TaxTMI 
TaxTMI 
2019 (12) TMI 812
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....ustaining the incorrect application of the rule of 'Force of Attraction' in the Protocol to the Double Taxation Avoidance Agreement between India and Germany by the learned assessing officer thereby subjecting to tax the entire revenues earned by the appellant during the subject year at the rate of 20% under section 115A of the Income Tax Act, 1961. 2. The learned Commissioner of Income Tax (Appeals)-XXIX has erred both on facts and in law in sustaining the learned assessing officers's contention that the reimbursement of expenses at actuals received by the appellant is taxable as its income. 3. The learned Commissioner of Income Tax (Appeals)-XXIX, has erred both on facts and in law in upholding the levy of interest under Section 234A, Section 234B and Section 234C of the Income Tax Act, 1961. Grounds of appeal of ITA No.5799/Del/2010 A.Y.2002-03 "The Appellant respectfully submits that on the facts and circumstances of the case and in law, while passing the final assessment order under section 147 read with section 144C of the Income Tax Act, 1961 (Act'), the Deputy Director of Income Tax, Circle 3(2), International Taxation, New Delhi (hereinafter r....
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....der section 234A and 234B of the Act. Grounds of appeal of ITA No.2124/Del/2009 A.Y.2004-05 1. On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) - XXIX ['CIT (A)'] has erred in upholding the stand of the Deputy Director of Income-tax, Circle 1(2), International Taxation ('hereinafter referred to as the Teamed assessing officer') that the Appellant is not covered under section 44BBB of the Act, thereby taxing the revenues of Rs. 16,814,835 earned by the Appellant from project with Jaiprakash Industries Limited ('JIL') during the subject year at the rate of 20 percent under section 115A read with section 44DA of the Income Tax Act, 1961 ('Act.'). 2. On the facts and circumstances of the case and in law, the learned CIT (A) while holding that the amount [i.e. revenues of Rs. 12,269,610 earned by Appellant during the subject year from contracts entered with Madurai Power Corporation Private Limited ('MPCPL'), Andhra Pradesh Transmission Corporation ('APTC') and Vishakhapatnam Industrial Water Supply Company .Limited ('VIWSCL')] is to be taxed under Article 12 of the India- Germany Double Taxation Avoidance Agree....
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.... in law in upholding the levy of interest under section 234A, 234B and 234D of the Act. 3. We are taking up ITA No.4960/Del/2004, A.Y. 2001-02 as the lead case. Lahmeyer International GmbH (hereinafter referred to as "the Assessee"), a non-resident company incorporated in Germany, is an engineering consulting company that offers wide range of planning, designing and consulting services, etc. in relation to complex infrastructure projects in India. The Assessee has been rendering engineering consulting services mainly in relation to 10 power projects. The Assessee had executed/undertaken several contracts during the financial year April 1, 2000 to March 31, 2001, relevant to the present Assessment Year 2001-02. The details of the technical services fees received by the Assessee from execution of various projects during the present year (and offered to tax) was furnished along with the return of income filed by the Assessee. During the present assessment year, the Assessee earned total revenues (classified as fees for technical services ("FTS")of Rs. 91,447,305/- The same was offered to tax as under: • Rs. 62,970,914/- was offered to tax at the rate of 20 % on a gross....
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....that it was in the process of collecting copy of the contracts and would furnish the same in due course during the assessment proceedings. The assessment order dated 24.12.2003 was passed under section 143(3) of the Act wherein the entire receipts of the Assessee during the present assessment year was subjected to tax at the rate of 20% by applying the principle of Force of Attraction under the Treaty; and the reimbursement of expenses received by the Assessee during the present assessment year was subjected to tax at the rate of 20%, as was done in earlier years. Thus, the Assessing Officer determined the Assessee's taxable income at Rs. 91,788,012/- by including within the taxable income of the Assessee, a sum of Rs. 340,707/- relating to reimbursement of expenses at actuals. The same was subjected to tax by the Assessing Officer at the rate of 20% and an additional tax and interest demand of Rs. 4,701,670/- was raised against the assessee. 4. Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of assesse. 5. As regards Ground No.1 relating to applying "Force of Attraction" (Foa) Rule, the Ld. AR relied o....
