R U L I N G [By Hon ble Chairman]

Transcription

1 BEFORE THE AUTHORITY FOR ADVANCE RULINGS(INCOME TAX), NEW DELHI 30 th Day of March, 2009 PRESENT Mr Justice. P.V. Reddi (Chairman) Mr. A. Sinha (Member) Mr. Rao Ranvijay Singh (Member) A.A.R. No. 749 of 2007 Name & address of the applicant : WorleyParsons Services Pty. Ltd. Level 7, 116 Miller Street, North Sydney NSW 2060 Australia. Commissioner Concerned : Director of Income-tax, (International Taxation)-II New Delhi. Present for the applicant : Mr. Pawan Kumar, FCA Mr. Rahul Garg, FCA Mr. Ravi Sharma, Adovcate Present for the Department : Mr. Sanjeev Sharma, Addl. Director of Income-tax, (International Taxation), Delhi. R U L I N G [By Hon ble Chairman] 1. The applicant which is incorporated in Australia provides professional services to the energy and resource Industries. In the financial years to , the applicant entered into agreements with various Indian companies viz. Reliance, ONGC, Sterlite and GAIL. This application is in respect of the contract entered into with Sterlite Industries (I) Limited (hereafter referred to as Sterlite) in connection with the setting up of an Alumina Refinery in Orissa. The contract entered into with Reliance Petroleum 1

2 Limited was in connection with the pipeline project and it is the subject matter of another application AAR/747/2007, which has been disposed of today We are concerned here with the contract entered into between Sterlite and the applicant evidenced by the Agreement executed by and between the said parties on 1 st August, The services required to be performed by the applicant under the Agreement are broadly engineering services and to be more specific, they are conceptual and basic engineering services and providing deliverables as set out in Annexure-I and IV to the agreement for the design of an Alumina Refinery with a capacity of 1.4. million tonnes per year. The next stage in the execution of engineering services is known as Detailed Engineering. The detailed engineering services were not done by the applicant Before we refer to some relevant clauses in the Agreement, we may advert to the facts stated in its written submissions filed after the hearing on 17 th October, They are stated as follows : The applicant is responsible for development of a set of Basic Engineering Documents which involves preparation of various diagrams, designs, drawings and lay out plans. The applicant has its design centres at Perth Australia fromwhere the design services were performed. However, for the purpose of 2

3 gathering inputs for the preparation of designs and documents, the personnel came to India for collecting data and information from Sterlite which was done at ground level. The staff of the applicant also visited India to explain deliverables to the officers/engineers of Sterlite and to help Sterlite test the same. Therefore, according to the applicant, there are three steps involved in the whole process i.e. collection of data, preparation of deliverables and transfer of deliverables and testing the same. The applicant avers that the collection of data and transfer of deliverables had taken place in India. However, preparation of deliverables which is the crucial activity in the transaction was done in Perth- Australia. While the work was carried out from Australia, 11 employees in all visited India intermittently for site visits and meetings. The number of days spent by the employees of the applicant in India was 24 days during the financial year and 70 days during The applicant submits that the services provided by it which were performed mostly outside India are in the nature of royalty. The applicant did not have a permanent establishment (PE) in India for the purpose of this contract and in the absence of PE, the receipts under the contract with Sterlite are taxable as royalty 3

4 income at the rate of 15 per cent on gross basis as per Art. XII of the DTAA between India and Australia. These are the contentions which were raised in the original application. The following questions were framed by the applicant for the purpose of seeking advance ruling: Whether in terms of the contract no. SIL-WORLEY-01 between the applicant and Sterlite and on the facts and circumstances of the case, (a) the receipts of the applicant under the contract with Sterlite are in the nature of royalties as defined in Article 12 of DTAA between India and Australia? (b) The applicant does not have a PE in India in respect of this contract? (c) If answers to (a) and (b) are in affirmative, the receipts from this contract are chargeable at the rate of 15%? 2.1. However, the applicant in the written submissions filed on sought to amend the question (c ) as follows: (c) If answers to (a) and (b) are in affirmative, the receipts from this contract are taxable only to the extent of services utilized as well as rendered in India and, therefore, the services outside India is not to be taxed. The amended question has been raised placing reliance on the decision of the Supreme Court in the case of Ishikawajima- Harima Heavy Industries vs. DIT^ (for short Ishikawajima). Relying on the said decision, the applicant submits that the ^ 288 ITR 408 4

