Authority For Advance Rulings, New Delhi
Michelin Tamil Nadu Tyres (P.) Ltd., In re
R.S. Shukla, (In-Charge), Chairman And Ashutosh Chandra, Member Revenue
A.A.R. No 1218 Of 2011
December 19, 2017
Ashutosh Chandra, Member Revenue- M/s. Michelin Tamil Nadu Tyres Private Ltd. (MITTPL or the Applicant)has filed the present application on 14 December 2011 in Form 34C, under section 245Q of the Income tax Act, 1961, seeking a Ruling on various questions, as subsequently enumerated. The application was admitted on 24 May 2013. During the course of these proceedings, the Applicant has submitted that with effect from 1 April 2014, the name of the Applicant has changed to Michelin India Private Limited (‘Michelin India’). A copy of the certificate of incorporation from the Registrar of Companies, Chennai, has been enclosed.
2. The Applicant is a Chennai based resident company. From the year 2009-10, it started taking steps to set up a factory for production of Bus and Truck tyres and also a manufacturing facility for mixtures and semi-finished products necessary for the production of tyres. For this purpose it entered into an Umbrella Agreement as an “Equipment Purchase Contract” on 1 April 2011 with M/s. Manufacture Francaise des Pneumatiques Michelin (MFPM), a closely associated group company, for design, engineering, manufacturing, inspection and packing, forwarding and dispatch from outside India of machinery and equipment for setting up its new manufacturing facility in India. MFPM is a company incorporated under the laws of France and is a tax resident of France. MFPM has extensive experience in facilitating the development of projects of establishment and extension of factories related to the activities of production of tyres and manufacture of mixtures.
2.1 Under the aforesaidUmbrella Agreement, MFPM wouldsupply the equipment in three phases. As regards Phase I, the total price for the equipment is stated as EURO9,31,90,452 (approx. INR 580 cr) and the purchase of the same was completed upto February 2013. Further, supply of equipment under Phase II and Phase III have not yet started. A plain reading of the Umbrella Agreement amply makes it clear that it is an equipment purchase contract for pure supply of machinery and equipment.
2.2 Subsequently it also entered into a Services Agreement on 1 February 2013, for providing supervisory services during installation, with Michelin France, after the supply of machinery and equipment was completed and after installation work had commenced. These installation services were rendered by different third party suppliers.
3. On the above facts, the Applicant has sought an Advance Ruling on the following questions:
(i) On the facts and circumstances of the case, whether the amounts payable to Manufacture Francaise des pneumatiques Michelin, France (‘MFPM’) by Michelin India Tamil Nadu Tyres Pvt. Ltd. (‘Applicant’ or ‘MITTPL’) under Umbrella Agreement for Equipment Purchase dated 1 April, 2011 (‘the Agreement’), for Offshore supply of machinery and equipment are liable to tax in India under the provisions of theIncometax Act, 1961 (‘Áct’) as per Convention between the Government of India and the Government of the French Republic for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and capital (herein after referred as ‘India-France Tax Treaty’) read with Protocol to India–France Tax Treaty dated 29 September, 1992?
(ii) Where, on the facts and circumstances of the case, if answer to Question (i) is affirmative i.e. the amounts payable to MFPM is taxable in India under the Act or India-France Tax Treaty, whether the Applicant is required to withhold tax in accordance with the provisions of section 195 of the Act and at what rate?
4. In support of its contentions and understanding of the issues involved, the Applicant has further stated as under:
4.1 Pursuant to the Umbrella Agreement, to further clarify certain terms and points of the Agreement, the Applicant and MFPM entered into a series of Letters of Understanding (‘LOU’), confirming the following:
LOU 1 – dated 30 August 2011 – The agreement has been executed in France and the consideration for supply of plant and equipment shall be paid by MITTPL to MFPM in Euros to a bank outside India.
LOU 2 – dated 30 August 2011 – The transfer of title and ownership of the plant and equipment shall take place outside India. The installation of the plant and equipment shall be done by the Applicant or through its contractors and MFPM would only provide required supervisory guidance.
LOU 3 – dated 30 September 2011 – MFPM will obtain transit insurance policy for supply of plant and equipment till the port of Chennai on behalf of the Applicant which will be reimbursed by the Applicant and also the risk and rewards are transferred to the Applicant at the port of shipment.
LOU 4 – dated 14 December 2012 -It was clarified that the scope of the Agreement strictly excluded installation services, which will be provided under a separate agreement and that too the scope of such services will be restricted to supervisory in nature. The supervision charges as mentioned Schedule – I to the Agreement are in relation to design and manufacture of the equipment prior to importation i.e. outside India and such charges are included as part of the cost of equipment and would be borne by MFPM.
4.2 On conjoint reading of the terms of the Umbrella Agreement and LOUs as mentioned above, it is clear that the supply of equipment is a pure off-shore contract for which supply is completed outside India, which is elaborated as under:
4.2.1 Transfer of title in property
Clause 5 of the Umbrella agreement specifically states that transfer of title of the equipment shall take place at the port of shipment that is outside of India. It further states that the title to the equipment shall deemed to be transferred on acceptance by MITTPL. All the activities essential for the transfer of title of the machinery and equipment would take place outside India and therefore it shall be an off shore contract.
4.2.2 Delivery of equipment outside India
The Umbrella agreement specifically states that transfer of title of the equipment shall take place at the port of shipment that is outside of India. Clause 4 of the Agreement provides that MFPM will intimate in advance the manner and other details regarding the delivery of the equipment. Further Clause 7.1 of the agreement provides that MITTPL has a right to inspect the equipment at the premises of Michelin France, outside India.
Supply of equipment under the Umbrella Agreement is divided under three phases. As regards Phase I, the total price for the equipment is stated as approx. EURO 93mn., to be paid by way of either irrevocable letter of credit, or cheque, or bank transfer or Telegraphic transfer payable in France, ie. outside India. The consideration for supply of plant and equipment has been paid to MFPM in Euros to a bank outside India. Thus, the equipment was delivered to MITTPL outside India, on FOB basis. As per Schedule 1, the price computation would include:
“Cost incurred by MFPM towards third party suppliers, ie. full engineering costs (design, project steering, etc., including the related transport costs),and full projection and external purchase costs of the equipment; cost incurred by MFPM as increased by appropriate coefficients determined on an arm’s length basis accounting for, but not limited to, the following as may be applicable; the specific administrative costs for MFPM related to the production and equipment; design services performed by MFPM; production of equipment by MFPM; sub-contracted design services and production of equipment (including travel) taking into account specific administration costs for MFPM; supervision charges (salaries charged, daily allowances, personnel transport costs, hotel accommodation and ancillary costs) and short term financing costs.”
4.2.4 Customs duties
Clause 4.3.5 of the Umbrella Agreement provides that MTTPL shall be responsible for obtaining any import license or carrying out all custom formalities for the import of equipment and its transit through another country. All the custom duties, tariffs, fees, taxes and the charges imposed and levied at the port of importation shall be borne by the Applicant.
Schedule 1 of the Umbrella Agreement specifically states that the price of the Equipment will be increased by transport, insurance and packing cost until the Port of Chennai. MFPM has obtained transit insurance policy for supply of plant and equipment till the port of Chennai on behalf of MITTPL and also the risk and rewards are transferred to MITTPL at the port of shipment.
4.3 Installation of equipment after importation by MITTPL
Under the Umbrella Agreement, majority of the equipment were imported in FY 2011-12 and FY 2012-13 wherein payment amounting to Rs 343.25 crore and Rs 199.78 crore respectively were made and in later years emergency spare parts and stand-by equipment were purchased for small amounts. Thereafter, the Applicant entered into installation contracts with external contractors.15 third party external contractors were engaged for installation work who were paid an amount of Rs 131.58 crore, 169 local employees of MITTPL were engaged and 79 foreign expats were employed on long term basis with MITTPL for installation work.
4.4 Pursuant to the Service Agreement, a total of 33 technicians had visited India and the average duration of stay of these technicians in India is 14 days. MITTPL has paid an amount of 1.173mn Euro, about Rs 9.95 crore, to MFPM in respect of services rendered by these technicians. While making payment against invoices raised under the aforesaid agreement, appropriate taxes (of Rs 99.5 lakh) were deducted by MITTPL under section 195 of the Act. The company has completed setting up the first phase of the manufacturing facility and started its commercial production on 9 January 2014.
4.5 The Applicant has contended that in view of the above factual background mentioned by it, it seeks a Ruling for taxability and withholding obligations on the payments made for off-shore supply of equipment to MFPM. It has taken support from various cases, which are considered later in this Ruling, to argue that on the facts of the case, the payments made to MFPM towards off shore supply of equipment cannot be taxed in India.
