO BE TAXED IS PROFIT OF THE ENTERPRISE IN INDIA, B UT ONLY SO MUCH OF THEM AS IS DIRECTLY OR INDIRECTLY ATTRIBUTABLE TO T HAT PERMANENT ESTABLISHMENT. ALL INCOME ARISING OUT OF THE TURNKE Y PROJECT WOULD NOT, THEREFORE, BE ASSESSABLE IN INDIA, ONLY BECAUS E THE ASSESSEE HAS A PERMANENT ESTABLISHMENT. :-21- : 65. THE DISTINCTION BETWEEN THE EXISTENCE OF A BUSI NESS CONNECTION AND THE INCOME ACCRUING OR ARISING OUT OF SUCH BUSI NESS CONNECTION IS CLEAR AND EXPLICIT. IN THE PRESENT CASE, THE PERMAN ENT ESTABLISHMENTS NON-INVOLVEMENT IN THIS TRANSACTION EXCLUDES IT FRO M BEING A PART OF THE CAUSE OF THE INCOME ITSELF, AND THUS THERE IS N O BUSINESS CONNECTION. 66. ARTICLE 5.3 PROVIDES THAT A PERSON IS REGARDED AS HAVING A PERMANENT ESTABLISHMENT IF HE CARRIES ON CONSTRUCTI ON AND INSTALLATION ACTIVITIES IN A CONTRACTING STATE ONLY IF THE SAID ACTIVITIES ARE CARRIED OUT FOR MORE THAN SIX MONTHS. PARAGRAPH 6 OF THE PR OTOCOL TO INDIA JAPAN TAX TREATY ALSO PROVIDES THAT ONLY INCOME ARI SING FROM ACTIVITIES WHEREIN THE PERMANENT ESTABLISHMENT HAS BEEN INVOLVED CAN BE SAID TO BE ATTRIBUTABLE TO THE PERMANENT EST ABLISHMENT. IT GIVES RISE TO TWO QUESTIONS, FIRSTLY OFFSHORE SERVI CES ARE RENDERED OUTSIDE INDIA; THE PERMANENT ESTABLISHMENT WOULD HA VE NO ROLE TO PLAY IN RESPECT THERETO IN THE EARNING OF THE SAID INCOME. SECONDLY, ENTIRE SERVICES HAVING BEEN RENDERED OUTSIDE INDIA, THE INCOME ARISING THEREFROM CANNOT BE ATTRIBUTABLE TO THE PER MANENT ESTABLISHMENT SO AS TO BRING WITHIN THE CHARGE OF T AX. 67. FOR ATTRACTING THE TAXING STATUTE THERE HAS TO BE SOME ACTIVITIES THROUGH PERMANENT ESTABLISHMENT. IF INCOME ARISES W ITHOUT ANY ACTIVITY OF THE PERMANENT ESTABLISHMENT, EVEN UNDER THE DTAA THE TAXATION LIABILITY IN RESPECT OF OVERSEA SERVICES W OULD NOT ARISE IN INDIA. SECTION 9 SPELLS OUT THE EXTENT TO WHICH THE INCOME OF NON- RESIDENT WOULD BE LIABLE TO TAX IN INDIA. SECTION 9 HAS A DIRECT TERRITORIAL NEXUS. RELIEF UNDER A DOUBLE TAXATION T REATY HAVING REGARD TO THE PROVISIONS CONTAINED IN SECTION 90(2) OF THE INCOME-TAX ACT WOULD ARISE ONLY IN THE EVENT A TAXABLE INCOME OF T HE ASSESSEE ARISES IN ONE CONTRACTING STATE ON THE BASIS OF ACCRUAL OF INCOME IN ANOTHER CONTRACTING STATE ON THE BASIS OF RESIDENCE. THUS, IF APPELLANT HAD INCOME THAT ACCRUED IN INDIA AND IS LIABLE TO TAX B ECAUSE IN ITS STATE ALL RESIDENTS IT WAS ENTITLED TO RELIEF FROM SUCH D OUBLE TAXATION PAYABLE IN TERMS OF DOUBLE TAXATION TREATY. HOWEVER , SO FAR AS ACCRUAL OF INCOME IN INDIA IS CONCERNED, TAXABILITY MUST BE READ IN TERMS OF SECTION 4(2) READ WITH SECTION 9, WHEREUPO N THE QUESTION OF :-22- : SEEKING ASSESSMENT OF SUCH INCOME IN INDIA ON THE B ASIS OF DOUBLE TAXATION TREATY WOULD ARISE. 68. IN CASES SUCH AS THIS, WHERE DIFFERENT SEVERABL E PARTS OF THE COMPOSITE CONTRACT IS PERFORMED IN DIFFERENT PLACES , THE PRINCIPLE OF APPORTIONMENT CAN BE APPLIED, TO DETERMINE WHICH FI SCAL JURISDICTION CAN TAX THAT PARTICULAR PART OF THE TRANSACTION. TH IS PRINCIPLE HELPS DETERMINE, WHERE THE TERRITORIAL JURISDICTION OF A PARTICULAR STATE LIES, TO DETERMINE ITS CAPACITY TO TAX AN EVENT. APPLYING IT TO COMPOSITE TRANSACTIONS WHICH HAVE SOME OPERATIONS IN ONE TERR ITORY AND SOME IN OTHERS, IS ESSENTIAL TO DETERMINE THE TAXABILITY OF VARIOUS OPERATIONS. 69. IT IS, THEREFORE, IN OUR OPINION, THE CONCEPTS PROFITS OF BUSINESS CONNECTION AND PERMANENT ESTABLISHMENT SHOULD NOT B E MIXED UP. WHEREAS BUSINESS CONNECTION IS RELEVANT FOR THE PUR POSE OF APPLICATION OF SECTION 9; THE CONCEPT OF PERMANENT ESTABLISHMENT IS RELEVANT FOR ASSESSING THE INCOME OF A NON-RESIDENT UNDER THE DTAA. THERE, HOWEVER, MAY BE A CASE WHERE THERE CAN BE OV ER-LAPPING OF INCOME; BUT WE ARE NOT CONCERNED WITH SUCH A SITUAT ION. THE ENTIRE TRANSACTION HAVING BEEN COMPLETED ON THE HIGH SEAS, THE PROFITS ON SALE DID NOT ARISE IN INDIA, AS HAS BEEN CONTENDED BY THE APPELLANT. THUS, HAVING BEEN EXCLUDED FROM THE SCOPE OF TAXATI ON UNDER THE ACT, THE APPLICATION OF THE DOUBLE TAXATION TREATY WOULD NOT ARISE. DOUBLE TAX TREATY, HOWEVER, WAS TAKEN RECOURSE TO B Y APPELLANT ONLY BY WAY OF AN ALTERNATE SUBMISSION ON INCOME FROM SE RVICES AND NOT IN RELATION TO THE TAX OF OFFSHORE SUPPLY OF GOODS. 