TaxTMI 
TaxTMI 
2014 (4) TMI 702
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....ments (PE) in India in terms of Article 5 of the India-Mauritius tax treaty during the relevant years. 3.1 It would be relevant to recount the background facts of the case, and toward which we shall, for the sake of context, advert to the facts and figures for A.Y. 1997-98, i.e., the first year under reference. The assessment for the year was initially made on 29.03.2000 at an income of Rs.514.27 lacs, including income of Rs.208.21 lacs (GBP 3,58,875) received from M/s. Godfrey Philips India Ltd. (GPI), a Indian company, on contract/s executed in India, as business income. The taxability of this income was contested by the assessee; the matter travelling upto the Appellate Tribunal. The bone of contention between the parties was the existence or otherwise of a PE in India; the assessee claiming its absence, so that the income qua the said business with GPI, though admittedly carried on by it, could not be brought to tax in India. The tribunal vide its order dated 18.10.2002 (in ITA No. 4679/Mum/2001) discussed the issue, and finding it as indeterminate, restored the matter along with the ancillary issue of the expenditure allowable in relation thereto, back to the file of the Asse....
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....see of being heard.' 3.2 In the set aside proceedings, the A.O. as well as the first appellate authority were of the view that there was a PE in existence in India within the meaning of India- Mauritius Double Tax Avoidance Agreement (DTAA) and, accordingly, the business income of GBP 2,08,20,596 was taxable in India. With regard to the expenditure, the assessee had claimed both direct as well as indirect expenditure, aggregating to GBP 2,87,055, including qua direct expenditure at GBP 1,02,335. The same, other than on salary (GBP 51,302) being not fully vouched, 15% thereof (GBP 51,033), i.e., GBP 7654.95 was disallowed. The first appellate authority found that the A.O. had not verified the assessee's claim of indirect expenditure, claimed at GBP 1,84,720, at all, merely accepting the certificate issued from the Auditors (KPMG) filed in its respect. The assessee was accordingly asked to prove the genuineness of its claim qua both direct and indirect expenditure. The assessee was unable to produce evidences, claiming that the matter being old, it was not possible to produce the vouchers. It however sought to emphasize the reasonableness of its claim with reference to the profit di....
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....re mainly involved in planning the improved work methods for the sale force of the GPI and supervising /reviewing the results obtained by adopting the suggested improved work methods; b) The appellant company was managed by the Board of Directors located at Mauritius, which gave directions to the 'Principal Consultants', and who in turn looked after the assignments in India, further directing the consultants deputed on the project. The communication between the directors and the principal consultants was mainly over phone or through electronic media. The marketing and the client contacts takes stand initiated through telemarketing from overseas followed by personal meetings with potential clients by the appellant's representatives, and who in turn report to the principal consultants. Based on these discussions and directions from the Board, the contracts/agreements with the clients are finalized. The place of the management of the assessee appellant was thus situated in Mauritius whereat the entire decision making powers were located. The contracts though executed in India, did not entail rendering of any managerial services, so that there was no place of management in India. In t....
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.... were required to render services in relation to the implementation of PIP, which required continuous inputs from the clients for its effective implementation. The inputs are generated from the continuous interaction between the employees of the GPI and the appellant and, further, subject to - review and analysis for further course of action. The rendering of the managerial services to GPI is thus manifest in the very execution of the contract/s, shares of the GPR's product/s. There was thus a place of management, power of which vested in the teams deputed for the purpose; b) The implementation programme was to be carried over three phases, aggregating to 80 weeks. A place of business, as defined in the Model Convention of Klaus Vogel (3rd edition) would cover any premises, facilities, installations used for carrying on the business of the enterprises whether or not they are used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business of the enterprises, and it may simply amount to space at its disposal. All it thus means is some tangible assets used for carrying on the business and in marginal cases....