5. The Revenue has also submitted detailed reports, wherein various issues have been raised, challenging the Applicant’s contentions. The thrust of Revenue’s contention is that the supply of equipment as well as the services rendered outside India (design engineering)and also the services rendered within India (supervision charges) constitute a composite contract. As the supply of the equipment and its installation in India is in 3 phases over a period of seven years, the supplying foreign company can be said to have a permanent establishment in India in terms of Para 3 of Article 5 of India-France DTAA.
5.1 On the conspectus, the stand of the Department is that the income arising to MFPM France from supply of the equipment and their installation in India is taxable in India in the hands of its permanent establishment, as also within the meaning of section 9(1)(i) of the Act.
5.2 Revenue has drawn attention to the application, and particularly page 1 thereof:
“..…..the price includes full engineering cost(design, project steering, supervisory charges for successful installation and implementation of equipment, etc……”.It submits that it is clear that the payments made by the Applicant to MFPM as per the agreement included supervisory charges for successful installation and implementation of equipments in India. Hence, it is submitted that the entire amount payable by it to MFPM directly or indirectly includes payment for the supervisory services rendered by MFPM in India and hence as these services have been rendered and utilized in India are as such taxable in India.
5.3 Regarding the Applicant’s contention that installation and commissioning of the machinery purchased has been carried on by it by employing local Indian contractors and by foreign nationals, who were employed by the Applicant on long-term basis, Revenue submits that the “local Indian contractors”, would have at best only assisted MFPM, the supplier of the machinery, in installing and commissioning of the machinery so supplied by it. These local contractors would have been used for moving of machinery from the “Port of Chennai” to the factory site, for construction of complicated civil works, sophisticated electrical works, etc., so as to facilitate the installation of the machinery by providing Cranes etc., which was carried on as per plan prepared by MFPM, since they did not have the requisite skills.
5.4 What is crucial in this Installation process is the “Master Plan”, prepared by MFPM with the help of which only the complicated Installation process can be carried out, as the same requires a special know-how, a plan for laying out of machinery, plan for the factory as to how to use land allotted keeping in view the future expansion requirements, etc. Thus, the role of local contractors or employees of MITTPL, in the installation and commissioning of the equipment is at best one of assisting MFPM. It is submitted that payments made to local contractors on which TDS is stated to have been made u/s 194J of the Income-tax Act, shall not change the very nature of the composite contract referred here, and the role of MFPM is very crucial in Installation and commissioning of the factory.
5.5 Revenue has referred to the Applicant’s statement that nearly 169 Indian employees have assisted in the process of installation and commissioning of the machinery so purchased from MFPM, and these were actually trained by MFPM and other group companies; and without whose crucial contribution the said installation and commissioning could not have been carried out by MITTPL. Further, Revenue states that the Applicant has claimed huge expenditures under the head “training” of its manpower from its associate-companies situated in France, details of which are reflected in the relevant form 3CEB. From this it is clear that the role played by the Indian employees of the Applicant may not be so crucial as compared to the role played by the employees of MFPM.
5.6 It has been further submitted that the Applicant had employed 79 foreign expats / nationals on long term basis for the purpose of installation and commissioning of the machinery purchased, and for this MFPM raised an invoice of Rs.9.95 crore on MITTPL in AY 2014-2015 based on the services agreement dated 01.02.2013, which shows the important role played by MFPM. However, it is also stated that a perusal of their position and nature of work which is listed by the applicant, it is clear that they were engaged in personnel training, production engineers, quality maintenance, R&D, and none of them were involved in the installation of MFPM supplied machineries.
5.7 Attention is also drawn to another application for ruling filed by the applicant in AAR No.1366 of 2012, related to the taxability of payments made by Michelin Global Mobility (hereinafter MGM) outside India, towards the expatriate personnel supplied by MGM and employed by MITTPL. The very nature of the composite contract referred here in this report is much larger in the scope, and cannot be confined to the employment of 79 expats alone, who are stated to have been paid just small sum of Rs. 9.95crore for the Financial Year 2014-15.
5.8 Revenue submits that in this context, the details of sums paid by MITTPL to MFPM, (except purchase of raw material and capital goods as reflected in Form 3CEB) are as under:
|Asst. Year||Description of the services availed||Amount(Rs.)|
|2011-12||Training of personnel||2,41,294|
|2012-13||Reimbursement of expenditure: Social security contribution, travel and other costs||11,41,582|
|2013-14||Training of personnel||77,83,395|
|2013-14||Reimbursement of expenditure||13,87,136|
|2014-15||Training of personnel||47,42,871|
|2014-15||Reimbursement of expenditure||1,79,36,811|
From the above Table, it appears that the said payment of 9.95 Crore made by MITTPL to MFPM as per the services agreement dated 1.02.2013 could have been accounted under the head Ädmin. Services.
5.9 Revenue states that during the period before F.Y. 2014-15, when the said “Service Agreement” was not in existence, the Applicant has not shown any sum as paid to MFPM towards installation and commissioning of the machinery purchased. It only implies that machinery so purchased could have been installed only after Financial Year 2014-15 onwards.
5.10 Attention is drawn to the Balance-sheets of the Applicant as on 31.03.2011, 31.03.2012, 31.03.2013 and 31.03.2014 on the value of total fixed assets as on that date, which are as under:
|Total Fixed assets||121||885||1637||2265|
Thus, the machinery purchased from MFPM had been gradually installed. As per the computation statements in the Income tax Returns, MITTPL had commenced its business activity during the financial year 2011-12 itself. Business loss has been claimed by the applicant company even before the said “Services Agreement” was signed on 01.02.2013. It only implies that the corresponding supervisory charges have not been taxed as per the service agreement in India entered on 01.02.2013, but are only billed in the purchase agreement and the invoices thereon either directly or indirectly, which in turn is taxable in India. Thus, it is submitted that factually the Umbrella Agreement is a composite contract for supply or machinery, installation and commissioning.
5.11 Revenue submits that the applicant has submitted a list of 15 third party contractors for installation of equipment and stated that these were engaged in the installation of machineries, towards which it paid Rs.131.58 crore. However, an analysis of these contractors shows that all except two are specialized equipment manufacturers and suppliers and are engaged in installation of specialized equipment supplied by themselves and not those of MFPM. Analysis of the few sample agreements and purchase orders of local third party contractors reveals that:
5.11.1 The agreement with Satnam Global Infra Projects Limited along with Industeam SA is not for installation of MFPM supplied machinery. In this agreement of 24 July 2012, MITTPL is the customer, Satnam Global is supplier and Industeam is a service provider. The recital itself says that:
“And whereas the supplier is engaged in the business of manufacturing and supplying machineries and equipment.
And whereas the service provider engaged in the business of providing service for manufacturing and installation.”
The total payment made to Satnam Global Group is Rs.7.86 crore, out of which Rs. 1.25 crore is for installation of machinery supplied by it and the balance is for the cost of machinery supplied to MITTPL. Thus Satnam Global had supplied the machinery manufactured by it and the same was installed by Industeam, and they were not engaged in installation of MFPM machinery.
5.11.2 Similarly, agreement with Webb India says: “this equipment and machinery purchase and installation agreement is executed…….” Here also MITTPL is the customer, Webb India is the supplier and Webb Technology is the confirming party. The recital says:
“And whereas the supplier is engaged in the business of manufacturing and supplying of conveyors and automated storage and retrieval system machineries and equipment”. The total payment to Webb India was Rs.11.92 crore and it was not for installation of machineries supplied by MFPM.
5.11.3 MITTPL also paid Rs.54.04 croreto another automation and technology control equipment manufacturer, out of which Rs. 15.34 crore is for installation of machineries and equipment supplied by CMFPE and balance for supply of machinery and equipments.
5.12 Hence, none of the above three contractors were engaged in the installation of MFPM machineries and equipment. The Revenue refers to list of Indian employees (out of 169) furnished by the Applicant, and their designations as under:
|(d)||Production Engineeers & Managers||65|
|(e)||Graduate Engineer and Trainee||21|
|(g)||Finance and Cost Management Personnel||11|
The above shows that they were not involved in the MFPM supplied machinery as none were experts in installation of machineries. They were only involved in production.
5.13 In the Service Agreement where Phases, services and deliverables are mentioned, there is no mention of installation of machineries by MFPM, and in the deliverables it was stated: “Environment, Security, Safety conditions, Studies for purchasing, PMPO, PDR implementation”. Thus it is clear that the service agreement does not mention installation of the machinery supply of MFPM but for the installation supervision and coordination of various machineries supplied by the third parties, numbering 15 and for which there were separate agreements. Hence the service agreement was not meant for installation of machineries supplied by MFPM. In short, MFPM supplied machines were installed and the same was supervised by MFPM, as there was no separate agreement for installation and supervisory service and hence the Umbrella Agreement becomes the composite agreement, for which MITTPL had not made any payment and the same was charged under the cost of machinery itself.
