Jindal Thermal Power Company Limited vs Dy. Commissioner of Income Tax

Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2009 Supreme(Kar) 186

High Court of Karnataka
THE HONOURABLE MR. JUSTICE K. SREEDHAR RAO & THE HONOURABLE MR. JUSTICE C.R. KUMARASWAMY
Jindal Thermal Power Company Limited
Versus
Dy. Commissioner of Income Tax
ITA.No.3021 of 2005 C/w. ITA Nos.3022 of 2005 to 3025 of 2005
Decided On : 16-03-2009

Advocates Appeared:
For the Appellant:Suhail Dutt, T.S. Venkatesh, Advocates. For the Respondent: Mohan Parasaran, ASG for M.V. Seshachala, Senior Standing Counsel.

Headnote:INCOME TAX ACT, 1961 - Section 9(1)(vii)(c): [K.Shreedhar Rao & C.R.Kumarswamy,JJ] Tax liability under - Payment of Tax - Assessing authority directing the appellant to make payment of tax on the account of REOL, confirmed in the Appeal - Challenge to - Held, The explanation incorporated in Section 9(2) declares that "where the income is deemed to accrue or arise in India under Clauses (v)(vi)(vii) of sub-Section (1), such income shall be included in the total income of the non resident ; whether or not the resident has a residence or place of business or business connection in India." The plain reading of the said provision suggests that criterion of residence, Place of business or business connection of a non-resident in India has been done away with for fastening the tax liability. However, the criteria of rendering service in India and the utilization of the service in India laid down by the Supreme Court in Ishikawajma Harima Heavy Industries Ltd., vs Director of Income Tax Mumbai,[ 2007 (3) SCC 481] to attract tax liability under Section 9(1)(vii) remains untouched and unaffected by the explanation to Section 9(2). When the purport of the explanation to Section 9(2) is plain in its meaning it is unnecessary and impermissible to refer to the Memorandum explaining the Finance Bill 2007. Therefore, it is explicit from the reading of Section 9(1)(vii)(c) and explanation to Section 9(2) that the ratio laid down by the Supreme Court in Ishikawajama’s case still holds the field. On facts held, It is found that in respect of "start up services and over all responsibility" the part of the technical services although rendered partly offshore but the execution of the work even though done by BEI and EOI, however the same is carried out under the direct supervision of REOL. The BEI and EOI, although hold independent contract with Jindal, as per the terms of the contract they execute the work under direct control and supervision of REOL. Hence, BEI and EOI virtually constitute the executive agents of REOL. In that view, the REOL under the contract, takes the over all responsibility for the successful erection and operation of the plant. The twin criterion of rendering of services in India and utilisation of services in India becomes evidently noticeable in respect of "start up services and over all responsibility." However, in respect of "technical services" the rendering of services being purely off-shore and outside India, the remuneration whatever paid towards technical services does not attract tax liability. However, the split up remuneration paid towards "start up services and over all responsibility", the Jindal had duty in law to effect TDS. The failure to do so makes Jindal vicariously liable to pay the tax on the amounts paid to REOL towards "start up services and over all responsibility." However, the Jindal would not incur any liability to pay tax towards the amount paid in respect of "technical services." The Jindal would be entitled to refund to Tax in respect of payment made to REOL towards "technical services."
INCOME TAX ACT, 1961 - Double Taxation Avoidance Agreement, Article 12(5): [K.Shreedhar Rao & C.R.Kumarswamy,JJ] Benefit claimed under - Finding of the Income Tax Appellate Tribunal that the appellant is not entitled to benefit under Article 12(2) of the DTAA -Pleaded against - Held, The Jindal has not produced the custom duty documents to show that the amounts paid to REOL in respect of "technical services, start up services and over all responsibility" forms part of the cost price of the equipment. Therefore, the ITAT has rightly held that Jindal is not entitled to benefit under Article 12(2) of the DTAA.

