AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2019 (1) TMI 542
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ITA 666/2017 & ITA 837/2017, ITA 645/2017; ITA 654/2017; ITA 657/2017; ITA 668/2017; ITA 684/2017 & ITA 688/2017, ITA 647/2017; ITA 670/2017; ITA 686/2017 & ITA 687/2017, ITA 648/2017; ITA 649/2017; ITA 660/2017; ITA 661/2017; ITA 678/2017; ITA 679/2017 & ITA 836/2017, ITA 650/2017; ITA 651/2017; ITA 662/2017; ITA 663/2017; ITA 664/2017; ITA 680/2017; ITA 681/2017 & ITA 682/2017, ITA 656/2017; ITA 665/2017; ITA 683/2017 & ITA 838/2017, ITA 828/2017, C.M. APPL.35327/2017, ITA 839/2017, ITA 840/2017; ITA 841/2017 & ITA 842/2017, ITA 843/2017; ITA 844/2017; ITA 845/2017; ITA 846/2017; ITA 847/2017; ITA 848/2017; ITA 849/2017 & ITA 850/2017, ITA 851/2017, ITA 852/2017, ITA 853/2017; ITA 854/2017; ITA 855/2017; ITA 856/2017 & ITA 857/2017; ITA 858/2017& ITA 859/2017, ITA 860/2017; ITA 861/2017; ITA 862/2017; ITA 863/2017 & ITA 864/2017; Through: Mr. Sachit Jolly and Mr. Siddharth Joshi, Advocates, for appellants. Mr. Ruchir Bhatia, Sr. Standing Counsel, for the respondent. MR. S. RAVINDRA BHAT 1. The present statutory appeals, under Section 260A of the Income Tax Act, 1961 (hereafter "the Act") are directed against the order dated 27.01.2017 (hereafter "impugned order") pas....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rious businesses of the GE Group. GEIOC had on its payroll more than 50 employees and the designation of such employees was mostly as Head India Operations. These assessees contended that employees are deputed to various GE companies and they work as their employees and they remain on the payroll of GEIOC till their transfer to other entities. In terms of the application made to RBI and permission obtained, the liaison office was to act as a communication channel between the head office and the customers in India. The assessees did not file returns of income for any year. 5. A survey under Section 133A of the Act was conducted on 02.03.2007 in the premises of GEIOC at its AIFACS, 1 Rafi Marg, New Delhi and it was concluded that GEIOC's liaison office ('LO") started operating in India from July 01, 1987. It was set up to undertake liaison activities. From the information available, it is seen that GEIOC has employed various persons and is sending these employees on assignments to GE entities located worldwide. From these premises, other entities, incorporated in India as well as non-resident entities of the GE group were also operating. During the course of survey statement of Sh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion of proceedings under Section 147/148 of the Act and existence of PE and attribution of income but allowed appeal on the issue of levy of interest under Section 234B of the Act. Aggrieved by the order dated 30.09.2010, the appellants preferred an appeal before the ITAT. GE Group submission to the ITAT 9. The Appellant submitted that the technology and not marketing enabled it to be successful in their business - since products are so sophisticated, marketing is a minimal component of the sale. All strategy decisions reside with the applicant outside India - work in India is only limited to providing market inputs and interface. In this case, the LO is only collecting information about potential customers in India and passing on this information to its non-resident businesses; and creating awareness of the business products. 10. Further, the Appellant submitted that mere participation in negotiations or even negotiation of some terms of the contract by employees of non-resident tax payer does not result in a PE unless all terms of the contract are negotiated and finalized by such employees. The OECD Commentary goes on to state that mere attendance/participation in negot....
