TaxTMI 
TaxTMI 
2010 (5) TMI 683
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....o condone the three days' delay in filing of appeal, and proceed to take up the matter for disposal on merits of the case. Delay condoned. 3. Grievances raised by the appellant, as set out in the memorandum of appeal, are as follows : "Based on the facts and circumstances of the case, and in law, the learned Commissioner of Income-tax (Appeals)-XXXI, Mumbai [hereinafter referred to as 'CIT(A)'] erred in upholding the assessment order dated 30-3-2001 issued by the learned Dy. CIT, Circle 2(1), Mumbai (hereinafter referred to as 'the Assessing Officer') under section 143(3) of the Income-tax Act, 1961 ('the Act') in relation to the assessment year 1998-99 in the case of Airline Rotables Ltd. a company incorporated under the laws of United Kingdom and carrying on the business of providing spares and component support for aircraft in India during the year ended 31-3-1998 ('hereinafter referred to as 'your appellant') on certain grounds. Your appellant's grounds of appeal against the order of the CIT(A) are specifically stated below : 1. Permanent Establishment (PE) in India The CIT(A) erred in holding that your appellant had a PE in India. Your appellant prays that the A....
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....replacement component which can be used by the airline during the period its original equipment is under repairs or overhauling by the assessee. Under the said agreement, the assessee is also responsible for providing replacement rotables, on exchange basis, required for an aircraft as a result of operational unserviceability. 'Rotable', for this purpose, is defined as "an item, with a manufacturer's serial number, that can be economically restored to a serviceable condition and in the normal course of operations rehabilitated to a fully serviceable condition over a period approximating the life of the flight equipment to which it is related". In order to ensure that the replacement components are readily available and the flight operations are not interrupted due to repairs and servicing of the components, the assessee-company provides stock of such components, as agreed with the airlines, at the operating bases of the airlines. In addition to this, the assessee-company also maintains a stock of components at its main depot in the United Kingdom from which the assessee-company provides replacement components within time-limits specified in the agreement, and which vary depending u....
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....at "they always have been satisfied by our performance as their agent for delivery of parts from consignment stock", it is on this basis that the Assessing Officer inferred that the stores staff of Jet Airways has been acting as agents of the assessee-company, and this relationship has resulted in a PE coming into existence. He relied upon article 5.4(b) which provides that "A person acting in a Contracting State for or on behalf of an enterprise of the other Contracting State other than an agent of an independent status in whom para (5) of this article applies shall be deemed to be a PE of that enterprise in the first-mentioned State if ...... he habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise for or on behalf of the enterprise". He also noted that it was not necessary that the person who manages and controls the stock should be an employee of the foreign enterprise. In his view, the emphasis was on the fixed place of business, and given that the assessee's stocks are permanently kept at fixed places in India, with clear identification of each of stock item, the assessee has a fixed....
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....e may, at the outset, mention that in both the orders of the authorities below, there are frequent references to the order passed by the Assessing Officer (TDS) under section 195 of the Act, when Jet Airways sought permission to remit the payment of bills to the assessee, as also the appellate order thereon by the CIT(A), but none of the parties could confirm whether the said matter travelled in appeal before this Tribunal, and if so, findings thereon, by the Tribunal. It has been stated at the Bar that the matter rests with the appeal by the CIT(A) having been decided against the tax deductor. We have no reasons to doubt this statement, nor could we find anything to the contrary. It is in this backdrop that we have proceeded to decide this matter on merits and without reference to the proceedings under section 195 in the hands of the tax deductor. 9. The first question that we need to decide is whether the assessee-company had any PE in India. Article 5 of the India-UK DTAA [(1994) 117 CTR (St.) 189 : (1994) 206 ITR (St.) 235] defines 'PE' as follows : "Article 5-Permanent Establishment.-(1) For the purposes of this convention, the term "PE" means a fixed place of business t....
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....or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d)the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise; (e )the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information or for scientific research, being activities solely of a preparatory or auxiliary character in the trade of business of the enterprise. However, this provision shall not be applicable where the enterprise maintains any other fixed place of business in the other Contracting State for any purpose or purposes other than the purposes specified in this para; (f )the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paras (a) to (e) of this para, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. (4) A person acting in a Contracting State for or on behalf of an enterprise of the other Contracting State other than an agent of an independent status in whom para (5) of ....
