TaxTMI 
TaxTMI 
2007 (5) TMI 260
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....lhi passed under s. 154 of the Act relating to the asst. yr. 1995-96. This appeal however will be dealt with separately as the issue raised therein is different and calls for an independent adjudication. ITA Nos. 5883 & 5885/Del/1998 and ITA Nos. 3942 to 3945/Del/1999: 3. The facts and circumstances under which these appeals arise are as follows: The assessee is a company incorporated as per the laws of Japan and a tax resident therein. It is a trading house and had established a liaison office (hereinafter referred to as "LO") in India at New Delhi since the year 1956, and has sub-LOs at Mumbai, Chennai, Bangalore and Calcutta. The LO in New Delhi was established with the approval of the Reserve Bank of India (herein after referred to as "RBI") for facilitating imports from Japan and exports from India. After the introduction of Foreign Exchange Regulation Act, 1973 (hereinafter referred to as "FERA"), the LO was granted an extension of license by the RBI, for continuing the activities, vide its letter dt. 17th Feb., 1976, for the limited purpose of carrying liaison activities subject, inter alia, to the following conditions: • the entire expenses of th....
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.... wish to contend the issue of taxability vis-a-vis the DTAA, in respect of supply of equipments and income therefrom, even after the Indo-Japan DTAA. 7. The assessee started expanding its activities in India. The assessee established project offices for the following: • Raichur project with the Karnataka Power Corporation, • Basin Bridge Project, • Paint and Assembly shop for Maruti Udyog Ltd. (hereinafter called "MUL"). In the present appeals, we will be more concerned with the setting up of the project office vis-a-vis contracts with MUL. The approval for establishing a project office in connection with MUL was granted by the RBI vide its approval dt. 15th Sept., 1992. The approval was granted under s. 29(1)(a) of the FERA, 1973 for the purpose of undertaking a contract with MUL for designing, engineering, supply and installation for YE2 car project. YE2 car project of MUL is an expansion of car production between 70,000 to 90,000 cars (of capacity 1,000 CC and 1,300 CC) per year. 8. MUL had issued tenders inviting bids for purchase of different machinery and equipments in connection with modernization and expansion of its car assem....
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....ase orders (hereinafter referred to as "PO") under which it supplied machinery and equipment and under which it also undertook to supervise the installation of the plant and machinery. 12. The assessee submitted that each contract was independent, separate and technical aspects of work involved were different and varied. Each contract had no relationship with the other. Though they were in respect of one entity viz., MUL, the period for which supervisory activities were carried out was less than 180 days for each contract and therefore there was no PE of assessee in India vis-a-vis the rendering of supervisory services (i.e., supervisory PE) to MUL under the POs referred to above. The further stand of the assessee was that, for the projects being executed by the company with Karnataka Power Corporation Ltd. (Raichur Project) and with Tamil Nadu Electricity Board (Basin Bridge Project) there was in existence a PE, which is essentially because of the nature of these contracts. The income under these projects is taxed as per the provisions of s. 44BBB of the Income-tax Act, 1961. The assessee explained that however, the contracts with MUL are not only independent in relation to eac....
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....tuated therein, or performs in that other Contracting 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 PE or fixed base. In such case, the provisions of art. 7 or art. 14, as the case may be, shall apply." 15. A reading of art. 12(2) would show that FTS is chargeable to tax at 20 per cent of the gross FTS. However, under art. 12(5) if the recipient of FTS has a PE in India and the contract in respect of which FTS paid is effectively connected with such PE, then the provisions of art. 7 or 14 of DTAA shall apply. Article 7 of DTAA reads as follows: "1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a PE situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is directly or indirectly attributable to that PE. 2. Subject to the provisions of para 3, ....