X X X X Extracts X X X X
X X X X Extracts X X X X
....acter. It was also held that Article 5 (4) stated that where a person, other than an agent of independent status to whom Article 5 (5) applies, and fulfils the conditions as set out in the Article 5(4), that person will constitute a PE of the enterprise. It was furthermore held that the first part of Para 5 refers to an agent of independent status and the second part of that para refers to an agent of independent status who is not considered an agent of independent status because of the conditions set out in the said paragraph. Thus, it follows, that the 'person' referred to in para 4 refers to an agent of dependent status and also an agent of an independent status who is covered in part 2 of para 5. Exception to the first part of para 5 created in part 2 is restricted only to 'an agent of independent status'. On the other hand, if there is an agent of dependent status per se whose activities are devoted to one or multiple related enterprises, he will be directly covered within the scope of para 4 of Article 5 of the DTAA. Therefore, ITAT observed that the nature of activities done by GE India, were of a core nature, and they demonstrated its authority to conclude contracts on beha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s undertaken by any of the appellants in India. However, the AO found [and the CIT confirmed- as did the Dispute Resolution Panel ("DRP")] and later, the ITAT that a part of the sales function is done in India through expatriates, which are deputed by the appellants along with a team of employees of GEIIPL and, therefore, the office space occupied by such expatriates along with the employees of GEIIPL constitute a fixed place PE. The lower authorities also held that such expatriates along with GEIIPL's employees had authority to conclude contracts on behalf of the appellants and, therefore, constituted Dependent Agent PE ("DAPE"). 17. Counsel stated that to conclude the existence of a fixed place (PE) and DAPE, the ITAT relied upon three sets of documents: (a) Appraisal Reports of the expatriates and the employees of GEIIPL; (b) Certain emails collected during survey conducted at the liaison office of GE International Operations Company ("GEIOC") in India and statements recorded during survey; and (c) submissions dated 14.11.2008 filed by the appellant before the AO. GE urges that ITAT's findings are incorrect, both on law and facts. As to fixed place PE, it is submitte....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ll part of the sales function, cannot be said to be the core business activity for the appellants. The revenue, having failed to prove that the personnel in India had the authority to close and conclude contracts on their own volition and accord, could not have proceeded to treat the existence of the personnel as constituting a PE in India. 20. Counsel emphasized that it is settled law that the question whether an activity constitutes preparatory and auxiliary activity or core business function is not to be judged from the viewpoint of importance of the function but from the viewpoint of its role in the overall business of the foreign enterprise. [Refer UAE Exchange Centre Ltd. v. Union of India 2009 (313) ITR 94 (Del). In the present case, it is undisputed that research and development, design, fabrication and manufacture of equipments all happened outside India. It is also undisputed that title of the goods passes of the Indian customers outside India and no marketing activity is done in India. Therefore, if a small portion of the sales function, i.e. participation in negotiation takes place inside India, no fixed place (PE) can be set to exist because such activity which is p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ary on Article 5 are relied upon by Mr. Jolly. 23. It is argued that Article 5(5) further restricts Article 5(4) and states that if the agent in India is not dependent on the foreign principal and the agent acts in ordinary course of business, then no DAPE can be said to exist. Counsel submitted that in present case, the revenue alleges that the same set of expatriates and employees of GEIIPL render services to more than 24 foreign enterprises. This submission of the revenue that these expatriates together constitute dependent agents of 24 entities is self-defeating. In fact, GEIIPL, apart from rendering these services, for which it is compensated on arm's length basis, has 12 different business divisions and they cannot be said to be dependent, whether economical or legal, on the various appellants herein. On that ground alone, the case of the revenue, insofar as the existence of DAPE must fall. Learned counsel relied on Varian India (P) Ltd. v. Additional Director Income Tax 2013 (142) lTD 692 (Mum). 24. It is urged by the appellants that in any case, the expatriates and employees of GEIIPL neither had the authority, whether expressed or implied to conclude contracts in Ind....
X X X X Extracts X X X X
X X X X Extracts X X X X
....il@ page no.23.Similarly, the statements of Mr. Chandan Jain or Mr. Rupak Saha do not even remotely suggest that the expatriates or the employees of GEIIPL had the authority to conclude contracts on behalf of the appellants herein. 27. It is submitted that the impugned order has obfuscated the authority to negotiate and participate in negotiation, with the authority to conclude contracts. It is apparent from a bare perusal of the submissions filed by the Appellant that the expatriates and the employees of GEIIPL merely provided sales support and participated in negotiation, without any express or implied authority to conclude contracts. Therefore, the reliance placed upon the submissions dated 14.11.2018 is out of context and perverse. 28. It was next argued that pursuant to the Global Services Agreement dated 26.01.2001, GEIIPL was required to render sales support services to GEIOC and all affiliates of GEIOC including the appellants here. It is also an admitted position that for rendering such services, GEIIPL was remunerated at arm's length. In fact, transfer pricing orders were passed in the case of GEIIPL both pre and post survey and continue to be passed till date and i....