* + o/o (1) IN THE HIGH COURT OF DELHI AT NEW DELHI ITA No.7O4 of 2011 ITA No.7O7 of ?OLL rTA No.7O4/2OlL DIRECTOR OF INCOME TAX . . . APPELLANT Through: Mr. Abhishek Maratha, Sr. Standing Counsel.. VERSUS L.S. CABLES LTD. Through: i '\ (2) ITA No.7o7 l2oLL DIRECTOR OF INCOME TAX Through: VERSUS . L.S. CABLES LTD. Through: . . .RESPONDENT Mr. R. Satish Kumar, Advocate. APPELLANT Mr. Abhishek Maratha, Sr. Standing Counsel. . . .RESPONDENT Mr. R. Satish Kumar, Advocate, CORAM :- HON'BLE MR. JUSTICE A.K. SIKRI HON'BLE MR. JUSTICE SIDDHARTH MRIDUL 1. Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest? , Reserved on: 13th September,2OI!. ITA No. 704 & 707/2017 Page 1 of 2 Digitally Signed By:AMULYA Certify that the digital file and physical file have been compared and the digital data is as per the physical file and no page is missing. Signature Not Verified \, A.K. SIKRI. J. 1. For orders, see ITA 706 of 2QLL. SEPTEMBER 30,2011 pmc JUDGE t)lr--)-'1 (SIDDHARTH MRIDUL) JUDGE t- iTA No. 704 & 707/20L1 Page 2 of 2 \ * + o/o (1) IN THE HIGH COURT OF DELI.II AT' IVEW DELFIT ITA No.7O6 of 2OLL nTA No.7O4 of ?OLL ITA lVo.7O7 of ZOLL Reserved ori: 13th September,2OI1 Pronounced on: 30th September. 2011. ECTOR OF INCOME TAX . . APPELLANT Mr. Abhislrek Maratha, Sr. Standing Counsel. . . .RESPONDENI- Mr. R. Satish Kumar, Advocate. . . APPELLAN]' Mr. Abhishek,Maratha, Sr. Standing Counsel. ECTOR OF INCOME TAX o.706, 704,'707 /ZOLL Through; VERSUS Through: ? (2) (3) I Mr. R. Advocate. . ,RESPONDENT Satish Kumar, L- , APPELLANT Mr. Abhishek Maratha, Sr. ' Standing Counsel. Page 1 of 14 .\ I. 't> - 'rl .rx. f, * . B tr'.t.. L r.i\ - tB- .r\r\ ,,tr, ttttn'\,lt L.S. CABLES LTD. (ii) (iii) Through: Officer ( even int . , ,RESPONDENT Satish Kumar' as per t Mr. R. Advocate. CORAM :- llo*'"ru MR' Iusrrg: *tfJf5l HoN'BLF **' ',;;+i& Si.doHnRrFr MR.IDT'.!L HON'BLE f'fiR. JUS I ILE >lvvttr 1. Whether Reporters fj Local newspapers may be allowed io ,"" the Judgment? z.\ l""T "J:'#";?,+:"::::li ;: ?::1 3 \ W.f.:"lm'iiJ&H:"t"J"J;J il! ''lpo""d in the Disest? ' assesseeris a company incorporated in Korea and r ^'tl notes attached to th'e statement of the total income' during year rlnder conside'i'ton' the company was engaged in the cution of the followirip four projects: (i) Fibre Optic \CuUf inO Project Eastern ': Power Grib CorPoration of India (hereinaftu'\'uf"rr"d to as the PGCiL)' finr" Optic daOfing Project - PDA -2A for PGCIL' Fibre Optic \tub"nn Project Western India for India for Limited PGCIL. (iv)' Fibre OPtic Project - PDT - 1B for PGCIL' L^- The Asselsing contracts and comPanY and ) after going through alt acting in details with the the four assessee on record PGCIL A perusing the documents .706, 70+,:JO7 l2orr I PageZ of 1'4 found out that the assessee had performed various activities in india cJuring the relevant assessment year and thereby attributed 5Oo/o of the income relatable to the operations carried out in India, both as.per the provisions of Section 9 of the Income Tax Act (hereinafter referred to as 'the Act') and L {:. 3. ArticleT of Double Taxation Avoidance Agreement ('DTAA' for I'{revity) between India and Ko'rea. The AO while consideritrg t: the offshore jsupply, attributed income for the taxation in India I I,,lide letter dated 05.07.2006, the details'of pdyments receivr:d I {n origiriating the territory of India in respect of tlre offshore I dupplies durinq the period 01.04.2003 to 31.03.2004 are of -l--- -." -- I litlts+ 25,705,837/-. \he TT buying rate as on 31.03.2004 was I \t,tZl ,+SB,O25/-. Thle profit taxable in india on this amount Ill_ @ 10o/o is computed !t <L!,27,45,8O2/-. The AO, therefore, TItll' ' - tent ordeh dated 26.L2'2006 assessed the income Yroe Assessrr I l,l dr tne assessee at t7,Q5, L6,943/-.' il $eing aggrieved by ttie assessment