DCIT (IT) 4(3)(2), MUMBAI V. WHESSOE OIL & GAS LTD, MUMBAI

ITA 4673/MUM/2015

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8994 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-11-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 24-07-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 14-08-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Services rendered outside India; Additional evidence; Permanent establishment; Advance ruling

Judgement Text

INCOME-TAX APPELLATE TRIBUNAL LBENCH M UMBAI , , BEFORE S/SH. RAJENDRA,ACCOUNTANT MEMBER & RAVISH SOOD, JUDICIAL MEMBER ./ITA./4673/MUM/2015, /ASSESSMENT YEAR: 2008-09 DCIT (INTL, TAXATION)-4(3)(2), ROOM NO.116, SCINDIA HOUSE, BALLARD PIER, N.M. ROAD MUMBAI-400 038. VS. M/S. WHESSOE OIL & GAS LIMITED C/O. A/J. SHAH & CO.,(CA.S) FORT CHAMBERS, C-BLOCK, 65, TAMRIND LANE, FORT MUMBAI-400 001. PAN:AAACW 7179 B ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI SAMUEL DARSE-CIT-DR ASSESSEE BY: NONE / DATE OF HEARING: 06.09.2017 / DATE OF PRONOUNCEMENT: 03.11.2017 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) / PER RAJENDRA, AM - CHALLENGING THE ORDER,DTD.30/03/2015,OF CIT(A)-55,M UMBAI THE ASSESSING OFFICER(AO)HAS FILED THE PRESENT APPEAL. ASSESSEE-COMPANY,INCORPORATED I N UNITED KINGDOM(UK), FILED ITS RETURN OF INCOME,30/03/2010,DECLARING TOTAL INCOME OF RS. 1.5 3 CRORES.THE AO COMPLETED THE ASSESSMENT, ON 25/02/2011,U/S.144C(3)R.W.S.143 (3) OF THE ACT,D ETERMINING ITS INCOME AT RS. 43.07 CRORES. 2. EFFECTIVE GROUND OF APPEAL IS ABOUT DELETING THE AD DITION OF RS.2.77 CRORES.DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT DURING TH E YEAR UNDER APPEAL,THE ASSESSEE ALONG WITH PUNJ LLOYD LTD.(PLL)HAD JOINTLY BID FOR A CONTRACT AWARDED BY RATNAGIRI GAS AND POWER PRIVATE LTD.(RPPGL)ON 08/09/06 FOR THE COMPLETION OF RGPPL S LNG TERMINAL AT DABHOL.THE WORK UNDER THE CONTRACT WAS TO BE COMPLETED ON ENGINEERI NG PROCUREMENT AND CONSTRUCTION (EPC) BASIS.A COMPLETE SPECIFICATION AND SCOPE OF WORK OF EACH OF THE TWO JOINT VENTURES WAS DESCRIBED IN THE DETAILED LETTER OF ACCEPTANCE (DLOA), DATED/ 08/2006, THAT THE DLOA ALSO SPECIFIED THE TOTAL LUMP SUM CONTRACT VALUE FOR THE WORK TO BE CA RRIED OUT UNDER THE CONTRACT,THAT BASED ON THE CONTRACT AGREEMENTS, A SUB CONTRACT AGREEMENT WAS ENTERED INTO BETWEEN THE JV AND THE ASSESSEE ON 03/10/206,THAT THE ASSESSEE RECEIVED THE TOTAL S UM OF RS. 16.69 CRORES FOR THE WORK COMPLETED 4673/M/15 M/S.WHESSOE OIL & GAS LTD. 2 DURING THE YEAR UNDER APPEAL AS PER THE TERMS AND C ONDITIONS OF THE CONTRACT, THAT IT HAD BIFURCATED ITS RECEIPTS INTO THREE PARTS NAMELY ENGINEERING AN D OFFSHORE SERVICES (SERVICES RENDERED IN UK - RS.15.07 CRORES),OFFSHORE SERVICES AND COMMISSIONIN G (SERVICES RENDERED IN INDIA-RS. 24.85 CRORES) AND OFFSHORE PROCUREMENTS (RS. 27.74 CRORES ),THAT IT TREATED THE OFFSHORE PROCUREMENTS FOR SPARE MACHINE PARTS EQUIPMENTS AS INCOME NOT TAXABL E IN INDIA, THAT IT OFFERED THE BALANCE INCOME FOR TAXATION UNDER THE PROVISIONS OF SECTION 44BBB OF THE ACT. HE DIRECTED THE ASSESSEE TO EXPLAIN AS TO WHY THE GROSS AMOUNT,INCLUDING THE AM OUNT EARNED FOR OFFSHORE PROCUREMENTS, SHOULD NOT BE BROUGHT TO TAX. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE, D ATED 21/12/2010, THE AO HELD THAT THE CONTRACT AGREEMENT OF THE JV WITH RP PGL WAS A COMPOSITE CON TRACT, THAT THE TOTAL CONSIDERATION RECEIVED FOR THE ASSIGNMENT COULD NOT BE BROKEN INTO WATERTI GHT AND INDEPENDENT COMPARTMENTS AS ATTEMPTED BY THE ASSESSEE, THAT ANNEXURE 2 TO THE A GREEMENT CLEARLY STATED THAT THE LUMP SUM CONTRACT VALUE FOR THE WORK UNDER THE CONTRACT WOUL D BE US DOLLAR 52 MILLION AND INDIAN RS. 1.8 BILLION, THAT THE BREAKUP OF THE LUMP SUM CONTRACT PRICE TO COMPONENTS SUCH AS DESIGN AND ENGINEERING, VALUE OF EQUIPMENT AND MATERIAL TO BE IMPORTED, MATERIAL TO BE SUPPLIED FROM WITHIN INDIA AND INDIAN TRANSPORTATION WAS NOT INDICATIVE THAT THE PROCUREMENT OF GOODS HAD BEEN CONTACTED BY RPPGL, THAT THE BREAKUP OF LUMP SUM VA LUE WAS MERELY INDICATIVE OF THE FACTORS THAT WOULD GOVERN THE TOTAL CONTRACT VALUE, THAT TH E ASSESSEE WAS TRYING TO COLOUR AN ARRANGEMENT FOR OPERATION AND MAINTENANCE AS A CONTRACT FOR PRO CUREMENT OF GOODS, THAT IT WAS THE JOINT RESPONSIBILITY OF THE ASSESSEE AND ITS CO-PARTNER T O DELIVER THE JOB AS PER TERMS AND CONDITIONS OF THE CONTRACTUAL AGREEMENT, THAT RP PGL WAS WELL WIT HIN ITS RIGHTS IN SPECIFIED ITS EXACT REQUIREMENT BOTH WITH RESPECT OF CONSTRUCTION, COMM ISSIONING, TESTING ETC.AND THE SPECIFICATION OF EQUIPMENTS AND MATERIAL TO BE USED, THAT RP PGL HAD NOT ENTERED INTO A CONTRACT FOR FULFILMENT OF MATERIAL INDEPENDENT OF ITS OBLIGATION PERTAININ G TO CONSTRUCTION AND COMMISSIONING EXERCISE, THAT ANY ATTEMPT BY THE ASSESSEE TO DISCOVER A SUB CONTRACT FOR PURCHASE OF GOODS WAS A MIS - REPRESENTATION OF FACTS,THAT RPPGL DID NOT INTEND T O PROVE YOUR EQUIPMENTS/MATERIAL IS A PRINCIPAL INDEPENDENT OF CONSTRUCTION-TESTING-COMMI SSION CONTRACT ENTERED WITH THE JV, THAT THE CONTRACT WAS A SINGLE MONOLITHS TO ACHIEVE A SPECIF IC PURPOSE, THAT IT WAS IMPOSSIBLE TO SEPARATE CONSUMPTION OF MATERIAL AND CIVIL CONSTRUCTION FROM THE DLOA, THAT NO DISTINCTION WAS MADE BETWEEN THE VARIOUS HEADS OF THE CONTRACT, THAT THE AMOUNT OF US DOLLAR 21.5 MILLION AND RS. 54.2 CRORES WAS INDICATIVE OF THE SUMS AGAINST THE ALL T HE SERVICES,THAT IT WAS NOT A CONTRACT IN 4673/M/15 M/S.WHESSOE OIL & GAS LTD. 3 ITSELF,THAT THE SUPPLY OF MATERIAL FOR THE OVERALL SCOPE OF WORK WAS NOT A CONTRACT INDEPENDENT OF THE CONTRACT FOR COMPLETION OF BALANCE WORK ON JETT Y, THAT THE ASSESSEE HAD NOT EXPLAINED AS TO WHY THE EXPENDITURE IN INDIAN RUPEES WAS TAKEN AS A N EXERCISE IN PROCUREMENT CONDUCTED WHOLLY OUTSIDE INDIA, THAT RP PGL DID NOT INTEND TO PROCUR E MATERIAL INDEPENDENT OF CONSTRUCTION CONTRACT, AS PER THE TERMS OF THE CONTRACT RP PGL D ID NOT BE AT THE RISK ON THE CHANGE IN THE PROCUREMENT VALUE OF THE MATERIALS/EQUIPMENT,THAT P ROCUREMENT OF MATERIAL WAS INEXTRICABLY LINKED WITH THE PERFORMANCE OF THE ENTIRE CONTRACT AND COULD NOT BE SUBDIVIDED, THAT THE STAND TAKEN BY THE ASSESSEE BETWEEN DEALING WITH INDIA AN D DEALING WITH INDIA WAS NOT ACCEPTABLE, THAT IT WAS NOT THE CASE THAT THE PROCUREMENT OF EQUIPME NT/SPARES WAS DONE FOR PURPOSES UNRELATED TO EPC CONTRACT, THAT EXERCISE OF CIVIL CONSTRUCTION A ND ITS SUBSEQUENT TESTING AND COMMISSIONING WITH RESPECT TO TURNKEY PROJECT REQUIRED A COMPLEX MIX OF MATERIAL AND SKILL, THAT IT COULD NOT BE REDUCED TO TWO SEPARATE CONTRACTS-ONE FOR SUPPLY OF MATERIAL AND THE OTHER FOR APPLICATION OF SKILL, THAT THE ASSESSEE