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Income from Offshore Supplies of Goods by a Non-Resident not Liable to Tax in India
The Authority for Advance Ruling ("AAR") has recently delivered a significant ruling in the case of Joint Stock Company Foreign Economic Association 'Technopromexport' holding. The ruling states that a non-resident was not liable to pay tax on the income arising out of supply of goods to an Indian entity when the property passed to the Indian entity outside India and no portion of the consideration was received by the non-resident in India. Taxand India discusses the ruling in detail and why it is welcomed.
The applicant, a Russian company, was engaged in constructing and commissioning power projects. It successfully bid for three separate contracts, for offshore supply of plant and equipment, onshore supplies and onshore services with National Thermal Power Corporation, India ("NTPC"). As per the agreement, ownership in plant and equipment was to pass outside India to NTPC. The applicant sought a ruling from the AAR as to whether the receipts for offshore supplies were liable to tax.
The Revenue contended that the contracts were composite and that the receipts for offshore supply were liable to tax, as the applicant had a PE in India for works relating to the offshore supply. The Revenue also contended that the applicant was responsible to take adequate insurance and costs and responsibility for import clearance of the equipment at the customs port were to remain with the applicant and the risk of loss was to remain with the applicant during the transportation and until the completion of the project. The AAR observed that the bearing of transit risk by the applicant was not inconsistent with the transfer of ownership outside India. The AAR also held that NTPC itself had invited separate bids for onshore supplies and services and offshore supplies and the applicant had not split the contract on its own. The AAR also held that the applicant's PE in India established for the purpose of carrying onshore supplies and services was not instrumental in offshore supplies and hence would not affect its taxability. Accordingly, it was ruled that the payment for offshore supplies was not liable to tax.
The ruling of the AAR reiterates the principles laid down by the landmark judgement of the Supreme Court of India in the case of Ishikawajma Harima Heavy Industries Ltd and also the ruling of the AAR in Hyosung Corporation. The Supreme Court in Ishikawajma's case had held as follows:
- Only such part of the income, as was attributable to the operations carried out in India, could be taxed in India
- Where all parts of the transaction, i.e. the transfer of property in goods as well as the payment, were carried on outside the Indian territory, the transaction could not be 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 was of no material consequence, if all activities in connection with the offshore supply were outside India, and therefore the income cannot be deemed to accrue or arise in the country
The ruling is a welcome reiteration of the principles laid down in earlier rulings including those of the Supreme Court, in light of the discordant view by the Madras High Court in Ansaldo Energia Spa, based on specific facts of the case. The AAR distinguished the ruling of the High Court after noting that in the case of Ansaldo, a single composite contract for supply and installation was split in four contracts only at the instance of Ansaldo. On the contrary, the AAR observed that in the case of Joint Stock Co, NTPC itself had invited separate bids for onshore and offshore components. Further, the High Court had observed in the case of Ansaldo that the splitting of contracts was a mere facade and there existed price imbalance amongst the contracts, which was skewed in favour of offshore supply.
The Revenue authorities often rely on the ruling in the case of Ansaldo, and seek to tax the offshore supply components as well. With this recent ruling in Joint Stock Co, taxpayers would be encouraged to approach the AAR for clarity and certainty on tax positions while undertaking turnkey projects.
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