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25.01.2011 - Some Useful Updates as on 25.01.2011
Tuesday, January 25, 2011

1.   DIRECTOR OF INCOME TAX, NEW DELHI Vs. LG CABLE LTD., ITA No. 703/2009, Date of Decision : December 24, 2010 HIGH COURT OF DELHI at NEW DELHI 

Whether the Income Tax Appellate Tribunal is justified in not holding that the contract in question is not a composite one and, therefore, the assessee is not liable to pay tax in India in respect of offshore service? 

Yes. 

Relevant Extracts from Judgments 

36. In the final analysis we have no hesitation in holding that viewed from any angle, the fact situation in the instant case is almost identical to that in the case of Ishikawajma (supra) and the law as enunciated by the Supreme Court in the said case will squarely apply to the facts of the present case. If at all there is a difference, the facts in the present case stand on a better footing than in Ishikawajma (supra). In Ishikawajma (supra) there was a turnkey contract with four separate component activities, viz., offshore supply, offshore services, onshore supply and onshore services awarded by Petronet LNG to a consortiumof companies led by the Japanese company Ishikawajma-Harima. In the instant case there are two separate contracts i.e. offshore supply and the onshore services contract awarded by the PGCIL to the respondent-assessee. As in the said case the consideration for offshore contract and onshore contract are separate and distinct from each other, inasmuch as the consideration in the case of offshore supply contract was received outside India through the mechanism of a Letter of Credit in foreign exchange while the consideration for onshore contract was received, for the most in Indian rupees with a nominal amount in foreign currency, the latter being for training charges. The title to the equipment supplied from outside India was transferred in favour of PGCIL outside India. In the case of Ishikawajma (supra), it was transferred on the high seas but in the instant case, it was transferred in the country of origin itself as soon as the goods were loaded upon the mode of transfer to be used to convey the plant and machinery, i.e., the shipping vessel, even prior to the goods reaching the high seas. Once the title was transferred in the aforesaid manner, there was no provision either in the agreement or in law providing recourse to the respondents to take back the title.  

36. With regard to the setting up of a permanent establishment also, the permanent establishment of the respondent in the instant case, as in the case of Ishikawajma (supra), had no role to play in the execution of the offshore supply contract and as a matter of fact was set up for the sole purpose of enabling the performance of the onshore services contract.  

37. The contract, however, in the instant case as in the case of Ishikawajma (supra) would be said to have been successfully performed only after the satisfactory commissioning and erection of the plant and equipments. Since the permanent establishment was not at all involved in the transaction of the offshore supply of equipment, the existence of the permanent establishment (which as held in Ishikawajma (supra) is for the purpose of assessment of income of a non-resident under the Double Taxation Avoidance Agreement), would be irrelevant in the instant case. Clause (a) of Explanation (1) to Section 9 (i) would not be attracted at all which provides that in the case of a business where all operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. In the instant case there were no operation qua the agreement for supply of equipment, which was carried out in India, and therefore, no income could be deemed to have accrued or arisen in India whether directly or indirectly or through any business connection in India.  

38. In view of the aforesaid we answer the question no.1 in the affirmative in favour of the respondent-assessee and against the Revenue. 

(Please click here for judgment)

   

2.  COMMISSIONER OF INCOME TAX, DELHI-XI Vs. M/S. AERO CLUB, ITA No. 216/2006  Date of Decision : December 24, 2010, HIGH COURT OF DELHI AT NEW DELHI 

The answer is our opinion must be an emphatic no. In our opinion, the CIT(A) and the Income Tax Appellate Tribunal rightly set aside the “best judgment” assessment of the Assessing Officer on the ground that the Assessing Officer had “not brought on record any comparable case wherein the net profit declared by a tax payer in the similar business was higher than the one declared by the assessee.” We also concur with the findings of the Income Tax Appellate Tribunal that the profit margins of a tax payer as declared by him, could be varied and disturbed only if the profit margins in the case of other assesses engaged in similar business are higher. In the instant case, the assessee has brought on record evidence that in the case of a company having similar business, the declared profits were in fact lower than the profits declared by the assessee. The Assessing Officer in his Remand Report was also unable to comment on the comparable case of M/s. Bata India Limited and Aero Traders relied upon by the assessee. In the circumstances, we are of the view that the Tribunal rightly held that the net profit as declared by the assessee was not required to be disturbed.

(Please click here for judgment)

  

3.   [Contribution by  CA. Manoj Gupta, and contributor is available on Mobile No. 9350760606 / email-id: mgupta2803@gmail.com ]

AN ARTICLE ON PRE - SHIPMENT CREDIT

(Please click here for detail)

  

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