70. WE WOULD IN THE AFOREMENTIONED CONTEXT CONSIDER THE QUESTION OF DIVISION OF TAXABLE INCOME OF OFFSHORE SERVICES. PA RTIES WERE AD IDEM THAT THERE EXISTED A DISTINCTION BETWEEN ONSHORE SU PPLY AND OFFSHORE SUPPLY. THE INTENTION OF THE PARTIES, THUS, MUST BE JUDGED FROM DIFFERENT TYPES OF SERVICES, DIFFERENT TYPES OF PRI CES, AS ALSO DIFFERENT CURRENCIES IN WHICH THE PRICES ARE TO BE PAID. 71. SECTION 9(1)(VII)(C ) OF THE ACT STATES THAT 'A PERSON WHO IS A NON- RESIDENT, WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILIZED IN A BUSINESS OR PROFESSION, CARRIED ON BY SUCH PERSON IN INDIA, OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM A NY SOURCE IN INDIA'. READING THE PROVISION IN ITS PLAIN SENSE, I T CAN BE SEEN THAT IT :-23- : REQUIRES TWO CONDITIONS HAVE TO BE MET THE SERVIC ES WHICH ARE THE SOURCE OF THE INCOME THAT IS SOUGHT TO BE TAXED, HA S TO BE RENDERED IN INDIA, AS WELL AS UTILIZED IN INDIA, TO BE TAXAB LE IN INDIA. IN THE PRESENT CASE, BOTH THESE CONDITIONS HAVE NOT BEEN S ATISFIED SIMULTANEOUSLY, THEREFORE EXCLUDING THIS INCOME FRO M THE AMBIT OF TAXATION IN INDIA. THUS, FOR A NON-RESIDENT TO BE T AXED ON INCOME FOR SERVICES, SUCH A SERVICE NEEDS TO BE RENDERED WITHI N INDIA, AND HAS TO BE A PART OF A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON IN INDIA. THE PETITIONERS IN THE PRESENT CASE HAVE PRO VIDED SERVICES TO PERSONS RESIDENT IN INDIA, AND THOUGH THE SAME HAVE BEEN USED HERE, IT HAS NOT BEEN RENDERED IN INDIA. 72. SECTION 9(1)(VII) OF THE ACT WHEREUPON RELIANCE HAS BEEN PLACED BY THE LEARNED ADDITIONAL SOLICITOR GENERAL, MUST B E READ WITH SECTION 5 THEREOF, WHICH TAKES WITHIN ITS PURVIEW THE TERRI TORIAL NEXUS ON THE BASIS WHEREOF TAX IS REQUIRED TO BE LEVIED, NAMELY : (A) RESIDENT; AND (B) RECEIPT OR ACCRUAL OF INCOME. 73. GLOBAL INCOME OF A RESIDENT ALTHOUGH IS SUBJECT ED TO TAX, GLOBAL INCOME OF A NON-RESIDENT MAY NOT BE. THE ANSWER TO THE QUESTION WOULD DEPEND UPON THE NATURE OF THE CONTRACT AND TH E PROVISIONS OF DTAA. 74. WHAT IS RELEVANT IS RECEIPT OR ACCRUAL OF INCOM E, AS WOULD BE EVIDENT FROM A PLAIN READING OF SECTION 5(2) OF THE ACT. THE LEGAL FICTION CREATED ALTHOUGH IN A GIVEN CASE MAY BE HEL D TO BE OF WIDE IMPORT, BUT IT IS TRITE THAT THE TERMS OF A CONTRAC T ARE REQUIRED TO BE CONSTRUED HAVING REGARD TO THE INTERNATIONAL COVENA NTS AND CONVENTIONS. IN A CASE OF THIS NATURE, INTERPRETATI ON WITH REFERENCE TO THE NEXUS TO TAX TERRITORIES WILL ALSO ASSUME SIGNI FICANCE. TERRITORIAL NEXUS FOR THE PURPOSE OF DETERMINING THE TAX LIABIL ITY IS AN INTERNATIONALLY ACCEPTED PRINCIPLE. AN ENDEAVOUR SH OULD, THUS, BE MADE TO CONSTRUE THE TAXABILITY OF A NON-RESIDENT I N RESPECT OF INCOME DERIVED BY IT. HAVING REGARD TO THE INTERNAT IONALLY ACCEPTED PRINCIPLE AND DTAA, IT MAY NOT BE POSSIBLE TO GIVE AN EXTENDED MEANING TO THE WORDS INCOME DEEMED TO ACCRUE OR AR ISE IN INDIA AS EXPRESSED IN SECTION 9 OF THE ACT. SECTION 9 INCORP ORATED VARIOUS HEADS OF INCOME ON WHICH TAX IS SOUGHT TO BE LEVIED BY THE REPUBLIC :-24- : OF INDIA. WHATEVER IS PAYABLE BY A RESIDENT TO A NO N-RESIDENT BY WAY OF FEES FOR TECHNICAL SERVICES, THUS, WOULD NOT ALW AYS COME WITHIN THE PURVIEW OF SECTION 9(1)(VII) OF THE ACT. IT MUST HA VE SUFFICIENT TERRITORIAL NEXUS WITH INDIA SO AS TO FURNISH A BAS IS FOR IMPOSITION OF TAX. WHEREAS A RESIDENT WOULD COME WITHIN THE PURVI EW OF SECTION 9(1)(VII) OF THE ACT, A NON-RESIDENT WOULD NOT, AS SERVICES OF A NON- RESIDENT TO A RESIDENT UTILIZE IN INDIA MAY NOT HAV E MUCH RELEVANCE IN DETERMINING WHETHER THE INCOME OF THE NON-RESIDENT ACCRUES OR ARISES IN INDIA. IT MUST HAVE A DIRECT LIVE LINK BE TWEEN THE SERVICES RENDERED IN INDIA, WHEN SUCH A LINK IS ESTABLISHED, THE SAME MAY AGAIN BE SUBJECTED TO ANY RELIEF UNDER DTAA. A DIST INCTION MAY ALSO BE MADE BETWEEN RENDITION OF SERVICES AND UTILIZATI ON THEREOF. 