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Case Number

A.A.R Nos. 858-861 of 2009

Attorney(S)

Present for the Applicant Mr. N. Venkataraman, Sr. Advocate, Mr. Taranpreet Singh, FCA, Mr. Satish Aggarwal, FCA, Mr. Akil Sambhar, ACA, Mr. Hitesh Jain, ACA, Mr. Atul Awasthi, ACA
Present for the Department Mr. Narender Kumar, ADIT (Intl. Taxn.), New Delhi.

Judges

P.K Balasubramanyan, Chairman
V.K Shridhar, Member

Acts

provisions of 5 the Income-tax Act, 1961 (Act)
INCOME TAX ACT 1961

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Smart Summary

Advance Ruling Summary: AAR Nos. 858–861 of 2009 (LS Cable Limited)

Factual and Procedural Background

LS Cable Limited (the applicant), a company incorporated and resident in Korea engaged in manufacturing electric wire and cable, was the successful bidder for four projects invited by Delhi Transco Limited (DTL) for the supply, laying, jointing, testing and commissioning of high-voltage cable and an overhead transmission line in New Delhi. For these projects the applicant entered into three contracts on 29 September 2009 with DTL, with the scope of work including: (1) an offshore supply contract (supply of equipment and materials including mandatory spares on CIF basis), (2) onshore supply contract and (3) onshore service contract.

The applicant submitted that, under the offshore supply contracts, property in the goods would pass outside India to DTL, the sale would be concluded outside India and payment would be received outside India in foreign currency; therefore, no income accrues or arises in India and nothing is deemed to have been received in India.

Four applications for advance rulings were filed (AAR Nos. 858, 859, 860 and 861 of 2009), each asking whether amounts receivable by LS Cable Limited from DTL under specified offshore supply contracts (CIF basis) for the respective projects were liable to tax in India under the Income-tax Act, 1961 and the India–Korea Double Taxation Avoidance Agreement. The Authority issued a ruling on 26 July 2011.

Legal Issues Presented

AAR No. 858/2009: Whether amounts receivable by LS Cable Limited from DTL under Contract No. DTL/CA/PROJECT-II/09-10/MB to EL/I dated 29 September 2009 (offshore supply contract) for offshore supply on CIF basis for the Maharani Bagh GIS–Electric Lane GIS project are liable to tax in India under the Income-tax Act, 1961 and the India–Korea tax treaty.
AAR No. 859/2009: Whether amounts receivable by LS Cable Limited from DTL under Contract No. DTL/CA/PROJECT-II/09-10/MB to TC/I dated 29 September 2009 (offshore supply contract) for offshore supply on CIF basis for the Maharani Bagh GIS–Trauma Centre (AIIMS) GIS project are liable to tax in India under the Income-tax Act, 1961 and the India–Korea tax treaty.
AAR No. 860/2009: Whether amounts receivable by LS Cable Limited from DTL for the proposed offshore supply contract for the 220 KV XLPE cable between Ridge Valley Substation and Trauma Centre (AIIMS) Substation (Tender No. DTL/DGM(PROJECT-IIA)/UGC/GT No.4/2009) are liable to tax in India under the Income-tax Act, 1961 and the India–Korea tax treaty.
AAR No. 861/2009: Whether amounts receivable by LS Cable Limited from DTL under Contract No. DTL/CA/PROJECT-II/09-10/LILO-1 dated 6 July 2009 (offshore supply contract) for offshore supply on CIF basis for the Bernauli–Mehrauli 220 KV double circuit overhead transmission line are liable to tax in India under the Income-tax Act, 1961 and the India–Korea tax treaty.

Arguments of the Parties

Applicant's Arguments

The offshore supply contracts provide for transfer of property/title outside India in favour of DTL; accordingly the sale and transfer of title are concluded outside India.
Payments are to be received outside India in foreign currency (mechanism via letter of credit credited to the applicant's foreign bank account on receipt of shipment advice).
Insurance and contractual clauses demonstrate that the offshore sale is separate and severable; therefore no income accrues or is deemed to be received in India.
Procedurally, the applicant contended that the question was concluded by an earlier decision of the Hon'ble Supreme Court (as part of the admission-stage argument against deferral).