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Ruchir Bhatia, learned counsel argued that the lower authorities correctly refused to accept the assessee's contentions that sale consideration was not taxable in India as the title in respect of the equipments was transferred outside India and the payments were also received outside India. It was pointed out that several activities relating to marketing and sales took place in India. Expatriates from GEII along with employees of GEIIPL constituting the Indian team were mostly involved and participated in the negotiation of prices. These price negotiations took place in India. The Indian customers discussed MOD terms with the Indian team. These facts, in the opinion of the AO, were clear indicators of the GE India securing orders for GE Overseas. It was also argued that the revenue authorities found that GE Overseas, by remotely sitting in foreign countries, could not make any sales, without the active involvement of GE India. This was held to be a business connection of GE Overseas in India under Section 9 of the Act. The AO, therefore, correctly held that all the profits did not accrue or arise to the assessee on foreign soil, but part of such profits arising in India, correspo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....will discuss the role of the employees of GEIIPL in assisting the expats in Indian operations of GE overseas entities, as unfolding from the survey documents. i. Nalin Jain - Pages 247 and 264 of the Survey documents PB contain profile of Nalin Jain duly signed by him which shows his designation in India as 'Sales Director' of GE Transportation, Aircraft engines. 'Job description' has been given as 'Market Intelligence and Support to Headquarters.' He has indicated his 'Reporting Manager' as William Blair, who is one of the seven expats from GEII working in India for GE overseas. ii. Pritam Kumar - Page 277 of the Survey documents PB is a profile of Pritam Kumar, an employee of GEIIPL with the designation of 'Market Strategy Manager'. He is reporting to Pierre Cante. iii. Yashdeep Sule - Page 280 contains details of Yashdeep Sule, again an employee of GEIIPL. His job description is 'Sales and Marketing for signaling and locomotives.' His reporting manager is Pritam Kumar as discussed immediately hereinabove, who, in turn, is reporting to Pierre Cante. iv. Janak Chaudhary - Page 292 is report of Janak Chaudhary with designation of 'Vice President'....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ever, all the employees (of the LO) are deputed to different GE entities. Its office space, facilities and staff are being used by GE Overseas entities for their business. The agreement for providing support services by GEHPL to GEIOC and affiliates is with GEIOC which means that GEIOC, LO is providing all the facilities and support in India for the business of GE Overseas entities. For that reason too the benefit of preparatory and auxiliary clause to GEIOC, LO is not available in terms of para 26 of the Commentary on Article 5 of OECD Model Tax Convention as discussed in detail by the AO and affirmed by the lower appellate authorities. 35. It was argued that marketing and sales activities, controlled and monitored by the assessee's expats, which were on its payroll, is a core management activity. The two premises, from where these activities were undertaken, and the deep and pervasive nature of control, at every stage, leading to finalization of all technical specifications in regard to supply of equipments and customized machinery, its pricing and all material details involved the active and detailed involvement of these expats. If any consultations did take place, it was onl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e provisions of paragraphs 1 and 2, where a person- other than an agent of an independent status to whom paragraph 5 applies- is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State if : (a) he has and habitually exercises in the first-mentioned State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercise through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph; (b) to (c)...... 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... owned or rented by or are otherwise at the disposal of the enterprise. A certain amount of space at the disposal of the enterprise which is used for business activities is sufficient to constitute a place of business. No formal legal right to use that place is required. Thus, where an enterprise illegally occupies a certain location where it carries on its business, that would also constitute a PE. Some of the examples where premises are treated at the disposal of the enterprise and, therefore, constitute PE are: a place of business may thus be constituted by a pitch in a market place, or by a certain permanently used area in a customs depot (e.g. for the storage of dutiable goods). Again the place of business may be situated in the business facilities of another enterprise. This may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise. At the same time, it is also clarified that the mere presence of an enterprise at a particular location does not necessarily mean that the location is at the disposal of that enterprise. The OECD commentary gives as many as four examples where location....
X X X X Extracts X X X X
X X X X Extracts X X X X
....terprise for that purpose. For this reason, an enterprise engaged in paving a road will be considered to be carrying on its business 'through' the location where this activity takes place." 42. Applying the standard to the facts at hand, the ITAT and the lower appellate authorities found that GE India - is located in the space leased by GEIOC in the AIFACS building. This space was at the constant disposal of GEIOC as evidenced by specific chambers/rooms and secretarial staff allotted to GE staff, and was used by GE staff for their work. GE has not made new submissions on this specific question in this case. Based on the factual record, it appears that ITAT's factual determinations in this regard are sound and in consonance with the general meaning of the expression PE vis-à-vis continuity of space available for GEIOC's activities. 43. GE's activities in India are wholly or partly carried on through its fixed place of business. The term "through which" is to be given a wide latitude - when business is carried out at a particular location at the disposal of an enterprise, it is sufficient to say it meets the "through which" threshold. 44. The ITAT found that the core ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e actual activity. Black's Law Dictionary 7th Edition at page 130 defines the term 'auxiliary' to mean as 'aiding or supporting, subsidiary.' An activity becomes auxiliary if it is in support or aid of the core income generating activity. The Hon'ble jurisdictional High Court in U.A.E. Exchange Centre Ltd. vs. Union of India and Ors. (2009) 313 ITR 94 (Del) considered a case in which the activity to be done through the Liaison Office in India was of downloading the data; preparation of cheques for remitting the amount; and dispatching the same through courier by Liaison Office. The Hon'ble High Court designated it as auxiliary to the main activity of the petitioner. The Hon'ble jurisdictional High Court in a more recent decision in National Petroleum Construction Company vs. DIT (IT) MANU/DE/0223/2016 : (2016) 383 ITR 648 (Del), considering the earlier decisions in Morgan Stanley (supra) and UAE Exchange Centre (supra), has held that activity of preparatory or auxiliary character is remote from actual realization of profits and is simply in aid or support of the main activity. In that case, the activities of the liaison office in India were held not to contribute directly or indire....