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....t case. There is no finding that 'Baglihar Project PE' was in any way involved in any other project across the Indian territories. Each agreement is different and was entered into with different parties. Thus, the involvement of PE cannot be presumed. Its involvement should be real/actual and cannot be superficial as held by the Assessing Officer. The Ld. AR further submitted that risks involved are different and none of the seven agreements had any underline motive, which has been carried out by the assessee at any stage. The Ld. AR submitted that Baglihar project was in respect of hydro-power and its PE cannot be said to be involved in projects in the field of water management or thermal power. Due to geographical reasons, Baglihar project PE located in Jammu & Kashmir could not be involved in other projects at far of places throughout India. The Ld. AR tried to demonstrate that why Baglihar Project PE was not involved in other projects by giving example in respect of agreement with Vishakhapatnam Industrial Water Supply Co. Ltd (VIWSCL). The agreement with VIWSCL related to "water management", whereas, Baglihar Project related to "Hydropower". The project was located in ....
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....he main consultant was "Louis Berger International Inc" and it was Louis Berger who was responsible to GIDBS for all the obligations. Besides the assessee, Dalai Consultants and Engineers Ltd, Balaji Rail-road Systems Ltd. and ICICI Ltd. were also the consultants. Personnel's who were to perform the services were agreed in advance and without the prior approval of GIDBS personnel other than agreed could not have been deputed. The Ld. AR further submitted in respect of agreement with JKSPDC-Sawalkote Project, the same was for consultancy services only and the consultancy services were to be provided prior to signing of EPC. In contrast, under JKSPDC- Baglihar Project, the assessee was Engineer-in-charge for implementation of Hydropower Project including project management, hydropower design review and supervision of civil works. Thus, under JKSPDC-Sawalkote Project, the Assessee was to provide limited services. The services under phase I and phase II was to be performed in assessee's home office in Germany and the third phase was related to Assistance in Contract Negotiations - EPC contract. Since primarily the services were to be provided in Germany, therefore, it cannot be sai....
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.... the performance of such services. Onus is on Revenue to show that other projects were effectively connected to PE in respect of Baglihar project. The Ld. AR relied upon decision of ADIT v. Valentine Maritime (Mauritius) Ltd. (2011) 45 SOT 34(Mum) 5.7 As regards to applicability of Section 44D, the Ld. AR submitted that the question of applicability of section 44D does not arise because except for fee received in respect of Baglihar project, the fee received in respect of other agreements was taxable under Article 12 of DTAA. Since DTAA is more beneficial to the assessee, therefore, it would prevail. The Ld. AR submitted that the assessee opted to be taxed under DTAA and Section 44D would apply only, if FTS is held to be business income by virtue of "effective connection" under Article 12(5). In that case, Article 7 would apply and consequentially section 44D. 6. The Ld. DR submitted that it is an undisputed fact that the income is in the nature of FTS. There is business connection and income accrues and arises or deemed to accrue or arise in India. There is existence of Fixed Place PE under Art-5(1) in the form of JKSPDC-BCS...." & existence of Supervisory PE under Art-5(2)(....
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....Design Contract) [@10% p.65 r.w.p.61 of PB 2001- 02] (BHP) [PE] [@20% p.26 r.w.p.29 & 57,PB-1 of 2001- 02] (BHP) [@10% p.7,PB of 2002-03] (BHP) [@10% p.5,PB of 2002-03] JKSPDC-Phase- II (BCS) [PE][@20% p.65 r.w.p.61 of PB 2001- 02] JKSPDC-Phase- II (BCS) [PE][@20% p.23 & 24 PB of 2002-03] JKSPDC-Phase- II (BCS) [PE][@20% [p.5 r.w.p.25,PB of 2002-03] JKSPDC-Phase- II (BCS) [PE][@20% [p.5,PB of 2002-03] It may be noted that the assessee has entered into 3 contracts with JKSPDC i.e. Baglihar, Phase-I dt. 17-08-1999[A.Y.2000- 01], Baglihar, Phase-II dt. 23-11-01[A.Y.2002-03] and Sawalkte dt. 09-12-2000[ A.Y. 2001-02]. 6.2 The Ld. DR submitted that the nature of activities carried out i.e. Technical Consultancy Services/Engineering Consultancy Services/Civil Engineering Consultancy Services remained the same for all the contracts. However, on the one hand, such services were treated and accepted to be in the nature of supervisory services and existence of PE under Art 5(2)(i) was accepted for JKSPDC & VISWL while for others it is argued by the Ld. AR that the nature of services are merely consultancy and not supervisory in nature and thus, ....
