HYOSUNG CORPORATION Vs. DIT (INTERNATIONAL TAXATION)

JUDGEMENT

(1.) THE applicant which is a Company incorporated in Korea having its registered office in Seoul is engaged inter alia in the business of power stations. In the year 2005, Power Grid Corporation of India Ltd. (hereafter referred to as 'POWERGRID') invited bids for the execution of the works related to 800KV / 400KV Tehri Pooling Station Package associated with Koteshwar Transmission System. For the sake of brevity, the same has been described by the applicant as "400 KV GIS Package". The applicant who submitted the bid, became the successful bidder. As per the terms and conditions of bid, the foreign bidder was authorized to assign the whole or part of the contract to an independent contractor subject to the approval of Power Grid. In view of such provision, the applicant, pursuant to the understanding reached with L&T, requested Power Grid to award the Off -Shore Contract to it and the On -Shore Supply and Services Contract to be performed in India to L&T. This proposal was preceded by a Memorandum of Understanding dated 8/8/2005 between the applicant and the L&T. As per para 12( c) of the MOU, the applicant was permitted to assign any portion of the Contract either in full or in part to L&T, in which event L&T will be permitted to work as an independent contractor and the customer, namely, Power Grid will enter into a separate Contract with L&T. Thus, L&T was nominated as the assignee in respect of certain works in case the bid of applicant was accepted. L&T in its letter dated 8/8/2005 addressed to Power Grid confirmed this understanding and consented to work as an independent contractor as per the terms and conditions offered by Power Grid. By the Letter of Award dated 24th March 2006, (for short 'LOA) Power Grid accepted the bid proposal submitted by the applicant and awarded to the applicant the Off -Shore Contract covering all the works to be performed outside India including supply of all Off -Shore equipment and materials on CIF Indian port of disembarkation basis. (vide para 2.1 of LOA). In the LOA, Power Grid referred to the applicant's bid proposal and the post -bid discussions and stated that the On -Shore supply contract and On -shore Services contract including civil works, training in India etc. has been awarded to the applicant's assignee, namely, L&T India as per its letter of the same date. Further, it was made clear in the LOA : "Notwithstanding that the award of work under three separate contracts in the aforesaid manner, you shall be overall responsible to ensure the execution of all the three contracts to achieve successful completion of the entire scope of work under 800KV / 400KV Tehri Pooling Station package associated with Koteshwar transmission system and its taking over by Power Grid". The total contract price payable to the applicant was specified as 6,935,389 US Dollars. After the LOA was issued, a Deed of Assignment was executed by and between the applicant and the L&T on 8th May, 2006. A formal contract in terms of the LOA was entered into between Power Grid and the applicant on 27th October, 2006. Power Grid also entered into the contracts with L&T on the same day.

(2.) IT is stated by the applicant that the time for successful completion, testing and commissioning of the Power Station is 19 months from the date of LOA and the same has been extended to 24 months.

(3.) IT is the contention of the applicant that no income accrues or arises in India under Section 5 of the Income -tax Act, 1961 (for short, the Act') in respect of offshore supply contract undertaken by it inasmuch as the property in the goods and title passes outside India and the payment is received outside India. Overall responsibility for the successful completion of the contract undertaken by the applicant is not incompatible with the contention that the income does not accrue or it receives in India. Reliance has been placed on the decision of the Supreme Court in Ishikawajima - Harima Heavy Industries 1 (hereinafter referred to as 'Ishikawajima'). Viewed from the angle of the Treaty provisions, the applicant has no PE in India in connection with the contract and in any case no profits can possibly be attributed to the PE in the case of offshore supply. Article 7.1 of the DTAA between India and Korea has been referred to in this connection.