Revenue's Arguments

Although separate contracts were awarded, breaches under one contract were deemed breaches of the other contracts and the employer had the right to terminate other contracts at the risk and cost of the applicant; hence the three contracts are composite and interdependent.
The offshore supply and onshore supply/service contracts were signed on the same date; offshore supplies were made by the applicant and it also performed onshore services including installation/commissioning obligations.
Insurance clauses required the applicant to take out and maintain cargo, installation and worker compensation insurance—indicating integration between supply and onshore activities.
Delivery is not complete until equipment is commissioned on site and full payment is linked to satisfactory demonstration; therefore passing of title outside India is of limited significance for taxability and the offshore and onshore contracts are not wholly independent.
The applicant effectively entered into a turnkey contract and has a permanent establishment (PE) in India; reliance was placed on Ansaldo Energia SPA (310 ITR 237) to support the view that offshore supplies may form part of a composite contract taxable in India.
At the admission stage the revenue also sought deferral of merits hearing because a similar issue had been decided against the revenue by the Delhi High Court and an SLP had been filed in the Supreme Court.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Ansaldo Energia SPA, 310 ITR 237	Authority for treating offshore supply as part of a composite/turnkey contract where the Tribunal found a façade in contract splitting, price imbalances and tax avoidance—supporting taxation of such income in India.	The Authority noted the facts in Ansaldo but distinguished them: in the present case there was no finding of a façade, no price skewing in favour of offshore supplies, and factual differences meant Ansaldo did not apply to deny non-taxability here.
Hyosung Corporation, 314 ITR 343 (AAR)	Advance ruling that income of similar nature earned by a non-resident for offshore supplies was not taxable in India; the AAR followed the Supreme Court decision in Ishikawajima.	The Authority observed that Hyosung considered these issues at length and followed Ishikawajima; the present Authority relied on Hyosung as supporting non-taxability of offshore supplies in comparable circumstances.
Ishikawajima Harima Heavy Industries, 288 ITR 410 (Hon'ble Supreme Court)	Binding Supreme Court authority on separability of the sale portion from a larger contract and that parties may determine when title passes; supports that sale concluded outside India can be treated as not taxable in India.	The Authority regarded Ishikawajima as binding and applied its principle that the consideration for a sale portion, if separately specified and title passes outside India, can be treated as a distinct sale not taxable in India.

Court's Reasoning and Analysis

The Authority proceeded in two parts: first by addressing the revenue's request to defer admission/merits because of parallel litigation and an SLP filed in the Supreme Court, and secondly by considering the merits of the four questions submitted.

On the procedural point, the Authority rejected the revenue's plea to defer the hearing simply because a Petition for Special Leave to Appeal had been filed; the Authority observed that mere filing of an SLP could not be a ground to keep the applications pending indefinitely, particularly when the applicant contended that the issue was already concluded by a Supreme Court decision.

On the merits, the Authority examined the contractual documents submitted and noted specific clauses in the offshore supply contracts relating to transfer of ownership/title, insurance obligations and the contractual payment mechanism (letter of credit ensuring credit to the applicant's foreign bank account on receipt of shipment advice). These contractual features led the Authority to find that:

The transaction of sale and the passing of title in the goods took place outside India.
The ownership and property in the goods passed outside India despite the transit risk being borne by the applicant until the goods reached the Indian site; transit risk does not necessarily negate the conclusion that sale occurred outside India.
Parties are free to decide contractually when title passes; where the consideration for the sale portion is separately specified, that portion can be separated from the remainder of the contract (a principle reflected in Ishikawajima).

The Authority distinguished the Ansaldo Energia decision relied upon by the revenue by reference to its facts: in Ansaldo the contract structure and pricing were found to create a façade to avoid tax (price imbalance skewed to offshore supply). The Authority found no such facts before it—no evidence of façade or skewed pricing—and therefore Ansaldo was not applicable to deny non-taxability here.

Concerning the revenue's contention that the applicant had a PE in India and that offshore supplies were effectively part of a turnkey arrangement, the Authority reasoned that any PE related to onshore supplies and services would not, on the facts presented, have a role to play in the offshore supplies. Even incidental activities by a PE (such as customs clearance or transportation) did not, in the Authority's view, connect the PE to the offshore supply so as to render the offshore receipts taxable in India.