HAD PERMANENT ESTABLISHMENT AT TH E SITE OF THE JETTY IN INDIAN WATERS, THAT THE PURCHASE ORDER HAD ORIGINATED FROM THE SITE OF THE CONSTRUCTION, THAT IT WAS IMMATERIAL WHETHER TECHNICALLY SALE WAS COMPLETED ON HIGH SEAS OR NOT, THAT THE ESTABLISHMENT OF THE ASSESSEE IN INDIA WAS THE BUSINESS CONNECTION THROUGH WITH THE ASSESS EE DERIVED ITS BUSINESS INCOME, THAT IT WAS NOT IN THE BUSINESS OF TRADING OF EQUIPMENTS AND MA TERIAL, THAT IT WAS ENGAGED IN EXECUTION OF CONSTRUCTION PROJECTS AND NOT ON SALE OF GOODS, THA T THE PURCHASE ORDER ORIGINATED FROM THE BUSINESS CONNECTION IN INDIA, THAT THE AMOUNT PERTA INING TO PROCUREMENT OF GOODS ACCRUED AND AROSE DIRECTLY/INDIRECTLY FROM THE BUSINESS CONNECT ION IN INDIA, THAT THE DUCHESS OF EQUIPMENTS AND SPACE WAS NOT DONE INDEPENDENT AND WAS NOT KEPT IN AN OVERSEAS WAREHOUSE,THAT THE INCOME RECEIVED FROM RPPGL-A PART OF WHICH WAS UTILISED IN PROCURING MATERIALS ON HIGH SEAS, FOR COMPLETION OF WORK AWARDED AT AN INDIAN SITE-WAS TA XABLE IN INDIA. HE REFERRED TO THE PROVISIONS OF SECTION 44BBB OF THE ACT AND HELD THAT IT WAS ON LY SPECIAL PROVISION FOR COMPUTATION, THAT IT DID NOT DETERMINE SCOPE OF INCOME, THAT THE ARGUMEN T OF THE ASSESSEE,THAT WORD PROCUREMENT DID NOT APPEAR IN SECTION 44BBB AND THEREFORE AN EXPEND ITURE SPENT FOR PURCHASE WAS NOT TAXABLE, WAS DEVOID OF MERITS,THAT ABSENCE OF WORD PROCUREME NT IN THE SECTION INDICATED THAT NO SPECIAL TREATMENT COULD BE METED OUT TO THE VALUE OF PROCUR E SPARE, MATERIAL AND EQUIPMENTS FROM THE TOTAL CONTRACT VALUE, THAT THE INCOME FROM SUCH CON TRACTS WAS CHARGEABLE IN INDIA AS PER THE PROVISIONS SECTION 44BBB, THAT THE TOTAL CONTRACTUA L RECEIVED COULD NOT BE DIVIDED INTO TWO PARTS, THAT CONTRACT FOR CIVIL CONSTRUCTION WOULD INCLUDE COST OF MATERIAL AND MEN, ELECTION OF PLANT AND 4673/M/15 M/S.WHESSOE OIL & GAS LTD. 4 MACHINERY COULD NOT BE USED TO PROCUREMENT OF MATER IAL OR APPLICATION OF MANPOWER.FINALLY,HE HELD THAT ONCE THE INCOME OF THE ASSESSEE WAS CHARG EABLE TO TAX IN INDIA UNDER SECTION 44BBB THE ENTIRE CONTRACTUAL REVENUE, AND NOT A PORTION OF IT , WOULD BE TAXED IN INDIA. HE MADE AN ADDITION OF RS. 27, 74, 34, 096/-TO THE TOTAL INCOME OF THE ASSESSEE. 3. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA) AND MADE ELABORATE SUBMISSIONS. IT ALSO RELIED UPON CERTAIN CASE LAWS.HE CALLED FOR A REMAND REPORT FROM THE AO WITH REGARD TO THE ADDITIONAL EVIDENCES FILED BEFORE HIM FOR THE FIRST TIME. REFERRING TO THE JUDGMENTS OF HONORABLE SUPREME COURT IN THE CASES OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES LTD. (282 ITR 482) AND HUND AI HEAVY INDUSTRIES COMPANY LTD. (291 ITR 482), HE HELD THAT ENTIRE CONTRACTUAL REVENUE O N ACCOUNT OF OFFSHORE PROCUREMENT COULD NOT BE BROUGHT TO TAX UNDER SECTION 44BBB OF THE ACT, T HAT THE CONSIDERATION RECEIVED BY THE ASSESSEE FOR OFFSHORE SUPPLY OF EQUIPMENT WAS NOT CHARGEABLE TO TAX IN INDIA, THAT THE AO WAS NOT JUSTIFIED IN MAKING ADDITION OF RS. 27.74 CRORES ON ACCOUNT O F OFFSHORE PROCUREMENT. 