The issue of taxability of ‘offshore supply’ was settled by the Apex Court in the case of Ishikawa [288 ITR 408] wherein it was held that ‘the entire transaction having been completed on the high seas, the profit on sale did not arise in India’.
The Hon’ble Court also held that ‘where different severable parts of the composite contract are performed in different places, the principle of apportionment can be applied, to determine which fiscal jurisdiction can tax that particular part of the transaction.’
Subsequent to the aforesaid decision, the Supreme Court in Vodafone’s case, 341 ITR 1, in the context of when a transaction can be said as designed for tax avoidance or evasion, observed that “It is the task of the Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach”.
However, the Authority for Advance Rulings (AAR) without going into the context in which the aforesaid observation in Vodafone’s case (supra) was made by the Supreme Court, has drawn a conclusion that consortium or composite contracts should not be dissected to determine the tax liability applying the “look at test”. (Alstom Transport SA, 2012 TII 28 ARA INTL., or Linde AG, AAR No 962 of 2010 dated 20.03.2012).
In these cases it has been held that the consortium agreements should not be dissected to segregate the tax liability relating to offshore supplies. In fact, such agreements will result in creation of AOP and accordingly, offshore supply will also be liable to tax in India.
Curiously, in earlier cases, Authority had taken a view that even in case of consortium agreements, the offshore supplies are not taxable in India.(See Speco III [AAR No 1008 of 2010], M/s Hyundai Rotem Co., Korea 323 ITR 277 and CTCI [AAR 854 of 2009]).
It needs to be mentioned here that in the cases decided in favour of the assessee, decision in Ishikawajima-Harima has been followed, while in other cases, decision in Vodafone’s case has been followed.
The AAR rejected the view taken by Apex Court in Ishikawajima–Harima’s case by observing that Ishikawajima–Harima is a two judge bench decision whereas Vodafone is a three judge bench decision.
The above controversy has, now, been resolved by the Delhi High Court in a recent decision dated 07.09.2012 in the case of DIT v Nokia Networks OY, in ITA no 512 of 2007.
In this case, the Hon’ble Court has considered the Apex Court decision both in Ishikawajima as well as in Vodafone.
In the said case, the assessee entered into three agreements with cellular operators, namely (1) Overall Agreement, (2) the Supply Agreement and (3) the Installation Agreement.
It was initially observed by the Hon’ble Court that “If this Supply Agreement is taken as standalone Agreement, the facts on record show that such supplies under this agreement were made overseas. The property in goods had passed on to the buyer under the Supply Contract outside India where the equipment was manufactured. As per the judgment of Supreme Court in Ishikawajima Harima Heavy Industries Ltd. v. DIT, Mumbai, (2007) 3 SCC 481 such agreement would not be taxable in India.”
The Revenue contended that the three agreements should be taken to form an integrated business arrangement between the parties which was governed by the Overall Agreement. But the Hon’ble Court observed that “Overall Agreement does not result in the income accruing in India. The execution of an overall agreement is prompted by purely commercial considerations as the India Cellular Operator would be desirous of having a single entity that he could liaise with,…..”
It was finally held by the Hon’ble High Court that “in the present case, the goods were manufactured outside India and even the sale has taken place outside India. Once that fact is established, even in those cases where it is one composite contract (though it is not found to be so in the present case) supply has to be segregated from the installation and only then would question of apportionment arise having regard to the expressed language of Section 9 (1) (i) of the Act, which makes the income taxable in India to the extent it arises in India.”
H.P. Agrawal e-mail: firstname.lastname@example.org