{"id":200423,"date":"2007-01-04T00:00:00","date_gmt":"2007-01-03T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/ishikawajma-harima-heavy-vs-director-of-income-tax-mumbai-on-4-january-2007"},"modified":"2018-03-08T19:28:30","modified_gmt":"2018-03-08T13:58:30","slug":"ishikawajma-harima-heavy-vs-director-of-income-tax-mumbai-on-4-january-2007","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/ishikawajma-harima-heavy-vs-director-of-income-tax-mumbai-on-4-january-2007","title":{"rendered":"Ishikawajma-Harima Heavy … vs Director Of Income Tax, Mumbai on 4 January, 2007"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Ishikawajma-Harima Heavy … vs Director Of Income Tax, Mumbai on 4 January, 2007<\/div>\n
Author: S.B. Sinha<\/div>\n
Bench: S.B. Sinha, Dalveer Bhandari<\/div>\n
           CASE NO.:\nAppeal (civil)  9 of 2007\n\nPETITIONER:\nIshikawajma-Harima Heavy Industries Ltd\n\nRESPONDENT:\nDirector of Income Tax,  Mumbai\n\nDATE OF JUDGMENT: 04\/01\/2007\n\nBENCH:\nS.B. Sinha & Dalveer Bhandari\n\nJUDGMENT:\n<\/pre>\n
J U D G M E N T
\n[Arising out of SLP (Civil) No.5318 of 2005]
\nS.B. SINHA, J :\n<\/p>\n
\tLeave granted.\n<\/p>\n
\tAppellant herein is a company incorporated in Japan.  It is a resident
\nof the said country.  It pays its taxes in Japan.  It is engaged, inter alia, in the
\nbusiness of  construction of storage tanks as also engineering etc.  It  formed
\na consortium along with Ballast Nedam International BV, Itochu
\nCorporation, Mitsui & Co. Ltd., Toyo Engineering Corporation and Toyo
\nEngineering (India) Ltd.  With the said  consortium members, it entered into
\nan agreement with Petronet LNG Limited (hereinafter referred to as “the
\nPetronet”) on 19.01.2001 for setting up a Liquefied Natural Gas (LNG)
\nreceiving storage and degasification facility at Dahej in the State of Gujarat.
\nA supplementary agreement was entered into by the parties on 19.03.2001.
\nThe contract envisaged a turnkey project.  Role and responsibility of each
\nmember of the consortium was specified separately.  Each of the member of
\nthe consortium was also to receive separate payments.  Appellant was to
\ndevelop, design, engineer and procure equipment, materials and supplies, to
\nerect and construct storage tanks of 5 MMTPA capacity, with potential
\nexpansion to 10 MMTPA capacity at the specified temperatures i.e. -200
\ndegree Celsius. The arrangement also was to include marine  facilities (jetty
\nand island break water) for transmission and supply of the LNG to
\npurchasers; to test and commission the facilities relating to receipt and
\nunloading, storage and re-gasification of LNG and to send out of re-gasified
\nLNG by means of a turnkey fixed lump-sum price time certain engineering
\nprocurement, construction and commission contract. The project was to be
\ncompleted in 41 months.  The contract indisputably involved : (i) offshore
\nsupply, (ii) offshore services, (iii) onshore supply, (iv) onshore services  and\n<\/p>\n
(v) construction and erection. The price was  payable  for offshore supply
\nand offshore services in US dollars, whereas that of onshore supply as also
\nonshore services and construction and erection partly in US dollars and
\npartly in Indian rupees.\n<\/p>\n
Liability to pay income tax in India by the appellant herein being
\ndoubtful, an application was filed by the same before the Authority for
\nAdvance Rulings (Income Tax) (hereinafter referred to as ‘the Authority’) in
\nterms of Section 241(Q)(1) of the Income Tax Act, 1961 (hereinafter
\nreferred to as ‘the Act’).  The following questions were proposed by the
\nappellant  for determination:\n<\/p>\n
“1.\tOn the facts and circumstances of the case,
\nwhether the amounts, received\/receivable by the
\napplicant from Petronet LNG for offshore supply
\nof equipments, materials, etc. are liable to tax in
\nIndia under the provisions of the Act and India-
\nJapan tax treaty?\n<\/p>\n
2.\tIf the answer to (1) is in the affirmative in view of
\nExplanation (a) to section (1)(i) of the Act and\/or
\nArticle (1) read together with the protocol of the
\nIndia-Japan tax treaty, to what extent are the
\namounts reasonably attributable to the operations
\ncarried out in India and accordingly taxable in
\nIndia?\n<\/p>\n
3.\tOn the facts and circumstances of the case,
\nwhether the amounts received\/receivable by the
\napplicant from Petronet LNG for offshore services
\nare chargeable to tax in India under the Act and\/or
\nthe India-Japan tax treaty?\n<\/p>\n
4.\tIf the answer to (3) above is in the affirmative, to
\nwhat extent would be amounts received\/receivable
\nfor such services be chargeable to tax in India
\nunder the Act and\/or the India-Japan tax treaty?\n<\/p>\n
5.\tIf the answer to (3) above in the affirmative, would
\nbe applicant be entitled to claim deduction for
\nexpenses incurred in computing the income from
\noffshore services under the Act and\/or the India-
\nJapan treaty?\n<\/p>\n
\tBefore the Authority no issue was raised as regards the liability of the
\nappellant to pay income tax on onshore supply and onshore services and on
\nits activities relating to construction and erection.  The dispute centered
\nround its exigibility to pay tax in respect of ‘offshore supply’ and ‘offshore
\nservices’.\n<\/p>\n
\tIt is also not in dispute that the Government of India and the
\nGovernment of Japan entered into a by-lateral treaty in regard to the tax
\nliabilities.\n<\/p>\n
\tContention of the appellant before the Authority was that the contract
\nbeing a divisible one, it did not have any liability to pay any tax in regard to
\noffshore services and offshore supply. Revenue, on the other hand,
\ncontended that the contract being a composite and integrated one, they were
\nso liable.\n<\/p>\n
\tThe Authority referred to a large number of decisions governing the
\nfield and opined that having regard to the provisions contained in Section 5
\nread with Section 9 of the Act, following propositions of law would emerge :\n<\/p>\n
“(1)\tIn a case of sale of goods simpliciter by  a non-
\nresident to a resident in India, if the consideration
\nfor sale is received abroad and the property in the
\ngoods also passes to the purchaser outside India,
\nno income accrues or arises or deemed to accrue or
\narise to the seller in India.\n<\/p>\n
(2)\tIn a case of transaction of  sale of goods by the
\nnon-resident to an Indian resident which is a part
\nof a composite contract involving various
\noperations within and outside India, income from
\nsuch sale shall be deemed to accrue or arise in
\nIndia if it accrues or arises through or from any
\nbusiness connection in India.\n<\/p>\n
(3) \tIn the case of a business of which all operations
\nare not carried out in India, the deemed accrual or
\narising of income shall be only such part of the
\nincome as is reasonably attributable to the
\noperations carried out in India.\n<\/p>\n
(4)\tWhether there is business connection in India
\nor\/and whether all operations of the business are
\nnot carried out in India are questions of fact which
\nhave to be determined on the facts of each case.”\n<\/p>\n
\tApplying the said principles to the facts of the present case, the
\nAuthority opined that the appellant was liable to pay direct tax even under
\nthe Treaty having regard to Articles 5 and 7 thereof as also Clause 6 of the
\nProtocol.  It was held :\n<\/p>\n
\t“The substance of the protocol quoted above,
\nrepresents the consensus reached between the parties to
\nthe treaty in regard to the meaning of the phrase “directly
\nor indirectly attributable to that permanent
\nestablishment” employed in paragraph 1 of article 7.