76. THE PROVISIONS OF SECTION 9(1)(VII) OF THE ACT ARE PLAIN AND CAPABLE OF BEING GIVEN A MEANING. THERE, THEREFORE, MAY NOT BE ANY REASON NOT TO GIVE FULL EFFECT THERETO. HOWEVER, EV EN IN RELATION TO SUCH INCOME, THE PROVISIONS OF ARTICLE 7 OF THE DTA A WOULD BE APPLICABLE, AS SERVICES RENDERED OUTSIDE INDIA WOUL D HAVE NOTHING TO DO WITH PERMANENT ESTABLISHMENT IN INDIA. THUS, IF ANY SERVICES HAVE BEEN RENDERED BY THE HEAD OFFICE OF APPELLANT OUTSI DE INDIA, ONLY BECAUSE THEY WERE CONNECTED WITH PERMANENT ESTABLIS HMENT. EVEN IN RELATION THERETO, PRINCIPLE OF APPORTIONMENT SHALL APPLY. 77. THE AUTHORITY, IN OUR OPINION, HAS COMMITTED AN ERROR IN THIS BEHALF, AS IF SERVICES RENDERED BY THE HEAD OFFICE ARE CONSIDERED TO BE THE SERVICES RENDERED BY THE PERMANENT ESTABLISH MENT, THE DISTINCTION BETWEEN INDIAN AND FOREIGN OPERATIONS A ND THE APPORTIONMENT OF THE INCOME OF THE OPERATIONS SHALL STAND OBLITERATED. 78. IT WOULD BE CONTRARY TO THE INTENT AND PURPORT OF THE DOUBLE TAXATION CONVENTION WHICH IS A PART OF THE SCHEME U NDER THE INCOME-TAX ACT. REGARDING OFFSHORE SUPPLY: (1) ONLY SUCH PART OF INCOME, AS IS ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT IN INDIA CAN BE TAXED IN INDIA AS CONTE MPLATED IN EXPLANATION 1(A) OF SECTION 9(1)(I); (2)SINCE ALL P ARTS OF THE TRANSACTION IN QUESTION, I.E. THE TRANSFER OF PROPE RTY IN GOODS AS WELL :-25- : AS THE PAYMENT, WERE CARRIED OUT OUTSIDE THE INDIAN SOIL, THE TRANSACTION COULD NOT HAVE BEEN TAXED IN INDIA; (3) THE PRINCIPLE OF APPORTIONMENT, WHEREIN THE TERRITORIAL JURISDICTION OF A PARTICULAR STATE DETERMINES ITS CAPACITY TO TAX AN EVENT, HAS TO BE FOLLOWED; (4) THE FACT THAT THE CONTRACT WAS SIGNED IN INDIA IS OF NO MATERIAL CONSEQUENCE, SINCE ALL ACTIVITIES IN CONNECTION WIT H THE OFFSHORE SUPPLY ARE CARRIED OUTSIDE INDIA, AND THEREFORE CAN NOT BE DEEMED TO ACCRUE OR ARISE IN INDIA; (5) THERE EXISTS A DISTIN CTION BETWEEN A BUSINESS CONNECTION AND A PERMANENT ESTABLISHMENT. AS THE PERMANENT ESTABLISHMENT CANNOT BE SAID TO BE INVOLV ED IN THE TRANSACTION, THE PROVISION OF SECTION 9 WILL HAVE N O APPLICATION. THE PERMANENT ESTABLISHMENT CANNOT BE EQUATED A BUSINES S CONNECTION, SINCE THE FORMER IS FOR THE PURPOSE OF ASSESSMENT O F INCOME OF A NONRESIDENT UNDER A DOUBLE TAXATION AVOIDANCE AGREE MENT, AND THE LATTER IS FOR THE APPLICATION OF SECTION 9; (6) THE EXISTENCE OF A PERMANENT ESTABLISHMENT WOULD NOT CONSTITUTE SUFFIC IENT 'BUSINESS CONNECTION', AND THE PERMANENT ESTABLISHMENT WOULD BE THE TAXABLE ENTITY. THE FISCAL JURISDICTION OF A COUNTRY WOULD NOT EXTEND TO THE TAXING ENTIRE INCOME ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT; (7) THERE EXISTS A DIFFERENCE BETWEEN THE EXISTENCE OF A BUSINESS CONNECTION AND THE INCOME ACCRUING OR ARISING OUT O F SUCH BUSINESS CONNECTION; (8) PARAGRAPH 6 OF THE PROTOCOL OF THE DTAA IS NOT APPLICABLE, BECAUSE, FOR THE PROFITS TO BE 'ATTRIBU TABLE DIRECTLY OR INDIRECTLY', THE PERMANENT ESTABLISHMENT MUST BE IN VOLVED IN THE ACTIVITY GIVING RISE TO THE PROFITS. REGARDING OFFSHORE SERVICES: (1) SUFFICIENT TERRITORIAL NEXUS BETWEEN THE RENDIT ION OF SERVICES AND TERRITORIAL LIMITS OF INDIA IS NECESSARY TO MAKE TH E INCOME TAXABLE; (2) THE ENTIRE CONTRACT WOULD NOT BE ATTRIBUTABLE TO TH E OPERATIONS IN INDIA, VIZ., THE PLACE OF EXECUTION OF THE CONTRACT , ASSUMING THE OFFSHORE ELEMENTS FORMS AN INTEGRAL PART OF THE CON TRACT; (3) SECTION 9 (1)(VII) READ WITH MEMO CANNOT BE GIVEN A WIDE ME ANING SO AS TO HOLD THAT THE AMENDMENT WAS ONLY TO INCLUDE THE INC OME OF NON- RESIDENT TAXPAYERS RECEIVED BY THEM OUTSIDE INDIA F ROM INDIAN