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....sion" of the PE through which the FOA need to be effected. The three conditions that need to be satisfied as per the India-Germany DTAA & Protocol are- I. business activities of the same or similar kind as those effected through that permanent establishment; II. resorted to in order to avoid taxation in the Source State and III. the PE in any way was involved. 6.6 The Ld. DR submitted that as can be seen, the twin conditions proposed by the assessee i.e. there is need for being 'an extension of the PE' or to be 'effected through the PE' are neither mandated in the UN Model Convention nor in the Protocol to the India- German DTAA. In fact, this is an attempt to misinterpret the convention/provisions. and misguide the Hon'ble Bench. Coming back to the nature of "business activity" being carried on by the assessee through its PE in respect of JKSPDC and other contracts, the assessee itself has accepted that the activities are 'same or similar' in nature. • "LIG is engaged in providing technical consultancy services to various projects in India." • "Under contracts entered with MPCPL, APTC, PPN, PGCI, Louis, JKSPDC-BHP & JKSPDC- S....
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.... ultimate installed capacity of 900 MW to be developed in 2 Stages. Stage-1 [refer to cl.1 of Apdx-A of Stage-I]of the Baglihar Project with an installed capacity of 450MW.. is currently under construction and LI being the appointed consulting engineer (Engineer-in- Charge)". [cl.1 of Apdx-A of Stage-2] • "Stage-2 benefits from the already existing structures of Stage- 1" [refer to cl.1 of Apdx-A of Stage-I] • "LI will appoint staff members who have already been involved in Stage-I". [cl.2 of Apdx-A of Stage-2] • "The EPC Contract for Stage-2 should be arranged in accordance to the existing EPC Contracts of Stage-1, either as a new separate contract package or as an addendum to the existing contract. The contract conditions should be similar to the existing ones." [cl.3.3 of Apdx-A of Stage-2] • "It goes without saying that the staff assisting PDC will be those who are involved in the ongoing Baglihar Project and thus are familiar with all aspects of the Project." [cl.3.3 of Apdx-A of Stage-2] • Same expats working for Baglihar-I as stated above and for Sawalkote as stated in p.60 0f PB-1 for 2001-02 i.e. Dr. Jokiel, ....
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.... ii. Establishment of 'Project Organization' at Hyderabad. [Art- IV, p.134] iii. Cost Estimate for Main Office at Hyderabad & Site Office at Visakhapatnam [Appendix-E, p.248; Appendix-D, Sch-6,7,8 p.206-208; Annex-7, p.220; Sch-3, p.242] iv. Provision of local staff & personnel [Appendix-E, p.248Annex-3, p.210; Sch-6, p.218 & Annex-7, p.220] v. Page 152 states at point C about the office rental charges., house rental etc. Similarly at page 218 of APB,; page 221 of equipment cost for office and site office details besides the method of cost in the from pages 152-250 of APB D. Baglihar-I [August 1999] - i. Accepted that it has a PE in the form of a Project Office for A.Y. 2000-01 & 2001-02 [i.e. before the signing of stage-II contact on Nov'2001] ii. Appendix-B, Clause-2 - Provision of accommodation & furnished office space etc. iii. Presence of Chief Resident Engineer [CRE] will monitor the Civil Contractor's progress on site. [p.109] Boris Lazaric is the Chief Resident Engineer [p.467-470 of 2010-11] iv. Provision for weekly review meetings with Client [cl.47] v. Employment of local staff& per....