5.14 Revenue relies on the following case laws which have been rendered in the context of Hon’ble Supreme Court judgement in the case of Vodafone International Holdings B.V. v. Union of India 204 Taxman 408/17 taxmann.com 202/341 ITR 1 (SC). Therein, a three-judge Bench of the Supreme Court has laid down that what is needed is to consider the transaction in its entirety and to look at the transaction as a whole. Based on these observations series of Rulings of this Authority pronounced in the following cases were relied upon: ABC, In re  20 taxmann.com 152/207 Taxman 315/345 ITR 119 (AAR – New Delhi); LindeAG, In re  19 taxmann.com 238/207 Taxman 299/349 ITR 172 (AAR – New Delhi); Roxar Maximum Reservoir Performance WLL, In re  21 taxmann.com 128/207 Taxman 293/349 ITR 189 (AAR – New Delhi); and Alstom Transport SA, In re  22 taxmann.com 304/208 Taxman 223/349 ITR 292 (AAR – New Delhi).
5.14.1 In all these case laws relied upon by the Revenue, the following findings are stated to have been given: (a) A contract has to be read as a whole, and the purpose for which the contract is entered into by the parties is to be ascertained from the terms of the contract. (b) If the purpose of the contract is for installation / set-up of a factory, the same composite contract cannot be artificially dissected into a contract for supply of machinery separately; and the balance erection. (c) The object of the contract so entered is an indivisible contract and hence cannot be separated for the purpose of taxation. (d) It is not open to the Non-Resident Company to plead that the said composite contract is divisible and sale of machinery and designing of project and equipment must be treated as off-shore transactions.(e) When a tender is floated for erection and commissioning of a plant, generally, the bid is for that work and the award of contract is for that work. The various terms of the contract have to be understood in that context. A contract for sale of goods, simpliciter, refers to a contract for designing and erecting a plant.
5.15 It is pointed out that in all these cases the Authority has held that contracts similar to that of the Umbrella Contract referred in this case have to be looked at as a whole and need not be split into as offshore supply of Machinery and onshore supply of Services for considering the taxability of the transaction involved thereon. In this background where the Authority has held that a Composite contract has to be “Looked at” as a whole, attention is drawn to the first page of the Umbrella Agreement in this case. Relevant portion of which is reproduced below:
1. Client wishes to establish in India a new manufacturing factory for Pneumatic tyres, the Client also wishes to put in place a new manufacturing facility for mixtures necessary for the production of tyres located in the same place;
2. The new tyre manufacturing factory and the new manufacturing facilities for mixtures require the purchase of specific machinery and equipment by the Client. The Client does not have sufficient knowledge and experience to buy these machinery and equipment under the base conditions of effectiveness;
3. The supplier has extensive experience in facilitating the development of projects of establishment and extension of factories related to the activities of production of tyres and manufacture of mixtures, and is able to deliver – directly or through specialized sub-contractors – specific machinery and equipment needed by the client;……”
5.15.1 Revenue submits that from the above it is very clear that the Client, i.e., MITTPL, does not have knowledge and experience to even decide on the machinery and equipment required to set up its manufacturing unit for Pneumatic tyres and facility for mixtures. That being the state of affairs of MITTPL, it cannot claim that it has the wherewithal to say that the Umbrella Agreement is only for the supply of offshore machinery and equipment. It is a contract between two closely associated companies.
5.16 Revenue submits that the case of Ishikawajma Harima, from which the Applicant takes support, is very different from the instant case: In that case, it was a consortium of various entities, each with distinct responsibilities to execute various parts of turnkey project. Here, MFPM is the only closely associated company which has setup a factory in India. In that case, the various components (such as offshore and onshore supply of materials and services) of the project were distinctly brought in the main contract along with price components specified thereon. But in this case, the various agreements for onshore and offshore have been entered at various stages and the price components have not been spelt out in the umbrella agreement. Further, in this case the contract price has not been split into offshore and onshore activities in the Umbrella Agreement. Moreover, this is a transaction between two companies which are closely connected and directed by the interest of the ultimate holding Company CGEM. Hence for these reasons the entire contract may be looked into as a whole. The contract so entered was for design, manufacture, supply of machinery required for setting up of the said factory and later on for successful installation and commissioning and thereafter to assist MITTPL in extension of factories in future, ie. both for offshore supplies and onshore services.
5.16.1 Reference has been made to the decision of Hon’ble Madras High Court in the case of Ansaldo Energia SPA v. ITAT 178 Taxman 57/310 ITR 237, where it was held that “…..it is not just where the title passed, but also whether there was a crucial and intimate relation, where there was an element of continuity between the business of the non-resident and the activity within the taxable territories….”.In the applicant’s case, there is an intimate connection and continuity between the activities of MFPM and MITTPL, outside and inside India, in so far as the supplier of machinery, installation & commission thereafter at the factory site of the MITTPL. Such income is therefore deemed to arise in India in terms of Section 9(1)(i) of the Act.
5.16.2 Reliance is also placed on the ruling given by this Authority in the case of Alstom Transport (supra), on the issue of splitting the contract wherein it was ruled that, even though four independent members formed a consortium and executed different phases of a single project, such division of work shall not affect the nature and content of the obligation undertaken by them jointly. It is submitted that in this case, it is only a single supplier and the ultimate purpose of the contract was to set up a factory.
5.17 In its final submission the Revenue has stated that the transaction between MITTPL and MFPM is that of related parties and the apparent form given to the written agreements and LOUs should not be taken into consideration and only substance over form should be seen. It is not a contract between a manufacturer and supplier but MFPM is engaged in establishing of factory on behalf of MITTPL. The installation of machinery supplied by MFPM was not done by third party contractors, employees and expats but only by MFPM.
5.18 The case laws relied upon by the applicant are factually different as in these cases the transactions were between two unrelated parties with different interest. But in the Michelin Group the ultimate holding company is CGEM which has two subsidiaries, MFPM and CFM, Switzerland. MFPM, France is the manufacturer, sales entity and service provider. MFPM, Switzerland is the holding and the finance company for non-French entities including MITTPL. Both work for the interest and profit of the ultimate holding company CGEM, France. In such transactions the substance and intention is to be seen. Michelin Group’s intention is to establish a manufacturing facility for its subsidiary MITTPL, and not merely supply of machinery, and MFPM is actively involved in establishing the manufacturing facility right from the feasibility study in FY 2010-11. The supply of machinery by MFPM is only one part of the various stages and has to be seen as a whole. The Revenue relies upon the case of MERO Asia Pacific Private Limited as decided by this authority in AAR No.981 of 2010 on this issue.
6. The Applicant, represented by MrRajanVora, FCA, has vehemently argued and submitted that the contentions of the Department are without any reasonable basis or analysis, and are based on assumptions and surmises without any supporting documents.
6.1 At the outset, the Applicant reiterates that it has entered into two agreements with Michelin France, namely:
|(a)||Umbrella Agreement dated 1 April 2011 for design, engineering, manufacturing and supply of machinery and equipment from outside India; and|
|(b)||Services agreement, dated 1 February 2013 in relation to supervision of installation services rendered by different external suppliers and to coordinate the start-up and ramp-up services rendered by those suppliers (‘Services Agreement’).|
6.2 Further, the role of MFPM in installation of equipment is limited to supervisory activity. The installation work is being primarily undertaken by the Applicant through its employees, third party local contractors, foreign expats employed by Michelin India on long term basis. The supervision agreement has been entered into after the supply of machinery and equipment was completed.
6.3 A plain reading of the Umbrella Agreement makes it clear that it is an equipment purchase contract for pure supply of machinery and equipment. Relevant extracts of the aforesaid Umbrella Agreement are reproduced hereunder:
1. The client wishes to establish in India a new manufacturing factory for Pneumatic tyres. The client also wishes to put in place a new manufacturing facility for mixtures necessary for the production of tyres located in the same place:
2. The new tyre manufacturing factory and the new manufacturing facilities for mixtures require the purchase of specific machinery and equipment by the client
4. The client agrees to purchase the equipment as mentioned in Clause 1 below (the ‘Equipment”)’, if any required for attainment of its objectives mentioned above, in accordance with this Contract and its appendices and/or its supplemental agreement (if any)
1.1 The purpose of this contract is to define in general terms the conditions that shall apply uniformly throughout the term of this Contract relating to the supply by the Supplier to the Client directly or through subcontractors of machinery and equipment for
– The new manufacturing factory for tyres; and
– The new manufacturing facility for mixtures of the Client
2.1 This new investment will require supply of machinery and equipment imported from outside India which is planned to be deployed between the years 2010 and 2017……………”
6.3.1 Thus, the aforesaid Umbrella Agreement dated 1 April 2011 was only for off-shore supply of equipment by MFPM to Michelin India and a separate Services agreement was entered into for supervision of installation of the equipment, post supply of equipment outside India. This supports the fact that installation of plant and equipment was to be done by the Applicant or through its contractors and that MFPM would only provide required guidance for successful installation and implementation of the equipment.
