TaxTMI 
TaxTMI 
2016 (4) TMI 413
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....esearch Shipyard. The terms of the Agreement between the Assessee and GRSE is contained in an agreement dated 29.4.2004 which later was amended by memorandum of Amendment to original Agreement on different occasions. The nature of services to be performed by the Assessee is set out in Appendix 1.1 to the Agreement. Appendix 1.1 of the Agreement refers to Section-III of bid document which contains "Terms of Reference". The terms of reference provides for performing various services. The same can be classified as follows: (1) Preparation of concept papers, (2) Preliminary project report (PPR); (3) Detailed project report (DPR); (4) Engineering services; (5) Project management services; and (6) Post - construction service. The consideration payable by GRSE for the services to be rendered by the Assessee is set out in Clause 5.3 of the Agreement. Clause 5.3 of the Agreement refers to Appendix-1.5 to the Agreement. Appendix 1.5 refers to three stages of work to be performed by the Assessee viz., Stage-1 Draft Project Report(DPR); Stage-2 (Design Stage); Stage-3 Construction Supervision Stage. The mode of payment for each stage of work is also given in Appendix 1.5. The relevant portion ....
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....re is no dispute that the status under the Act for the purpose of assessment of income is "Non-Resident Company". Section 4(1) of the Act provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person. Sec.5(2) of the Act (2) the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Sec.9 of the Act provides when income accrues or arises or is deemed accrue or arise in India to a non-resident. Income deemed to accrue or arise in India has different categories of Incomes within its ambit. They are as follows: 1) Any income accruing or arising to an assessee in any place outside India whether directly or ....
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.... Preliminary project report (PPR); Detailed project report (DPR); Engineering services; Project management services; and Post - construction service * The said services were to be performed both from India as well as from the United Kingdom ('UK'). The local services were rendered through independent Indian subcontractors and the foreign services were rendered partly by an independent foreign sub-contractor i.e. Appledore and partly by the Assessee, from its head office in the UK. * Fees for the said services were payable in two parts i.e. foreign currency payment in USD and local currency payments in INR. * The work on the said contract was started in April 2004 and the Assessee has since been filing tax returns in India for incomes earned from the said contract. 6. During the previous year relevant to AY 07-08, the Assessee received a sum of Rs. 2,86,61,214/- from GRSE which sum was credited in profit and loss account. The corresponding expenditure in connection with execution of work in India of Rs. 1,06,81,827/- was debited as an expenditure in the profit and loss account. In the return of income filed for AY 2007-08 the Assessee (filed on 8 N....
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....ear before the expiry of the time prescribed under subsection (1) of section 200 : 2. Issue of disallowance under section 40(a)(i) of the Act, of the payment made to Appledore, on account of non deduction of tax at source, under section 195 of the Act. As we have already seen, the Assessee made payments to non-residents in India under the Act M/S.Appledore, U.K., who acted as sub-consultants. The Assessee entered in a contract with GRSE for rendering consultancy services for modernisation of their shipyard project. The scope of work envisaged- Preparation of concept plan, preliminary project report (PPR) and detailed project report (DPR). Design, detailed engineering, drawing and tender documents for works contract. Project management and construction supervision services. According to the Asssessee, the scope of consultancy services was to be rendered partly from the UK and partly from India. For the purpose of rendering services from the UK, the Assessee had obtained certain services from M/S.Appledore, an independent sub-consultant. The services in India were rendered by local independent sub-consultants, appointed by the Assessee. M/S.Appledo....
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....in India and not otherwise. Explanation I to section 5(2) provides that income accruing or arising outside India shall not be deemed to be arising in India, within the meaning of this section, by reason only of the fact that it has been taken into account in a Balance sheet prepared in India. Therefore, only by reasons of the fact that the payment was made to Appledore by the head office of Gifford in the UK and that such payment is taken into account in the balance sheet of PE in India, it shall not be automatically considered that such income of Appledore is income received in India. The amounts paid to the sub-consultants were claimed as deduction/expenditure in arriving at the income declared in the return of income. According to the AO, the payments made to sub-consultants were payments made to non-residents and therefore in terms of Sec.195 of the Act, the Assessee ought to have deducted at source on such payments in terms of Secc.194J of the Act. The Assessee had not deducted tax at source on such payments. As a consequence, the AO was of the view that the expenditure claimed as deduction cannot be allowed as a deduction in view of the provisions of Sec.40(a)(i) of the Ac....
