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Direct Tax

Whether income from offshore equipment supplies can be attributed to the Indian Permanent Establishment(PE) ?

Whether offshore services connected with setting up a plant in India are taxable in India?

Technip France SAS AAR No 1413 of 2012.


The taxpayer is a resident company in France and is engaged in Engineering, Procurement and Construction (EPC) business for oil production. ONGC Petro Additions Limited (OPAL) desired to set-up a Butene-1 Plant at Dahej Petro Chemicals Complex, Gujarat, on a lump-sum turnkey basis. The tender was awarded to the taxpayer, who then set-up a Project Office (PO) in India for the execution of the onshore scope of work under the contract in respect of installation/supervisory activities, and thus, the applicant had a PE in India under Article 5(3) of the India-France DTAA.

As a part of the turnkey project, the taxpayer supplied equipment and claimed that although supply was a part of the composite agreement, the title of such equipment was passed on a FOB basis outside India and the consideration for the same was also received outside India. Thus, such income should not be attributed to India. Reliance was placed on the Hon’ble Supreme Court’s judgment in the case of Ishikawajima-Harima Heavy Industries Limited.

Under the contract, the taxpayer also rendered basic engineering design services (in relation to the construction, erection, installation, commissioning, and testing of the Plant at Dahej) and advisory services (in relation to detailed engineering). As per the taxpayer, these services were rendered in France and thus shall not be attributed to Indian PE. Further, according to India-France Double Tax Avoidance Agreement (DTAA), read with India-Finland DTAA, imported by virtue of Protocol, Fees for Technical Services (FTS) shall be taxable in the state where the services were rendered, i.e., France as per the taxpayer.

Without prejudice to the aforementioned, the taxpayer was of the view that even when such services are considered to be rendered in India, the same cannot be considered as FTS as it would not make any technical knowledge available (as per India-France DTAA read with IndiaPortuguese DTAA). Thus, such income shall also not be taxed in India. Contrary to the above, the Revenue strongly contended that:

  • Responsibilities of the taxpayer did not end with simply handing over the equipment of offshore supply to OPAL; rather, the responsibilities were not discharged till the work contract was executed to the satisfaction of OPAL. Thus, the title cannot be said to have passed outside India;
  • As far as the basic engineering services and advisory services are concerned, the preparations of designs was a highly technical service, many elements of which were carried out in India. Further, the Protocol to the India-France DTAA cannot be used to import the ‘make available’ clause from a treaty with a third country. Even if the ‘make available’ clause has been imported, the said condition was satisfied in this case as the taxpayer had imparted technical knowledge.


Considering the arguments laid down by both the parties, the Authority for Advance Ruling (AAR) pronounced the following ruling:

Taxability of Offshore Supply

The offshore supply of equipment and materials was part of this composite contract and there was no separate agreement for such offshore supply. However, it is apparent from the terms of the contract that ownership of the equipment and materials under the offshore supply part of the contract was transferred outside India. 90% of the payment was made till FOB delivery of materials, 5% on arrival of materials at site and the rest of the 5% on successful completion of work. Even if the goods were in the custody of the applicant for the purpose of erection and installation, OPAL had already become the owner of equipment and materials well before the goods had reached the Indian port. Thus, no income arising in the hands of the applicant from the offshore supply of equipment and materials can be held chargeable to tax in India, under the Income Tax Act (ITA) 1961, as the sale was completed outside India and there was no accrual or deemed accrual in India.

Taxability of Offshore Services

It was found from the terms of the contract that basic engineering design and detail engineering services, even if developed in France, were not final and could not have been rendered directly from France without the involvement of the project office in India and also without prior consultation with the company, i.e., OPAL. In this process, the applicant was making the design services available to OPAL but the design, even if prepared in France, was not being rendered directly from France. Further, such engineering design had to be customized and prepared vis-avis the site's location and taking into account the local factors and could not have been delivered exclusively from France.

Thus, the involvement of the PE of the applicant in such a designing process was inevitable. Accordingly, income from these services shall be attributed to the Indian PE and shall be taxed as per the provision of Article 7 of IndiaFrance DTAA.

Our Comments

Although there have been multiple instances where the courts have dealt with the taxability of offshore supply (services as well as goods), based on the facts of the respective cases, courts have delivered their decision. Under EPC contracts, a detailed analysis of a contract with respective terms and conditions plays a vital role in determining the taxability of offshore as well as onshore transactions.