4. DURING THE COURSE OF HEARING BEFORE US,THE DEPARTME NTAL REPRESENTATIVE (DR) ARGUED THAT THAT THE CONTRACT AGREEMENT WAS A COMPOSITE CONTRACT, TH AT THE TOTAL CONSIDERATION RECEIVED FOR THE ASSIGNMENT COULD NOT BE BROKEN INTO WATERTIGHT AND INDEPENDENT COMPARTMENTS AS ATTEMPTED BY THE ASSESSEE,THAT THE BREAKUP OF LUMP SUM VALUE WAS MERELY INDICATIVE OF THE FACTORS THAT WOULD GOVERN THE TOTAL CONTRACT VALUE,THAT THE ASSESSEE W AS TRYING TO COLOUR AN ARRANGEMENT FOR OPERATION AND MAINTENANCE AS A CONTRACT FOR PROCURE MENT OF GOODS,THAT THE CONTRACT WAS A SINGLE EVENT TO ACHIEVE A SPECIFIC PURPOSE, THAT IT WAS IM POSSIBLE TO SEPARATE CONSUMPTION OF MATERIAL AND CIVIL CONSTRUCTION FROM THE DLOA,THAT THE SUPPL Y OF MATERIAL FOR THE OVERALL SCOPE OF WORK WAS NOT A CONTRACT INDEPENDENT OF THE CONTRACT FOR COMPLETION OF BALANCE WORK ON JETTY,THAT THE INCOME FROM SUCH CONTRACTS WAS CHARGEABLE IN INDIA AS PER THE PROVISIONS SECTION 44BBB OF THE ACT. 5. WE HAVE PERUSED THE MATERIAL AVAILABLE ON RECORD.WE FIND THAT ASSESSEE AND PLL HAD ENTERED INTO A JV, THAT THEY WERE AWARDED A CONTRACT BY RGP PL,THAT THEY ENTERED INTO A SEPARATE SUB CONTRACT FOR EXHIBITING THE WORK,THAT THE CONTRACT ENTERED INTO WAS ON EPC BASIS,THAT THE ASSESSEE DID NOT OFFER THE INCOME ARISING OUT OF PROCUREMENT OF OFFSHORE EQUIPMENTS FOR TAXATION, THAT THE AO HELD THAT PROVISION OF SECTION 44BBB WERE APPLIC ABLE TO THE ASSESSEE ON THE AMOUNT OF OFFSHORE PROCUREMENT AS WELL, AS IT WAS THE PART OF SAME EPC CONTRACT, THAT THE F AA DELETED THE 4673/M/15 M/S.WHESSOE OIL & GAS LTD. 5 ADDITION RELYING UPON TWO SUPREME COURT JUDGMENTS. IN OUR OPINION, SHORT ISSUE TO BE DECIDED IS AS TO WHETHER THE AMOUNT RECEIVED BY THE ASSESSEE O N ACCOUNT OF WAS TAXABLE IN INDIA AS PER THE PROVISIONS OF SECTION 44BBB OF THE ACT ? THE CONTRACT ENTERED INTO WITH RPPGL,IN ITS CONSIDE RATION CLAUSE,HAD SEPARATELY IDENTIFIED THE AGGREGATE CONSIDERATION PAYABLE IN RESPECT OF THE D IFFERENT COMPONENTS OF THE CONTRACT NAMELY DESIGN AND ENGINEERING SERVICES (ONSHORE/OFFSHORE), IMPORT OF EQUIPMENT/MATERIAL AS WELL AS EQUIPMENT/MATERIAL TO BE PROCURED FROM WITHIN INDIA . THE ASSESSEE HAD OFFERED OFFSHORE/OFFSHORE SERVICES FOR TAXATION UNDER SECTION 44BBB.IT IS A F ACT THAT OFFSHORE PROCUREMENT WAS BEING HANDLED ENTIRELY FROM OUTSIDE INDIA. THE AO HAS NOT BROUGHT ANYTHING ON RECORD THAT PURCHASE OF MATERIAL,MADE BY THE ASSESSEE,WAS LINKED TO ITS PE IN INDIA.THE ESTABLISHMENT OF THE ASSESSEE WAS NOT A BUSINESS CONNECTION,AS ALLEGED BY THE AO, THROUGH WHICH IT HAD DERIVED ITS INCOME.THEREFORE,THE SUMS INCLUDED UNDER THE HEAD O FFSHORE PROCUREMENTS INCLUDED THE SUMS PAYABLE TOWARDS SUPPLY OF EQUIPMENT AND MACHINERY P ROCURED FROM OUTSIDE INDIA.THERE IS NO DOUBT THAT THERE WAS A CLEAR DEMARCATION IN THE WOR K AND COST BETWEEN THE MEMBERS OF THE JV I.E.THE ASSESSE AND PLL.WE FIND THAT IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES LTD. (SUPRA),THE HONBLE APEX COURT HAS DEALT WITH THE S IMILAR ISSUE, WHERE AGREEMENT HAD TWO PARTS. FACT OF THE ISHIKAWAJIMA WERE THAT THE ASSESSEE, A NON-RESIDENT COMPANY INCORPORATED IN JAPAN, ALONG WITH FIVE OTHER ENTERPRISES FORMED A CONSORTI UM.THE CONSORTIUM WAS AWARDED BY PETRONET A TURNKEY PROJECT FOR SETTING UP A LIQUEFIED NATURA L GAS (LNG) RECEIVING, STORAGE AND REGASIFI - CATION FACILITY IN GUJARAT.THE CONTRACT SPECIFIED T HE ROLE AND RESPONSIBILITY OF EACH MEMBER OF THE CONSORTIUM AND THE CONSIDERATION TO BE PAID SEPARAT ELY FOR THE RESPECTIVE WORK OF EACH MEMBER. THE APPELLANT WAS TO DEVELOP,DESIGN,ENGINEER, PROCU RE EQUIPMENT, MATERIALS