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....red from the UK and are not taxable in India on account of the following three factors: i) No profits from these services are attributable to the PE in India ii) Services have to be rendered in India, for taxability in India, as per the ratio of the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. iii) The services cannot be taxed under FTS owing to the 'make-available' clause contained in Article 13 of the DTAA 9. With respect to the submission filed on 18 December 2009 as stated above, the Assessee also filed an application under section 144A of the Act, to the Addl. DIT(IT)-I, Kolkata ('ADIT') requesting the ADIT for issuing necessary directions to the AO in this regard. Under Section 144A of the Act, a Joint Commissioner may, on his own motion or on a reference being made to him by the Assessing Officer or on the application of an assessee, call for and examine the record of any proceeding in which an assessment is pending and, if he considers that, having regard to the nature of the case or the amount involved or for any other reason, it is necessary or expedient so to do, he may issue such directions as he thinks f....
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.... the following conclusions: 1. The AO referred to a letter dated 14.9.2009 by the Assessee's representative to the AO wherein they had admitted that it had a PE in India and all income arising or accruing to it is accounted for and taxes are paid. The AO referred to the return of income filed by the Assessee wherein income was offered to tax. The AO also referred to the profit and loss account of the Assessee wherein the entire receipts of the Assessee from GRSE whether in USD or INR is duly credited. Thus the Assessee cannot now go back on his stand that income in question is not taxable in India. 2. According to the AO the contract between the Assessee and GRSE provided for completion of project in three stages. According to the AO the scope of work as per the contract was such as to require continuous involvement of the Assessee and its sub-consultants/associates with GRSE at the project site of GRSE. Even in respect of reports prepared at UK, the necessary technical details had to be collected and scrutinized by the Assessee and its subconsultants/ associates. 3. According to the AO, Appendix 1.3 of the contract between the Assessee and GRSE contained details of foreig....
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....cceptable. 'Principle of consistency' is an important principle of accountancy which should be followed. The final conclusion of the AO was: "f)...there exists a PE in the case of the Assessee in India within the meaning of Article 5 of the Indo-UK DTAA. The consideration for consultancy services provided by the Assessee to GRSE is in the nature of "Fees for Technical Services"(FTS) within the meaning of Article 13 of Indo-UK DTAA. Since the FTS is arising in India and the Assessee is carrying on business in India through a PE situated in India and also since these services are "effectively connected" with the PE in India, therefore the consideration for these services are liable to tax in India under Article 7 of the Indo-UK DTAA by virtue of the provisions of Article 13(6) of the Indo-UK DTAA." 12. The AO thereafter disallowed consultancy charges paid to sub-consultants in India u/s.40(a)(ia) of the Act and payments made to Appledore, UK u/s.40(a)(i) of the Act. The AO also disallowed expenditure to the extent of Rs. 30,09,179 on the ground that the same relates to period prior to the previous year relevant to AY 2007-08. The AO also held that since taxes of the Ass....
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....ining to this phase. Phase - III Issuance of the detailed working drawings to the Contractors (separate from the Assessee), as independently selected by GRSE, for the necessary execution of the work, as required, for the construction. It was submitted that the above being the scope of work to be carried out by the Assessee for GRSE, it can be said that the Contract between the Assessee and GRSE was a composite contract, with different severable parts - services that were rendered Offshore, in the UK, by the Assessee concerned and services that were rendered Onshore, by the independent Indian sub-consultants, appointed by the Assessee. 15. It was pointed out that the Contract Value was payable partly in USD and partly in INR. This was to ensure that, whilst the fees payable to the Assessee for the services (which was rendered from the UK office of the Assessee) would be in USD, the INR part was to accommodate the payments to be made to the Indian subconsultants, by the Assessee. It was pointed out that during the relevant previous year, the Assessee had to visit India, for the purposes of the collection of data and information, which formed the basis of the reports gener....
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....gime is independent of its accounting treatment. In this regard attention was drawn to the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg Co Ltd vs CIT (Central) Calcutta 82 ITR 363 (1971) (SC) wherein it was held that whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. It was argued that preparation of accounts in India incorporating the invoices raised from UK does not have any material effect on taxability of such income in India. 18. In was thus submitted that there was no PE in India in terms of Article 5 of the DTAA and hence no part of income earned by the Assessee during the year ended 31 March 2007, from execution of the contract of GRSE, can be taxed in India. 19. Issue of taxability of payments received in USD The Assessee submitted that it had rendered services and raised invoices on GRSE separately, for services rendered outside India and services rendered in India. The local services had been render....
