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linde ag, linde engineering division and anr. Vs. deputy director of income tax
May, 14th 2014
              THE HIGH COURT OF DELHI AT NEW DELHI
%                                Judgment delivered on: 23.04.2014

+       W.P. (C) NO. 3914/2012 & CM No.8187/2012

LINDE AG, LINDE ENGINEERING DIVISION
AND ANR.                                                   .....Petitioners
                        versus
DEPUTY DIRECTOR OF INCOME TAX                              .....Respondent

Advocates who appeared in this case:
For the Petitioners  : Mr S. Ganesh, Sr. Adv. with Mr R.P. Garg,
                       Mr V.S. Wahi, Mr Rupesh Jain & Mr Vaibhav
                       Kulkarni.
For the Respondent   : Mr Sanjeev Sabharwal.

CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE VIBHU BAKHRU

                                JUDGMENT

VIBHU BAKHRU, J

1.      The petitioners have filed the present petition under Articles 226/227
of the Constitution seeking quashing of the ruling dated 20.03.2012 passed
by the Authority for Advance Rulings (hereinafter referred to as the
`Authority'). By the said ruling dated 20.03.2012, the Authority has
disposed of the application (AAR No.962 of 2010) filed by the petitioner
under section 245Q of the Income Tax Act, 1961 (hereinafter referred to as
the `Act') and held that the Consortium of the petitioner no.1 and Samsung
Engineering Company Ltd. constitutes an Association of Persons and the
income or profits received/ receivable by petitioner no.1 for the offshore



W.P.(C) No.3914/2012                                              Page 1 of 94
supply of goods and for rendering of offshore services were taxable in
India. The said ruling is hereinafter referred to as the `impugned ruling'.

2.       The petitioner no. 1, Linde AG, Linde Engineering Division, Pullach,
Germany is hereinafter referred to as `Linde'. Samsung Engineering
Company Ltd., Seoul, Korea is hereinafter referred to as `Samsung'. Linde
and Samsung are hereinafter also referred to as members and collectively
referred to as `Consortium'. ONGC Petro Additions Limited is hereinafter
referred to as `OPAL'. Memorandum of Understanding dated 03.03.2008 is
hereinafter referred to as `MOU'.




3.       The principal controversy which is required to be considered in the
present petition is: whether in the given facts, Linde and Samsung
constitute an Association of Persons within the meaning of `person' as
defined under section 2(31) of the Act? And, whether the income
received/receivable by Linde for the supply of equipment, material and
spares outside India and for rendering services outside India is taxable in
India?

4.       The relevant facts in brief are as follows:-

4.1.     On 19.4.2007, OPAL floated a Tender Notice inviting bids executing
the work (including undertaking all activities and rendering all services) for
the     design,        engineering,   procurement,   construction,   installation,
commissioning and handing over of the plant for the Dual Feed Cracker
and Associated Units of Dahej Petrochemical Complex in accordance with
the Bid Documents. The project was to be executed on turnkey basis.




W.P.(C) No.3914/2012                                                 Page 2 of 94
4.2.    On 03.03.2008, Linde and Samsung entered into a Memorandum of
Understanding (hereinafter referred to as the `MOU') whereby both the
parties agreed to form a Consortium, for jointly submitting a bid to secure
the contract for execution of the aforesaid project. The MOU was followed
by an `Internal Consortium Agreement' dated 14.03.2008 executed between
Linde and Samsung. Thereafter, on 20.03.2008, the Consortium submitted
its proposal pursuant to the aforementioned tender notice publicised by
OPAL. The price bid was submitted by the Consortium on 28.07.2008.

4.3.    The said proposal submitted by Linde and Samsung was accepted
and OPAL issued a Notification of Award on 23.12.2008 awarding the
work of executing the project on a turnkey basis to the Consortium.
23.12.2008 was also fixed as the effective date.

4.4     Thereafter, OPAL (referred in the Contract as the `Company') and
the Consortium (referred in the Contract as the `Contractor') entered into a
definitive agreement on 10.02.2009. As per the said agreement, OPAL
awarded the contract for carrying on work of all activities and services
required      for      the   design,   engineering,   procurement,   construction,
installation, commissioning and handing over of the plant on a lump sum
turnkey basis in accordance with the Bidding Documents, to the
Consortium. The Consortium agreed to perform the work in conformity
with the terms of the agreement and OPAL agreed to pay the consideration
in the manner as specified in the contract. The agreement included various
annexures, viz.: the General conditions of contract as amended, Technical
documents, Agreed clarifications, contract price schedule, construction
schedule, Project instructions, Milestone payment formula, Notification of



W.P.(C) No.3914/2012                                                  Page 3 of 94
award, Letter of acknowledgement of notification of award from the
Consortium, Integrity pact and the MOU executed between the Consortium
members.           The   said     agreement      being     Contract         No.
MR/OW/MM/DFC/02/2007 dated 10.02.2009 for dual feed cracker and
associated units of Dahej Petro Chemical Complex is hereinafter referred to
as the `Contract'.

5.      Linde filed an application before the Assessing Officer under section
197 of the Act claiming that no portion of the amount payable to Linde for
supply of equipment, material and spares and for providing basic and
detailed engineering services was liable to be subjected to withholding of
tax under section 195 of the Act as it was contended that the said
transactions were performed and completed outside India and payments for
the said transaction were also received outside India. It was, thus,
contended that the amounts received/receivable by Linde for the said
supplies and services were not chargeable to tax in India. The Assessing
Officer did not accept the plea of Linde and directed OPAL to withhold tax
on amounts paid to Linde in terms of the Contract. Thereafter, Linde filed
an application before the Authority under section 245Q of the Act seeking
advance ruling with regard to the status of Linde and Samsung as an
Association of Persons and also as to the tax liability of Linde in India in
respect of income received/receivables under Contract dated 10.02.2009.
The Authority admitted the application for consideration of the following
questions:-

        "(i) Whether in terms of the Contract dated 10.02.2009
        (hereinafter referred to as the contract) between ONGC Petro



W.P.(C) No.3914/2012                                             Page 4 of 94
        Additions Limited (hereinafter referred to as "OPAL") and
        Consortium of Linde AG, Germany, and Samsung Engineering
        Company Ltd., Korea (hereinafter referred to as "SEC") the
        applicant and SEC are taxable in the status of AOP?

        (ii) Whether in terms of the Contract, the amount
        receivable/received in respect of design and engineering,
        prepared solely for manufacture, procurement of equipment
        outside India and being inextricably linked to such equipment
        to be supplied, liable to tax in India, under the provisions of
        the Income-tax Act, 1961 ("the Act") or under the Double
        Taxation Avoidance Agreement read with Protocol between
        India and Germany ("DTAA").

        (iii) If the answer to question no. 2 is in the affirmative, to
        what extent and at what rate of tax, are the amounts
        received/receivable for design and engineering liable to tax in
        India?

        (iv) Whether in terms of the Contract, the amount receivable
        by the applicant for supply of equipment, material and spares,
        outside India are liable to tax in India, under the provisions of
        the Income-tax Act, 1961 or under the DTAA read with
        Protocol?
        (v) If the answer to (iv) is in the affirmative, to what extent
        are the profits from supply of plant and equipment taxable in
        India?

        (vi) Whether in terms of the Contract, consideration for
        onshore services comprising supervision of installation,
        testing, commissioning and construction, management/
        supervision is liable to tax on the profits of the PE, as may be
        deemed to exist in India, in terms of Section 44DA of the Act
        read with the provision of the DTAA?

        (vii) If the answer to question No. (vi) is in the affirmative,
        whether for the purpose of determining the profits of the PE in
        India, the actual expenditure incurred by head office
        exclusively and specifically in relation to onshore activities of



W.P.(C) No.3914/2012                                               Page 5 of 94
        the PE (not being general administrative/executive expenses)
        and reimbursed to it, are allowable in full and not subject to
        limits in Section 44C of the Income-tax Act, 1961?"

6.      The said application (AAR No.962 of 2010) was disposed of by the
impugned ruling whereby the Authority held that the Consortium of the
Linde and Samsung constitutes an Association of Persons. The Authority
noted that the Notification of Award was in the name of the Consortium
and not in the name of Linde and Samsung individually. The liability of
Linde and Samsung towards OPAL, for due performance of the Contract,
was joint and several. The Authority further held that the Contract was an
indivisible contract and was incapable of being split up into different
components/parts. And, on this basis the Authority concluded that income
received/ receivable by the petitioner for offshore supply of equipment,
materials and spares and for offshore supply of drawings and designs
relating thereto was taxable in India. The Authority also held that since
Linde/Samsung continued to be responsible for the supplies up to the stage
of acceptance of the work in relation to the erection, procurement and
commissioning project, the title of the equipment/material supplied could
not be accepted to have transferred to OPAL overseas.

7.      Aggrieved by the impugned ruling passed by the Authority, the
petitioners have filed the present writ petition.

SUBMISSIONS

Submissions of Petitioners/Linde

8.      It is contended by the learned senior counsel for the petitioner that
the status of the Consortium formed by Linde and Samsung was not that of



W.P.(C) No.3914/2012                                             Page 6 of 94
an Association of Persons and as such the Consortium was not liable to be
assessed under the Act as an Association of Persons. It was submitted on
behalf of Linde that an Association of Persons is one in which two or more
persons join in a common purpose or common action whether or not the
same is formed with the object to produce income, profits or gains. It is
contended that in the present case, there is no element of the common
action or common purpose and, therefore, the status of the Consortium was
not that of an Association of Persons.

9.      It was submitted on behalf of petitioners that Linde and Samsung
were having the requisite technical experience in their respective fields and,
therefore, had jointly submitted the bid in order to fulfil the
criteria/conditions specified under the bid documents. It was submitted that
the common object of Linde and the Samsung was to secure the contract
and the Consortium was formed only for this limited purpose and each
party was required to perform its specified portion of the Contract
separately. The learned counsel for Linde referred to various clauses of the
MOU, the Internal Consortium Agreement as well as the Contract and
submitted that Linde and Samsung were responsible for performing
separate items of work. Both Linde and Samsung were responsible for their
respective profits and liabilities and there was no sharing of risks, expenses
or profits. The expenses or the costs incurred by each member, for the part
of the work performed by it, was also borne exclusively by that member.
There was also no sharing of assets or resources employed by each of them.
The scope of the work to be performed under the Contract by both the
parties     was        clearly   demarcated   and   separately   identified.     The




W.P.(C) No.3914/2012                                                  Page 7 of 94
considerations payable to Linde and Samsung for the respective items of
work to be performed by them were separately specified and the amounts
payable by OPAL under the Contract were also paid directly to each
member of the Consortium. It was also pointed out that the Performance
Bank Guarantee was also required to be submitted by the members of the
Consortium separately. It was submitted that in these facts, no joint
management or joint action or common purpose in the performance of the
Contract could be inferred and hence, the Consortium could not be assessed
as an Association of Persons.

10.     In support of these contentions, the learned counsel placed reliance
on the judgment of the Supreme Court in the case of CIT v. Indira
Balkrishna: (1960) 39 ITR 546 (SC) and also referred to the decisions
passed by the Authority in the case of Hyundai Rotem Co. and Mitsubishi
Co. v. DIT (International Taxation): [2010] 323 ITR 277 (AAR),
Hyosung Corporation v. Director of Income-tax (International Taxation)
New Delhi: [2009] 314 ITR 343 (AAR) and In Re: Van Oord Acz. Bv:
[2001] 248 ITR 399 (AAR).

11.     It is also contended that the Authority was obliged to follow its
earlier rulings passed in the cases of Hyundai Rotem Co. and Mitsubishi
Co. (supra), Hyosung Corporation (supra) and In Re: Van Oord Acz. Bv
(supra) as it is settled law that a principle of law laid down by any Judicial
Authority, unless upset in appeal or rendered inapplicable by subsequent
change in law would be binding on the said Judicial Authority. In support
of this contention, reliance has been placed on the judgment of the Supreme
Court in the case of Columbia Sportswear Co. v. DIT: (2012) 11 SCC 224.



W.P.(C) No.3914/2012                                             Page 8 of 94
12.     It was next contended on behalf of Linde that the consideration
received/receivable by Linde for supplying equipment, material and spares
was not taxable in India as the income arising and accruing from the
transaction could not be deemed to accrue or arise in India. It was
submitted that certain offshore services provided by Linde were
inextricably linked with the offshore supplies and income arising therefrom
would also not accrue or arise in India. It is contended that the petitioner
being a non-resident would be chargeable to tax in India only in the event
income accrues or arises in India or is deemed to accrue or arise in India.
Therefore, the amount received/receivable by the petitioners for the
offshore supplies or offshore services were not liable to tax under the
provisions of the Act or under the Double Taxation Avoidance Agreement
read with Protocol between India and Germany.

13.     It is contended that although the liability of Linde and Samsung for
due performance of the Contract was joint and several, the respective items
of work to be executed by them were separately identified along with the
consideration payable for the same. It was submitted that as per the
Contract, the petitioner was obliged to perform, broadly, the following
activities, viz.: (i) basic and detailed engineering and drawings; (ii)
procurement and offshore supply of equipment and material; and, (iii)
onshore       services       such   as   supervision    during    pre-commissioning,
construction, post-commissioning, training of personnel, etc. While activity
(iii) had to be performed in India, activities (i) and (ii) were required to be
performed         entirely     outside    India.   As    per     the   Contract,         the
consideration/price for the offshore and onshore transactions was also




W.P.(C) No.3914/2012                                                      Page 9 of 94
separately provided. Whilst, the considerations for the offshore transactions
were also to be paid in foreign currency (i.e. Euros), the considerations for
the onshore transactions were to be paid in Indian currency. It was pointed
out that in terms of Clause 7 of the Contract, the equipments, materials and
spares were to be supplied on FOB basis. It was submitted that this meant
that the title to the said equipment, materials and spares was transferred to
OPAL outside the territory of India. The offshore services were stated to be
inextricably linked to the supply of equipment and had also been rendered
outside India. It was submitted that as no part of the income for the offshore
supply or offshore services was received or accrued in India, the same was
not taxable in India and the Authority misdirected itself in passing the
impugned ruling.

14.     It was also contended that in terms of the Double Taxation
Avoidance Agreement (DTAA) between India and Germany, income of
Linde was taxable exclusively in Germany with respect to its global
business income, except in cases where the petitioner carried on business
through a permanent establishment in India, in which case the profits
attributable to the permanent establishment would be taxable in India. The
counsel has relied upon Articles 5 and 7 of the said DTAA. It was also
submitted that the permanent establishment of Linde did not come into
existence till the commencement of the installation stage which was
subsequent to Linde providing the basic and detailed engineering and
drawings and offshore supply of equipment and material. Thus, the income
from provision of offshore supplies and services had already accrued and
arisen, prior to Linde's permanent establishment coming into existence.




W.P.(C) No.3914/2012                                             Page 10 of 94
Thus, it was contended that the income from supply of equipments,
materials and spares supplied from overseas and offshore services were not
taxable under the Act.

15.     It was further submitted that treating Linde's enterprise as an
Association of Persons would deprive the petitioners of the treaty benefits
and the same would amount to "treaty override" which is illegal and
impermissible. It was contended that, as per section 90A of the Act and as
per the judgment delivered by the Supreme Court in the case of Azadi
Bachao Andolan v. Union of India: 263 ITR 706 (SC), it was settled that
in case of conflict between the provisions of the Act and the provisions of
DTAA, the provisions of DTAA would prevail to the extent that the treaty
provisions are more beneficial to the tax payer.

16.     It was submitted that the case of the petitioner was covered by the
judgment of the Supreme Court in the case of Ishikawajima-Harima
Heavy Industries v. Dir. Of Income Tax: (2007) 288 ITR 408 (SC) and
also in the case of CIT v. Hyundai Heavy Industries Co. Ltd.: (2007) 291
ITR 482 (SC). The counsel has also placed reliance on the judgment of this
Court in the case of DIT v. LG Cable Ltd.: 197 Taxmann 100 (Del.). It is
contended that the impugned ruling was liable to be set aside as the
Authority had not considered the judgments in Ishikawajima-Harima
Heavy Industries (supra) and Hyundai Heavy Industries Co. Ltd. (supra).
It is contended that the Authority had erred in referring to the judgment of
the Supreme Court in the case of Vodafone International Holdings B.V. v.
Union of India (UOI) and Anr.: (2012) 6 SCC 613 as the same was not
applicable to the facts of the present case.



W.P.(C) No.3914/2012                                            Page 11 of 94
17.     The learned counsel for the petitioner also referred to Instruction
No.1829 dated 21.09.1989 issued by the Central Board of Direct Taxes in
respect of taxability of income of non-residents arising from the execution
of power projects on turnkey basis involving activities to be carried out in
India as well as outside India. It was submitted by the petitioner that the
said instruction indicated a correct understanding of law. The said
Instruction has been withdrawn subsequently by the Board by an
Instruction No.5/2009 dated 20.07.2009. However, it was submitted by the
petitioner that the withdrawal of the Instruction was prospective in nature
as held by this Court in the case of DIT v. Ericsson AB: 343 ITR 470 and
the since the Contract was entered into by Linde prior to 20.07.2009, the
said instruction would still be applicable in respect of income arising from
the Contract.