5 receipts related to the operations carried out in Australia cannot be taxed in India. However, according to the applicant, the amount worked out on the basis of man-hours spent by the applicant s personnel in India can be taxed in India. We have permitted arguments on the amended question. 3. We shall now refer to the relevant clauses in the Agreement. Art. 2 bears the heading Scope of Work. Art.2.1 reads thus : 2.1 Engineering Services WORLEY shall perform the conceptual and basic Engineering Services and provide the associated deliverables as defined in Annexure-1 and Annexure- 4 to the Contract for the design of an Alumina Refinery with a design capacity of 1.4 Million tonnes per year at Lanjigarh, Orissa, India. The content of such deliverables shall be such that it shall be adequate to proceed with detail engineering. Art.3 is about Contract price. The opening part of the Art. reads thus : The Contract Price payable by SIIL to WORLEY for the Scope of Work as set out in Annexure-I shall be: Engineering Services and associated Engineering Deliverables : AUD 15,950,000 (Australian Dollars). 5

6 3.1.2 The Lump sum includes a PC (Prime Cost) Allowance for 28 trips by Worley personnel to India to cover flights, accommodation and per-diem allowances. The amount allowed is AUD 78,250. During execution of the contract, Worley will charge these items at actual cost plus 10%, with the variance against the PC (Prime Cost) Allowance payable by or refundable to SIIL. Art says that the price stated above is for the delivery of engineering deliverables at Sterlite s office at Mumbai. Art provides that except for withholding tax subject to a maximum of 15%, all taxes and duties as applicable in India on engineering and other technical services shall be borne and paid by Sterlite. Art.4 deals with terms of payment. It stipulates that out of the contract price of AUD 15,950,000, 10% shall be paid as an advance against bank guarantees and 80% of the price shall be paid on a monthly basis based on actual progress of deliverables as detailed in Annex-5 and the remaining 10% of Contract price shall be paid against the submission by Worley of a process bank guarantee. The bank guarantee will be returned to Worley on successful completion of the process guarantee tests. 3.1 Annex-1 deals with scope of services. Some of the details of services mentioned therein are: Engineering and drawings 6

7 necessary to meet the conceptual and basic engineering objectives including the specified aspects of the process plant, developing Process Manual, preparation of Data Sheets, review of Environmental Impact Assessment, addressing the aspects relating to infrastructure support to the process plant, preparing a typical manning plan, providing relevant engineering documentation to enable commercial enquiries relating to long-lead equipment items, providing assistance to Sterlite and the Detail Design Engineer in the development of capital estimates, estimating all operating unit consumptions for process plant, providing operating and training manual for the entire project etc. Under the head implementation strategy, it is stated that the preliminary phase of the project will involve the collection and verification of available data and consolidation of information that is available. From this information, a generic process block-diagram will be proposed for the purpose of selection of the particular unit operations that will be required. Upon the selection of appropriate technologies, a more detailed process block-diagram would be developed. Then, the inputs required from Sterlite during conceptual Engineering phase are set out. In para 1.5 of Annex-1, it is stated that Sterlite representative with sign-off authority will be present in the Worley design office for the duration of the project and that Sterlite will provide at least one engineering person to the Worley team. 7

8 3.2 Annex-4 refers to deliverables and the details thereof are set out in a Table. Broadly it is stated that the services covered by the Agreement are the preparation of a set of basic engineering documents as required by the document Enquiry for basic engineering for greenfield Alumina refinery. In the details of deliverables given in the Table, we find the classifications such as Area Deliverables (which include block-floor diagram, area design criteria, quantitative floor diagram etc. to be prepared at the Concept phase) and the Basic Engineering deliverables (such as process flow diagram, piping and instrumentation diagram, piping lay-out drawings and civil, mechanical and electrical drawings). In para 4.3 of Annex-4, the technical data required to be furnished by Sterlite for the conceptual and basic engineering is set out. It is further stated that the conceptual phase cannot start until all the required information such as site/project related information is made available. 4. The applicant s stand that the amount received for the services performed under the Contract answers the description of royalties in para 3 of Article XII of DTAA * between India and Australia, admits of no doubt. In fact, there is no controversy on this aspect having regard to the nature of various activities carried out by the applicant. The conclusion is inevitable that essentially, * also referred to hereinafter as Treaty 8