6.3.2 In this regard, it is submitted that, under the aforesaid Umbrella Agreement, majority of the equipment were purchased under Phase 1 during the period April 2011 to February 2013. As per the said Umbrella Agreement, the total value of the machinery and equipment under Phase 1 was EURO 9,31,90,452 (approx. INR 580 crore). The details of payments made for the purchase of equipment as reflected in the Related Party Schedule of the financial statements of Michelin India are tabulated as under:
|Particulars||Year ended 31.03.2012||Year ended 31.03.2013||Year ended 31.03.2014*||Year ended 31.03.2015*|
|Payments made for purchase of equipment||Rs 343.25 crore||Rs 199.78 crore||Rs 25.62 crore||Rs 12.46 crore|
* For the year ended 31 March 2014 and 2015, the above amounts reflect the payments made towards purchase of emergency spare parts for installation, stand by equipment, and moulds for production of tyres.
6.4 As regards its second agreement, the Services agreement, the relevant extracts are as under:
B. In order to supervise the installation services provided by the different external suppliers, and to coordinate the start-up and ramp-up servicesrendered by those suppliers, the Receiving Party wishes to get the assistance of a unique interlocutor specialized in management services as regards construction of tyre manufacturing facilities. The services needed by the Receiving Party including supervision of installation services and start-up & ramp-up coordination, are referred to hereinafter the “Services”
Schedule 3 – The Services
As regards supervision of installation services and start-up and ramp-up coordination, the Providing party shall provide the Receiving party with the Services described hereinafter.
The Providing party shall provide the Services through correspondence, telephone, electric commerce, telefax, visits of personnel not exceeding a 6 (six) months period over a 12 (twelve) months period, and other means agreed on from time to time with the Receiving party.”
6.4.1 The Applicant submits that the Department has erred in classifying the payment of Rs 9.95 crore in admin services as the same were towards supervision services as mentioned in the service contract dated 1st Feb 2013. Without prejudice to the same, in FY 2013-14 also, Michelin India has paid an amount of Rs 2.01 crore for admin services rendered by MFPM, as evident from the Department’s Report itself.
6.5 For installation of the equipment after importation, the Applicant has entered into installation contracts with external suppliers and with the help of its employees and foreign expats employed with Michelin India on long term basis, it has undertaken installation work at its factory. The local contractors with Indian employees of Michelin India played the main role in installation work. 15 third party local contractors were engaged for installation work who were paid an amount of Rs 131.58 crore. 169 employees of Michelin India were engaged and 79 foreign expats were employed on long term basis with Michelin India for installation work.
6.5.1 As against this, MFPM has sent only 33 technicians under the Services Agreement for a short period of 14 days to oversee the work of installation done by the external suppliers. Michelin India has paid an amount of Rs 9.95 crore in respect of the deployment of such technicians to MFPM, and appropriate taxes were withheld by Michelin India under Section 195 of the Act.
6.5.2 It is submitted that the equipment as imported under the Umbrella agreement and the expenses incurred for installation of the equipment were reflected as capital work in progress in the financial statements of the Applicant. The fixed assets as reflected in the financial statements of the Applicants are as under:
|Particulars||Year ended 31.03.2011||Year ended 31.03.2012||Year ended 31.03.2013||Year ended 31.03.2014|
|Tangible Assets||6.07 crore||27.88 crore||27.85 crore||798.39 crore|
|Intangible Assets||79.20 crore||86.79 crore||86.96 crore||2.58 crore|
|Capital work in progress|
|– Construction in progress||28.69 crore||714.6 crore||1,405.49 crore||1,312.75 crore|
|– Expenditure capitalized||14.22 crore||55.41 crore||116.21 crore||151.40 crore|
|Fixed Assets||128.20 crore||884.67 crore||1,636.51 crore||2,265.12 crore|
It is stated that the Revenue has erred in considering the figures of Plant and Machinery as appearing in tangible assets instead of considering figures of capital work in progress forming a part of fixed assets schedule.
6.5.3 Further, the company has completed setting up the first phase of the manufacturing facility and started its commercial production on 9 January 2014. During FY 2011-12, the Applicant did not earn any revenues from trading or manufacturing activities but generated revenues only from sale of services like testing charges and sale of scrap and other income like interest and foreign exchange fluctuation gains. Thus the business loss of Rs. 63 crore was on account of excess expenditure over the above earned income.
6.6 Coming to the main issue, it is submitted that the Department has wrongly concluded that as per the aforesaid alleged composite agreement, the price of equipment includes ‘supervisory charges’ for installation and implementation of equipment in India, and the supervisory services can be rendered and utilized only in India. MFPM is only selling the equipment off shore and the Umbrella Agreement provides that the price of the equipment includes cost incurred by MFPM towards supervision charges (i.e. salaries charged, daily allowances, personnel transport costs, hotel accommodation and ancillary costs) which is done prior to importation of equipment in India and does not relate to any supervision of the installation of equipment in India. The cost of supervision charges is borne by the Supplier i.e MFPM and the price is inclusive of the expenditure incurred by Michelin France, outside India, considering that some of the equipment would be manufactured by subcontractors. In such a case, the Agreement provides that the price shall include the expenditure incurred in supervising the manufacturing activity of the subcontractors. This is evident from the following sub-clause which also provides that the price shall be inclusive of sub-contracted design services.
‘4. Sub-contracted design services and production of equipment (including travel) taking into account specific administrative costs for MFPM.’
6.6.1 The Applicant further clarifies from the recitals of the Agreement that MFPM is supplying the equipment directly or through the subcontractors outside India:
“The Supplier has extensive experience in facilitating the development of projects of establishment and extension of factories related to the activities of production of tires and manufacture of mixtures and is able to deliver – directly or through specialized subcontractors – specific machinery and equipment needed by the Client”.
“Clause – 8 The Supplier will be able to subcontract, transfer or assign part of this Contract to a third party…”
6.6.2 The Applicant submits that MFPM would draw up the price of these equipment on the following basis:
“Schedule 1 – Price Computation
Cost incurred by MFPM towards third party suppliers comprising of (a) the full engineering costs (design, project steering, etc., including the related transport costs); and (b) Full projection and external purchase costs of the equipment
Cost incurred by MFPM as increased by appropriate coefficients determined on an arm’s length basis accounting for, but not limited to, the following as may be applicable;
1. The specific administrative costs for MFPM related to the production and the same of the equipment;
2. Design services performed by MFPM;
3. Production of equipment by MFPM;
4. Sub-contracted design services and production of equipment (including travel) taking into account specific administration costs for MFPM;
5. Supervision charges (salaries charged, daily allowances, personnel transport costs, hotel accommodation and ancillary costs) and
6. Short term financing costs.”
6.6.3 The Department is misguided by the fact that in the AAR Application it is mentioned that Price includes full engineering costs (design, project, steering, supervisory services for successful installation and implementation ofequipment, etc.). It is important to note that the price computation as defined in the agreement in Schedule 1 does not include the terms “successful installation and implementation of equipment“. Ambiguity, if any has been clarified by subsequent confirmation issued by MFPM dated 14 December 2012. It is, further, submitted that this agreement has to be read in light of the said clarification issued by Michelin France.
6.6.4 The Applicant reiterates that the cost of the equipments include the charges for designing, engineering, supervision, etc. outside India for the purpose of manufacturing the equipment and MFPM does not render any such kind of services to the Applicant under the Agreement. Therefore, the Agreement cannot be said to be a composite agreement with the element of technical services.
6.7 Regarding Revenue’s observation that the local contractors and employees of Michelin India and foreign expats do not possess the requisite skill and know-how for installing the equipment, the Applicant has highlighted the magnitude and the large size and scale of factory to be set up in Chennai. It is to be noted that the factory is spread over an area of 290 acres which has offered employment opportunities to a minimum number of approximately 1,500 workers. For setting up of the factory, around 100 acres of total land is already utilized. The various departments of the factory, catering to different product lines covers the following: Semi-finished area having two main workshops – Mixing plant and Calendaring area; Finished goods area with workshops like Cold Prep; Hot Prep; Tyre building shop; Curing tyres; Quality Control area; SAS Area; Warehouse to stock the finally manufactured/ quality tested tyres; Scrap yard area; Stores for maintaining spare parts; Tyre test area; Utility building managing water supply, electricity etc.; Sewage Water Treatment (SWT) and process water treatment area; and Admin building for employees in group service teams i.e. HR, finance, Safety etc. 4500 tonnes of machinery requiring 2,80,000 meters of cable were installed to operationalize the factory. In January 2014, when the manufacturing plant started commercial production, it had a capacity of manufacturing 3 lakh radial truck/ bus tyres per annum. In view of the above volume and size of the project, the overall activity of setting up and installation of the factory of such large magnitude could not have been completed by only 33 technicians.
