TaxTMI 
TaxTMI 
2020 (6) TMI 99
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..... 2. That in any case and in any view of the matter the action of Ld. AO/DRP in bringing to tax amount of Rs. 4,89,36,723/- by holding inter-alia that the entire receipts receivable under the contract with NATRIP was taxable as business income in India and that too on the ground that assessee had a Permanent Establishment (PE) in India is bad in law and against the facts and circumstances of the case. 3. That having regards to the facts and circumstances of the case Ld. AO/DRP has erred in law and on facts in presuming 75% of total receipts as attributable to the alleged PE. 4. That having regards to the facts and circumstances of the case Ld. AO/ Hon'ble DRP has erred in law and on facts in disallowing the aggregate expenditure paid to M/s GPO Ingeneria S.A., M/s AVL Iberica S.A., Mr. Alex Punset incurred for the purpose of earning income in connection with DRIP and Engineering Services in relation to NATRIP Project. 5. That having regards to the facts and circumstances of the case Ld. AO/ Hon'ble DRP has erred in law and on facts in disallowing the expense of Rs. 70,00,000/- paid to M/s IMaCs for non-deduction of tax at source u/s 40(a)....
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..../global consultants; (v) setting up of National facility for testing of tractors and off-road vehicles. Regional in use Vehicle Management Center together with National Accident Analysis facility and also Specialized Driving Training School at Rae Bareilly; (vi) setting up of National Specialized Hill Area Driving Training Centre and Regional in use Vehicle Management Center for the North East at Silchar. 4. The project was broadly split into three categories: i. For DPIR :Rs. 8,59,00,000 ii. For Engineering Services :Rs. 15,22,00,000 iii. For Construction Supervision :Rs. 17,69,00,000 5. An agreement was signed between the IDIADA and Natrip Implementation Society (NATIS) on 27.01.2006 at a total cost of Rs. 39.50 crores and following responsibilities were entrusted to Global Consultants under this agreement: i. To prepare a Detailed Project Implementation Report (DPIR) based on certain key deliverables; ii. To prepare detailed civil engineering drawings, designs, detailed architectural plans etc. and preparation of bid documents for civil works and equipment procurement; and iii. To undertake constructio....
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....n as FTS should not be taxed as business profit, since they are effectively connected with PE in India. In response, the assessee filed various replies, the content of which have been summarized by the AO in the following manner: • There is no permanent establishment in India in respect of rendering of services relating to Preparation of DPIR and Engineering services. • The services were rendered from outside India and, therefore, such consideration is taxable u/s 15A of the Act only. • The volume of documentation already submitted demonstrates that the activity of Detailed Engineering has been rendered outside India. • Even if it was to be concluded that the services relating to DPIR and Engineering together with those relating to Construction Supervision are effectively connected with PE, then Article 7(1) allows the authorities in India to tax only the profits attributable to the PE under Article 7. • These are in the nature of start up expenses which was in relation to the India Project Office that was set up for the purpose of Construction Supervision. The activity of Construction Supervision commenced only in fi....
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....costs • Supervision of the control qualify programme results • Coordination of the civil contractors with the test equipments suppliers • Organization of the commissioning of the utilities (electricity, HVAC, fluids, fuel supply) • Organization of the commissioning of the auxiliary buildings, laboratories and civil works. • Close out of the project: acceptance certificates open issue list and wrap-up meetings. 5.3. The following conclusion can be drawn after reading the general provisions of the contract is as under: * The project Consultancy Agreement is signed between three consortium partners and the definition of consultant and Article t of the agreement supports the finding of consortium. * The consultant has been retained for the entire project the scope of work for which end to end is as per Activity Schedule at Annexure B (refer article 1.1 of Agreement) extracted above has project milestones as per Annexure C and project sites as per Annexure C. * The services to be delivered are as per Annexure D of the Agreement and perusal of this will clearly indicate that the existence....
