The applicant was to design the curtain wall and façade, supply all materials, erect, install, inspect, test and commission the entire subcontract

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1 from India Tax & Regulatory Services Offshore supplies held on facts to be taxable in India in case of composite contract for supplies and services; supply transaction not completed outside India September 13, 2016 In brief On the basis of specific facts of the case, the Authority for Advance Ruling (AAR), recently ruled that the entire contract revenue arising to the Singaporean company (applicant) towards supply of goods and rendition of services was taxable in India. The AAR observed that the contract was a composite one and there was no evident division in the contract whatsoever for supply and services in terms of scope of work, payment terms, responsibility, risk, etc. Regarding the intention of the parties to the contract, the property in goods passed only upon the completion of the entire works under the contract. Therefore, offshore supplies were taxable in India. In detail Facts The applicant 1, a company registered in Singapore, was engaged in the business of executing contracts in relation to structural glazing and wall cladding works. The main contract for the development of a new international airport terminal was awarded to a contractor which L&T in turn awarded the applicant a sub-contract for the entire external and internal façade, for the glazing and cladding systems for piers, fixed link bridges and nodes in connection with development of the airport terminal. The applicant was to design the curtain wall and façade, supply all materials, erect, install, inspect, test and commission the entire subcontract works. The contractual consideration was in Indian rupees, and the place of payment was an Indian city. However, there was also an option of receiving certain payments in Singapore Dollars in Singapore. During financial year , the applicant applied under section 197 of the Income-tax Act, 1961 (the Act) for obtaining a lower withholding tax certificate on the ground that supply of goods would not generate any tax liability in India. However, the revenue rejected the request for nil deduction of tax. The applicant filed an application before the AAR for determining the taxability of offshore supply of certain goods under its contract. Applicant s contentions The applicant, referring to relevant portions of the contract, stated that the scope of work could be broadly divided into Offshore supply of goods, and Installation and other work to be executed in the airport. 1 AAR No. 981 of

2 The offshore supplies executed by the applicant were an independent scope of work. The applicant relied on the Supreme Court s (SC) decision in the case of Ishikawajima Harima Heavy Industries Limited 2 and other rulings, 3 contending that the present contract was an offshore supply contract for supply of goods. The title in goods was passed to the contractor outside India and payments for the same were also received outside India (i.e., in Singapore). The contractor thereafter sold the consignments to the airport company on a high sea sale basis against transfer of bill of lading. All activities in connection with the offshore supplies were carried out outside India, and the PE (project office) of the applicant in India had no connection, direct or indirect, with the offshore supplies. Revenue s contentions The contract for supply of goods and rendering of services was a composite one, and could not be dissected in any way. There was no separate or exclusive contract for offshore supply of materials. The contractor did not want to split the risk, and had kept the risk factor/ liability for the entire subcontract as a whole on the applicant. As evidenced from the payment schedule, the payments under the contract in both currencies were based on various cost centres, and upon percentage of completion of the single composite work and did not separately relate to payments towards offshore supply. The delivery of goods would not be completed till the goods were supplied and commissioned on site. The goods claimed to be sold offshore were used by the applicant itself in the contract works, and accordingly, the high sea sale claimed by the applicant was not a sale at all. The Revenue relied on the judgment of Madras High Court (HC) in the case of Ansaldo Enrgia SPA, 4 wherein it was held that passing of title was not the sole determinant to decide taxability. Where the contract was a composite contract, all responsibility from beginning to end rested with the taxpayer; there was an intimate, real and continuous relationship with Indian activities, and if the price of other onshore activities/ contract was loaded on to supply contract, it would be held to be taxable in India. To apply the ratio in the Ansaldo 4 judgement to the facts of the applicant s case, the Department compared the prices obtained from domestic/ Indian companies for supply of same or similar materials by the applicant, and concluded that prima facie it appeared that there was a possibility of loading of prices materials. The Department, placing reliance on earlier AAR rulings, 5 also pointed out that composite contracts should not have been dissected; and that they must be looked at and not looked through. The Department distinguished the facts in Ishikawajima Harima s 2 case with the applicant s case thus: In the former case, there was a consortium of various entities having separate roles and responsibilities; case, it was a single subcontractor with full responsibility for executing the work. In the former case, various components of the contract and the price of each component was specified separately; however, in the applicant s contract there was no such specification. In the former case, the contract categorically provided that the title in the goods would pass to the buyer on the high seas; case, there was no such mention. In the former case, the goods were insured in the buyer s name, and the buyer obtained insurable interest in the goods along with the title; however, in the applicant s case, the materials imported were insured in the applicant s name and it was to bear the risk and responsibility for the goods at all times. In the former case, the PE of the foreign company had no role in the offshore supply of goods, whereas, in the applicant s case, the applicant s PE was involved in providing technical and engineering inputs in the procurement of material outside India. 2 Ishikawajima Harima Heavy Industries Ltd v. DIT [2007] 288 ITR 408 (SC) 3 Hysoung Corporation, In re [2009] 314 ITR 343 (AAR), DIT v. Linde AG, Linde Engineering Division [2014] 44 Taxmann.com 244 (Delhi), DIT v. Nokia Networks OY [2012] 25 Taxmann.com 225 (Delhi) and Joint Stock Company Foreign Economic Association Technopromo Expert (322 ITR 409) 4 Ansaldo Energia SPA [2009] 310 ITR 237 (Mad)] 5 Roxar Maximum Reservoir Performance WLL [2012] 349 ITR 189 (AAR) and Alstom Transport SA [2012] 349 ITR 292 (AAR) PwC Page 2