order passed by the AO, itl the assessee filed lthree separate appeals, i.e. Appeal ,l No.179106-07, 380/0F-07 & L27/07-OB for the Assessment years 2oo3-04, zoo+-fs & 2005-06 respectively before the cIT ,l (A). The CIT (A) videlthe consolidated order dated 06.07.2009 :l dismiss,:d the appeal Qf the assessee. il il:ll :il A No.706, 7?4, 707 l2oLLt il Page 3 of 1'4 lll illi:ll ill i:ll Itllitlrll l;rllrlllll Iti 4 Not satisfied with the order of the CIT (A), the assessee preferred three separate appeals, i.e., ITA Nos.3634/Del/2O09, 3635/Del/2OO9 & 3636/Del/2OO9 before the Income Tax Appellate Tribunal'(hereinafter referred to as 'the Tribunal). Learned Tribunal, however, vide common orders dated I 13.0t8.2010 partly allowed the appeals of the assessee. L i In tihese appeals preferr'ed by the Revenue against the tiI'i afor{said drOer$ of the Tribunal, .we are concerned with the t: taxapility of offshore supply of the equipments. From the brief t; narrbtions of the eventsl stated above, it is clear that the I assepsee, a company (parlier known as LG Cables Ltd.) .. I i-.. incofporated in Republic o[ Korea, is engaged in the business of ll mani.rfacture and sale of fo*"t transmission cable and related ,I equipments. It had entgred into a series of contracts with po*|r. Grid Corporation 1[ cou"rnment of India Undertaking) tl (for lshort 'PGCI') with thp approval of Reserve Bank of india lli' sincq 2001 for off-shore $upply and on-shore erection testing, commissioning, etc. of r Optic Cabling System for power raphical rbgions of India. Four contracts, particulars whelreof are already given above, were entered into between thel assessee and the PGCI. Insofar as on-shore erection testing;l commissioning, etc. are concerned, returns and paying the assessee has been filling income tax oJ06,704,707/20!I Page 4 of L4 5. C{ transmission in different ITA I iI I I Iri\ ( -:ril' il r g I (+l . taxes. Aslper as off-shore supply is concerned, the admitted facts are .phat the cables ?re manufactured in Korea and ,,. shipped from a port in the said country. 6. We may rhention at this stage that"for each project two contracts were entered into, viz., a contract for off-shore supply of equipments and separate supply for on-shore t. supply, viz., custom clearance of imported equipments at l;i Indilan port, inland transportation insurance, erection and testing, commissioning and related activities. We may also noirft out here itself thatifor on-shore activities, the assessee I hadl appointed Indian agent, viz., M/s. Alpasso Industries Il:l Pvt.l Ltd. f' This Indian] agent was concerned only with Ir exepution of contract in {ndia. ll 7. fhel AO as well as CIT (F), however, tpok th.e view that the rl issule relating to off-shQre contract and on-shore contract . betrlveen the assessee arhd PGCI had been carried out by the exebution of contract in India. l'l 7. Thel AO as well as CIT (R), however, tpok th.e view that the lr issule relating to off-shfre contract and on-shore contract tl . betrfveen the assessee a{O ncct had been carried out by the lr ageht in Ipdia,'income {n sale of equipment has accrued in ' India and on that basis, pection 9 of the Act was attracted in ;I this case I il B. I ln respect of off-shore lsupplies also, it was held that the ll Iassessee",had a businftss connection in India and M/s. tll I Alpasso Industries Pvt. tftd. was a permanent establishment. til nn f o.zoo , 704, .70,7 l2orL i ' ll tage 5 of 14 liitllirtil r'il li'rl ttll llilllil t*; \l I ; It is on this ground that income from off-shore contacts had accrued in India and was held liable for tax. It is a matter of record that the Assessment Year 2OO2-O3, identical issue had cropp'ed up and the Tribunal had taken the view that off- shore/overseas contract was totally incumbent-' on on-shore