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... done by GE India were of preparatory or auxiliary character. As per the application made to RBI and permission obtained, the LO of GEIOC was to act as a communication channel between the head office and the customers in India. Thus, there remains no doubt that the activities to the extent of communication channel, as sanctioned by the RBI, being of preparatory or auxiliary character, would not constitute any PE in India. However, it has been noticed above that the actual activities carried on from the fixed place of AIFCAS building did not remain confined only to those of a communication channel as was allowed by the RBI to GEIOC at the time of setting up its LO in India. 28.5 The ld. AR harped on the assessee's reply to the AO's letter dated 14.11.2008 submitting four stages of sales to contend that the activities carried out in India by GE India were merely preparatory or auxiliary. He further relied on the roles and responsibilities of employees of GEIIPL etc. supplied by the assessee to Department, pursuant to the judgment of the Hon'ble High Court. Based on such submissions, it was argued that all the activities carried out in India were of preparatory or auxiliary nature ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....marketing, etc. In the event, GE Overseas decides to pursue the identified business opportunity, it commences the proposal development process and intimates GE India in this regard. GE India (on receipt of such intimation and under the explicit instructions of GE Overseas) undertakes an interaction with the prospective end-customer so as to identify customer's requirements/which are passed on to GE Overseas as inputs in the proposal development process. As part of the proposal development process, GE Overseas may seek inputs from GE India in respect of various aspects such as pricing, preparation of bidding package and other supplementary information. 28.8.2. It is noticed that the assessee has admitted a small role played by GE India. Claim of independent decision taken by GE overseas has been rightly held by the AO as erroneous. Various survey documents, as discussed above, abundantly show GE India playing an important and proactive role in the finalization of the deal and the terms and conditions with customers in India. In reality, the major activities about sourcing of customers and finalizing the deals with them were done by GE India in consultation, wherever required, wit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndia. GE India was negotiating terms with the Indian customers is also borne out from page 195 of Survey Documents PB-I as discussed above, whereby Indian customer was requesting GE India to revise the offer. Similarly, page 82 of Survey Documents PB-I, as discussed above, shows that GE India changed the terms and conditions. In the like manner, pages 2 and 3 of Survey Documents PB-II show that the draft agreement by Reliance Industries Ltd. to GE Overseas was sent back to GE India to get it reviewed from aftermarket colleagues in India. Pages 32 and 33 of Survey documents PB-II show that when GE Overseas tried to contact directly with RIL, GE India objected to the same and wanted the entire consultations only through the Indian team, which was positively responded by GE Overseas. Page 39 of the Survey documents PB-II again shows that it is GE India which was negotiating with Indian customers and not allowing GE Overseas even to change the terms and conditions. 28.10. At this juncture, it is significant to note that the assessee is not dealing in off the shelf goods. Sales are made on the basis of a prior contract. In such cases, customer's requirements are first properly und....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ursuant to the judgment of the Hon'ble High Court. Based on such details, it was argued that GE India was simply assisting GE Overseas and their role was not more than that of a support staff to GE Overseas, who, in turn, was taking all the relevant decisions regarding sales in India. 28.13. At this point it is pertinent to mention that the Department collected Linked in profiles of some employees of GE group, who in its opinion were carrying on the operations of GE overseas in India. Such details were filed before the Tribunal on an earlier occasion as additional evidence. The tribunal passed a separate order admitting such evidence. On a writ petition, the Hon'ble High Court vide its order dated 21.11.2014 set aside the tribunal order but required the assessee to furnish the details of :'Names, designations, roles and responsibilities of the employees of G.E. Group Companies, who were working in India during the relevant period along with their educational qualifications'. The assessee filed the information, whose copy has been placed before us. Thus, it is clear that this information was given by the assessee after the passing of the assessment order and no Income-tax authori....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e over what the assessee stated by way of Annexure after the termination of assessment. ii. Kumar Pratyush- Annexure 12 to the assessee's letter pursuant to the Hon'ble High Court's order explains his roles and responsibilities. It has been written that, inter alia, : 'Pratyush was not involved in any sales..... was never involved in negotiating deals, terms and conditions and pricing for or on behalf of any GE overseas entity. He was more involved in overall management of client and government relationships including smooth functioning of GE businesses in India'. In contrast, when we see his designation in the Assignment letter as 'Leader, GE Infrastructure, Ops-India' of GE Transportation reporting directly to the Global CEO of GE Infrastructure and the 'job description' given by him in the earlier referred documents of having a specific role to: 'Help GE infrastructure business develop their strategy in India; Align GE solutions with customer need; Help shape policy to realize opportunities; and Facilitate business development discussions', it becomes manifest that the assessee intentionally trimmed his role to justify its stand, which, being contrary to the primary and so....