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....s used in the DTAA are to be interpreted on the basis of broad principles of general interpretation and not on a narrow or legalistic basis. 6.11 The Ld. DR submitted that all the projects are undertaken with the help of local staff and local personnel. Moreover, the staffs of one project are also involved in other projects. Hence, the claim of the assessee that the physical presence of employees was less than 180 days is factually incorrect. Moreover, the assessee artificially splits Baglihar-I project into BHP & BCS and claimed existence of PE as per its convenience. Similarly, Baglihar Phase-I & Phase-II contracts are treated as independent ones although it has been clearly specified in the contract for Baglihar, Phase-II that it will benefit from Stage-I and common personnel associated with Stage-I to be used. [Appendix-A(1),(2)& (4).There is existence of Fixed Place PE under Art-5[1] too in respect of all these projects. In addition, the assessee also uses the premises of its Indian subsidiary which is at its disposal for its business purposes. 6.12 As regards to the assessee's claim that the Assessing Officer & CIT(A)/DRP have not disputed the fact that the assessee doe....
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....on of treaties are different from that of statutory legislations. This has been reiterated in the case of Azadi Bachao Andolan where the Hon'ble Supreme Court had observed - 130. The principles adopted in interpretation of treaties are not the same as those in interpretation of a statutory legislation. While commenting on the interpretation of a treaty imported into a municipal law, Francis Bennionobserves: "With indirect enactment, instead of the substantive legislation taking the well-known form of an Act of Parliament, it has the form of a treaty. In other words, the form and language found suitable for embodying an international agreement become, at the stroke of a pen, also the form and language of a municipal legislative instrument. It is rather like saying that, by Act of Parliament, a woman shall be aman. Inconveniences may ensue. One inconvenience is that the interpreter is likely to be required to cope with dis-organised composition instead of precision drafting. The drafting of treaties is notoriously sloppy usually for a very good reason. To get agreement, politic uncertainty is called for. - The interpretation of a treaty imported into munici....
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.... to be determined on the basis of Protocol which provides for the FOA rule. The Ld. DR submitted in the context of the Ld. AR's argument that "Revenue has to show that FTS earned from other projects are also effectively connected to Baglihar PE" is fallacious as the same is not based on the proper appreciation of the DTAA & legal provisions. If the said contentions are accepted and the revenue proves that the other contracts are also 'effectively connected' to the Baglihar PE then the FOA rule becomes redundant as each such contract shall be taxed under Art-12[5] r.w. Art-7 of DTAA automatically. It may be noted that it is to alleviate the difficulties faced by source countries with reference to establishing the 'effective connection' mandate of OECD convention that the provision of FOA was made in the UN convention. This he submitted was amply explained by Tribunal in the case of HITT Holland Instituted of Traffic Technology B.V as under- "As to whether the income attributable to the PE alone has to be taxed in the other country or any other income which accrues to the Non-Resident in the other country having no connection with the PE, can also be brought to tax in the ot....
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....mitted that reliance upon the case of Valentine (supra) will not have any advantage either as it has already been proved that the assessee has been artificially splitting the contracts. 6.17 As regards to reliance upon order for A.Y. 2000-01 by the Ld. AR where Force of Attraction rule was not applied, the Ld. DR submitted that the assessee relied upon the Assessment Order for A.Y. 2000-01 where the Assessing Officer has not applied FOA principle. At the very outset, it is highlighted that the principles of 'res-judicata' is not strictly applicable to the proceedings under the IT Act. Moreover except for its reply dt. 24/12/02 the assessee could not furnish any evidence in support of its claim that the issue of FOA was examined by the Assessing Officer. No such questionnaire issued by the Assessing Officer was produced nor there is any discussion in the body of the assessment order accepting or rejecting the so-called reply on the basis of some 'telephonic conversation/query'. The reply of the assessee only talks about "telecom" and "intention". Hence, the submission by the assessee deserves to be rejected. Without prejudice to this, he submitted "perpetuation of an error is no ....