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....ut such deductions shall in no case be less than what are allowable under the Indian IT Act as effective on the date of signature of this convention." 17. To determine whether the assessee has a PE in India or not one has to look at the provisions of art. 5 of the Indo-Japan DTAA which reads as follows: "Article 5 1. For the purposes of this Convention, 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; (g) a warehouse in relation to a person providing storage facilities for others; (h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; (i) a store or other sales outlet; and (j) an installation or structure used for the exploration of natural resources, but only if so used for....
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....enses of Rs. 6.49 crores and Rs. 1.81 crores respectively. The AO has also referred to the fact that even for executing Raichur Project with Karnataka Power Corporation, Basin Bridge Project with Tamil Nadu Electricity Board and YE2 Car Project for MUL, the assessee had obtained NOC from RBI under the FERA, 1973. The AO has also referred to the fact that MUL before making payment to the assessee have deducted tax at source of 30.25 per cent thereby by its own conduct admitted that the assessee had a PE in India. 20. For the above reasons the AO brought to tax the supervision fee received by the assessee at 30 per cent as per provisions of s. 115A of the Act. 21. The facts in asst. yr. 1995-96 are substantially the same. The AO in this year assigned two more reasons for rejecting the plea of the assessee that it did not have a PE in India vis-a-vis the supervisory services rendered to MUL. The AO has referred to the fact that in the last two decades the assessee has been offering substantial income to tax. The LO cannot therefore be called a LO but was in the nature of a PE. The AO has then referred to the fact that in a letter written by the LO to MUL, they have agreed to MUL....
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....pect has been examined and discussed in extenso by learned CIT(A)-XIV, New Delhi, in his combined order (Nos. 690/9798 and 86/98-99) dt.31st Aug., 1998for the asst. yrs. 1994-95 and 1995-96 wherein he has upheld the findings of AO to the effect that the assessee company was having PE pertaining to income received on account of supervision and technical fees from MUL. The relevant concluding portion of the said order of learned CIT(A)-XIV reads as under: 'In course of the hearing the Authorised Representative has also referred to the absence of force of attraction of the PE in the OECD Model, and specifically, in the DTAA between India and Japan in support of his claim that the 10 contracts cannot be connected with the PE relating to the MUL project. It is true that the DTAA between India and Japan has adopted the OECD Convention and have decided against adopting the 'Force of attraction of the PE', but in the instant case, the facts and also the specific provisions of the DTAA clearly establish that the 10 contracts with MUL were directly or indirectly attributable to the PE as reflected in the projects undertaken relating to the assembly line, paint shop and a....
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....ion or cannot be extended to the other contracts executed by the assessee for MUL. It was submitted that existence of PE has to be viewed separately for each independent project/ contract. (d) It was pointed out that ten contracts in question for asst. yr. 1994-95 were awarded to the assessee on the basis of competitive bidding process. The description and scope of work undertaken under each contract were separate so also were the technical aspect of work involved in each contract having no inter-relation with another. (e) That para 1 of art. 7 of the DTAA between India and Japan is based on the OECD Model and was different from para 1 of art. 7 of the UN Model Convention in the sense that under the latter, the rights of primary taxation by the State in which there is a PE were much wider and also go beyond the scope as envisaged in the OECD Model. Referring to the commentary by Klaus Vogel: Double Taxation Conventions, 3rd edition (published by Kluwer Law International) and specifically to p. 402, it was pointed out that the India Japan Treaty, based on the OECD Model allows the State of the PE to tax business profits, but only so much of them as is attributable ....
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....ffice for a long time. According to CIT(A) though the income so declared was pursuant to an agreement between the Department and the assessee, the fact remains that the assessee was carrying out business activity through the LO. The CIT(A) therefore held that the LO constituted a PE of the assessee in India. The CIT(A) also referred to the letter dt. 24th April, 1996of DGM of New Delhi LO agreeing to TDS at 30.25 per cent which according to CIT(A) is an admission on the part of the assessee that it had a PE in India vis-a-vis the contracts with MUL. The CIT(A) also held that the decision in the case of IAC vs. Mitsui & Co. Ltd. (1991) 39 ITD 59 (Del)(SB) wherein it was held that LO cannot constitute a PE, did not apply to the case of the assessee because facts in the assessee's case were different. Thereafter, the CIT(A) narrated the facts in the case of the assessee that the assessee was showing substantial income attributable to the LOs. According to CIT(A), the assessee was not only maintaining LOs in India but was carrying out trading, commercial or industrial activity and had also started executing purchase with Maruti Udyog Ltd., Karnataka Power Corpn. and with Tamil Nadu....