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....s. DCIT (2003) 86ITD 791, ITAT BOM * Intertek Testing Services India Pvt. Ltd. (2008) 307 ITR 418AAR It was again reiterated that during the relevant AY, the Assessee was involved in Phase-II of the contract with GRSE involving the preparation of the engineering drawings and report. The said services were performed and carried out entirely from the UK with some support obtained from the independent Indian sub-consultants who were paid in INR from Rupee component of the contact value. 20. Without prejudice to the above contention, it was contended that even if the Assessee is deemed to have constituted a PE in India, then the taxability thereof, would be governed by Article 7(1) of the DTAA, which reads as under:- "The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent, establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enter price may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment." The Assessee in this regard dre....
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....s rendered outside India would have nothing to do with permanent establishment in India. Thus if any services have been rendered by the head office of Appellant outside India, only because they were connected with permanent establishment. even in relation thereto, principle of apportionment shall apply." Reliance was also placed on the decision in the case of Clifford Chance vs. DCIT (2008) 318 ITR 237 (Bom.) wherein the transaction entered into by the assessee partly took place in one territory and partly in another. The Hon'ble High Court of Bombay referred to the decision in the case of Ishikawajma Harima (supra). The relevant extract is stated as under: "In the above judgement, Apex Court observed that "Section 9(J)(vii) of the Act must be read with section 5 thereof, which takes within its purview the territorial nexus on the basis whereof tax is required to be levied, namely, (a) resident; and (b) receipt of accrual of income. According to Apex Court, the global income of a resident although is subjected to tax, the global income of a non-resident may not be. The answer to the question would depend upon the nature of the contract and the provisions of the DT A. What....
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....ident from the contract of the Assessee with GRSE, that services rendered by the Assessee from UK have nothing to do with the local activities which are separately performed and accounted for. Such offshore services rendered from outside India are independent and not connected with the activities carried on in India. It was thus submitted that consideration received in USD in respect of the offshore services, is not liable to tax in India: (i) as the said service has not been rendered in India; and (ii) rendering of the said services is not attributable to a PE, even if one such, is alleged to exist in India; 24. Applicability of the provisions of section 115A Without prejudice to the above objections, the Assessee submitted that the tax liability of the Assessee cannot exceed the amount of tax chargeable under section 115A of the Act on gross receipts by way of 'Fees for technical services' ('FTS') as provisions of section 44DA are not applicable from the facts and circumstances of the case. In this regard, the relevant provisions of section 115A of the Act, needs to be looked into. The same reads as under:- "115A(I) Where the total income of- ....
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....dent (not being a company) or a foreign company with Government or the Indian concern after the 31 st day of March, 2003, where such non-resident (not being a company) or a foreign company carries on business in India through a permanent establishment situated therein, or performs professional services from a fixed place of profession 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 permanent establishment or fixed place of profession, as the case may be, shall be computed under the head "Profits and gains of business or profession" in accordance with the provisions of this Act :" FTS would fall within the purview of section 44DA(1) of the Act, only if it is actively connected to the PE of the non-resident in India. PE for the purpose of this section has been defined in section 92F(iiia) of the Act which reads as under:- "(iiia) "permanent establishment", referred to in clause (iii), includes a fixed place of business through which the business of the enterprise is wholly or partly carried on;" It was claimed that in view of the above provisions it would be saf....
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...., without prejudice to the contention that the Assessee does not have a PE in India in terms of the DTAA and its entire income is not chargeable to tax. 28. Issue of claims made by the Assessee without revising the return On the above issue, the Assessee submitted that the action of the AO in not accepting the claim of the Assessee that receipts from GRSE was chargeable to tax in India for the reason that the said claim was made without filing a revised return of income and contrary to Assessee's own claim in the return of income already filed that the receipts in question are chargeable to tax, was not proper. In coming to the above conclusion the AO had placed reliance on the decision of the Hon'ble Supreme Court in the case of Goetz (India) Ltd. (supra) wherein it was held that claim made in the course of assessment proceedings without filing a revised return of income, cannot be entertained by the AO. In this regard, the Assessee placed reliance on the decision in the case of Chicago Pneumatic India Ltd. vs. DCIT 15 SOT 252 (2007) (ITAT) (Del). The Delhi ITAT, in the context of allow ability of new claims during the assessment proceedings without having recourse to a revi....
