RULINGS
AAR No. 603 of 2002
Decided On: 01.06.2004
Appellants: In Re: Sutron Corporation
Vs.
Respondent:
Hon’ble Judges:
Syed Shah Mohammed Quadri, J. (Chairman), K.D. Singh and K.D. Gupta, Members
Counsels:
For Appellant/Petitioner/Plaintiff: O.S. Bajpai, Adv.
S.M.J. Abidi, Adv. for the CIT
Subject: Direct Taxation
Acts/Rules/Orders:
Income Tax Act, 1961 – Sections 5(2), 9(1) and 90(1)
Cases Referred:
CIT v. Union Tile Exporters, (1969) 71 ITR 453 (SC); Addl. CIT v. Skoda Export, Praha, (1988) 172 ITR 358 (AP); CIT v. R.D. Aggarwal & Co., (1965) 56 ITR 20 (SC); Anglo-French Textile Co. Ltd v. CIT, (1953) 23 ITR 101 (SC); Union of India and Anr. v. Azadi Bachao Andolan and Anr., (2003) 263 ITR 706 (SC)
JUDGMENT
Syed Shah Mohammed Quadri, J. (Chairman)
1. The applicant, M/s Sutron Corporation, Virginia, USA, is a non-resident company. In response to the tenders floated in three packages by the Government of Andhra Pradesh, India (for short GOAP) in respect of the project for installation of remote stations (“the project”), the applicant prepared and signed proposals in USA and submitted the same. The GOAP awarded contract for package-2 and package-3 to the applicant. We are not concerned with package 1 which was awarded to some third party. Accordingly, the applicant through its authorized country manager (Mr. Naresh Goel) at Hyderabad, entered into two contracts with the “GOAP”-the first on 14th June, 2002, for supply, installation and commissioning of gauging equipment and associate systems and ancillary services termed as Package-3 and the second on 25th June, 2002, for supply of installation and commissioning of Satellite Telemetry and associated systems and ancillary services termed as package-2. The contracts relate to supply of foreign equipments and providing local material and services including internal insurance, custom clearance, inland transportation, civil and mechanical works, installation, commissioning, acceptance and warranty for two years and annual maintenance for a period of four years for the consideration specified in the contracts. Each contract comprises of two parts (1) supply of goods and erection of three to six specimen remote stations and on-the-spot training of personnel, and (ii) providing local material and services, etc. In regard to the first part of the contract, the goods were delivered to the Air India in USA which was appointed as carriers on the instructions of the GOAP which bore the cost of insurance and freight. The documents of title were sent by courier to SBH at Hyderabad. In regard to the second part of the contracts, it is stated that a Memorandum of Understanding was executed between the applicant and M/s Arraycom (India) Limited (for short “Arraycom”) for supplying all local integration material, providing local and other services and also for giving warranty services for the said period of 2 years and AMC services for a total of 4 years for which Arraycom will recover the cost from the applicant. The MOU was submitted along with bid documents to GOAP. The consideration for the first part is payable to the applicant for both the packages in US dollars in USA and the consideration for the second part is payable in Indian rupees in India. The payment is required to be made by GOAP as follows :
(i) 10 per cent of contract price is to be paid within 30 days of the signing of the contract against bank guarantee to be furnished by the applicant company (bank guarantee is required to be furnished for the entire amount of contract).
(ii) 70 per cent of contract price is to be paid through irrevocable letter of credit which was opened by Government of AP through their bankers State Bank of Hyderabad, in favour of the applicant’s bank, i.e., Allfirst Bank, Baltimore, USA through Union Bank of California on shipment of goods by the supplier.
(iii) 20 per cent of the contract price is to be paid within 30 days of installation upon issue of acceptance certificate by the purchaser.
(iv) Thus, the entire payment is to be made by transfer of the amount to Allfirst Bank, Baltimore, USA.
It is said that the consideration has been received by the applicant in USA through the applicant’s bankers “Allfirst Bank, Baltimore, USA”. It is claimed that no income/profit accrues/arises or can be deemed to accrue/arise in India and in any event in view of the DTAA, no income of the applicant from the said contracts is taxable in India. On these facts, in this application filed under Section 245Q(1) of the IT Act (for short “the Act”), the applicant seeks ruling on the following questions :
“Q. 1, Whether, on the facts and circumstances of the case, any income could accrue or arise under the IT Act, 1961 or can be deemed to accrue or arise under the said Act, to the non-resident applicant company in India ?