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....z., MUL. (c) The six months test laid down in art. 5(4) of Indo-Japan DTAA cannot be circumvented by splitting the 10 pas. These contracts were to be considered as one though they were performed at several sites. The activities in the ten contracts had to be performed without any interruption. These contracts related to execution of supervision of creation and installation of machines at paint shop and assembly shop which were part of one car project viz., YE2 Project of MUL. (d) That the PE for MUL Project of the assessee in India had an effective connection with the rendering of technical services by the assessee. 28. With regard to the plea of the assessee that if there is a PE in a State/country for one activity then for all activities carried out in that State/country, that PE would be enough to say that there was a PE for all activities, being against the principle of "No Force of Attraction" which is advocated by the OECD Model and which has been adopted in the Indo-Japan DTAA, the CIT(A) held that the period spent on all activities of the assessee have to be aggregated because all contracts taken together form a coherent whole commercially and geographi....
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....e income from supply of equipment is charged and brought to tax by the Revenue can be accepted? (c) Whether the supervision fee is taxable @ 20 per cent as per art. 12(2) or at 30.25 per cent as per art. 12(5) r/w art. 7(1) of the Indo-Japan DTAA to tax in India and at what rate of tax? The answer to the above question would depend on the answer to the following points: (i) Whether the assessee had a PE in India?; (ii) Whether the contract in respect of which supervision fee is paid is effectively connected to such PE within the meaning of art. 12(5) of the Indo-Japan DTAA? (d) If the answer to the above point (c) is in the affirmative then what is the quantum of supervision fee that can be taxed as attributable directly or indirectly to that PE? 33. We shall first take up for consideration issues (a) and (b) for consideration. As far as issue (a) regarding the very chargeability to tax of the receipts in the form of supervision fee on the ground that it forms part of the contract for supply of equipments and since the ownership of the equipments was transferred by sale to MUL outside the Indian territory i.e. at Japan, no income can ....
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....152 CTR (Mad) 9 : (2000) 244 ITR 459 (Mad); (iii) CIT vs. Nav Bharat Ferro Alloys Ltd. (2000) 162 CTR (AP) 289 : (2000) 244 ITR 261 (AP); (iv) CIT vs. Hindustan Shipyard Ltd. 1975 CTR (AP) 97 : (1977) 109 ITR 158 (AP); (v) Dy. CIT vs. Alcatel (1993) 47 ITD 275 (Del). 35. The learned counsel for the assessee submitted that the contract for supply of equipment and supervision of the installation was of a composite nature and therefore the fee received for supervision of installation of equipments was not fees for technical services rendered. His further argument was that the supply of equipments took place FOB, Japan, and therefore title to the equipments passed on to MUL outside India and therefore no income either in respect of supply of equipments or for supervision fee accrued in India and could be brought to tax in India. 36. Alternatively, it was argued that since the supervision fee payable was part of the contract of supply of equipment, they can at best be taxed only in the manner in which the income from supply of equipments is taxed. We may at this juncture recall the historical background of this case whereby the dispute between the assess....