CONCERNS FOR SERVICES 'RENDERED OUTSIDE INDIA; (4) THE TEST OF RESIDENCE, AS APPLIED IN INTERNATIONAL LAW ALSO, IS THAT OF THE TAXPAYER :-26- : AND NOT THAT OF THE RECIPIENT OF SUCH SERVICES; (5) FOR SECTION 9(1) (VII) TO BE APPLICABLE, IT IS NECESSARY THAT THE SERVICES SHOULD NOT ONLY BE UTILIZED WITHIN INDIA, BUT SHOULD ALSO BE RENDER ED IN INDIA OR SHOULD HAVE SUCH A 'LIVE LINK' WITH INDIA THAT THE ENTIRE INCOME FROM FEES 'AS ENVISAGED IN ARTICLE 12 OF DTAA BECOMES TAXABLE IN INDIA; (6) THE TERMS 'EFFECTIVELY CONNECTED' AND 'ATTRIBUT ABLE TO' ARE TO BE CONSTRUED DIFFERENTLY EVEN IF THE OFFSHORE SERVICES AND THE PERMANENT ESTABLISHMENT ARE CONNECTED; (7) SECTION 9(1)(VII)( C) IN THE INSTANT CASE WOULD HAVE NO APPLICATION AS THERE IS NOTHING TO SHOW THAT THE INCOME DERIVED BY A NON-RESIDENT COMPANY IRRESPECTI VE OF WHERE RENDERED, WAS UTILIZED IN INDIA; (8) ARTICLE 7 IS A PPLICABLE IN INSTANT CASE, AND IT LIMITS THE TAX ON BUSINESS PROFITS TO THAT ARISING FROM THE OPERATIONS OF THE PERMANENT ESTABLISHMENT. IN THE I NSTANT CASE, THE ENTIRE SERVICES HAVE BEEN RENDERED OUTSIDE INDIA, A ND HAVE NOTHING TO DO WITH THE PERMANENT ESTABLISHMENT, AND CAN THU S NOT BE ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT AND, TH EREFORE, NOT TAXABLE IN INDIA; (9) APPLYING THE PRINCIPLE OF APP ORTIONMENT TO COMPOSITE TRANSACTIONS WHICH HAVE SOME OPERATIONS I N ONE TERRITORY AND SOME IN OTHERS, IS ESSENTIAL TO DETERMINE THE T AXABILITY OF VARIOUS OPERATIONS; (10) THE LOCATION OF THE SOURCE OF INCO ME WITHIN INDIA WOULD NOT RENDER SUFFICIENT NEXUS TO TAX THE INCOME FROM THAT SOURCE; (11) IF THE TEST APPLIED BY THE AUTHORITY F OR ADVANCE RULINGS IS TO BE ADOPTED, IN THE INSTANT CASE TOO, THEN IT WOULD ELIMINATE THE DIFFERENCE BETWEEN THE CONNECTION BETWEEN INDIAN AN D FOREIGN OPERATIONS, AND THE APPORTIONMENT OF INCOME ACCORDI NGLY; (12) THE SERVICES ARE INEXTRICABLY LINKED TO THE SUPPLY OF G OODS, AND IT MUST BE CONSIDERED IN THE SAME MANNER.(PARA 79) 25. THIS ISSUE WAS ALSO RE-EXAMINED BY THE HON'BLE APEX COURT IN THE CASE OF CIT VS. HYUNDAI HEAVY INDUSTRIES LTD., (SUP RA) AND THEIR LORDSHIPS HAVE HELD THAT WHILE DEALING WITH TAX LIABILITY FOR DESIGN, FABRICATION AND COMMISSION OF PLATFORM IN BOMBAY HIGH IN INDIA THE CONTRACT IN QUESTION WAS DIVISIBLE INTO TWO TYPES OF OPERATIONS ONE BEI NG FABRICATION IN KOREA AND THE OTHER CONSISTING OF INSTALLATION IN INDIA A ND, THEREFORE, ANY INCOME ARISING FROM THE ACTIVITY OF FABRICATION IN KOREA W AS NOT ASSESSABLE TO TAX IN :-27- : INDIA AND TO THAT EXTENT THE REVENUES RECEIVABLE UN DER THE ABOVE CONTRACT IN RESPECT OF THE ACTIVITY OF FABRICATION SHOULD BE EXCLUDED FROM THE PROFIT AND LOSS ACCOUNT TOGETHER WITH THE EXPENDITURE RELA TING TO THE ACTIVITY OF FABRICATION. 26. THIS ASPECT WAS ALSO EXAMINED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF DIRECTOR OF INCOME-TAX VS. ERICSSON A.B. (S UPRA) IN THE LIGHT OF THE PROVISIONS OF SECTION 9 OF THE ACT AND DOUBLE TAXAT ION AVOIDANCE AGREEMENT AND THEIR LORDSHIPS HAVE HELD THAT HAVING REGARD TO FACT THAT GOODS WERE MANUFACTURED OUTSIDE INDIA AND TAXABLE E VENT ALSO TOOK PLACE OUTSIDE INDIA WITH PASSING OF PROPERTY FROM SELLER TO BUYER, IT WAS TO BE HELD THAT ASSESSEE HAD NOT EARNED ANY INCOME IN IND IA THROUGH OR FROM ANY BUSINESS CONNECTION UNDER SECTION 9(1)(I) OF THE AC T. WHILE HOLDING THAT THE PROPERTY IN GOODS HAD PASSED ON TO THE BUYER UNDER THE SUPPLY CONTRACT OUTSIDE INDIA, NO PART OF PROFIT ARISING FROM THE S UPPLY OF EQUIPMENT OUTSIDE INDIA WOULD BE CHARGEABLE TO TAX IN INDIA, THEIR LO RDSHIPS OF THE HON'BLE DELHI HIGH COURT HAS OBSERVED AS UNDER:- 37. IN THE PRESENT CASE, WE ARE CONCERNED WITH THE INCOME EARNED BY THE ASSESSEE AS A RESULT OF SUPPLY OF HARDWARE A ND SOFTWARE LICENCE UNDER THE SUPPLY AGREEMENT. IF THIS SUPPLY AGREEMENT IS TAKEN AS STANDALONE AGREEMENT, THE FACTS ON RECORD SHOW THAT SUCH SUPPLIES