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....e hold that the Assessing Officer is bound to assess the correct income and for this purpose, the Assessing Officer may grant reliefs/ refunds suo motu or can do so on being pointed out by the assessee in the course of assessment proceedings for which assessee has not filed revised return, although, as per law, the assessee is required to file the revised return ..... " Further, reliance was also placed on the decision in the case CIT vs Ramco International 221 CTR 491 (2008) HC (P&H) wherein the Punjab and Haryana High Court, distinguished the judgement of Goetze allowed the claim of the Assessee which was made in course of the assessment proceedings and not by filing revised return. 29. In view of the above judicial pronouncements, it was submitted that the action of the ld. AO of not allowing the claim of the Assessee due to failure to file the revised return, is bad in law. 30. Issue with regard to disallowance of payments made to M/S.Appledore, UK for non deduction of tax at source by invoking the provisions of Sec.40(a)(i) of the Act: The Assessee submitted before the DRP that it had entered in a contract with GRSE for rendering consultancy services for modernisat....
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....by PE and thereby the distinction between Indian and foreign operations and the apportionment of income of the operation shall stand obliterated. Appledore, being a non-resident in terms of section 5(2) of the Act, would be chargeable to tax in India only in the event of income accrues or arises in India or is deemed to accrue or arise in India or income is received or is deemed to be received in India and not otherwise. Explanation I to section 5(2) provides that income accruing or arising outside India, shall not be deemed arising in India, within the meaning of this section, by reason only of the fact that it has been taken into account in a Balance sheet prepared in India. Therefore, only by reasons of the fact that the payment was made to Appledore by the head office of Gifford in the UK and that such payment is taken into account in the balance sheet of PE in India, it shall not be automatically considered that such income of Appledore is income received in India. Although the PE is required to carry out certain activities in India, the consideration for offshore services rendered by Appledore in the UK, which is not attributable to the work of the PE, should not be considere....
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....nditions have not been satisfied simultaneously. 33. It was submitted that it is true that the Finance Act 2007 has amended section 9 of the Act, with retrospective effect from 1.6.1976, by insertion of an explanation after sub-section (2) providing that interest, royalty, technical fees, will be taxable in India "whether or not the non-resident has a residence or place of business or business connection in India". Since the amendment is to the domestic law, the decision in Ishikawajima Harima Heavy Industries Ltd.'s case rendered in the context of DTAA between India and Japan cannot be taken to be overruled. The place of accrual of income may be required to be determined with reference to DTAA. It was pointed out that even after introduction of an explanation to Section 9 of the Act, through Finance Act 2007, the Bombay High Court has considered the issue in a recent case in the matter of Cl'I' vs. Siemens Aktiongesellschaft (2009) 310 ITR 320 BOM). The issue was whether the Double Taxation Avoidance Agreement between India and Germany overrides the domestic law, which treats the royalty to be taxable as Indian income. Double Taxation Avoidance Agreement between Ind....
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....able to the Assessee. 35. As far as applicability of Clause ( c ) of Article 13(4) of the Indo-UK DTAA is concerned, the Assessee submitted that the said clause contemplates that fees paid should be for making available of the technical knowledge, experience, skill, etc. In other words, the technical knowledge, experience, skill, etc. must be made available to the Assessee, so as to be covered within its scope, and mere providing of such services, without making them available to the Assessee, shall not serve the purpose and hence, will be outside the ambit of the Article. "Rendering of any technical or consultancy service" is followed by "which made available technical knowledge, experience, skill and know-how". In this context it becomes imperative to understand the meaning of the expression "make available" as used in this article. It was submitted that the meaning of the expression "make available" has been aptly considered in the case of Intertek Testing Services India P. Ltd. [(2008) 307 ITR 418 (AAR) as under:- "Now, we shall proceed to analyse further clause (c) of article 13(4). Rendering of service and making use of service go together. They are two sides of the same c....