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....nd Japan. 38. The learned counsel for Revenue further pointed out that even in the appeal by the assessee before the CIT(A) as well as before the Tribunal, in the grounds of appeal (original grounds before the Tribunal), the grievance raised by the assessee was as to whether FTS has to be taxed either at 20 per cent or 30 per cent. It was pointed out by the learned counsel for Revenue that it was only on 23rd April, 2003 that the assessee for the first time, i.e. after 7 years, took a stand that FTS is part of consideration for equipment supply and therefore has to be taxed in the same manner in which the income from supply of equipments is taxed. According to him, permitting the assessee to do so will be allowing an assessee to change the very complexion of the case as originally brought before the Tribunal. That the assessee cannot approbate and reprobate. That the principle of promissory estoppel will apply and the assessee should not be allowed to go back on his stand at this belated stage of the proceedings. That the assessee is guilty of laches on its part. The counsel for the Revenue in this regard placed reliance on the following decisions: (a) CIT vs. Ram Kumar....
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.... the following decisions: (a) AEG Aktiengesllschaft vs. CIT (2004) 188 CTR (Kar) 497 : (2004) 267 ITR 209 (Kar); (b) Bharat Heavy Plate & Vessels Ltd. vs. CIT (1979) 9 CTR (AP) 4 : (1979) 119 ITR 986 (AP); (c) Skoda Exports vs. CIT (1983) 37 CTR (AP) 77 : (1983) 143 ITR 452 (AP). The learned counsel for the Revenue pointed out that the assessee has not even placed the entire material i.e. all the relevant purchase orders in its paper book, so as to even verify the claim of the assessee. 40. His further submission was that the Tribunal while admitting the additional ground of appeal only thought it fit to examine the issue raised therein subject to the availability of facts necessary for such examination being already available on record. The assessee having itself admitted that the supervision fee received is FTS, there was no occasion for the Revenue authorities to examine the fact whether supervision fee was part of the contract of supply of equipments. Thus, according to him the additional ground has to be dismissed on the ground that facts necessary for adjudication of the additional ground of appeal are not available on record and new facts can....
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....he sum in question being brought to tax as FTS. The contents of this letter have already been set out in paras 10 and 11 of this order and are not being repeated. The assessee in a letter dt.19th Aug., 1996addressed to the AO however took a stand that the assessee executed about 10 orders for supply of equipments to MUL and all these 10 purchase orders were independent and did not complement each other. As per the terms of the supply of equipments, the installation of the equipment was to be carried out by MUL and the assessee was to depute supervisors to oversee testing and commissioning of the equipments because the assessee was familiar with the equipment supplied. According to the assessee under art. 12(2) of Indo-Japan DTAA only 20 per cent tax has to be levied on FTS because the assessee did not have a PE in India which was effectively connected with the contract in respect of which FTS was received by the assessee from MUL. If such PE did exist then under art. 12(5) r/w art. 7(3) of Indo-Japan DTAA, FTS has to be brought to tax at 30 per cent of the gross receipts. The limited contention of the assessee was that since the 10 contracts were independent and did not complete ea....
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....the Tribunal that the issue raised in the additional ground has to be decided on the basis of facts already found by the tax authorities and having a bearing on the tax liability of the assessee. 45. The contention of the learned counsel for the assessee has been that even according to the AO (in asst. yr. 1994-95), supervision of installation is closely related to the supply of materials and equipments. It is therefore necessary to examine whether this plea of the learned counsel for assessee is correct. The assessee never put forth such a plea before the AO or CIT(A) and there was no occasion for the AO or CIT(A) to consider any such plea. The admitted plea of the assessee before the AO was that the sum in question was "fees for technical services" but was taxable at 20 per cent thereof under art. 12(2) of the DTAA and not at a higher percentage under art. 12(5) of DTAA as there was no PE of the assessee in India. In support of such contention, the assessee submitted that to constitute a supervisory PE under art. 5(4) of DTAA, the assessee should carryon supervision activities for more than 6 months. According to the assessee, each contract for supply of equipment was separate....