UNDER THIS AGREEMENT WERE MADE OVERSEAS. THE PROPERTY IN GOODS HAD PASSED ON TO THE BUYER UNDER THE SUPPLY C ONTRACT OUTSIDE INDIA WHERE THE EQUIPMENT WAS MANUFACTURED. AS PER THE JUDGMENT OF SUPREME COURT IN ISHIKAWAJIMA HARIMA HEAVY INDUS TRIES LTD.'S (SUPRA), SUCH AGREEMENT WOULD NOT BE TAXABLE IN IND IA. IN ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES LTD.'S CASE (S UPRA) THE SUPREME COURT HELD THAT NO PART OF PROFIT ARISING F ROM THE SUPPLY OF EQUIPMENT OUTSIDE INDIA WOULD BE CHARGEABLE TO TAX IN INDIA. MR. DASTUR IS RIGHT IN HIS ANALYSIS OF THE PRESENT CASE ON THE BASIS OF THE RATIO OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES LTD.' S CASE (SUPRA) INASMUCH AS :- :-28- : (I) IN BOTH THE CASES THE PROPERTY IN THE EQUIPMENT PASSED OUTSIDE INDIA AND IN THE ASSESSEE'S CASE EVEN THE R ISK PASSED OUTSIDE INDIA; (II) IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY INDUS TRIES LTD'S CASE (SUPRA) EVEN THOUGH IT WAS TO PERFORM ONSHORE SERVICES INCLUDING THE ERECTION AND COMMISSIONING OF THE EQU IPMENT SUPPLIED BY IT NEVERTHELESS, THE SUPREME COURT HELD THAT NO PART OF THE PROFIT ON THE OFFSHORE SUPPLY OF THE EQ UIPMENT WAS TAXABLE IN INDIA AS A CONSEQUENCE OF THE PERFORMANC E OF SUCH ACTIVITIES IN INDIA. IN THE ASSESSEE'S CASE THE ASS ESSEE DOES NOT PERFORM ANY SERVICE IN INDIA IN CONNECTION WITH THE INSTALLATION OF THE EQUIPMENT OR OTHERWISE; (III) THE PERFORMANCE OF THE ACCEPTANCE TEST IN IND IA WAS NOT CONSIDERED A RELEVANT CIRCUMSTANCE WHILST DETERMINI NG WHETHER ANY PART OF THE PROFIT ON THE OFFSHORE SUPPLY WAS C HARGEABLE TO TAX IN INDIA IN THE CASE OF ISHIKAWAJIMA, SO ALSO I N THE ASSESSEE'S CASE. (IV) ALTHOUGH ADMITTEDLY A PERMANENT ESTABLISHMENT EXISTED IN THE CASE OF ISHIKAWAJIMA, NEVERTHELESS, THE COURT H ELD THAT NO PART OF THE PROFIT ARISING FROM THE SUPPLY OF THE E QUIPMENT WAS CHARGEABLE TO TAX IN INDIA AS THE PERMANENT ESTABLI SHMENT HAD NO ROLE TO PLAY IN THE TRANSACTION SOUGHT TO BE TAX ED AS IT TOOK PLACE ABROAD, WHILST IN THE CASE OF THE ASSESSEE, I T HAS BEEN FOUND AS A FACT BY BOTH THE APPELLATE AUTHORITIES T HAT NO PERMANENT ESTABLISHMENT EXISTED; (V) THE MERE SIGNING OF THE CONTRACT PURSUANT TO WH ICH THE SUPPLY WAS MADE IN INDIA, IN BOTH CASES DOES NOT RE SULT IN GIVING RISE TO A TAX LIABILITY IN INDIA; (VI) THE EXISTENCE OF THE OVERALL RESPONSIBILITY CL AUSE WAS HELD TO BE IRRELEVANT IN ISHKAWAJIMA'S CASE AND LIKEWISE THE OVERALL AGREEMENT EXECUTED IN THE ASSESSEE'S CASE SHOULD NO T MAKE ANY DIFFERENCE TO THE TAXABILITY OF THE EQUIPMENT S UPPLIED; :-29- : (VII) GIVING THE NOMENCLATURE OF A TURNKEY PROJECT OR WORKS CONTRACT IS NOT RELEVANT IN DETERMINING WHETHER ANY PROFIT ARISING FROM THE SUPPLY OF EQUIPMENT PURSUANT TO SU CH CONTRACT WAS CHARGEABLE TO TAX IN INDIA; (VIII) THE SUPREME COURT RELIED UPON INSTRUCTION NO . 1829 TO COME TO THE CONCLUSION THAT THE EXISTENCE OF AN OVE RALL RESPONSIBILITY CLAUSE WAS NOT MATERIAL IN DETERMINI NG THE TAX LIABILITY ARISING FROM THE OFFSHORE SUPPLY OF EQUIP MENT AND AS THE SAID INSTRUCTION CONTINUES TO BE IN FORCE FOR T HE ASSESSMENT YEAR RELEVANT TO THE PRESENT APPEALS, THE EXISTENCE OF AN OVERALL AGREEMENT SHOULD MAKE NO DIFFERENCE TO THE TAXABILITY OF THE EQUIPMENT SUPPLIED BY THE ASSESSEE. 38. WE MAY ADD THAT SECTION 19 OF THE SALE OF GOODS ACT MAKES IT CLEAR THAT PROPERTY IN GOODS PASSES WHEN THE PARTIE S INTEND IT TO PASS AND IN THE PRESENT CASE, THE INTENTION OF THE PARTI ES IS MANIFESTED IN ARTICLE 13 OF THE SUPPLY CONTRACT AND THE PROVISION S OF ARTICLE 15 IN NO MANNER MILITATE AGAINST SUCH INTENTION. FURTHER, TH ERE IS NOTHING IN THE CONDUCT OF THE PARTIES WHICH WOULD SUGGEST THAT THE EXPRESS PROVISIONS OF ARTICLE 13 HAVE BEEN GIVEN A GO-BY. 27. SIMILAR VIEWS WERE AGAIN EXPRESSED BY THE HON'BLE D ELHI HIGH COURT IN THE CASE OF DIRECTOR OF INCOME-TAX, NEW DELHI VS . LG CABLE LTD., 197 TAXMAN 100. 