18.     It was lastly, contended that in terms of Section 86 of the Act, the
income of an Association of Persons was to be taxed in the hands of the
association and the distribution of income to the members of an Association
of Persons was not liable to tax. In the present case, the entire consideration
under the Contract was paid/payable by OPAL to the members separately
and not to the Consortium. Thus, the notional inflow of funds in the hands
of the Consortium was also equal to the outflow in favour of the members.
And in such case, no income would arise in the hands of the Consortium. It
is pertinent to mention that this contention was neither raised by the
petitioner before the Authority nor was considered by the Authority.

Submissions of Respondent/Revenue




W.P.(C) No.3914/2012                                              Page 12 of 94
19.     The learned counsel for the respondent has supported the impugned
ruling passed by the Authority. It was contended by the respondent that the
Consortium formed by petitioner and Samsung constituted an Association
of Persons and income or profits received/receivable under the Contract
were liable to be assessed in the hands of the Consortium as a separate
person. It was submitted that the Contract was entered by OPAL with the
Consortium as one entity, which was described as the "contractor" under
the contract. It is submitted that the common purpose was to bid as a single
entity and the common action was to execute the contract as a single entity.
The subsequent division of the work between the members of the
consortium was not relevant. It is submitted that Linde and Samsung agreed
to jointly cooperate as a Consortium in the submission of the proposal and
for jointly executing the same. The learned counsel for the respondent drew
the attention of this court to various clauses of the Contract to indicate that
insofar as OPAL was concerned, it regarded the Consortium as a single
entity for due performance of the Contract. It was further submitted that the
Contract was awarded to the Consortium for the entire work with the
parties agreeing to be jointly and severally liable to OPAL for due
performance of the Contract. It is further submitted that the Contract
provided for a lump sum consideration payable for execution of the entire
Contract and as such the same was not divisible. The certificate of
completion and acceptance of work was to be given to the Consortium and
not to individual members. The Consortium was liable to OPAL for
consequential and liquidated damages and Linde and Samsung being
members of the Consortium were both jointly and severally liable for the
same. It is submitted that Linde and Samsung submitted their bid as one



W.P.(C) No.3914/2012                                              Page 13 of 94
and the Contract is indivisible. It was further submitted that the object and
purpose of the Contract was to set up the Dual Feed Cracker and
Associated Units of the Petrochemical Complex. The activities required for
the execution of the Contract could not be considered as independent
transactions. Linde and Samsung had joined for the said common purpose
of bidding and execution of the contract and thus any income arising
therefrom was assessable in their hands as an unregistered association i.e.
an Association of Persons. The counsel for the respondent relied upon the
ruling passed by the Authority in the case of Geoconsult ZT GmbH v.
Director of Income Tax (International Taxation): [2008] 304 ITR 283
(AAR) in support of his contentions. The counsel for the respondent has
also submitted that the facts in the case of Hyundai Rotem Co. (supra) were
not similar to the facts in the present case and, therefore, the said decision
was not applicable to the present case.

20.     The counsel for the respondent disputed the contention of the
petitioner that income/profits received outside India for the offshore
transaction were not taxable in India. It was contended by the respondent
that the project in the present case is a turnkey project and the contract is an
integrated and indivisible contract. Any splitting up of the contract would
be artificial and could not be resorted to. It was submitted that the offshore
and the onshore transactions could be segregated for the purposes of
taxation and the contract had to be read as a whole as an indivisible
contract. The dominant object of the contract is the execution of a turnkey
project and the question whether the title to the goods supplied passes
offshore or within India is secondary to the execution of the contract. The




W.P.(C) No.3914/2012                                               Page 14 of 94
offshore and the onshore transactions are interlinked and the non-execution
of one transaction/part would result in the breach or failure of the whole
contract. The contract itself provides for milestone dates and the breach of
any of the terms thereof would result in the breach of the entire contract and
not just a particular obligation. The consideration received for the offshore
transaction formed part of the consideration for the entire contract and
could not be segregated for the purposes of taxation. Therefore, the
consideration for the whole work was receivable by the Consortium and
could not be segregated on the basis of the transactions/activities involved
in execution of the Contract. As such, the whole income or profit
received/receivable under the contract was taxable in India.

21.     It is submitted that the judgments in the case of Ishikawajima-
Harima Heavy Industries (supra) and Hyundai Heavy Industries Co. Ltd.
(supra) relied upon by the petitioner in support of its contention were not
applicable in the present case. It is submitted by the respondent that the
facts in each case were dissimilar. It was submitted that in the present case,
the role and responsibilities were not specified and the different milestones
specified for the execution of the contract made no difference in so far as
the taxability of the income arising from the Contract was concerned. The
Contract specified that the contract price/consideration was payable by
OPAL to the Consortium for the whole of the Contract and the entire work
was to be executed by the Consortium.

22.     In response to the submission made on behalf of the petitioner that
the petitioner did not have any permanent establishment in India at the
material time when the offshore transactions were performed, it was



W.P.(C) No.3914/2012                                             Page 15 of 94
contended that Linde had a direct subsidiary in India and the same was
involved in pre-bidding negotiations. Thus, Linde had a permanent
establishment in India even prior to the Contract being signed. It was
further submitted that the Contract entailed execution of the project on a
turnkey basis and the ground work for the same commenced shortly after
execution of the Contract. The same also implied that Linde had its
permanent establishment in India. It was contended that the Consortium
was liable to be taxed as a tax resident entity in India and to that extent the
DTAA between India and Federal Republic of Germany did not apply.

23.     With regard to the contention of the petitioner on the application of
Instruction No.1829 dated 21.09.1989 in the present case, it is submitted by
the respondent that the said Instruction is not applicable in the facts of the
present case as the same was limited to power projects and in any event the
same was withdrawn on 21.07.2009.

24.     It is submitted that the Sections 86 and 67A of the Act relied upon by
the petitioners only dealt with the method of computation of the income of
partnership/Association of Persons and not whether the association was to
be taxed as a separate entity.

DISCUSSION AND CONCLUSION

25.     We have heard the counsel for the parties. The principal questions
that are required to be considered are:-

(i)     Whether the consortium formed by Linde and Samsung constitutes
an Association of Persons under section 2(31) of the Act and are they







W.P.(C) No.3914/2012                                              Page 16 of 94
liable to be taxed under the provisions of the Act as an Association of
Persons; and

(ii)    Whether the income/profit received/receivable by the Linde towards
the offshore supply of equipment, materials and spares and for drawings
and designs in relation thereto, is taxable in India under the provisions of
the Act or under the Double Taxation Avoidance Agreement read with the
Protocol between India and Germany?

Whether the Consortium constitutes an AOP

26.     Section 4 of the Act is the charging section. Section 4(1) provides
that income tax shall be charged in respect of the total income of a person
in the previous year. A person is defined under Section 2(31) of the Act as
under:-

        "(31) `person' includes--
               (i)     an individual,
               (ii)    a Hindu undivided family,
               (iii)   a company,
               (iv)    a firm,
               (v)     an association of persons or a body of individuals,
                       whether incorporated or not,
               (vi)    a local authority, and
               (vii)   every artificial juridical person, not falling within
                       any of the preceding sub-clauses;
        Explanation.-- For the purposes of this clause, an association of
        persons or a body of individuals or a local authority or an
        artificial juridical person shall be deemed to be a person,
        whether or not such person or body or authority or juridical



W.P.(C) No.3914/2012                                                 Page 17 of 94
        person was formed or established or incorporated with the
        object of deriving income, profits or gains;"
27.     Section 3(42) of the General Clauses Act, 1897 defines a `person' to
include "any company or association or body of individuals, whether
incorporated or not".

28.     The expression `Association of Persons' has not been defined in the
Act. However, it is apparent that the expression has not been used in any
technical sense and the expression has to be construed as per the plain
ordinary meaning of the words used. Given the wide definition of the word
`person', the meaning of the expression `Association of Persons' would
also be of wide import. The Supreme Court in the case of Indira
Balkrishna (supra), taking cue from the dictionary meaning of the word
`associate', interpreted the said expression and held as under:-

        "9. In B.N. Elias [(1935) 3 ITR 408] Derbyshire, C.J., rightly
        pointed out that the word "associate" means, according to
        the Oxford dictionary, "to join in common purpose, or to join in
        an action". Therefore, an association of persons must be one in
        which two or more persons join in a common purpose or
        common action, and as the words occur in a section which
        imposes a tax on income, the association must be one the object
        of which is to produce income, profits or gains. This was the
        view expressed by Beaumont, C.J. in CIT v. Laxmidas
        Devidas [(1937) 5 ITR 548] at page 589 and also in Re.
        Dwaraknath Harishchandra Pitale [(1937) 5 ITR 716] ...."

                                                (emphasis supplied)

29.     The Supreme Court in the case of G. Murugesan and Brothers v.
Commissioner of Income Tax, Madras: (1973) 4 SCC 211 made the
following observations:-



W.P.(C) No.3914/2012                                               Page 18 of 94
        For forming an `Association of Persons', the members of the
        association must join together for the purpose of producing an
        income. An `Association of Persons' can be formed only when
        two or more individuals voluntarily combine together for a
        certain purpose. Hence volition on the part of the member of the
        association is an essential ingredient. It is true that even a minor
        can join an `Association of Persons' if his lawful guardian gives
        his consent. In the case of receiving dividends from shares,
        where there is no question of any management, it is difficult to
        draw an inference that two more shareholders functioned as an
        `Association of Persons' from the mere fact that they jointly
        own one or more shares, and jointly receive the dividends
        declared. Those circumstances do not by themselves go to show
        that they acted as an `Association of Persons'.
                                                (emphasis supplied)

30.     It is also relevant to refer to a judgment of the Supreme Court in the
case N.V. Shanmugham and Co. v. CIT: (1970) 2 SCC 139 for
understanding the meaning of the term Association of Persons. In that case,
the Court appointed three receivers in a suit for dissolution of a partnership
firm. The receivers were directed to conduct the business of the firm and
the profits earned from the business, being treated as an assets of the firm,
were directed to be distributed among the partners as per their shares and in
accordance with the deed. The issue before the Supreme Court was whether
the profits earned in the business should be considered as profits earned by
an `Association of Persons' or whether it should be considered as having
been earned by individuals (individual partners as beneficiaries). The
Supreme Court held that the receivers constituted an Association of Persons
on the ground that the business was carried on by the receivers jointly and
the control and the management of the business was a unified one in the
hands of the receivers. The relevant portion of the judgment is as under:-



W.P.(C) No.3914/2012                                                 Page 19 of 94
        "7. We are unable to accede to the contentions of the learned
        counsel for the assessee. It is not denied that the business was
        carried on by the receivers on behalf of erstwhile partners of the
        firm and that considerable profits were earned from the
        business. The control and the management of the business was
        in the hands of the receivers. That control and management was
        a unified one. The receivers had joined in a common purpose
        and they acted jointly. When they did so they acted on behalf of
        the persons who were the owners of the business. The receivers
        did not and could not have represented the individual interest of
        the various owners of the business. If they had done so there
        would have been chaos in the business. The profits to which
        those owners lay claim and which they were not averse to
        pocket, were earned on behalf of an "association of persons".
        The profits were earned on behalf of the persons who had a
        common interest created by the order of the Court and were on
        that account of an "association of persons". The existence of
        specific or defined interest in the profits did not make the
        earning any the less by an "association of persons". Liability to
        tax depends upon the earning of profits by a unit and not upon
        the ultimate division of the profits....."
                                                (emphasis supplied)

31.     It is also relevant to refer to the decision of the Calcutta High Court
in the case of B. N. Elias and others, In Re.: (1935) 3 ITR 408 (Cal). The
Supreme Court in the case of Indira Balkrishna (supra) cited the following
passages from the concurring opinion of Costello J, with approval:-

        "...although these four persons did not constitute a body which
        was the same as partnership, it was in many respects similar to a
        partnership and was approximate to a partnership and it may
        well be that the intention of the Legislature was to hit
        combinations of individuals who were engaged together in
        some joint enterprise but did not in law constitute partnership....

        xxxx           xxxx       xxxx          xxxx         xxxx



W.P.(C) No.3914/2012                                                Page 20 of 94
        when we find, as we do find in this case, that there is a
        combination of persons formed for the promotion of a joint
        enterprise banded together if I may so put it, co-adventurers to
        use an expression, then I think no difficulty whatever arises in
        the way saying that in this particular case these four persons did
        constitute an "association of individuals" within the meaning of
        both section 3 and section 55 of the Indian Income Tax Act,
        1922."

32.     The condition that the association must be formed for the object of
producing income, profits or gains is no longer applicable in view of the
Explanation inserted in Section 2(31) of the Act, with effect from
01.04.2002. However, the essential condition that an association of persons
must be one where two or more persons join in common action for a
common purpose continues to be applicable and is not diluted in any
manner.

33.     Therefore, it emerges from the above discussion that the Association
of Persons is one in which two or more persons join together for a common
purpose or common action and there is a joint management or joint action
by the said two or more persons. In order to treat persons as an association,
it is necessary that the members must have a common intention and must
act jointly for fulfilling the object of their joint enterprise.

34.     However, it is also necessary to bear in mind that the purpose of
treating two or more persons as an association of persons is to impose tax
on the income that may be attributed to their joint enterprise. It is, thus,
obvious that it would be necessary to consider the extent and the nature of
the common purpose and the common action, in order to determine whether
the said persons form an association for the purposes of imposing tax or



W.P.(C) No.3914/2012                                               Page 21 of 94
not. As explained by the Calcutta High Court in B. N. Elias (supra), the
intention of the Legislature was to treat combinations of persons, who were
engaged together in some joint enterprise but did not in law constitute
partnerships, as a separate taxable entity. It is, thus, essential that an
Association of Persons has the trappings of a partnership for conducting the
joint enterprise which makes it amenable to be treated as a separate taxable
entity. A person carrying on business may in the usual course cooperate
with others for a common purpose. In many instances, the test of common
purpose and common action, if literally applied, may also hold true.
However, treating every instance of such cooperation between two or more
persons as resulting in an Association of Persons would militate against the
purpose of considering an association as a separate tax entity. Whether an
arrangement or collaborative exercise between two or more persons results
in constituting an Association of Persons as a separate taxable entity would
depend on the facts of each case including the nature and the extent of
collaboration between them. The Supreme Court in Indira Balkrishna
(supra) had also clarified that:-

        "there is no formula of universal application as to what facts,
        how many of them and of what nature are necessary to come to
        a conclusion that there is an association of persons within the
        meaning of Section 3".

35.     It is obvious that unless the facts lead to a conclusion that there is
sufficient joint participation for a common enterprise, it would not be
appropriate to treat two or more persons as an Association of Persons for
the purposes of assessing them as a separate taxable entity. A mere
cooperation of one person with another in serving one's business objective



W.P.(C) No.3914/2012                                              Page 22 of 94
would not be sufficient to constitute an Association of Persons merely
because the business interests are common. A common enterprise, which is
managed through some degree of joint participation, is an essential
condition for constituting an Association of Persons.

36.          It follows from the above discussions that before an association can
be considered as a separate taxable entity (i.e an Association of Persons),
the same must exhibit the following essential features:

      (i)       must be constituted by two or more persons.

      (ii)      the constituent members must have come together for a common
                purpose.

      (iii)     the association must move by common action and there must be
                some scheme of common management.

      (iv)      the cooperation and association amongst the constituent members
                must not be perfunctory and/or merely in form. The association
                amongst members must be real and substantial which is sufficient
                to treat the association as a separate homogenous taxable entity.

37.          The facts in the present case need to be considered in view of the
above discussion and in the light of the judgments of the Supreme Court
referred above. In the present case, the MOU dated 03.03.2008 and the
Internal Consortium Agreement dated 14.03.2008 entered into by Linde
and Samsung record their agreement, on the basis of which they had agreed
to bid and execute the project. The intention of the parties has to be
ascertained from the terms of the said MOU and the Internal Consortium
Agreement. The relevant extracts of the said MOU are quoted below:-



W.P.(C) No.3914/2012                                                   Page 23 of 94
        "WHEREAS LE ("LEADER OF CONSORTIUM") will
        perform Basic Engineering, supply of Selected Key Equipment
        and the Related Detail Engineering, Detail Engineering and
        Procurement of Cracking Furnaces, parts of Technical
        Supervision Services, Commissioning, Testing, Conducting
        Performance Tests and Post-Commissioning Services of the
        PROJECT.

        WHEREAS, SECL will perform Detailed Engineering of
        DFCU Recovery Section and AU, Supply of Equipment,
        Construction, Erection and Pre-Commissioning of DFCU and
        AU and Parts of Technical Supervision Services of the
        PROJECT.