Whether logistic support and reimbursement of Global Account Management (GAM) expense qualify to be FTS?

Expeditors International of Washington Inc. Vs. DCIT ITA No. 1705/DEL/2016


The Expeditors group, headquartered in Seattle, is engaged in providing logistic services. The group also provides services related to distribution management, vendor consolidation, cargo insurance, purchase order management and customize logistics information and value-added services. The operations of the group span over various countries, including USA, Europe, India, etc. In India, the assessee provides services through its wholly-owned subsidiary Expeditors International (India) Pvt. Ltd.

During the year under consideration, the taxpayer, a US resident, earned certain income from Indian customers and the Associated Enterprise (AE).

These incomes, among others, included international freight logistics service and reimbursement of GAM expense. The taxpayer was of the view that such income would not constitute FTS under the Act or India-USA Treaty. The Assessing Officer (AO) made additions considering reimbursement of GAM expense as FTS. The draft assessment order was upheld by the Dispute Resolution Panel (DRP).

Aggrieved by the assessment order, the taxpayer filed an appeal with the Delhi Tribunal.


After considering the arguments of both parties, the Delhi Tribunal was of the opinion that the logistic support services are general in nature and thus, would not fall within the purview of Managerial/Technical or Consultancy Expertise.

Regarding the GAM service, the cost of the group has been allocated to the respective country that benefited from the services. The reimbursement does not include any income element and thus shall not be subject to any tax.

Our Comments

Whether a service would constitute FTS or not depends on the intricacies of the activities undertaken to execute the service. One needs to analyze the agreement and the modus operandi of the services.

Transfer Pricing

Whether issuance of a letter of comfort/ support towards loans availed by AE be considered as an international transaction?

Asian Paints Ltd I.T.A. No.2754/Mum/2014 A.Y. 2009-10


The taxpayer is engaged in the business of manufacturing paints and synthetic enamel in India. During the year under consideration, the taxpayer issued a non-contractual letter of comfort/ support to banks towards the loan availed by its AE. The taxpayer did not charge any fees to the AE for providing such facility to the bank on behalf of AEs.

The Transfer Pricing Officer (TPO) alleged that the fee ought to have been charged on such a letter of comfort at 1.41% on loan availed by the AEs and proposed a TP adjustment accordingly.

The Commissioner of Income Tax(Appeals) [CIT(A)] also considered the provision of the letter of comfort on behalf of AE as an international transaction on the grounds that provision of a letter of comfort is similar to the provision of guarantee and upheld the adjustment, however at a reduced rate of commission, thus a partial relief was achieved.

The taxpayer submitted that in case of any default by AE, it was not required to make good any losses. The taxpayer was only responsible to intimate the bank in case it makes divestment of its shares in AE. The taxpayer also argued that since there is no financial implication borne by it, providing such a facility cannot be covered under the scope of transfer pricing provisions.

Ruling by Income Tax Appellate Tribunal (ITAT)

The ITAT observed that letter of comfort/support given to the bank does not cover any liability. It observed that there is nothing on record to showcase that the loan will be recovered from the taxpayer in case of any default by the AE.

Further, ITAT upheld that letter of comfort cannot be equated to a corporate guarantee and thus cannot be covered under the transfer pricing provisions. Accordingly, TP adjustment was deleted.

Our Comments

Provision of letter of comfort/support having no financial implication on the taxpayer cannot be said to be akin to corporate guarantee, thus not qualifying the definition of international transaction.

Allocation of profits between taxpayer and AEs performing marketing activities

Sitel India Ltd – ITA No. 561/ Mum/2011 – A.Y. 2005-06


The taxpayer is engaged in the business of providing contact center services. During the year under consideration, the taxpayer has provided services in the nature of email web-based chart solutions and voice responses to its AEs in the USA and UK. While the AEs perform marketing activities in the USA and UK, they retain the revenue in a range of 0% to 28% (an average of 12%) of total gross revenue earned from third parties for marketing activities performed.

The taxpayer benchmarked the said transaction using (taxpayer as the tested party) and selecting the Transactional Net Margin Method (TNMM), wherein the average margin earned by comparables worked out to 9.95% using multiple year data and 9.73% using current year data, whereas taxpayers being the tested party earned 12.83%. The said margin earned by the taxpayer was after the application of the idle capacity adjustment. The TPO disallowed such idle capacity adjustment on the grounds that the taxpayer provides services only to its AE and such idle capacity is on account of AEs not giving enough business to the taxpayer and proposed transfer pricing adjustment.