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....on at all. If at this stage, we were to look into the purchase orders and to investigate as to whether the supervision fee was part of the contract for supply of equipments, then that might involve investigating several circumstances requiring even examination of parties. The transactions in question relate to asst. yr. 1994-95 and before. At this point of time viz., after 14 years this question cannot be investigated. In other words, the facts necessary for adjudication of the issue are not available on record. The matter could not also be remanded at this point of time. The delay or laches on the part of the assessee in this regard has to be viewed as a factor against the assessee. From the decision of the Hon'ble Supreme Court in the case of National Thermal Power Corporation vs. CIT (1999) 157 CTR (SC) 249 : (1998) 229 ITR 383 (SC), the following principles emerge regarding the right of parties to raise a new plea for the first time before the Tribunal, viz., (a) it is the discretion of the Tribunal to admit or not to admit a new ground to be raised before it; (b) if the Tribunal is required to only consider a question of law arising from the facts which are on record in th....
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.... (b). 48. The only other issue that remains for consideration IS regarding the existence of PE of the assessee inIndiaand whether the contract in respect of which supervision fee was received by the assessee was effectively connected with the PE in India. If the answer to the above question is in the affirmative what is the supervision fee that can be taxed as attributable to the PE and at what rate shall the tax be levied. 49. Before we proceed to discuss the above issue we may briefly narrate the scheme of taxation of non-resident assessees, such as the assessee in the present case, in the light of the Indo-Japan DTAA. Under s. 4 of the Act, the charge to tax is on the total income of every person. Sec. 5 of the Act explains the scope of total income of every person. Sec. 5(2) lays down the scope of total income of every person who is a non-resident. Any income received or deemed to be received in India and any income which accrues or arises in India or is deemed to have accrued and arisen in India shall be included in his total income. Sec. 9 of the Act lays down as to when income shall be deemed to have accrued or arisen in India. Sec. 9(1)(vii)(b) lays down that income b....
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....dent, provided the transactions are of the same or similar kind as that effected through the PE. Some provide for taxing profits/income from all transactions whether they are attributable to PE or not or whether they are of the same kind of transactions carried on by the PE or not. The third category is referred to as "full force of attraction" principle. The second category is referred to as "limited force of attraction" principle. The first category is referred to as "No force of attraction" principle. As to which principle is applicable in a given case depends on the clauses of the convention between two countries. The OECD Model Convention generally adopts the "no force of attraction principle". The UN Model Conventions generally adopt the "limited force of attraction principle". 54. With the above broad principles in mind, let us now consider the facts of the present case and the rival contentions on behalf of the assessee and the Revenue. 55. At the outset, we may clarify that neither the AO nor the CIT(A) has examined the applicability of art. 12(5) of DTAA in proper perspective, in the light of the facts of the present case. Article 12(5) is being reproduced for the s....
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....s for applicability of art. 12(5) of DTAA to the facts and circumstances of the present case. Admittedly, the assessee had a PE in India in respect of its Raichur Project (Karnataka State), Basin Bridge Project (at Chennai) during the previous year relevant to asst. yr. 1992-93. From15th Sept., 1992, the assessee got permission from RBI to have a PE in respect of designing, engineering and installation for YE2 project of MUL. Even as early as 1956, the assessee has been carrying on business of supply by way of import to buyers in India of equipments. According to the assessee, normally equipment sold on a principal-to-principal basis (FOB) (Free on Board) foreign port to an Indian buyer is not chargeable to tax under the Act. The claim of the Revenue is to the contrary. The assessee had filed a writ petition against the tax Department, sometime in late 1970, pursuant to which the tax Department had certain discussions with the assessee and a compromise was arrived at between the two parties vide the letter of the tax Department, dt.19th March, 1980. The settlement provided that the assessee's LO in India would pay tax on the profits in respect of income determined in respect of....
