AAR : the Applicant to LSCL under the transaction mentioned in Annexure III in respect of Offshore supply of Equipments is liable to tax

Authority For Advance Rulings Income-Tax New Delhi

Deepak Cables (India) Ltd., In Re

Section : 9

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

A.A.R. No. 940 Of 2010

July 26, 2011


1. The applicant is a company incorporated in India, engaged in manufacturing of cables, electrical & automotive wire and bronze type cables. The applicant formed a consortium with M/s LS Cables Limited, Korea on 22-6-2007 with a view to bid for four tenders invited by the Karnataka Power Transmission Corporation Ltd., (KPTCL) for setting up four specified transmission lines on turnkey basis. According to the consortium agreement, the applicant was to act as the leading company on winning the contract and the parties were jointly and severally bound for the successful performance of the contract and to be fully responsible for the design, manufacture, supply and successful performance of the equipments in accordance with the contract. According to the consortium agreement, all local supplies, installation services, testing and commissioning of 220 KV XLPE cable circuits fell within the scope of the work to be done by the applicant and the work of design, engineering, manufacturing and supply of 220 KV XLPE cable joints, terminations link boxes and bonding cable, jointing services for joints and terminations and supervision of cable laying, jointing, testing and commissioning fell under the scope of the work of M/s LS Cables Ltd., New Delhi. The consortium having won the contract, four separate contracts were awarded to the applicant under different Letters of Award. It is the case of the applicant that the Letter of Award inter alia recognizes the fact that offshore supplies shall be the responsibility of LS Cables Ltd. It is the further case of the applicant that the property in the goods supplied by M/s LS Cables from Korea under the four contracts pass to the applicant outside India, i.e. before the goods entered the customs frontiers of India. Clause 5 of the Memorandum of understanding between the applicant and LS Cables is relied on in support.

2. It is in the context of those contracts that the applicant approached this Authority for an advance ruling. While admitting the application under section 245R (2) of the Income-tax Act, this Authority framed the following questions for ruling:—

“1. Whether the amount paid/payable by the Applicant to LSCL under the transaction mentioned in Annexure III in respect of Offshore supply of Equipments is liable to tax in India in the hands of LSCL, i.e. the recipient non-resident Korean company?

2. If the answer to above question is in the negative, whether any tax is required to be deducted at source by the Applicant on payments to LSCL i.e., recipient non-resident Korean company.”

3. It is the case of the applicant that transfer of the goods by LS Cables, Korea to the applicant being outside India, there is no territorial nexus for taxation regarding those off-shore supplies. It is pointed out that the applicant after obtaining the goods from LS Cables, Korea sells them to KPTCL for consideration. For its on-shore activity, including the sale it is taxed in India. Learned Counsel specifically requested as to note that sale by the applicant to KPTCL is taxed in India since it is taxable in India and that part of the contract is not involved in this application. It is submitted that in the light of the decision of the Supreme Court in Ishikawajma Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408/ 158 Taxman 259 the questions raised by the applicant have to be ruled in favour of the applicant. Counsel pointed out that the two objections raised by the Revenue are that LS Cables has a project office in India when the contract was signed in India. It is submitted that this aspect has also been considered in the above decision of the Supreme Court and it has been ruled that it has no role to play in respect of offshore supplies. The concluding portion of that ruling is brought to our notice. It is pointed out that except the fact that the on-shore supplies are by the applicant and the off-shore supplies are by LS Cables, the case is identical regarding the transaction between LS Cables and the applicant on the one hand and KPTCL on the other with that of the case decided by the Supreme Court. Since the onshore activities of the applicant are taxed in India, regarding this part of the agreement relating to off-shore activity, the decision of the Supreme Court has to be applied.

4. The representative of the revenue submitted that the division of responsibility of on-shore and off-shore activities between the consortium partners was not a relevant consideration for considering the liability. What was relevant was the source of Income. Arrangement between the parties cannot control the arising of that income. They have together entered into the contract and the contract has to be construed in the context of the relevant provision of the Income-tax Act. The doubts expressed by this Authority on some of the aspects of that ruling is relied on in support. The representative also made an attempt to raise questions regarding the correctness of the view taken in Ishikawajma-Harima Heavy Industries Ltd.’s case( supra).

5. It is not for us to consider the arguments on the correctness or otherwise of the view expressed or test the correctness of the postulates in the decision of the Supreme Court. It is for the Revenue to raise those questions before the Supreme Court if it wants to seek a reconsideration of the question. Suffice it to say, that we are bound by the law laid by the Supreme Court in that decision, unless, of course, it is a question of our looking into the question whether there is an attempt for avoidance of tax, within the meaning of the proviso to section 245R(2) of the Income-tax Act.

6. We find that the applicant is being assessed and is being taxed in respect of the sale by it to KPTCL. What is involved in the questions before us is the taxability of the off-shore sales by LS Cables to the applicant. Regarding that part of the transaction, the question is seen to be covered by the decision of the Supreme Court in Ishikwajma Harima Heavy Industries Ltd.’s case (supra). In view of this position, we rule in favour of the applicant on the two questions that were formulated.

[Citation : 337 ITR 127]

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