Q. 2. Whether, on the facts and circumstances of the case, the non-resident applicant company can be said to have permanent establishment in India as defined in the Double Taxation Avoidance Agreement (DTAA) with United States of America ?
Q. 3. Without prejudice to the foregoing main contentions of the applicant company, if the applicant company is found liable to pay any tax under the IT Act, 1961, what would be the proportion of the net income content in the total receipts ?
Q. 4. Whether, on the facts and circumstances of the case and without prejudice to the main contention of the non-resident applicant company, is any part of their income liable to tax deduction at source and if yes, at what rates.”
2. In his comments, the jurisdictional CIT, the Director of IT (International Taxation), Delhi, states that : the applicant appointed Mr. Naresh Goel as its country manager in India. He collects information about the invitation of tenders by various concerns in India including the Central and the State Governments for supplying data about the environmental monitoring and control systems such as weather, floods, cyclone, forecast system; in response to the tenders floated by GOAP, he submitted proposals which were approved and prepared by the applicant at Virginia, USA; he collects information as to whether the tender is awarded to the applicant and conveys the same to the applicant; he has authorization of the applicant to submit bids and sign contracts with the GOAP after obtaining due approval from them. The applicant has an office for its operations in India and Mr. Goel is the country manager for rendering various duties referred to above. Therefore, the applicant has business connection for the purpose of Section 9(1)(i) of the Income-tax Act (for short “Act”) and he is also a dependent agent of the applicant within the meaning of Article 5 of the Double Taxation Avoidance Agreement (DTAA) concluded between India and USA. As the applicant has an agent in India, the income, under the contract aforementioned, is deemed to accrue or arise in India under Section 9(1)(i) of the Act. Further, the applicant has permanent establishment in India and a dependent agent–Mr. Naresh Goel. Thus, the requirements of Article 5 of DTAA, concluded between Republic of India and the Government of the USA are fulfilled. It is further stated that, on the facts stated in the application, it is not possible to find out as to what would be the portion of the net income in the total receipts of the applicant which would be taxable and it has to be ascertained on the basis of the facts. Mr. Goel, the country manager, entered into agreement with the applicant on 4th Dec., 2000, describing himself an independent consultant and not an employee. He receives a fixed remuneration of $ 3,000 per month for his professional services. He is also paid the following expenses :
Drive $ 125 Local conveyance $ 125 Travelling expenses $ 1000 Communication costs $ 120 Local expenses $ 100
These facts clearly shows that Mr. Goel is not an independent consultant but is only an employee of the applicant. Therefore, while making payments under the contracts, GOAP has to deduct tax @ 48 per cent under Section 195 of the Act.
3. Mr. O.S. Bajpai, advocate who appeared for the applicant submitted, at the outset, that he would not press question Nos. 3 and 4.
With regards to question Nos. 1 and 2, he argued that the sale of the machinery and plant is outside India, therefore, no income accrues or arises to the applicant or is deemed to accrue or arise to the applicant under Section 9 of the Act; according to Article 7(1) of DTAA, the profit of the applicant would be taxable only in USA and not in India; the applicant has no business connection or permanent establishment in India and the residential address of Mr. Naresh Goel, the country manager of the applicant, cannot be treated as permanent establishment. Mr. Abidi, Addl. CIT of the jurisdictional CIT submitted that Mr. Naresh Goel is the agent of the applicant in India; he was authority to negotiate and enter into contract and, indeed, he has signed the contracts with GOAP. It is asserted that the applicant has business connection within the meaning of Section 9(1)(i) of the Act and also permanent establishment in India within the meaning of Article 7(4) of DTAA. Therefore, requirements of both Section 9 as well as of DTAA are satisfied. It is not a case of sale of goods and supplying services but a contract of turnkey project.
4. Before adverting to the rival contentions of the parties, it may be pointed out that the answer to the second question is germane to any ruling on the first question. The present discussion will cover both the questions. In this backdrop, the short question that needs to be addressed is: whether any income/profit accrues or arises, or deemed to accrue or arise to the applicant in India from the sale of machinery/equipment and providing of services under the contracts with GOAP.
5. It will be appropriate to note that Section 5 of the Act deals with the scope of total income which forms the subject-matter of charge under Section 4 of the Act. Sub-section (1) of Section 5 speaks of total income of a resident. The topic of total income of any previous year of non-residents is the subject-matter of Sub-section (2) of Section 5 of the Act which provides, inter alia, that all income, from whatever source, which accrues or arises or is deemed to accrue or arise in India in any previous year by or on behalf of non-resident will be included in his total income.