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....ids restricting entrepreneurial freedom of disposition through fictitiously allocating profits by way of generalizing standards. While OECD committee on fiscal affairs recognized that such extensive freedom of entrepreneurial disposition might also involve the risk of being abused, it thought that this risk should not be given undue weight and that much more importance should be attached to "ensuring, both for tax purposes and otherwise, that international business contacts can be shaped according to commercial requirement." Another principle that should be kept in mind is the material date for determination of accrual of income arising through the PE is the existence of the PE at the time when whatever decisively caused the profits to accrue, actually occurred. 59. The term "effectively connected" used in art. 12(5) of the DTAA is not to be construed as the opposite of "legally connected" but in the sense of something "really connected". The connection has to be seen not in the form but in real substance. The income producing activity should be closely connected in terms of relationship besides being connected economically also with the PE. 60. In the light of the above b....
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....re of the Contract and Mandays: (a) Supply, installation and commissioning and trial run of 8 station shattle, conveyor system in weld shop; (b) All features same as above; (c) 90 mandays of supervision subject to maximum of 45 days. Time to be counted from the date of arrival of the supervisors at MUL site. (d) No. of supervisors: 2 Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 5. 1-1-92 MUL:PE:AS:460:184 31,80,900 3,60,000 - Nature of the Contract and Mandays: (a) Supply, supervision for installation and commissioning of one number side slip tester equipment; (b) All other terms identical as above; (c) 1 supervisor for 4 days. Asst. yr. 1996-97 Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 1. 1-7-93 MUL:PE:AS:NYE-2-T Line 3:613:97:1 13,07,78,500 7,70,00,000 - Nature of the Contract and Mandays: (a) Design, engineering, manufacture, supply and supervision for installation and commissioning of Tester Line equipments; (b) Conne....
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.... Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 4. 29-6-92 MUL:PE:AS/YE2(EA)/485/394 7,08,16,095 78,75,000 - Nature of the Contract and Mandays: (a) Firing testing equipment for assembly shop expansion connected with YE2 Project. (b) All other terms same as above. (c) 2 supervisors to be completed within 75 days from the date of arrival. Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 5. 11-6-92 MUL:PE:AS/YE2(EA)/485/372 17,29,95,500 1,57,50,000 - Nature of the Contract and Mandays: (a) Engine, assembly and testing equipment for assembly shop expansion project for start up of YE2 production. (b) All other terms same as above, (c) Connected to YE2 project. (d) 11 supervisors to be deputed. 150 mandays is the time allowed to complete supervision. Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 6. 11-6-92 MUL/Engg./TAD/EM AC/PO-1 5,39,05,000 1,65,00,000 - Nature of the Contract....
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....and Mandays: (1) Supply and supervision of installation and comissioning of 6 sets of Hemming Press and 6 sets of Hemming dies for YE2 model. (d) All other terms same as above. (e) 3 Supervisors to be deputed from Japan. (f) 70 Mandays time to complete erection and supervision. Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 3. 25-6-93 MUL:PE/A9YE2(EA)/485/957 20,77,800 19,82,000 - Nature of the Contract and Mandays: (a) Repair of damaged firing text bench. (b) 1 Supervisor to repair to be deputed. (c) 3 Mandays time to complete. (d) Other terms same as above. Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 4. 30-3-93 MUL:PE/A9/YE2(EA)/485/812 17,69,73,700 2,32,48,333 - Nature of Contract and Mandays: (a) Purchase order for design, engineering, manufacture, supply and supervision for installation and commissioning of engine assembly and testing equipment for assembly shop expansion project. (b) Other terms same as above. ....
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....,23,42,83,800 5,57,50,000 - Nature of Contract and Mandays: (a) Purchase order for craskshaft machining line with toding and spare parts for expansion project. (b) 22 Nos. supervisors. (c) 364 mandays. To work 8 hours per day/48 hours per week. (d) All other terms are same. Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 11. 24-2-93 MUL/PE/MC/93/126 1,22,96,05,080 4,07,40,000 - Nature of Contract and Mandays: (a) Purchase order for cylinder head machining line with tailings and spare parts for expansion project. (b) 16 Supervisors. (c) 360 mandays. to work 8 hours a day/48 hours a week (d) All other terms are same. Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 12. 24-3-93 MUL/PE/PN/75/46 88,49,000 39,00,000 2,10,000 Nature of Contract and Mandays: (a) Supply, installation, assembly conveyor line No.4 printed body storage conveyor, headlight tester equipment On line A/c gas charging equipment. (b) 2 Supervisors ....