AND SUPPLIES TO ERECT AND CONSTRUCT STORAGE TANKS INCLUDING MARINE FACILI TY (JETTY AND ISLAND BREAKWATER) FOR TRANSMISSION AND SUPPLY OF LNG TO PURCHASERS, TO TE ST AND COMMISSION THE FACILITIES, ETC. THE CONTRACT INVOLVED : (I) OFFSHORE SUPPLY, (II) OFFSH ORE SERVICES, (III) ONSHORE SUPPLY, (IV) ONSHORE SERVICES AND (V) CONSTRUCTION AND ERECTION. THE PRI CE FOR OFFSHORE SUPPLY AND OFFSHORE SERVICES WAS PAYABLE IN US DOLLARS, THAT FOR ONSHORE SUPPLY AND ONSHORE SERVICES AND CONSTRUCTION AND ERECTION PARTLY IN US DOLLARS AND PARTLY IN INDIAN RUPEES. THE PAYMENT FOR OFFSHORE SUPPLY OF EQUIPMENT AND MATERIALS SUPPLIED FROM OUTSIDE INDIA WAS RECEIVED BY THE APPELLANT BY CREDIT TO A BANK ACCOUNT IN TOKYO AND THE PROPERTY IN THE GOODS PASSED TO PETRONET ON THE HIGH SEAS OUTSIDE INDIA.THOUGH THE APPELLANT UNLOADED THE GOODS, CLEA RED THEM FROM CUSTOMS AND TRANSPORTED 4673/M/15 M/S.WHESSOE OIL & GAS LTD. 6 THEM TO THE SITE, IT WAS FOR AND ON BEHALF OF PETRO NET AND THE EXPENDITURE INCLUDING THE CUSTOMS DUTY WAS REIMBURSED TO IT. THE PRICE OF OFFSHORE SE RVICES FOR DESIGN AND ENGINEERING INCLUDING DETAILED ENGINEERING IN RELATION TO THE SUPPLIES, S ERVICES AND CONSTRUCTION AND ERECTION AND THE COST OF ANY OTHER SERVICES TO BE RENDERED FROM OUTS IDE INDIA, WAS ALSO PAID IN US DOLLARS IN TOKYO. ON THESE FACTS THE APPELLANT APPLIED TO THE AUTHORITY FOR ADVANCE RULINGS (INCOME-TAX) FOR A RULING ON THE FOLLOWING POINTS : (A) WHETHER THE AMOUNTS RECEIVED/RECEIVABLE BY THE APPELLANT FROM PETRONET FOR OFFSHORE SUPPLY OF EQUI PMENT, MATERIALS, ETC., WERE LIABLE TO TAX IN INDIA UNDER THE PROVISIONS OF THE ACT AND THE DOUBL E TAXATION AVOIDANCE CONVENTION BETWEEN INDIA AND JAPAN ;(B) WHETHER THE AMOUNTS RECEIVED/R ECEIVABLE FROM PETRONET FOR OFFSHORE SERVICES WERE CHARGEABLE TO TAX IN INDIA UNDER THE ACT AND T HE CONVENTION ; AND (C) WOULD THE APPELLANT BE ABLE TO CLAIM DEDUCTION FOR EXPENSES INCURRED IN COMPUTING THE INCOME FROM OFFSHORE SERVICES.THE AUTHORITY RULED (I) THAT, THOUGH PROPE RTY IN THE GOODS PASSED TO PETRONET WHILE THE GOODS WERE ON THE HIGH SEAS, AND IN SO FAR AS THE A CTIVITIES OF THE APPELLANT FOR TAKING DELIVERY OF THE GOODS FROM THE SHIP, PAYMENT OF CUSTOMS DUTY AN D TRANSPORTATION OF THE GOODS TO THE SITE WERE CONCERNED, THE APPLICANT COULD BE SAID TO BE A CTING AS AN AGENT OF PETRONET, THESE FACTS DID NOT MILITATE AGAINST THE PROPERTY IN THE GOODS PASS ING TO THE APPELLANT.IN CONNECTION WITH THE OFFSHORE SUPPLY, CERTAIN OPERATIONS WERE INEXTRICAB LY INTERLINKED IN INDIA, SUCH AS, SIGNING OF THE CONTRACT IN INDIA WHICH IMPOSED LIABILITY ON THE AP PELLANT TO PROCURE EQUIPMENT AND MACHINERY IN INDIA AND RECEIVING, UNLOADING, STORING AND TRANSPO RTING, PAYING DEMURRAGE AND OTHER INCIDENTAL CHARGES ON ACCOUNT OF DELAY IN CLEARANCE.THE PRICE OF THE GOODS COVERED NOT ONLY THEIR PRICE BUT ALSO OF ALL THESE OPERATIONS WHICH WERE CARRIED OUT IN INDIA AND FROM WHICH INCOME ACCRUED TO THE APPELLANT.THEREFORE, INCOME ACCRUED TO THE APPE LLANT FROM THE OFFSHORE SUPPLY THROUGH BUSINESS CONNECTION IN INDIA AND SOME OPERATIONS OF THE BUSINESS WERE CARRIED OUT IN INDIA. PROFITS WERE DEEMED TO ACCRUE/ ARISE TO THE APPLICA NT IN INDIA FROM OFFSHORE SUPPLY OF EQUIPMENT/MACHINERY BUT THE PROFITS DEEMED TO ACCRU E/ARISE IN INDIA WOULD BE ONLY SUCH