        WHEREAS, PARTIES intend to jointly cooperate as
        consortium (hereinafter referred to as "CONSORTIUM") in
        order to prepare and submit a joint proposal as a consortium for
        the PROJECT, (hereinafter referred to as "BID") and if the BID
        is accepted by ONGC/OPaL to perform the contract (hereinafter
        referred to as "CONTRACT") for the execution of the
        PROJECT.
        NOW THEREFORE the PARTIES agree as follows:

        1.       AGREEMENT TO COOPERATE
                 xxxx       xxxx        xxxx        xxxx         xxxx

                 As far as the CONSORTIUM MEMBERS are concerned,
                 this AGREEMENT is signed only for the purpose of
                 bidding and, if awarded, as a basis for a consortium
                 agreement ("CONSORTIUM AGREEMENT") in order
                 to execute the CONTRACT.
        2.       CONSORTIUM

        2.1      The PARTIES agree to cooperate on the basis of the
                 CONSORTIUM AGREEMENT with joint and several
                 responsibility/liability towards ONGC/OPaL     for




W.P.(C) No.3914/2012                                             Page 24 of 94
                 execution of the entire works and discharging all
                 obligations under the CONTRACT.
                 xxxx         xxxx         xxxx         xxxx         xxxx

                 The overall responsibility of the project management of
                 the entire project shall be that of the leader of the
                 consortium and shall also perform by himself and not
                 through sub-contract, Project Management + FEED
                 Engineering for the DFCU.

                 xxxx         xxxx         xxxx         xxxx         xxxx
        2.4      The PARTIES confirm herewith that direct payments to
                 each PARTY shall be made by ONGC/OPaL according
                 to the details of the price break-up and payment schedule
                 as laid down in the BID.

                 xxxx         xxxx         xxxx         xxxx         xxxx

        3.1      Each PARTY, in the event that the CONSORTIUM is
                 awarded the CONTRACT, shall be responsible for
                 performance of its responsibilities and services as
                 stipulated in this AGREEMENT and to be stipulated in
                 the CONSORTIUM AGREEMENT in detail.
                 xxxx         xxxx         xxxx         xxxx         xxxx

        3.4      Each PARTY shall be responsible for timely performance
                 of its share of work under CONTRACT including timely
                 supply of required information, data, and material
                 required for the performance of the scope of the work of
                 other PARTIES. Each PARTY is also responsible for
                 quality of its scope of work.

                 xxxx         xxxx         xxxx         xxxx         xxxx
        4.4      Notwithstanding any other provisions of the
                 AGREEMENT, in no event shall either PARTY be liable
                 to the other PARTIES, whether arising under contract,
                 tort (including negligence), strict liability or otherwise,



W.P.(C) No.3914/2012                                                 Page 25 of 94
                 for loss of revenue, profit or use of capital, downtime of
                 facilities, damage for failure to meet other contractual
                 commitments or deadlines, loss of business reputation or
                 opportunities, loss of production, loss of product, or for
                 any special, incidental or consequential loss or damage of
                 any nature arising at any time or from any causes
                 whatsoever.

                 xxxx         xxxx          xxxx         xxxx          xxxx

        4.8      The PARTIES mutually agree and confirm that the
                 CONSORTIUM shall constitute an unincorporated
                 arrangement established for the limited purpose of
                 representations and dealing with ONGC/OPaL with
                 independent and separate scope of work as set forth
                 herein. The PARTIES shall be liable jointly & severally
                 vis-a-vis ONGC/OPaL for the obligations of the
                 PROJECT in accordance with the terms & conditions of
                 the Tender document. Such Joint and Several Liability
                 shall not extend to any third party other than
                 ONGC/OPaL nor for any purpose other than the Project
                 and each one will be liable in respect of its separate and
                 independent scope of work set forth herein.
                 Nothing in the AGREEMENT shall be deemed to
                 constitute, create, give effect to, or otherwise recognize a
                 corporation, association, partnership joint venture or
                 formal or informal business entity of any kind
                 (incorporated or not incorporated). Nothing shall be
                 construed as providing for common management and the
                 sharing of profits or losses arising out of the Project. Both
                 parties shall file their respective tax returns and be
                 assessed separately.

                 Each of the Parties expressly agrees that it is not their
                 intention through the joint venture to carry on business in
                 common with the other PARTIES with a view to profit.
                 Each party shall bear its own losses and retain all profits




W.P.(C) No.3914/2012                                                   Page 26 of 94
                 arising from the performance of its respective scope of
                 work.
                 The CONSORTIUM Linde ­ Samsung is a non-
                 incorporated one-time co-operation of two individual,
                 independent and separate legal entities with a defined
                 split of scope of work under this CONTRACT.
                 Individual payments will be released by ONGC/OPaL to
                 the members of the CONSORTIUM as per their separate
                 invoices."
38.     The intention of the members of the Consortium is discernable from
the various clauses of the MOU which are quoted above. Clause 4.8 of the
MOU expressly provided that "the CONSORTIUM shall constitute an
unincorporated arrangement established for the limited purpose of
representations and dealing with ONGC/OPaL with independent and
separate scope of work as set forth" in the MOU. Clause 3.1 of the MOU
clearly specifies that each consortium member would be responsible for
performance of its responsibilities and services as stipulated in the MOU.
Clause 3.4 of the MOU further specified that each consortium member
would be responsible for its share of work and would also provide the
information, data and material required for performance of work by the
other member.

39.     Insofar as the execution of the contract is concerned, the
responsibilities of each member were separate and independent. Neither of
the members had any role to play with respect to the scope of work which
was allocated to the other member. The equipment/material to be supplied
and the works to be executed by each member under the MOU as well as
under the Contract entered into with OPAL was well defined and the




W.P.(C) No.3914/2012                                             Page 27 of 94
members were to act separately and in accordance with the respective work
allocated to them. The opening recitals as recorded in the MOU indicate
that the Linde was required to perform Basic Engineering, supply Selected
Key Equipment and the related Detail Engineering, Detail Engineering and
Procurement of Cracking Furnaces, parts of Technical Supervision
Services, Commissioning, Testing, Conducting Performance Tests and
Post-Commissioning Services of the Project. Samsung was required to
perform Detailed Engineering of DFCU Recovery Section and AU, supply
of Equipment, Construction, Erection and Pre-Commissioning of DFCU
and AU and parts of Technical Supervision Services of the Project.

40.     The allocation of the work was done in such a manner that each
member was required to perform work which was within its field of
expertise and could not be performed by the other party. The work to be
performed by both the members was separate, definite and divisible.
Therefore, as far as execution of the project was concerned, each party had
to work independent of the other. The only area of cooperation and
management envisaged under the MOU was in respect of sharing of
information and material, to enable the other member to perform its work.
In terms of the MOU, each member was obliged to provide the necessary
information to the other which was necessary for the other member to
perform its work. This level of cooperation is necessary for execution of
any project where multiple agencies are involved. Even in cases where the
agencies involved in execution of a project are not related, it would be
necessary that they cooperate with each other in providing information so
that each agency can work in a coordinated manner. The said MOU formed




W.P.(C) No.3914/2012                                           Page 28 of 94
an integral part of the Contract entered into between Linde, Samsung and
OPAL and was appended as Annexure J to the said Contract. And, to that
extent OPAL also recognized the relationship between Linde and Samsung.

41.     Subsequent to the MOU, Linde and Samsung entered into an Internal
Consortium Agreement. This agreement also clearly specified that the
scope of works of Linde and Samsung were separate and independent. Each
of the members was responsible for its own scope of work. The annexures
to this agreement included a Gantt Chart which indicated the schedule for
execution of the project. This schedule clearly specified the separate
tasks/work to be executed by the Linde and Samsung. The agreement also
made a specific provision in case the scope of work of the respective
members was altered and either of the members was required to execute
additional work. It was agreed that in such case, the price for additional
work would have to be paid to the party executing additional work in
addition to the consideration as agreed under the contract. Clause 6.1 of the
said agreement expressly provided that prices and payment for the
respective works to be performed by the members would be stipulated
separately in the bid and the Contract to be entered into with OPAL. Clause
6.3 contemplated that separate invoices would be issued by Linde and
Samsung to OPAL (described as the `company' under the Contract).
Clauses 6.1 and 6.3 of the said agreement are relevant and are quoted
below:-

        "6.1 The prices and payment conditions for Linde's and
             SECL's respective Scope of Work as per Articles 4.1 and
             4.2 shall be as stipulated in the Bid and, finally, as
             stipulated in the Contract with the COMPANY.



W.P.(C) No.3914/2012                                             Page 29 of 94
                 xxxx         xxxx         xxxx         xxxx          xxxx

        6.3      Detailed terms and conditions regarding payments to be
                 effected by the COMPANY to the Parties under the
                 Contract shall be as follows: Separate invoices will be
                 issued by SECL and Linde to COMPANY for each
                 milestone payment. The Parties agree and acknowledge
                 that under the Contract there shall be direct payments by
                 the COMPANY to each Party for its respective price
                 portion and/or related progress in the total Contract price.
                 The Contract shall include individual Contract prices and
                 payment schedules for Linde and SECL for which each
                 party shall be solely responsible. "

42.     The Internal Consortium Agreement was also explicit with regard to
risk to be borne by the members. Linde and Samsung agreed to bear the
risk for the work falling within their scope of work including on account of
non-payment or default by OPAL. Neither of the members would be liable
to each other on account of any loss or damages incurred by the other
member on account of non-payment by OPAL. This was expressly
provided in Clause 6.4 of the said agreement which reads as under:-

        "6.4 Each Party to this Agreement shall bear the risk of non-
             payment or payment default by the COMPANY
             WHETHER from equity or from loans or from other
             sources of the COMPANY'S funding for the Project
             regarding its respective price portion and related progress
             in the total Contract Prices under the Contract."

43.     Each of the members was also responsible for any deficiency in
performance of the work falling within their scope of works. Although, the
parties had agreed to be joint and severally liable to OPAL, the members
had internally agreed that each of them would be responsible and liable for




W.P.(C) No.3914/2012                                                  Page 30 of 94
performance and completion of their scope of work. Clauses 9.1 and 9.2 of
the said agreement are relevant and are quoted below:-

        "9.1 Notwithstanding Linde's and SECL's liability towards
             the COMPANY as per Contract, it is agreed that
             internally the Parties shall each be responsible and liable
             for the performance and completion of their Scope of
             Work for the Project according to the requirements and
             stipulations of the Contracts and this Agreement.
        9.2      Linde's Liabilities

        9.2.1 Licensing and Engineering

                 (1) In case of deficiencies in Linde's engineering work
                 defined in Article 4.1.1(1) and (2) above, Linde will
                 perform the necessary corrective engineering work at its
                 own expense.
        9.2.2 Equipment
                 If for reasons attributable to Linde the equipment
                 supplied by Linde as per Article 4.1.1(10) above is found
                 defective by COMPANY prior to the expiration of the
                 warranty period as per Contract, Linde will, at its cost,
                 repair or replace such defective equipment including
                 related CIF transportation, as well as any import duties
                 and any taxes or expenses according to the stipulations of
                 the Contract, and will compensate the respective
                 additional construction costs.

        9.2.3 Liquidated Damages for Delay

                 (1) In case deficiencies in Linde's execution of its Scope
                 of Work as defined in Article 4.1.1 and in Annex 2 to this
                 Agreement result in a delay in the penalized milestone(s)
                 according to the Contract with COMPANY, Linde shall
                 be responsible for the payment of the liquidated damages
                 for the length of delay caused by Linde due to



W.P.(C) No.3914/2012                                                Page 31 of 94
                 COMPANY and claimed by COMPANY under the
                 Contract.
                 (2) Linde's liability for liquidated damages under this
                 Article 9.2.3 shall be limited to 5 percent (%) of Linde's
                 price of its Scope of Work.

        9.2.4 Liquidated Damages for Non-fulfilment of Performance
              Guarantees
                 In case of non-fulfillment of the process performance
                 guarantees - as per the Contract-if claimed by the
                 COMPANY, Linde will be responsible for payment of
                 liquidated damages."

44.     Insofar as cooperation between Linde and Samsung towards project
management is concerned, it was expressly agreed between the said parties
that each shall be responsible for the management and control of work
falling within their own scope. However, for the purposes of representing
the Consortium to OPAL, it was agreed that `Project Directors' would be
nominated by Linde and Samsung who would have the authority to direct
the project execution in accordance with the provisions of the Contract
entered into between the parties with OPAL and in conformity with their
internal agreements. It was expressly agreed that the Project Directors
would remain responsible to their respective sponsors. Clause 7 of the
Internal Consortium Agreement is relevant and is quoted below:-

        "7.      Project Management

        7.1      Each Party shall be responsible for the management and
                 controlling of its Scope of Work.

                 Linde and SECL will nominate one responsible Project
                 Manager each and will establish their Project teams.




W.P.(C) No.3914/2012                                                Page 32 of 94
                 The Project Directors are persons to be nominated by the
                 Parties to whom the Project Managers report and are
                 responsible and who are the official representatives of the
                 Consortium towards COMPANY. The Project Directors
                 shall be given full authority by Linde's and SECL's
                 management to direct the Project execution in accordance
                 with the provisions of the Contract and this Agreement
                 and to act in the best interest of the Consortium. The
                 Project Directors shall remain responsible to Linde and
                 SECL respectively and shall regularly report to Linde
                 and SECL with respect to any matters concerning the
                 Consortium.

                 For the avoidance of doubt, Project Directors
                 responsibility towards Linde and/or towards SECL shall
                 not constitute a personal financial liability of the Project
                 Directors.

                 The Project Managers shall discuss all important matters
                 related to the Project and shall make best efforts to reach
                 agreement on all issues. In order to achieve a successful
                 implementation of the Project in accordance with the
                 provisions of the Contract, un-resolvable disagreements
                 between the Project Managers shall be referred to the
                 Project Directors.

                 In addition to representing the Consortium towards
                 COMPANY, the Project Directors shall receive un-
                 resolvable disagreements between the Project Managers
                 and make best efforts to facilitate a consensus with
                 regard to such disagreements.

                 Should no consensus be reached, despite best efforts of
                 the Project Directors and the Project Managers, the
                 Project Directors shall refer such unresolved
                 disagreements to the Steering Committee for further
                 action."




W.P.(C) No.3914/2012                                                  Page 33 of 94
45.     Subsequent to executing the Internal Consortium Agreement, Linde
and Samsung submitted a bid as a Consortium which was accepted and a
Notice of Award dated 23.12.2008 was issued. Thereafter, a Contract dated
10.02.2009 was executed between the OPAL on one part and the
Consortium on the other. It is necessary to refer to the relevant clauses of
the said Contract and the same are reproduced hereunder:-

        "AND WHEREAS the Contractor represents that it has
        expertise and technical know-how in respect of the said Work
        and had submitted his offer as per Company's Bidding
        Documents in response to the above said Tender enquiry of the
        Company vide the Contractor's offer No. P310-7009 dated
        20.03.2008 and 28.07.2008 for Adjustment Price Bid.

        AND WHEREAS pursuant to the above and the discussions
        conducted with the Contractor, the Company has awarded to the
        Contractor the Contract for the said Work by its NOA No.
        MR/OW/MM/DFC/02/2007 dated 23.12.2008 which is the
        effective date of commencement of this Contract and on the
        terms and conditions as agreed to by the two parties as of the
        said date of NOA and as outlined in this Agreement,
        (hereinafter also referred to as "the Contract").

                 xxxx     xxxx         xxxx        xxxx         xxxx

        1.1.3 (a) "Company" means ONGC Petro additions Limited
              ("COMPANY") incorporated under Companies Act,
              1956 having its registered office at Jeevan Bharati,
              Tower-11, 124 Cannought Circus, New Delhi - 110 001,
              and one of its offices at 4th Floor, VCCI Commercial
              Complex, 73-GIDC Makarpura, Vadodara - 390010,
              India including its legal successors and permitted
              assignees.

                 xxxx     xxxx         xxxx        xxxx         xxxx




W.P.(C) No.3914/2012                                            Page 34 of 94
      1.1.10 "Contractor" means consortium of Linde Engineering
             and Samsung Engineering Co. Ltd. the successful party
             with whom contractual relations are subsequently formed
             for the Dual Feed Ethylene Cracker & Associated units
             for the Dahej Petrochemical Complex at Dahej.

                 The consortium is comprising of

                 LINDE AG, Linde Engineering Division, a company
                 organized and existing under the laws of Germany,
                 whose principal office is at Dr.-Carl-von-Linde-Strasse
                 6-14,82049 Pullach, Germany

                 and

                 SAMSUNG ENGINEERING CO. LTD., a company
                 organized and existing under the laws of the Republic of
                 Korea, whose principal office is at Samsung SEI Tower,
                 467-14 Dogok 2-Dong,Gangnam-Gu, Seoul, Korea, a
                 Company established and registered under the laws of
                 Korea, the party to this Contract so defined in the
                 agreement including their legal successors or permitted
                 assignees.
       1.1.11 "Contract Price" means the total amount specified in the
              substantive article in the contract (i.e. Section 3.1)
              subject to any additions thereto, or deductions there from
              which may be made through applications of the relevant
              provisions of the Contract.
                 xxxx        xxxx         xxxx         xxxx        xxxx

       1.2.5 Entire Agreement

                 The Contract constitutes the entire agreement between
                 the Company and the Contractor with respect to the
                 subject matter of the Contract and supersedes all
                 communication, negotiations and agreement (whether
                 written or oral) of the parties with respect thereto made
                 prior to the date of this Agreement.



