Facts of the case
The applicant along with three other companies, entered into a Consortium Agreement for the purpose executing a contract: “to implement the design, manufacture, supply, installation, testing and commissioning of signaling/ train-control and communication system”. The consortium was jointly and severally responsible for the work tendered. The Applicant contended that:
- The design and supply of equipment by the applicant took place outside India and being an offshore transaction, income therefrom is not chargeable to tax in India.
- Title to the goods passed outside and payment was received outside India and no part of the income either arose in India or can be deemed to arise in India.
- Reliance is placed on Ishikawajima–Harima 288 ITR 408 (SC), Hyundai Heavy Industries 291 ITR 482 (SC) & Hyosung Corp 341 ITR 18 (AAR). The applicant contended that a contract of this nature was capable of being dissected and it should be treated separately for the purpose of deciding whether income from the performance of that part of the contract arose onshore or offshore and that part of the income attributable to offshore transaction.
Revenue argued that the contract was one for design, manufacture, supply, installation, testing & commissioning of a system in India and the contract cannot be split up since it was a composite contract for the commissioning of a project. There was no occasion to deal with offshore supply, so called, separately. Hence, the Consortium Members including the applicant are liable to be assessed as an Association of Persons and the income from the transaction was chargeable to tax in India.
- A contract has to be read as a whole in the context of the purpose for which it is entered into. A contract for the installation and commissioning of a project like the present one, cannot be split up into separate parts as consisting of independent supply or sale of goods and for installation at the work site, leading to the commissioning and so on.
- The object of the contract and the purpose of the contract were the installation and commissioning of a signaling and communication system. The contract provided for the payment for the work in lump and it cast a joint and several liability on the consortium for carrying out the work. A contract has to be read as a whole in the context of the purpose for which it is entered into.
- In the Vodafone judgement rendered by three-Judge bench of the Supreme Court it is clearly laid down that “it is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look at the transaction as a whole and not to adopt a dissecting approach.” Thus, the approach adopted in Ishikawajima – Harima Heavy Industries Limited vs. DIT now stands disapproved or overruled.
- In Linde AG AAR 962/2010 & Roxar Maximum (AAR), this Authority has discussed this aspect and has taken the view that such contracts should be read as a whole in the context of the object sought to be achieved and they cannot be split up into different parts for the purpose of taxation.
- Further, as the applicant and the others came together for jointly executing the project, they constituted an AOP & were liable to be taxed as such. The argument that the obligations undertaken by the Consortium jointly and directly under the contract were not relevant in considering the question whether there was an AOP but what was relevant was only their relationship inter se is not acceptable. The fact that between themselves, the members of the Consortium divide the performance of the obligation does not affect the nature and content of the obligation undertaken by them jointly.
It is pertinent to note that AAR in the case of SEPCO III Electric Power Construction Corporation, In re (2012) 342 ITR 313 (AAR) relying on the Supreme Court’s decision in Ishikawajima-Harima Heavy Industries v. DIT, (2007) 288 ITR 408 (SC), had held that the transaction cannot be considered as one and indivisible and therefore, the tax authority does not have the jurisdiction to tax payment made outside India for offshore supplies. However, in the said case, the question raised was only on offshore supply of equipments and not on other activities.