\nFurther, profits shall also be regarded as attributable to
\nthe permanent establishment to the extent indicated in the
\nsaid protocol even when the contract or order relating to
\nthe sale or provision of goods or services in question is
\nmade or placed directly with the overseas head office of
\nthe enterprise rather than with the permanent
\nestablishment.\n<\/p>\n
\tIt would be clear that having regard to provisions
\nof article 7(1) of the Treaty read with para 6 of the
\nprotocol supply of equipment of machinery (sale of
\nwhich was completed abroad, having placed the order
\ndirectly overseas office of the enterprise) the same should
\nbe within the meaning of the phrase directly or indirectly
\nattributable to that permanent establishment.”\n<\/p>\n
\tAs regards taxability of the amounts ‘received’ and ‘receivable’ by the
\nappellant from Petronet for offshore services, it was held :\n<\/p>\n
\t“In so far as the Treaty is concerned, both section
\n115A(1)(b)(B) and para 2 of Article 12 of the Treaty
\nclearly indicates that the whole technical fee without any
\ndeduction is chargeable to tax, however, the tax so
\ncharged shall not exceed 20% of the gross amount of the
\nroyalty or fee for technical services.”\n<\/p>\n
Question Nos. 4 and 5 were held to be the consequential ones.  It was
\nopined :\n<\/p>\n
“In the light of the above discussions we rule on :\n<\/p>\n
(i)\tQuestion No.1 that on the facts and in the
\ncircumstances of the case, the amounts
\nreceived\/receivable by the applicant from Petronet
\nLNG in respect of offshore supply of equipment
\nand materials is liable to be taxed in India under
\nthe provisions of the Act and the India-Japan
\nTreaty.\n<\/p>\n
(ii)\tQuestion No.2 that in view of the Explanation (a)
\nto section  9(1)(i) of the Act and\/or Article 7(1)
\nread with the Protocol of the India-Japan Treaty
\nthe amounts that would be taxable in India is so
\nmuch of the profit as is reasonably attributable to
\nthe operations carried out in India, we decline to
\nanswer the other part of the question in regard to
\nquantification of the amount taxable in India as the
\nparties produced no evidence and did not address
\nin this regard.\n<\/p>\n
(iii)\tQuestion No. 3 that the amount
\nreceived\/receivable by the applicant from Petronet
\nLNG for offshore services is liable to be taxed in
\nIndia both under the provisions of the Act as well
\nas under Indo-Japan Treaty.\n<\/p>\n
(iv)\tQuestion No.4 that the entire amount received for
\noffshore services is chargeable to tax under the Act
\nand under the Treaty but at the rate not more than
\n20% of the gross amount.\n<\/p>\n
(v)\tQuestion No. 5 that the applicant would not be
\nable to claim any deduction in computing the
\nincome from offshore service under the Act, and\/or
\nunder the Indo-Japan Treaty.”\n<\/p>\n
\tBefore us, the following findings of the Authority are not disputed :\n<\/p>\n
“(i)\tthe Petitioner has a business connection in India;\n<\/p>\n
(ii)\tif consideration accrues only for supply of goods
\nand the sale is completed outside India no profits
\ncan accrue in India;\n<\/p>\n
(iii)\thowever, if a contract envisages a composite
\nconsideration for the various obligations to be
\nperformed and if certain operations are to be
\nperformed\tby or through the business
\nconnection, then, profits would be deemed to
\naccrue in India;\n<\/p>\n
(iv)\tproperty in the goods, which were the subject
\nmatter of the offshore supply, passed outside India;
\nand<\/p>\n
(v)\tthe petitioner has a permanent establishment in
\nIndia within the meaning of the said term in
\nparagraph 3 of Article 5 of the Double Taxation
\nAvoidance Agreement entered into between the
\nGovernments of India and Japan (hereinafter
\nreferred to as “the DTAA”).”\n<\/p>\n
\tMr. Harish N. Salve, the learned Senior Counsel appearing on behalf
\nof Appellant, urged :\n<\/p>\n
(i) The Authority misconstrued and misinterpreted the contract in
\narriving at its aforementioned findings, as from a bare perusal thereof, it
\nwould appear that the payments were made in US dollars in respect of
\n‘offshore supply’ and ‘offshore services’ and furthermore title to the goods
\npassed on to Petronate outside the territories of India and services had also
\nbeen rendered outside India;\n<\/p>\n
(ii) The fact that the contract signed in India was of consequences as
\nconverse could not have made the appellant not liable to pay the tax;\n<\/p>\n
(iii) The Authority committed a manifest error in arriving at its
\nfindings insofar as it failed to properly construe  Explanation-2 appended to
\nSection 9(1)(vii) of the Act as it was nobody’s case that the consideration
\nrelated to a construction, assembly, mining or like project so as to fall
\noutside the scope thereof;\n<\/p>\n
(iv)  Although fee received by  Appellant is effectively connected to
\nthe contract but it is not attributable to the permanent establishment and,
\ntherefore, Article 12(5) of the Double Taxation Avoidance Agreement
\n(DTAA)  is not attracted;\n<\/p>\n
(v)  Appellant being a non-resident in terms of Section 5(2) of the Act,
\nit would be chargeable to tax in India only in the event income accrues or
\narises in India or is deemed to accrue or arise in India or income is received
\nor is deemed to be received in India and not otherwise;\n<\/p>\n
(vi)  As no part of the income for the ‘offshore supply’ or ‘offshore
\nservices’ is received in India, the Authority misdirected itself in passing the
\nimpugned judgment;\n<\/p>\n
(vii)  A legal fiction raised under the Act cannot be pushed too far.
\nAlso, as all operations in connection with the offshore supply are carried out
\noutside India, the question of any portion of the consideration to be regarded
\nas deemed to accrue or arise in India would not arise;\n<\/p>\n
(viii) The requirement of the appellant to perform certain services in
\nIndia, such as unloading, port clearance, transportation of the equipments
\nsupplied would not render the appellant eligible to tax as the  consideration
\nthereof is embedded in the consideration for the offshore supply;\n<\/p>\n
(ix) Although the appellant was required to carry out certain activities
\nin India, the consideration for offshore services had separately been provided
\nfor.\n<\/p>\n
(x) Assuming that the income from the offshore supply is chargeable
\nto tax in India on the premise that Section 9(1)(i) applies, it was required to
\nbe examined by the Authority as to whether it would also be chargeable in
\naccordance with the provisions of the Double Taxation Avoidance
\nAgreement (DTAA) in terms whereof no charge to tax in India was leviable
\nin respect of the consideration for offshore supply.
\n\tMr. Mohan Parasaran, the learned Additional Solicitor General
\nappearing on behalf of  the respondent, on the other hand,  submitted :\n<\/p>\n
 (i) The question as to whether terms of the contract constitute a
\ncomposite contract or not is essentially a question of fact and the findings of
\nthe Authority being final, therefore, should not ordinarily be interfered with;\n<\/p>\n
(ii) The Authority having found  in favour of the Revenue two
\nprimary tests to determine as to whether the contract in question was a
\ncomposite one for execution of a turnkey project viz :\n<\/p>\n
(a) whether the ‘offshore’ and ‘onshore’ elements of the contract are
\nso inextricably linked that the breach of the ‘offshore’ element would
\nresult in the breach of the whole contract;\n<\/p>\n
(b) whether the dominant object of the contract is the execution of a
\nturnkey project and the question whether the title to the goods
\nsupplied passes offshore or within India is secondary to the execution
\nof the contract,
\n the impugned judgment should not be interfered with;\n<\/p>\n
\t(iii) Each component of the contract was directly relatable to the
\nperformance of the integrated contract as violation and\/or breach on the  part
\nof the parties thereto would affect the entire contract;\n<\/p>\n
(iv) The contract itself providing for milestone dates, the breach of
\nany of the terms thereof  would result in the breach of the entire contract and
\nnot just the particular obligation;\n<\/p>\n
(v) The turnkey project contemplated a permanent establishment and
\nin that view of the matter Explanation appended to Section 9(1)(i) of the Act
\nis directly applicable.\n<\/p>\n
(vi)  The appellant has business connection in India and in that view
\nof the matter the causal connection between the offshore supply and offshore
\nservices being interlinked with the entire project, the opinion of the
\nAuthority cannot be faulted;\n<\/p>\n
(vii) By reason of  DTAA, the parties thereto can always allocate the
\njurisdiction to tax the entire income  attributable to such permanent
\nestablishment to the country in which it is established;\n<\/p>\n
(viii) Supply of goods whether offshore or onshore as well as
\nrendition of service whether offshore or onshore are attributable to the
\nturnkey project and, thus, it would be wrong to contend that in terms of
\nArticle 7 of DTAA,  no tax could be levied upon the appellant.\n<\/p>\n
Contract : The Material Part :\n<\/p>\n
\tPetronat LNG Limited, on the one hand,  and five members of the
\nconsortium, on the other, are parties to the contract.  The contract contained
\nbroad items.  It has its own interpretation clauses.  Clause 2.1 provides for
\nscope of the work in the following terms :\n<\/p>\n
\t“2.1\tThe Work<\/p>\n
Except as otherwise expressly provided in this  Contract,
\nContractor shall provide, furnish and perform, or cause to
\nbe provided, furnished and performed, on a turnkey basis
\nall necessary design, engineering, procurement, supplies,
\ninstallation, erection, construction, testing,
\ncommissioning, operation and turning over services,
\nactivities and work (including all rectification and
\nremedial services, activities and work relating to defects
\nand deficiencies) for the Equipment and Materials and
\nthe Facilities in accordance with the Scope of Work
\n(Exhibit A) and the other terms, provisions and
\nrequirements of this Contract, including the Contract
\nSchedule, and shall provide all necessary and sufficient
\nContractor’s Equipment and experienced personnel
\nhaving the requisite expertise for such purposes.\n<\/p>\n
After Mechanical Completion of the Facilities,
\nContractor shall carry out Commissioning, start-up and
\ntesting of the Facilities and, if requested by Owner, shall
\nprovide advisory assistance in connection with the
\noperation and maintenance of the Facilities and shall
\nprovide all necessary and sufficient experienced
\npersonnel having the requisite expertise for the prompt
\nperformance of any rectification and remedial work
\nrequired until Final Acceptance of the Facilities, in
\naccordance with this Contract.\n<\/p>\n
The Parties acknowledge and agree that this Contract is a
\nlump-sum firm fixed price time certain turnkey contract
\nand Contractor’s obligation to provide, furnish and
\nperform its services, activities and work under this
\nContract  includes Contractor providing Owner with the
\noperating and completed Facilities, complete in every
\ndetail within the time and for the purposes specified in
\nthis Contract and to do and furnish Owner everything
\nnecessary in connection herewith.\n<\/p>\n
The foregoing obligations, work, services, activities and
\nresponsibilities of Contractor are more fully set forth in
\nthis Contract, including the Scope of Work (Exhibit A).