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.... India to understand evolvement of policies for standards and emissions norms. 3. ARAI and VRDE to understand existing tests being offered and pricing strategies. 4. Other agencies for reviewing test facilities and pricing strategies in neighboring countries and in the West. * Article 7 and 8 of the agreement regarding Report where it is laid-down that the consultant and the client shall meet on a regular basis and that the consultant shall ensure the availability of its personnel to attend such meetings as well as other meetings with other advisors and contractors etc. Inspection of services being performed is also provided for and the availability of personnel to discuss reports and information to be provided by the Consultant on the 4 th day of each month. Clearly these cannot be achieved without a PE. * At the end of each phase a detailed project implementation report to NATIS covering deliverables is required from the Consultant as per agreement. 5.4. In l ights of the above discussion the submission of the assessee is not accepted due to the following reasons: * FTS services cannot be stated to have been rendered directly ....
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.... Detailed Engineering and Construction Supervision. The services had been divided into project milestones and interim milestones in relation to the identified project sites only for the purpose of facilitating payment and timely implementation of the project. Hence the claim of the assessee that only construction supervision necessitated establishment of project office in India. • The assessee further subcontracted the contract to its consortium partner namely IMACS (ICRA Management Consultancy Services) and GPO Ingeniera S.A. The confirmations of both the parties are placed on record. As per the assessee, it has itself done only construction supervision. Even if the other milestones were subcontracted to outside parties, the full and undivided responsibility and liability for ensuring the performance of obligations and coordination among parties lies with the assessee. • One of the subcontracted parties is an Indian concern while the other party is a non resident. Effective coordination among parities is necessary considering the nature of project. Without having a base in India it is not practically possible to provide detailed engineering related to dif....
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.... the facts of the case prove that service PE had been established even before the establishment of the Project Office in India on 1-9-2006. 7.3 The assessee has submitted that there was no PE in India as the DPIR was submitted on 8-8-2006 even before the setting up of the project office which was or 1.9.2006. There is fundamental difference between AY 2009-10 and the current year and therefore, the f inding of existence of PE in AY 2009-10 is not relevant in AY 2007-08. It is further submitted that IMaCs performed the tasks required to be done in India in normal course of its business and therefore work through an agent of independent status cannot give rise to a PE Holding regular meetings with client about the progress of work cannot constitute a PE. Without prejudice, the assessee has submitted that even if services PE is established, 100% of the profits cannot be attributed to the PE, even though they may be effectively connected therewith. 7.4 The Panel has examined the matter, it is seen from the copy of the Agreement and its Annexures that the task of preparation of DPIR could not have to complete without detailed site visits in India and under taking detai....
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....which alone could have been considered and rendered through project office. Therefore, during this period for other services no PE could have constituted in India and that is the reason why, Order u/s 195/197 was passed after considering the entire agreement as well as material placed on record that services rendered has purely in the category of FTS. One very important fact which he pointed out that, all the payment was made prior to 01.09.2006 i.e. before the establishment of project office in India which is evident from TDS certificate placed in the paper book at page 80. This clearly shows that the entire payment has been received from the period 01.05.2006 to 31.08.2006. Thus, prior to earning of income, project office was not even established in India. In support, he drew our attention to the certificate of establishment of project office which has been placed at paper book page 54 which has been established w.e.f. 01.09.2006 issued by Registrar of Companies. He also drew our attention to a reply submitted before the AO dated 18.12.2009, the relevant contents for the sake of ready reference is reproduced herein below: "We have already submitted documents to establish....
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....ervices rendered in 'Fees for technical services' as defined in Explanation 2 to Section 9(1)(vii). We also submit that since the material on record as well as clear inferences from / other documents submitted by us establish that no services are attributable to any Permanent Establishment; Section 44DA f inds no applicability in the instant matter. Furthermore, if no services are attributable to any Permanent Establishment, then Article 7 read with Article 5 of the DTAC, too, does not apply and the payments are covered by Article 13." 12. Another important fact brought on record by him was that the department could not prove or there was any material to prove that there was any kind of Service PE in terms of Article 5(2)(k) of India-Spain DTAA. The number of days of the personnel visited in India during the year was only 77 days and not exceeded the period of 183 days. Thus, he concluded by submitting that; • firstly, the project office was established only for the purpose of carrying out construction supervision activity which was a non-starter and in fact stood cancelled; • secondly, the project office was established on 01.09.2006 and prior to t....
