J. Khosla, Member -
(1.) THE applicant is a company incorporated in Russia and also is tax resident of that country. It is one of the leading companies in the field of power project construction and export of electric power and is further engaged in the business of construction and commissioning of power project. In response to the tender floated by the National Thermal Power Corporation (NTPC), the applicant successfully bid the tender and three separate following contracts are entered into with the NTPC:
(1) Offshore supply contract -Contract No. CS -9558 -102 -2 -FC -COA -4520 dt. 25th March, 2005. ('Offshore supply contract No. 4520') for design, engineering, manufacture, inspection and testing at supplier's works, packing, forwarding and dispatch from manufacturer's works to the port of disembarkation in India of all offshore plant and equipment including mandatory spares.
(2) Onshore supply contract -Contract No. CS -9558 -102 -2 -SC -COA -4521 dt. 25th March, 2005.
(3) Onshore services contract - Contract No. CS -9558 -102 -2 -TC -COA -4522 dt. 25th March, 2005
In this case we are concerned only with the offshore supply contract No. 4520 and therefore, it is unnecessary to delve into other contracts. The value of the offshore supply contract is US$ 391,121,452 (Rs. 17,084,185,023) to be paid in foreign currency in execution of offshore supply contract. According to the applicant, the transaction of offshore plant and equipment etc. was completed outside India and that the property in goods passed to NTPC outside India and no portion of income from the offshore supply accrues or arises to the applicant in India or received from the NTPC within India and therefore it is not liable to pay any tax under the IT Act.
(2.) AGAINST this background the applicant seeks the ruling of this Authority on the following question in order to know its tax liability:
(1) On the facts and circumstances of the case, whether the amounts received/receivable by Joint Stock Company Foreign Economic Association "Technopromexport" ('applicant' or 'JSC Technopromexport') from National Thermal Power Corporation Ltd. ('NTPC') under Contract No. CS -9558 -102 -2 -FC -COA -4520 dt. 25th March 2005 ('offshore supply contract No. 4520'), for offshore supply of all plant and equipment including mandatory spares are liable to tax in India under the provisions of the IT Act, 1961 (Act) and the Agreement for Avoidance of Double Taxation between India and Russia ('India -Russia tax treaty')?
The offshore supply contract was made on 25th March, 2005 between the applicant and the NTPC for providing work of design, engineering, manufacture, inspection and testing at supplier's works, packing, forwarding and dispatch from manufacturer's works to the port of disembarkation in India of all offshore plant and equipment including mandatory spares. In the General Conditions of Contract entered into between the applicant and the NTPC, the mode of payment is available in Article 5 which is extracted below:
5. Mode of payment
5.1 The employer will establish an irrevocable letter of credit (L/C) in favour of the contractor through the employer's bank in employer's country for payments due, as per terms of payment, on GIF despatch of plant and equipment including mandatory spares covered in Sch. 1 (including due payments towards ocean freight and marine insurance). The value of L/C will be as per despatch schedule for each quarter of year and the L/C shall remain valid for one quarter of a year. It will be the responsibility of the contractor to utilize the L/C to the fullest extent. In case L/C has been established by the employer and not utilized fully/partially by the contractor, for reasons of delay attributable to him, all reinstatement charges for the L/C for further period necessitated due to non -utilization of L/C will be to the account of the contractor.
5.2 All other payments including payments for advance amount, type test charges, if any, price adjustment amounts, all other supply payments and taxes and duties (wherever admissible) shall be made directly to the contractor by the employer and no L/C shall be established by the employer for such payments.
So far as terms of payments are concerned 15 per cent: of the total FOB price component is initial advance payment on signing the contract and submission of bank guarantees and also the submission of detailed PERT network. 60 per cent of FOB price component of the contract price for each identified equipment is payable upon dispatch of equipment from manufacturer's works on pro rata basis on production of invoices and satisfactory evidence of shipment. 15 per cent of FOB price component is payable on receipt of the equipment at site on pro rata basis after physical verification. The remaining 10 per cent of the contract price is payable at various stages upto the successful completion of guarantee tests for Units I, II and III.
Some of the other salient features of the contract are as follows:
21.3.1 The contractor shall at its own risk and expense transport all the plant and equipment and the contractor's equipment to the site by the mode of transport that the contractor judges most suitable under all the circumstances.
21.3.3 Upon despatch of each shipment of the plant and equipment and , the contractor's equipment, the contractor shall notify the employer by courier, post or by telefax followed by post confirmation of the description of the plant and equipment and of the contractor's equipment, the point and means of despatch, and the estimated time and point of arrival in the country where the site is located, if applicable, and at the site. The contractor shall furnish the employer with relevant shipping documents to be agreed upon between the parties.
The customs clearance is provided under Clause 21.4 of the contract, which is extracted below:
21.4 Customs clearance
The contractor shall, at its own expense, handle all imported* plant and equipment including spares and contractor's equipment at the point(s) of import and shall handle any formalities for customs clearance, including liability for port charges etc., if any, subject to the employer's obligations under GCC Sub -clause 14.2, provided that if applicable laws or regulations require any application or act to be made by or in the name of the employer, the employer shall take all necessary steps to comply with such laws or regulations.
Transfer of ownership is specified in Clauses 31.1 and 31.5 of the contract, which are reproduced below:
31.1 Ownership of plant and equipment (including spare parts) to be imported into the country where the site is located shall be transferred to the employer upon loading on the mode of transport to be used to convey the plant and equipment (including spare parts) from the country of origin to that country and upon endorsement of the despatch documents in favour of the employer.
31.5 Notwithstanding the transfer of ownership of the plant and equipment, the responsibility for care and custody thereof together with the risk of loss or damage thereto shall remain with the contractor pursuant to GCC Clause 32 (care of facilities) hereof until completion of facilities or the part thereof in which such plant and equipment are incorporated.
As per Appendix 3 of the contract, the insurance is to be taken by the contractor. The employer shall be named as co -insured under all insurance policies taken out by the contractor pursuant to GCC 34.1 except for third party liability, workman's compensation and employer's liability insurances and the Contractor's sub -contractors shall be named as co -insured under all insurances policies taken out by the contractor pursuant to GCC 34.1, except for the cargo insurance during transport, workman's compensation and employer's liability insurances. All insurers rights of subrogation against such co -insureds for losses or claims arising out of the performance of the contract shall be waived under such policies.
Notwithstanding the insurance requirements mentioned above, it would be the contractor's responsibility to take adequate insurance cover as may be pertinent to protect his interest and interest of the employer. If at any point of time during execution of the contract, the insurance policies are found to be inadequate, the contractor shall take fresh insurance policies meeting aforesaid requirements. The employer reserves the right to make suitable recovery from the contractor, if any.
(3.) THE Revenue opposed the application on grounds that:
(i) the contract is a composite contract;
(ii) the facts are distinguishing from the case of Ishikawajma -Harima Heavy Industries Ltd. v. Director of IT : (2007) 207 CTR (SC) 361 : (2007) 288 ITR 408 (SC) (hereinafter referred to as 'Ishikawajma')
(iii) the assessee has business connection in India and also PE in India in respect of works relating to offshore supply.;