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... We fail to comprehend as to what a 'Sales & Marketing Manager' will do without any authority to take any decision w.r.t. sale. Fallacy of the assessee's claim in the postassessment letter is established from the Self appraisal report of Kenneth, which states that 'He Led the GS team through key activities - Sales, Cross-approval, Partnership approvals, Marketing and Resourcing.' Then there is 'Manager assessment' of the self appraisal of Kenneth M. Pierson. It has been mentioned that: 'Ken is committed to growing the India signaling business, but missed the orders target for the year'. This shows that Kenneth Pierson was given sales target, which he could not achieve. Here, it is relevant to note the judgment of the Hon'ble Allahabad High Court in Brown and Sharpe Inc. vs. CIT & Anr. (2014) 369 ITR 704 (All) in which the Tribunal, while affirming the order of the CIT (A), relied upon relevant documentary material in arriving at the conclusion that the activities of the liaison office established that it was promoting the sales of the assessee in India and the Assessing Officer was justified in holding that the income attributable to the liaison office was taxable in India. Upholdi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er explains his role and responsibilities. It has been written, inter alia, that, : 'Nalin's role was to collect the market intelligence and initiate a dialog with the Indian customer to understand their requirements... His role was to pass on the information/queries between the overseas entity and the Indian customer...Nalin has no authority to finalize any deal. He was just acting as a communication channel...All the pricing and terms and condition decisions were taken by GE overseas entity and he had no role in such decision making'. Here again, we find that the assessee did not come out clean. Survey documents show his designation in India as 'Sales Director' of GE Transportation, Aircraft engines. 'Job description' has been given as 'Market Intelligence and Support to Headquarters.' He has indicated his 'Reporting Manager' as William Blair, who is one of the seven expats from GEII working in India for GE overseas entities. 28.15. On a holistic consideration of the entire material before us, por una parte, there is primary, specific and original substantiated material relied by the ld. DR in the form of survey documents, Self appraisals, Manager assessment and Job descriptio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ond bullet point that : 'As a part of his job, Anand's role was to formulate marketing strategy for wind energy related equipments in India, which involved, among other things, determining a marketing strategy that helps distinguish GE products from its competitors, assist potential customers in their study phase and help define their needs for wind energy equipments.' Bullet point 5 also provides that : 'From 2007 onwards, Anand was supporting BGGTS (Joint venture of GE and BHEL), and was responsible to providing after sale and maintenance support.' iii. Sharmila Barathan - She is MA in Economics and also did her Masters in International Business. She is an employee of GEIIPL. Her designation is 'Government Affairs'. Annexure 3 discussing her roles and responsibilities provides through the second bullet point that : 'She supports the team of Market Development and assist them through shaping government policies. Her role was to provide recommendations on the integrated energy policies and also to prepare enabling policies to encourage investments in the Energy sector on behalf of GE.' iv. Scott Bayman - He did his masters in Management and Bachelors in Marketing.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... job, Sanjeev would understand the requirements of clients in terms of equipment required as well as financing required and thereafter, communicate these requirements to the overseas entities.' There is again a reference to R Table process and it has been mentioned that he will not sign or negotiate with any customer in India without any prior approval of the overseas entities. This again shows that he was signing or negotiating with customers in India, but with the approval of the GE overseas. It has been specifically provided in the eighth bullet point that: 'Although Sanjeev and other people sitting in India were part of the negotiating team with customers, however, at no point of time could they commit to any negotiation with respect to terms and conditions or discount without prior approval from the overseas people listed on the R Table.' vii. Alpana Khera - She did her Engineering in Instrumentation and Diploma in Marketing. Her designation is 'Sales Manager'. She is an employee of GEIIPL working since 2001. Annexure 11 discussing her roles and responsibilities again refers to R Table process, which implies that signing or negotiating with customers in India was allo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....place belongs, would not fall within the scope of subparagraph e)'. This part of the Commentary explaining 'preparatory or auxiliary activities' makes it clear that if a fixed place of business is used for rendering services to more than one companies of a group, as is a case under consideration, then such services cannot be treated as of preparatory or auxiliary character." 47. Determining whether a practice is preparatory or auxiliary requires asking whether the activity undertaken at the fixed place of business is an essential and significant part of the activity of the enterprise as a whole. In National Petroleum Construction Company vs. DIT (IT) (2016) 383 ITR 648 (Del), it was held that activities that are remote from the realization of profits are considered preparatory or auxiliary: "26. The language of sub-para (e) of paragraph 3 of Article 5 of the DTAA is similar to the language of sub-para (e) of paragraph 4 of Article 5 of the Model Conventions framed by OECD, United Nations as well as the United States of America. The rationale for excluding a fixed place of business maintained solely for the purposes of carrying on activity of a preparatory or auxiliary charact....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to us, the Authority has fallen is in reading Article 5 (3) (e) as a clause which permits making a value judgment as to whether the transaction would or would not have been complete till the role played by liaison offices in India was fulfilled as represented by the petitioner to their NRI remitter. According to us, what has been lost sight of, is that, by invoking the clause with regard to permanent establishment, we would, by a deeming fiction tax an income which otherwise neither arose nor accrued in India - when looked at from this point of view, the exclusionary clause contained in Article 5 (3) and in this case in particular, subclause (e) have to be given a wider and liberal play. Once an activity is construed as being subsidiary or in aid or support of the main activity it would, according to us, fall within the exclusionary clause. To say that a particular activity was necessary for completion of the contract is, in a sense saying the obvious as every other activity which an enterprise undertakes in earning profits is with the ultimate view of giving effect to the obligations undertaken by an enterprise vis-a-vis its customer. If looked at from that point of view, then, n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ds the question of deputation, we are of the view that an employee of MSCo when deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo. As long as the lien remains with MSCo the said company retains control over the deputationist's terms and employment. The concept of a service PE finds place in the UN Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge. 18. Applying the above tests to the facts of this case we find that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCo. I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntire existence of the office in India is made exclusively out of the funds of the head office and they have not borrowed any money. They have not acquired any properties. They have no direct commitment with the customers and therefore, it was contended that the liaison office in Bangalore cannot be considered as a PE so as to attract the provisions of the Act. It is in this background, we have to see what was unearthed in the course of investigation by an investigating agency. 