6. Ordinarily, profits of a business accrues at the place of formation of contract but factors like where the contract is carried out or acts done under the contract have an important bearing on the decision of a question regarding place of accrual of the profit which is no doubt a vexed question. In the case of sale of goods simpliciter, profits arise at the place where the contract of sale is effected. And a contract is made at the place where the offer is accepted. In a case where the contract of sale is made in one place and the sale takes place in another, profits may accrue partly at the place where the contract of sale is made and partly at the place where the sale is effected or the contract is executed. [“The Law and Practice of Income tax” Kanga Palkivala & Vyas (9th Edn. Vol. I p. 332). See also CIT v. Union Tile Exporters (1969) 71 ITR 453 (SC)]. But, in a case where under a contract various obligations are undertaken including sale of goods, profits will accrue/arise where the sale is effected.
In this case, the contracts are executed in India but goods are delivered to the carrier appointed by the purchaser in USA and consideration for sale, installation of the machinery and for providing service is received by the applicant in USA, no income/profit will accrue/arise to the applicant partly in India. Therefore, neither Clause (a) nor Clause (b) of Sub-section (2), except the deeming provision will apply. We shall advert to the deemed accrual/arising of profits presently.
7. In support of his contention that where the goods are sold outside India, no income can be said to accrue/arise in India, Mr. Vajpai relied on the following decision of the Andhra Pradesh High Court. Addl. CIT v. Skoda Export, Praha (1988), 172 ITR 358 (AP). In that case a Government of India Undertaking (for short “the Undertaking”) entered into two agreements with the non-resident company. The second agreement was in respect of delivery of machinery and equipment F.O.B. European and the time for the fulfilment of the delivery was the date of bills lading. On consideration of the relevant clauses of the agreement, the Tribunal held that the sale of machinery took place outside India and no part of the profit arising therefrom could be said to arise in India to the non-resident company. On a reference, the A.P. High Court held that the sale of machinery was not an independent or isolated transaction. It was part and parcel of the business venture or business connection, between the “Undertaking” and the non-resident. It was observed that in such a situation one has to apply the test of predominance and decide where the sale took place. The High Court answered the question thus, “on a combined reading of the clauses of the agreement, we have no doubt that the sale of machinery did take place outside India.”
8. Now we shall proceed to consider whether any part of profits can be deemed to accrue to the applicant under Sections 5(2)(b) and 9(1)(i) of the Act. It is necessary to clarify here that when income/profit accrues/arises in India, the further question whether it shall be deemed to accrue/arise, does not arise.
9. The provisions of Clause (i) of Sub-section (1) of Section 9 and the Explanation thereto which incorporate the principle of deemed accrual or arising of income, may be referred to here :
“9.(1) The following incomes shall be deemed to accrue or arise in India :
(1) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, (*) or through the transfer of a capital asset situate in India.
Explanation–For the purposes of this clause –
(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India;
(b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export;
(c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India;
(d) in the case of a non-resident, being –
(1) an individual who is not a citizen of India; or
(2) a firm which does not have any partner who is a citizen of India or who is resident in India; or
(3) a company which does not have any shareholder who is a citizen of India or who is resident in India,
no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph in India];”
A perusal of the provisions extracted above shows that all income accruing or arising whether directly or indirectly through or from any business connection in India or from any property in India or through any assets or source of income in India or through transfer of capital assets situate in India, shall be deemed to accrue or arise in India. The mandate contained in the Explanation is that for the purpose of aforementioned clause where the business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. Here, for the deeming provisions to apply we need to examine whether any income accrues or arises to the applicant (whether directly or indirectly) through or from any ‘business connection’ in India.
10. The important aspect we have to consider here is whether the applicant has “business connection” in India.
The expression “business connection” was not defined for the purpose of the aforementioned provision, before 31st March, 2003. By Finance Act, 2003 two Explanations were inserted after the then existing Explanation which is numbered as Expln. 1 of Sub-section (1) of Section 9 w.e.f. 1st April, 2004. Expln. 2 which is relevant for our purpose defines the expression thus :
“Explanation 2–For the removal of doubts, it is hereby declared that “business connection” shall include any business activity carried out through a person who, acting on behalf of the non-resident,–
(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or
(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or
(c) habitually secures orders in India, mainly or wholly for the non-resident or that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident :”
The said Explanation contains an inclusive definition; it brings in the business activities specified in Clauses (a) to (c), referred to above, within the fold of the expression “business connection” which has to be understood in its ordinary meaning. On the facts of this case, it cannot be concluded that any of the business activities in the aforementioned Clauses (a) and (c) are carried out in India by Mr. Naresh Goel for the applicant. The newly added Expln. 2 defining the expression “business connection” is of no consequence here. The fact that the said Explanation is inserted after Mr. Naresh Goel entered into contracts with GOAP in June 2002, and that it is declaratory may not, therefore, be relevant for the present discussion.