W.P.(C) No.3914/2012                                               Page 35 of 94
                 xxxx        xxxx         xxxx         xxxx        xxxx

       2.4       Scope of Works for each discipline
                 The Scope of work for the tender shall include in general
                 but not be limited to the following, as defined by
                 Annexure - B and Annexure - E of the Contract. In case
                 of any contradiction, scope of Work described in
                 Annexure - B of the Contract shall prevail over the scope
                 of Work outlined in the GCC (Annexure - A) of the
                 bidding document.
                 xxxx        xxxx         xxxx         xxxx        xxxx

       3.0       PAYMENT

       3.1       Contract Price
                 The Company shall pay to the Contractor in
                 consideration of satisfactory completion of all the works
                 covered by the Scope of Work under the Contract the
                 Contract Price of
                 EURO 354,512,000 (in words: EURO Three Hundred
                 Fifty Four Million and Five Hundred Twelve Thousand
                 only)
                 plus

                 USD 365,109,000 (in words: United States Dollars:
                 Three Hundred Sixty Five Million and One Hundred
                 Nine Thousand only)

                 plus
                 INR 27,088,667,000 (in words: Indian Rupees: Twenty
                 Seven Billion Eighty Eight Million and Six Hundred
                 Sixty Seven Thousand only) as per the details and break-
                 up of prices given in Schedule of prices.

                 xxxx        xxxx         xxxx         xxxx        xxxx



W.P.(C) No.3914/2012                                               Page 36 of 94
                 Payment shall be made in the currency or currencies
                 given in the schedule of prices for the work executed as
                 per the procedure set forth in Clause 3.2. Adjustment to
                 Contract Price, if any, shall be made in accordance with
                 provisions of Contract.

       3.2       Payment Procedure

       3.2.1 Pending completion of the whole Works, provisional
             progressive payments for the part of the Works executed
             by the Contractor shall be made by Company on the basis
             of said work completed and certified by the Company's
             Representative as per the milestone formula provided in
             the Contract at Annexure `F'. Such certification of the
             Work completed shall be made by the Company's
             Representative within 15 days of receipt of Contractor's
             Application for Certification. No payments shall become
             due and payable (with the exception of the 10% down
             payment of the Contract Price which is due for payment
             within 30 days after signing of Contract) to the
             Contractor until Contract is signed by the two parties and
             Contractor furnishes to the Company Performance Bank
             Guarantee (as per Clause 3.3) and Insurance policy /
             Certificate of Insurance (as per requirement of Clause
             7.3) for the policies specific for the Project and
             requirement of Reserve Bank of India, if any (for foreign
             Contractors).

       3.2.2 The Contractor shall submit its invoice(s) once in each
             month along with four copies for the work completed and
             certified by Company's Representative as per agreed
             milestone formula, with all required supporting
             documents and details of the said work to the Company's
             Representative for certification of the said invoice, at
             Company's Office for approval of the amount payable
             and any payment thereafter. Contractor shall submit
             separately in accordance with the Clause 3.2.5 hereof a
             monthly invoice for Extra Work approved by the
             Company. Payment shall be done to each member of the



W.P.(C) No.3914/2012                                              Page 37 of 94
                 Consortium individually as per each member's detailed
                 price break down as indicated under Annexure -C to the
                 Agreement to be authorized by the leader of the
                 Consortium.

       3.2.3 The Company shall arrange approval of the invoice
             (undisputed amount) and payments within 15 (fifteen)
             working days of receipt thereof by the Company. In the
             event of the Company objecting to any portion of Work
             covered by the said invoice, such objection shall be
             communicated to the Contractor within 10 working days
             from the date of receipt of invoice by the Company at its
             office. The Contractor shall have the right to claim the
             payment of such amounts objected by the Company in
             subsequent invoice after removal of cause of such
             objection.

       3.2.4 The payment against clear (undisputed) bills/invoices
             submitted by the Contractors will be made by Company
             within 15 (Fifteen) working days from the date of
             submission of bill/invoices complete in all respects.
             However, in case of payment to non-resident contractors,
             the time required for obtaining NOC and / or RBI permit
             for release of subject payment shall be in addition to 15
             working days (normally applicable for first payment
             only). In case of delay in payment of undisputed portion
             of the invoices beyond 30 Working days, interest @
             LIBOR plus 1% shall be applicable on the undisputed
             portion of the invoices for the period beyond 30 Working
             days.

                 Payment for amount objected to by Company as referred
                 to in Clause 3.2.3 shall be made in accordance with
                 provision under this Clause when the objection due to
                 which the amount withheld by the Company has been
                 removed/settled and the Contractor submits fresh invoice
                 for the same.

                 xxxx        xxxx        xxxx         xxxx        xxxx



W.P.(C) No.3914/2012                                              Page 38 of 94
       3.2.6 All the payments outside India by the Company shall be
             remitted through Electronic Fund transfer (EFT) /
             Telegraphic transfer (T/T) and credited to the
             Contractor's bank account to be specified by the
             Contractor in writing to the Company before submission
             of the first invoice. The payment shall be made in
             currencies stated in the Contract. The Company shall be
             deemed to have arranged payment to the Contractor on
             the date of transmission of instruction by the Company's
             bankers to the Contractor's Bank in the country where
             the money is required to be paid to the Contractor.
                 xxxx        xxxx         xxxx        xxxx         xxxx

     3.2.6.1 The Contractor agrees to receive all payments inside
             India under this contract through Electronic Clearing
             system (ECS) to their Bank account. The details of Bank
             Account along with MICR No. of the Bank and Branch
             shall be provided by the Contractor at the time of
             submission of the first invoice.

                 The Company shall be deemed to have arranged payment
                 to the Contractor on the date of Company's instructions
                 to Company's bankers to effect payment under ECS to
                 the Contractor's account.

                 Payment shall be made by account payee cheque
                 wherever such facility is not available.

                 Upon Company's instruction to Company's bankers, the
                 Company shall also inform in writing to the Contractor
                 the details of remittance i.e amount and date of payment.
                 xxxx        xxxx         xxxx        xxxx         xxxx

       3.3       Performance Guarantee

       3.3.1 The Contractor shall furnish to the Company within 2
             weeks from the date of signing of this Contract two
             separate unconditional and irrevocable letters of



W.P.(C) No.3914/2012                                               Page 39 of 94
                 guarantee ("Performance Bank Guarantee(s)") for due
                 performance of the Contract, each of which shall be as
                 per proforma given at Appendix - I of the Contract, for
                 an aggregate sum equivalent to 10% (ten percent) of the
                 Contract price. The Performance Bank Guarantees shall
                 be drawn in favour of the Company and shall be valid
                 upto a period of Scheduled Completion Date for the
                 Works of the Contract and warranty period plus sixty
                 (60) days. The aggregated value of Performance Bank
                 Guarantees for warranty period shall be reduced from
                 10% to 5% of Contract value.
                 xxxx         xxxx         xxxx         xxxx         xxxx

       3.3.4 The Contractors will submit individually irrevocable and
             unqualified bank guarantees issued by Hypovereinsbank /
             Germany and K-EXIM Bank (Korean Export and Import
             Bank) / Korea (or any other bank as listed in the ITB) in
             the aggregate sum equivalent to 10% (ten percent) of the
             Contract Price.

       5.2.1 Assignment
                 The Contractor shall not, except with the explicit prior
                 approval in writing of the Company, transfer, sub-
                 contract or assign his obligations or any benefit or
                 interests in the Contract or any part thereof in any
                 manner whatsoever. Any such assignment shall not
                 absolve the Contractor from his obligations and
                 responsibilities under this Contract.

     5.10.2      If the Company is satisfied that the entire Works have
                 been completed as specified in 5.10.1 above and have
                 successfully passed all tests provided in the Contract then
                 the Company shall issue within fourteen working days a
                 Certificate of Completion and Acceptance which
                 certificate shall be effective from the completion date
                 which the Contractor had notified to the Company
                 subject to the Company's Representative certifying that
                 the entire Works were completed by the Contractor



W.P.(C) No.3914/2012                                                 Page 40 of 94
                 without any defect on the said notified completion date
                 except for the Punch List items.
     5.14        Performance of Contract/Discharge Certificate

                 No certificate other than the Discharge Certificate
                 referred to in Clause 5.14.1 shall be deemed to constitute
                 approval of any Work or other matter in respect of which
                 it is issued or shall be taken as an admission of the due
                 performance of the Contract or any part of it or of the
                 accuracy of any claim or demand made by the Contractor
                 or of extra Work/Charge Order having been ordered by
                 the Company nor shall any other certificate conclude or
                 prejudice any of the rights of the Company under the
                 contract.
     5.14.1      The Contract shall not be considered as completed until a
                 discharge certificate has been signed by the Company's
                 Representative on behalf of the Company and delivered
                 to the Contractor stating that the Works have been
                 completed and made good to the satisfaction of the
                 Company's Representative in accordance with the
                 Contract.

     5.14.2      The Discharge Certificate shall be issued by the
                 Company's Representative within (28) twenty eight days
                 after the expiration of Guarantee period (of if different
                 guarantee periods become applicable to different parts of
                 the Works then, without prejudice to the Company's
                 Representatives' rights upon the expiration of the latest
                 of those periods) or as soon thereafter as any Works
                 ordered during that period have been completed to the
                 satisfaction of the Company's Representation in
                 accordance with the Contract. In case Company fails to
                 issue such Discharge certificate within the period
                 prescribed herein above without any reason having been
                 notified to the Contractor in writing, the Discharge
                 Certificate shall be deemed to have been issued on the
                 expiry of the above said period.



W.P.(C) No.3914/2012                                                Page 41 of 94
     6.1.1       The Contractor agrees to ensure that all materials and
                 components used in execution of the works under this
                 Contract, shall be new and unused (not reconditioned)
                 and of recent manufacture which shall in no case be of a
                 date of manufacture older than one year from the date of
                 delivery.

     6.2.2       The Company or its other contractors or their personnel
                 shall in no event be responsible for or liable to the
                 Contractor or his Sub-contractor for consequential
                 damages suffered by the contractor or his sub-contractor
                 including without limitation to business interruption or
                 loss of profits etc.

     6.3.2       Liquidated Damages
                 If the Contractor, due to reasons not solely attributable to
                 Company, fails to achieve the date of Ready for Start-Up
                 (RFSU) on or before 44 (Forty four) months from the
                 date of issue of NOA or the extended date for Ready for
                 Start- Up (RFSU) or if Contractor repudiates the Contract
                 before completion of the Works related to Ready for Start
                 Up (RFSU), the Company may without prejudice to any
                 other right or remedy available to the Company as under
                 the Contract.

                 i)    recover from the Contractor as ascertained and
                       agreed liquidated damages and not by way of
                       penalty, sum equivalent to ½ % (Half percent) of
                       the total Contract Price for each week of delay or
                       part thereof beyond the date of Ready for Start-Up
                       (RFSU) subject to a maximum of 5% (Five
                       percent) of the total Contract Price even though the
                       Company may accept delay for the date of Ready
                       for Start-Up (RFSU) after the expiry of the Ready
                       for Start-Up (RFSU) date

                                                  AND/OR




W.P.(C) No.3914/2012                                                  Page 42 of 94
                 ii)   terminate the Contract or a portion or part of the
                       Work thereof after 90 days of delay (or longer if
                       technically required) related to the date of Ready
                       for Start-Up (RFSU) subject to provision of Clause
                       8.3. The Company shall give 14 working days
                       notice to the Contractor of its intention to
                       terminate the Contract and shall so terminate the
                       Contract unless during the 14 days notice period,
                       the Contractor initiates remedial action acceptable
                       to the Company.

      7.1.1      Ownership of materials shall be transferred to the
                 Company upon FOB shipment for imported supply and
                 FOT for local supply subject to Contractor takes full
                 responsibility for any damage / loss during the course of
                 transportation until acceptance of works.

      7.1.2      Deleted

      7.1.3      Ownership of the construction Equipment used by the
                 Contractor and its subcontractors in connection with the
                 Works shall remain with the Contractor and its sub-
                 contractors."

46.     The Contract also included various annexures forming an integral
part of the contract and inter alia specifying certain details as agreed
between the parties. Annexure C of the said Contract was a Contract Price
Schedule which clearly indicated the overall split of prices for the work to
be performed by Linde and Samsung respectively. The summary of
payments agreed to be made to Linde and Samsung as tabulated from the
details specified in Annexure C of the Contract, is as under:

Overall split of prices for the work to be performed by LINDE (excluding
service tax)




W.P.(C) No.3914/2012                                               Page 43 of 94
      DESCRIPTION OF THE SCOPE OF WORK TO Total Amount
      BE PERFORMED BY THE LINDE           to be Paid
      I. Design and Engineering rendered (outside India) in
      Germany (Process Design, Basic Engineering,                40.071
      Detailed Engineering) [EUR x 1000]
      II. Supply (CIF Indian Port) ­ Mechanical, Electrical,
                                                                 275.944
      Instrumentation) [EUR x 1000]
      III. Services (EURO Portion) rendered by Linde
      (construction management and supervision/testing and       18.540
      commissioning) [EUR x 1000]
      TOTAL LINDE EURO PORTION I ­ III. (EUR x
                                                                 334.555
      1000)
      IV. Services rendered by Linde (construction
      management        and     supervision/testing     and      621.209
      commissioning) [INR x 1000]
      TOTAL LINDE INR PORTION IV. (INR x 1000)                   621.209


Overall split of prices for the work to be performed by SAMSUNG
(excluding service tax)
      DESCRIPTION OF THE SCOPE OF WORK TO Total Amount
      BE PERFORMED BY THE SAMSUNG                             to be Paid
      I. Design and Engineering rendered by SAMSUNG
                                                                  53.800
      (Detailed Engineering) [USD x 1000]
      II. Design and Engineering rendered by SAMSUNG
                                                                   4.500
      (Detailed Engineering) [EUR x 1000]
      III. Supply - DDU (i.e FOT) Dahej site ­ rendered by
      SAMSUNG (Mechanical, Electrical, Instrumentation,           293.909
      Civil/Structural and Architectural) [USD x 1000]
      IV. Supply - DDU Dahej - rendered by SAMSUNG
      (Mechanical,         Electrical,       Instrumentation,     12.158
      Civil/Structural and Architectural) [EUR x 1000]
      V. Supply ­ DDU Dahej - rendered by SAMSUNG               18.550.258



W.P.(C) No.3914/2012                                           Page 44 of 94
      (Mechanical,         Electrical,       Instrumentation,
      Civil/Structural and Architectural) [INR x 1000]
      VI. Services rendered by SAMSUNG (Construction
      Management         and     Supervision/Testing     and         3.300
      Commissioning/Post Commissioning) [EUR x 1000]
      VII. Services rendered by SAMSUNG (Construction
      Management         and     Supervision/Testing     and        17.400
      Commissioning/Post Commissioning) [USD x 1000]
      VIII.     Services     rendered     by      SAMSUNG
      (Construction/Fabrication/Erection on Site) [INR x           6.969.000
      1000]
      Total (II. + IV. + VI.) EUR - Portion rendered by
                                                                    19.958
      SAMSUNG [EUR x 1000]
      Total (I. + III. + VII.) USD ­ Portion rendered by
                                                                    365.109
      SAMSUNG [USD x 1000]
      Total (V. + VIII.) INR ­ Portion rendered by
                                                                  25.519.258
      SAMSUNG [INR x 1000]


47.     It is material to note that even, as per the terms of the Contract, the
scope of work to be executed by Linde and Samsung was separate and was
accordingly specified in the annexures to the Contract. The payments to be
made for separate items of work were also specified. The currency in which
the payments were to be made was also separately indicated. Thus, insofar
as execution of the work was concerned, even OPAL recognised that
different items constituting the Contract would be performed independently
by Linde and Samsung. The consideration for the work performed was to
be made directly to the concerned member of the Consortium in accordance
with the work performed by him. Annexure C of the Contract specified the
payment schedule i.e. the amount to be paid for the supply of goods and



W.P.(C) No.3914/2012                                              Page 45 of 94
services rendered by both the members of consortium. Linde and Samsung
were to be paid on the basis of the separate invoices raised by them
respectively. There was no arrangement for sharing of profits and losses
between Linde and Samsung. And, each of them would make profits or
incur losses based on the price as agreed by them and the costs incurred by
them for performance of the contract falling within their independent scope
of work.

48.     It follows from the above, that Linde and Samsung had joined
together to (a) bid for the contract; (b) present a façade of a consortium to
OPAL for execution of the contract and accept joint and several liability
towards OPAL for due performance of the contract and completion of the
project; and (c) put in place a management structure for inter se
coordination and execution of the project. However, in all other respects,
both Linde and Samsung were independent of each other and were
responsible for their own deliverables under the Contract, without reference
to each other.

49.     In the aforesaid facts, the substratal controversy to be addressed is
whether the following features of the agreement between Linde and
Samsung and their contract with OPAL would lead to a conclusion that the
consortium of Linde and Samsung constitutes an AOP :-

      (a) That Linde and Samsung are jointly and severally liable to OPAL
        for due performance of the Contract dated 10.02.2009.




