TaxTMI 
TaxTMI 
2016 (5) TMI 371
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....s. Maruti Udyog Limited was not taxable by reason of article 12(2) of the Double Taxation Avoidance Agreement ?" 3. The respondent assessee is a company incorporated in Japan and is being assessed to tax in Japan. The assessee supplies equipment from Japan on the basis of the global tenders floated by Maruthi Udyog Ltd. ("MUL"). The supplies were made against separate and independent purchase orders ("POs") issued by MUL. Separate purchase orders were also raised for "supervision and installation". According to the assessee, neither the monies received for the supplies, nor the supervision fee is taxable in India as supervision fee is integral to the provision of supplies. However, the assessee accepted the Revenue's contention that the supervision fee is taxable in India as fees for technical services (FTS) in terms of article 12(5) of the Double Taxation Avoidance Agreement ("DTAA") between India and Japan. 4. In the assessment orders dated March 27, 1997 and March 23, 1998, for the assessment years 1994-95 and 1995-96 respectively, the Assessing Officer ("AO") held that the fees for technical services was taxable as business income under article 7 read with article 12(....
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....tion Avoidance Agreement between India and Japan came into force from November 29, 1989. Article 12 of the Double Taxation Avoidance Agreement, the relevant portions of which pertains to payment of royalties and fees for technical services, reads as under (see [1990] 182 ITR (St.) 380, 389) : "Article 12 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 20 per cent. of the gross amount of the royalties or fees for technical services. 3. The term 'royalties' as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any p....
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....ry ; (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 a period of more than six months. 3. A building site or construction, installation or assembly project constitutes a permanent establishment only if it lasts for more than six months. 4. An enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it carries on supervisory activities in that Contracting State for more than six months in connection with a building site or construction, installation or assembly project which is being undertaken in that Contracting State. 5. Notwithstanding the provisions of paragraphs 3 and 4 an enterprise shall be deemed to hav....
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....s to be noticed is that during this very period, the assessee started expanding its activities in India and established project offices for the following three separate projects : (i) A project at Raichur with the Karnataka Power Corporation. (ii) A project at Basin in Tamil Nadu. (iii) A paint and assembly shop for Maruthi Udyog Ltd. 12. The last mentioned project office was established with the approval of the Reserve Bank of India dated September 15, 1992, granted under section 29(1)(a) of the Foreign Exchange Regulation Act, 1973. This was for the purposes of designing, engineering, supply and installation of the YE2 car project, whereunder there would be expansion of the car production between 70,000 to 90,000 cars per year. 13. For assessment year 1994-95, the assessee filed its return of income disclosing an income of Rs. 3,49,82,616. The assessee received fees for technical services for supervision of the installation of the machinery and equipment supplied by it to Maruthi Udyog Ltd. in the sum of Rs. 2,35,86,939. By a letter dated July 18, 1996, the Assessing Officer called upon the assessee to explain as to why the said sum received as fe....
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....es as business income under article 7 read with article 12(5) of the Double Taxation Avoidance Agreement. The assessee preferred an appeal before the Income-tax Appellate Tribunal. 17. Before the Income-tax Appellate Tribunal, at the instance of the assessee, an additional ground was framed on July 15, 2003 as under (page 313 of 31 ITR (Trib)) : "Whether on the facts and in the circumstances of the case and in law, the supervision fees earned on account of the supply of equipment could be taxed as 'fees for technical services', even though they are integral and incidental to the supply of equipment, since the supervision fees received by it on account of the supply of equipment are inextricably and essentially linked to the supply of equipment, and hence, should in all fairness partake the same character as the supply of the equipment as it is nothing else but a supply of equipment simpliciter." 18. By order dated May 31, 2007, the Income-tax Appellate Tribunal held that the supervision fee is taxable under article 12(2) since the assessee did not have a permanent establishment and the supervisory activities in respect of the installation of the equipment wer....
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....st submitted by Ms. Suruchi Aggarwal that the concurrent findings of both the Assessing Officer and the Commissioner of Income-tax (Appeals) were that the assessee had its permanent establishment in India. It was admitted by the assessee during the course of assessment proceedings that there were multiple contracts all related to Maruthi Udyog Ltd. The assessee's office in India agreed to the deduction of tax at source at 30.25 per cent. which in fact would locate the transaction within article 12(5) read with article 7(3) of the Double Taxation Avoidance Agreement. It was further submitted that a perusal of the purchase orders placed by Maruthi Udyog Ltd. on the assessee, which have been set out in a tabular form in the earlier order dated May 31, 2007, passed by the Income-tax Appellate Tribunal, would show that the specification of days of supervision was essentially the basis for calculation of supervision fees which was one of the components of the order. The other component was the supply of the equipment itself. Some of the orders, having the value of Rs. 100-200 crores, involved man days of 364, 478 and 730. While the Income-tax Appellate Tribunal answered the question ....
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....20 per cent. As regards the alleged admission by the assessee that there it could be taxed at 30.25 per cent., Mr. Aggarwal pointed out that apart from the fact that the assessee had retracted such admission, Maruthi Udyog Ltd. had a legal obligation, without reference to the assessee, to deduct tax at source from the fees for technical services paid. This by no means precluded the assessee from challenging the applicability of the rate of tax deducted at source at 30.25 per cent. 25. As far as the question framed by this court is concerned, the issue that arises is whether the tax deducted at source from the fees for technical services paid by Maruthi Udyog Ltd. to the assessee should be 20 per cent. in terms of article 12(2) or 12(5) read with article 7 of the Double Taxation Avoidance Agreement ? This in turn raises the question of whether, for the activity of supply of equipment by the assessee to Maruthi Udyog Ltd., with or without supervision of the installation, it could be said that the assessee had a permanent establishment in India ? 26. Under article 7 of the Double Taxation Avoidance Agreement, the assessee would be liable to pay taxes in India if it carried on th....
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....cerned, there was no effective connection between the execution of the purchase orders for supply of equipment and supervision of their installation, and, the project office for the paint and assembly shop of the YE2 car project of Maruthi Udyog Ltd. Additionally, as pointed out by Mr. Aggarwal, the supervisory fee paid by Maruthi Udyog Ltd. was on the basis of "man days". The number of days per supervisor was calculated by dividing "man days" by the "number of supervisors". If 10 supervisors had stayed for 100 man days, the supervision period would be 10 days only, though the "man days" are 100. Thus, the period of stay would be only of 10 days and not 100 days. 30. As regards the contention that the assessee had conceded the position that Maruthi Udyog Ltd. could deduct tax at 30.25 per cent., it is seen that the liaison offices only facilitated the communication between the head office and Maruthi Udyog Ltd. The explanation that its letter on the rate of tax deducted at source was given only to expedite the payment from Maruthi Udyog Ltd., appears plausible. The assessee offered the fees for technical services to tax at 20 per cent. and claimed refund. The court is unable to ....