9. The liaison office of the assessee was opened in 1998. The operations of the assessee at Bangalore were carried out pursuant to the approval by the RBI. The liaison office has five employees in all. The South Korean based company is a trader in semi-conductor components manufactured by various companies across the world. In the course of the said survey and investigation, the authorities have recorded the statement of one Sri V. Natarajan, the country manager. He has stated on oath that out of the five employees who are working in the liaison office, three of them are directly related to sales (including him) and two administrative assistants. They also identify new customers by way of their past exper....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stomer. The same will be shipped directly to the customer by the first available flight or ship. The head office will send a copy of the commercial invoice, packing list and airway bill/bill of lading to the liaison office at Bangalore by e-mail/fax. They in turn send these three documents to the customer. Then the responsibility of getting the goods cleared lies with the customers. The payments will be made by the customer through telegraphic transfer through bank to the head office account at Korea. Their work also involves following up of payments from the customers and offer sales support, if necessary. He has also deposed that they have cent per cent freedom in deciding the margin or selling price provided they are not incurring any loss. It was stated that the marketing man is given the liberty to sell the goods on profit within a band margin of profit and in case any discount is asked then he has to revert back to the head office. Hence, only in those cases where the price quoted by the liaison office is not competitive then they have to revert back to the head office. Sri H.B. Raghumaran who was working as a Senior Engineer (Marketing) has stated that he enjoys full freedom....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ll today would not render the findings recorded by the authorities under the IT Act as erroneous or illegal." 51. GE contends that the business activities in India must include the authority to conclude contracts for such activities to not be auxiliary or preparatory in nature. This is not necessary. The assessee's reading is based on a misapplication of the principles of Article 5(4)(a) - dealing with agency PE - in the context of Article 5(3) which deals with only fixed place PE. It is indeed correct that neither a dependent agent PE nor a fixed place PE can be constituted if the business activities undertaken are preparatory or auxiliary. However, Article 5(3) makes no mention of the authority to conclude contracts - language that is explicitly used in Article 5(4)(a). Accordingly, reading the conditions as equivalent would erode a key distinction between fixed place PE and agency PE - and it is accordingly recommended that GE's contention should be rejected. This interpretation also accords with the decision of the Karnataka High Court in Jebon (supra). 52. In Browne & Sharpe Inc. v. Commissioner of Income Tax and Another 2014 (369) ITR (All), the Allahabad High Court hel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e as significant as this. The Assessing Officer has quite justifiably declined to accept the explanation." 53. Applying the above standards to the factual matrix at hand, the ITAT concluded that GE's activities in India were not of an auxiliary or preparatory nature. Substantial reliance was placed on e-mail exchanges between employees in India and overseas, the job description of employees in India and their appraisal reports. In the brief before this Court, GE strongly disagreed with ITAT's characterization of the above sources and provided a point by point rebuttal to ITAT's inferences drawn from various e-mails. 54. The above factual records are too extensive to comprehensively discuss in this section. Nonetheless, as an overall matter, GE is correct that in some instances, ITAT's characterization of certain conversations appears to overstate the importance of the activities in India (for e.g. email chain on Reliance-GT Exhaust Height; e-mail chain on confirmation of RIL PO No. DG8/3389741). Nevertheless, in many other instances, ITAT's decision is sound, and gives rise to the inference that business activities that were not auxiliary or preparatory were taking place in I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ail from Pump Design Department to GE India and copy to other members of GE India requesting the Indian team to send the draft of MOU along with complete comments, so that the same could be incorporated in the original MOU. Similarly, page 127 of the Survey documents PB-I shows that the MOU with BHEL reflected the conversation what GE India and GE overseas discussed. Thus, there is not even an iota of doubt that GE India was fully involved in proposal development. 28.9.1. The ld. AR submitted for the third stage of 'Bid approval and negotiations', that the assessee stated before the AO that once the proposal/bid/tender have been put together as described in Stage 2 above, it is approved by the senior management during the Stage 3 and, thereafter, submitted to the end customer. Subsequently, GE Overseas may carry out negotiations with the customer, which may entail addressing queries, if any, raised by the end-customer, seeking/providing clarifications regarding work scope, pricing, etc required by the end customer. For the fourth stage of 'Final contract development and approval', the assessee stated that GE Overseas discusses the outcome of the negotiation process internally am....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ts of sales activity, which have to be necessarily done in India by GE India. Ordinarily, it is not the Indian customer, who would visit GE entities overseas, but it is GE India, who has to have physical presence in India and such presence is through the GE India team." 57. This court is of the opinion that the process of sales and marketing of GE's product through its various group companies, in several segments of the economy (gas and energy, railways, power, etc.) was not simple. As noticed by the tribunal, entering into contract with stakeholders (mainly service providers in these segments) involved a complex matrix of technical specifications, commercial terms, financial terms and other policies of GE. To address these, GE had stationed several employees and officials: high ranking, and in middle level. At one end of the spectrum of their activities was information gathering and analysis- which helped develop business and commercial opportunities. At the other end was intensive negotiations with respect to change of technical parameters of specific goods and products, which had to be made to suit the customers. Standard "off the shelf" goods - or even standard terms of c....