Judgment :-

Set aside the judgment and orders all dated: 18-05-2005 of the ITAT Bangalore in ITA No.239/Bang/1999 for the assessment year 1997-98, ITA No.238/Bang/1999 for the assessment year 1996-97, ITA No.247/Bang/1999 for the assessment year 1998-99, ITA No.246/Bang/1999 for the assessment year 1997-98, ITA No.245/Bang/1999 for the assessment year 1996-97.)

Common Judgment: (Sreedhar Rao, J.)

All the appeals pertain to same subject matter involving similar questions of law and fact. Hence, all the appeals are heard together for common disposal. The material facts are as under:

M/s. Jindal Thermal Power Company Limited (Jindal) (appellant in all the appeals) entered into contract with Raytheon-Ebasco Overseas Ltd., (REOL) and other three companies viz., 1) BHEL, 2) Energy Overseas International Inc. (EOI) and 3) Badger Energy Inc. (BEI) for commissioning of power plant at Thorangal, Bellary District. The companies BEI & EOI are the subsidiary companies of REOL. BHEL is a Government of India undertaking. Jindal entered into four separate contracts with REOL, BHEL, BEI and EOI. BHEL under the contract obliged to supply of Boilers, steam turbine Generators, main power transformers and process piping. The BEI Under the contract is obliged to local services, construction of all BHEL supply, start up and commissioning. The obligation of EOI under the contract is to collect and purchase local material equipment supply and construction of all REOL and local supply. The REOL under the contract has the obligation of Off-shore services which includes conceptualization of the project, designs, drawings and other technical aspects for commissioning and to make the project operative. The REOL also must supply equipment and material supply. The remuneration for services to be rendered by BHEL, BEI & EOI is separately agreed under the contract. The remuneration to be payable to REOL under the contract is under three categories:

1) TECHNICAL SERVICES:

The Technical Services to be provided under the REOL were to be rendered entirely outside India and includes the following services:

i) Providing engineering and design work relating to conceptualization of the power plant, i.e., overall Power Plant design,

ii) Providing specification of all material for the Power Plant, based on, the overall design including the specific requirements developed as part of the overall design,

iii) Providing suppliers quotations and document reviews to enable compliance with specifications developed by REOL for the Power Plant,

iv) Supplying drawing reviews to enable integration of the equipment to be supplied to Jindal into the overall Power Plant design, and

v) Undertaking preparation of final documentation of the design of the plant and equipment necessary for Power Plant.

2) START UP SERVICES:

The nature of Start-up Services to be provided by REOL primarily relates to what is known as home office start-up support. Accordingly, REOL's home office in the US would indicate in detail the procedures of start up to be carried out on site by the start up contractor, an entity different from REOL. The Start-up Services provided by REOL under the Contract includes the following:

i) Development of scoping Packages whereby the various instrumentation, electrical, mechanical and equipment listings were drawn up and were further broken down into sub-systems for the purpose of commissioning by the start up contract;

ii) Laying out of test procedures for the various sub-systems, systems, equipment and components, contained in detailed instructions in the form of manuals are made available to start up contractor who is required to follow the given instructions (The start up contractor has no authority whatsoever to deviate from the instructions given by REOL and should any change be required the same has to be approved and duly authenticated by REOL only); and

iii) The presence of the vendor or their representatives in India during the start-up process should the equipment s

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2009 Supreme(Kar) 186

High Court of Karnataka THE HONOURABLE MR. JUSTICE K. SREEDHAR RAO & THE HONOURABLE MR. JUSTICE C.R. KUMARASWAMY Jindal Thermal Power Company LimitedVersusDy. Commissioner of Income Tax ITA.No.3021 of 2005 C/w. ITA Nos.3022 of 2005 to 3025 of 2005 Decided On : 16-03-2009

Cases Referred (1)

High Court of Karnataka
THE HONOURABLE MR. JUSTICE K. SREEDHAR RAO & THE HONOURABLE MR. JUSTICE C.R. KUMARASWAMY
Jindal Thermal Power Company Limited
Versus
Dy. Commissioner of Income Tax
ITA.No.3021 of 2005 C/w. ITA Nos.3022 of 2005 to 3025 of 2005
Decided On : 16-03-2009