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....ll the three model conventions, namely, the UN, the OECD Model and the US Model, use it as an instrument to establish tax jurisdiction over a business income of a foreign entity. The basis of the concept of PE is that profit of an enterprise of one contracting state is taxable in the other state only if the enterprise maintains a PE in the latter state and, further, to the extent that profit attributable thereto (PE) (Art. 7). The PE thus seeks to compromise and harmonize the taxing jurisdiction between the source state and residence state for the purposes of taxation of business profits. The same must be understood with a view to arrive at the degree of economic penetration as per the applicable treaty that justifies a nation in treating a foreign person in the same manner as a domestic person. The profits attributable to a PE being taxable in the state of source are either exempt in the state of residence or it allows credit for the taxes paid in the source state by the PE on such profits. There is thus a transfer of the taxing jurisdiction by the state of residence to the state of source, and which shall explain our stating of the PE being a concept devised to harmonize and comp....
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....ing storage facilities for others ; (g) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources ; (h) a firm, plantation or other place where agricultural, forestry, plantation or related activities are carried on ; (i) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than nine months. 3. Notwithstanding the preceding provisions of this article, the term "permanent establishment" shall be deemed not to include: (a) the use of facilities solely for the purpose of storage or display of merchandise belonging to the enterprise ; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display ; (c) the maintenance of a stock of goods 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- (....
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....seen, is pari materia with the definition of the term under the treaty, which though is not of much consequence in-as-much as only the definition per the treaty shall hold; section 92F being applicable only with reference to sections defined thereunder and which does not include section 90. The same, however, stands referred to so as to bring forth the unanimity of the concept both under the domestic law as well as the tax treaty. The fixed place concept has thus following the elements built therein: There must be a fixed place of business (situs test); The fixed place of business must be located [in a] certain territorial area (locus test); The use of the fixed place of business must last for a certain period of time (tempus test); The taxpayer must have a certain right of use [over] the fixed place of business (ius test); The activities performed through the fixed place of business must be of a business character (business activity test) 4.4 In order to, therefore, decide whether a PE stood constituted, one has to undertake a factual and functional analysis of the activities undertaken by the establishment. The decision by the tribunal in the f....
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.... judicial precedents and standard text in terms of the OECD commentary. The same being relevant, we may reproduce it as under: '10. In terms of the provisions of article 5(1), i.e., the basic rule a PE is said to exist in the other Contracting State when an enterprise of one of the Contracting States has a fixed place of business in that other Contracting State, through which business is carried out-wholly or partly. There are three criteria embedded in this definition-physical 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 1, Hon'ble Andhra Pradesh High Court, after an elaborate survey of worldwide judicial precedents and technical literature on ....
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.... solely for the purpose of project undertaken on behalf of the owner of the premises." [Emphasis supplied]. 13. It is thus necessary that, in order to give a positive finding about existence of the PE, not only that there should be a physical location through which the business of the foreign enterprise is carried out, but also such a place should be at the disposal of the foreign enterprise in the sense that foreign enterprise should have some sort of a right to use the 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 en....
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....r improving the management performance quotient of an enterprise by enhancing the operating parameters, as reducing costs, improving the work methods/services, providing efficient management control, as delineated by the assessee's letters dated 17.05.1996 and 26.08.1997 (PB 2, pgs.1-5), which provide the framework for both, the services to be rendered and the manner in which they shall be, also specifying the objective of the exercise or its output in terms of deliverables, thereby serving as base documents, regulating the business relationship between the enterprises. The total consideration would be for: a) Development and improvement programme; b) Providing information and scientific knowledge. The project was to be completely in three phases, each beginning upon satisfactory completion of the preceding one, so that time, though of significance, was not of essence, with an expected time schedule thereto, as: Phase I : Model phase - 30 weeks Phase II: for Delhi region - 20 weeks Phase III: other regions - 30 weeks As stated, Phase III was abandoned, so that it continued only upto the completion of Phase II. The project was aimed at improved market share and as also impro....
