Facts
of the Case:
· Company
‘X’
floated a Tender
Notice inviting tender inquiries for carrying on the work of design,
engineering, procurement, construction, installation, commissioning and handing
over of the plant on a lump sum turnkey basis. The applicant along with Company 'E' decided to come together to
take up the work as a Consortium.
· For this purpose, the applicant and Company E
entered into a Memorandum of Understanding for the purpose of bidding for and
taking up the work. Further, an ‘Internal Consortium Agreement' was also
entered into between the applicant and Company E.
· The tender submitted by the Consortium was accepted
and the work was awarded to the Consortium. A formal agreement was entered into
between Company X and the consortium companies in order to perform the work in
conformity with the provisions of the contract. The Consortium took up the
project work pursuant to the contract.
· The applicant filed an application under section
197 of the Income-tax Act (‘the Act’) taking up the position that no portion of
the amount payable was liable to be withheld under section 195 of the Act,
since what it performed under the contract was all off-shore and payments were
received off-shore and hence not chargeable to tax in India
· The
Income-tax Officer rejected the applicant’s plea and directed Company X to
withhold tax on amounts paid to the applicant in terms of the contract. It is
in that situation that the applicant approached this Authority with its
application under section 245Q of the Act.
·
The
following questions were put before the AAR for perusal:
1. Whether
the consortium of ABC Germany with Company E is taxable as AOP?
2. Whether
the amount receivable in respect of design and engineering, liable to tax in
India under the Act or under the Double Taxation Avoidance Agreement read with
Protocol between India and Germany ("DTAA")?
3. If the
answer to question no. 2 is in the affirmative, what is the rate of tax in
India?
4. Whether
the amount receivable by the applicant for supply of equipment, material and
spares, outside India are liable to tax in India, under the Act or DTAA?
5. If the
answer to 4 is in the affirmative, to what extent are the profits from the supply
of plant and equipment taxable in India?
6. Whether the
consideration for onshore services comprising supervision of installation,
testing, commissioning and construction, management/supervision is liable to
tax on the profits of the PE, as may be deemed to exist in India, in terms of
Section 44DA of the Act read with the provision of the DTAA.
7. If the
answer to question No. 6 is in the affirmative, whether for the purpose of
determining the profits of the PE in India, the actual expenditure incurred by
head office exclusively and specifically in relation to onshore activities of
the PE and reimbursed to it, are allowable in full?
Revenue’s
contentions:
· The contract for erection is a lump sum turnkey
contract and was an indivisible contract. Any splitting up of the contract
would be artificial and cannot be resorted to. A lump sum turnkey contract for
erection of a plant was a well understood form of contract and it would be
unrealistic to split it up into parts just for the purpose of taxation alone.
· The Revenue also refuted the claim of the applicant
that the title to the machinery passes off-shore. It was submitted that in a
supply and erection contract, when the risk is retained not merely until
delivery but until acceptance of the works by Company X, which is after trial and commissioning of the project.
Further, the contract does not specify that title to the machinery shall pass
on to Company X on high seas or in the country of origin.
· The members came together to undertake a contract.
The motive was obviously to generate an income. The liability of the Consortium
continued after installation and even after commissioning. It was a joint
liability. In this situation, an AOP was formed and the assessment has to be on
that basis.
Applicant’s
contentions:
· The applicant emphasizes that the contract is a
divisible contract which clearly identifies the scope of work and obligations
of the two Consortium members and the consideration is payable by Company X
directly to each member for the work done by it.
· The expenses incurred by each member for the part
of the work performed by that member. There is no sharing of costs or receipts
between the two members inter se. There is also no sharing of assets employed
by each of them and there is no sharing of profit or loss. There is also no
common employment of capital or resources.
Verdict:
· The AAR followed the decision of Supreme Court in Vodafone
International Holdings B.V. v. UOI and another [(2012) 341 ITR 1
(SC)], wherein it was held that section 9(1)(i) of the Act is not a 'look
through' provision and that the Revenue must look at the transaction to
understand its import. The Chief Justice held "it is the task of the Revenue/Court to ascertain the legal
nature of the transaction and while doing so, it has to look at the transaction
as a whole and not to adopt a dissecting approach." The AAR said that “To read such a
contract as one for sale of goods independent of the contract as a whole and
separately from the obligation undertaken thereunder to erect, commission and
deliver a plant, would be adopting a dissecting approach to that contract.” Applying
the 'look at' test and interpreting the terms of the contract as a whole, the
contract is one and indivisible and it is not open to the applicant to attempt
to split up each component of the contract for the purpose of taxation. A
dissecting approach is not warranted in this case.
· It was held that an AOP is formed in this case
since the internal division of responsibility by the Consortium members and the
recognition thereof by Company X or the making of separate payments by Company
X to the two members, cannot dislodge the legal position of formation of an AOP
by the applicant.
· Since the assessment is to be as an Association of
Persons and taxable in India under the Act, the question of existence or
non-existence of a PE does not arise.
(Compiled by team of JGarg Economic Advisors Private Limited)
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