W.P.(C) No.3914/2012                                             Page 46 of 94
      (b) That in terms of the Contract dated 10.02.2009, Linde and Samsung
         were described as a "contractor" and for the purpose of the
         obligations under the Contract were considered as a Consortium.

      (c) That the agreement between the parties provided for certain level of
         cooperation by way of appointing Project Directors and Manager for
         execution of the project.

50.      The Contract defines the "contractor" to mean the Consortium of
Linde and Samsung. The learned counsel for the respondent has, thus,
contended that insofar as OPAL was concerned, the consortium was treated
as a single entity. This according to the respondent would indicate that the
project being executed by the consortium is their joint enterprise. Clause
3.1 of the Contract specified that the consideration for execution of the
works was payable to the "contractor". The payments as contemplated
under clause 3.2 of the said Contract were to be made on achieving certain
milestones. This according to the learned counsel for the respondent also
indicated that as far as OPAL was concerned (which is referred to as
"company" under the contract) both the consortium members were treated
as one contracting party and not as independent parties. The learned
counsel for the respondent had also referred to various other clauses of the
contract in support of this contention.

51.      A plain reading of the said Contract clearly indicates that insofar as
OPAL is concerned, the consortium members were treated as a single party
for due performance of the Contract. However, the annexures to the
contract provided for the split of the Contract between the consortium




W.P.(C) No.3914/2012                                               Page 47 of 94
members and amounts payable to each of the consortium members is
detailed separately. The scope of work of each of the members was also
separately listed. The Contract specified that an organisation structure
would be set up which would facilitate OPAL in dealing with the
consortium members collectively and not separately. The only conclusion
one can draw is that while OPAL treated the consortium members as a
single entity for imposing liability for due performance of the Contract,
OPAL also recognized that each consortium member would perform the
items of work falling within their respective scope of work, independently.

52.     While, it is relevant as to how a third party deals with the members
of a consortium, the same would not be conclusive in determining whether
the consortium members constitute an Association of Persons. It is
indisputable that the purpose of Linde and Samsung in collaborating with
each other was to procure the Contract and, to that end, both the said
members had agreed to present themselves as a consortium. However, as
stated earlier the question as to whether the said consortium members
formed an Association of Persons would have to be determined by the level
of association and the extent of collaboration as agreed between them. The
fact that a third party is desirous to deal with the members as one
consortium cannot be the determinative factor in considering whether the
members constitute an Association of Persons for the purposes of being
assessed for taxation. Both the consortium members had agreed to present
a common face. However, the agreement inter se between the members
clearly spelt out that except for presenting a common face and complying
with the conditions as imposed by OPAL, the members would conduct their




W.P.(C) No.3914/2012                                            Page 48 of 94
business independently with no interference from the other. This, in our
view, clearly indicates that Linde and Samsung had no intention to form an
Association of Persons. Clause 4.8 of the MOU and 16 of the Internal
Consortium Agreement expressly recorded that the members did not have
any intention to form an association.

53.     We are also unable to accept the contention that the fact that
Samsung and Linde had agreed to be jointly and severally liable for
performance of the contract, would be sufficient to hold that they
constituted an Association of Persons for the purposes of the Act. Linde
and Samsung agreeing to be jointly and severally liable to OPAL for due
performance of the Contract only indicates that Linde and Samsung had
accepted a contractual obligation towards a third party, the same does not
by itself lead to a conclusion that the said members had formed an
Association of Persons. Any entity/individual may agree, for its own
business purposes, to accept a liability for due performance of an obligation
of another. This by itself would not lead to a conclusion that the said
persons had formed a common enterprise or an association which was
moved by joint action for a common purpose. As a matter of illustration, let
us take a case where a director of a company provides a personal guarantee
for a loan taken by the company. Having stood as a surety for the company,
the director and the company would be jointly and severally liable to the
lender. However, they continue to be independent of each other and the fact
that are jointly and severally liable cannot possibly lead to the conclusion
that the company and its director constitute an Association of Persons for
the purposes of the Act. In order for independent entities/individuals to be




W.P.(C) No.3914/2012                                             Page 49 of 94
considered as an Association of Persons, they must exhibit some trappings
of a partnership in relation to their common enterprise.

54.     Lastly, it is necessary to consider whether the joint management
structure of the project as agreed to be constituted by Linde and Samsung is
sufficient to conclude that they had constituted an Association of Persons.
Clause 7 of the Internal Consortium Agreement between Linde and
Samsung specifically records that "each Party shall be responsible for the
management and controlling of its Scope of Work". It was further agreed
that Linde and Samsung would establish their own project teams and also
nominate one responsible "Project Manager" each who would report to the
respective "Project Directors" nominated by Linde and Samsung. The
Project Directors would represent the consortium in interaction with OPAL.
It is, thus, apparent that both Linde and Samsung were managing the
execution of their part of the contract separately without interference by the
other member. Neither Samsung nor Linde could carry out the work agreed
to be performed by the other. Neither of the parties exercised any control
over the quality of the equipment/plant supplied by the other or exercised
any control with respect to the quality of the works executed. Each of the
parties, thus, were responsible for executing the project through their own
personnel and through their independent resources. There was no pooling
of resources to form a common management.              Each of the parties
conducted its business independently. However, in terms of the MOU,
Linde and Samsung had agreed to share information and material to enable
the other member to perform its work. The Gantt chart annexed to the
Contract indicated the schedule in accordance with which each member




W.P.(C) No.3914/2012                                             Page 50 of 94
was expected to complete the various tasks and works within their
respective scope of works. This would undoubtedly, require co-ordination
between Linde and Samsung.

55.     In every project which is executed by multiple independent agencies,
a certain level of cooperation and coordination is required to ensure that the
agency involved performs its work in a timely manner as per a
predetermined schedule in order to enable the other agency to commence
and complete its portion of work. The level of cooperation as agreed
between Linde and Samsung was also akin to the level of cooperation as
expected from independent agencies executing a project. This can be
understood by taking an illustration of a simple project for construction of a
building. It is only after an Architect or a Designer provides the detailed
drawings that a civil contractor can commence construction. Similarly, it is
only after the civil construction is commenced and progressed to a certain
level that space for electrical contractors is available for them to perform
their work. The work of Interior finishing can take place only after the civil
works are complete. The fact that each of the aforesaid agencies, namely,
the architect, the civil and electrical contractors are required to complete
their work in a pre-determined sequence and are required to cooperate with
each other in providing the necessary information and adhering to a
specified schedule would not necessarily imply that the architect, civil
contractors and electrical contractors had formed an Association of Persons.
In this illustration each one of the participants works towards a common
project with a certain level of cooperation. However, since the said
participants do not act as a single cohesive entity, but perform their




W.P.(C) No.3914/2012                                             Page 51 of 94
independent allocated works, they cannot be considered as an Association
of Persons. In order to consider independent agencies as an Association of
Persons, it is necessary that they form a joint enterprise with a greater level
of common management. An element of mutual agency and joint action for
mutual purpose is also necessary. Mere obligation to exchange information,
between independent agencies, for co-ordinating their independent tasks
would not result in an inference that the agencies had constituted an
Association of Persons.

56.     It is relevant to keep in mind that Linde and Samsung shared neither
the costs nor risks. Both Linde and Samsung managed their own
deliverables. As discussed above, in our view, the facts of this case do not
indicate a sufficient degree of joint action between Linde and Samsung
either in execution or management of the project to justify a conclusion that
they had formed an Association of Persons and in our view, the Authority
erred in concluding so.

57.     The learned counsel for the petitioner had also referred to the
Instruction No.1829 dated 21.09.1989 issued by the Central Board of Direct
Taxes (CBDT). The said Instruction had been issued in respect of power
projects being executed by a Consortium of companies on turnkey basis.
The said Instruction explains that the concept of turnkey execution of a
project would involve the persons undertaking the project to take complete
responsibility of the entire project. It is noted in the circular that the
projects may involve a Consortium of companies where one company may
be designated as a leader for the purposes of ensuring coordination of the
inter-related tasks. The said Instruction explains that in such cases, the



W.P.(C) No.3914/2012                                              Page 52 of 94
foreign companies forming a Consortium would not constitute an
Association of Persons under the Act and each foreign company would be
individually liable for taxation as a separate entity. The learned counsel for
the petitioners had relied upon the said Instruction in support of its
contention that foreign companies forming a Consortium to execute large
projects on turnkey basis would not constitute an Association of Persons.
Admittedly, the said Instruction had been withdrawn by Instruction No. 5
dated 20.07.2009. However, it is contended that the said instruction would
be applicable as the Contract had been entered into prior to the withdrawal
on 20.07.2009. This contention cannot be accepted as the applicability of
the Instruction/Circular would have to be viewed in relation to the relevant
assessment years during which the same was in force. Merely because the
Contract had been entered into before 20.07.2009 would not imply that the
instructions would continue to be applicable on the income arising
therefrom which may be spread over several years. The decision of this
Court in case of Ericsson A.B. (supra) also clearly indicates the same. The
relevant passage from the said judgment is quoted below:-

        "43. Thus, Overall Agreement does not result the income
        accruing in India. The execution of an overall agreement is
        prompted by purely commercial considerations as the India
        Cellular Operator would be desirous of having a single entity
        that he could liaise with, a fact which even the Board has noted
        in its Instruction No. 1829 dated 21st September, 1989.
        Although Instruction number 1829 stands withdrawn by virtue
        of Circular No.7/2008 dated 22nd October, 2009, such
        withdrawal can have no retrospective effect and the principle
        laid down in Instruction No. 1829 must continue to govern the
        assessment for the relevant year."




W.P.(C) No.3914/2012                                             Page 53 of 94
58.     Having stated the above, we must add that although, the said
instruction does not strictly apply to the facts of the present case, however,
the said instruction does indicate the correct understanding in law. That is,
in projects where various foreign companies form a consortium for a
coordinated execution of the project on turnkey basis, their limited
collaboration for coordination of their inter-related tasks would not be
sufficient to constitute an Association of Persons under the Act.

59.     Although, the said Instruction had been, subsequently, withdrawn on
20.07.2009, the reasons for the withdrawal are principally: that the earlier
instruction had been misused by certain assessees who were deliberately
splitting up the contract and creating consortia where non-residents took
take advantage of the said instruction to avoid exigibility to tax. Therefore,
it is apparent that the instructions had not been withdrawn on account of
any change in understanding of law and to that extent reference to the
Instruction No. 1829 may be relevant.

60.     The learned counsel for the petitioner had contended that the
Authority has erred in not following its earlier decisions in Hyundai Rotem
Co. and Mitsubishi Co. (supra), Hyosung Corporation (supra) and Re:
Van Oord Acz BV (supra). He submitted that the facts in the said cases
were similar to the facts of the present case and a view in variance with the
earlier decision, was not warranted.

61.     In the case of Hyosung Corporation (supra), the applicant therein -
Hyosung Corporation (Hyosung) submitted a bid for execution of the works
relating to 800 KV/400KV Tehri Pooling Station which was floated by




W.P.(C) No.3914/2012                                                Page 54 of 94
Powergrid Corporation of India Limited (Powergrid). The applicant was
successful and its bid was accepted. As per the terms and conditions of the
bid, the applicant could assign the whole or part of the work to an
independent contractor subject to the approval of Powergrid. In terms of
this provision, the applicant requested that part of the contract relating to
onshore supply and services be assigned to M/s L & T. Accordingly,
Powergrid entered into a separate contract for onshore supplies and services
with M/s L & T. Although, Hyosung continued to be responsible for the
overall execution of the project, the scope of work of Hyosung was limited
to the offshore portion of the contract. It is apparent from the above that the
facts of the present case are not entirely similar with the facts of the
Hyosung Corporation (supra). First of all, there is no separate contract
entered into between OPAL and each of the consortium members and a
single contract had been entered into by OPAL with the Consortium
consisting of Linde and Samsung. Secondly, Linde and Samsung were
jointly and severally liable for execution of the entire Contract.

62.     However, the material facts in the present case and in the case of
Hyundai Rotem (supra) are, indisputably, similar. In that case, Hyundai
had entered into a MRMB Consortium Agreement with Mitsubishi
Corporation, Mitsubishi Electric Corporation and BEML Ltd. (hereinafter
collectively referred to as the `MRMB Consortium'). As per the terms of
the MRMB Consortium Agreement, Mitsubishi Corporation was appointed
as a consortium leader. The MRMB Consortium submitted a bid to Delhi
Metro Rail Corporation (DMRC) for mass rapid transport system, phase-II.
The MRMB Consortium Agreement provided for constitution of a "project




W.P.(C) No.3914/2012                                                 Page 55 of 94
board" which included project directors nominated by each consortium
member. The function of the project board included overall planning,
organizing and directing the complete execution of the project in an
efficient manner. After the bid of the MRMB Consortium was accepted, the
consortium members entered into a Supplementary Consortium Agreement
which specified the role of each consortium member. The percentage of
each participating member in the contract was specifically agreed for the
purposes of sharing the amount receivable for execution of the Contract.
DMRC insisted on a separate guarantee from the parent company of each
consortium member and the same was provided. The liability of each
consortium member towards DMRC was also joint and several. The
Authority considered the facts of that case and came to the conclusion that
the Consortium could not be treated as an Association of Persons. The
factors which weighed with the Authority to conclude that MRMB
Consortium did not constitute an Association of Persons were as under:-

    (a)     The nature of work undertaken and capable or being executed by
            each consortium member was different and the scope of work of
            one member could not be undertaken by the other.

    (b)     Each consortium member had a different skill set.

    (c)     Overseeing of each others work, by the consortium members was
            not possible.

    (d)     Each consortium member had independently determined the
            prices (by way of agreeing to separate discounts).




W.P.(C) No.3914/2012                                             Page 56 of 94
      (e)      The consortium agreements specifically recorded that nothing in
               the agreement would be construed as creating a partnership, joint
               venture or any other legal entity with the other parties to the said
               agreements.

      (f)      The profit and losses were borne by individual members and there
               was no common expenditure to be incurred by the members
               jointly.

63.         The facts in case of Hyundai Rotem (supra) are similar in all
material aspects with the facts of the present case. In absence of any
material change in law, the Authority was bound to follow the principle of
law as applied in the earlier ruling. The Supreme Court in the case of
Columbia Sportswear (supra) had after examining the powers exercised by
the Authority held as under:-

            "10. .....We have, therefore, no doubt in our mind that the
            Authority is a body exercising judicial power conferred on it by
            Chapter XIX-B of the Act and is a Tribunal within the meaning
            of the expression in Arts. 136 and 227 of the Constitution."

64.         The Supreme Court had noted that, although, a ruling would be
binding only on the applicant and the Income-tax Authorities in respect of a
transaction in relation to which the ruling had been sought. However, the
Supreme Court also explained that the same did not mean that the
principles of law which were settled in a case, would not be followed in
future. The relevant observation of the Supreme Court is quoted below:-

            "9. ....However, it has also been rightly held by the Authority
            itself that this does not mean that a principle of law laid down in
            a case will not be followed in future."


W.P.(C) No.3914/2012                                                   Page 57 of 94
65.     We also find merit in the submission made by the learned counsel for
the petitioner that the Authority exercising judicial power would
necessarily have to follow the principle of law already accepted by it. This
is also a necessary facet of Article 14 of the Constitution of India. The
equal protection clause in the Constitution would necessarily imply that the
judicial authorities interpreting the law must also follow a consistent view.
Thus, in the event the Authority was of the opinion that the earlier view
was erroneous, it was incumbent upon the Authority to refer the matter to a
larger bench. In the present case, the Authority has sought to distinguish its
earlier decision in the case of Hyundai Rotem (supra) without pointing out
any material dissimilarity in facts which would render the earlier decision
inapplicable. We are also unable to find any material dissimilarity in facts
that would warrant such a conclusion.

66.     The next contention to be considered is whether the Income Tax
Authorities can assess Linde and Samsung as an Association of Persons in
view of the provisions of the "Agreement between Republic of India and
Federal Republic of Germany for avoidance of double taxation with respect
to taxes on income and capital" (referred to as DTAA herein). It is
contended that in the event of a conflict between the provisions of the
DTAA and the provisions of the Act, the provisions of the Act would
prevail to the extent the same are more beneficial to the tax payer. It is
contended that treating Linde and Samsung as an Association of Persons
would amount to depriving Linde of the benefits under the DTAA and as
such constitutes a "Treaty override". We are unable to accept this
contention as it based on an erroneous assumption that there would be a




W.P.(C) No.3914/2012                                             Page 58 of 94
conflict between the provisions of the DTAA and the Act in the event an
Association of Persons, which has a resident of Federal Republic of
Germany as one of its constituent members, is assessed to tax in India. If in
given facts, it is found that a non-resident has formed an association with
another entity for conduct of a business venture in India, there is no doubt
that the said association would be assessed to tax in India and the same is
not proscribed by the provisions of the DTAA. In this regard, it is also
apposite to refer to certain provisions of the DTAA.