9 there was transfer of technical plan/design and the rendering of services in connection therewith. Thus, clause (g) of Article XII(3) is attracted. Moreover, some of the services may also fall within clause (c) read with clause (d) i.e. supply of scientific, technical or commercial information and the rendering of technical or consultancy services incidental thereto. Under the Income-tax Act, 1961, apart from the royalty provision contained in section 9(1)(vi), some of the services could also fall under the next clause i.e. (vii) concerning fee for technical services (FTS). However, the Treaty does not have a separate provision for FTS). In view of the consensus on this aspect, we proceed on the basis that it is royalty income. As regards Permanent Establishment also, there is no dispute. It does not appear that the applicant had any fixed place in India from where the business operations were carried on. The task of performance of work under the Agreement has been accomplished by the occasional visits of the applicant s personnel during the financial years and The aggregate period that they spent in India was for 24 days in the first year and 70 days in the next year as per the details given. Two or three employees of the applicant stayed in India for considerable time i.e. about a month. But, that by itself does not give rise to an inference that the applicant had set up a fixed establishment in India. Having regard to the nature of services involving preparation and transfer 9

10 of various plans, designs and drawings connected to conceptual and basic engineering services, it can be said as submitted by the applicant, that most of the work and services could be done from the applicant s office abroad i.e. at Perth. The deemed provision in Art. 5.3 (c), is not applicable here. We, therefore, accept the contention of the applicant that no permanent establishment was set up by the applicant to perform the services under the contract with Sterlite. The Revenue, as already stated, has not refuted the applicant s contention as regards the PE. 5. The only question that was debated before us was that related to the amended question for which the applicant seeks support from the decision of the Supreme Court in Ishikawajima case. Based on that decision, the principle of territorial nexus and apportionment of profits has been projected to deny the power of taxation to the Indian authorities to levy tax on the entirety of royalty income. It is the case of the applicant that on the application of such principles, the services rendered outside India cannot be taxed in India. Thus, according to the applicant, only that part of the receipts attributable to Indian operations which relate to services rendered and utilized in India could be taxed under the Act. 6. In the connected application no. AAR/747/2007, filed by the applicant which has been disposed of today, we have explained the 10

11 ratio and implications of the decision on the point of territorial nexus. In particular we have clarified that most of the observations related to territorial nexus were made in the context of sub-clause (c) of section 9(1)(vii) though it was sub-clause (b) that governed the case dealt with by the Supreme Court. It was in the context of sub-clause (c) that the word rendered was read into that provision, keeping in view the principle of territorial nexus. It was observed by the Supreme Court that the services covered by section 9(1)(i)(vii) should have such a live link with India that the entire income from FTS becomes taxable in India. Then, after referring to the proposition laid down by the Supreme Court that sufficient territorial nexus between the rendition of services and territorial limits of India is necessary to make the income taxable, we have pointed out, relying on the decision of Federal Court^, that the width and extent of territorial connection is not really material when once some of the ingredients relevant to the territorial nexus are found to be present in India. We expressed the view that the object of S.9(1)(vii) will in no way be defeated by giving effect to the legal fiction embodied therein. Further, after considering the dicta and observations made by their Lordships in Ishikawajima case, we did not accept the contention of the applicant that most of the services having been rendered from Australia and only 20 per cent of the activities carried out in India, the territorial nexus was lacking to tax ^ (in the case of A.H. Wadia vs. CIT Bombay, 1949, 17 ITR 63) 11