seqvice contract and in respect of off-shore contract, no work JEllv lLg Lvl lLl clr-L cll lL.l ll | | urHvvL \ Irl.!,,,, wab entrusted by the assessee to its Indian agent, M/s. liIr Alflasso Industries Pvt. Ltd. On this basis, it was held that s"ttion 9 of the Act had no application and in respect of th{se off-shore supplies, the Indian agent did not constitute I I a {usiness connection And the following two conditions whicft : urJ nu."ssary for invo(ation of Section 9 of the Act are not satisfied: | ; llI til Business coninection in India; or t; I fiil Attributing irjcome earned by the assessee from the | , . said suppliesl, were not satisfied. Following the decision r{ndered in respect of Assessme;t Year 2OO2-O3, the Tribunal h s allowed the appeals PartlY. It would be relevant to int out that against the order of tlre Tribunal pertaining to had preferred appeal u ment Year'2002-03, the Revenue er Section 260A of the Act, which was No.706, 7O4, 707 lZjtl Page 6 of 14 \ (.-) 9. 10;. I I I I I 'l 'registered as ITA No.703 of 2009. following substantial question of : '.r extracted below: It was admitted on the lp '(1) Whether the 'Income Tax Appellate Tribunal is justified in not holding that the contract in question is not -a cdmposite one and, theiefore, the assessee is not liable to pay tax in india in respect of offshore service? (2) Whether the levy of interest under Section 2341u- for short deduction of TDS is mandatory and' is leviable 11, "25. Since it w equipments sup delivery thereof Rulings proceedec pldce offshore. It, premise that 7O4,7O7/2OtI not in disPute that the title in the ed was to sfand transferred uPon utside India on high-seas basis as on the basis that supplies had .taken however, rendered its opinion on the hore supplies or offshore services Page 7 of 14 provided for in le 22(t), the AuthoritY for Advance A No.706, c-; '\\ were intimately connected with the turnkey project and proceeding on that basis the Authority, as already stated, opined that the assessee company was liable to pay tax'in India though the property in the goods wl'rich were subject matter of the offshore supply passed outside India, in view of the fact that it had a business connection in India. It further opined that if a contract envisaged a composite compensation for the various obligations to be performed'and if certain operations are to be performed by or through a birsiness connection then, profits would be deemed to have accrued in India. The petitioner had a permanent establishment in India within the meaning of the said ierm iq paragraph 3 in Article 5 of the Double Taxation Avoidahce Agr""m"nt entered into between the Ggvernments of India and JaPan' 26.ReyersingtheaforesaidfindingoftheAuthorityfor A,lvance .Rulings, the Supreme Coutt in respect of the otfshore supply and equipments held as under: - "Re: Offshore SuPPIY: (1) That only such part of the income, as is attributable to the operations carried out in India can be taxed in India. (-. I (2-) Since all paits of the transaction in question, i'e' in" transfer 'ofl property in goods as well as the I pavment, were barried on outside the Indian soil, the ir:a'nsaction could not have been taxed in India' (3) The prin.i|oi" of apportionment, wherein the ieiritorial iurisdilction of a particular state determines ii:s capacity to t{x an event, has to be followed' ial ttre fact tha[ the contract was signed in India is of ;" material clpntequ"n.e, since ' all activities in connection with lthe offshore supply were outside India' uni tfr.r"fore cfnnot be deemed to accrue or arise in the countrY. I (5) There exi$ts a distinction between a business co-nnection andl a permanent establishment' As the o"rr.""rt esta'[listrment cannot be'said to be involved il ih; truniu.don, the aforementioned provision will , ,.il have no ;appllpation. The permanent establishment tl il Page 8 of 14 7O4, 7O7 lz}ir 'l ,.il t,;l .il itit. 