The Authority also relied on prior AAR authority (Hyosung) and the binding Supreme Court decision in Ishikawajima to support the separability of the offshore sale portion and the consequent non-taxability of the offshore receipts in the circumstances at hand.

Holding and Implications

Holding:

The Authority answered each of the questions in the negative and held that the applicant is not liable to tax in respect of the offshore supplies under the Income-tax Act, 1961 and the India–Korea tax treaty.

Implications:

Direct effect: LS Cable Limited's receipts under the specified offshore supply contracts (CIF basis) for the four projects were held not taxable in India; the advance rulings were given in favour of the applicant.
Scope: The Authority applied existing Supreme Court precedent (Ishikawajima) and prior AAR reasoning (Hyosung) to the facts and distinguished the contrary factual scenario in Ansaldo Energia. The ruling applies to the specific contractual facts and documentation before the Authority; the opinion does not purport to create a new legal precedent beyond its application of existing binding and precedential authorities.

Ruling pronounced on 26 July 2011. Members: P.K. Balasubramanyan (Chairman) and V.K. Shridhar (Member). The decision was communicated to the applicant, the Director of Income-tax-I (International Taxation), and relevant CBDT officers. Note on publication: under Section 245S of the Act this ruling should not be published without prior permission of the Authority.

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Ls Cable Limited v. Director Of Income-Tax

Mr Justice. P.K. Balasubramanyan (Chairman) Mr. V.K. Shridhar (Member) Name & address of the applicant LS Cable Limited, (12-16F) LS Tower, 1026-6, Hogye-dong Gyeonggi-do, 431-080 Korea Commissioner Concerned Director of Income-tax-I (International Taxation) New Delhi Present for the Applicant Mr.N.Venkataraman, Sr.Advocate Mr. Taranpreet Singh, FCA Mr.Satish Aggarwal, FCA Mr. Akil Sambhar, ACA Mr. Hitesh Jain, ACA Mr. Atul Awasthi, ACA Present for the Department Mr.Narender Kumar, ADIT (Intl. Taxn.), New Delhi. Ruling (By V.K.Shridhar) Four applications are filed by the applicant, LS Cable Limited. The applicant is a company incorporated and located in Korea and is a tax resident of Korea. It is engaged in the business of manufacturing electric wire and cable for 2 power distribution. The applicant was the successful bidder in the bids invited by the Delhi Transco Limited (DTL) for the supply, laying, jointing, testing and commissioning of the following projects: A. 220 KV, D/C XLPE cable of 1 x 1200 sq.mm between Maharani Bagh GIS Sub-Station and Electric lane GIS Sub-Station at New Delhi, B. 200 KV D/C U/G Cable between 400/200 K V Maharani Bagh GIS substation and 220 K V Trauma Centre (AIIMS) GIS Substation at New Delhi, India. C. 220 KV XLPE Cable of 1000 Sq.mm between 220 KV GIS Ridge Valley Substation and 220 KV GIS TRAUMA Centre (AIIMS) Substation at New Delhi. D. 220 KV double circuit overhead transmission line between Bernauli- Mehrauli for feeding proposed 220 KV GIS Substation at IGI Airport, New Delhi. For the above four projects, applicant states that it entered into three separate contracts on 29th September 2009 with DTL. The scope of work of the applicant under the said contracts for all these projects include: (1) offshore supply contract involving supply of equipments and materials including mandatory spares on CIF basis, (2) onshore supply contract and (3) onshore service contract. The applicant refers to various clauses in the contract documents relating to 3 offshore supply contract viz. transfer of title, insurance, payment mechanism etc. and submits that in connection with the said contract, the property in the goods to be supplied from Korea would pass outside India in favour of DTL and the sale would be concluded outside India and the payment would be received outside India in foreign currency. The applicant contends that no income accrues or arises in India and further no income will be received or deemed to be received in India.