6.7.1 The Department has erroneously assumed that the aforesaid local contractors and the employees of the Applicant, ‘would have at best only assisted Michelin France, the supplier of machinery in installing and commissioning of the machinery so supplied by it and that the role played by the Indian employees of the Applicant company may not be so crucial’. This assumption has no basis, and MFPM did not have any role in installation of the equipment or machinery under the Agreement dated 1 April 2011.
6.7.2 Further, on the other hand, the fact that such a huge sum of Rs 131.58 crore was paid by the Applicant to the local contractors is sufficient evidence of the crucial role played by such contractors in the installation of the equipment purchased by Michelin India from Michelin France.
6.7.3 On perusal of the said details and documents, it is evident that the said contractors have requisite expertise, experience and capacity to design the machinery and equipment, and manufacture and install the same as per the requirements of Michelin India and MFPM has no role to play here. Further, it can be observed that some of these third party local contractors have also provided training to the employees of the Applicant.
6.7.4 Details of 169 Indian employees who were involved in the installation work shows that most of the employees are engineers having specialized skills and technical knowledge required for the purpose of commissioning and installation of the machinery purchased by Michelin India for setting up of its factory. Accordingly, it is submitted that MFPM has no role to play in the installation of the equipment.
6.7.5 The 79 foreign nationals were employed by the Applicant on a long term basis for assistance in installation of equipment, and then for manufacture of tyres and running the day to day operations. These expats have come from various countries like UK, USA, Italy, Netherlands, Germany, Romania, Canada, France, Poland, Hungary, Spain etc. Most of the employees are from engineering, quality and maintenance background possessing technical expertise and experience in managing projects for the purpose of commissioning and installation of the machinery.
6.7.6 Further, the observations of the Department that MFPM trains the employees of Michelin India for installation work is incorrect. Michelin employees are not trained for Installation but on Michelin’s training module “Michelin Manufacturing Way”, which enables employees to implement the production process of manufacturing the tyres in a specified manner.
6.8 In view of the above, the project of such a huge magnitude can be completed only with the active involvement of employees and expats of Michelin India along with external specialized contractors having hundreds of workers who were involved in the installation of equipment.
6.8.1 As regards the issue of MGM raised by Revenue, it is submitted by the Applicant that under the arrangement between MGM and the Applicant, expatriate personnel shall be employed by the Applicant for the services to be rendered in India and the personnel shall be released/ discharged in the home country from the obligation and rights of employment. MGM has agreed to pay certain portion of the salary in foreign currency directly to the foreign bank account of the expatriate employees and fully recover it from the Applicant.
6.9 Further, the aforesaid transactions of purchase of equipment from MFPM were part of the Transfer Pricing report in Form 3CEB and were subjected to scrutiny before the Transfer Pricing Officer (‘TPO’)/ Assessing Officer (‘AO’), wherein, after considering various aspects and documentation, the learned TPO/ AO have accepted the said transaction to be at arm’s length and hence an independent transaction between two related parties.
6.10 Regarding Revenue’s contention that MFPM had a business connection in India, in terms of Section 9(1)(i) of the Act, and liable to be taxed in view of the Supreme Court’s decision in the case of CIT v. R.D. Aggarwal & Co. 56 ITR 20, it is submitted that Explanation 1 to section 9 of the Act, inter alia, however clarifies, that in case of such business of which all the operations are not carried out in India only such part of income shall be deemed to accrue or arise in India as is reasonably attributable to the operations of the business carried out in India.
6.10.1 Since all parts of the transaction in question i.e. the transfer of property in goods as well as the payment, were carried out outside the Indian soil, the transaction could not be taxed in India. Also, there exists a difference between the existence of a business connection and the income accruing or arising out of such business connection. Thus, in the present case, even if for the sake of argument, it is assumed that MFPM has a business connection in India, it cannot be said that the income is deemed to accrue or arise in India as per Section 9(1)(i) of the Act, as no part of the income earned by MFPM from sale of equipment in India is attributable to the operations carried out in India.
6.11 Regarding the department’s contention that the Applicant had a Permanent Establishment in India, the Applicant submits that there is no fixed place through which the business of MFPM is wholly or partially carried on in India. In absence of any PE of MPFM in India, there cannot be any tax liability attached to MPFM for the offshore supply of equipment under the provisions of the tax treaty.
6.11.1 The Department has specifically contended that MFPM has installation PE in India under Article 5(3) under the India France DTAA. In this regard, it is submitted that, Article 5(3) of the India France DTAA reads as under:—
“A building site or construction, installation or assembly project constitutes a permanent establishment only where such site or project continues for a period of more than six months.”
The Applicant reiterates that the aforesaid Agreement dated 1 April 2011 is for offshore supply of equipment by MFPM to Michelin India. As per the said Agreement equipment are to be supplied by MFPM to Michelin India under 3 phases. The list of equipment under Phase-I are listed under Schedule II of the Agreement. Further, under the Agreement, no installation services were provided by MFPM to Michelin India in India, and hence, the Applicant submits that Michelin India does not have any PE in terms of Article 5(3) of the India France DTAA.
6.11.2 Further, without prejudice to the contention that MFPM does not have a PE in India, the Applicant submits that the alleged PE of MFPM cannot come into existence till the commencement of the installation stage which was subsequent to the sale of equipment offshore by MFPM to Michelin India. Thus, the income from provision of offshore equipment had already accrued and arisen outside India, prior to Michelin France’s alleged PE coming into existence. Accordingly, it is contended that even if a PE of MFPM is established in India, the income from supply of equipment, materials and spares supplied offshore is not taxable in India.
6.11.3 Without prejudice, even if it is assumed that MFPM had a permanent establishment in India for carrying out its operations i.e. of supervision of installation, then also, only income that is attributable to such supervision services could be considered for the purpose of taxation and that since payment for supervision charges received by MFPM has already borne tax in India (by way of TDS), nothing is further taxable in India. However, in respect of supply of plant and equipment, in no case, PE can be said to have any role in supply of plant and equipment outside India as supply of equipment was completed before the Services agreement in February 2013.
6.12 The Protocol to the India-France DTAA further supports the position that no portion of the income relating to off-shore supply of equipment is taxable in India even if MFPM establishes any kind of PE in India. The relevant portions of the protocol are reproduced as under:
“Especially, in the case of contracts for the survey, supply, installation or construction of industrial, commercial or scientific equipment or premises, or of public works, when the enterprise has a permanent establishment, the profits of such permanent establishment shall not be determined on the basis of the total amount of the contract, but shall be determined only on the basis of that part of the contract which is effectively carried out by the permanent establishment in the Contracting State where the permanent establishment is situated. The profits related to that part of the contract which is carried out by the head office of the enterprise shall be taxable only in the Contracting State of which the enterprise is a resident.”
6.13 With regard to Revenue’s contention that it was an agreement between two closely associated companies, it is submitted that merely for this reason it cannot be concluded that it is for the purpose of avoidance of taxes on the basis of conjectures and surmises without any documentary evidences. Further, the Revenue has erroneously opined that the clarification received from MFPM, dated 14 December 2012, should be rejected on the grounds that the same was issued by two closely associated companies for the purpose of avoidance of taxes. This is not warranted.
6.14 Regarding Revenue’s reliance on various cases decided by the AAR, it is submitted that the ratio decidendi laid down in the above decisions is based on the ruling of the Hon’ble Supreme Court in the case of Vodafone International Holdings BV (supra), wherein the Hon’ble Supreme court had held that, what is needed is to consider a transaction in its entirety and to look at the transaction as a whole. But the Hon’ble Delhi High Court, in the cases of Linde AG, Linde Engg. Division v. Dy. CIT 44 taxmann.com 244/224 Taxman 43 (Mag.)/365 ITR 1 (Delhi) and in case of DIT v. Nokia Networks OY 25 taxmann.com 225/ 212 Taxman 68/358 ITR 259 (Delhi), has overruled the above mentioned judgments and has distinguished the judgment laid down by the Hon’ble Supreme Court in the case of Vodafone International Holdings BV (supra), in respect of offshore supply of goods and decided the issue in favour of the Assessee.
6.14.1 The Applicant has referred to the decision of the Hon’ble Supreme Court in the case of Ishikawajma Harima Heavy Industries Co. Ltd., In re  141 Taxman 669/271 ITR 193 (AAR – New Delhi) and other rulings, to say that all the conditions to determine whether the supply of machinery and equipment and materials qualify as offshore supply, are clearly fulfilled in the present case of Michelin India, and hence the off-shore supply of equipment by MFPM to Michelin India shall not be taxable in India.