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....n taken in the case of Mahindra & Mahindra vs. DCIT (2009-TIOL-255- ITAT-MUM-SR) and Reymonds Ltd. vs. DCIT (2003) 86ITD 791, ITAT BOM, wherein it was held that mere rendering of service is not enough as it requires that such rendering of service should make available technical knowledge, skill, etc. to the receiver of service, who can use such knowledge in future for the business without the aid of service provider and thus, there should be some permanence of the service provided. 36. It was submitted that in the case of the Assessee, GRSE has not gained any technical knowledge, skill, etc. as a result of service provided to it, which can be subsequently utilized by it. Thus, payments made by it, for services provided do not fall within the scope of FTS, as laid out in Article l3( 4)( c) of DT AA and, as such, the payments made by the Assessee were not taxable in India and the Assessee was not under obligation to deduct tax. It was thus submitted that Article 13 of the DTAA does not apply to the instant case. Payment made by head office of Gifford to Appledore for rendering services in the nature of preparation of concept papers, preliminary project report ('DPR') and d....
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....as borne by GRSE. During the year ended 31 March 2007, the net consideration (net of TDS borne by GRSE) received in USD (converted into INR) amounted to Rs. 24.393,589. It was submitted to the Id. AO that the 'grossing up' was done as per the provisions of section 195A of the Act, for the purpose of computation of TDS liability and that there is no need to recognize such notional income as there is no provision either in section 2(24) or in section 28 of the Act for deeming the same as income/profits and gains from business. The Id. AO, in his impugned order, expressed the view that the Assessee was deriving benefit within the meaning of section 28(iv) of the Act by way of crediting the net consideration in the audited accounts and claiming the credit of TDS on the 'grossed up' amount. The certificates of GRSE totalled to Rs. 28,126,740 whereas the Assessee has accounted for only Rs. 24,393,588 in the audited profit and loss accounts. Therefore the difference of Rs. 37,33,151 was added back to the total income of the Assessee. The limited prayer of the Assessee before DRP was to direct the Id. AO be directed to give consequential relief to the Assessee with regard t....
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....dness of the services rendered to GRSE and in the event of any deficiency in the services, the consultant was required to re-do such services for which GRSE was not required to pay any additional compensation. In Appendix-1.3, the personnel employed by the consultant in all the three stages included foreign staff of Gifford and its associate enterprise - 'Appledore', In Appendix-1.4, it is mentioned that GRSE would provide to the consultant i.e. the assessee air-conditioned office space of about 50 sq. mt. inside the Garden Reach Shipyard with a telephone and fax facility for the duration of the Contract and the consultant had to bear the charges for local, STD & ISD calls, faxes & e-mail for all the three stages of the project. These facts as per the Contract clearly indicate that the assessee maintained permanent office in India for rendering consultancy services to GRSE. Article-5 of DTAA between India & the UK defines the term 'permanent establishment' to include 'an office'. The assessee has maintained office at the place of GRSE in India, therefore, the assessee had permanent establishment in India in the year under consideration for rendering consulta....
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....ave any PE in India, and without prejudice to this claim, the income earned by it in USD was not connected to the PE in India. The AO besides dealing with the assessee's fresh claims on merits held that the assessee's fresh claims without filing a revised return could not be entertained in view of the decision of the Apex Court in the case of Goetze (I) Ltd. vs. CIT, 284 ITR 323. The assessee contested the AO's findings relying on the decisions in the case of Chicago Pneumatic India Ltd. vs. DCIT 15 SOT 252 (2007) (ITAT) (Del) and in the case of CIT vs. Ramco International 221 CTR 491 (2008) HC (P & H). The ITAT Delhi in the above mentioned decision considered the decision of the Apex Court (supra) and held that the revised claim u/s.80HH & 801 should be allowed in view of the CBDT's Circular F. No. 81/27/65-ITCB), dated 18th May, 1965. The facts of the cited case law were that the assessee made claim for deductions u/s.80HH & 801 in the original return and later filed a revised return in which the claim of deductions u/s.80HH & 801 was not revised; however, the assessee made revised claim of said deductions by filing a revised working during the assessment proceedi....
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....r the Contract. GRSE made payment directly to the consultant and not to Appledore. The head office of Gifford in UK made payment to Appledore at UK for the services provided by it to Gifford in connection with GRSE project located in India. The entire amount of consultancy fee was included in the accounts of PE and expenses by way of payment to Appledore were claimed in the accounts of PE. The place of services rendered by Appledore and also the place of payment made to Appledore were immaterial as long as the source of income was in India and the expenses were claimed against the receipts arising from the said source of income. Section 9 of the LT. Act, 1961 was amended by the Finance Act, 2010 w.e.f. 01.06.1976 by substituting the Explanation occurring after sub-Section 2 as under: "Explanation. - For the removal of doubts, it is hereby declared that for the purpose of this Section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-Section (1) and shall be included in the total income of the nonresident, whether or not, - (i) the non-resident has residence or place of business or business ....