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., i.e manufacture and supply of highly specialized and technically customized equipment, the "core activity" of developing the customer (identifying a client), approaching that customer, communicating the available options, discussing technical and financial terms of the agreement, even price negotiations, needed a collaborative process in which the potential client along with GE's India employees and its experts, had to intensely negotiate the intricacies of the technical and commercial parameters of the articles. This also involved discussing the contractual terms and the associated consideration payable, the warranty and other commercial terms. No doubt, at later stages of contract negotiations, the India office could not take a final decision, but had to await the final word from headquarters. But that did not mean that the India office was just for mute data collection and information dissemination. The discharge of vital responsibilities relating to finalization of commercial terms, or at least a prominent involvement in the contract finalization process, discussed by the revenue authorities, in the present case, clearly revealed that the GE carried on business in India throu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of a dependent agent PE in India, which is created solely due to the nature of activities of such an agent for the overseas entity. 64. The ITAT opinion focuses on Article 5(4)(a) i.e. the authority to conclude contracts. GE relies on Para 33 of OECD commentary to suggest the understanding of such authority - "a person who is authorized to negotiate all elements and details of a contract in a way binding on the enterprise can be said to have exercised this authority" and "the mere fact, however, that a person has attended or even participated in negotiations . . . will not be sufficient, by itself, to conclude that the person has exercised in that State an authority to conclude contracts in the name of the enterprise." The revenue responded by clarifying that India had clarified its position that it does not agree with the above portions of Para 33 commentary. The position of India is that "a person has attended or participated in negotiations in a State between an enterprise and a client, can, in certain circumstances, be sufficient, by itself, to conclude that the person has exercised in that State an authority to conclude contracts in the name of the enterprise; and that ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....required for an agent to have habitually exercised an authority to conclude on behalf of the enterprise, it is necessary to make a reference to the parties' arguments. 68. Counsel on behalf of the Appellant, drawing on OECD commentary, argued that person who is authorized to negotiate all elements and details of a contract which is in a way binding on the enterprise can be said to have exercised this authority. Accordingly, the mere fact, however, that a person has attended or even participated in negotiations, will not be sufficient. The revenue, on the other hand, suggested that in 2008, India had clarified its position with respect to paragraph 33 of the OECD commentary - suggesting it did not agree with the above sentences. Rather, India's position was that if a person has attended or participated in negotiations in a State between an enterprise and a client, can, in certain circumstances, be sufficient, ipso facto, to conclude that the person has exercised in that State an authority to conclude contracts in the name of the enterprise; and that a person who is authorized to negotiate the essential elements of contract, and not necessarily all the elements, can be said to exe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Tribunal adverted to the question as to whether there was any PE in India within the meaning of Article 5 of the Indo-UK DTAA. The Tribunal extracted the provisions of Article 5 and stated the legal position that emerged therefrom. Thereafter, it referred to various documents in para 22 and narrated its effect in detail. Our purpose would be served by extracting para 23 of the impugned order which reads as under:- "23. It is also seen that the appellant has a dependent agent in India in the form of RRIL. The fact that RRIL is totally dependent upon the appellant is not denied. However, the contention of the appellant is that even though RRIL is a dependent agent and such agency is to be deemed as PE, so long such dependent agent has no authority to negotiate and enter into contracts, under Article 5 (4), there is no PE in India. It is to be noted that Article 5 (4) has three clauses, namely, a, b & c. Thus, even if one has to hold that the dependent agent has no authority to negotiate and enter into contracts for and on behalf of appellant, still as per clause (c) of sub Article (4) , it is found that RRIL habitually secures orders in India for the appellant. It is a set p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be said to have a PE in India within the meaning of Article 5 (1) 5 (2) and 5 (4) of the Indo UK DTAA. Since we have found that the appellant 496/2008, 497/2008, 498/2008,498/2008 584/2008, 647/2008, 648/2008, 649/2008, 650/2008,663/2008 has a business connection in India as well as PE in India, the income arising from its operation in India are chargeable to tax in India." 17. We are thus convinced that there is a detailed discussion after taking into consideration all the relevant aspects while holding that RRIL constituted PE of the assessee in India. While undertaking critical analysis of the material on record, the Tribunal kept in mind the objections filed by the assessee as well as the documents on which it wanted to rely upon. Those objections were duly met and answered. 18. We thus, do not find any need to remand the case back to the Tribunal for this purpose which was the plea raised by the learned Counsel for the appellant/assessee. Agreeing with the view taken by the ITAT in the impugned order as well as in the Misc. Application, we answer questions no.2 & 4 against the assessee. As a result, we find no merits in the appeals of the assessee which are accordingly d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essee, GE has organized its affairs in such a manner - and one cannot quarrel with its intent, so as to minimize tax incidence in India. Yet, the court's task is not as easy to neatly compartmentalize the analysis of whether the patterns of past decisions result in its establishments constituting fixed place PE or a dependent agent PE. The intricate nature of activities it has carefully designed, where technical officials having varying degree of authority involve themselves - along with local managerial and technical employees, in contract negotiation, often into core or "key" areas, modification of technical specifications and the negotiations for it, to fulfill local needs and even local regulatory requirements, the complexities of price negotiation, etc. clearly show that the assessee carries out through the PE business in India. These activities also intersect and overlap with the content of the principle of dependent agent, inasmuch it is evident that these agencies work solely for the overseas companies, in their core activities. 