12 the entirety of receipts representing royalty income as per the deeming provision in section 9 read with Articles XII(2) & (3) of DTAA Considering the nature and volume of activities and services undertaken in India, the reasoning therein would apply a fortiori to the present case. It is the admitted case of the applicant that its personnel came to and stayed in India for collecting data and information from Sterlite which was done at ground level. Further, as stated by the applicant, transfer of deliverables took place in India and the staff of the applicant visited India for transferring and testing the basic engineering deliverables under the Contract. We have already noted the details of visits and the duration of stay of the applicant s personnel in India. Though as stated by the applicant, the core activities of preparation of designs and plans took place in Australia, the activities and services undertaken by the applicant at various stages (both before and after the preparation of designs and other deliverables) are by no means negligible or insufficient. In fact, they were essential to carry out the obligations under the Contract. Hence, it cannot be said that there is no sufficient territorial nexus for the levy of tax under the Act read with the provisions of the DTAA. We would like to state in reiteration of what we said in AAR/ that in the case of Ishikawajima, the entire offshore services which according to their 12

13 Lordships were inextricably linked to offshore supply of goods, were rendered from outside India, and therefore, the Supreme Court held that the deeming provision in Section 9 cannot reach such income. We are, therefore, of the view that the applicant cannot press into service the ratio of the decision in Ishikawajima in support of its contention The learned counsel for the applicant has relied on the following observation of the Supreme Court in Ishikawajima case, Section 9 raises a legal fiction; but having regard to the contextual interpretation and furthermore in view of the fact that we are dealing with a taxation statute, the legal fiction must be construed having regarding to the object it seeks to achieve (vide page 430 of ITR). At the same time, the observation at page 445 may be noted; 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, a qualification has been added in the next sentence by stating even in relation to such income, the provisions of article 7 of the DTAA would be applicable as services rendered outside India would have nothing to do with the PE in India. This observation reiterates the principle that Section 9(1)(vii) is subject to the provisions of DTAA. In the present case, there is no permanent establishment of the applicant in India as discussed earlier, and therefore, the qualificatory 13

14 sentence regarding the applicability of Art. VII does not apply. As regards the object of legal fiction, we have dealt with this aspect in AAR 747 at paragraph Then, we would like to advert to some of the observations of the Supreme Court on territorial nexus and the principle of apportionment which have been relied upon by the learned counsel for the applicant. While discussing the issue of taxability of offshore supplies, the Supreme Court observed at page 430 * that the territorial nexus doctrine plays an important part in assessment of tax and then posed the question whether the income that arises out of a transaction in which operations giving rise to income take place partly in one territory and partly in another will have to be apportioned to each of the territories or not. Then, it was observed: income arising out of operations in more than one jurisdiction would have territorial nexus with each of the jurisdictions on actual basis. If that be so, it may not be correct to contend that the entire income accrues or arises in each of the jurisdictions. To understand the implications of this observation, we have to advert to the statement of law in the later paragraphs. At page 445, it was observed in a case of this nature, interpretation with reference to the nexus to tax territories will also assume significance. Having regard to the internationally accepted principle and DTAA, it may not be possible to give an extended meaning to * of 288 ITR 14

15 the words income deemed to accrue or arise in India as expressed in section 9 of the Act... whatever is payable by resident to a non-resident by way of fee for technical services (FTS), thus, 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 tax. Then, it was observed that services of a non-resident utilized in India may not have much relevance in determining whether the income of the non-resident accrues or arises in India. However, the reason for such statement is not given. But, with due deference to this observation, we must proceed on the basis that the utilization of services of non-resident in India, by itself does not establish territorial nexus where the entirety of services giving rise to FTS or royalty were performed abroad. In ultimate analysis, the requirement of rendering services was read into Section 9(1)(vii)(c). At the same time, it was pointed out that it (income) must have direct live link between (sic) the services rendered in India. Thus, the live link test was also referred to In our ruling in Application No. AAR/747/2007, we observed that the territorial nexus cannot be understood in a narrow sense especially when the Treaty itself concedes the power to tax royalties to the contracting State in which they arise. We have also pointed out relying on the decision of the Federal Court in Wadia s 15