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....ding that the payment made by the assessee to Appledore was for transfer of technical plan or technical design falling within the purview of FTS in terms of the second limb to clause (c) of Article 13(4) of the DTAA. d) In view of the discussions at item (c) above, the payment made by the assessee to Appledore was covered by Article 13(4)(c) of the DTAA because the services rendered by Appledore were to 'make available' of technical knowledge, skill or expertise by Appledore. The ratio of the decision in the case of Intertek Testing Services India P. Ltd. (2008) 307 ITR 418 (AAR) supports the finding of the AO because the technical report and design prepared and submitted by Appledore were for the specific GRSE project and the same was to be utilized only by GRSE and no one else for the entire period until the completion of the said. project and even afterwards for diagnosing and correcting any fault in the project, if noticed at a later date. As such, the technical knowledge, design and experience of Appledore were made available to the assessee who in turn made the same available to GRSE for permanent use in its project. Therefore, the AO was justified in holding that ....
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....dition made by him was otherwise correct in law. The amount of tax deducted at source is deemed income of the payee (i.e. the assessee) as per the provisions of Section 198 of the Act. The payer (i.e. GRSE) of the income treated the amount of TDS as part of outgoing for the purpose of claiming deduction in its computation of total income. Section 199 states that the credit for TDS can be granted to the payee only when the income on which the tax at source has been deducted is included in the computation of total income of the payee. The assessee (i.e. the payee) claimed credit of TDS on the payment made by GRSE (i.e. the payer) but did not include the full amount of receipt from GRSE. The treatment given by the assessee in its accounts as well as in computation of its total income was contrary to the provisions of Section 198 & 199 of the Act. In view of this legal position, the difference amount of Rs. 37,33,151 was correctly added by the AO to the total income of the assessee." 42. The AO passed the fair order of assessment dated 21.9.2010 giving effect to the directions of the DRP. Aggrieved by the order of the AO dated 21.9.2010, the Assessee is in appeal before the Tribunal....
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....issions. The submissions made by the learned counsel for the Assessee was identical to the submissions as were made before the DRP. The submissions made by the learned DR were identical to the reasons given by the DRP for its conclusions on the various issues. 44. We have given a very careful consideration to the rival submissions. As we have already seen, the Assessee is a foreign company incorporated in United Kingdom. It is engaged in the business of providing consultancy services for execution of projects. Garden Research Shipbuilders and Engineers Ltd.,(GRSE) is a Government Company. GRSE was desirous of carrying out modernisation of its existing shipyard and approached the Assessee to provide conlsultancy service for modernisation of GRSE's Garden Research Shipyard. The terms of the Agreement between the Assessee and GRSE is contained in an agreement dated 29.4.2004 which later was amended by memorandum of Amendment to original Agreement on different occasions. 45. The nature of services to be performed by the Assessee are set out in Appendix 1.1 to the Agreement. Appendix 1.1 of the Agreement refers to Section-III of bid document which contains "Terms of Reference". Cl....
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....awings, specifications, designs, reports and other documents prepared by the Consultant in performing the Services shall become and remain the exclusive property of GRSE, and the Consultant shall =, not later than upon termination or expiration of this Contract, deliver all such documents to GRSE, together with a detailed inventory thereof. The Consultant shall not use the said documents for purposes unrelated to this Contract in any manner whatsoever." 48. The Contract between the Assessee and GRSE gives the general nature of services for which the Assessee was being engaged as follows: "WHEREAS GRSE intends to and/or is desirous of carrying out Modernisation of its existing shipyard (hereinafter referred to as the Project) and the Consultant, having represented themselves as technically capable of and/or possessing professional qualification, skill, personnel infrastructure and all other technical resources, have submitted their offer to provide all required technical and ancillary services for providing Consultancy Services for Modernisation of Garden Reach Shipyard and whereas GRSE have accepted the said offer of the Consultant under the terms and conditions as mentioned ....
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....ll be deemed to accrue or arise in India :- (vii) income by way of fees for technical services payable by- (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : ...... Explanation [ 2].-For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction , assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". 51. Section 9 of the Act, was....