6.15 Reliance is placed on the ruling of this Authority in the case of Hyosung Corpn. v. DIT (IT) 181 Taxman 270/314 ITR 343 (AAR – New Delhi), to say that in the event the sale took place outside the territory of India, the income arising out of such sale cannot be said to have accrued or arisen in India. Again, on similar facts, case of DIT v. LG Cable Ltd.  9 taxmann.com 51/197 Taxman 100 (Delhi), which has approved the decision of Delhi Tribunal in the case of LG Cable Ltd. v. Dy. DIT (IT) 113 ITD 113 (Delhi), has been cited in support.
6.15.1 In the Linde AG case, where the AAR held that the contract was an indivisible contract and was incapable of being split up into different components/ parts, relying on the ruling of the Hon’ble Supreme Court in the case of Ishikawajma Harima Heavy Industries Co. Ltd.(supra), the Hon’ble High Court reversed this Ruling, holding that it cannot be concluded that the Contract provides a business connection in India and accordingly, the Offshore Supplies cannot be brought to tax under the Act.
6.15.2 It is submitted that the principles laid down by the Supreme Court in the case of Ishikawajma Harima Heavy Industries Co. Ltd. (supra) and Delhi High court have been followed by the Hon’ble AAR and various other High courts, as regards the facts relating to the contract, responsibilities of supplies, role of PE, terms of payment, transfer of title outside India, such as in: CIT v. Hyundai Heavy Industries Co. Ltd . 161 Taxman 191/291 ITR 482 (SC); LS Cable Ltd., In re  12 taxmann.com 362/201 Taxman 108 (Mag.)/337 ITR 35 (AAT – New Delhi); DIT v. Ericsson A.B.  16 taxmann.com 371/ 204 Taxman 192/343 ITR 470 (Delhi); Sepco III Electric Power Construction Corpn., In re  18 taxmann.com 44/205 Taxman 115/342 ITR 213 (AAR – New Delhi); Joint Stock Co. Foreign Economic Association “Technoprom export”, In re  189 Taxman 337/322 ITR 409 (AAR – New Delhi) ; Deepak Cables (India) Ltd., In re  12 taxmann.com 366/201 Taxman 107 (Mag.)/337 ITR 127 (AAR – New Delhi); Nokia Networks OY (supra); Nortel Networks India International Inc v. DIT 69 taxmann.com 47/241 Taxman 464/386 ITR 353 (Delhi) and LS Cable & System Limited (AAR No. 1279-1283 & 1320-1323/2012)dated 9 May 2016.
6.15.3 In light of the above rulings, it is submitted that the following key principles are to be evaluated to determine whether the supply of machinery and equipment and materials qualify as offshore supply: a) There should be separate/ divisible contracts for offshore supply and onshore services or such distinction should be specifically mentioned in the agreement; b) Transfer of title in property outside India; c) Delivery of the equipment should be outside India; d) Payment for purchase of equipment should be made outside India; e) Customs duty should be borne by the owner of the goods; and f) Insurance should be borne by the owner of the goods. All of these were satisfied in the case of the Applicant, and the Revenue has not controverted the same.
6.16 The Applicant also states that even if it is assumed that there is a composite contract for supply and installation of machinery between Michelin India and Michelin France, a conjoint reading of section 4, 5 and 9(1)(i) states that an income which accrues or arises to a foreign enterprise in India can only be such portion of income as is attributable to its business carried out in India. Hence supply has to be segregated from the installation and only then question of apportionment will arise. Alternatively, such permanent establishment based in India cannot have any role to play in a transaction of offshore supply of equipment. In the case of a turnkey project the PE is set up at the installation stage while the entire turnkey project including the sale of equipment is finalized before the installation stage. The setting up of the PE in such a case is a state subsequent to the conclusion of the contract. It is as a result of sale of equipment that installation PE comes into existence. Reliance in this regards is placed on the Supreme Court decision in case of Hyundai Heavy Industries Co Ltd . (supra).
6.17 With regard to Revenue’s mention of the feasibility report in FY 2010-11 for which a payment of Rs 5.52 crore has been made, and creation of a PE since then, the Applicant states that MFPM’s help was taken as it had extensive experience in facilitating the development of such projects. However, this was done by MFPM even before execution of the Umbrella Agreement for supply of equipment from outside India. Even this transaction was subjected to scrutiny before the learned TPO/AO wherein the TPO/AO have accepted this transaction to be at arm’s length, independent of purchase of equipment from MFPM under the Umbrella Agreement. Hence, the statement of the Revenue that MFPM is solely and actively involved in establishing the manufacturing facility in India right from the feasibility study is factually incorrect.
7. We have considered the facts of the instant case, the submissions and contentions of both the Applicant and the Revenue.
7.1 The questions raised by the Applicant are with reference to the taxability of income arising in the hands of MFPM on the off shore supplies of equipment which have been paid for by the Applicant. However, the Revenue has primarily raised the issue that since the Applicant and the French group company MFPM were closely associated, the two agreements, namely Umbrella Agreement and the Service Agreement, should be read as one and in continuum, since the Applicant had got the installation done by the MFPM personnel itself, the supply, installation and supervision were to be seen together, and the Applicant’s premises in India be seen as constituting a PE of MFPM. Hence, the entire income arising from the execution of this composite contract should be brought to tax in India.
7.2 It is seen that the Applicant has entered into two agreements with MFPM, namely:
(a) Umbrella Agreement dated 1 April 2011 for design, engineering, manufacturing and supply of machinery and equipment from outside India; and
(b) Services agreement, dated 1 February 2013 in relation to supervision of installation services rendered by different external suppliers and to coordinate the start-up and ramp-up services rendered by those suppliers.
These are entered into at different points of time and having independent scope of work and separate considerations, and the second follows only after the first one has been completed. One is for off shore supply and the other is for on shore services of supervision.
7.3 As per the requirements of the Agreement entered into, from a perusal of the Ocean Bill of Lading issued by transporting container company, in the name of Michelin India, describing the equipment being shipped from Shanghai to Michelin India and a copy of the Bill of Entry issued by Indian Customs in favour of Michelin India describing equipment imported from MFPM, it is clear that the title in the property was transferred outside India. The sample copies ofBill of Lading, Purchase order and Invoice also show that the delivery of the equipment took place outside India on FOB basis. The consideration for supply of plant and equipment was paid by Michelin India to MFPM in Euros to a bank outside India. All the custom duties and other charges levied at the port of importation were borne by Michelin India. Further, MFPM obtained transit insurance policy for supply of equipment till the port of Chennai on behalf of Michelin India, and also the risk and rewards were transferred to Michelin India at the port of shipment. We do not consider it necessary to discuss here the further details appearing in these documents, as these are not so much in dispute, and it was clearly an offshore equipment supply contract.
7.3.1 The Transfer Pricing Officer (TPO) has accepted that the payment for such import of equipment from MFPM is at arm’s length in the Transfer Pricing assessments for the year ended on 31 March 2012, 31 March 2013 and 31 March 2014, when such transactions were before him. This is clearly indicative that the price paid is only for the equipment, and cost and services related to such manufacture, prior to shipment, and is not for installation or any services post shipment or other than those covered by the Umbrella Agreement, as alleged by the Revenue.
7.4 The second agreement is the Service Agreement, which as per its terms, was to supervise the installation services at the factory premises, and to coordinate the start-up and ramp-up services rendered by those suppliers. But there is no mention in this agreement also regarding any installation services to be provided to the Applicant by the MFPM personnel, and in the absence of any evidence being brought on record, it cannot be assumed that the personnel sent by MFPM under this Agreement were involved in installation work. Revenue’s submission that the installation would have been done only by MFPM personnel to whom payment would have been made as part of the Administrative expenses, is also merely an assumption and bereft of any evidence whatsoever.
7.5 To examine the Applicant’s claim that the services under the Services Agreement were only in the nature of supervision, and not of installation, as alleged by the Revenue, we have gone through the details of the equipment purchased, invoices raised by third party contactors, personnel hired / employed by the Applicant etc.
7.5.1 ‘Schedule II – Price List’ of the Equipment Purchase Contract 2011, gives the details of the equipment purchased from MFPM. It is seen that most of these are not huge and complex machines that require manufacturing personnel to install. Most appear to be pre-fabricated, shipped as such in plywood cartons (as the invoices suggest) and ready to use. These were fabricated and assembled in France itself or other places through third party suppliers of MFPM, and for which the Applicant has been billed, being within the scope of “Schedule 1 – Price Computation” of the Umbrella Agreement. The cost worked out as incurred by MFPM for being charged to the Applicant is mentioned in the Agreement itself, and includes full engineering costs, full production and external purchase costs of the equipment, designing, project steering, transportation, administrative costs relating to production and sales, supervision and short term financing etc. That is, cost involved in their production and till the time of shipment. There is no mention of any installation cost included or charged with the price, nor any evidence has been brought on record, to this effect. In this situation their installation by the Applicant through its employees, expats and third party contractors under the supervision of MFPM personnel seems a realistic assertion by the Applicant.