16 case that the extent of territorial connection is not a material factor to determine the fiscal jurisdiction of the State which seeks to tax the subject. Adopting such approach and further applying the test of live link enunciated by the Supreme Court in the very same decision, we have no difficulty in reaching the conclusion as we did reach in the connected case Appln. No. AAR/747/2007 that sufficient territorial nexus exists to subject the royalty income to tax in India. Not only the services have been utilized in India for the work done in India for the benefit of a resident of India, but even a part of the activities/services under the Agreement were actually undertaken in India. 8. Once it is held that the principle of territorial nexus is not infringed by levying tax on the income by way of royalty arising in India, the principle of apportionment pales into insignificance. However, as the applicant s counsel placed reliance on some of the observations bearing on the principle of apportionment of income and there is scope to think that the Supreme Court approached the issue from that angle also, we consider it necessary to refer to and explain the relevant observations in this regard In the following passages, the principle of apportionment has been adverted to by the Supreme Court: In cases such as this, where different severable parts of the composite contract are performed in different places, the principle of apportionment can be applied, to determine 16

17 which fiscal jurisdiction can tax that particular part of the transaction.) Applying the principle of apportionment to composite transactions which have some operations in one territory and some in others, is essential to determine the taxability of various operations. (p.443) Then, at page 445, it was stated: Thus, if any services have been rendered by the head office of the appellant outside India, only because they were connected with permanent establishment. Even in relation thereto, principle of apportionment shall apply. (sic) (at p.445) 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 establishment, the distinction between Indian and foreign operations and the apportionment of the income of the operations shall stand obliterated. (at p.446) 8.2. It appears that the observations of the Supreme Court on the aspect of apportionment of income are based on the decision in Anglo-French Textiles Co. vs. CIT (1952) 25 ITR 27. The proposition stated in the earlier decision of CIT vs. Ahmedbhai Umarbhai & Co., Bombay which arose under the Excess Profits Tax Act was reiterated in that case. The relevant passages in Anglo- French Textiles may be referred to: The above passage is also sufficient in our opinion to establish that the apportionment of income, profits or gains between those arising from business operations carried on in the taxable territories and those arising from business operations carried on without the taxable territories is based not on the applicability of section 42(3) of the Act but on general principles of apportionment of income, profits or gains. 17

18 [Section 42(1) of Indian Income-tax Act, 1922 corresponds to Section 9(1) of IT Act, 1961, quoted earlier. Section 42(3) corresponds to the Explanation to Section 9(3). Section 42(3) recognizes the principle of apportionment as it says that in the case of a business of which all the operations are not carried out in the taxable territories, the profits and gains deemed to accrue or arise in the taxable territories are only such as are attributable to that part of operations carried out in taxable territories]. Then, question no. 2 was answered as follows in Anglo-French case: Question 2. The income received in British India cannot be said to wholly arise in India within the meaning of section 4A(c)(b) of the Act and that there should be allocation of the income between the various business operations of the assessee-company demarcating the income arising in the taxable territories in the particular year from the income arising without the taxable territories in that year for the purposes of section 4A(c)(b) of the Act The provisions that came up for interpretation in Anglo- French Textiles as well as CIT vs. Ahmedbhai and the circumstances in which the questions arose were very much different. In the state of law as it was when the above decisions were rendered, the principle of apportionment of profits was applied. The position has materially changed with the enactment of Section 9(1) which has expanded the scope of deemed income in India. It must be noted that Section 42(3) in its terms did not 18

19 apply as the Supreme Court was not concerned with deemed accrual or arisal of income, but the question was whether the income actually arose in British-India. The following passages from Anglo-French Textiles at page 48 highlight the rationale of that decision: The question whether a particular part of the income, profits or gains arose or accrued within the taxable territories or without the taxable territories would have to be decided having regard to the general principles as to where the income, profits or gains could be said to arise or accrue. Section 42 of the Indian Income-tax Act has no relevance to the determination of this question because it is mainly concerned with income which is deemed to have arisen or accrued and not with income which actually arises or accrues within the taxable territories. Section 42(3) also is a part of the scheme which is enacted in Section 42 and cannot help in the determination of the question before us. If therefore Section 42(3) has nothing to do with the determination of the income arising in the taxable territories as distinguished from the income arising without the taxable territories as understood in Section 4A(c)(b) of the Act what we have got to consider is whether there is anything in the Act which prevents the application of the general principle of apportionment of income, profits or gains between those which are derived from business operations carried on within the taxable territories and those which are derived from business operations carried on without the taxable territories. After referring to the observations in Ahmedbhai s case in regard to Section 42(3), it was observed thus: The above passage is also sufficient in our opinion to establish that the apportionment of income, profits or gains between those arising from business operations carried on in the taxable territories and those arising from business operations carried on without the taxable territories is based not on the applicability of Section 42(3) of the Act but on general principles of apportionment of income, profits or 19