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....ted parties. Most of these contracting parties are government or semi government or private organisations. The assessee constitutes PE on account of undertaking supervisory activities as provided in article 5(2)(i) of the treaty in relation to construction of Hydro Power Projects at Baglihar in the state of Jammu & Kashmir. In respect of the balance contracts, based on specific contract requirements, the assessee's personnel either performed service at the client's location or at its home office in Germany, wherein the assessee provided contract-wise, the location wherein the activities were undertaken. The above fact as per the assessee clearly demonstrates that owing to geographical region, the PE on account of JKSPDC Phase-II projects (executed in the state of Jammu & Kashmir) could not play a part or be involved in any project in India. These contracts have been carried out by the assessee by using different teams at a given point of time. In this regard, the details of the project managers/ project engineers who visited India in connection with the execution of different contracts clearly shows that distinct PE of technician were involved in the execution of various projects i....
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.... find merit in the argument of the Ld. AR that such income by way of FTS is to be subjected to tax @ 10% under article 12 of the treaty and cannot be subject to tax @ 20% as contemplated by the Assessing Officer. As per the Revenue's contention, it is undisputed fact that the income earned by the assessee was in the nature of FTS, there is business connection and income accrues and arises or deem to accrue and arise in India. The regional existence of place of PE and the article 5(1) in the form of JKSPDC-BCS as well as there is existence of supervisory PE under article 5(2)(i) in the form of JKSPDC-BCS was not established by the Revenue from any documentary evidence on record. Similarly, the nature of business of the assessee remains unchanged and the assessee is engaged in the business of providing consultancy services to various projects in India. The assessee is an engineering consultancy services that offers wide range of planning, designing and consultancy services etc. in relation to complex infrastructure projects in India. The assessee rendered engineering consultancy services mainly in relation to power projects. 7.1 From the perusal of the records and contradictory as....
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....can't be said as PE in India is involved. The Assessing Officer has accepted that except for Baglihar there are not any other PEs in respect of any other contracts. Thus, the Ld. AR submitted that reimbursements are on cost-to cost basis and there is no element of profit. The Ld. AR relied upon the decision of Engineering Projects Ltd. (1993) 202 ITR 1014 (Del). The Ld. AR relied upon the following decisions: a) Sumitomo Corporation [114ITD 61,ITAT &43 Taxmann.com, HC, Delhi]- b) Clifford Chance [33 Taxmann.com 200, Mum SB]- c) Roxon OY [291ITR(AT)275, Mum]- d) Smt. Bani Roy Chowdhury & Others [131ITR 578, Kol]- [Azadi Bachao Andolan (2003) 263 ITR 706 (SC), Nokia Networks (2013 (358) ITR 259),New Skies Satellite BV and Anr. (2016-TII-06-HC-DEL-INTL) e) GFA Anlagenbau Gmbh [47taxmann.com 313 Hyd-Trib]- f) National Petroleum Construction Company[(2016) 383 ITR 648]- 9. The DR submitted that at the very outset, the contention of the assessee that it is not liable to tax is fallacious since the assessee itself, has accepted its liability and offered to tax the income it has earned. The provision in the contract for the payment o....
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....le Tribunal is duty bound to consider the evidence in view of the decision of Hon'ble jurisdictional High Court in the case of Jan Sampark [275 ITR 273]. The Ld. DR accordingly submitted that the onus is on the assessee to prove that there is no element of profit in the reimbursements. Moreover, the assessee itself has included the reimbursements in its taxable income for A.Y. 2000- 01. Without prejudice, it has been held by Hon'ble Supreme Court in the case of Sedco Forex International Inc.[2017 TII 38 SC INTL] 'reimbursements' can partake the nature of 'income'. The Ld. DR again reiterated that in the case of the assessee, the site, project or activity has continued for a period of more than the prescribed duration and the activities are being carried on with the help of expat as well as local employees. Accordingly, the above decision only re-confirms and strengthens the decision of the lower authorities. 10. We have heard both the parties and perused all the relevant material available on record. It can be seen that these expenses were actually incurred by the assessee and there is no element of income involved in these expenses. This has been demonstrated by the assessee du....