| The Supreme Court recently entertained a petition challenging an order by the Authority for Advance Rulings (AAR) to tax a foreign company operating in the country. This was the first such petition that the apex court admitted.
The court, however, reserved its judgement on the petition by Japans Ishibkawajima-Harima Heavy Industries, challenging the ruling of AAR, which is the final arbiter on tax liability of foreign companies in India.
In January 2001, Petronet LNG Ltd awarded the Japanese company, and five others, a $65.2 million contract to set up a liquefied natural gas (LNG) facility in Dahej, Gujarat.
In October 2004, AAR ruled that the amount received/receivable by the Japanese company from Petronet LNG for offshore services and supply of equipment & material was also liable to be taxed in India as it is connected to the companys permanent establishment in India. Before passing the order, AAR had examined the contract, the Income Tax Act as well as the India-Japan Double Taxation Avoidance treaty.
The authority said certain operations of the offshore supply were inextricably linked with its permanent establishment in India. This includes the signing of contract in India, which imposes liability on the Japanese company to procure equipment and machinery in India. The income accrued to the company was from offshore supply through business connection in India and therefore could be taxed, the AAR ruled. On its part, the Japanese company contended that it was paying income tax on the income from onshore supply and onshore services.
However, as regards to offshore supply of equipment and materials, the price of the equipment and the machinery was paid outside India and the property in the goods passed to Petronet on high seas. The company said, since the sale was completed outside India, the profit arising to the applicant on the offshore supply of equipment and machinery would not be taxable in India.
In the apex court, Additional Solicitor General Mohan Parasaran, appearing for the government, defended the AAR ruling, arguing that in case of composite turnkey contracts, like the present one, there was no question of artificially splitting it into offshore and onshore elements. Parasaran said the location of the source of income from offshore elements within India gives sufficient nexus to tax the income from that source.
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