20 [ gains. That was really the ratio of the judgment of the majority in Commissioner of Income-tax, Bombay v. Ahmedbhai Umarbhai & Co., Bombay That apart, the principle of apportionment was applied in a situation where manufacturing was carried out in one State and sales or purchases took place in another State. The question arose whether and to what extent the income arose within and outside the taxable territory. The services related to a single contract with divisible transactions did not fall for consideration in those cases. Even in the case of Ishikawajima, the Supreme Court did not allocate profits to the two countries based on the operations carried on within and outside India as regards the offshore services. In fact, no such occasion did arise because the entire offshore services were rendered in Japan and therefore the territorial nexus to tax any part of the income in relation thereto was lacking. 9. Now, reverting back to the observations of Supreme Court on the principle of apportionment, they must be understood in the context of the facts therein and the features of the relevant contract. There were offshore supplies of goods in respect of which title passed outside the territorial limits of India, and there were offshore engineering services which were rendered entirely outside India i.e. from the head-office of appellant company. Separate consideration was fixed for these supplies and services. There were also onshore services and onshore supplies which took place in India. 20

21 Thus, a composite contract consisted of distinct and severable segments, some having territorial nexus with India, some not having such nexus. That is how it was viewed by the Supreme Court and the apportionment contemplated by the Supreme Court was in relation to offshore supplies/services and onshore supplies/services. Regarding the latter, there was actually no dispute. The Supreme Court was not concerned with a situation where in respect of a distinct segment of the contract, for e.g, offshore services, part of the work was done in India and part of it was done outside the territory of India. We cannot understand the observations of the Supreme Court as extending the principle of apportionment to a situation where there is a single Agreement covering only one particular type of work/services, as in the present case. It does not follow from what has been stated by Supreme Court that the services or work covered by such agreement should be split up depending on the actual place of performing them and the profits should be apportioned accordingly. Proportionate deemed income in respect of a single agreement which does not have severable elements was not contemplated by the Supreme Court as a concomitant of the principle of apportionment. We do not think that S.9(1)(vi) can be interpreted in that manner. 10. In the light of above discussion, the questions are answered as follows: 21

22 The questions (a) & (b) are answered in the affirmative, agreeing with the contention of the applicant. The amended question no.(c) is answered in the negative. The entire receipts representing royalty income under the agreement in question are liable to be taxed in India at the appropriate rate, both under the provisions of IT Act, 1961 as well as DTAA between India Australia. The splitting up of such income is not permissible. The applicant cannot draw support from the decision of the Supreme Court in Ishikawajima. Accordingly, ruling is given and pronounced on this the 30 th day of March, sd/- sd/- sd/- (A. Sinha) (P.V. Reddi) (Rao Ranvijay Singh) Member Chairman Member F.No. AAR/749/2007/ Dated 31/03/2009 (A) This copy is certified to be a true copy of the advance ruling and is sent to: 1. The applicant. 2. The Director of Income-tax(International Taxation-II) New Delhi.. 3. The Joint Secretary (FT&TR-I), M/Finance, CBDT, North Block, New Delhi. 4. The Joint Secretary (FT&TR-II), M/Finance, CBDT, North Block, New Delhi 5. Guard file. (B) In view of the provisions contained in Section 245S of the Act, this ruling should not be given for publication without obtaining prior permission of the Authority. ( Batsala Jha Yadav) Addl. Commissioner of Income-tax(AAR-IT) 22

23 23