\nThe Technical Documents  and the obligations under
\nClause 2.2. are herein collectively referred to as the
\n“Work”.\n<\/p>\n
Except as otherwise expressly provided in this Contract,
\nContractor agrees and acknowledges that Contractor shall
\nperform all of its obligations and responsibilities under
\nthis Contract at its own risk, cost and expense.”\n<\/p>\n
\tClause 2.2. provides for additional responsibilities of the appellant,
\nwhich reads as under :.\n<\/p>\n
    “2.2\tAdditional Responsibilities<\/p>\n
Except as otherwise expressly provided in this Contract,
\nContractor shall be responsible for providing, or causing
\nthe provision of, design, engineering, procurement,
\nerection, construction and commissioning and testing
\nservices, activities and work, and personnel and labour,
\nand all Equipment and Materials (and components
\nthereof) and Contractor’s Equipment, and any other items
\nnot specifically described in the Scope of Work (Exhibit-
\nA) and\/or the Technical Documents if (a) it reasonably
\nmay be inferred in accordance with Good Industry
\nPractice that the providing, or causing the provision, of
\nsuch additional items  was contemplated as part of the
\nWork (including the Technical Documents) or (b) the
\nproviding, or causing the provision, of such additional
\nitems is necessary in order for Contractor to satisfy the
\nCompletion and Performance Guarantees and the
\nwarranties set forth, in this Contract and to make the
\nFacilities operable and capable of performing  as
\nspecified in the Technical Documents or as otherwise
\nnecessary in order to comply with the requirements of
\nthis Contract.  Without limitation to the foregoing,
\nwherever this Contract describes any portion of the Work
\nin general terms, but not complete in detail, Contractor
\nagrees that the Work shall include any incidental work,
\nactivities and services which may be reasonably inferred
\nas required or necessary to complete and render operable
\nthe Facilities in accordance with the terms and conditions
\nof the Contract, and owner shall have no obligation or
\nresponsibility whatsoever (except as specifically set forth
\nin this Contract) with respect to the completion of the
\nFacilities.\n<\/p>\n
Contractor shall ensure that the Facilities shall be fit and
\nsuitable for its intended purpose (including  attaining the
\nCompletion and Performance Guarantees) as evidenced
\nby, or reasonably to be inferred from, this Contract, and
\nshall fully comply with the Contract.\n<\/p>\n
Work undertaken, Equipment and Materials (including
\ncomponents thereof), Contractor’s Equipment, labour and
\npersonnel, and additional items provided pursuant to this
\nClause 2.2 shall not give rise to any adjustment in this
\nContract Price, the Contract Schedule or any other terms
\nof this Contract, and shall be included in and comprise
\nthe Work for all purposes of this Contract.\n<\/p>\n
Clause 7.1 provides for shipment in the following terms :\n<\/p>\n
\t“7.1\tNotice of Shipment <\/p>\n
Contractor shall comply with and follow the procedures
\nfor shipment set forth in Section E of Exhibit H (General
\nProject Requirements and Procedures).  In particular, at
\nleast prior to arrival of each shipment in India, Owner
\nand Owner’s insurance company providing insurance
\nwill receive from the Contractor, the notice of shipment,
\nsuch notice shall set forth the following information
\nconcerning such shipment : (a) a reference to the date,
\nparties and subject matter of this Contract; (b) a
\ndescription of, or that part of, the Equipment and
\nMaterials contained in such shipment; (c) the date of
\nembarkation and departure, (d) the port of origin, (e) the
\nmeans of shipment (air or sea); (f) the estimated date of
\narrival in India; (g) the port of entry in India; (h) the
\nvalue of the shipment; (i) the approximate weight and
\nvolume (gross and net); (j) the name, flag and owner of
\nthe vessel if shipment by sea or the designation of aircraft
\nif ship is by air; and (k) the number and value of bill of
\nlading or airfreight bill.   Contractor  shall ensure that a
\nprovision similar to this Clause 7.1 is included in all
\nagreements with Suppliers.\n<\/p>\n
Contractor shall be responsible for packing, loading,
\ntransporting, receiving, unloading, storing and protecting
\nall Equipment and Materials and\/or Contractor’s
\nEquipment and other things required for the Works.”\n<\/p>\n
\tPrice is specified under Clause 13.1 in the following terms :\n<\/p>\n
\t“13.1\tContract Price<\/p>\n
The total price to be paid by or on  behalf of Owner to
\nContractor in full consideration for the performance by
\nContractor of its obligations and responsibilities under
\nthis Contract, including the Work, shall be a fixed and
\nfirm lump sum price of US$ 151,044.192 (One hundred
\nfifty one million forty four thousand one hundred ninety
\ntwo US Dollars) (the “US Dollar Portion) and
\nRs.7,602,796,324 (Seven billion six hundred two million
\nseven hundred ninety six thousand three hundred twenty
\nfour Indian Rupees) (the “Indian Rupee Portion”), which
\nshall be subject to adjustment only as provided under
\nClause 13.4 (the US Dollar Portion and the Indian Rupee
\nPortion, as the same may be so adjusted, together, the
\n“Contract Price”).”\n<\/p>\n
\tThe contract envisages that the appellant may do the job itself or get
\nthe same done by sub-contracting.   It may only do a part of  the job itself.\n<\/p>\n
\tThe contract splits in  dollar and rupee components separately.  Clause
\n14.8 provides for general terms of payment, effect of payment and
\nmethodology of payment.  Pursuant to or in furtherance whereof separate
\npayment in US dollars and Indian rupees is to be made depending upon the
\nnature of supply viz. offshore supply and offshore services and onshore
\nsupply and onshore services.\n<\/p>\n
\tClause 22.1 deals with passing of title to the goods supplied in the
\nfollowing terms :\n<\/p>\n
22.1  Title to Equipment and Materials and Contractor’s
\nEquipment<\/p>\n
Contractor agrees that title to all Equipment and
\nMaterials shall pass to Owner from the Supplier or
\nSubcontractor pursuant to Section E of Exhibit H
\n(General Project Requirements and Procedures).
\nContractor shall, however, retain care, custody, and
\ncontrol of such Equipment and Materials and exercise
\ndue care thereof until (a) Provisional Acceptance of the
\nWork or (b) termination of this Contract, whichever shall
\nfirst occur.  Such transfer of title shall in no way affect
\nOwner’s rights under any other provision of this
\nContract.”\n<\/p>\n
The interpretation of different components of contract has been dealt within
\nAnnexure-A appended thereto.  So far as ‘offshore services work items’ are
\nconcerned, the same  has been defined to mean the items of work set forth as
\nitem numbers D-2.2.1, 2.2.2 and 2.2.3 of the Contract Price Schedule; details
\nwhereof have been mentioned in the said Annexure, which, inter alia,
\nprovides :\n<\/p>\n
                Notes
\nGeneral\n<\/p>\n
1.    xxx                xxx            xxx<\/p>\n
2.  Offshore supply (Exhibit D-2.1) is the price
\nof Equipment & Material (including cost of
\nengineering, if any, involved in the
\nmanufacture of such Equipment & Material)
\nsupplied from outside India on CFR basis, and
\nthe property therein shall pass on to the Owner
\non high seas for permanent incorporation in the
\nWorks, in accordance with the provisions of
\nthe Contract.\n<\/p>\n
3. Offshore Services (Exhibit D-2.2) is the
\nprice of design and engineering including
\ndetail engineering in relation to supplies,
\nservices and construction & erection and cost
\nof any other services to be rendered from
\noutside India.\n<\/p>\n
4.  Onshore Supply (Exhibit D-2.3 is the price
\nof Equipment & Material supplied from within
\nIndia for direct delivery at Site and permanent
\nincorporation in the Works.\n<\/p>\n
5. Onshore services (Exhibit D-2.4) is the price
\nof design engineering, detail engineering,
\ncustoms clearance, inland transportation,
\nprocurement services, supervision services,
\nproject management, testing and
\ncommissioning and any such service in relation
\nto the Works rendered in India.”\n<\/p>\n
The break down of contract price is as under :\n<\/p>\n
Exhibit
\nNo.\/Sl.\n<\/p>\n
No.\n<\/p>\n
Description of
\nScope
\nIn Indian
\nRupees
\nIn US
\nDollars
\nName and
\naddress of
\nContracting
\nentity
\nD-2.1
\nOffshore Supply
\n(Total of 2.1.1.,
\n2.1.2 and 2.1.3
\nNil
\n81,711,877
\nIHI, BNI &
\nTEIL
\nD-2.2
\nOffshore Services
\n(Total of 2.2.2 to
\n2.2.3)
\nNil
\n19,756,225
\nIHI, BNI &
\nTEIL
\nD-2.3
\nOnshore Supply
\n(Total of 2.3.1 to
\n2.3.3)
\n1,869,978,658
\nNil
\nIHI, BNI &
\nTEIL
\nD-2.4
\nOnshore Services
\n(Total of 2.4.1 to
\n2.4.3)
\n1,774,353,282
\n12,780,467
\nIHI, BNI &
\nTEIL
\nD-2.5
\nConstruction and
\nErection
\n(Total of 2.5.1. to
\n2.5.3)
\n3,958,464,384
\n36,795,623
\nIHI, BNI &
\nTEIL
\nD-2.0
\nTotal (D-2.1 to D-\n<\/p>\n
2.5) (See Note 9
\n7,602,796,324
\n151,044,192<\/p>\n
Treaty :  Double Taxation Avoidance Agreement (DTAA) :
\n\tArticle 5 of the Double Taxation Avoidance Agreement (DTAA)
\nbetween India and Japan, inter alia, provides as under :\n<\/p>\n
“1.\tFor the purposes of this Convention, the term
\n“permanent establishment” means a fixed place of
\nbusiness through which the business of an enterprise is
\nwholly or partly carried on.\n<\/p>\n
2.\tThe term “permanent establishment” includes
\nespecially :\n<\/p>\n
\t\t\t(a) a place of management;\n<\/p><\/blockquote>\n
\t\t\t(b) a branch;\n<\/p><\/blockquote>\n
\t\t\t(c) an office;\n<\/p><\/blockquote>\n
\t\t\t(d) a factory;\n<\/p><\/blockquote>\n
(e) a workshop;\n<\/p>\n
(f) a mine, an oil or gas well, a quarry or any other place
\nof extraction  of natural resources;\n<\/p>\n
(g) a warehouse in relation to a person providing storage
\nfacilities for others;\n<\/p>\n
(h) a farm, plantation or other place where agriculture,
\nforestry, plantation or related activities are carried on;\n<\/p>\n
(i) a store or other sales outlet; and\n<\/p>\n
(j) an installation or structure used for the exploration of
\nnatural resources, but only if so used for a period of more
\nthan six months.\n<\/p>\n
”\n<\/p>\n
\tClause 1 of  Article 7 of the said agreement  reads as under :\n<\/p>\n
\t“1.  \tThe profits of an enterprise of a Contacting
\nState shall be taxable only in that Contracting State
\nunless the enterprise carries on business in the other
\ncontracting State through a permanent establishment
\nsituated therein.  If the enterprise carries on business as
\naforesaid, the profits of the  enterprise may be taxed in
\nthat other Contracting State but only so much of them as
\nis directly or indirectly attributable to that permanent
\nestablishment.”\n<\/p>\n
\tClauses 1, 2 and 5 of Article 12 which are relevant for the purpose of
\nthis case, read as under :\n<\/p>\n
\t“1.\tRoyalties and fees for technical services
\narising in a Contracting State and paid to a resident of the
\nother Contracting State may be taxed in that other
\nContracting State.\n<\/p>\n
\t2.\tHowever, such royalties and fees for
\ntechnical services may also be taxed in the Contracting
\nState in which they arise and according to the laws of that
\nContracting State, but if the recipient is the beneficial
\nowner of the royalties or fees for technical services, the
\ntax so charged shall not exceed 20 per cent of the gross
\namount of the royalties or fee for technical services.\n<\/p>\n
\t5.\tThe provisions of paragraphs 1 and 2 shall
\nnot apply if the beneficial owner of the royalties or fees