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....rtant part and if the income arises out of operations in more than one jurisdiction, it would not be correct to contend that the entire income accrues or arises in each of the jurisdictions. The High Court applied the law laid down by the Supreme Court in the context of s. 9(1)(i) that if all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to the operations carried out in the taxable territories. The applicability of the Amendment referred to above viz., insertion of explanation to Sec.9(2) of the Act in the context of Sec.9(1)(vii), was not considered at all by the Tribunal. 52. Having held that the income in question accrues and arises in India and therefore taxable in India, we will now proceed to examine the taxability of the income in question under the DTAA between India and UK. Article 13 of the DTAA provides for taxation of income in the form of Fees for Technical Services between the source country (India) and the resident country (UK). The relevant clauses of the DTAA provides as fol....
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.... paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other 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 permanent establishment or fixed base. In such case, the provisions of Article 7 (Business profits) or Article 15 (Independent personal services) of this Convention, as the case may be, shall apply. 7. Royalties and fees for technical services shall be deemed to arise in a Contracting State where the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection wit....
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....he said clause contemplates that fees paid should be for making available of the technical knowledge, experience, skill, etc. In other words, the technical knowledge, experience, skill, etc. must be made available to the Assessee, so as to be covered within its scope, and mere providing of such services, without making them available to the Assessee, shall not serve the purpose and hence, will be outside the ambit of the Article. "Rendering of any technical or consultancy service" is followed by "which made available technical knowledge, experience, skill and know-how". The contention of the Assessee is that the meaning of the expression "make available" has been considered in several judicial pronouncements and the essence of those decisions was that , the technical or consultancy service rendered should be of such a nature that "make available" to the recipient technical knowledge, know-how and the like. The service should be aimed at end result in transmitting the technical knowledge, etc., so that the payer of service could derive an enduring benefit and utilize the knowledge or know-how in future on his own without the aid of the service provider. By making available the techn....
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....uestion whether the Assessee had a permanent establishment in India. In all Double Taxation Avoidance Agreement the basic concept is that an enterprise should be liable for tax on profits earned in a country that is not the country of residence of the enterprise, unless the enterprise has a real and significant or substantial economic nexus with the country in which the profits accrue. An enterprise will only have such a real and significant or substantial nexus if it carries on business in the other country through a permanent establishment in that country. Article 5 of the DTAA lays down rules with regard to determination of the question as to when an enterprise can be considered as having a PE in the source country (i.e., the country from which income accrues or arises to the enterprise). ARTICLE 5 PERMANENT ESTABLISHMENT 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" shall include especially : (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) ....
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....ly 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 paragraph; (f) the maintenance of a fixed place of businesses solely for any combination of activities mentioned in sub-paragraphs (a) to (e) of the paragraph, 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 to whom paragraph (5) of this A....
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....hysical presence e.g., some premises or equipment, which are used in business; (b) Place of business should be fixed in the sense that it is a distinct place which exhibits some degree of permanence. The fact that an enterprise has a certain amount of space at its disposal, which is used for business activity is sufficient to constitute a place of business. No formal legal right to use that place is therefore the requirement. (c) The enterprise should not only have a fixed place of business but also wholly or partly business should be carried on thought that fixed place. Carrying on of business involves the carrying on in a country of virtually any activity related to the business of the enterprise. Article 5(1) contains what is referred to as basic-rule PE. Article 5(2)(a) to (k) contains examples (positive definitions) of rule contained in Article 5(1) and Article 5(3) are exceptions to PE (negative definition). 59. It has been the contention of the Assessee that for a place or an office to be treated as PE. it must be at the disposal of the enterprise i.e. the assesssee must be able to occupy the premises in its own right and use the same for the purpose of carrying its busin....
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....he Philip Baker's commentary on Treaties which states as under.- (Relevant extracts of Philips baker PB Page 348 to 350). "A requirement of the fixed place of business. which is implicit in Article 5(1). is that the place of business must be at the disposal of the enterprise. The Commentary at paragraph -4 makes it clear that the premises need not be owned or even rented by the enterprise, provided they are at the disposal of the enterprise .... This has given rise to some difficulties where premises are made available to a foreign enterprise for the purposes of carrying out particular work on behalf of the owner of the premises in that situation, the space provided is not lit the disposal of the enterprise since it has no right to occupy the premises but is merely given access for the purposes of the project. "...... the fixed place of business need not be owned or leased by the foreign enterprise provided that it is at the disposal of the enterprise in the sense of having some right to use the premises for the purposes of its business and not solely for the purposes of the project undertaken on behalf of the owner of the premises." 62. Reference was made to the OECD ....