PART OF THE PROFITS AS WAS REASONABLY ATTRIBUTABLE TO THE O PERATIONS CARRIED OUT IN INDIA. (II) THAT HAVING REGARD TO ARTICLE 7(1) OF THE CONVENTION FOR AVOIDA NCE OF DOUBLE TAXATION AND FISCAL EVASION WITH RESPECT TO TAXES ON INCOME BETWEEN INDIA AND J APAN READ WITH PARAGRAPH 6 OF THE PROTOCOL SUPPLY OF EQUIPMENT OR MACHINERY (SALE OF WHICH WAS COMPLETED ABROAD, THE ORDER HAVING BEEN PLACED DIRECTLY BY THE OVERSEAS OFFICE OF THE ENTER PRISE) WOULD BE WITHIN THE MEANING OF THE PHRASE DIRECTLY OR INDIRECTLY ATTRIBUTABLE TO THAT PERMANENT ESTABLISHMENT AND, THEREFORE, SO 4673/M/15 M/S.WHESSOE OIL & GAS LTD. 7 MUCH OF THE AMOUNT RECEIVED OR RECEIVABLE BY THE AP PELLANT AS WAS DIRECTLY OR INDIRECTLY ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT AS POST ULATED IN PARAGRAPH 6 OF THE PROTOCOL WOULD BE TAXABLE IN INDIA. THE PRICE OF THE OFFSHORE SERVICE S WOULD BE DEEMED TO ACCRUE OR ARISE U/S. 9(1) (VII)OF THE ACT.AND INASMUCH AS FEES FOR TECHNICAL SERVICES WERE SPECIFICALLY PROVIDED IN ARTICLE 12 OF THE CONVENTION, THEY WOULD NOT FALL UNDER ART ICLE 7. THEREFORE, THE PRICE OF THE OFFSHORE SERVICES WAS TAXABLE IN INDIA UNDER THE ACT AS WELL AS THE CONVENTION. (III) THAT, HOWEVER, IN VIEW OF SECTION 115A(1)(B)(B) OF THE ACT AND ARTICL E 12(2) OF THE CONVENTION, TAX WAS PAYABLE AT THE FIXED RATE OF 20% OF THE GROSS AMOUNT OF FEES F OR TECHNICAL SERVICES AND THE APPLICANT WOULD NOT BE ABLE TO CLAIM ANY DEDUCTION FROM THE GROSS A MOUNT. THE APPELLANT PREFERRED AN APPEAL BY WAY OF SPECIAL LEAVE TO THE SUPREME COURT.DECIDING THE MATTER THE HONBLE COURT HELD AS UNDER : ..SECTION 9 OF THE INCOME-TAX ACT, 1961, RAISES A LEGAL FICTION ; BUT, HAVING REGARD TO THE CONTEXTUAL INTERPRETATION AND IN VIEW OF THE FACT T HAT THE COURT IS DEALING WITH A TAXATION STATUTE, THE LEGAL FICTION MUST BE CONSTRUED HAVING REGARD T O THE OBJECT IT SEEKS TO ACHIEVE. THE LEGAL FICTION CREATED UNDER SECTION 9 MUST ALSO BE READ H AVING REGARD TO THE OTHER PROVISIONS THEREOF. (II) THAT SINCE THE APPELLANT CARRIED ON BUSINESS IN INDIA THROUGH A PERMANENT ESTABLISHMENT IT WOULD CLEARLY FALL OUT OF THE APPLICABILITY OF ARTI CLE 12(5) OF THE CONVENTION AND FALL WITHIN THE AMBIT OF ARTICLE 7. IN THE PROTOCOL TO THE CONVENTI ON IT WAS STATED THAT THE TERM DIRECTLY OR INDIRECTLY ATTRIBUTABLE INDICATED THE INCOME THAT SHOULD BE REGARDED ON THE BASIS OF THE EXTENT APPROPRIATE TO THE PART PLAYED BY THE PERMANENT EST ABLISHMENT IN THOSE TRANSACTIONS. THE PERMANENT ESTABLISHMENT IN THIS CASE HAD NO ROLE TO PLAY IN THE TRANSACTION OF OFFSHORE SUPPLY, SOUGHT TO BE TAXED, SINCE THE TRANSACTION TOOK PLAC E ABROAD. (III) THAT THE SECOND SENTENCE OF ARTICLE 7(1) WHIC H ALLOWED THE STATE OF THE PERMANENT ESTABLISHMENT TO TAX BUSINESS PROFITS, BUT ONLY SO MUCH OF THEM AS WAS ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT EXCLUDED THE APPLICABILITY OF THE PRINCIPLE THAT WHERE THERE WAS A PERMANENT ESTABLISHMENT, THE STATE OF THE PERMANENT ESTABLISHMENT SHOULD BE ALLOWED TO TAX ALL INCOME DERIVED BY THE ENTERPRISE FROM SOURCES IN TH E STATE IRRESPECTIVE OF WHETHER OR NOT SUCH INCOME WAS ECONOMICALLY CONNECTED WITH THE PERMANEN T ESTABLISHMENT. THE STATE OF THE PERMANENT ESTABLISHMENT WAS ALLOWED TO TAX ONLY THO SE PROFITS WHICH WERE ECONOMICALLY ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT, I.E., THOSE WHICH RESULTED FROM THE PERMANENT ESTABLISHMENTS ACTIVITIES, WHICH WERE ECONOMICALLY FROM THE BUSINESS CARRIED ON BY THE PERMANENT ESTABLISHMENT. IN THIS CASE, THE PERMANEN T ESTABLISHMENTS NON-INVOLVEMENT IN THE TRANSACTION OF OFFSHORE SUPPLY, EXCLUDED IT FROM BE ING A PART OF THE CAUSE OF THE INCOME ITSELF AND THUS THERE WAS NO BUSINESS CONNECTION. (IV) THAT FOR ATTRACTING THE TAX THERE HAD TO BE SO ME ACTIVITIES THROUGH THE PERMANENT ESTABLISHMENT. IF INCOME AROSE WITHOUT ANY ACTIVITY OF THE PERMANENT ESTABLISHMENT, EVEN UNDER THE CONVENTION THE TAXATION LIABILITY IN RESPECT OF OVERSEAS SERVICES WOULD NOT ARISE IN INDIA. SECTION 9 SPELLED OUT THE EXTENT TO WHICH THE INCOM E OF A NON-RESIDENT WOULD BE LIABLE TO TAX IN INDIA. SECTION 9 HAD A DIRECT TERRITORIAL NEXUS. RE LIEF UNDER A DOUBLE TAXATION AVOIDANCE TREATY, HAVING REGARD TO THE PROVISIONS CONTAINED IN SECTIO N 90(2), WOULD ARISE ONLY IN THE EVENT TAXABLE INCOME OF THE ASSESSEE AROSE IN ONE CONTRACTING STA TE ON THE BASIS OF ACCRUAL OF INCOME IN ANOTHER CONTRACTING STATE ON THE BASIS OF RESIDENCE . SO FAR AS ACCRUAL OF INCOME IN INDIA WAS CONCERNED TAXABILITY MUST BE READ IN TERMS OF SECTI ON 4(2) READ WITH SECTION 9, WHERE-UPON THE QUESTION OF SEEKING ASSESSMENT OF SUCH INCOME IN IN DIA ON THE BASIS OF THE DOUBLE TAXATION 4673/M/15 M/S.WHESSOE OIL & GAS LTD. 8 TREATY WOULD ARISE. PARAGRAPH 6 OF THE PROTOCOL TO THE CONVENTION WAS NOT APPLICABLE, BECAUSE, FOR THE PROFITS TO BE ATTRIBUTABLE DIRECTLY OR IND IRECTLY, THE PERMANENT ESTABLISHMENT MUST BE INVOLVED IN THE ACTIVITY GIVING RISE TO THE PROFITS . (V) THAT THE FACT THAT THE CONTRACT WAS SIGNED IN I NDIA WAS OF NO MATERIAL CONSEQUENCE, SINCE ALL ACTIVITIES IN CONNECTION WITH THE OFFSHORE SUPPLY W ERE OUTSIDE INDIA, AND THEREFORE INCOME COULD NOT BE DEEMED TO ACCRUE OR ARISE IN THE COUNTRY. (VI) THAT WHERE DIFFERENT SEVERABLE PARTS OF A COMP OSITE CONTRACT WERE PERFORMED IN DIFFERENT PLACES, AS IN THIS CASE, THE PRINCIPLE OF APPORTION MENT COULD BE APPLIED TO DETERMINE WHICH FISCAL JURISDICTION COULD TAX THAT PARTICULAR PART OF THE TRANSACTION. THIS PRINCIPLE HELPED DETERMINE WHERE THE TERRITORIAL JURISDICTION OF A PARTICULAR STATE LAY AND TO DETERMINE ITS CAPACITY TO TAX AN EVENT. APPLYING IT TO COMPOSITE TRANSACTIONS WHICH HAD SOME OPERATIONS IN ONE TERRITORY AND SOME IN THE OTHER, WAS ESSENTIAL TO DETERMINE THE TAX-AB ILITY OF VARIOUS OPERATIONS. THEREFORE, THE CONCEPTS OF PROFITS OF BUSINESS CONNECTION AND PERM ANENT ESTABLISHMENT SHOULD NOT BE MIXED UP. WHEREAS BUSINESS CONNECTION WAS RELEVANT FOR THE PU RPOSE OF APPLICATION OF SECTION 9, THE CONCEPT OF PERMANENT ESTABLISHMENT WAS RELEVANT FOR ASSESSI NG THE INCOME OF A NON-RESIDENT UNDER THE CONVENTION. (VII) THAT IN THIS CASE THE ENTIRE TRANSACTION WAS COMPLETED ON THE HIGH SEAS AND, THEREFORE, THE PROFITS ON SALE DID NOT ARISE IN INDIA. ONCE EXCLUD ED FROM THE SCOPE OF TAXATION UNDER THE INCOME- TAX ACT APPLICATION OF THE DOUBLE TAXATION AVOIDANC E TREATY WOULD NOT ARISE. (VIII) THAT, IN RELATION TO OFFSHORE SERVICES, SECT ION 9(1)(VII)(C) REQUIRED TWO CONDITIONS TO BE MET : TO BE TAXABLE IN INDIA THE SERVICES WHICH WERE THE SOURCE OF THE INCOME SOUGHT TO BE TAXED HAD TO BE RENDERED IN INDIA AS WELL AS UTILIZED IN INDIA. IN THIS