Permanent establishment time test must be applied contract-wise, while inspection fee and section 234B interest were treated differently.

Under the India-Germany DTAA, the six-month time threshold in the permanent establishment article is to be tested separately for each independent site, project, or activity, and unrelated contracts cannot be aggregated unless the treaty language permits it. Temporary interruptions do not break the period, which runs from commencement until completion of the relevant activity. In the absence of a permanent establishment under a particular contract, supervisory receipts were not accepted as outside tax altogether; Article 12 continued to govern the characterization issue. Inspection fee was treated as fees for technical services, while reimbursement of expenses was not taxable because it lacked an income element. Interest under section 234B was held not leviable where tax was deductible at source.

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Issues: (i) Whether supervisory activities carried on under separate contracts with different Indian parties created a permanent establishment in India under Article 5(2)(i) of the India-Germany DTAA, and whether the six-month threshold had to be tested project-wise or on an aggregated basis. (ii) Whether, in the absence of a permanent establishment under a particular contract, receipts for supervisory services were taxable as business profits or continued to be chargeable under Article 12. (iii) Whether reimbursement of expenses and inspection fee received by the assessee were taxable as fees for technical services. (iv) Whether interest under section 234B of the Income-tax Act, 1961 could be levied.

Issue (i): Whether supervisory activities carried on under separate contracts with different Indian parties created a permanent establishment in India under Article 5(2)(i) of the India-Germany DTAA, and whether the six-month threshold had to be tested project-wise or on an aggregated basis.

Analysis: The time test in Article 5(2)(i) was held to apply to each individual site, project, or activity. The language of the treaty did not justify aggregation of unrelated contracts or sites. The period had to be counted from the commencement of the relevant activity and continued until completion, without excluding temporary interruptions or splitting the period year-wise. However, the record was insufficient to determine the six-month threshold for several contracts, and the existence of a permanent establishment could not be conclusively decided on the available material.

Conclusion: The lower authorities were not justified in aggregating unrelated contracts, and the matter was remanded to the Assessing Officer for fresh adjudication on a contract-wise basis.

Issue (ii): Whether, in the absence of a permanent establishment under a particular contract, receipts for supervisory services were taxable as business profits or continued to be chargeable under Article 12.

Analysis: The contention that no tax could be levied at all in the absence of a permanent establishment was rejected. Article 12 governed royalties and fees for technical services, and Article 7 did not support the assessee's alternative claim in the manner urged. The rate directed by the Commissioner (Appeals) for cases where no permanent establishment was established was not found infirm.

Conclusion: The assessee's additional ground was dismissed.

Issue (iii): Whether reimbursement of expenses and inspection fee received by the assessee were taxable as fees for technical services.

Analysis: Inspection work done by technicians deputed by the assessee involved technical knowledge and therefore constituted fees for technical services. Reimbursement of expenses, however, was held not to contain an income element; where judicial views conflicted, the interpretation favourable to the assessee was adopted.

Conclusion: The inspection fee was taxable as fees for technical services, while reimbursement of expenses was not taxable.

Issue (iv): Whether interest under section 234B of the Income-tax Act, 1961 could be levied.

Analysis: Since the income was liable to tax deduction at source, advance tax liability did not arise in the manner required for charging interest under section 234B.

Conclusion: Interest under section 234B was not leviable, and the Revenue's challenge failed.

Final Conclusion: The common order granted partial relief to the assessee on reimbursement of expenses and on the levy of interest, rejected the assessee's additional legal ground, and sent the permanent establishment issue back for fresh determination on the basis of individual contracts and evidence.

Ratio Decidendi: For treaty construction PE provisions, the prescribed time threshold must ordinarily be tested separately for each independent site, project, or activity, and unrelated contracts cannot be aggregated unless the treaty language expressly so provides.

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