\nfor technical services, being a resident of a Contracting
\nState, carries on business in the other Contracting State in
\nwhich the royalties or fees for technical services arise,
\nthrough a permanent establishment situated therein, or
\nperforms in that other Contracting State independent
\npersonal services from a fixed base situated therein, and
\nthe right, property or contract in respect of which the
\nroyalties or fees for technical services are paid is
\neffectively connected with such permanent establishment
\nor fixed base.  In such case, the provisions of article 7 or
\narticle 14, as the case may be, shall apply.”\n<\/p>\n
\tThe Treaty contains the Japanese notes,  clause 6 whereof reads as
\nunder :\n<\/p>\n
\t“6.\tWith reference to paragraph 1 of article 7 of
\nthe Convention, it is understood that by using the term
\n“directly or indirectly attributable to the permanent
\nestablishment”, profits arising from transactions in which
\nthe permanent establishment has been involved shall be
\nregarded as attributable to the permanent establishment to
\nthe extent appropriate to the part played by the permanent
\nestablishment in those transactions.  It is also understood
\nthat profits shall be regarded as attributable to the
\npermanent establishment to the above-mentioned extent,
\neven when the contract or order relating to the sale or
\nprovision of goods or services in question is made or
\nplaced directly with the overseas head office of the
\nenterprise rather than with the permanent establishment.”\n<\/p>\n
Statutory provisions :\n<\/p>\n
\tSections 5(2), Section 9(1)(i), Section 9(1)(vii) of the Act, which are
\nrelevant  for our  purpose, read as under :\n<\/p>\n
“5(2) Subject to the provisions of this Act, the total
\nincome of any previous year of a person who is a non-
\nresident includes all income from whatever source
\nderived which <\/p>\n
(a)     is received or is deemed to be received in India in
\nsuch year by or on behalf of such person; or<\/p>\n
(b)\taccrues or arises or is deemed to accrue or arise to
\nhim in India during such year.”\n<\/p>\n
“9(1). The following incomes shall be deemed to accrue
\nor arise in India :\n<\/p>\n
(i)\tall income accruing or arising, whether directly or
\nindirectly, through or from any business
\nconnection in India, or through or from any
\nproperty in India, or through or from any asset or
\nsource of income in India or through the transfer of
\na capital asset situate in India.\n<\/p>\n<\/p>\n
(vii) income by way of fees for technical services payable
\nby <\/p>\n
(a)\tthe Government; or<\/p>\n
(b)\ta person who is a resident, except where the fees
\nare payable in respect of services utilized in a
\nbusiness or profession carried on by such person
\noutside India or for the purposes of making or
\nearning any income from any source outside India;
\nor<\/p>\n
(c)\ta person who is a non-resident, where the fees are
\npayable in respect of services utilized in a business
\nor profession carried on by such person in India or
\nfor the purposes of making or earning any income
\nfrom any source in India :\n<\/p>\n
\tProvided that nothing contained in this clause shall
\napply in relation to any income by way of fees for
\ntechnical services payable in pursuance of an agreement
\nmade before the 1st day of April, 1976, and approved by
\nthe Central Government.”\n<\/p>\n
Analysis :\n<\/p>\n
 \tFor the purpose of taxation, the authority had proceeded on the basis
\nthat the element of tax consisted of  : (i) onshore supply and onshore
\nservices; and (ii) construction of offshore supply and offshore services.  It is
\nnot denied or disputed, as indicated hereinbefore,  that in respect of the first
\nelement of onshore  supply and onshore service, and construction tax would
\nbe payable in India.\n<\/p>\n
\tTwo basic issues which, thus, arise  for our consideration are :  (a) the
\ntaxation of the price of goods supplied,  by way of offshore supply price of
\nwhich is specified in Ex. D, Clause 2.1; and (b) the taxation of consideration
\npaid for rendition of services  described in the contract as offshore services
\nat Ex. D.\n<\/p>\n
\tThe contract is a complex arrangement.  Petronat and Appellant are
\nnot the only parties thereto, there are other members of the consortium who
\nare required to carry out different parts of the contract.  The consortium
\nincluded an Indian company.  The fact that it has been fashioned as a
\nturnkey contract by itself may not be of much significance.  The project is a
\nturnkey project.  The contract may also be a turnkey contract, but the same
\nby itself would not mean that even for the purpose of taxability the entire
\ncontract must be considered to be an integrated one so as to make the
\nappellant to pay tax in India.  The taxable events in execution of a contract
\nmay arise at several stages in several years.  The liability of the parties may
\nalso arise at several stages.  Obligations under the contract are distinct ones.
\nSupply obligation is distinct and separate from service obligation.  Price for
\neach of the component of the contract is separate.  Similarly offshore supply
\nand offshore services have separately been dealt with.  Prices in each of the
\nsegment are also different.\n<\/p>\n
\tThe very fact that in the contract, the supply segment and service
\nsegment have been specified in different parts of the contract is a pointer to
\nshow that the liability of the appellant thereunder would also be different.\n<\/p>\n
\tThe contract indisputably was executed in India.  By entering into a
\ncontact in India, although parts thereof will have to be carried out outside
\nIndia would not make the entire income derived by the contractor to be
\ntaxable in India.  We would, however, deal with this aspect of the matter  a
\nlittle later.\n<\/p>\n
\tScope of work is contained in clause 2.1 of Ex. A appended to the
\ncontract which includes supply of equipment, materials and facilities.  The
\nsaid exhibit spells out different systems to be set in place. It imposes an
\nobligation on the contractor to supply equipments required therefor.  It was
\nto arrange for the engineering services in relation thereto.  It was also
\nrequired to render various other services within India.  Ex. D, however,
\nprovides for the prices to be paid in respect of offshore supplies and offshore
\nservices, onshore supply and onshore services, construction and erection.
\nPayment schedule has also been separately specified in respect of each of the
\ncomponents separately.\n<\/p>\n
\tIt is not in dispute that title in the equipments supplied was to stand
\ntransferred upon delivery thereof outside India on high-sea basis as provided
\nfor in Article 22.1.  Similarly, Article 13.1. provides for a lump sum contract
\nprice, whereas Article 13.3.2. specifically refers to the cost of offshore
\nsupplies.  The provisions with regard to offshore supplies and offshore
\nservices were to be read with the provisions contained in Ex. D which
\nformed the basis of customs duty.  Clause 13.4 refers to Ex. D as the basis
\nfor price escalation.\n<\/p>\n
\tThe question of imposition of tax on income arising from a business
\nconnection may, thus, have to be considered keeping in view the
\naforementioned factual backdrop.\n<\/p>\n
\tSection 9(1)(i) of the Act states that income accruing or arising
\nwhether directly or indirectly, through or from any business connection in
\nIndia shall be deemed to accrue or arise in India.  Appellant is a non-resident
\nassessee.\n<\/p>\n
\tSection 9 raises a legal fiction; but having regard to the contextual
\ninterpretation and furthermore in view of the fact that we are dealing with a
\ntaxation statute the legal fiction must be construed having regard to the
\nobject it seeks to achieve.  The legal fiction created under Section 9 of the
\nAct must also be read having regard to the other provisions thereof. [See
\nMaruti Udyog Ltd. v. Ram Lal and Others,<\/a> (2005) 2 SCC 638]<\/p>\n
\tFor our benefit we may notice the provisions of Section 42 of the
\nIncome Tax Act, 1922.  It provided that only such part of income as was
\nattributable to the operations carried out in India would be taxable in India.\n<\/p>\n
\tTerritorial nexus doctrine, thus,  plays an important part in assessment
\nof tax.  Tax is levied on one transaction where the operations which may
\ngive rise to income may take place partly in one territory and partly in
\nanother.  The question which would fall for our consideration is as to
\nwhether the income that arises out of the said transaction would be required
\nto be proportioned to each of the territories or not.\n<\/p>\n
\tIncome arising out of operation in more than one jurisdiction would
\nhave territorial nexus with each of the jurisdiction on actual basis.  If that be
\nso, it may not be correct to contend that the entire income ‘accrues or arises’
\nin each of the jurisdiction.  The Authority has proceeded on the basis that
\nsupplies in question had taken place offshore.  It, however, has rendered, its
\nopinion on the premise that offshore supplies or offshore services were
\nintimately connected with the turnkey project.\n<\/p>\n
\tThe learned Additional Solicitor General in support of his contention
\nthat the contract is a composite one, has relied upon the following decisions :
\nN. Khadervali Sahib (Dead) by L.Rs. and Another v. N. Gudu Sahib (Dead)
\nand Others [(2003) 3 SCC 229]; Hindustan Shipyard Ltd. v. State of A.P.
\n[(2000) 6 SCC 579];  State of Rajasthan v. M\/s Man Industrial Corporation
\nLtd.<\/a> [(1969) 1 SCC 567],  K.S. Subbiah Pillai  v. Commissioner of Income
\nTax [(1999) 3 SCC 170]; M\/s Patnaik and Co. Ltd. v. Commissioner of
\nIncome Tax, Orissa<\/a>  [(1986) 4 SCC 16]; BSES Ltd. (Now Reliance Energy
\nLtd.) v. Fenner India Ltd. and Another<\/a> [(2006) 2 SCC 728].  The said
\ndecisions, in our considered view, are not applicable herein.\n<\/p>\n
\tIn Khadervali Sahib (supra), the question which arose for
\nconsideration was whether an award amounted to creation of or  transfer of
\nany fresh rights  in respect of  movable or immovable properties so as to
\nrequire registration under Section 17 of the Registration Act, when the same
\nrelated to the properties of a partnership firm.  Therein by reason of an
\naward, the residue upon settlement of accounts on dissolution of the
\npartnership firm was allocated to the partners.  It was held that the award did
\nnot require any registration.\n<\/p>\n
\tIn Hindustan Shipyard (supra), the question which arose for
\nconsideration was whether a contract constituted a sale or works contract.
\nLaying down the tests therefor, having regard to the terms and conditions
\ncontained therein, it was  opined that a contract of sale of goods was separate
\nfrom a contract for works and labour.  In regard to the categories of contract,
\nit was stated :\n<\/p>\n
“(i) the contract may be for work to be done for
\nremuneration and for supply of materials used in the
\nexecution of the work for a price;\n<\/p>\n
(ii) it may be a contract for work in which the use of the
\nmaterials is accessory or incidental to the execution of the
\nwork; and<\/p>\n
(iii) it may be a contract for supply of goods where
\nsome work is required to be done as incidental to the sale.”\n<\/p>\n
Whereas the first contract was held to be a composite contract, the
\nsecond was held to be a contract for work and labour not involving the sale
\nof goods; and the third was held to be a contract of sale where the goods
\nwere sold as chattels and the work done was merely incidental thereto.\n<\/p>\n
The view taken in State of Madras v. Gannon Dunkerley & Co.