CASE, BOTH THESE CONDITIONS WERE NOT SATISFIED SIMULTANEOUSLY, THEREBY EXCLUDING THE INC OME FROM THE AMBIT OF TAXATION IN INDIA. THUS FOR A NON-RESIDENT TO BE TAXED ON INCOME FOR SERVIC ES, SUCH A SERVICE HAD TO BE RENDERED WITHIN INDIA, AND HAD TO BE PART OF A BUSINESS OR PROFESSI ON CARRIED ON BY SUCH PERSON IN INDIA. THE APPELLANTS HAD PROVIDED SERVICES TO PERSONS RESIDEN T IN INDIA, AND THOUGH THEY HAD BEEN USED HERE, THEY HAD NOT BEEN RENDERED IN INDIA. (IX) THAT WHATEVER WAS PAYABLE BY A RESIDENT TO A N ON-RESIDENT BY WAY OF TECHNICAL FEES WOULD NOT ALWAYS COME WITHIN THE PURVIEW OF SECTION 9(1)(VII) . IT MUST HAVE SUFFICIENT TERRITORIAL NEXUS WITH INDIA SO AS TO FURNISH A BASIS FOR IMPOSITION OF TA X. (X) THAT EVEN IN RELATION TO SUCH INCOME, VIZ., INC OME FROM OFFSHORE SERVICES, THE PROVISIONS OF ARTICLE 7 OF THE CONVENTION WOULD BE APPLICABLE, AS SERVICES RENDERED OUTSIDE INDIA WOULD HAVE NOTHING TO DO WITH THE PERMANENT ESTABLISHMENT IN I NDIA. THUS, IF ANY SERVICES HAD BEEN RENDERED BY THE HEAD OFFICE OF THE APPELLANT OUTSIDE INDIA, ONLY BECAUSE THEY WERE CONNECTED WITH THE PERMANENT ESTABLISHMENT, EVEN IN RELATION THERETO T HE PRINCIPLE OF APPORTIONMENT WOULD APPLY. (XI) THERE EXISTS A DISTINCTION BETWEEN A BUSINESS CONNECTION AND A PERMANENT ESTABLISHMENT. THE PERMANENT ESTABLISHMENT CANNOT BE EQUATED TO A BUSI NESS CONNECTION, SINCE THE FORMER IS FOR THE PURPOSE OF ASSESSMENT OF INCOME OF A NON-RESIDENT U NDER A DOUBLE TAXATION AVOIDANCE AGREEMENT, AND THE LATTER IS FOR THE APPLICATION OF SECTION 9 OF THE INCOME-TAX ACT. CLAUSE (A) OF EXPLANATION 1 TO SECTION 9(1)(I) STAT ES THAT ONLY SUCH PART OF THE INCOME AS IS ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT IN INDIA , ARE TAXABLE IN INDIA. 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 TAXING THE ENTIRE INCOME ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT. THERE EXISTS A DIFFERENCE BETWEEN THE EXISTENCE OF A BUSINESS CONNECTION AND THE INCOME ACCRUING OR ARISING OUT OF SUCH BUSINESS CONNECTION. 4673/M/15 M/S.WHESSOE OIL & GAS LTD. 9 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 PARTIES. NO DOUBT, THE APPLICABILITY OF THE TAX LAWS WOULD DEPEND UPON THE NATURE OF THE CONTRA CT, BUT THE SAME SHOULD NOT BE CONSTRUED KEEPING IN VIEW THE TAXING PROVISIONS. THE CONCEPTS OF PROFITS OF BUSINESS CONNECTION AND PERMANENT ESTABLISHMENT SHOULD NOT BE MIXED UP. WHEREAS BUSINESS CONNECTION IS RELEVANT FOR THE PURPOSE OF APPLICATION OF SECTION 9, THE CONCEPT OF PERMANENT ESTABLISHMENT IS RELEVANT FOR ASSESSING THE INCOME OF A NON-RESIDENT UNDER THE DOUBLE TAXATION AVOIDANCE AGREEMENT. CONSIDERING THE ABOVE WE ARE OF THE OPINION THAT TH E FACTS OF THE CASE UNDER APPEAL AND OF ISHIKAWAJIMA(SUPRA)ARE ALMOST SIMILAR AS OBSERVED B Y THE FAA.THEREFORE,CONFIRMING HIS ORDER, WE HOLD THAT THE INCOME EARNED BY THE ASSESSEE ON A CCOUNT OF OFFSHORE PROCUREMENT,TO THE TUNE OF RS.2.77CRORES,IS NOT TAXABLE U/S.44BBB OF THE AC T. AS A RESULT,APPEAL FILED BY THE AO STANDS DISMISSED . PRONOUNCED IN OPEN COURT ON 3 RD NOVEMBER, 2017 . 3 , 2017 SD/- SD/- /RAVISH SOOD) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 03.11.2017. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR L BENCH, ITAT, MUMBAI / , , . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.