75. In view of the above observations it is held that the second question is, therefore, answered in favour of the revenue, and against the asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....attribution of such profit to marketing activities, which the AO has taken at 35% of 10%. As regards the first component, being, the estimation of profit on the sales made in India, we find that the AO specifically required the assessee to furnish year-wise entity-wise profits of GE overseas entities for the operations carried out in India. Either such information was not given or a part of the information given did not help in deducing the correct amount of profit. In such circumstances, the AO was left with no alternative, but, to estimate income on some rational basis. He invoked the provisions of Rule 10(iii) and estimated profit at 10% of sales made in India. Rate of 10% was applied by drawing strength from sections 44BB and 44BBB, which, in turn, are special provisions for computing profits and gains in connection with the business of exploration, etc. of mineral oils/operation of aircraft in the case of nonresidents. In our considered opinion, the approach of the AO in estimating income at 10% of sales made in India, in the given circumstances, is perfectly in order and does not require any interference. 57. As regards the second component of the share of marketing activi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the amount of sales made by the assessee in India, we direct to apply 2.6% on the total sales for working out the profits attributable to the PE in India." 77. The Revenue authorities carried out a two-part analysis on this aspect, i.e. attribution of income based upon the profits derived by the assessee. By this analysis, 10% of the sales income made in India is attributed as the basis of total profits of GE overseas entities in India. Upon that figure, the attribution of profit to the marketing activity, which the Assessing Officer applied, was 35%. In this regard, the contentions of the assessee were that the attribution was arbitrary and high and that the application of principles in Galileo International Inc. (supra) were not automatic. Learned counsel had stressed that each case would involve an intensive factual analysis to arrive at a figure that would fit in the concept of total profits accruing to the overseas entities from Indian activities and that the further refinement of that into a broad percentage cannot be a matter of precedent. 78. This Court notices that the analysis carried out by the Revenue - not merely by the ITAT but also by the AO in the assessment ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....een GE Power/ GEIIPL provides for performance of very specific services and which centre around to act as a communication channel between customers and GEIOC or its affiliates. The payment to GEIIPL is on account of those specific services only. As found during survey and discussed in this order, the scope of services of employees' of GEIIPL far exceeds the scope provided in the agreement. More than 40 employees of GEIIPL are providing the services. The assessee was asked to submit the designation and the qualifications of these persons, which could have suggested that these persons are not only support persons, but provide various other type of services with regard to sales by overseas entities. (ii) The persons of GEIIPL are working under the control and direction of the expatriates and also report to them. Therefore, GEIIPL cannot be considered as an independent person. The agreement does not refer to any such type of reporting structure. (iii) The agreement has continued to be the same since April, 2001 and the compensation to the GEIIPL is based on a markup of 5% on cost. How could the assessee claim that the payments to GEIIPL are at arm's length always? As ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....resent the value of the profit attributable to his service. (Emphasis supplied) Reference is also made to the DECO Commentary on Article 7, which reads as below: ''Where, under paragraph 5 of Article 5, a permanent establishment of an enterprise of a Contracting State is deemed to exist in the other Contracting State by reason of the activities of a so-called dependent agent (see paragraph 32 of the Commentary on Article 5), the same principles used to attribute profits to other types of permanent establishment will apply to attribute profits to that deemed permanent establishment. As a first step, the activities that the dependent agent undertakes for the enterprise will be identified through a functional and factual analysis that will determine the functions undertaken by the dependent agent both on its own account and on behalf of the enterprise. The dependent agent and the enterprise on behalf of which it is acting constitute two separate potential taxpayers. On the one hand, the dependent agent will derive its own income or profits from the activities that it performs on its own account for the enterprise; if the agent is itself a resident of either Contracting State,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the order, I am satisfied that it is a fit case for initiation of penalty proceedings u/s 271(1)(c) the Act. 17. The total sales of the assessee in India during the year are ofRs.199,806,676/-. The profit @3.5% of the same works out to Rs. 6,993,234/-. This is taxable as business income." Assessed u/s 143(3) of the Act at income Rs. 6,993,234/- at the applicable tax rate, surcharge and ed. cess. Charge interest u/s 234A, 234B and 234C of the Act. Issue penalty notice u/s 271(1)(c) of the Act. Issue necessary forms." 79. We notice that in Galileo International Inc. (supra) as well as in Hukum Chand v. UOI 1976 (103) ITR 548, it was stressed that what are the proportions of profit of sales attributable to the profits carried on in a national jurisdiction is essentially where all facts are dependent upon circumstances of the case. It was further noticed in these decisions that absence of statutory or other formal framework render the task dependent on some extent on guess work and that the endeavor will only be to approximate the correct figure. The Court stated in Hukum Chand (supra) that "there cannot in the very nature of things great precision and exactness in the matt....