\n(Madras) Ltd.<\/a>  [1959 SCR 379] is sought to be applied.  The contract in such
\na case must stipulate that the equipment would be supplied on CRF basis. It
\nspells out the price for supply of goods, in which event, for the purpose of
\nsales tax, the contract would involve sale of goods.  The principle of Gannon
\nDunkerly (supra), does not appear to be of much relevance in the instant
\ncase.\n<\/p>\n
Decisions of this court under the Sales Tax Laws referred to by the
\nlearned counsel, moreover,  may have to be considered on a different
\nfooting.\n<\/p>\n
In this case,  we are faced with a different situation.  It is only for the
\npurpose of taxability that the terms of the contract are required to be
\nconstrued.  A turnkey contract may involve supply of materials used in the
\nexecution of the contract for  price as also for use of the materials by works
\nand labour; but the same may not have any relation with the taxability part
\nof it.\n<\/p>\n
It is interesting to note that Instruction No.1829 issued by the Central
\nBoard of Direct Taxes on 21.09.1989 provides for certain guidelines having
\nregard to the possibility of undertaking of Hydro Electric Power Project by a
\nconsortium of a foreign company, stating :\n<\/p>\n
\t“The concept  of turnkey execution of the project
\ninvolves total and complete responsibilities of the
\npersons undertaking the contracts for commissioning the
\nproject and they are accordingly required to furnish
\nperformance guarantees for timely completion.”\n<\/p>\n
\tIt was further stated :\n<\/p>\n
\t“Apart from the separate contracts for the jobs
\nmentioned in Para 4 above, there would be an overall co-
\nordination agreement between the public sector company
\non the one hand and the foreign contracting parties
\nreferred to in Paragraph 4 on the other hand to ensure
\nguaranteed performance of all the contracts in a
\ncoordinated manner, and within an agreed time frame and
\nfor undertaking to meet necessary liabilities and
\nresponsibilities including payments of liquidated
\ndamages for delays etc.  One of the companies would, for
\nthis purpose, act as leader to ensure supervision and
\ncoordination of inter-related tasks.”\n<\/p>\n
\tIn M\/s Man. Industrial Corporation Ltd. (supra), this Court held :
\n“16. Our attention was invited to a judgment of the Court
\nof Appeal in Love v. Norman Wright (Builders) Ltd.
\n[1944] 1 K.B. 484 In that case the respondents contracted
\nwith the Secretary of State for War to do the work and
\nsupply the material mentioned in the Schedules to the
\ncontract, including the supply of black-out curtains,
\ncurtain rails and battens and their erection at a number of
\npolice stations. It was held by the Court of Appeal that
\nthe respondents were liable to pay purchase-tax. Reliance
\nwas placed upon the observations made by Godiard, L.J.
\nat p. 482:\n<\/p>\n
\t“If one orders another to make and fix
\ncurtains at his house the contract is one of sale
\nthough work and labour are involved in the making
\nand fixing, nor does it matter that ultimately the
\nproperty was to pass to the War Office under the
\nhead contract. As between the plaintiff and the
\ndefendants the former passed the property in the
\ngoods to the defendants who passed it on to the
\nWar Office.”\n<\/p>\n
We do not think that these observations furnish a
\nuniversal test that whenever there is a contract to “fix”
\ncertain articles made by a manufacturer the contract must
\nbe deemed one for sale and not of service. The test in
\neach case is whether the object of the party sought to be
\ntaxed is that the chattel as chattel passes to the other party
\nand the services rendered in connection with the
\ninstallation are under a separate contract or are incidental
\nto the execution of the contract of sale.”\n<\/p>\n
In M\/s Patnaik and Co. (supra), whereupon reliance has been placed
\nby the learned Additional Solicitor General, the question which arose for
\nconsideration was as to whether the investment in the loan by the assessee
\nout of the advance payment made by the Government departments was a
\ncapital asset and the loan was a capital loan or not.   We are not herein
\nconcerned with such a  situation.  The said decision, therefore, cannot be
\nsaid to have any application at all.\n<\/p>\n
In BSES Ltd. (supra), this Court was concerned with the construction
\nof bank guarantees.  The question which arose for consideration therein was
\nas to whether in the fact situation of the case, customer faced irretrievable
\ninjuries so as to obtain an order of injunction.  In view of the terms and
\nconditions of the contract, it was opined, although for the sake of
\nconvenience, the same had been split up into four sub-contracts, it
\nconstituted a composite contract executable on a turnkey basis.  The
\nquestion which arose for consideration, thus, was whether in terms of the
\ncontract having been reduced into writing by the “wrap around agreement”,
\nAppellant therein had a right to negotiate any or all the guarantees for any
\nbreach of any of the four contracts.  The said decision again has no
\napplication in the facts of the present case.\n<\/p>\n
Tax under the Act has to be assessed under different heads.  Income
\nunder one head  may be subject to exemption; under same head, deductions
\nmay be claimed;  yet under another, no tax may be payable at all.  Whether a
\npart of the income of the assessee would be taxable or not depends upon the
\nfact of each case.  Even there is nothing to prevent the income accruing or
\narising at the sources.\n<\/p>\n
In Union of India and Another v. Azadi Bachao Andolan and Another<\/a>
\n(2004) 10 SCC 1], this Court was dealing with a double taxation treaty.  It
\nwas held :\n<\/p>\n
“6. The Agreement provides for allocation of taxing
\njurisdiction to different contracting parties in respect of
\ndifferent heads of income. Detailed rules are stipulated
\nwith regard to taxing of dividends under Article 10,
\ninterest under Article 11, royalties under Article 12,
\ncapital gains under Article 13, income derived from
\nindependent personal services in Article 14, income
\nfrom dependent personal services in Article 15,
\ndirectors’ fees in Article 16, income of artists and
\nathletes in Article 17, governmental functions in Article
\n18, income of students and apprentices in Article 20,
\nincome of professors, teachers and research scholars in
\nArticle 21 and other income in Article 22.\n<\/p>\n
\tIn Commissioner of Income Tax, Bombay v. Ahmedbhai Umarbhai &
\nCo., Bombay<\/a> [(1950) SCR 335], this Court,  having regard to the provisions
\ncontained in Section 42 of the Income Tax Act, 1922, held that profits
\naccrued to the assessee of a part of the business in an Indian State having
\naccrued out of such business carried on in such State are exempted under the
\nthird proviso to Section 5 of the Excess Profit Tax Act.
\n\tOpining that the source of income can never be  the place  where the
\nincome accrues or arises, Kania, CJ, stated :\n<\/p>\n
“In my opinion there is nothing to prevent income
\naccruing or arising at the place of the source. The
\nquestion where the income accrued has to be determined
\non the facts of each case. The income may accrue or arise
\nat the place of the source or may accrue or arise
\nelsewhere, but it does not follow that the income cannot
\naccrue or arise at the place where the source exists.
\nTherefore it is necessary to ascertain whether that part of
\nthe business which is capable of being treated as one
\nseparate unit in the Hyderabad State has given rise to the
\nincome or profit sought by the assessee to be exempted
\nfrom taxation in the present case”\n<\/p>\n
\tPatanjali Sastri, J. approved the application of the principle underlying
\nthe decision in Commissioner of Taxation v. Kirk  [(1900 AC 588], namely,
\nthe principle of apportioning profits as between different processes
\nemployed in producing those profits and the different places where they
\nwere employed.\n<\/p>\n
\tMahajan, J. held :\n<\/p>\n
“For instance, where a person carries on manufacture,
\nsale, export and import, it is not possible to say that the
\nplace where the profits accrue to him is the place of sale.
\nThe profits received relate firstly to his business as a
\nmanufacturer, secondly to his trading operations, and
\nthirdly to his business of import and export. Profit or loss
\nhas to be apportioned between these businesses in a
\nbusinesslike manner and according to well-established
\nprinciples of accountancy. In such cases it will be doing
\nno violence to the meaning of the words “accrue” or
\n“arise” if the profits attributable to the manufacturing
\nbusiness are said to arise or accrue at the place where the
\nmanufacture is being done and the profits which arise by
\nreason of the sale are said to arise at the place where the
\nsales are made and the profits in respect of the import and
\nexport business are said to arise at the place where the
\nbusiness is conducted. This apportionment of profits
\nbetween a number of businesses which are carried on by
\nthe same person at different places determines also the
\nplace of the accrual of profits. To hold that though a
\nbusinessman has invested millions in establishing a
\nbusiness of manufacture, whether in the nature of a
\ntextile mill or in the nature of steel works, yet no profits
\nare attributable to this business or can accrue or arise to
\nthe business of manufacture because the produce of his
\nmills is sold at a different place and that it is only the act
\nof sale by which profits accrue and they arise only at that
\nplace is to confuse the idea of receipt of income and
\nrealization of profits with the idea of the accrual of
\nprofits. The act of sale is the mode of realizing the
\nprofits. If the goods are sold to a third person at the mill
\npremises no one could have said that these profits arose
\nmerely by reason of the sale. Profits would only be
\nascribed to the business of manufacture and would arise
\nat the mill premises. Merely because the mill owner has
\nstarted another business organization in the nature of a
\nsales depot or a shop, that cannot wholly deprive the
\nbusiness of manufacture of its profits, though there may
\nhave to be apportionment in such a case between the
\nbusiness of manufacture and business of shop keeping. In
\na number of cases such apportionment is made and is
\nalso suggested by the provisions of Section 42 of the
\nIndian Income Tax Act, reference to which has also been
\nmade in Proviso (2) of Section 5 of the Excess Profits
\nTax Act.”\n<\/p>\n
In Anglo-French Textile Co. Ltd. v. Commissioner of Income Tax,
\nMadras<\/a> (1954) SCR 523], the question which arose for consideration, inter
\nalia, was :\n<\/p>\n
” (2) Can the income received in India be said to arise in
\nIndia within the meaning of Section 4-A(c)(b) of the Act?