'll tl ill ,ll ,ll il 0. ITA No.706, I 11/ ff cannot be equated to a business connection, since the former is for the purpose of assessment of income'of a non-resident under a Double Taxation Avoidance Agree,ment, and the latter' is for the application of Section 9 of the Income Tax'Act, (6) Clause (a) of Explanation 1to S. 9(1)(i) states that only guch part.of the income as is attributable to the operaLions carried out in India, are taxable in India, (7) The existence of a permanent establishment Would not constitute sufficient ,,business connection" and the permi.inent establishment would be the taxable entity. The fiscal jurisdiction of a country would not extend to the taxingientire income attributable to the permanent establishment. (8) There exists a difference between the existence of a business connection and the income accruing or arising out of such business connection. (9) Paragraph 6 of .the Protocol to the DTAA is not applicable, because, ifor the profits to be ,,attributable directly or indirectly" the permanent establishment must., be involved ih the activity giving rise to the profits." i 27. Applying the Jforesaid law enunciated by the Suprelme Court in thle case of Ishikawaima (supra), there. can be no minner of doubt that the offshore supplies in the instarit case are not chargeable to tax in India. The instant cabe, in fact, in our view stands on a t better footing as separate contracts have been enterbd into betweeh the parties, albeit on the same day, one for the off$hore supply and the other for the onshore services, br-lt even assuming that both these contracts need to He read together as a composite contract, the issuel in controversy is nevertheless squar;ely covered by lthe decision of the Supreme Court in Ishikawaima (siupra). It is beyond dispute that PGCII- had issued i ble letter of credit in favour ee and in paragraPh 3L.2 of th.e respondent- agreed that the pro$erty in the goods will pass to the buyer (PGCIL) as arfrd when the respondent-assessee loads. the equipmenf onto the mode of transport for transportation froql the country of origin. The nd agreement (Erection Contract) stipulation in the : 7O4,7O7/z0rt Page 9 of 14 I) i .relating to certain performances by the respondent- assessee including poft handling, custom clearance, transportation, insurance, handling on,site, unloading at transportation site, testing and commissioning to the satisfaction of the buyer are in a separate agreement for a. separate consideration which is clearly enunciatecl in t['e second agreement as follows: - "Whereas the employer desires to engage the contractor for petformance of all activities within India.................. subject to the terms and conditions hereinafter appea ring. " ! I Mr.l Abhishek iMaratha, learned counsel appearing for the ti ReJenue, ;outOi not dispute that the id6ntical issue was decided bV fhe Tribunal; earlier, which view was upheld by this Court in l' ' r I ^ thel case of Director of Income Tax, New Delhi Vs. LG I caQIe Ltd. (in ITA No..703/2009 decided on 24.LZ.2OL}). Ii I Facpd with this, his only submission was that even in respect of I off-phore qupply in the in.stant case, the AO had found that the lii confract between the a$sessee and PGCI even for off-shore I IL supply provided that thf assessee had appointed an Indian aqelnt, viz., M/s. Alpadso Industries Pvt. Ltd. who was I t' wo{king for the assessele in India. Therefore, this contract demonstrated that the pssessee was to be represented by the.Indian agent in Indip, from which it should be discerned ,t I that the operation in rfspect of off-shore had been carried out through India by pn agent, This contention of the learned counsel does