67.     The expression "enterprise of a contracting state" is used at several
places in the DTAA including in Article 7 of the DTAA (which deals with
Business profits). The said expression is defined by Clause (g) of Article 3
as under:-

        "(g) the terms "enterprise of a Contracting State" and
             "enterprise of the other Contracting State" mean
             respectively an enterprise carried on by a resident of a
             Contracting State and an enterprise carried on by a
             resident of the other Contracting State."
The expression "resident of a Contracting state" is defined under paragraph
1 of Article 4 as under:-

        "For the purposes of this Agreement, the term "resident of a
        Contracting State" means any person who, under the laws of that
        State, is liable to tax therein by reason of his domicile,
        residence, place of management or any criterion of a similar
        nature. But this term does not include any person who is liable
        to tax in that State in respect only of income from sources in that
        State or capital situated therein."
Clause (d) of Article 3 of the DTAA defines a "person" as under:-




W.P.(C) No.3914/2012                                               Page 59 of 94
        "(d) the term "person" includes an individual, a company and
             any other entity which is treated as a taxable unit under
             the taxation laws in force in the respective Contracting
             States."
68.     It is apparent from the above that the DTAA recognises that the laws
of each of the Contracting State may define a tax entity. Section 2(31) of
the Act defines a `person' to include an `Association of Persons'. It is
obvious that a venture undertaken by an Association of Persons formed by
a resident of Germany in India would not be considered as an enterprise of
Germany. The reliance placed by the petitioner on paragraph 6 of Article 5
of the DTAA is misplaced. The said paragraph of DTAA reads as under:-

        "6. An enterprise shall not be deemed to have a permanent
        establishment in a Contracting State merely because it carries on
        business in that State through a broker, general commission
        agent or any other agent of an independent status, provided that
        such persons are acting in the ordinary course of their business
        and in their commercial and financial relations to the enterprise
        no conditions are agreed or imposed which differ from those
        usually agreed between independent persons."
69.     Article 5 of the DTAA defines the expression "permanent
establishment". It is clear from a plain reading of paragraph 6 of the said
Article that the same only clarifies that an enterprise conducting business
through a broker, commission agent or an agent of independent status
would not be deemed to have a permanent establishment only for the reason
of conducting business through the said specified agents. Undisputedly, a
non-resident carrying business through brokers and agents of independent
status acting in normal course of business on usual terms would not be
construed as forming an Association of Persons with them. It is, thus,




W.P.(C) No.3914/2012                                              Page 60 of 94
obvious that the said paragraph has no application to an Association of
Persons.

70.     It was submitted on behalf of the petitioners that even if Linde and
Samsung were considered as an Association of Persons, no income could
be assessed in the hands of the said Association as all the fund were
received directly by Linde and Samsung separately. And, any notional
inflow of funds would be matched by the outflow of funds. We do not
propose to consider this submission for the following reasons: First of all,
this contention was not canvassed by the petitioner before the Authority
and Secondly, that the quantum of income that may be assessed in the
hands of an Association of Persons is not relevant for the purpose of
determining whether in given facts an Association of Persons had been
formed.

Whether Linde's income is taxable under the Act and DTAA

71.     The next question to be considered pertains to the taxability of
income received and/or receivable by Linde for:

      (a)    design and engineering, prepared solely for manufacture and/or
             procurement of equipment outside India;

      (b)    supply of equipment, material and spares, outside India.

72.     The relevant questions i.e. question (ii) and (iv) framed for
consideration of the Authority are quoted below:-

        "(ii) Whether in terms of the Contract, the amount
        receivable/received in respect of design and engineering,



W.P.(C) No.3914/2012                                               Page 61 of 94
        prepared solely for manufacture, procurement of equipment
        outside India and being inextricably linked to such equipment
        to be supplied, liable to tax in India, under the provisions of
        the Income-tax Act, 1961 ("the Act") or under the Double
        Taxation Avoidance Agreement read with Protocol between
        India and Germany ("DTAA").

        xxxx           xxxx       xxxx         xxxx         xxxx

        (iv) Whether in terms of the Contract, the amount receivable
        by the applicant for supply of equipment, material and spares,
        outside India are liable to tax in India, under the provisions of
        the Income-tax Act, 1961 or under the DTAA read with
        Protocol?"

73.     It is apparent that the above questions are in two parts. The first
being whether the income received/receivable in respect of the specified
items of work is liable to tax in India under the provisions of the Act. The
second part is whether the income received in respect of the specified items
of work is taxable under the DTAA. Double Taxation Avoidance
Agreements do not contain any charging provisions by virtue of which
income tax is levied. Income tax is charged by virtue of Section 4 read with
Section 5 of the Act. It is only in the event that an assessee is liable to pay
tax under the Income Tax Act (dehors any Double Taxation Avoidance
Agreements) that the question of examining whether the assessee is entitled
to any benefit under the relevant Double Taxation Avoidance Agreement
would arise. Any income which is not liable to tax under the normal
provisions of the Act would not be bought to tax only by virtue of a Double
Taxation Avoidance Agreement. It would thus, be essential to first examine
whether any amount receivable/received by Linde in respect of design and
engineering or for supply of equipment is liable to tax under the Act. In the




W.P.(C) No.3914/2012                                               Page 62 of 94
event, a portion of income is not exigible to tax under the Act, it would not
be necessary to consider whether the DTAA is applicable.

74.     The scope of work under the Contract has been broadly described in
clause 2.1.1 of the Contract and the same is quoted below:-

      "2.1.1 Scope of Work
                 The scope of work for the tender shall include in general
                 but not be limited to the following, as defined by
                 Annexure - B and Annexure - E in the bidding
                 document. In case of any contradictions, scope of Work
                 described in Annexure - B of the Contract shall prevail
                 over the scope of Work outlined in the GCC of the
                 contract document.

                 Scope of EPC (LSTK) within RFSU
                       Preparation of the Process Design Package
                       Residual Basic Engineering
                       Detailed Engineering
                       Management Control of all procurement activities
                       of all materials
                       Fabrication, construction, installation, testing etc.
                       Trial run and Pre-commissioning
                       Obtaining statutory approvals as far as in
                       Contractor's scope and required prior to
                       Commissioning
                       Project Management and Support services
                       Carrying out of function tests of individual
                       equipment
                       Preparation of start up and operating manuals
                       Management of HSE including Hazop, DMP etc.

                 Scope of EPC (LSTK) Contractors after RFSU
                      Commissioning of the Plant
                      Performance Test Runs for the Plants
                      Remaining training activities


W.P.(C) No.3914/2012                                                 Page 63 of 94
                       Providing as built drawings
                       Supply of all test report,
                       Post commissioning services for six months as per
                       Clause 2.4.11
                       Working for punch list item,
                       Working for any warranty obligations
                       Training of operators within Post Commissioning
                       Services"

75.     It was submitted by Linde that the Contract entailed certain activities
which were to be performed in India and certain activities which were
required to be performed entirely outside India. It is stated that the
procurement of equipment as well as providing basic engineering and
detailed engineering and drawings were to be performed entirely overseas.
As discussed hereinbefore, even though the Contract provided a lump sum
consideration, Annexure C to the Contract separately indicates the detailed
break up of the amounts payable for various activities. A perusal of the said
schedule indicates a split of prices for the work which were to be performed
by Linde and Samsung. The schedule also expressly indicates that certain
work was to be performed outside India. The consideration payable for the
performance of the Contract was also split in three components. While one
component was payable in INR, the other two components were payable in
Euros and US Dollars respectively.

76.     There can be no dispute that Linde would be liable to pay tax on the
component of income included in the amounts received by Linde on
account of onshore supply and services, viz,: supervision during the pre
commissioning construction, post commissioning services and supplies,
training and other items of work/activities to be performed in India.




W.P.(C) No.3914/2012                                              Page 64 of 94
However, the liability in respect of income arising in respect of offshore
services and supplies is disputed. And, it would be necessary to first
consider whether any income can be deemed to accrue or arise in India in
respect of the income which is received / receivable for offshore supply of
equipment, material, spares and provision of services outside India.

77.     Section 5(2) of the Act provides that the total income of a person
who is a non-resident in any previous year includes income that is received
or is deemed to be received in India or which accrues or arises or is deemed
to accrue or arise in India. Section 9 of the Act indicates the income that
shall be deemed to accrue or arise in India. Sections 5(2), 9(1)(i) and
9(1)(vii) of the Act are relevant and are quoted below:-

        "5. Scope of total income ­
        (1) xxxx             xxxx        xxxx         xxxx        xxxx
        (2) Subject to the provisions of this Act, the total income of
        any previous year of a person who is a non-resident includes
        all income from whatever source derived which --

            a) is received or is deemed to be received in India in such
               year by or on behalf of such person; or

            b) accrues or arises or is deemed to accrue or arise to him
               in India during such year."

                 xxxx        xxxx        xxxx         xxxx        xxxx

        "9. Income deemed to accrue or arise in India. -- (1) The
        following incomes shall be deemed to accrue or arise in
        India--

                 (i) all income accruing or arising, whether directly or
                 indirectly, through or from any business connection in



W.P.(C) No.3914/2012                                              Page 65 of 94
                 India, or through or from any property in India, or
                 through or from any asset or source of income in India,
                 or through the transfer of a capital asset situate in India:

        Explanation 1.-- For the purposes of this clause--

                 (a) in the case of a business of which all the operations
                 are not carried out in India, the income of the business
                 deemed under this clause to accrue or arise in India shall
                 be only such part of the income as is reasonably
                 attributable to the operations carried out in India;
                 xxxx           xxxx         xxxx         xxxx         xxxx

                 (vii) income by way of fees for technical services
                 payable by--
                       a) the Government; or

                       b) a person who is a resident, except where the fees
                          are payable in respect of services utilised in a
                          business or profession carried on by such person
                          outside India or for the purposes of making or
                          earning any income from any source outside
                          India; or
                       c) a person who is a non-resident, where the fees are
                          payable in respect of services utilised in a
                          business or profession carried on by such person
                          in India or for the purposes of making or earning
                          any income from any source in India."
78.     Explanation to Section 9(2) of the Act, as amended by Finance Act
2010 with retrospective effect from 01.06.1976 is quoted below:

        "Explanation.-- For the removal of doubts, it is hereby
        declared that for the purposes of this section, income of a non-
        resident shall be deemed to accrue or arise in India under
        clause (v) or clause (vi) or clause (vii) of sub-section (1) and




W.P.(C) No.3914/2012                                                   Page 66 of 94
        shall be included in the total income of the non-resident,
        whether or not,--
                 (i) the non-resident has a residence or place of business
                 or business connection in India; or

                 (ii) the non-resident has rendered services in India."

79.     In terms of Section 9(1)(i) of the Act, all income which accrues or
arises directly or indirectly from any business connection in India would be
deemed to accrue or arise in India. The expression "Business Connection"
has been explained in a catena of decisions. The Supreme Court in the case
of CIT v. R.D. Aggarwal & Co.: (1965) 56 ITR 20 explained that the
expression "Business Connection" as contemplated under Section 42 of the
Indian Income-tax Act, 1922 (corresponding to Section 9 of the Act)
envisaged "a relation between a business carried on by a non -resident and
some activity in the taxable territories which are attributable directly or
indirectly to the earnings, profits or gains of such business". The core issue
to be addressed is whether the amount receivable by Linde for supply of
goods outside India and for providing services outside India bears a nexus
with any activity in India which can be ascribed to result in any income to
Linde in India. The business connection as contemplated under Section 9 of
the Act has to be direct and real. A sale of goods simplicitor outside India
would not give rise to any taxable income in India even though the said
goods are to be utilized within India. Similarly, income from providing
offshore services (other than Fees for Technical Services) would also not be
taxable under the Act unless the same can be said to arise through or from
any "business connection" in India. Thus, in order to determine whether
any income accrues or arises from provision of services by Linde, it would



W.P.(C) No.3914/2012                                                  Page 67 of 94
be necessary to consider whether the consideration for such services can be
considered as "Fees for Technical Services" or whether the income
subsumed in the consideration for the services accrues or arises through or
from any business connection in India. Similarly, it would also be
necessary to consider whether income from supply of equipment, materials
and spares outside India can be stated to arise from any business connection
in India.

80.     The Authority has held, by the impugned ruling, that the Contract
entered into by the Consortium with OPAL is a composite contract and
cannot be split for the purposes of tax. It is contended that this view is
erroneous as Annexure C to the Contract provides for the break-up of the
lump sum consideration as agreed under the Contract and separate value is
allocated to various items of work. It is further contended that the title to
the equipment and material supplied offshore was also transferred to OPAL
outside India and the basic and detailed engineering is inextricably linked
with the equipment supplied overseas.

81.     At this stage, it is apposite to refer to the judgment of the Supreme
Court in the case of Ishikawajima-Harima Heavy Industries (supra) as the
issues raised and considered in that case are similar to the issues in the
present case. In that case, Petronet LNG Limited, on the one hand, and five
members of the consortium, on the other hand, entered into an agreement
for setting up a Liquefied Natural Gas (LNG) receiving storage and
degasification facility at Dahej in the State of Gujarat. The contract
envisaged a turnkey project. The scope of work and the role and
responsibility of each member of the consortium was specified separately.



W.P.(C) No.3914/2012                                             Page 68 of 94
The contract price was payable for offshore supply and offshore services in
US dollars and each member of the consortium was to receive separate
payments for the work executed by them. The contract indisputably
involved: (i) offshore supply, (ii) offshore services, (iii) onshore supply,
(iv) onshore services and (v) construction and erection. The disputes related
to the liability to pay tax, under the provisions of the Act and the India-
Japan tax treaty, in respect of the amounts received/receivable by the
appellant (therein) from Petronet LNG for offshore supply and offshore
services. The contention of the appellant (therein) was that the contract
being a divisible one, it did not have any liability to pay any tax with regard
to offshore services and offshore supplies. The Revenue, on the other hand,
contended that the contract was a composite and integrated one, and thus
could not be split for the purposes of considering whether the income
arising therefrom was taxable under the Act. The Supreme Court
considered the question whether the income in respect of `offshore supply'
and `offshore services' was taxable under the Act and/or the DTAA
between India and Japan and held as under:-

        "30. The contract is a complex arrangement. Petronet and the
        appellant are not the only parties thereto, there are other
        members of the consortium who are required to carry out
        different parts of the contract. The consortium included an
        Indian company. The fact that it has been fashioned as a
        turnkey contract by itself may not be of much significance.
        The project is a turnkey project. The contract may also be a
        turnkey contract, but the same by itself would not mean that
        even for the purpose of taxability the entire contract must be
        considered to be an integrated one so as to make the appellant
        to pay tax in India. The taxable events in execution of a
        contract may arise at several stages in several years. The



W.P.(C) No.3914/2012                                              Page 69 of 94
        liability of the parties may also arise at several stages.
        Obligations under the contract are distinct ones. Supply
        obligation is distinct and separate from service obligation.
        Price for each of the component of the contract is separate.
        Similarly, offshore supply and offshore services have
        separately been dealt with. Prices in each of the segment are
        also different.

        31. The very fact that in the contract, the supply segment and
        service segment have been specified in different parts of the
        contract is a pointer to show that the liability of the appellant
        thereunder would also be different.
        32. The contract indisputably was executed in India. By
        entering into a contract in India, although parts thereof will
        have to be carried out outside India would not make the entire
        income derived by the contractor to be taxable in India. We
        would, however, deal with this aspect of the matter a little
        later.

        xxxx           xxxx        xxxx         xxxx          xxxx

        39. The territorial nexus doctrine, thus, plays an important part
        in assessment of tax. Tax is levied on one transaction where
        the operations which may give rise to income may take place
        partly in one territory and partly in another. The question
        which would fall for our consideration is as to whether the
        income that arises out of the said transaction would be
        required to be apportioned to each of the territories or not.

        40. Income arising out of operations in more than one
        jurisdiction would have territorial nexus with each of the
        jurisdictions on actual basis. If that be so, it may not be correct
        to contend that the entire income "accrues or arises" in each of
        the jurisdictions. ......

        xxxx           xxxx        xxxx         xxxx          xxxx

        76. In construing a contract, the terms and conditions thereof
        are to be read as a whole. A contract must be construed



W.P.(C) No.3914/2012                                                 Page 70 of 94
        keeping in view the intention of the parties. No doubt, the
        applicability of the tax laws would depend upon the nature of
        the contract, but the same should not be construed keeping in
        view the taxing provisions.

        xxxx           xxxx       xxxx         xxxx         xxxx

        98. We, therefore, hold as under:

        (A) Re: Offshore supply
        (1) That only such part of the income, as is attributable to
        the operations carried out in India can be taxed in India.
        (2) Since all parts of the transaction in question i.e. the
        transfer of property in goods as well as the payment, were
        carried on outside the Indian soil, the transaction could not
        have been taxed in India.

        (3) The principle of apportionment, wherein the territorial
        jurisdiction of a particular State determines its capacity to tax
        an event, has to be followed.
        (4) The fact that the contract was signed in India is of no
        material consequence, since all activities in connection with
        the offshore supply were outside India, and therefore cannot be
        deemed to accrue or arise in the country.