7.5.2 As regards the role of the third party contractors, who were paid Rs 131.58 crore, after the equipment was received in India, we fail to understand on what basis Revenue submits that the “local Indian contractors would have at best only assisted MFPM in installing the machinery….. and would have been used for moving of machinery from the port to the factory, for construction of complicated civil works, sophisticated electrical works…….since they did not have the requisite skills”. A close look shows that there is a clear link between the agreements entered into with the third party contractors, the services provided, items purchased from MFPM and those installed by these third party contractors.
7.5.3 For example, in the contract with these parties, such as with Satnam Global Infraprojects Ltd. and Webb India Pvt. Ltd., it is seen that they are in the business of manufacturing and supplying machineries and equipment, have been identified to manufacture, supply and install the same, through a service provider/confirming party or directly. The service provider shall be responsible for installing the machinery and equipment at the factory of the Applicant as per its lay out plan, and shall also provide technical training to the Applicant’s employees. Another Equipment and Machinery Installation Agreement was entered into with ASAS Systems, Spain. This company was in the business of installing machineries, and had the requisite expertise in this field. And it had the responsibility of installing machineries at the factory of the Applicant, as per its master plan.
7.5.4 Further, as against these agreements it is seen from the bills raised by them for installation, that some of the items installed are also appearing in the Schedule II – Price List, to the Umbrella Agreement, which gives the description of equipment imported/purchased. For example, some purchase orders show installation charges for Calander Environmental Machines, Calander 800, Calander EB etc. and the list of equipments in the Price list of MFPM also shows supply of these items as appearing at S. No. YPK18.1, YPK18.2, YPK24.1 etc.Satnam and Webb have also supplied and installed machineries / equipment such as belt conveyors, Axing tables with rollers, directional alignment table etc., required to synchronize with the bigger plant and installation of the same along with the machinery imported from Michelin France.
7.5.5 Similarly, the purchase orders of another third party CMI FPE Ltd. indicate installation of some of its own supplied machines, and also those of Michelin India and Michelin France. It has also installed Belt-Joining which is an item appearing in the list of imported equipment at S No. P52, and also provided Installation contract consultancy and raised bills for the same. It was paid an amount of Rs 54.04 crore under an agreement for installation of machinery, as per the standard purchase orders. Avasarala Technologies Ltd too was into similar business of installation and commissioning, and has undertaken contract for installation only. Many of the items supplied or installed have the same markings, such as A4LOA, A4LO7 etc. as are appearing in the purchase orders placed with MFPM.
7.5.6 Thus, even if it is said that some of these contractors were providing machines and installing the same as per the specifications of the Applicant, as contended by the Revenue, it is very clear that they were into installation of similar, in fact identical machines for the Applicant as the imported ones as are appearing in the list of equipment imported, in Schedule II to the Equipment Purchase Agreement. Hence it is incorrect to say that the local contractors did not possess the requisite skills for carrying out installation work. There was a mix of third parties that were suppliers also, and some were only into installation work.
7.5.7 As regards the qualifications of the 169 Indian employees and 79 Expats involvement in installation and commissioning, Revenue’s questioning their competence is rather sweeping. Such evaluation can only be done by a technical person at the factory. Most of the personnel are Engineers, and the rest are mostly Managers. The expats employed by the Applicant on a long term basis are mostly Engineers, technical persons, maintenance personnel, quality managers etc. who have been employed from inception to assist in the installation stage and later in production, as stated by the Applicant. They are specialists drawn from different countries, such as from UK, USA, Italy, Netherlands, Germany, Romania, Canada, France, Poland, Hungary, Spain etc.We do not find any material brought on record to suggest that all these technical people did not do installation work or that they were not qualified enough. Only a broad assumption has been drawn by the Revenue, which appears not to be accurate and is bereft of any evidence.
7.5.8 On the other hand, 33 technicians visited India for short durations and Michelin India paid an amount of about Rs 9.95 crore to MFPM in respect of services of supervision rendered by them, as per the Service Agreement. Revenue has not brought on record anything to establish that they were involved in installation or were paid for that purpose, nor do the agreements show this. Considering the large scale of the project spread over 100 acres, it is highly improbable that the work could have been completed by just 33 technicians from MFPM, when they have stayed for very short periods. There is no evidence also to show that more such MFPM technicians had visited India, or payment made for more personnel. It appears therefore, that installation was done by the third parties, local technicians and expats employed by the Applicant on long term basis only, trained at a high cost, under the supervision of the 33 MFPM specialist technicians who were paid Rs 9.95 crore for the same.
7.5.9. An overview of the expenses incurred by the Applicant up to 31.3.2014 for setting up of the factory gives the following picture:
|Particulars||Amount (Rs. crore)|
|Total Capital Work in progress (CWIP) *||1,464.15|
|Less: Purchase of machinery from MFPM||(580)|
|Less: Payment to third party local contractors||(131.58)|
|Less: Payment to 33 technicians under Service agreement||(9.95)|
(* Construction in progress and expenditure capitalized, as shown by the Applicant in its Balance Sheet as on 31.03.2014, and referred to in its submission).
The balance expenditure of Rs 742.62 crore, therefore, appears to pertain to various other costs, such as purchase of machinery from third parties and employee cost (capitalised) by the Applicant for synchronizing the installation of machinery and setting up the entire factory, with the help of local contractors, Indian employees and expats, under the supervision of MFPM personnel.
7.6 The above examination tells us that the activities of equipment purchase and the services of supervision, respectively, were carried out as per the two clearly demarcated agreements, with different periods of execution, clearly stipulated terms of payment, including a schedule to the Umbrella Agreement showing item wise pricing of equipment supplied by MFPM, one for offshore supply and the other for on shore services. There is no material to suggest that MFPM had dealt with the Applicant on a turnkey basis, for supply, installation, commissioning and supervision of the setting up of the plant in India, as argued by the Revenue. Also, the two had transacted on a principal to principal basis, as found by the TPO while assessing the payments for purchase of equipment, and it cannot be said that merely because the Applicant and MFPM were closely associated or under the ultimate holding company, they had colluded to transact in a manner that was akin to tax avoidance or that this automatically created a PE in India. For this reason, the citing of the Vodafone case by the Revenue looks out of place in the instant case, as the overall transaction was not designed for tax avoidance, but for genuine business of setting up a plant for manufacture of tyres, with the help of MFPM and other third parties who are genuine, and should be ‘looked at’ from that point of view.
7.6.1 Again, the entire flow of business shows that off shore supply of equipment and onshore services of supervision have been provided by MFPM, whereas installation of equipment is done by unconnected third parties and technicians on specific terms and conditions which are well documented and samples of which have been furnished. Thus, neither can the project be called turnkey, nor can the two separate contracts be read together as a composite contract. Revenue has based all its arguments on the assumption that installation was done by MFPM and being closely associated companies, and that it has been designed to look as separate contracts. This view cannot be accepted on the factual position narrated above.
7.7 Revenue has also argued that since MFPM had earlier carried out a feasibility study for which the Applicant had paid Rs 5.52 crore, its PE was established then itself. We donot agree. This study was carried out even before the signing of the Umbrella Agreement and supply of equipment at the behest of the Applicant, and for which the amount was paid on arms length basis, as assessed by the TPO. This study of preparatory and auxiliary nature carried out for a short and one off period, even before the business commenced could not be said to have established a business connection at that point in time, or fixed place of business through which its business was carried on, or merely for the reason that they were closely associated entities.
7.8 Having examined the factual position in some detail, let us see how the same fares as against the provisions of the Act, and decided cases. First, it has to be said that, as held in the case of Linde AG (supra), 23 April 2014,in this case also the subject matter of taxation was not the contract between the parties but the income that MFPM derived from the contract. Thus, the situs of the object of the contract would not be as relevant as determining the situs where the income of the applicant had accrued or arisen. In this connection, we may add that though various cases have been cited by both sides on the issue of composite contracts, we are of the view that the number of contracts or parties to the contract are of limited significance. What is important is whether from the contracts and activities undertaken there under, in the normal course of business, the taxable events and the situs of income are clearly determinable or not, and whether they can clearly demonstrate a business connection under section 9 of the Act, and taxability under sections 4 and 5 of the Act. Where this becomes difficult, for reasons of blurred connecting points in the chain of events, overlapping arrangements, unclear terms and obligations, intermixed pricing, or unsegmented continuity etc., being some of the illustrative examples, the need to treat the entire arrangement of multiple contracts as composite may become necessary. That is, even if there are fewer parties and fewer segments, if the income generating events are not crystal clear, we may have to treat the entire contract as composite for the different segments. Or, also if the case is one which is designed for tax avoidance, it may be needed to look through the whole arrangement.