\nIf not, should only those profits determined under Section
\n42(3) as attributable to the operations carried out in India
\nbe taken into account for applying the test laid down in
\nSection 4-A(c)(b), and remanded the case to the High
\nCourt with the direction that it should give its opinion on
\nthese two questions.”\n<\/p>\n
In regard to the first question, it was opined that Section 42(3) had
\nnothing to do with the determination of the income arising in the taxable
\nterritories as distinguished from the income arising without taxable
\nterritories  as understood in Section 4A(c)(b) of the Act, it was held <\/p>\n
“The phraseology of Section 42(3) of the Act also
\nrepels the contention insofar as the profits and gains of
\nthe business which are referred to therein and which are
\ncapable of apportionment as therein mentioned are
\ndeemed to accrue or arise in the taxable territories thus
\nusing the words “accrue” and “arise” as synonymous
\nwith each other.\n<\/p>\n
 The above passage is also sufficient in our opinion to
\nestablish that the apportionment of income, profits or
\ngains between those arising from business operations
\ncarried on in taxable territories and those arising from
\nbusiness operations carried on without the taxable
\nterritories is based not on the applicability of Section
\n42(3) of the Act but on general principles of
\napportionment of income, profits or gains”\n<\/p>\n
While the first question was answered in negative, question no.2 was
\nanswered in the following terms :\n<\/p>\n
“Question 2The income received in British India
\ncannot be said to wholly arise in India within the
\nmeaning of Section 4-A(c)(b) of the Act and that there
\nshould be allocation of the income between the various
\nbusiness operations of the assessee company demarcating
\nthe income arising in the taxable territories in the
\nparticular year from the income arising without the
\ntaxable territories in that year for the purposes of Section
\n4-A(c)(b) of the Act.”\n<\/p>\n
In  Carborandum Co. v. Commissioner of Income-Tax, Madras<\/a>
\n[(1977) 108 ITR 335 : (1977) 2 SCC 862], this Court referring to its earlier
\ndecision in Commissioner of Income Tax, Punjab   v. R..D. Aggarwal and
\nCo.<\/a>& Another   [(1965) 56 ITR 20], opined :\n<\/p>\n
“15. On a plain reading of sub-sections (1) and (3) of
\nSection 42 it would appear that income accruing or
\narising from any business connection in the taxable
\nterritories  even though the income may accrue or arise
\noutside the taxable territories  will be deemed to be
\nincome accruing or arising in such territory provided
\noperations in connection with such business, either all or
\na part, are carried out in the taxable territories. If all such
\noperations are carried out in the taxable territories, sub-
\nsection (1) would apply and the entire income accruing or
\narising outside the taxable territories but as a result of the
\noperations in connection with the business giving rise to
\nthe income would be deemed to accrue or arise in the
\ntaxable territories. If, however, all the operations are not
\ncarried out in the taxable territories the profits and gains
\nof the business deemed to accrue or arise in the taxable
\nterritories shall be only such profits and gains as are
\nreasonably attributable to that part of the operations
\ncarried out in the taxable territories. Thus comes in the
\nquestion of apportionment under sub-section (3) of
\nSection 42.”\n<\/p>\n
\tIn CIT v. Mitsui Engineering and Ship Building Co. Ltd.  [259 ITR
\n248], on which reliance was placed;  the contention was that the finding that
\nthe contract for designing, engineering, manufacturing, shop testing and
\npacking up to f.o.b port of embarkation could not  be split up since the entire
\ncontract was to be read together and was for one complete transaction.  It
\nwas in the said fact situation held that it was not possible to apportion the
\nconsideration for design on one part and the other activities on the other part.
\nThe price paid to the assessee was the total contract price which covered all
\nthe stages involved in the supply of machinery.\n<\/p>\n
\tThis case is clearly distinguishable from the facts of the present case,
\nsince the payment for the offshore and onshore supply of goods and services
\nwas in itself clearly demarcated and cannot be held to be a complete contract
\nthat has to be read as a whole and not in parts.\n<\/p>\n
The principle of apportionment is also recognized by Clause (a) of
\nExplanation I. Thus, if submission of the learned Additional Solicitor
\nGeneral is accepted that the contract is a composite one, then offshore
\nsupply would be of equipment designed and manufactured in one territory
\n(Japan), and then sold in another tax territory,  leading to division of profits
\narising in two tax territories, which is not envisaged under our taxation law.\n<\/p>\n
It gives rise to the question as to what would be the meaning of the
\nphrase ‘business connection in India’.  Mere existence of business
\nconnection may not result in income of the non-resident assessee from
\ntransaction with such a business connection accruing or arising in India.\n<\/p>\n
\tIn Mazagaon Dock Ltd. v. CIT and Excess Profits Tax  [34 ITR 368],
\nwhereupon again reliance placed is distinguishable.  In that case a non-
\nresident carried on business with a resident, and the issue adjudicated upon
\nby the Court was that whether there was a clear and close connection
\nbetween them that produced profits or not, and whether any such income
\ngenerated by the non-resident company sending its ships for repairs to the
\nresident company is taxable, if it amounted to business. The Court answered
\nboth questions affirmatively.\n<\/p>\n
\tThe principle laid down therein has no application to the current fact
\nsituation because there was an extremely close connection between the
\nappellant company and non residents in that the two non-resident (British)
\ncompanies beneficially owned the entire share capital of the appellant
\ncompany. In the present situation there is no such connection, which can be
\nsaid to give rise to a business connection between the permanent
\nestablishment in India and the transaction that is sought to be taxed.\n<\/p>\n
\tYet again in Anglo French Textile Co. Ltd. v. CIT Madras<\/a>  [23 ITR
\n101], in the fact situation obtaining therein, it was held that when there was a
\ncontinuity of business relationship between the person in India who helps
\nmake the profits and the person outside who receives or realizes this profit, a
\nbusiness connection exists.\n<\/p>\n
\tIn that case, the Assessee company incorporated in the UK, owned a
\ntextile company in French Pondichery and had appointed another limited
\ncompany in Madras to act as its constituted agents. The same was held to be
\na business connection within British India. Such a close connection cannot
\nbe envisaged in the present case since it does not involve any such principle-
\nagent relationship between the PE and the non residents.\n<\/p>\n
\tBarendra Prasad Ray v. ITO  [129 ITR 295] whereupon reliance has
\nbeen placed, is not apposite.  Therein, the Court held that the professional
\nrelationship of a solicitor, who was a non-resident, with an Indian firm will
\nbe a business connection. There was a connection between the Indian firm
\nand the British solicitor which was real and intimate and not just a casual
\none and the fees earned by the solicitor was only through this connection,
\nand could not have done so without associating himself with the firm. Thus,
\nthe income earned by the solicitor was subject to tax in India, and payable by
\nthe firm as agents of the solicitor.\n<\/p>\n
\tThe principle of this case, is again not applicable in the present
\nscenario since the nature of the relationship between the permanent
\nestablishment, the foreign firms and the Indian firms are evidently
\ncontractual and not professional. And the transaction of sale and supply of
\ngoods offshore have not taken place with the involvement of the permanent
\nestablishment, therefore excluding this transaction from the scope of
\ntaxation in India.\n<\/p>\n
In Commissioner of Income-Tax, A.P. v. Toshoku Ltd. [(1980) 125
\nITR 525 : (1980) Supp. SCC 614], this Court interpreted Section 9(1)(i) and
\nthe Explanation thereto on the factual matrix obtaining therein that the
\nstatutory agent exported his goods to Japan and  France where they were
\nsold through the assessee and the entire sales price was received in India by
\nthe said agent who made credit entries in his accounts books regarding the
\ncommission amounts payable to the assessees and remitted the commission
\namounts to them subsequently.  Having regard to the fact that the Japanese
\ncompany was a non-resident company, distinguishing the case Raghava
\nReddi & Another   v. Commissioner of Income Tax, A.P.<\/a>  [(1962) 44 ITR
\n720] , it was held :\n<\/p>\n
“It is not possible to hold that the non-resident
\nassessees in this case either received or can be deemed to
\nhave received the sums in question when their accounts
\nwith the statutory agent were credited, since a credit
\nbalance without more only represents a debt and a mere
\nbook entry in the debtor’s own books does not constitute
\npayment which will secure discharge from the debt. They
\ncannot, therefore, be charged to tax on the basis of
\nreceipt of income actual or constructive in the taxable
\nterritories during the relevant accounting period.”\n<\/p>\n
\tA Division Bench of the Karnataka High Court presided over by
\nVenkataramiah, J., in VDO Tachometer Werke, West Germany etc. v.
\nCommissioner of Income-Tax, Karnataka-I etc.  [(1979) 117 ITR 804]
\nfollowing  Carborandum Co. (supra), held that notwithstanding the
\namendment of Section 9 of the Act by the addition of Clauses (vi) and (vii),
\nthe cases continued to be governed by the provisions of Section 9 of the Act.\n<\/p>\n
\tIn Commissioner of Income-Tax  v. Atlas Steel Co. Ltd. [(1987) 164
\nITR 401], a Division Bench of the Calcutta High Court following
\nCarborandum (supra) and other decisions held :
\n“35. The expression “business connection” in the
\ncontext of the Income-tax Act has come to acquire a
\nspecial meaning as laid down by the Supreme Court in R.