        (5) There exists a distinction between a business connection
        and a permanent establishment. As the permanent
        establishment cannot be said to be involved in the transaction,
        the aforementioned provision will have no application. The
        permanent establishment cannot be equated to a business
        connection, since the former is for the purpose of assessment
        of income of a non-resident under a Double Taxation
        Avoidance Agreement, and the latter is for the application of
        Section 9 of the Income Tax Act.

        (6) Clause (a) of Explanation 1 to Section 9(1)(i) states that
        only such part of the income as is attributable to the operations
        carried out in India, is taxable in India.



W.P.(C) No.3914/2012                                               Page 71 of 94
        (7) The existence of a permanent establishment would not
        constitute sufficient "business connection", and the permanent
        establishment would be the taxable entity. The fiscal
        jurisdiction of a country would not extend to the taxing of
        entire income attributable to the permanent establishment.

        (8) There exists a difference between the existence of a
        business connection and the income accruing or arising out of
        such business connection.

        (9) Para 6 of the Protocol to the DTAA is not applicable,
        because, for the profits to be "attributable directly or
        indirectly", the permanent establishment must be involved in
        the activity giving rise to the profits.

        (B) Re: Offshore services
        (1) Sufficient territorial nexus between the rendition of
        services and territorial limits of India is necessary to make the
        income taxable.
        (2) The entire contract would not be attributable to the
        operations in India viz. the place of execution of the contract,
        assuming the offshore elements form an integral part of the
        contract.

        (3) Section 9(1)(vii) of the Act read with memo cannot be
        given a wide meaning so as to hold that the amendment was
        only to include the income of non-resident taxpayers received
        by them outside India from Indian concerns for services
        rendered outside India.

        (4) The test of residence, as applied in international law
        also, is that of the taxpayer and not that of the recipient of such
        services.

        (5) For Section 9(1)(vii) to be applicable, it is necessary
        that the services not only be utilised within India, but also be
        rendered in India or have such a "live link" with India that the




W.P.(C) No.3914/2012                                                 Page 72 of 94
        entire income from fees as envisaged in Article 12 of DTAA
        becomes taxable in India.
        (6) The terms "effectively connected" and "attributable to"
        are to be construed differently even if the offshore services and
        the permanent establishment were connected.

        (7) Section 9(1)(vii)(c) of the Act in this case would have
        no application as there is nothing to show that the income
        derived by a non-resident company irrespective of where
        rendered, was utilised in India.
        (8) Article 7 of DTAA is applicable in this case, and it
        limits the tax on business profits to that arising from the
        operations of the permanent establishment. In this case, the
        entire services have been rendered outside India, and have
        nothing to do with the permanent establishment, and can thus
        not be attributable to the permanent establishment and
        therefore not taxable in India.
        (9) Applying the principle of apportionment to composite
        transactions which have some operations in one territory and
        some in others, is essential to determine the taxability of
        various operations.

        (10) The location of the source of income within India would
        not render sufficient nexus to tax the income from that source.

        (11) If the test applied by the Authority for advanced rulings
        is to be adopted here too, then it would eliminate the
        difference between the connection between Indian and foreign
        operations, and the apportionment of income accordingly.

        (12) The services are inextricably linked to the supply of
        goods, and it must be considered in the same manner."

82.     The facts obtaining in the present case are quite similar to the facts as
in the case of Ishikawajima-Harima Heavy Industries (supra). It is
indisputable that as far as obligations of           Linde and Samsung are



W.P.(C) No.3914/2012                                                Page 73 of 94
concerned, the Contract is an indivisible one. However, for the purposes of
tax, the Contract does specify the amounts that are payable with respect to
the various activities carried on by Linde/Samsung. Income may accrue or
arise at various stages and on account of varied activities. In case of a non-
resident tax entity any income which accrues or arises from an activity
outside India, would not be taxable unless the same falls within the
deeming provision contained in Section 9(1) of the Act. In these
circumstances, following the decision of the Supreme Court in
Ishikawajima-Harima Heavy Industries (supra), it would not be apposite
to consider the contract as a composite one for the purposes of imposition
of tax under the Act.

83.     The Authority concluded that although, payments for each item or
work were specified or that the amounts payable for the work to be
performed by individual members of the Consortium was recognized under
the Contract, the same would not alter the nature of the Contract in any
manner. The Authority concluded that the Contract would have to be
considered as one indivisible contract and the income from the same would
be taxable in India as the object of Contract was to set up a facility in India.
The Authority further held that the MOU entered into between Linde and
Samsung could not be understood to be overwriting the Contract or the
object of the Contract. With respect to the Internal Consortium Agreement,
the Authority held that the same was at best only an internal arrangement
between Linde and Samsung and could not be referred to for determining
the nature of the Contract. The Authority was of the view that the Contract
being a composite contract, a `dissecting approach' was not permissible.




W.P.(C) No.3914/2012                                               Page 74 of 94
Having found that the contract was an indivisible one, the Authority
concluded that it was not open for Linde to plead that the sale of equipment
and machinery and designing of the project and equipment should be
treated as an offshore transaction. The Authority referred to the decision of
the Supreme Court in the case of Vodafone International Holdings B.V. v.
Union of India: (2012) 6 SCC 613 in support of its view that since in law
the liability for performance of the Contract by Linde and Samsung was
joint and severable, the Contract must be read as an indivisible one for the
purposes of tax.

84.     In our view, the approach as well as the conclusion of the Authority
is flawed. First of all, the Authority erred in proceeding on the basis that the
contract as a whole was the subject of taxation. The subject matter of
taxation was not the Contract between the parties but the income that the
petitioner derived from the Contract. Thus, the situs of the object of the
Contract would not be as relevant as determining the situs where the
income of Linde had accrued or arisen. By virtue of Section 4 of the Act,
income tax is charged in respect of the total income of a person. By virtue
of Section 5 of the Act, the scope of total income of a non-resident is
limited to income which is received or deemed to be received in India and
income which accrues or is deemed to accrue or arise in India. It, therefore,
follows that the object of inquiry would have to be to determine whether
any income of Linde accrued or arose in India or whether any income could
be deemed to accrue or arise in India.         The fact that the contractual
obligations of Linde were not limited to merely supplying equipment, but
were for due performance of the entire Contract, would not necessarily




W.P.(C) No.3914/2012                                               Page 75 of 94
imply that the entire income which was relatable to the Contract could be
deemed to accrue or arise in India.

85.     The principle of apportionment of income on the basis of territorial
nexus is now well accepted. Explanation 1(a) to section 9(1)(i) of the Act
also specifies that only that part of income which is attributable to
operations in India would be deemed to accrue or arise in India. It
necessarily follows that in cases where a contract entails only a part of the
operations to be carried on in India, the assessee would not be liable for the
part of income that arises from operations conducted outside India. In such
a case, the income from the venture would have to be appropriately
apportioned. The Supreme Court in the case of Ishikawajima-Harima
Heavy Industries (supra) had considered this aspect and held that merely
because a project is a turnkey project would not necessarily imply that for
the purposes of taxability, the entire contract be considered as an integrated
one. The taxable income in execution of a contract may arise at several
stages and the same would have to be considered on the anvil of territorial
nexus. The decision in the case of Ishikawajima-Harima Heavy Industries
(supra) is clearly applicable to the facts of the present case as in that case
also the contract in question was for a turnkey project where the object was
to setup a Liquefied Natural Gas (LNG) receiving, storage and
degasification facility. Indisputably, insofar as obligations of parties are
concerned, this contract was also an indivisible contract. The Supreme
Court held that for the purposes of determining the taxability, it was
necessary to enquire as to where the income sought to be taxed had accrued




W.P.(C) No.3914/2012                                             Page 76 of 94
or arisen. The impugned ruling is thus clearly contrary to the decision of the
Supreme Court in Ishikawajima-Harima Heavy Industries (supra).

86.     The reference of the Authority to the decision of the Supreme Court
in the case of Vodafone International Holdings B.V. (supra) is also not
apposite. In that case, the Supreme Court was considering a matter which,
inter alia, involved a transfer of a capital asset outside India which was
sought to be taxed by the Income Tax Authorities under Section 9(1)(i) of
the Act. The subject matter of controversy was a transaction of sale and
purchase of a share of an overseas company (capital asset). This capital
asset was sold by a non-resident company to another non-resident
company. The Revenue contended that the capital gains arising from this
transaction was exigible to tax under the Act by virtue of Section 9(1)(i) of
the Act as the transaction also implied transfer of control and assets of the
Indian subsidiary of the overseas company, whose share had been sold and
purchased. The Supreme Court observed that the last sub-clause of Section
9(1)(i) of the Act referred to income arising from "transfer of capital asset
in India". The Court further explained that Section 9(1) of the Act created a
legal fiction which had a limited scope and could not be expanded.
Accordingly, transfer of capital asset situated outside India could not be
taxed by virtue of Section 9(1)(i) of the Act. The expression "look through"
had been used by the Supreme Court in this context. The relevant extract of
the judgment is as under:-

        "90. We have to give effect to the language of the section
        when it is unambiguous and admits of no doubt regarding its
        interpretation, particularly when a legal fiction is embedded in
        that section. A legal fiction has a limited scope. A legal fiction



W.P.(C) No.3914/2012                                                Page 77 of 94
        cannot be expanded by giving purposive interpretation
        particularly if the result of such interpretation is to transform
        the concept of chargeability which is also there in Section
        9(1)(i), particularly when one reads Section 9(1)(i) with
        Section 5(2)(b) of the Act. What is contended on behalf of the
        Revenue is that under Section 9(1)(i) it can "look through" the
        transfer of shares of a foreign company holding shares in an
        Indian company and treat the transfer of shares of the foreign
        company as equivalent to the transfer of the shares of the
        Indian company on the premise that Section 9(1)(i) covers
        direct and indirect transfers of capital assets.
        91. For the above reason, Section 9(1)(i) cannot by a process
        of interpretation be extended to cover indirect transfers of
        capital assets/property situate in India. To do so, would amount
        to changing the content and ambit of Section 9(1)(i)."

87.     In the present case also, Linde has contended that it being a non-
resident is not liable to pay tax in India and the sweep of Section 9(1) of the
Act cannot be extended to income which has not accrued or arisen in India.

88.     The Supreme Court also reiterated the "look at" principle as was
enunciated in W.T. Ramsay Ltd. v. IRC: (1981) 1 All ER 865 (HL). That
matter related to a combination of transactions where gains in one
transaction were sought to be counteracted by another, so as to avoid tax.
The set of transactions was designed to create an artificial loss in one
transaction which was counteracted by a gain in another. The House of
Lords' dismissed the appeal of the tax payer by holding that the Courts
would "look at" the entire combination of transactions. It was held that the
Revenue or the Courts were not limited to consider the genuineness or
otherwise of each individual transaction in the scheme but could consider
the scheme as a whole. The contentions being considered by the Supreme




W.P.(C) No.3914/2012                                               Page 78 of 94
Court in the Vodafone International Holdings B.V. (supra) as well as the
House of Lords' in Ramsay Ltd. (supra) were in respect of schemes which
were contended to be for the purposes avoiding tax. The Supreme Court
held that the "look at" principle must be applied to see the transaction as it
existed and piercing of the Corporate Veil was not necessary where the
transactions were genuine and had commercial substance. In the present
case, there is no controversy which involves lifting of the corporate veil or
"looking at" any scheme to find whether a transaction is a sham or has any
substance. Both the Revenue and Linde are accepting the Contract as it
stands and the controversy only revolves around the situs of the income
accruing or arising from the contract. To our minds, the Authority has read
the principles applied by the Supreme Court in Vodafone International
Holdings B.V. (supra) completely out of context.

Income from Offshore Supplies

89.     In the present case, the Contract involves supply of equipment,
materials and spares by Linde. The contract specifically provides that the
ownership of the material to be supplied by Linde would be transferred to
OPAL upon FOB shipment. Article 7 of the Contract is quoted below:-

      "7.1.1     Ownership of materials shall be transferred to the
                 Company upon FOB shipment for imported supply and
                 FOT for local supply subject to Contractor takes full
                 responsibility for any damage / loss during the course of
                 transportation until acceptance of works.
      7.1.2      Deleted

      7.1.3      Ownership of the construction Equipment used by the
                 Contractor and its subcontractors in connection with the



W.P.(C) No.3914/2012                                                Page 79 of 94
                 Works shall remain with the Contractor and its sub-
                 contractors."
90.     FOB is an abbreviation of "Free on Board" and clearly indicates that
the ownership of the material to be supplied by Linde would transfer to
OPAL, the moment, the materials were placed for shipment. The petitioner
had pointed out that shipping Documents/Bill of Lading also recorded the
name of Linde as a Consignor and OPAL as a Consignee. In terms of the
Contract, Linde and Samsung were fully responsible for any damage/loss
during the transportation of the equipment and material. However, the same
would not in any manner contradict the position that the ownership of the
material in question was transferred to OPAL overseas. The petitioner has
also submitted that the payment for design and engineering, supply,
insurance and spares and consumables was to be paid to Linde in Euros and
for the balance onshore work the payments were to be made in INR.
According to the petitioner, this also indicated the portion of work that was
required to be done overseas.

91.     In the case of Ishikawajima-Harima Heavy Industries (supra) also
the applicant therein, continued to be responsible for the equipment and
material till the acceptance of the project. The relevant Clause which was
considered by the Supreme Court in that case is quoted below:-

        "22.1 Title to equipment and materials and contractor's
        equipment:

        Contractor agrees that title to all equipment and materials shall
        pass to the owner from the supplier or subcontractor pursuant
        to section E of exhibit H (General Project Requirements and
        Procedures). Contractor shall, however, retain care, custody,



W.P.(C) No.3914/2012                                               Page 80 of 94
        and control of such equipment and materials and exercise due
        care thereof until (a) provisional acceptance of the work, or (b)
        termination of this contract, whichever shall first occur. Such
        transfer of title shall in no way affect the owner's rights under
        any other provision of this contract."

92.     It is also relevant to refer Explanation 1(a) to Section 9(1)(i) of the
Act which clearly embodies the principle of apportionment. In cases where
all the operations of business are not carried out in India, the income arising
therefrom is required to be apportioned and only that portion of income i.e.
reasonably attributable to operations carried on in India would fall within
the net of tax in India under Section 9(1)(i) of the Act. In the facts of the
present case, where the equipment and material is manufactured and
procured outside India, the income attributable to the supply thereof could
only be brought to tax if it is found that the said income therefrom arises
through or from a business connection in India. However, in view of the
decision of the Supreme Court in Ishikawajima-Harima Heavy Industries
(supra) it cannot be concluded that the Contract provides a "business
connection" in India and accordingly, the Offshore Supplies cannot be
brought to tax under the Act.

Income from Offshore Services

93.     It is stated that Linde was responsible for preparing drawings and
designs for manufacturing and fabricating equipment to be supplied to
OPAL. It is submitted that the said work is a part of the Basic and Detailed
Engineering that was to be performed by Linde outside India. The steps for
process design and Basic Engineering have been described by Linde as
under:-



W.P.(C) No.3914/2012                                               Page 81 of 94
        "Block Diagram, Process Flow Diagram, Material and Heat
        Balance, Process Simulation, Process Data Sheets for
        Equipment, Instruments, Piping etc., Piping & Instrumentation
        Diagram, Operating Manual, Process Safety Design. All of the
        above is prepared by qualified engineers using in-house know-
        how and software applications, in Germany.

        Detailed engineering, designing of each plant unit, equipments,
        components before it's manufacture. These are prepared in
        Germany and sent for approval of OPAL.
        Only after receipt of approval, order for purchase/manufacture
        of equipment is placed.

        Invoices for payments for engineering are raised based on each
        equipment, drawings, calculations.
        At the end of engineering phase, all documents are compiled
        and issued as engineering package soft and hard copy.
        Consignee for Dahej Project is always OPAL. Entire set of
        final drawings, documents, manuals, hard copies were cleared
        through the Indian Customs. No customs duty was payable
        being a SEZ, project."
94.     It has been contended by Linde that the above steps are only for the
purposes of manufacturing and fabricating the equipment that was to be
supplied overseas. It is submitted that the work relating to design and
engineering is inextricably linked with the manufacture and fabrication of
the material and equipment to be supplied overseas and this work was also
performed wholly outside India. These submissions have not been
evaluated. Question no. (ii) framed for consideration of the Authority
invites a ruling on the basis that the offshore services falling within the
scope of services by Linde are inextricably linked with the Offshore supply
of equipment and material and cannot be considered as technical services



W.P.(C) No.3914/2012                                             Page 82 of 94
on a standalone basis. This is a question of fact which would have to be
considered at an appropriate stage. However, if it is accepted that the
services provided by Linde relating to design and engineering are
inextricably linked with the manufacture and fabrication of the material and
equipment to be supplied overseas and form an integral part of the said
supplies, then the services rendered by Linde would not be amenable to tax
under Section 9(1)(vii) of the Act. Consideration for such services would
not be considered as "Fees for Technical Services" for the purposes of
Section 9(1)(vii) of the Act. This view has also been expressed by the
Authority In Re, Rotem Company: (2005) 279 ITR 165 (AAR). The
relevant extract of the said decision reads as under:-

        "16. The principle which emerges from the decisions in the
        aforementioned cases is that in a contract for manufacture,
        installation, sale or supply of goods the element of services
        will always be present. Where services are inextricably linked
        with manufacture, installation, sale or supply, they cannot be
        evaluated for the purpose of FTS; it is only where services are
        separable and independent that the FTS will be assessable."