3 Applicant s counter contentions Countering the Revenue s contentions, the applicant responded as under: The aspect of supplies and consideration therefor was dealt with separately in the contract. The supply transaction was complete upon the consignment leaving the factory of manufacture. The continued risk related to quality and quantity of supplies, and not to the service aspect. The payment towards shipment of goods was effected upon receipt of shipment. The comparison by the Revenue of material prices with prices of a third party was incorrect, as the goods varied in quality and on various other parameters. Revenue s reliance on the decision of Madras HC in the case of Ansaldo Energia SPA 4 was distinguishable on facts, and was pending before the SC for final hearing. Questions before the AAR Were the amounts received/ receivable by the applicant goods liable to tax in India under the Act read with the India-Singapore tax treaty? If the answer to the above is in the affirmative, to what extent were the amounts reasonably attributable to the operations carried out in India and accordingly, taxable in India? AAR s ruling The AAR perused various clauses of the contract, such as scope of work, subcontractor s responsibility, payment terms and schedule, delivery terms, etc., along with sample documents furnished such as invoices, bills of lading, and certificate of insurance. The AAR observed that to assess whether the amounts received by the applicant from the contractor pursuant to the contract could be bifurcated into offshore supply of goods and materials and services rendered, the following needed to be considered: Was the contract divisible into offshore supply and services rendered, and were the obligations under the contract distinct and independent? Were all parts of the transaction relating to sale of goods (i.e., transfer of property in goods and payments) carried out outside India, and could sale of goods be treated as completed outside India? Were the prices of goods supplied by way of offshore supply, and separate payments for that, specified in the contract? Did the PE have a role in the execution of supply from abroad into India? Was the SC ruling 3 applicable to the applicant s case? The AAR rejected the Revenue s reliance on the ruling of the Madras HC in the case of Ansaldo Energia, 4 holding that the Department s conclusion that there was a possibility of loading of prices materials on the basis of comparison of prices of Indian companies rather than from offshore suppliers for similar materials, was flawed. There was only one contract agreement. The design, engineering, supply, fabrication, assembly, erection and installation were interlinked, and everything culminated into one system. The applicant s PE (i.e., the project office in India) had come into existence long before the design of materials and equipment for offshore supply started. The goods had been cleared from customs in India by the project office and customs duty had been paid by the project office. In these circumstances, to say that the PE had no role in respect of the supply of goods and materials, was incorrect. There was no bifurcation between supply and erection/ installation in terms of work/ payment in the entire contract. The applicant s artificial bifurcation was incorrect. It was not right to pick up one portion of a clause selectively to show that it represented an independent scope of work. The applicant was to ensure deliveries of the materials at site in India and store them there. The offshore supply of goods by the applicant to the contractor, and then by the contractor to its ultimate customer (the airport company) on high seas was contentious as, even though the applicant was not a party to the goods supplied by the contractor to the airport company, it was responsible for delivery of materials to the project site in India, and acted as an agent of the airport company (paying customs duty in India). The buying of insurance in the name of the applicant instead of in the contractor s name until it reached the site in India was clear proof that risk did not pass to the contractor or its ultimate customer until the goods were used for the works as per the contract. PwC Page 3

4 The currency under the contract was Indian Rupees, and the place of payment was in India. A mere option had been given to the applicant to receive certain payments in Singapore Dollars outside India. Such payment was not specifically relatable to offshore supply of goods as projected by the applicant. Payments under the contract were not in relation to sale of goods, and were linked to different stages of work (i.e. milestones). Supply of goods was not recognised as a milestone for payment separately. Accordingly, the nature of contract was one and indivisible. Referring to the Sale of Goods Act, the AAR stated that the property in goods passed when the parties intended it to pass. Regard had to be given to intention of the parties, terms of the contract, conduct of the parties, and the circumstances of the case. In the present case, the applicant s intention was that the property in goods would pass only when the installation and erection of the entire works was completed. The AAR summarised the ratio in the judgments 3,4 relied on by the applicant, and compared the facts in these rulings with those in the applicant s case as under: In these cases, there were separate contracts for offshore supplies and onshore services, or such distinction was specific, with supply obligation being distinct from service obligation; however, in the applicant s case, there was no such distinction. In all these cases, the price for each component was separately specified; case, the cost value centre mentioned price for the entire contract. In these cases, all parts of the sale transaction were completed outside India, but in the applicant s case, the sale was not completed outside India. In case of Ishikawajima Harima, 2 the insurance for goods supplied was in the owner s name; however, in the present case, the insurance was in the applicant s name. In all these cases, the PE had no role to play in the offshore supply, whereas in this case, the PE played a significant role in relation to supply of goods. In view of the discussion, the detailed scrutiny of the applicant s facts, and analysis of the quoted jurisprudence, the AAR ruled that: The contract was a composite contract, and offshore supplies were not an independent scope of work. All parts of the sale were not completed outside India. No separate price was specified in the contract for goods supplied. The PE played a role in the supply of goods. The fact pattern in the applicant s case was not at all similar to the facts in case of Ishikawajima Harima s 2 case. Thus, the entire amount received by the applicant from the contractor was taxable in India. The takeaways This decision is important as it would impact many foreign companies executing EPC projects in India. The ruling has been delivered on the specific facts of the case, and cannot be uniformly applied in each case for determining taxability of offshore supplies. Each case should be examined on specific facts. Terms of the contract/ agreement and the conduct of the parties play a vital role in deciding the same. Let s talk For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor. PwC Page 4

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