2. In AAR No. 858/2009, the following question is formulated by the applicant for seeking advance ruling from this Authority: On the facts and circumstances of the case, whether the amounts receivable by LS Cable Limited (Applicant) from Delhi Transco Limited (DTL) under Contract No. DTL/CA/PROJECT-II/09-10/MB to EL/I dated 29 September 2009 (offshore supply contract) for offshore supply of equipments and materials including mandatory spares on CIF basis for 200 KV D/C U/G cable between 400/220 K V Maharani Bagh GIS substation and 220 K V Electric Lane GIS Substation at New Delhi, India are liable to tax in India under the provisions of the Income- tax Act, 1961 (Act) and the Agreement for Avoidance of Double Taxation between India and Korea (India-Korea tax treaty)? In AAR No. 859/2009, the following question is formulated by the applicant for seeking advance ruling from this Authority: On the facts and circumstances of the case, whether the amounts receivable by LS Cable Limited (Applicant or LSCL) from Delhi Transco Limited (DTL) Contract No. DTL/CA/PROJECT-II/09-10/MB to TC/I dated 29 September 2009 (offshore supply contract) for offshore supply of equipments and materials including mandatory 4 spares on CIF basis for 200 KV D/C U/G Cable between 400/200 K V Maharani Bagh GIS substation and 220 K V Trauma Centre (AIIMS) GIS Substation at New Delhi, India are liable to tax in India under the provisions of the Income-tax Act, 1961 (Act) and the Agreement for Avoidance of Double Taxation between India and Korea (India-Korea tax treaty)? In AAR No. 860/2009, the following question is formulated by the applicant for seeking advance ruling from this Authority: On the facts and circumstances of the case, whether the amounts receivable by LS Cable Limited (ApplicantLSCL) from Delhi Transco Limited (DTL) for Proposed Supply Contract (Off-Shore Contract) for the package of Supply, Laying, Jointing, Testing and Commissioning of 220 KV XLPE Cable of 1000 Sq.mm between between 220 KV GIS Ridge Valley Substation and 220 KV gist RAUMA Centre (AIIMS) Substation at New Delhi (India for Tender No. DTL/DGM(PROJECT- IIA)/UGC/GT No.4/2009 are liable to tax in India under the provisions of the Income-tax Act, 1961 ( Act) and the Agreement for Avoidance of Double Taxation between India and Korea (India-Korea tax treaty)? In AAR No. 861/2009, the following question is formulated by the applicant for seeking advance ruling from this Authority: On the facts and circumstances of the case, whether the amounts receivable by LS Cable Limited (Applicant or LSCL) from Delhi Transco Limited (DTL) Contract No. DTL/CA/PROJECT-II/09-10/LILO-1 dated 6 July, 2009 (offshore supply contract) for offshore supply of equipments and materials including mandatory spares on CIF basis in respect of Bernauli Mehrauli 220 KV double circuit overhead transmission line for feeding proposed 220 KV GIS Substation at IGI Airport, New Delhi are liable to tax in India under the provisions of 5 the Income-tax Act, 1961 (Act) and the Agreement for Avoidance of Double Taxation between India and Korea (India-Korea tax treaty)?

3. The learned Additional DIT present on behalf of the revenue has responded by raising the question relating to admission of application under section 245R(2) vide order dated 4.6.2010. Initially, the revenues view was that similar transaction involving taxation of offshore supplies is already pending before the Honble High Court. Now it has taken the plea that as the Honble Delhi High court has decided the issue against the revenue in its order dated 24.10.2010 and as the decision has not been accepted and a Petition for Special Leave to Appeal has been filed before the Honble Supreme Court, the hearing on merits of the case may be deferred till the decision of the Honble Supreme Court. We are satisfied that the mere filing of a Petition for Special Leave to Appeal cannot lead to keeping these applications pending indefinitely especially when the contention on behalf of the applicant is that the question stands concluded by an earlier decision of the Honble Supreme Court.

4. The revenue submits that on perusal of the various documents submitted by the applicant, it is noticed that though the contracts were awarded separately, any breach under one contract was deemed breach of the other contracts and a right was conferred on the employer to terminate 6 the other contracts at the risk and cost of the applicant. The award of separate contracts does not in any way dilute the responsibility of the applicant for successful completion of the facility as per the specifications. The three contracts are composite contracts and one cannot exist without the other. It then submits that the offshore supplies were on CIF basis and the contracts for offshore supply and onshore contracts were signed on the same date. The offshore supplies were made by the applicant and the onshore supplies of the services were also made by the applicant. The insurance requirement of the offshore supplies contract require that the applicant will take out and maintain insurance of cargo, installation, worker compensation, etc.