CIT(A) rejected the tested party selection by the taxpayer. The CIT(A) selected the AE as the tested party and held that profit earned by AEs from the amount retained by it varies between losses to 20.93%, while arm’s length range in the USA and UK for marketing services ranges from 5% to 7%. Thus, considering 6% as the arm’s length rate, CIT(A) proposed an adjustment for profits earned by AEs over 6%. As a result of the said approach adopted by CIT(A), the adjustment proposed by the TPO was significantly reduced.

The taxpayer stated that since the AEs arranged customers and provided marketing services, an average 12% margin on gross revenue was retained from end customers. Further, it pointed out that for few projects, the AEs did not retain anything and the entire revenue was passed on to the taxpayer. Considering the function performed by the AEs and the cost incurred, profits earned by AEs can be said to be at an arm’s length.

Ruling by the ITAT

The ITAT observed that considering the marketing functions performed by the AEs and cost incurred in that regard, AEs have earned negligible profits except for two projects wherein the AEs earned profits of 6.97% and 20.93%. Therefore, the amount retained by the AEs cannot be considered as unreasonably high not to meet arm’s length requirements.

Thus, based on the facts captured above and considering that similar treatment by CIT(A) was upheld by the AO in the previous assessment year, the reduced adjustment proposed by CIT(A) was upheld by the ITAT.

Our Comments

The said ruling has re-iterated the importance of robust documentary evidence to support the benchmarking analysis of the taxpayer and to justify the transactions at arm’s length.

Whether share application money can be treated as an interest-free loan until equity shares are issued?

Reliance Life Sciences Pvt Ltd. – I.T.A. No. 4957 & 6434/Mum/2018, I.T.A. No.2130/Mum/2018, I.T.A. No. 4842/Mum/2018


The taxpayer subscribed to 100% equity shares of its AE as a part of its capital investment and to provide finance to AE to develop global business opportunities and expansion outside India. However, no shares have actually been allotted by the AE to the taxpayer against share application money.

The TPO has re-characterized the provision of share application money as an interest-free loan provided to the AE and proposed a transfer pricing adjustment considering a notional interest at 6% per annum. The CIT(A) upheld the TPO’s order and therefore, the taxpayer has now filed an appeal before the ITAT.

Ruling by the ITAT

The ITAT has ruled that re-characterization of a transaction is not permitted in the absence of specific provisions under the Act. It states that such treatment of re-characterizing debt into equity or vice versa was only provided in the proposed Direct Tax Code Bill of 2010 as a part of the General Anti Avoidance Rules (GAAR), but there is no law in existence that allows it.

The ITAT upheld that the TPO cannot question taxpayer's commercial expediency in the absence of any material or evidence to justify that the entire transaction was a bogus transaction. The ITAT thus, based on facts of the case, rejected the Revenue’s contentions regarding adjustment proposed to charge interest on share application money.

Further, relying on a co-ordinate bench ruling of the taxpayer’s own case for previous assessment years, the ITAT ruled in favor of the taxpayer.

Our Comments

Provision of share application money cannot be characterized as an interestfree loan till the equity shares are actually allotted.

Taxpayers will also need to re-evaluate their financing arrangements and conduct a transfer pricing analysis such that it meets the accurate delineation of the transaction test.

Indirect Tax

Whether GST should be applicable only on the services charges for providing manpower services or on the total bill amount?

KSF-9 Corporate Services Pvt. Ltd. [2021 (2) TMI 198 – Authority for Advance Ruling, Karnataka]


  • The applicant provides manpower supply services and complies with all the labor laws in relation to its workers. It ensures payment of minimum wages to the workers engaged in providing the said services on an outsourcing basis;
  • The applicant deposits the EST/PF contributions of the workers to the appropriate authority as per the Rules and also pays taxes, duties, fees, and other impositions as may be levied under the applicable law. These amounts are deemed to have been included in the contract price;
  • The customer pays service charges to the applicant at the rate of 2% in addition to the wages of the employees, such that the applicant does not deduct any amount from the wages.

Based on the above facts, the AAR ruled as follows:

  • In the instant case, the applicant (supplier) and the recipients (customers) are not related, and the price is the sole consideration;
  • Therefore, the value of the applicant’s taxable supply of manpower services shall be the transaction value, i.e., the total bill amount inclusive of actual wages of the manpower supplied and the additional 2% amount paid to the applicant.