no[ cut much ice. Construing this very L2. CY \_l ar Page 10 of 14 ! o,706, 7O4, 707/2017 ITA I I agreementi it has also been held that two contract, one for i off-shore .trppty and other for on-shore service are independent of each other. Again, a finding of fact was arrived aq viz M/s, Alpasso Industries Pvt. Ltd, was concerned bnly with on-shore contract and had no any other .!t role to play in respect of off-shore/overseas supplies. In the 1r'r LT \- I agre'pmentrrelating to off-shore supply between the assessee and fhe PGCI, no doubt, PGCI had agreed to pay 1.OLo/oo/o of L: i l'!i the QIF price ofi the goods as the Indian agent's commission I to M[s. Alpasso'industries Ltd. as a part of contract process I' for {verseap srjpply. In fact, M/s, Alpasso Industries Ltd. t,, was Fngageq Dy other forleign companies also as their Indian ,; aOerlts while entering into similar coniacts for overseas ( ,rpfty with PGCL lvt/s, Atpasso had filed an affiddvit that it tltl was lan indrependent enti,ty working for several clients. As I'llrl per. fhe off-shore contrapt for overseas supply, the goods t,.ll'l werel manufactured byl the assessee overseas in its tt .tt establishmelnt and dispatfhed from abroad. The property in tl | .- the goods passed into prfrrchaser on delivery at the foreign cl port. The bn-shore erecfion contract was in respect of the I service of customs cle{rance, inland transportation and erection of commissionifrg of transmission cables. The il I t.706, 704, 707 lzOLL I nage 11 of 14 I 't 'l il tl il ,'.ll rlll,il llllrlt1 lrl !| :- above work was attended to by the project office, which constituted permanent establishment of the assessee company in India. In view of the above, the only work which could be entrusted by the assessee to its Indiarr agent, lt4/s. Alpasso was general administrative coordination and liaispn with PGCI and nothing else. rellatable to sale outsilde India had not accrued i; India. Such income could ly be taxed outside India and not rther, there cannot be a business / 13. 1 ) ol F Vt under Indian law. I connection between Shipyard ''Ltd, 109 lo+, tbtlzott ; . seller . and purchaser (Hindustan 158), The income from onshor'e' Page t2 of 14 ITAINo.706, lb I services WPS taxable in India, simply because such income accrued in India from sbrvices rendered in india. One need i not look f6r business connection to tax such income' The assessee company had shipped the goods from abroad with : the bill of lading in the name of Power Grid Corporation against a irrecoverable letter of credit' The assessee had assJmed, under the onshore contract, the responsibility of .urdo-r clearahce on behalf of Power Grid Corporation as an t onlT and it would be wrong to assume'that the ipoft|regoodsdidnot'TheTribuna|hasright|y i netd ttrat the property in the equipment had passed to the Uuyler as stipulated in para 3 L12 of Genera'l Conditions of the coJtru.t. stipulation i" the on-shore contact relating to \. certain performances IUV the assessee irrcluding port cer{ain performances iOU the assessee irrcluding port tl f.,urlOting, customs cllarance, tr'ansportation, insurance, tl harfOting on site, unlo{Oing at transportation site, testing tl anJ comn'iission to the latisfaction of the buydr are under a '--rl sejarate agreement for la s"parate consideration. ,l'l Thus, the aforesaid arO{rments of the learned counsel for the I Revenue is not acceRtafle and t[-rere is no reason to change the decision arrived at ifr the case of LG Cable l-td' (suPra)' I in ITA No,703 of 2009' :l 'l No.7o6, to+, iot /zott I Page 13 of L4 I I .il il il ,1ll ll tl -t---- :. ; No questiOn dismissed.l o.706, 7O4, 7G.7 /2OL! tY 15. of law arises. These appeals are, accordingly, J I,.' DG E (sr D D HARTFT M R.nD [.t n-) .][,JDGE Page L4 of 74 () R 30, ZOLL 'i.: : i I' l I