28. THE AUTHORITY FOR ADVANCE RULINGS IN THE CASE OF JO INT STOCK COMPANY FOREIGN ECONOMIC ASSOCIATION TECHNOPROMEXP ORT, IN RE, 322 ITR 309 HAS ALSO EXPRESSED SIMILAR VIEWS BY HOLDING THAT IN VIEW OF DISCUSSION, IT IS RULED THAT THE APPLICANT IS NOT L IABLE TO PAY TAX UNDER THE PROVISIONS OF INCOME-TAX ACT READ WITH THE INDIA-RU SSIA DTAA IN RESPECT OF THE AMOUNT RECEIVED FROM NTPC FOR EXECUTION OF OFFS HORE SUPPLY CONTRACT AND WE, THEREFORE, ANSWER THE QUESTION IN THE NEGAT IVE. :-30- : 29. A STRONG RELIANCE WAS ALSO PLACED UPON THE JUDGMENT OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF LINDE AG. LINDE ENG INEERING DIVISION AND ANOTHER VS. DEPUTY DIRECTOR OF INCOME-TAX, 365 ITR 1 (DEL), IN WHICH THEIR LORDSHIPS HAVE EXAMINED THE PRINCIPLE OF APPORTIONM ENT OF INCOME ON THE BASIS OF TERRITORIAL NEXUS AND IT WAS HELD THAT IT NECESSARILY FOLLOWS THAT IN CASES WHERE A CONTRACT ENTAILS ONLY A PART OF THE O PERATIONS TO BE CARRIED OUT IN INDIA, THE ASSESSEE WOULD NOT BE LIABLE FOR THE PART OF INCOME THAT ARISES FROM OPERATIONS CONDUCTED OUTSIDE INDIA. THE RELEVANT OBSERVATIONS OF THE HON'BLE COURT ARE REPRODUCED HEREUNDER FOR T HE SAKE OF REFERENCE:- 84. IN OUR VIEW, THE APPROACH AS WELL AS THE CONCL USION OF THE AUTHORITY IS FLAWED. FIRST OF ALL, THE AUTHORITY ER RED IN PROCEEDING ON THE BASIS THAT THE CONTRACT AS A WHOL E WAS THE SUBJECT OF TAXATION. THE SUBJECT MATTER OF TAXATION WAS NOT THE CONTRACT BETWEEN THE PARTIES BUT THE INCOME THAT TH E PETITIONER DERIVED FROM THE CONTRACT. THUS, THE SITUS OF THE O BJECT OF THE CONTRACT WOULD NOT BE AS RELEVANT AS DETERMINING TH E SITUS WHERE THE INCOME OF LINDE HAD ACCRUED OR ARISEN. BY VIRTUE OF SECTION 4 OF THE ACT, INCOME-TAX IS CHARGED IN RESP ECT OF THE TOTAL INCOME OF A PERSON. BY VIRTUE OF SECTION 5 OF THE ACT, THE SCOPE OF TOTAL INCOME OF A NON-RESIDENT IS LIMITED TO INCOME WHICH IS RECEIVED OR DEEMED TO BE RECEIVED IN INDIA AND INCOME WHICH ACCRUES OR IS DEEMED TO ACCRUE OR ARIS E IN INDIA. IT, THEREFORE, FOLLOWS THAT THE OBJECT OF INQUIRY W OULD HAVE TO BE TO DETERMINE WHETHER ANY INCOME OF LINDE ACCRUED OR AROSE IN INDIA OR WHETHER ANY INCOME COULD BE DEEMED TO A CCRUE OR ARISE IN INDIA. THE FACT THAT THE CONTRACTUAL OBLIG ATIONS OF LINDE WERE NOT LIMITED TO MERELY SUPPLYING EQUIPMENT BUT WERE FOR DUE PERFORMANCE OF THE ENTIRE CONTRACT, WOULD NOT N ECESSARILY IMPLY THAT THE ENTIRE INCOME WHICH WAS RELATABLE TO THE CONTRACT COULD BE DEEMED TO ACCRUE OR ARISE IN INDI A. 85. THE PRINCIPLE OF APPORTIONMENT OF INCOME ON THE BASIS OF TERRITORIAL NEXUS IS NOW WELL ACCEPTED. EXPLANATION 1(A) TO :-31- : SECTION 9(1)(I) OF THE ACT ALSO SPECIFIES THAT ONLY THAT PART OF INCOME WHICH IS ATTRIBUTABLE TO OPERATIONS IN INDIA WOULD BE DEEMED TO ACCRUE OR ARISE IN INDIA. IT NECESSARILY FOLLOWS THAT IN CASES WHERE A CONTRACT ENTAILS ONLY A PART OF TH E OPERATIONS TO BE CARRIED ON IN INDIA, THE ASSESSEE WOULD NOT B E LIABLE FOR THE PART OF INCOME THAT ARISES FROM OPERATIONS COND UCTED OUTSIDE INDIA. IN SUCH A CASE, THE INCOME FROM THE VENTURE WOULD HAVE TO BE APPROPRIATELY APPORTIONED. THE SUP REME COURT IN THE CASE OF ISHIKAWAJIMA-HARIMA HEAVY INDU STRIES (SUPRA) HAD CONSIDERED THIS ASPECT AND HELD THAT ME RELY BECAUSE A PROJECT IS A TURNKEY PROJECT WOULD NOT NE CESSARILY IMPLY THAT FOR THE PURPOSES OF TAXABILITY, THE ENTI RE CONTRACT BE CONSIDERED AS AN INTEGRATED ONE. THE TAXABLE INCOME IN EXECUTION OF A CONTRACT MAY ARISE AT SEVERAL STAGES AND THE SAME WOULD HAVE TO BE CONSIDERED ON THE ANVIL OF TH E TERRITORIAL NEXUS. THE DECISION IN THE CASE OF ISHI KAWAJIMA- HARIMA HEAVY INDUSTRIES (SUPRA) IS CLEARLY APPLICAB LE TO THE FACTS OF THE PRESENT CASE AS IN THAT CASE ALSO THE CONTRACT IN QUESTION WAS FOR A TURNKEY PROJECT WHERE THE OBJECT WAS TO SET UP A LIQUEFIED NATURAL GAS (LNG) RECEIVING, STORAGE AND DEGASIFICATION FACILITY. INDISPUTABLY, IN SO FAR AS OBLIGATIONS OF PARTIES ARE CONCERNED, THIS CONTRACT WAS ALSO AN IN DIVISIBLE CONTRACT. THE SUPREME COURT HELD THAT FOR THE PURPO SES OF DETERMINING THE TAXABILITY, IT WAS NECESSARY TO ENQ UIRE AS TO WHERE THE INCOME SOUGHT TO BE TAXED HAD ACCRUED OR ARISEN. THE IMPUGNED RULING IS THUS CLEARLY CONTRARY TO THE DECISION OF THE SUPREME COURT IN ISHIKAWAJIMA- HARIMA HEAVY IND USTRIES (SUPRA). 