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.... 23. - MUL/P/Maint/04 - 33,80,000 - 24. - MUL/P/Maint/77 - 48,00,000 - 25. - MUL/PR/AS/NYE-2/ EGA/482/977 - 9,90,000 - Nature of contract and man days not available in the paper book filed by the assessee for contracts Sl. Nos. 19 to 25. 61. Perusal of the various purchase orders shows that a common feature in all of the purchase orders is the fact that supervisors were to come from Japan and MUL bears the cost of their air ticket and provides for their boarding and lodging in India. The period of supervision in the case of individual contracts did not exceed a period of 180 days and they did not constitute a supervisory PE in terms of art. 5(4) of the DTAA. The learned Departmental Representative's reliance in this regard was on the fact that there were technicians on the payrolls of the PE in India established for contracts with MUL for the year ending 31st March, 1994 and this fact by itself would go to show that the PE in India and the contract for rendering technical services were "effectively connected." We do not think that this aspect alone would be conclusive in such matters. The fact of the matter is that the P....
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....a PE in India of the assessee and that in any event for MUL YE2 project there was a PE in existence in India and therefore supervision fee is also attributable to the PE in India and taxable as such. In coming to the above conclusion the CIT(A) held that the time spent on the various contracts by the assessee inIndiafor MUL has to be aggregated and if done so they would exceed a period of 180 days. Therefore, there was inIndiasupervisory PE and therefore supervision fee received is connected to such PE and hence taxable at a higher rate. The question of aggregation of the time frame of various contracts will be dealt with separately. Here again, the CIT(A) has not considered the aspect of "effectively connected" with the PE inIndia. 65. As already stated, perusal of the various purchase orders shows that supervisors were to come fromJapanand MUL was to bear the charges of airfare and stay inIndia. The contract for supervision was a severable contract and had to be viewed separately. There is no evidence on record to show that the contract in respect of which FTS is received was effectively connected with a PE inIndia. Article 12(5) of the DTAA did not apply and therefore art. 12....
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....under different contracts had to be aggregated. He took strong exception to the belief entertained by the Revenue authorities that the contracts for supervision had been deliberately split up and divided into smaller contracts just to circumvent the period of 6 months mentioned in art. 5(4) of DTAA. Reliance was placed on the decision of the Delhi Bench of Tribunal in the case of Dy. CIT vs. Alcatel wherein it has been held that allegation of tax planning device where contract is by the Government of India cannot be accepted. In this regard, he pointed out that the whole project of MUL had not been awarded to the assessee and there were several persons other than the assessee who were awarded different contracts on the basis of tenders floated independently. He also highlighted the fact that even the equipments supplied under each contract, were different and did not complement each other. The fact that the equipments supplied by the assessee were installed by local contractors and that the assessee merely supervised such installation, according to him, would go to show that each of the contracts for supply and contracts for supervision was independent and the period of supervision....
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....ty, continuity and infrastructure framework for its activities. It was a LO which executed various purchase orders for MUL connected with the YE2 car project. Thus, the LO's activity expanded in range and volume and included import of various equipments from Japan as well as purchase of indigenous equipment inIndiaand also supervision of installation and commissioning thereof. According to him the following facts clearly establish that the project office carried out the terms of various purchase orders: (a) The equipment sold by the assessee to MUL included imported equipment and spare parts. (b) The purchase orders were in relation to the assembling, paint and belt shop of MUL and connected with the YE2 car project for which RBI had granted permission to the assessee to have a project office inIndia. (c) In some contracts the supplier had to carry out installation, erection as well as supervision. (d) The purchase orders themselves indicate that the LO in India played an important role in negotiating, finalizing and formation of the contracts. It was also contended that the version of the assessee that the purchase orders were directly ex....