\nD. Aggarwal & Co.’s case.  A business connection
\ncontemplated under Section 42 of the Indian Income-tax
\nAct, 1922 (corresponding to Section 9 of the Income-tax
\nAct, 1961, involved “a relation between a business
\ncarried on by a non-resident and some activity in the
\ntaxable territories which are attributable directly or
\nindirectly to the earnings, profits or gains of such
\nbusiness”. It was laid down by the Supreme Court that
\nthere must be trading activity both outside and within the
\ntaxable territory. In the facts of this case, for the supply
\nof inventions, patents, application for patents, secret
\nknowledge and know-how, no trading activity had been
\nor was required to be carried on by the assessee within
\nthe taxable territory. Further, on a consideration of the
\nagreement, it cannot be said that the trading activity
\nwhich was intended to be carried on by the assessee as
\nproduction adviser of Hindustan Steel Ltd., in future was
\nrelatable to or connected with the past supply of the said
\nknow-how and other items.\n<\/p>\n
[See also Income-Tax Officer and  Others v. Shriram Bearings Ltd.<\/a>  (1987)
\n164 ITR 419] <\/p>\n
\tA similar view was taken, when the matter came before this Court  in
\nIncome-Tax Officer and Others v. Shriram Bearings Ltd.<\/a> [(1997) 224 ITR
\n724 : (1997) 10 SCC 332], wherein B.P. Jeevan Reddy, J. speaking for the
\nDivision Bench, opined  :\n<\/p>\n
“We are not prepared to agree that the High Court
\nhas not correctly understood the purport of the agreement
\nbetween the respondent and M\/s Nippon Seike Kabushiki
\nKaisha (NSK). The agreement is in two parts. It is true
\nthat the two parts are interdependent but yet the
\nconsideration for the sale of trade secrets and
\nconsideration of technical assistance is separately
\nprovided for and mentioned under separate sections. So
\nfar as the consideration for the technical assistance is
\nconcerned, its taxability is not in doubt. The only
\ncontroversy is with respect to the taxability of 1,65,000
\nUS Dollars which is stipulated as the consideration for
\nsale of trade secrets. The agreement specifically says that
\nthe said sale is effected in Japan. We are unable to see on
\nwhat basis it can be said that any part of the said amount
\nhas been earned in India.”\n<\/p>\n
\tIn construing a contract, the terms and conditions thereof are to be
\nread as a whole.  A contract must be construed keeping in  view the intention
\nof the parties.  No doubt, the applicability of the tax laws would depend
\nupon the nature of the contract, but the same should not be construed
\nkeeping in view the taxing provisions.\n<\/p>\n
\tIn Commissioner of Income-Tax, Tamil Nadu-V  v. Fried Krupp
\nIndustries<\/a>  [(1981) 128 ITR 27], a Division Bench of the Madras High Court
\nopined :\n<\/p>\n
“Nowadays we have what are called turnkey projects,
\nand in such projects until the machinery is actually run
\nand proves its performance, the responsibility of the
\nforeigner would continue. But in the present case the
\ncontract cannot be equated to a turnkey contract. The
\noperations in India for the erection of the machinery are
\nonly the responsibility of the Indian company. It is only
\nany defect in the machinery or any negligence in the
\nperformance of the foreign engineer, that may give rise to
\na claim for damages. But that is not the same as the
\nforeign company performing any operation in pursuance
\nof this contract in India. Whatever we have said above
\nwould apply also to deputation of foreign personnel for
\nprocuring Indian spare parts. It was obviously considered
\nnecessary to get foreign personnel from abroad for this
\npurpose only because the type of spare parts required for
\nthe foreign machinery could be better picked up by these
\npersonnel, who have experience in running the
\nmachinery. It is merely an assistance provided to the
\nIndian company, the foreign personnel being treated as
\nthe employees of the Indian company. Having gone
\nthrough the terms of the agreement in full, we are
\nsatisfied that there are no operations in India attributable
\nto the foreign company which can give rise to any profits
\nbeing earned in India. The agreement itself says that the
\nterms of the payments were in Germany. Thus, there is
\nabsolutely no operation in India which would give rise to
\ntax liability in India as far as the foreign company is
\nconcerned”\n<\/p>\n
The term ‘permanent establishment’ has not been defined in the
\nIncome Tax Act.\n<\/p>\n
\tSince the appellant carries on business in India through a Permanent
\nEstablishment, they clearly fall out of the applicability of Article 12(5) of the
\nDTAA and into the ambit of Article 7. The Protocol to the DTAA, in
\nparagraph 6, discusses the involvement of the permanent establishment in
\ntransactions, in order to determine the extent of income that can be taxed. It
\nis stated that the term ‘directly or indirectly attributable’ indicates the
\nincome that shall be regarded on the basis of the extent appropriate to the
\npart played by the permanent establishment in those transactions. The
\npermanent establishment  here has had no role to play in the transaction that
\nis sought to be taxed, since the transaction took place abroad.\n<\/p>\n
Clause 1 of Article 7, thus, provides that if an income arises in Japan
\n(Contracting State), it shall be taxable in that country unless the enterprise
\ncarries on business in the other Contracting State (India) through a
\npermanent establishment situated therein.  What is to be taxed is profit of the
\nenterprise in India, but only so much of them as is directly or indirectly
\nattributable to that permanent establishment.  All income arising out of the
\nturnkey project would not, therefore, be assessable in India, only because the
\nassessee has a permanent establishment.\n<\/p>\n
It is relevant to note that the tax treaty between India and Japan is
\nessentially  based on OECD model, providing :\n<\/p>\n
\t“a)\tthe income of a resident, including of the
\nkind that would fall under would be table under Section
\n9, would be taxed in the State of residence, save and
\nexcept the income attributable to a Permanent
\nEstablishment, and<\/p>\n
\tb)\teven in the case of a permanent
\nestablishment, income from business would be taxable in
\nthe State of residence.”\n<\/p>\n
\tIn Klaus Vogel on Double Taxation Conventions, it is stated :\n<\/p>\n
\t“g)\tNo force of attraction principle : The second
\nsentence of Art. 7 (1) allows the State of the permanent
\nestablishment to tax business profits, ‘but only so much
\nof them as is attributable to that permanent
\nestablishment’.  The MC has thus decided against
\nadopting the so-called ‘force of attraction of the
\npermanent establishment’, i.e. against the principle that,
\nwhere there is a permanent establishment, the State of the
\npermanent establishment should be allowed to tax all
\nincome derived by the enterprise from sources in that
\nState irrespective of whether or not such income is
\neconomically connected with the permanent
\nestablishment.  In line with the domestic law then
\nprevailing in the USA, such a ‘force of attraction’ was,
\nfor instance, incorporated in Germany’s 1954 DTC with
\nUSA (second sentence of Art. III (I).  In contrast, the
\nsecond sentence of Art. 7(1) MC allows the State of the
\npermanent establishment to tax only those profits which
\nare economically attributable to the permanent
\nestablishment, i.e. those which result from the permanent
\nestablishment’s activities, which arise economically from
\nthe business carried on by the permanent establishment
\n(cf. also para 5 MC Comm. Art. 7, supra m. no. 10).  As
\nregards the profits made by the enterprise in the State of
\nthe permanent establishment, a distinction must always
\nbe made between those profits which result from the
\npermanent establishment’s activities and those made,
\nwithout any interposition of the permanent establishment,
\nby the head office or any other part of the enterprise (also
\nfor mere assembly permanent establishment :BFH 37
\nRIW 258 (1991).  It is only when there is a connection
\nwith the permanent establishment that the State of the
\npermanent establishment is entitled to impose tax.
\nConversely, losses incurred in connection with direct
\ntransactions may not be set off against a permanent
\nestablishment’s profits.   Since a DTC may not increase
\ntax liability, the USA, it is true, imposes tax at the lower
\namount that would ensue if the permanent
\nestablishment’s business and direct transactions were
\ncombined and treated as if no DTC existed (of course, the
\ntaxpayer may, in such event, not only set off the result of
\nindividual direct transactions, which amounted to a loss
\nagainst the permanent establishment’s positive operating
\nresult :I.R.S. Rev. Rul. 84-17, 1984-I Cum. Bull. 308).
\nAccording to that ruling, the taxpayer is in such cases
\nentitled to elect taxation which discounts the DTC. (see
\nsurpa Art. I, at m. no.44).”\n<\/p>\n
 \tWe generally agree with the said statement law.\n<\/p>\n
\tThe distinction between the existence of a business connection and
\nthe income accruing or arising out of such business connection is clear
\nand explicit. In the present case, the permanent establishment’s non-
\ninvolvement in this transaction excludes it from being a part of the cause of
\nthe income itself, and thus there is no business connection.\n<\/p>\n
Article 5.3 provides that a person  is regarded as having a permanent
\nestablishment if he  carries on construction and installation activities in a
\nContracting State only if the said activities are carried out for more than six
\nmonths.  Paragraph 6 of the Protocol to India Japan Tax Treaty also provides
\nthat only income arising from activities wherein the permanent
\nestablishment has been involved can be said to be attributable to the
\npermanent establishment. It gives rise to two questions, firstly offshore
\nservices are rendered outside India;  the permanent establishment would
\nhave no role to play in respect thereto in the earning of the said income.
\nSecondly, entire services having been rendered outside India, the income
\narising therefrom cannot be attributable to the permanent establishment so as
\nto bring within the charge of tax.\n<\/p>\n
\tFor attracting the taxing statute there has to be some activities through
\npermanent establishment.  If income arises without any activity of the
\npermanent establishment, even under the DTAA the taxation liability in
\nrespect of oversea services would not arise in India.  Section 9 spells out the
\nextent to which the income of non-resident would be liable to tax in India.
\nSection 9 has a direct territorial nexus.  Relief under a Double Taxation
\nTreaty having regard to the provisions contained in Section 90(2) of the
\nIncome Tax Act would arise only in the event a taxable income of the
\nassessee arises in one Contracting State on the basis of  accrual of income  in
\nanother Contracting State on the basis of residence.  Thus, if  Appellant had
\nincome that accrued in India and is liable to tax because in its State all
\nresidents it was entitled to relief from such double taxation payable in terms
\nof Double Taxation Treaty.  However, so far as accrual of income in India is
\nconcerned,  taxability must be read in terms of Section 4(2) read with
\nSection 9, whereupon the question of seeking assessment of such income in
\nIndia on the basis of Double Taxation Treaty would arise.\n<\/p>\n
\tIn cases such as this, where different severable parts of the composite
\ncontract is performed in different places, the principle of apportionment can
\nbe applied, to determine which fiscal jurisdiction can tax that particular part
\nof the transaction. This principle helps determine, where the territorial
\njurisdiction of a particular state lies, to determine its capacity to tax an event.
\nApplying it to composite transactions which have some operations in one
\nterritory and some in others, is essential to determine the taxability of
\nvarious operations.\n<\/p>\n
\tIt is, therefore, in our opinion, the concepts profits of business
\nconnection and permanent establishment should not be mixed up.  Whereas
\nbusiness connection is relevant for the purpose of application of Section 9;
\nthe concept of permanent establishment is relevant for assessing the income
\nof a non-resident under the DTAA.  There, however, may be a case where
\nthere can be over-lapping of income; but we are not concerned with such a
\nsituation.  The entire transaction having been completed on the high seas, the
\nprofits on sale did not arise in India, as has been contended by the appellant.