We may note here that the expression has been interpreted by the Courts in various decisions. It will be useful to refer to the following :
11. In CIT v. R.D. Aggarwal & Co. (1965) 56 ITR 20 (SC), the import of the expression is brought out in the following observation of the Supreme Court:
“The expression “business connection” postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activities within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity.”
The Supreme Court, speaking through Hon’ble Mr. Justice Shah (as he then was) for the purpose of Section 42 of the IT Act, 1922 laid down, “‘business connection’ contemplated by Section 42 involves a relation between a business carried on by a non-resident which yields profits and gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of non-resident and the activity in the taxable territories, a stray or isolated transaction not being normally regarded as a business connection.”
The requirement of continuity of transactions to form ‘business connection’ between a non-resident and a resident was laid down by the Supreme Court as long back in 1952 in Anglo-French Textile Co. Ltd v. CIT (1953) 23 ITR 101 (SC). Hon’ble Mr. Justice Mahajan (as he then was) speaking for the Court, observed, “an isolated transaction between a non-resident and a resident in British India without any course of dealings such as might fairly be described as a business connection does not attract the application of Section 42, but when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realizes the profits, such relationship does constitute a business connection.”
12. In the light of above discussion, the essential features of “business connection” may be summed up as follows :
(a) a real and intimate relation must exist between the trading activities by a non-resident carried on outside India and the activities within India;
(b) the relation contributes directly or indirectly to the earning of income by the non-resident in his business;
(c) a course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident outside India and the activity in India, would furnish a strong indication of ‘business connection’ in India:
From the facts of the case it is evident that all the steps in formulating the proposal, filing the tender forms and signing, etc., were taken in USA. They were, however, submitted through Mr. Naresh Goel, country manager in India and the contract was also signed by him under the authority of the applicant for and on its behalf.
13. The CIT described Mr. Naresh Goel, as an employee of the applicant who is getting a salary of $ 3000 per month and the following perks :
Driver $ 125 Local conveyance $ 125 Travelling expenses $ 1000 Communication costs $ 120 Local expenses $ 100
In the agreement entered into between the applicant and Mr. Naresh Goel, he is described as country manager. It is specifically provided therein that he is an independent consultant and not an employee of the company but from material placed before us and in the absence of any record to show that he is an agent of independent status, we cannot but conclude that he is at least a paid agent of the applicant for the purpose of collecting market information, notice inviting tenders by various institutions and Government Departments relating to Sutron’s products and services, supply such information to the company, submit bid proposal to the respective customers prepared by the company and execute contracts for the enterprise and perform other tasks as authorized by the applicant.
Thus, it is seen that all these features are present in this case. It has, therefore, to be concluded that the applicant has business connection in India.
14. It will be apposite to notice at this stage that notwithstanding the provisions of Section 5(2) and Section 9(1)(i), having regard to the mandate contained in Section 90(2) of the Act, the provisions of the agreement entered into by the Central Government under Section 90(1) of the Act will have overriding effect. It is a common ground here that such an agreement was entered into between the Government of Republic of India and the Government of USA which is referred to herein as DTAA. No authority is needed for this proposition. [However, see the case of Union of India and Anr. v. Azadi Bachao Andolan and Anr. (2003) 263 ITR 706 (SC)].
Article 7(1) of DTAA which deals with business profits and insofar as it is evident, reads thus:
Article 7: Business profits
“1. The profits of an enterprise of a Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment.
2. xxxx
3. xxxx
4. x x x x
5. xxxx
6. xxxx
7. For the purposes of the Convention, the term “business profits” means income derived from any trade or business including income from the furnishing of services other than included services as defined in Article 12 (royalties and fees for included services) and including income from the rental of tangible personal property other than property described in para 3(b) of Article 12 (royalties and fees for included services).”