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....inary analysis and proposals, followed by a detailed study. The study is to be followed by its actual implementation, i.e., of the contents of the study, entailing what is required to be done and how. Constant feedback, which again has two variants thereto - formal and informal, on a regular and defined basis, and review, is contemplated, so that correctives and changes, validating or revising the assumptions made, are applied and the implementation stays on course, i.e., toward the desired objective, and provided for. It is, thus, as apparent, essentially an interactive exercise, and which is to assume various forms, viz. interviews, interactions, exchanges, meetings, training sessions, seminars, etc., as suitable for the specific objective at hand. Understandably, therefore, the assessee-company operates at all the three management levels. At Tier I or the base level, consultants (5 to 8) are to work full time as a team during the course of the project. This is subject to supply of additional resources, if so considered by Renoir management, though at no extra cost to GPI, who is also required to dedicate 10 to 15 of its employees full time on the project, and which is designated....
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....ob, as of a salesman, has necessarily to be a shifting one; it being fixed in terms of its' operating parameter/s, and the continued physical presence in India at the different locations being as warranted by the exigencies of the contract, which is undisputed. The claim of the personnel only executing planning and supervising work, is again without substance and contradictory of the contract work as profiled by the documents, and as stated here-inbefore. Here we also clarify that a fixed place of business, as contemplated in the definition of PE under Art. 5, does not at all imply or is confined to a place where the top management of the company is located. Thus, apart from the import of the said argument in the context of the present case being not clear, it is even devoid of any merit. A branch of an enterprises may well be its' PE; only the profit attributable to the same being liable to be taxed in the source State. The assessee's next argument is that no place of business, apart from meetings with its personnel, has been assigned or made available by the GPI to the assessee's team. The argument is devoid of any substance whatsoever. Firstly, it is to be appreciated that it is....
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.... is the independent collection, collation, analysis and review, etc. of the data/information being sought from the organization during any phase of the project management. That thus some place is at the disposal of the assessee or its employees during the entire period of the stay in India is, thus, manifest and eminent and follows unmistakably from the work nature/profile and the modus operandi followed. The argument thus is of no moment. 4.7 We may next consider the assessee's reliance on case law. In fact, the same, based on the standard texts, as the OECD commentary or that by Professor Klaus Vogel, has been made by both the parties before us. We have in fact reproduced from the decisions in the case of Visakhapatnam Port Trust (supra) and Airlines Rotables Ltd. (supra), relied upon by the assessee, capsuling their ratios. The issue, as we discern, and, as clarified, is principally and primarily factual, and our decision follows a factual examination of the matter. As such, reliance on the case law, apart from the thrust on the legal concept of PE, which has been followed/adopted, is of little moment. We, accordingly, do not consider it necessary to dwell on the facts of each ....
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....art allowance of the business expenditure as confirmed by the first appellate authority for A.Y. 1999-2000 qua which both the parties are in appeal. 8. As regards the Revenue's appeal, it agitates the deletion of the disallowance made with reference to sections 40(a)(iii) (wrongly written as '40(a)(ia)' by the A.O.) and 44C. The same is covered by the decision by the tribunal in the assessee's own case for A.Y. 1997-98, even as clarified by the first appellate authority. The limitation as regards the actual expenses, made particularly with reference to section 44C, has also been clarified by him as not applicable in view of Circular No.333 dated 02.04.1982 by CBDT, so that Art. 7(3) of Indio-Mauritius DTA would prevail. No argument, much less material, has been led by the Revenue before us. The assessee in fact also argues that no tax is deductible in view of Art. 15 of the DTAA. We, accordingly, have little hesitation in following the decision by the tribunal in the assessee's own case for the preceding year, as well as the CBDT circular, to confirm the impugned orders on these grounds. The Revenue, accordingly, fails. 9. The only other issue raised by the assessee per its appe....