7.8.1 We have considered the cases cited by both the Applicant and Revenue. We find that some of the cases of the AAR cited by the Revenue, are overruled by virtue of the decision of the Hon’ble Supreme Court in the case of Ishikawajima Harima, (supra) which has been followed by most of our Rulings subsequent to this decision, especially on the issue of taxability of offshore contracts, and the Hon’ble Delhi High Court in the case of Linde AG(supra), which overruled the AAR Ruling in this very case. The Revenue has taken support from the cases of MERO Asia Pacific Pte Ltd., In re  73 taxmann.com 17/243 Taxman 322/387 ITR 274 (AAR – New Delhi) (MAPL), Ansaldo Energia SPA (supra); and Alstom Transport SA (supra), among others.
7.8.2 The case cited by Revenue, that is MAPL appears inapplicable to the facts of the instant case. For example, there was a composite agreement and though the scope of the work was divided, MAPL was responsible for the entire project from supply of all materials, shipment, transportation, fabrication, installation, inspection, testing, and commissioning, indicating that it was an indivisible contract. Payments were also related not to sale of goods, but to different stages of completion of the contract, which were not separately linked to supply and services. MAPL sold the goods outside India but its responsibility remained till delivery on site, paid Customs duty and for clearances. It was responsible for all the shipment risks, including taking insurance of the goods. Thus all the activities were integrated from the supply till commissioning of the plant in India and hence could not be dissected to identify the taxable events or cut of off shore from on shore activities. On all these features, the case of the Applicant is on a different footing.
7.8.3 It is also seen that Revenue has taken support from the case of Ansaldo Energia, on grounds of continuity in the offshore and onshore activities, by assuming that in the instant case also supply, installation and commissioning and supervision were all done by the Applicant. We have said above that on the facts before us, it could not be said that the MFPM was involved in installation. Hence, there was no continuity in these activities. Besides, in Ansaldo Energia, a case was made out that the different segments had been created to manipulate the costing for the purposes of tax avoidance, which is not the case here. Again, reliance on the case of Linde AG (supra) is misplaced, as the reasoning given by the AAR was not accepted by the Hon’ble Delhi High Court. In the case of Alstom Transport SA , (supra) the Ruling flowed from the facts that one single supplier had split the contract into 4 parts, though they were found to be indivisible. In the instant case, the segments are clearly demarcated and also involve third and unrelated parties, who have done substantial part of the work.
7.9 Let us now examine the facts vis-à-vis section 9 of the Act. The Applicant has made payments of about Rs 580 crore for the off shore supply of equipment under the Umbrella Agreement. There is no way that it can be contended that since MFPM had a role in the supervision of setting up the same, the transfer of the property extended beyond the shores of France such as to have income arisen or accrued in India. The point at which the property is passed to the Applicant, on the shore of the supplier country, the taxable event in respect of such supply of equipment is over, there itself. Business connection through supervision on the Indian premises later has no connection with this supply, and there is no justification to mix up the considerations received by MFPM from its offshore supplies and onshore services, as held by the Hon’ble Delhi High Court in the case of LG Cable Ltd. (supra). In the instant case, there is no such point of contact in these two acts of supply and services that make it difficult for us to set apart the non taxable and taxable events, ie. Offshore supply, onshore supply and installation and on shore supervision, each being clearly demarcated. We had similarly held in L S Cable Ltd. that when the prices for the equipment were clearly specified, as in the instant case, it can be well separated from the whole. Such segregation may be essential also, as held by the Hon’ble Supreme Court in Hyundai Heavy Industries Co. Ltd., (supra) to separate the PE from the other transactions so that income can be correctly attributed to the PE. The business connection as contemplated under Section 9 of the Act has to be direct and real. In the present case, the sale of goods, simplicitor, outside India would not give rise to any taxable income in India even though the said goods are to be utilized within India. Hence, no part of the income from the off shore supply of equipment can be brought to tax in India, on the facts of this case.
7.9.1 The principle of apportionment on the basis of territorial nexus is now well accepted. Explanation 1 to section 9(1)(i) of the Act also specifies that only that part of income which was due to operations in India would be deemed to accrue or arise in India. It necessarily follows that in case where a contract is only a part of the operations to be carried out in India, the assessee would not be liable for part of income that arises from operations conducted outside India. In such a case, income from the venture would have to be appropriately apportioned. The Hon’ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DIT 158 Taxman 259/288 ITR 408, had considered this aspect and held that may be because the project is a turnkey project would not necessarily imply that for purposes of taxability, the entire contract is to be considered as an integrated one. The taxable income in execution of a contract may arise at several stages and the same would have to be considered on the anvil of territorial nexus. It was held in Ishikawajima Harima that:
“30 …………..The project is a turnkey project. The contract may be also a turnkey contract, but the same by itself would not mean that even for the purpose of taxability the entire contract must be considered to be an integrated one………… The taxable events in execution of a contract may at several stages in several years. The liability of the parties may also arise at several stages. Obligations under the contract are distinct ones. Supply obligation is distinct and separate from service obligation. Price for each of the component of this contract is separate. Similarly, offshore supply and offshore services have separately been dealt with. Prices in each of the segment are also different.
The very fact that in the contract, the supply segment and the service segment have been specified in different parts of the contract is a pointer to show that the liability of the applicant thereunder would also be different.
The contract indisputably was executed in India. By entering into a contract in India although parts thereof will have to be carried out outside India would not make the entire income derived by the contractor to be taxable in India……..”
7.9.2 At para 99 of the above decision of the Hon’ble Supreme Court, it was finally held that: only such part of the income, as is attributable to the operations carried out in India can be taxed in India; if the transfer of property in goods as well as the payment, were carried on outside the Indian soil, the transaction could not have been taxed in India; the principle of apportionment, wherein the territorial jurisdiction of a particular State determines its capacity to tax an event, has to be followed; the fact that the contract was signed in India is of no material consequence, since all activities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country; Clause (a) of Explanation 1 to Section 9(1)(i) states that only such part of the income as is attributable to the operations carried out in India, is taxable in India; the existence of a permanent establishment would not constitute sufficient “business connection”, and the permanent establishment would be the taxable entity; the fiscal jurisdiction of a country would not extend to the taxing of entire income attributable to the permanent establishment; and there exists a difference between the existence of a business connection and the income accruing or arising out of such business connection.
7.10 In both the cases of Ishikawajima Harima Heavy Industries (supra) as well as Linde AG (supra), which followed Ishikawajima Harima, there was a single composite contract but the project was undertaken by several different parties coming together on turnkey basis. The instant case is actually on a better footing in that here there are only two parties, apart from the third parties engaged in manufacture, supply and installation, there are two clearly demarcated contracts, the events from which income emanates are distinguishable, one is for off shore supply and the other for on shore services, there is no overlap or haziness about the activities undertaken such that make apportionment of income difficult. In view of this position, respectfully following the decision in the case of Ishikawajima Harima Heavy Industries Ltd., we are clear that no income arising in the hands of MFPM from the off shore supply of equipment can be held to be chargeable to tax in India, under the Income tax Act 1961. For this reason we do not consider it necessary to deal with in any detail with the issue of its being taxable under the India France DTAA read with its Protocol, especially as we are not tying the erection and commissioning of the project to MFPM. We have been following the essence of this decision of the Hon’ble Supreme Court, in cases cited by the Applicant, in cases such as LG Cable Ltd., (supra), Hyosung Corp. (supra) and Deepak Cables India Limited, (supra) etc., differing only where the fact situation was different.
7.11 While examining provisions of section 9, we gave reasons why the income from off shore supply could not be brought to tax in India. By the same reasoning under this provision, we have to hold that income derived from the discharging of its obligations by MFPM, namely provision of services of supervision in India at the factory site where the plant has been set up, is chargeable to tax in India as the income arising therefrom can be said to have arisen or accrued in India. There is a direct and real nexus between the terms of the contract, the activities of supervision undertaken at the site, and hence the income earned in India through the provision of the services and would be covered by section 9, as a business connection clearly exists between these supervisory services and the business of MFPM of assisting in setting up of manufacturing units in the field of bus and truck tyres. In fact, a service PE is also formed since the MFPM is carrying on its supervisory activities through its personnel at the fixed place,that is the factory premises, and this income can be fastened to this PE. Hence, the payments made by the applicant to MFPM’s 33 supervisory staff and engineers, amounting to Rs. 9.95 crore, would be chargeable to tax in India, and would also attract the provisions of section 195 of the Act.
8. In conclusion, the questions referred to us for our Ruling, are answered as under:
8.1 Question no. 1 is answered in the negative. No income from the off shore supply of equipment would be taxable in India. However, the payments made for the Services of supervision rendered by MFPM to the Applicant, as per the Services Agreement, shall be chargeable to tax in India.
8.2 Since question no. 1 has been answered in the negative in respect of payment made by the Applicant to MFPM for the offshore supply of equipment, there shall be no liability to withhold tax under section 195 of the Act, from such payment.
[Citation : 401 ITR 164]