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....a positive finding about existence of the PE, not only that there should be a physical location through which the business 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. .. As far as the consideration for use or right to use the replacement equipments 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 t....
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....ces, it has to be concluded that there was a PE in existence in India. It was further submitted that the services rendered by the assessee to GRSE were of technical nature in terms of provisions of section 9(1)(vii) of the Income- tax Act, 1961 read with Article 13 of the India-UK DTAA and the contract as a whole in respect of which the fees for technical services arose and that such payment was effectively connected with the PE in India. Therefore, Article 13(6) would apply and the gross receipts by way of fees for technical services (received by the assessee both in foreign currency and Indian currency) are includible in the computation of business income/ profits of the PE in India, for which the provisions of section 44DA would apply. He also relied on the orders of the revenue authorities and the fact that in the return of income originally filed, the assessee did not deny the fact that there existed a PE of the Assessee in India and accounted for the entire fees received from GRSE both in foreign currency and in Indian rupees and claimed deduction of expenses in the computation of business profits of the PE. In all other respects, the DR relied on the order of the AO/DRP. ....
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....was for the limited purpose of rendering of services agreed between the Assessee and GRSE. The commentaries of Philip Baker on Treaties and OECD guidelines and decisions referred to by the learned counsel for the Assessee support the plea of the Assessee that it had no PE in India. The Revenue came to the conclusion that the Assessee had a PE in India mainly on the basis of existence of an office at GRSE's shipyard. That alone was not sufficient to come to such a conclusion. The fact that the Assessee filed a return of income including all receipts from the contract with GRSE cannot be the basis to come to a conclusion that there was an admission by the Assessee that it had a PE in India. Existence of PE in India has to be established on the basis of evidence and by application of the requirements as contemplated in DTAA. 70. On the question whether the Assessee having filed a return of income admitting income on the basis that it had a PE in India can thereafter make a claim that there was no PE of the Assessee in India without filing a revised return of income, we find that the AO in coming to the above conclusion, had placed reliance on the decision of the Hon'ble Supreme Cou....
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....see fulfills condition (i) and condition (ii) as mentioned above. As regards condition no. (iii), the provisions of sub-section (1) of section 44DA of the Act, FTS would fall within the purview of section 44DA(1) of the Act, only if it is actively connected to the PE of the non-resident in India. PE for the purpose of this section has been defined in section 92F(iiia) of the Act which reads as under:- "(iiia) "permanent establishment", referred to in clause (iii), includes a fixed place of business through which the business of the enterprise is wholly or partly carried on;" We have in the earlier paragraphs already held that there was no PE in Indi in the form of fixed place of business through which the business of the Assessee was wholly or partly carried on in India. As such, the Assessee would be entitled to the benefit of the provisions of section 115A of the Act and be taxed at 20% of the Gross receipts. We also hold that tax liability borne by GRSE will also need to be grossed up for arriving at Gross receipts of the Assessee and after such grossing up such receipts have to be taxed at 20%. We hold accordingly. 74. In view of the above conclusion, the issue with re....
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....ents to the non-resident had defaulted in deducting the tax at source from such payments. the non - resident is not absolved from payment of taxes thereupon. However, in such a case, the non-resident is liable to pay tax and the question of payment of advance tax would not arise. This would be clear from the reading of Section 191 of the Act along with Section 209 (1) (d) of the Act. For this reason. it would not be permissible for the Revenue to charge any interest under Section 234B of the Act. . Reliance was also be placed on following decisions laying down identical proposition as set out above. DIT(lnternational Taxation) v Maersk Co. Ltd. 2011) 198 Taxman 518 (Uttarakhand) (FB). Sedco Forex International Drilling v Dy ClIT [2000] 72 ITD 415 (Del); Rheinbraun Engg. & Wasser Gmbh v DCIT 1. T. A 0.1915/ Born / 96 dated 3 October 1997 (Bom); M.M. Ratnam v ITO [1997] 62 ITD 21 (Bom);Asia Satellite Telecommunications Co. Ltd v DCIT [2003] 78 TTJ 489 (Del); DIT v NGC Network Asia LLC [2009] 313 ITR 187 (Bom); CIT v Tide Water Marine International Inc. [2009] 309 ITR 85 (Uttaranchal); and Commissioner of Income-tax and Others v Ranchi Club Ltd (2001) 247 ITR 209. Therefore, it was....