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.... criterion, i.e., existence of physical location, subjective criterion, i.e., right to use that place, and functionality criterion i.e., carrying out of business through that place. It is only when these three conditions are satisfied, a PE under the basic rule can be said to have come into existence. 11. As observed by a Co-ordinate Bench in the case of Western Union Financial Services Inc. v. Asstt. DIT [2007] 104 ITD 34 (Delhi), "a PE should project in the foreign enterprises in India (the other Contracting State)". In the case of CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146 , Hon'ble Andhra Pradesh High Court, after an elaborate survey of worldwide judicial precedents and technical literature on this issue, has observed that, "in our opinion, the words 'PE' postulate the existence of substantial element of enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country". Their Lordships further added that "it should be of such a nature that it would amount to a virtual projection of foreign enterprise of one country into the soil of another country". Incidentally, the treaty definition of 'PE'....
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....e said physical location for its own business. 14. The third and final test for existence of PE under the basic rule is the functionality test, i.e., the fixed place of business should be used for the purposes of business of the foreign enterprise. As observed by the Special Bench of this Tribunal in the case of Motorola Inc. (supra), such a use should not be confined to mere doing the work for owner of the enterprise owning that physical location and must extend to carrying on of the business of the foreign enterprise. The business carried out at that place should be such as to amount to, as was observed by Hon'ble Andhra Pradesh High Court in the case of Visakhapatnam Port Trust (supra), "virtual projection of enterprise of one country into soil of another country". The PE must project the foreign enterprise of which it is claimed to be PE. It is in this sense that the business must be carried on at the physical location in the other country. It is also important to bear in mind that when such a physical location has come into play as an end result of business having been carried out, such as a barge in territorial waters of the other country upon having given such barges on h....
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....ipments are concerned, the location of such equipments so given for use or right to use cannot be viewed as a place of carrying on its business, which, as we understand, is limited to, qua that consignment, the consignment so having been given for use or right to use. The business with regard to that consignment is over when that consignment is given for standby purposes to the airline. It is thus clear that not only that the assessee did not have any right to use the location of consignment stock, such a location was also not used for the purposes of assessee's business. There is also no projection of the assessee at this physical location in the sense that the business of the assessee is not carried out, or sought to be carried out or even projected, from these locations. When the physical locations at which consignment stock is kept do not project the assessee, it cannot be said that these locations constitute PE of the assessee. 16. We have also noticed that the revenue has made efforts to demonstrate that the assessee is storing the goods and using the place for securing the orders, and for this reason, the physical location of storing the consignment stock should be treate....
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....ehind the dependent agency PE clause in tax treaties. It is thus clear that dependent agency PE can come into existence only when business is carried out through the dependent agent. In the situation before us, no business is carried out through the agent, even if there be an agent in keeping the consignment stock, because this consignment stock with the airlines is the end result of assessee's business and not an intermediate step to get business. What the assessee is paid for, vis-a-vis the consignment stock, is consideration for so placing the consignment stock at the disposal of the airlines. The only other part of the consideration received by the assessee is for repairs and overhauling of aircraft rotables-a work which is entirely carried out outside India and no part of profit thereon could be taxed in India as attributable to PE. It is also difficult to understand how can Jet Airways Ltd. be construed as a dependent agent of the assessee before us. It would be absurd to contend that Jet Airways is a dependent agent of its supplier for the purposes of giving out replacement component. Nothing has been elaborated in the orders of the authorities below except for making a refe....
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....ities have not been able to establish that the assessee had a PE in India. It is a settled position of law, as noted by the Special Bench of this Tribunal in the case of Motorola Inc. (supra), that the onus is on the revenue to demonstrate that a PE of the foreign enterprise exists in India. That onus is not discharged. Having said that, we may also add that, in our considered view, the business model of the assessee-company is such that in the above arrangements, a PE in the source location does not come into existence. 17. In view of the above discussions, we are of the considered opinion that the assessee-company did not have any PE in India, and, accordingly, the entire income attributable to the India operations could not have been taxed in India. The grievances raised against quantification of income attributable to the PE, under article 7(1), are thus rendered infructuous. To that extent, we uphold the grievance of the assessee and vacate the orders of the authorities below. 18. We may, however, add that while the consideration for use or right to use the consignment stock of equipments is taxable under article 7(1) read with article 13(6), in a situation when the asse....
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....poses of this article, the term "royalties" means- (a )payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b )payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic. 4. For the purposes of para (2) of this article, and subject to para 5 of this article, the term "fees for technical services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which- (a )are ancillary and subsidiary to the application or enjoyment of the right, property or inf....
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....ies or fees for technical services shall be deemed to arise in the Contracting State in which the PE or fixed base is situated. 8. Where, owing to a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services paid exceeds for whatever reason the amount which would have been paid in the absence of such relationship, the provisions of this article shall apply only to the last mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this convention. 9. The provisions of this article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation of assignment of the rights in respect of which the royalties or fees for technical services are paid to take advantage of this article by means of that creation or assignment." 19. When a PE exists, even such a consideration, which may otherwise be taxable in the source country under article 13, is taxable on net basis under article 7. Therefore, merely be....