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....d 3 tasks is evident from following phrases in the annexure D for services and key deliverables. Task No 2- "Detailed civil Engineering and preparation of bid documents for civil works and equipment procurement" Starts form the phrase "The result of Detailed Engineering will he the project documentation structured in packages as defined by DPIR............"The relevant extracts of the agreement are pasted below: 1. Detailed Civil Engineering Project The result of the Detailed Engineering will be the project documentation structured in packages as defined by the DPIR. Each documentation package will contain all the information that the contractors would need for quotation purposes and will be the basis for them to execute the works. 5. Thus, the above terms of the agreement show that the task 2 is to the performed in accordance with task 1 i.e. DPIR. Further it mentions that the project will be developed where adaptation of master plan of each centre defined by DPIR ( task 1) to the definitive sites. 6. Task No.3 - "Construction supervision..." mentions that construction supervision of implementation works in each of construction activity sites ac....
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....oads, bridges or canals, the renovation (involving more than mere maintenance or redecoration) of buildings bridges or canals, the laying of pipe-lines and excavating and dredging. Additionally the term - installation project is not restricted to on installation related to a construction project; it also includes the installation of new equipment, such as a complex machine, in sn existing building or outdoors. On-site planning and supervision of the erection of a building are covered by paragraph 3. States wishing to modify the text of the paragraph to provide expressly for that result are free to do so in their bilateral conventions." 10. In the present case, the services are in the nature of site planning and thus, are covered as per article 5(2)(k) of DTAA. 11. It is also relevant to add that issue "whether the expressions "mining projects" or "like projects" occurring in Explanation 2 to Section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas or not?" was there before Hon'ble Supreme Court. In this regard, Hon'ble Supreme Court in t....
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....duration needs to be seen with reference to the entire project and not task wise. 14. In this regard, it is relevant to refer to text of "Klaus Vogel on Double Taxation Conventions, Third Edition", which provided that the minimum period for considering a construction site/project as a PE of an enterprise would begin when the enterprise starts to perform business activities on the spot in connection with the building site or construction or assembly of the project and any interruptions in the minimum period should also be included for determining the minimum period. The commentary by A. Skaar supports the position that time spent on onsite planning would also be included in computing the duration while considering whether a PE of an enterprise existed. 15. In view of the above discussion, it is submitted that the facts of the present case are clearly fall under inclusive definition of permanent establishment as per article 5(2)(k) because the task 1 and 2 together have duration running over the complete year and thus qualifies the threshold period as laid down in article 5(2)(k) of the DTAA. Without prejudice, it is also important to note that the stay period of ex....
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....of the IDIADA is situated. The case of the revenue is that looking to the nature of contract as discernable from the agreement various supervision and planning and construction, etc. the contract cannot be split and these are composite activities which requires lot of primary research and market research which are preparatory in nature which cannot be carried out without any PE in India before setting up of Project Office in India. 15. From the perusal of the relevant finding of the Assessing Officer as incorporated above, it is seen that various kind of presumption has been drawn by him like; i) for carrying out such services, existence of PE is essential precondition; ii) all the services are based on detailed site analysis which cannot be carried out without a PE; iii) FTS cannot be held to be rendered directly from Spain because no expenses relating to FTS has been incurred in India; iv) at the same time holds that there is a Service PE as well as project office PE at each site for rendering services relating to preparation of DPIR and engineering services; and v) India project office was set up not for the limited purpose of construction and supervision activities. However,....
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....: "A building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities ( together with other such sites, projects or activities, if any) continue for a period of more than six months in any twelve-months period, or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment." 17. Even if it is accepted that there was a some kind of activity which falls within clause (k), then such activity to fall within the ambit in scope of PE has to pass time period test prescribed therein, that, is 6 months in any 12 months period for which such project or supervisory activity was carried out. There is no such material or finding in the impugned order that any such kind of project or supervisory activity was carried out for more than six months in India. There has to be some kind of onsite planning and supervision activity which is completely absent here in this case, firstly, for....