Our Comments

Under the GST regime, a similar view has also been taken by AAR, Gujarat, in the case of Gujarat Industrial Security Force Society.

However, under the service tax law, a contrary view was also prevalent, and in a few cases, abatement towards payments made on account of contribution to ESI, PF, etc., was allowed to determine service tax.

Whether electricity/incidental charges recovered by the landlord from the tenant can be considered as the amount recovered as ‘pure agent’ of the tenant?

[Background: As per Rule 33 of CGST Rules, expenditure or costs incurred by a supplier as a pure agent of the recipient of supply shall be excluded from the value of supply.]

M/S. Gujarat Narmada Valley Fertilizers & Chemicals Ltd. [2021 (1) TMI 596 - AAR, Gujarat]


  • The applicant has entered into a lease agreement to lease its premises along with the interior infrastructure to various tenants;
  • It recovers electricity and incidental expenses proportionately from the tenants based on the reading from the sub-meters on an actual basis;
  • The lessee pays GST only on the rent portion and not on the electricity/ incidental expenses.

Based on the above facts, the AAR held as follows:

  • Careful scrutiny of the agreement indicates that the supplier of service has made it mandatory that the recipient should pay all charges in respect of electric power used;
  • Therefore, it cannot be said that the electricity charges would be covered by Sec.15(2)(c) of the CGST Act for the sole reason that the rate for renting of premises has been fixed at an amount and the electricity charges are to be borne by the lessee as per the actual usage of electric power;
  • The lessor and lessee have mutually agreed to collect the electricity charges on the basis of actual usage based on the sub-meters and onward payment to the electricity company;
  • Thus, the conditions of Rule 33 are satisfied in the instant case, and as such, it is concluded that the electricity expenses incurred by the applicant on behalf of the lessee have been incurred in the capacity of a pure agent.

Our Comments

Similar arrangements between landlords and tenants for collection and payment of utility bills are common across the industry, and this ruling can provide clarity on the taxability of such recovery.

However, usually, the liability to pay charges to the utility service provider is on the landlord (being the owner of the premises), and therefore, whether he can be considered as a ‘pure agent’ of the tenants for payment of such charges may be disputed by the GST authorities.

Whether a liaison office is required to obtain registration under GST?

[Background: Earlier, AAR had ruled that the applicant is required to obtain GST registration in India and is liable to pay GST as its activities do not qualify as ‘export of services’.]

Fraunhofer-Gessellschaft Zur Forderung Der Angewwandten Forschung – AAAR, Karnataka [2021 (2) TMI 1164]


  • The appellant has a liaison office which is acting as an extended arm of the Head Office to carry out activities as permitted by the Reserve Bank of India (RBI);
  • As per the permission granted by RBI, the liaison office will not generate income in India and will not engage in any trade/ commercial activity;
  • The liaison office does not account for any form of income, with the only source of income being remittance from the Head office, which is purely to meet the liaison office's working.

Based on the above facts, the AAAR has now ruled as follows:

  • The appellant's HO in Germany is no doubt a 'person' by virtue of Section 2(84)(h) of the CGST Act;
  • However, the liaison office is not recognized as a separate legal entity in India;
  • The concept of ‘related person’ arises only when there are two ‘persons' in existence as per law;
  • In this case, there is only one legal entity, i.e., the company in Germany and the liaison office in India is only an extension of the foreign company having no separate identity in India;
  • We disagree with the findings of the lower authority that the liaison office is an 'artificial juridical person.' Artificial juridical persons are not natural persons but separate entities under the law;
  • The liaison activity performed by the appellant for the parent company is in the nature of a service rendered to self. A service rendered to oneself does not come within the purview of 'supply' under GST.

Hence, there is no ‘supply,’ and there is no requirement for obtaining a GST registration or payment of GST.

Our Comments

This ruling by the appellate authority provides some relief as the earlier decision by the AAR was contrary to the understanding prevalent in the industry. The decision of the appellate authority is also in sync with rulings of AAR Tamil Nadu in Takko Holding Gmbh and AAR Rajasthan in Habufa Meubelen B.V. wherein it was held that a liaison office does not undertake any ‘business’ and, therefore, is not required to obtain GST registration.

However, with the proposed amendment to Section 7 of CGST Act to treat transactions or activities involving supply of goods and / or services by persons (other than individuals) to their members / constituents or vice versa for a consideration, as ‘supply’ for the purposes of GST, it would be interesting to see the stand being adopted by the Revenue in the near future.