5. The revenue submits that in view of the above, the applicants case is not a case of a sale simpliciter. The contract is for full package involving onshore services. It could not have made a difference had the contract been one instead of three divisible contracts. Same function would have been performed by entering into a single contract for the composite work which includes not only design, fabrication, testing and supply but also upto the stage of jointing, testing and commissioning.

6. The learned Additional DIT submits that the delivery would not be complete till the equipments are commissioned on site. The full payments 7 against the supply can be made only after satisfactory demonstration of the equipments. Under these circumstances, the passing of title outside India is of little significance as far as the issue of taxability of income earned in the transaction is concerned. It cannot, therefore, be accepted that the offshore and onshore contracts are totally isolated and independent of each other. It has rather entered into a turnkey contract and has a PE in India. The revenue placed reliance on the case of Ansaldo Energia SPA, 310 ITR 237.

7. Income of similar nature earned by a non-resident was held to be not taxable in India by this authority in the case of Hyosung Corporation, 314 ITR 343, where all these issues were considered at length following the binding decision of the Honble Supreme Court in Ishikwajima Harima Heavy Industries, 288 ITR 410. At the outset it may be stated that this authority is not free to disregard the law laid down by the Supreme Court and to have a fresh look into the matter. The clauses in the offshore supply contract agreement regarding the transfer of ownership, the payment mechanism in the form of letter of credit which ensures the credit of the amount in foreign currency to the applicants foreign bank account on receipt of shipment advice and insurance clause, would go to establish that the transaction of sale and the title took place outside Indian Territory. The ownership and property in goods passed outside India. The transit risk borne 8 by the applicant till the goods reach the site in India is not necessarily inconsistent with the sale of goods taking place outside India. The parties may decide between them as to when the title of the goods should pass. As the consideration for the sale portion is separately specified, it can well be separated from the whole as is held in the case of Ishikwajima. In the case of Ansaldo Energia SPA relied on by the revenue, the contract for offshore supply awarded to the assessee was held to be a composite contract together with onshore supply contract etc. awarded to another. The turnkey project as a whole was awarded to the applicant who was not a single bidder. Thereafter the contract was split up. In that case the Tribunal found that there was a faade created for the purpose of avoiding tax and that there was price imbalance in the contracts and that it was skewed in favour of the offshore supply contract in order to minimize the tax liability. There is no such case before us. Therefore, the facts are different from the facts of the present case. Nothing in law prevents the parties to enter into a contract which provides for sale of material for a specified consideration, although they were meant to be utilized in the fabrication and installation of a complete plant. Regarding the revenues plea that as the applicant has a PE in India, the income arising should be taxed in India, it stated that the existence of PE would be for the purpose of carrying out the contract for 9 onshore supplies and services etc. but such a PE would have no role to play in offshore supplies. Even if a PE is involved in carrying on some incidental activities such as clearance from the port and transportation, it cannot be said that the PE is in connection with the offshore supplies. We accordingly hold that the applicant is not liable to tax in respect of offshore supplies as per the Act. The question in each of the applications is answered in the negative, in favour of the applicant. The ruling is given and pronounced on this 26 day of July, 2011. Sd/- Sd/- (P.K. Balasubramanyan) (V.K.Shridhar) Chairman Member F.No. A.A.R. No. 858-861 of 2009 Dated . (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-I(International Taxation), New Delhi.

3. The Joint Secretary (FT&TR-I), M/Finance, CBDT, Bhikaji Cama Place, New Delhi.

4. The Joint Secretary (FT&TR-II), M/Finance, CBDT, Bhikaji Cama Place, 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. ( Nidhi Srivastava ) Addl. Commissioner of Income-tax(AAR-IT)

Ls Cable Limited v. Director Of Income-Tax

Advance Ruling Summary: AAR Nos. 858–861 of 2009 (LS Cable Limited)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Applicant's Arguments

Revenue's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Ls Cable Limited v. Director Of Income-Tax

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