86. THE REFERENCE OF THE AUTHORITY TO THE DECISION OF THE SUPREME COURT IN THE CASE OF VODAFONE INTERNATIONAL HOLDINGS B.V. (SUPRA) IS ALSO NOT APPOSITE. IN THAT CASE, TH E SUPREME COURT WAS CONSIDERING A MATTER WHICH, INTER ALIA, I NVOLVED A TRANSFER OF A CAPITAL ASSET OUTSIDE INDIA WHICH WAS SOUGHT TO BE TAXED BY THE INCOME-TAX AUTHORITIES UNDER SECTION 9 (1)(I) OF THE :-32- : ACT. THE SUBJECT MATTER OF CONTROVERSY WAS A TRANSA CTION OF SALE AND PURCHASE OF A SHARE OF AN OVERSEAS COMPANY (CAPITAL ASSET). THIS CAPITAL ASSET WAS SOLD BY A NON-RESIDE NT COMPANY TO ANOTHER NON-RESIDENT COMPANY. THE REVENUE CONTEN DED THAT THE CAPITAL GAINS ARISING FROM THIS TRANSACTIO N WAS EXIGIBLE TO TAX UNDER THE ACT BY VIRTUE OF SECTION 9(1)(I) O F THE ACT AS THE TRANSACTION ALSO IMPLIED TRANSFER OF CONTROL AN D ASSETS OF THE INDIAN SUBSIDIARY OF THE OVERSEAS COMPANY, WHOS E SHARE HAD BEEN SOLD AND PURCHASED. THE SUPREME COURT OBSE RVED THAT THE LAST SUB-CLAUSE OF SECTION 9(1)(I) OF THE ACT REFERRED TO INCOME ARISING FROM 'TRANSFER OF CAPITAL ASSET IN I NDIA'. THE COURT FURTHER EXPLAINED THAT SECTION 9(1) OF THE AC T CREATED A LEGAL FICTION WHICH HAD A LIMITED SCOPE AND COULD N OT BE EXPANDED. ACCORDINGLY, TRANSFER OF CAPITAL ASSET SI TUATED OUTSIDE INDIA COULD NOT BE TAXED BY VIRTUE OF SECTI ON 9(1)(I) OF THE ACT. THE EXPRESSION 'LOOK THROUGH' HAD BEEN USE D BY THE SUPREME COURT IN THIS CONTEXT. THE RELEVANT EXTRACT OF THE JUDGMENT IS AS UNDER (PAGE 39 OF 341 ITR) : 'WE HAVE TO GIVE EFFECT TO THE LANGUAGE OF THE SECT ION WHEN IT IS UNAMBIGUOUS AND ADMITS OF NO DOUBT REGARDING ITS INTERPRETATION, PARTICULARLY WHEN A LEGAL FICTION I S EMBEDDED IN THAT SECTION. A LEGAL FICTION HAS A LIMITED SCOP E. A LEGAL FICTION CANNOT BE EXPANDED BY GIVING PURPOSIVE INTE RPRETATION PARTICULARLY IF THE RESULT OF SUCH INTER PRETATION IS TO TRANSFORM THE CONCEPT OF CHARGEABILITY WHICH IS ALSO THERE IN SECTION 9(1)(I), PARTICULARLY WHEN ONE READS SECTION 9(1)(I ) WITH SECTION 5(2)(B) OF THE ACT. WHAT IS CONTENDED ON BE HALF OF THE REVENUE IS THAT UNDER SECTION 9(1)(I) IT CAN 'L OOK THROUGH' THE TRANSFER OF SHARES OF A FOREIGN COMPANY HOLDING SHARES IN AN INDIAN COMPANY AND TREAT THE TRANSFER OF SHARES OF THE FOREIGN COMPANY AS EQUIVALENT TO THE TRANSFER OF TH E SHARES OF THE INDIAN COMPANY ON THE PREMISE THAT SECTION 9 (1)(I) COVERS DIRECT AND INDIRECT TRANSFERS OF CAPITAL ASS ETS. FOR THE ABOVE REASON, SECTION 9(1)(I) CANNOT BY A PROCESS O F INTERPRE :-33- : TATION BE EXTENDED TO COVER INDIRECT TRANSFERS OF C APITAL ASSETS/PROPERTY SITUATE IN INDIA. TO DO SO, WOULD A MOUNT TO CHANGING THE CONTENT AND AMBIT OF SECTION 9(1)(I).' 87. IN THE PRESENT CASE ALSO, LINDE HAS CONTENDED T HAT IT BEING A NON-RESIDENT IS NOT LIABLE TO PAY TAX IN INDIA AN D THE SWEEP OF SECTION 9(1) OF THE ACT CANNOT BE EXTENDED TO INCOM E WHICH HAS NOT ACCRUED OR ARISEN IN INDIA. 88. THE SUPREME COURT ALSO REITERATED THE 'LOOK AT' PRINCIPLE AS WAS ENUNCIATED IN W. T. RAMSAY LTD. V. IRC [1981 ] 1 ALL ER 865 (HL). THAT MATTER RELATED TO A COMBINATION OF T RANSACTIONS WHERE GAINS IN ONE TRANSACTION WERE SOUGHT TO BE CO UNTERACTED BY ANOTHER, SO AS TO AVOID TAX. THE SET OF TRANSACT IONS WAS DESIGNED TO CREATE AN ARTIFICIAL LOSS IN ONE TRANSA CTION WHICH WAS COUNTERACTED BY A GAIN IN ANOTHER. THE HOUSE OF LORDS' DISMISSED THE APPEAL OF THE TAXPAYER BY HOLDING THA T THE COURTS WOULD 'LOOK AT' THE ENTIRE COMBINATION OF TRANSACTI ONS. IT WAS HELD THAT THE REVENUE OR THE COURTS WERE NOT LIMITE D TO CONSIDER THE GENUINENESS