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....act that there was no such case made out by the Revenue and that the learned special counsel for the Revenue is putting forth such contention for the first time before the Tribunal and without any material on record to substantiate such an allegation. With regard to the contention that LO constituted PO of the assessee, the learned counsel besides pointing out legal hurdles in doing so in the permission granted by the RBI, also highlighted the fact that the RBI in the event of such violation would have proceeded against the assessee under the provisions of FERA. He submitted that there were no such proceedings against the assessee. He reiterated that each contract was separate and did not together form an integral whole contract. It was also argued by him that YE2 project of MUL was a large project with involvement of several vendors and the assessee supported only a few portion of the MUL project along with several other vendors. It was also contended by him that the rule that once there is a PE under art. 5(1) or (2) of DTAA then there is no necessity to look into art. 5(4) of the DTAA will hold good only if the PE is in respect of the one and the same activity. In this regard ou....
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....t the LO owned assets and incurred huge expenses can never be a ground to conclude that they constitute PE. The prohibition on the part of the LO to carry on activities generally done by a PE in the permission granted by RBI cannot be lost sight of. There has been no proceeding against the assessee by RBI in this regard. The fact that LO gave consent to deduct tax at a higher rate in respect of payments made by MUL to the head office is again no ground to hold that the LO was in fact a PE of the assessee inIndia. The principle to be applied in such cases has been laid down in the case of Mitsui & Co. followed by Special Bench of Delhi Tribunal in the case of Motorola & Co. vs. Dy. CIT. In the case of Mitsui & Co. the following principle has been laid down: "One is not to be led away by the enormity of the expenditure incurred in running an office inIndia. That would depend upon the level of the country to which the office belongs. One has to judge the expenditure incurred from that angle and not from our angle. It was not the case of the Revenue that the expenditure incurred was so camouflaged as to cover the expenditure incurred in a trading activity to show it as expendi....
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....ent supplied in another purchase order. The technicians were deputed to work from Japan. The assessee did not co-ordinate the work of the various purchase orders and each was done according to the terms of the purchase order, each one of which was independent by itself. Even MUL floated separate tenders for each of the purchase orders and the assessee was not the only bidder and there were other enterprises which were awarded purchase orders. 77. The period of supervision under each contract was less than the period of 180 days as contemplated by art. 5(4) of the DTAA. The period spent on supervision on each contract if aggregated, the period would be more than 180 days. The question is whether the period spent on different contracts have to be aggregated or not? 78. Article 5(4) replaces the permanence element for existence of a PE by the test of a minimum length of time. In a case where there are several sites where supervision is going on in a country, the rule is that the test of minimum period should be determined for each individual site or installation project. Klaus Vogel in his commentary on Double Tax Conventions Vol. 1 3rd edition p. 308 has the following to say on....
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....DTAA and the same is directed to be accepted, 82. The next issue for consideration is the charging of interest under ss. 234B and 234C. This issue will not arise for consideration at all, in view of our conclusions on the other issues and there may not be any liability on the part of the assessee to pay interest under s. 234B or 234C of the Act. Nevertheless, we proceed to decide this issue also, as the same is an issue which has already been decided by the Special Bench of the Tribunal in the case of Motorola Inc. The provisions of ss. 234B and 234C are attracted only when the advance tax is not paid by an assessee despite there being an obligation to pay advance tax. Under s. 209(1)(d) of the Act, income-tax liability has to be computed on the current income of an assessee. From such tax liability, the tax deductible at source will have to be reduced to arrive at the advance tax liability. The income in question is fees for technical services payable by MUL to the assessee. Under s. 195 there is an obligation on the part of MUL to deduct tax at source. According to the assessee, the expression "tax deductible at source" used in s. 195 of the Act, actually refers to the "tax deduc....