\nThus, having been excluded from the scope of  taxation under the Act, the
\napplication of the double taxation treaty would not arise. Double Tax Treaty,
\nhowever, was taken recourse to by Appellant only by way of an alternate
\nsubmission on income from services and not in relation to the tax of offshore
\nsupply of goods.\n<\/p>\n
\tWe would in the aforementioned context consider the question of
\ndivision of taxable income of offshore services.  Parties were ad idem that
\nthere existed a distinction between onshore supply and offshore supply.  The
\nintention of the parties, thus, must be judged from different types of services,
\ndifferent types of prices, as also different currencies in which the prices are
\nto be paid.\n<\/p>\n
\t Section 9(1)(vii)(c) of the Act states that “a person who is a non-
\nresident, where the fees are payable in respect of services utilized in a
\nbusiness or profession, carried on by such person in India, or for the
\npurposes of making or earning any income from any source in India”.
\nReading the provision in its plain sense, it can be seen that it requires two
\nconditions have to be met  the services which are the source of the income
\nthat is sought to be taxed, has to be rendered in India, as well as utilized in
\nIndia, to be taxable in India. In the present case, both these conditions have
\nnot been satisfied simultaneously, therefore excluding this income from the
\nambit of taxation in India. Thus, for a non-resident to be taxed on income for
\nservices, such a service needs to be rendered within India, and has to be a
\npart of a business or profession carried on by such person in India. The
\nPetitioners in the present case have provided services to persons resident in
\nIndia, and though the same have been used here, it has not been rendered in
\nIndia.\n<\/p>\n
Section 9(1)(vii) of the Act whereupon reliance has been placed by
\nthe learned Additional Solicitor General, must be read with Section 5
\nthereof, which takes within its purview the territorial nexus on the basis
\nwhereof tax is required to be levied, namely,  : (a) resident; and (b) receipt or
\naccrual of income.\n<\/p>\n
\tGlobal income of a resident although is subjected to tax, global
\nincome of a non-resident may not be.  The answer to the question would
\ndepend upon the nature of the contract and the provisions of DTAA.\n<\/p>\n
What  is  relevant is receipt or accrual of income, as would be evident
\nfrom a plain reading of Section 5(2) of the Act..  The legal fiction created
\nalthough in a given case may be held to be of wide import, but it is trite that
\nthe terms of a contract  are required to be construed having regard to the
\ninternational covenants and conventions.  In a case of this nature,
\ninterpretation with reference to the nexus to tax territories will also assume
\nsignificance.  Territorial nexus  for the purpose of determining the tax
\nliability is an internationally accepted principle.  An endeavour should, thus,
\nbe made to construe the taxability of a non-resident in respect of income
\nderived by it.   Having regard to the internationally accepted principle and
\nDTAA, it may not be possible to give an extended meaning to the words
\n‘income deemed to accrue or arise in India’ as expressed in Section 9 of the
\nAct.  Section 9 incorporated various heads of income on which tax is sought
\nto be levied by the Republic of India.  Whatever is payable by a resident to a
\nnon-resident by way of fees for technical services, thus, would not always
\ncome  within the purview of Section 9(1)(vii) of the Act.   It must have
\nsufficient territorial nexus with India so as to furnish a basis for imposition
\nof tax.  Whereas a resident would come within the purview of Section
\n9(1)(vii) of the Act, a non resident would not,  as services of a non-resident
\nto a resident utilize in India may not have much relevance in determining
\nwhether the income of the non-resident accrues or arises in India.  It must
\nhave a direct live link between the services rendered in India, when such a
\nlink is established, the same may again be subjected to any relief under
\nDTAA.  A distinction may also be made between rendition of services and
\nutilization thereof.\n<\/p>\n
Section 9(1)(vii)(c) clearly states “where the fees are payable in
\nrespect of services utilized in a business or profession carried on by such
\nperson in India”  It is evident that Section 9(1)(vii), read in its plain, same
\nenvisages the fulfillment of two conditions : services, which are source of
\nincome sought to be taxed in India must be  (i) utilized in India and (ii)
\nrendered in India.  In the present case, both these conditions have not been
\nsatisfied simultaneously.\n<\/p>\n
The provisions of Section 9(1)(vii) of the Act are plain and  capable of
\nbeing given a meaning.  There, therefore, may not be any reason not to give
\nfull effect thereto.  However, even in relation to such income, the provisions
\nof  Article 7 of the DTAA would be applicable, as services rendered outside
\nIndia would have nothing to do with permanent establishment in India. Thus,
\nif any services have been rendered by the head office of  Appellant outside
\nIndia, only because they were connected with permanent establishment.
\nEven in relation thereto, principle of apportionment shall apply.\n<\/p>\n
The Authority, in our opinion, has committed an error in this behalf,
\nas if services rendered by the head office are considered to be the services
\nrendered by the permanent establishment, the distinction between Indian and
\nforeign operations and the apportionment of the income of the operations
\nshall stand obliterated.\n<\/p>\n
It would be contrary to the intent and purport of the Double Taxation
\nConvention which is a part of the scheme under the Income Tax Act.\n<\/p>\n
We, therefore, hold as under :\n<\/p>\n
Re : Offshore Supply :\n<\/p>\n
(1)\tThat only such part of the income, as is attributable to the operations
\n\tcarried out in India can be taxed in India.\n<\/p>\n
(2)\tSince all parts of the transaction in question, i.e. the transfer of
\n\tproperty in goods as well as the payment, were carried on outside the
\n\tIndian soil, the transaction could not have been taxed in India.
\n(3)\tThe principle of apportionment, wherein the territorial jurisdiction of
\n\ta particular state determines its capacity to tax an event, has to be
\n\tfollowed.\n<\/p>\n
(4)\tThe fact that the contract was signed in India is of no material
\n\tconsequence, since all activities in connection with the offshore
\n\tsupply were outside India, and therefore cannot be deemed to accrue
\n\tor arise in the country.\n<\/p>\n
(5)\tThere exists a distinction between a business connection and a
\n\tpermanent establishment.  As the permanent establishment cannot be
\n\tsaid to be involved in the transaction, the aforementioned provision
\n\twill have no application.  The permanent establishment cannot be
\n\tequated to a business connection, since the former is for the purpose
\n\tof assessment of income of a non-resident under a Double Taxation
\n\tAvoidance Agreement, and the latter is for the application of Section
\n\t9 of the Income Tax Act.\n<\/p>\n
(6)\tClause (a) of Explanation 1 to S. 9(1)(i) states that only such part of
\n\tthe income as is attributable to the operations carried out in India, are
\n\ttaxable in India.\n<\/p>\n
(7)\tThe existence of a permanent establishment would not constitute
\n\tsufficient ‘business connection’, and the permanent establishment
\n\twould be the taxable  entity. The fiscal jurisdiction of a country would
\n\tnot  extend to the \ttaxing entire income attributable to the permanent
\n\testablishment.\n<\/p>\n
(8)\tThere exists a difference between the existence of a business
\n\tconnection \tand the income accruing or arising out of such business
\n\tconnection.\n<\/p>\n
(9)\tParagraph 6 of the Protocol to the DTAA is not applicable, because,
\n\tfor the profits to be ‘attributable directly or indirectly’, the permanent
\n\testablishment  must be \tinvolved in the activity giving rise to the
\n\tprofits.\n<\/p>\n
Re: Offshore Services :\n<\/p>\n
(1) \tSufficient territorial nexus between the rendition of services and
\n\tterritorial limits of India is necessary to make the income taxable.
\n(2)\tThe entire contract would not be attributable to the operations in India
\nviz. the place of execution of the contract, assuming the offshore
\nelements form an integral part of the contract.
\n(3)\tSection.9(1)(vii) of the Act read with Memo cannot be given a wide
\n\tmeaning so as to hold that the amendment was only to include the
\n\tincome of non-resident taxpayers received by them outside India from
\n\tIndian concerns for services rendered outside India.
\n(4)\tThe test of residence, as applied in international law also, is that of the
\n\ttaxpayer and not that of the recipient of such services.
\n(5)\tFor Section 9(1)(vii) to be applicable, it is necessary that the services
\n\tnot only be utilized within India, but also be rendered in India or have
\n\tsuch a “live link” with India that the entire income from fees as
\n\tenvisaged in Article 12 of DTAA becomes taxable in India.
\n(6)\tThe terms ‘effectively connected’ and ‘attributable to’ are to be
\nconstrued differently even if the offshore services and the permanent
\nestablishment were connected.\n<\/p>\n
(7)\tSection 9(1)(vii)(c) of the Act in this case would have no application
\nas there is nothing to show that the income derived by a non-resident
\ncompany irrespective of where rendered, was utilized in India.
\n(8)\tArticle 7 of the DTAA is applicable in this case, and it limits the tax
\non business profits to that arising from the operations of the
\npermanent establishment. In this case, the entire services have been
\nrendered outside India, and have nothing to do with the permanent
\nestablishment, and can thus not be attributable to the permanent
\nestablishment and therefore not taxable in India.
\n(9)\tApplying the principle of apportionment to composite transactions
\nwhich have some operations in one territory and some in others, is
\nessential to determine the taxability of various operations.
\n(10)\tThe location of the source of income within India would not render
\n\tsufficient nexus to tax the income from that source.
\n(11)\tIf the test applied by the Authority for Advanced Rulings is to be
\nadopted here too, then it would eliminate the difference between the
\nconnection between Indian and foreign operations, and the
\napportionment of income accordingly.\n<\/p>\n
(12)\tThe services are inextricably linked to the supply of goods, and it
\n\tmust be considered in the same manner.\n<\/p>\n
 For the reasons aforementioned, the appeal is allowed in part and to
\nthe extent mentioned hereinbefore.  No costs.<\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Ishikawajma-Harima Heavy … vs Director Of Income Tax, Mumbai on 4 January, 2007 Author: S.B. Sinha Bench: S.B. Sinha, Dalveer Bhandari CASE NO.: Appeal (civil) 9 of 2007 PETITIONER: Ishikawajma-Harima Heavy Industries Ltd RESPONDENT: Director of Income Tax, Mumbai DATE OF JUDGMENT: 04\/01\/2007 BENCH: S.B. Sinha & Dalveer Bhandari JUDGMENT: J […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-200423","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nIshikawajma-Harima Heavy ... vs Director Of Income Tax, Mumbai on 4 January, 2007 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/ishikawajma-harima-heavy-vs-director-of-income-tax-mumbai-on-4-january-2007\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Ishikawajma-Harima Heavy ... vs Director Of Income Tax, Mumbai on 4 January, 2007 - 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