OR OTHERWISE OF EACH INDIV IDUAL TRANSACTION IN THE SCHEME BUT COULD CONSIDER THE SC HEME AS A WHOLE. THE CONTENTIONS BEING CONSIDERED BY THE SUPR EME COURT IN THE VODAFONE INTERNATIONAL HOLDINGS B.V. ( SUPRA) AS WELL AS THE HOUSE OF LORDS' IN RAMSAY LTD. (SUPRA) WERE IN RESPECT OF SCHEMES WHICH WERE CONTENDED TO BE FOR T HE PURPOSES AVOIDING TAX. THE SUPREME COURT HELD THAT THE 'LOOK AT' PRINCIPLE MUST BE APPLIED TO SEE THE TRANSACTIO N AS IT EXISTED AND PIERCING OF THE CORPORATE VEIL WAS NOT NECESSARY WHERE THE TRANSACTIONS WERE GENUINE AND HAD COMMERC IAL SUBSTANCE. IN THE PRESENT CASE, THERE IS NO CONTROV ERSY WHICH INVOLVES LIFTING OF THE CORPORATE VEIL OR 'LOOKING AT' ANY SCHEME TO FIND WHETHER A TRANSACTION IS A SHAM OR HAS ANY SUBSTANCE. BOTH THE REVENUE AND LINDE ARE ACCEPTING THE CONTRA CT AS IT STANDS AND THE CONTROVERSY ONLY REVOLVES AROUND THE SITUS OF THE INCOME ACCRUING OR ARISING FROM THE CONTRACT. T O OUR MINDS, THE AUTHORITY HAS READ THE PRINCIPLES APPLIE D BY THE :-34- : SUPREME COURT IN VODAFONE INTERNATIONAL HOLDINGS B. V. (SUPRA) COMPLETELY OUT OF CONTEXT. 30. LOOKING TO THE FACTS OF THE INSTANT CASE IN THE LIG HT OF THE AFORESAID JUDGMENTS OF THE HON'BLE APEX COURT AND DIFFERENT H IGH COURTS, WE FIND THAT UNDISPUTEDLY THOUGH IT IS A COMPOSITE CONTRACT FOR SUPPLY OF EQUIPMENTS AND INSTALLATION AND PROVIDING OF DIFFER ENT SERVICES, BUT THE COST OF EACH OPERATION IS SEPARATELY STIPULATED IN THE A GREEMENT. THEREFORE, THIS COMPOSITE CONTRACT CANNOT BE CALLED TO BE INDIVISIB LE CONTRACT. THE COST OF EQUIPMENT AND COST OF SERVICES ARE IDENTIFIABLE AND DIVISIBLE. AS PER TERMS OF THE CONTRACT, THE PROPERTY OR TITLE WAS TRANSFER RED TO THE OWNER WHEN EQUIPMENT WAS DELIVERED OVER THE SHIPS RAIL AT THE PORT OF EXPORT IN THE COUNTRY OF ORIGIN I.E FOB DELIVERY. SINCE THE COST OF THE EQUIPMENT WAS IDENTIFIABLE IN THE CONTRACT AND THE PROPERTY IN EQ UIPMENT WAS TRANSFERRED ON ITS DELIVERY OVER THE SHIPS RAIL AT THE PORT OF EXPORT IN THE COUNTRY OF ORIGIN, THE TRANSACTION TO THIS EXTENT WAS UNDERTAK EN OUTSIDE INDIA, THEREFORE, ON THIS OFFSHORE SUPPLY OF EQUIPMENT, NO TAX LIABILITY WOULD ARISE IN INDIA. WHATEVER TAX LIABILITY ACCRUES IN THIS T RANSACTION, IT WOULD ONLY ACCRUE WITH RESPECT TO THE SERVICE PROVIDED IN INDI A BY THE INDIAN ASSOCIATES OF THE ASSESSEE I.E. ECL-PO. THOUGH THE LD. CIT(A) HAS APPORTIONED THE TOTAL COST OF THE CONTRACT IN TWO P ARTS HAVING HELD THAT THERE IS NO TAX LIABILITY ON OFFSHORE SUPPLY, BUT H E HAS OVERLOOKED THE FACT THAT THE COST OF EQUIPMENT WHICH WERE SUPPLIED OFFS HORE ARE IDENTIFIABLE AND THE SAME SHOULD BE EXCLUDED FROM THE TAX LIABIL ITY IN INDIA. WE ACCORDINGLY MODIFY THE ORDER OF THE LD. CIT(A) AND DIRECT THE ASSESSING OFFICER TO EXCLUDE THE TAX LIABILITY OF OFFSHORE SU PPLY OF EQUIPMENTS, THE COST OF WHICH IS IDENTIFIABLE IN THE CONTRACT DEEDS. TH E TAX LIABILITY IN INDIA WILL ARISE WITH RESPECT TO THE SERVICE AND SUPERVISION I N INSTALLATION OF THE EQUIPMENTS IN INDIA ONLY. :-35- : 31. SO FAR AS THE CHARGEABILITY OF TAX UNDER SECTION 23 4B AND 234C IS CONCERNED, IT IS CONSEQUENTIAL IN NATURE. RELIANCE WAS ALSO PLACED UPON THE JUDGMENT OF THE HON'BLE DELHI HIGH COURT IN THE CAS E OF DIRECTOR OF INCOME- TAX VS. JACABS CIVIL INCORPORATED/MITSUBISHI CORPOR ATION, 194 TAXMAN 495. IN THE INSTANT CASE, THERE IS NO TAX LIABILITY OF O FFSHORE SUPPLIES MADE BY THE ASSESSEE, THEREFORE, INTEREST UNDER SECTION 234B AN D 234C OF THE ACT CANNOT BE CHARGED. ACCORDINGLY THESE APPEALS ARE D ISPOSED OFF. 32. IN THE RESULT, APPEALS OF THE ASSESSEE ARE PARTLY A LLOWED FOR STATISTICAL PURPOSES. ORDER WAS PRONOUNCED IN THE OPEN COURT ON THE DAT E MENTIONED ON THE CAPTIONED PAGE. SD/ - SD/ - [ B. P. JAIN ] [ S UNIL KUMAR Y ADAV ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 10 TH AUGUST, 2015 JJ:07-0807 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR ASSISTANT REGISTRAR