Para 1 of Article 7 to the extent relevant for our purpose lays down that the profit of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profit of the enterprise may be taxed in the other State but only so much of them as is attributable to the permanent establishment. It means that the profits of the applicant shall be taxable only in USA unless the applicant carries on business in India through a permanent establishment situated therein. In such a case, the profits of the applicant may be taxed in India only to the extent they are attributable to the permanent establishment.
In para 7 of Article 7 “business profits” is defined to mean income derived from any trade or business including income from the furnishing of services other than included services as defined in Article 12 (Royalty and fees for included services) and including income from tangible personal properties other than property described in para 3 (b) of Article 12.
From the above, it is explicit that the business profits of the applicant, which means income, derived from sale and installation of equipment and machinery as well as from furnishing of services will be taxable in India if they are through permanent establishment in India.
15. Article 5 of the said DTAA defines permanent establishment thus :
Article 5 : Permanent establishment
“1. For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
2. The term “permanent establishment” includes especially :
(a) a place of management;
(b) branch;
(c) an office;
(d) to (i) xxxx
3. Notwithstanding the preceding provisions of this article, the terra “permanent establishment” shall be deemed not to include any one or more of the following:
(a) the use of facilities solely for the purpose of storage, display, or occasional delivery of goods or merchandise belonging to the enterprise;
(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or occasional delivery;
(c) the maintenance of a stock or goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise;
(e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise.
4. Notwithstanding the provisions of paragraphs 1 and 2, where a person other than an agent of an independent status to whom paragraph 5 applies is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first mentioned state, if–
(a) he has and habitually exercises in the first-mentioned State an authority to conclude contracts on behalf of the enterprise, unless the activities are limited to those mentioned in the paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph;
(b) he has no such authority but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in that State on behalf of the enterprise have contributed to the sale of goods or merchandise; or
(c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise.
5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm’s length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph.
6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.”
A combined reading of paras 1 to 3 of Article 5 brings out the meaning of the expression ‘permanent establishment’. Whereas para 1 defines the expression to mean a fixed place of business through which a business of an enterprise is wholly or partly carried on, para 2 includes seven places specified in sub Clauses (a) to (k) and furnishing of services specified in sub Clause (i) within the scope of the expression and para 3 excludes the facilities noted in Clause (a), maintenance of stock mentioned in Clauses (b) and (c) and maintenance of fixed places for the purposes indicated in Clauses (d) and (e) from the scope of the expression. Para 4, which commences with non obstante clause, says that notwithstanding the definition of the expression outlined in paras 1 and 2, a person acting in contracting state on behalf of enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if any one of the three Clauses (a), (b) and (c) thereof–applies. Clause (a) deals with a person who has and habitually exercises authority to conclude contract on behalf of the enterprise in the first-mentioned State unless (i) the activities are limited to those mentioned in para 3 (excluded activities), and (ii) if they are exercised through a fixed place of business would not make that fixed place of business, a permanent establishment under the provisions of that para. Clause (b) deals with a person who acts without authority, therefore, is not relevant for our purpose. Clause (c) says that the person habitually secures orders in the first-mentioned State wholly or almost wholly for the enterprise. Para 5 contains an exclusionary clause and says that an enterprise of a Contracting State shall not be deemed to have permanent establishment in the other Contracting State merely because it carries on business in the other State through a broker, general commission agent or any other agent of an independent status provided that such persons are acting in the ordinary course of business. Nonetheless, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm length condition, he shall not be considered as an agent of an independent status within the meaning of those paragraphs. This para would not apply as from the fact stated above, it is not possible to hold that Mr. Naresh Goel is an agent of an independent status. The address of Mr. Naresh Goel is a fixed place from which the business of the applicant is partly carried on. It is immaterial if the same is his residential address. It may also be termed as a place of management or an office. None of the clauses in paras 3 and 4 or the stipulation in para 5 would apply. In the result, it has to be held that the applicant has a permanent establishment in India.
Para 6 is not relevant for the present discussion.
16. It is worth noticing that payment of consideration by the GOAP has been split in US dollars and in Indian currency under packages 2 and 3 as is evident from Annex. I to the application as follows :
S.No.
Particulars
Amount Package-3
Amount Package-2
1.
Supply
of foreign equipment
US $ 8,20,584
US $ 3,27,960
2.
Providing
local material and services including, internal insurance, custom clearance,
inland transportation, civil and mechanical
works, installation, commissioning, acceptance of warranty for two years.