95.     It is clarified that in order to fall outside the scope of Section
9(1)(vii) of the Act, the link between the supply of equipment and services
must be so strong and interlinked that the services in question are not
capable of being considered as services on a standalone basis and are
therefore subsumed as a part of the supplies. Given the fact that its Linde's
case that the consideration for the supplies are separately specified, this
aspect would require a closer scrutiny and determination of facts, which we
do not propose to do in the present proceedings.




W.P.(C) No.3914/2012                                             Page 83 of 94
96.     It is clarified that in the event, it is found that the offshore services
rendered by Linde are not inextricably linked to the manufacture and
fabrication of equipment overseas so as to form an integral part of the
supply of the said equipment, the income arising from the said services
would be taxable in India as fees for technical services. By virtue of Section
9(1)(vii) of the Act, fees for technical services paid by a resident are taxable
in India (except where such fees are payable in respect of services utilised
by such person in business and profession carried outside India). In view of
the Explanation to Section 9(2) as substituted by Finance Act 2010 with
retrospective effect from 01.06.1976, the decision of the Supreme Court in
Ishikawajima-Harima Heavy Industries (supra), in so far as it holds that in
order to tax fees for technical services under the Act the services must be
rendered in India, is no longer applicable. Therefore, in the event the
services in question are not considered as an integral and inextricable part
of equipment and material supplied, it would be necessary to examine
whether any relief in respect of such income would be available to Linde by
virtue of the DTAA between Germany and India.

Taxability under the DTAA

97.     The next question that requires to be considered is whether the
amount receivable/received by Linde in respect of design and engineering
and supply of equipment, material and spares outside India is liable to tax
in India under the DTAA. Section 90(2) of the Act provides that where the
Government has entered into an agreement with the Government of another
country for granting Avoidance of Double Taxation then in relation to the
assessee to whom such agreement applies, the Provisions of the Act would



W.P.(C) No.3914/2012                                                Page 84 of 94
apply only to the extent they are more beneficial to the assessee. Article 7
of the DTAA provides that the profits of an enterprise of a contracting state
shall be taxable only in that state unless the enterprise carries on business in
the other contracting state through a permanent establishment. It is further
specified that only the income that is attributable to the permanent
establishment would be taxed in the other contracting state. Linde being a
tax resident of Federal Republic of Germany would not be taxable in India
in respect of its business profits unless such business profits are attributable
to its "permanent establishment" in India. By virtue of Article 12 of DTAA,
the income from fees for technical services would be amenable to tax in the
contracting state in which they arise. Article 5 of the DTAA defines
permanent establishment. The relevant extracts of Article 5, 7 and 12 of
the DTAA are quoted below:-

        "ARTICLE 5 : Permanent establishment - 1. For the purposes
        of this Agreement, the term "permanent establishment" means a
        fixed place of business through which the business of an
        enterprise is wholly or partly carried on.

        2. The term "permanent establishment" includes especially,--

           (a) a place of management;
           (b) a branch;
           (c) an office;
           (d) a factory;
           (e) a workshop;
           (f) a mine, an oil or gas well, a quarry or any other place of
               extraction of natural resources, including an installation
               or structure used for the exploration or exploitation;
           (g) a warehouse or sales outlet;



W.P.(C) No.3914/2012                                               Page 85 of 94
           (h) a farm, plantation or other place where agricultural,
               forestry, plantation or related activities are carried on;
               and
           (i) a building site or construction, installation or assembly
               project or supervisory activities in connection therewith,
               where such site, project or activities continue for a period
               exceeding six months.
        3. An enterprise shall be deemed to have a permanent
        establishment in a Contracting State and to carry on business
        through that permanent establishment if it provides services or
        facilities in connection with, or supplies plant and machinery on
        hire used for or to be used in the prospecting for or extraction or
        exploitation of mineral oils in that State.

        4. Notwithstanding the preceding provisions of this Article, the
        term "permanent establishment" shall be deemed not to
        include,--

           (a) the use of facilities solely for the purpose of storage,
               display or delivery of goods or merchandise belonging to
               the enterprise;
           (b) the maintenance of a stock of goods or merchandise
               belonging to the enterprise solely for the purpose of
               storage, display or delivery;

           (c) the maintenance of a stock of goods or merchandise
               belonging to the enterprise solely for the purpose of
               processing by another enterprise;

           (d) the maintenance of a fixed place of business solely for
               the purpose of purchasing goods or merchandise or of
               collecting information, for the enterprise;

           (e) the maintenance of a fixed place of business solely for
               the purpose of carrying on, for the enterprise, any other
               activity of a preparatory or auxiliary character;




W.P.(C) No.3914/2012                                                Page 86 of 94
           (f) the maintenance of a fixed place of business solely for
               any combination of activities mentioned in sub-
               paragraphs (a) to (e), provided that the overall activity of
               the fixed place of business resulting from this
               combination is of a preparatory or auxiliary character.

        5. Notwithstanding the provisions of paragraphs 1 and 2, where
        a person - other than an agent of an independent status to whom
        paragraph 6 applies - is acting in a Contracting State on behalf
        of an enterprise of the other Contracting State that enterprise
        shall be deemed to have a permanent establishment in the first-
        mentioned State, if this person,--
           (a) has and habitually exercises in that State an authority to
               conclude contracts on behalf of the enterprise, unless his
               activities are limited to the purchase of goods or
               merchandise for the enterprise;

           (b) has no such authority, but habitually maintains in the
               first-mentioned State a stock of goods or merchandise
               from which he regularly delivers goods or merchandise
               on behalf of the enterprise; or
           (c) habitually secures orders in the first-mentioned State,
               wholly or almost wholly for the enterprise itself or for the
               enterprise and other enterprises controlling, controlled
               by, or subject to the same common control, as that
               enterprise.

        6. An enterprise shall not be deemed to have a permanent
        establishment in a Contracting State merely because it carries
        on business in that State through a broker, general commission
        agent or any other agent of an independent status, provided that
        such persons are acting in the ordinary course of their business
        and in their commercial and financial relations to the enterprise
        no conditions are agreed or imposed which differ from those
        usually agreed between independent persons.

        7. The fact that a company which is a resident of a Contracting
        State controls or is controlled by a company which is a resident



W.P.(C) No.3914/2012                                                Page 87 of 94
        of the other Contracting State or which carries on business in
        that other State (whether through a permanent establishment or
        otherwise), shall not of itself constitute either company a
        permanent establishment of the other.

        xxxx           xxxx        xxxx         xxxx          xxxx

        ARTICLE 7 - Business profits - 1. The profits of an enterprise
        of a Contracting State shall be taxable only in that State unless
        the enterprise carries on business in the other Contracting State
        through a permanent establishment situated therein. If the
        enterprise carries on business as aforesaid, the profits of the
        enterprise may be taxed in the other State but only so much of
        them as is attributable to that permanent establishment.

        2. Subject to the provisions of paragraph 3, where an enterprise
        of a Contracting State carries on business in the other
        Contracting State through a permanent establishment situated
        therein, there shall in each Contracting State be attributed to that
        permanent establishment the profits which it might be expected
        to make, if it were a distinct and separate enterprise engaged in
        the same or similar activities under the same or similar
        conditions and dealing wholly independently with the enterprise
        of which it is a permanent establishment.
        xxxx           xxxx        xxxx         xxxx          xxxx

        5. No profits shall be attributed to a permanent establishment by
        reason of the mere purchase by that permanent establishment of
        goods or merchandise for the enterprise.

        xxxx           xxxx        xxxx         xxxx          xxxx

        7. Where profits include items of income which are dealt with
        separately in other Articles of this Agreement, then the
        provisions of those Articles shall not be affected by the
        provisions of this Article.

        xxxx           xxxx        xxxx         xxxx          xxxx




W.P.(C) No.3914/2012                                                 Page 88 of 94
        ARTICLE 12 - Royalties and fees for technical services - 1.
        Royalties and fees for technical services arising in a Contracting
        State and paid to a resident of the other Contracting State may
        be taxed in that other State.

        2. However, such royalties and fees for technical services may
        also be taxed in the Contracting State in which they arise and
        according to the laws of that State, but if the recipient is the
        beneficial owner of the royalties, or fees for technical services,
        the tax so charged shall not exceed 10 per cent of the gross
        amount of the royalties or the fees for technical services.

        xxxx           xxxx       xxxx         xxxx         xxxx

        4. The term "fees for technical services" as used in this Article
        means payments of any amount in consideration for the services
        of managerial, technical or consultancy nature, including the
        provision of services by technical or other personnel, but does
        not include payments for services mentioned in Article 15 of
        this Agreement.

        5. The provisions of paragraphs 1 and 2 shall not apply if the
        beneficial owner of the royalties or fees for technical services,
        being a resident of a Contracting State, carries on business in
        the other Contracting State in which the royalties or fees for
        technical services arise, through a permanent establishment
        situated therein, or performs in that other State independent
        personal services from a fixed base situated therein, and the
        right, property or contract in respect of which the royalties or
        fees for technical services are paid is effectively connected with
        such permanent establishment or fixed base. In such case, the
        provisions of Article 7 or Article 14, as the case may be, shall
        apply."

98.     In terms of paragraphs 1 & 2 of Article 12 "fees for technical
services" are liable to be taxed in the Contracting State in which they arise
and according to the laws of that State. However, paragraph 5 of Article 12
provides that paragraphs 1 and 2 of the said Article would not apply, if the



W.P.(C) No.3914/2012                                               Page 89 of 94
beneficial owner of fees for technical services carries on business through a
permanent establishment situated in the State. And, in that case Article 7 of
the DTAA would apply. Thus, fees for technical services (which are not
inextricably linked with offshore supplies and form integral part of those
supplies) are liable to be taxed in the State in which they arise. In this case,
the source of fees for technical services is in India and, therefore, by virtue
of paragraph 1 and 2 of Article 12 of the DTAA read with Section 9(1)(vii)
of the Act, the fees for technical services would be liable to be taxed in
India provided the said fees is not attributable to Linde's Permanent
Establishment in India. In the event such fees is attributable to Linde's PE
in India, by virtue of paragraph 5 of Article 12 of DTAA, Article-7 of the
DTAA would be applicable and the income arising from provision of
services would be liable to tax in India as Business Profits.

99.     At this stage, it is relevant to refer to the decision of the Supreme
Court in Hyundai Heavy Industries Co. Ltd. (supra). In that case, the
petitioner (therein) had entered into an agreement with ONGC for
designing, fabrication, hook-up and commissioning of South Bassein Field
Central Complex Facilities in Bombay High. The contract was divided into
two parts i.e. the fabrication of the platform was to be performed in Korea
and the installation and commissioning of the platform was to be done in
India. The petitioner (therein) claimed that no tax is payable for the
operations outside India as there is no permanent establishment of the
petitioner (therein) in India and for Indian operations, the petitioner claimed
exemption under Article 7 of the Convention for Avoidance of Double
Taxation (between India and South Korea which is similar to the DTAA




W.P.(C) No.3914/2012                                               Page 90 of 94
between India and Germany). The Assessing Officer rejected the contention
of the appellant and held that the income from designing, fabrication,
procurement of material etc. was partly attributable to the permanent
establishment of the assessee in India. The Assessing Officer arrived at this
conclusion on the ground that the contract was not divisible and the
designing, fabrication and procurement of material were activities having
nexus/linkage to the ultimate activity of installation and commissioning of
platform in Bombay High and, therefore, income from the Korean
operations was taxable in India. The Commissioner of Income Tax
(Appeals) upheld the view taken by the Assessing Officer. On Appeal, the
Income Tax Appellate Tribunal set aside the decision of the Assessing
Officer and CIT (A) and accepted the contention of the assessee that the
income from work performed outside India was not taxable in India. The
High Court also dismissed the appeal preferred by the Revenue. The
Supreme Court also dismissed the appeal preferred by the Revenue and
held as under:-

        "8. The Income Tax Act, 1961 is concerned only with the
        profits earned in India and, therefore, a method is to be found
        out to ascertain the profits arising in India and the only way to
        do so is by treating the Indian PE as a separate profit centre
        vis-à-vis the foreign enterprise (the Korean GE, in the present
        case). This demarcation is necessary in order to earmark the
        tax jurisdiction over the operations of a company. Unless the
        PE is treated as a separate profit centre, it is not possible to
        ascertain the profits of the PE which, in turn, constitutes
        profits arising to the foreign GE in India. The computation of
        profits in each PE (taxable jurisdiction) decides the quantum of
        income on which the source country can levy the tax.
        Therefore, it is necessary that the profits of the PE are
        computed as independent units. However, in a case where the



W.P.(C) No.3914/2012                                               Page 91 of 94
        Government of India has entered into a tax treaty with a
        foreign country (Korea, in the present case) then in relation to
        an assessee on whom such tax treaty applies, the provisions of
        the Act shall apply only to the extent to which the provisions
        thereof are more beneficial to the assessee

        xxxx           xxxx       xxxx         xxxx         xxxx

        11. Applying the above test to the facts of the present case, we
        find that profits earned by the Korean GE on supplies of
        fabricated platforms cannot be made attributable to its Indian
        PE as the installation PE came into existence only after the
        transaction stood materialised. The installation PE came into
        existence only on conclusion of the transaction giving rise to
        the supplies of the fabricated platforms. The installation PE
        emerged only after the contract with ONGC stood concluded.
        It emerged only after the fabricated platform was delivered in
        Korea to the agents of ONGC. Therefore, the profits on such
        supplies of fabricated platforms cannot be said to be
        attributable to the PE. There is one more reason for coming to
        the aforestated conclusion. In terms of Para (1) of Article 7,
        the profits to be taxed in the source country were not the real
        profits but hypothetical profits which the PE would have
        earned if it was wholly independent of the GE. Therefore, even
        if we assume that the supplies were necessary for the purposes
        of installation (activity of the PE in India) and even if we
        assume that the supplies were an integral part, still no part of
        profits on such supplies can be attributed to the independent
        PE unless it is established by the Department that the supplies
        were not at arm's length price. No such taxability can arise in
        the present case as the sales were directly billed to the Indian
        customer (ONGC). No such taxability can also arise in the
        present case as there was no allegation made by the
        Department that the price at which billing was done for the
        supplies included any element for services rendered by the PE.
        In the light of our above discussion, we are of the view that the
        profits that accrued to the Korean GE for the Korean
        operations were not taxable in India.




W.P.(C) No.3914/2012                                               Page 92 of 94
        12. .....It is the act of setting out a PE which triggers the
        taxability of transactions in the source State. Therefore, unless
        the PE is set up, the question of taxability does not arise --
        whether the transactions are direct or they are through the PE.
        In the case of a turnkey project, the PE is set up at the
        installation stage while the entire turnkey project, including the
        sale of equipment, is finalised before the installation stage. The
        setting up of PE, in such a case, is a stage subsequent to the
        conclusion of the contract. It is as a result of the sale of
        equipment that the installation PE comes into existence.
        However, this is not an absolute rule...........We reiterate, in
        the circumstances, not all the profits of the assessee Company
        from its business connection in India (PE) would be taxable in
        India, but only so much of profits having economic nexus with
        PE in India would be taxable in India. To this extent, we find
        no infirmity in the impugned judgment of the Tribunal.
        Accordingly, we are of the view that the Tribunal was right in
        holding that profits attributable to the Korean operations were
        not taxable in view of Article 7 of CADT."
                                                (emphasis supplied)

100. Following the aforesaid decision, it would be necessary to determine
the income attributable to Linde's permanent establishment in India.
Admittedly, Linde has a permanent establishment in India, however, it is
contended by Linde that its Permanent Establishment came into existence
after Linde had completed the offshore supplies of equipment and duly
provided the offshore services. This is disputed by the Revenue and it is
contended that Linde had a pre-existing permanent establishment in India.
The stage at which the permanent establishment came into existence is a
mixed question of fact and law. The Authority has not considered this
question in view of its conclusion that Linde and Samsung had constituted
an Association of Persons which was a tax resident entity in India for the



W.P.(C) No.3914/2012                                                Page 93 of 94
purposes of the Act. The question at what stage Linde's permanent
establishment came into existence would have to be examined by the
Authority.

101. In the event, it is found that Linde had a permanent establishment in
India at the material time when taxable services were being rendered by
Linde which were attributable to the permanent establishment, the same
would have to be considered as Business Profits and taxed accordingly.

102. We do not propose to examine these questions for the first time in
these proceedings.

103.     In view of the foregoing, the impugned ruling is set aside and we
remand the matter to the Authority for deciding the same afresh and in
accordance with the views expressed herein.

104. Accordingly, the petition and application stand disposed of.




                                              VIBHU BAKHRU, J



                                        BADAR DURREZ AHMED, J
APRIL 23, 2014
RK/MK




W.P.(C) No.3914/2012                                           Page 94 of 94

 
 
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