Rs. 1,92,46,424
Rs. 31,47,030
3.
Annual maintenance
for a period of four years
US $ 15,756 and Rs.
43,75,280
US $ 11,250
and Rs. 15,30,000
In regard to the supply of foreign equipment under both the packages, even though the contracts were entered into in India, the delivery of the goods was in USA as goods were delivered to the carrier–Air India which was appointed as carrier of goods for and on behalf of the purchaser, GOAP. It has already been noted above that the consideration was paid in US dollars through the bankers of the applicant, Allfirst Bank, Baltimore, USA through Union Bank of California on shipment of the goods by the supplier, and the 10 per cent had already been paid within 30 days of the signing of the contract against bank guarantee furnished by the applicant. 20 per cent of the contract price is required, to be paid between 30 per cent of the installation upon issue of acceptance certificate by the purchaser.
17. It is also evident from Annex. I that consideration for providing local material and services including internal insurance, custom clearance, inland transportation, civil and mechanical works, installation and commissioning, acceptance and warranty for 2 years, the amount is payable in Indian rupees both under package 2 as well as package 3. The amount payable by GOAP for annual maintenance for a period of 4 years is both in US dollars and Indian rupee (Package 3–US $ 8,20,584 i.e. Rs. 1,92,46,424 and Package 2–US $ 3,27,960 i.e. Rs. 31,47,030). It is important to note here for items 2 and 3 noted in the above statement, as per the contract form (P. I and P, II), the applicant entered into a Memorandum of Understanding with Arraycom on 19th Dec., 2001, (Annex. P. 12) which, inter alia, recites as under :
“SUTRON will supply the Gauging Equipment-including the DCPs, INSAT Satellite transmitters, Sensors and associated ancillary equipment that will be shipped from the USA. The equipment and sensors will meet the tender specifications. SUTRON will complete the factory acceptance tests and will provide training to the customer and for Arraycom including the complete installation of 3 to 6 remote stations. SUTRON will provide warranty for the period of 2 years and the repairs of all equipment for a period of 4 addition years under the AMC as per terms of our proposal. Arraycom will supply all local integration materials including maintenance-free batteries, station mounting towers, masts, lightning rods, grounding rods, conduit for bubbler systems, provide all civil works, fencing gates, etc. Arraycom will also provide installation of SUTRON products and financial acceptance testing of the equipment; 2 years warranty service and AMC services for a total of 4 years.”
18. The applicant is not correct in saying that the applicant company and Arraycom, in fact, gave joint bid for 2 independent activities; the applicant bid for supply of equipment, etc., while Arraycom bid for providing local services; both of them have calculated their bid price separately and are to receive the same in consideration of their respective activities. Sutron gets paid in US dollars and Arraycom gets paid in Indian rupees. It is equally incorrect to say that profits earned by each of the two concerns are to be derived by their respective activities and the earning of the profits by one is totally independent of the other both for supply of foreign equipments as well as for providing local material and services. Indeed, the applicant alone gave bid for supplying goods, for warranty of 2 years and annual maintenance for 4 years for Package 2 and Package 3. The bid was accepted. The letter of Secretary, Planning, of GOAP dt. 10th Oct., 2002 corroborates: (i) agreements for supply of equipment under Packages 2 & 3 were concluded by the GOAP with M/s Sutron Corporation, USA, duly approved by the World Bank, in the name of Sutron Corporation only, (ii) the applicant was requested to open an account in case it did not already have to receive the Indian currency payment whenever due, and (iii) the payment will be made in the currency quoted in the contract price and question of paying the balance payments in US dollars in lieu of Indian rupees does not arise.
From the above discussion it follows that the applicant alone is entitled to receive and has received payments both for sale and supply of equipments as well as for providing services indicated above. It is by internal arrangement between the applicant and Arraycom with regard to division of work and sharing of price, that it will receive part of consideration. So far as the applicant is concerned, the income/profits under the aforementioned contracts with the GOAP for sale of equipment, installation and service agreement shall be deemed to accrue/arise in India and only so much of them will be taxed in India under Article 7(1) of DTAA, as is attributable to the permanent establishment.
19. For the aforementioned reasons, we rule on question No. 1, that on the facts and in the circumstances of the case, income could be deemed to accrue or arise under the said Act to the non-resident applicant company in India; on question No. 2, the applicant company has ‘permanent establishment’ in India as defined in Double Taxation Avoidance Agreement with the United States of America.