TaxTMI 
TaxTMI 
2021 (8) TMI 986
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.... to tax as business profit under Article 7 of the India-Norway Double Tax Avoidance Agreement (' the Treaty') instead of " Fees for technical services" (" FTS") under Article 12, as contended by the appellant. 3. That the Assessing Officer erred on facts and in law in holding that stay of employees of the appellant in India during the relevant previous year resulted in constitution of permanent establishment ("PE") of the appellant in India under Article 5(2)(1) of the Treaty and the income arising to the appellant from Unitech Wireless was 'effectively connected' with such alleged PE. 3.1 That the Assessing Officer erred on facts and in law in aggregating the time spent by appellant's employees in India for rendering services under each SOF for the purposes of the duration threshold in Article 5(2)(1) of the Treaty. 3.2 That the Assessing Officer erred on facts and in law in not appreciating that each Service Order Form (" SOF") constituted an independent activity/ project, and the duration threshold in Article 5 (2)(1) of the Treaty was required to be tested with reference to presence of employees in India in relation to each SOF on an individual basis.....
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....ppellant. 6. That the Assessing Officer erred on facts and in law in levying interest under section 234B of the Act." 3. The assessee, a tax resident of Norway, entered into Business Service Agreement (BSA), dated 10.08.2010 with Unitech Wireless (Tamil Nadu) India P. Ltd. effective from 01.04.2009. As per the BSA, the assessee provided services under independent SOFs to Unitech Wireless (UW). Such income, as per the assessee was in the nature of " fee for technical services" (FTS) and so offered to tax @ 10% on gross basis, relying on Article 13 of the DTAA between India and Norway. 4. For the previous year ended 31st March 2010, in response to notice issued under section 142(1) of the Income- tax Act, 1961 the assessee filed return of income on 06.07.2011, declaring income of Rs. 13,77,94, 438/-. 5. The assessing officer held that the assessee has a PE in India in terms of Article 5 (2)(1) of the Treaty on the following grounds: (i) The employees of assessee have stayed in India for a period of 260 days, which exceed the threshold provided in item (1) to Paragraph (2) of Article 5 of the treaty; (ii) The consultancy services rendered by various....
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....defines PE with reference to same or connected project. In the circumstances SOF cannot be considered individually but must be aggregated as has been done by the AO. 5.2.3.3 Thus there is no infirmity in the order of AO. Consequently in view of the above discussion DRP finds no ground to interfere with the order of the AO and the objection is rejected by the DRP." 8. Thus, we find that the ld. DRP held the assessee to be having a PE in India based on the billings scheme showing consolidated invoices and various SOF have been operated as a single project. 9. Aggrieved the assessee filed appeal before us and argued that the assessee cannot be considered as a PE, referring to various provisions of the treaty. The ld. AR argued that Article 5 of the Treaty defines PE to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on. He referred to Paragraph 2 of Article 5 of the DTAA which provides illustrative situations, that could result in PE of an enterprise in the other contracting state. The relevant provisions relied are as under: "Article 5: PERMANENT ESTABLISHMENT-1. For the purposes of this Convention, the te....
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....helinn 16-Mar- 09 3-Apr- 09 April 1 - 4 April 14-30 20 Soby, Lars Christian 25-Mar- 09 2-Apr- 09 Moe, Oyvind Solberg 25-Mar- 09 2-Apr- 09 Nyborg, Espen 29-Mar- 09 3-Apr- 09 Revhaug, Jon Omund 30-Mar- 09 4-Apr- 09 Falkgard, Kristian 14-Apr- 09 18-Apr- 09 Revhaug, Jon Omund 14-Apr- 09 18-Apr- 09 Wellesen, Asbjorn Bjornstad 14-Apr- 09 27-Apr- 09 Moe Oyvind Solberg 14-Apr- 09 29-Apr- 09 Lindseth, Bjorn 14-Apr- 09 30-Apr- 09 Soby, Lars Christian 16-Apr- 09 29-Apr- 09 Talmoen, Ivar 20-Apr- 09 25-Apr- 09 Revhaug, Jon Omund 26-Apr- 09 KMay- 09 Talmoen, Ivar 3-May- 09 14-May- 09 May 1 3 - 16 May 20 - 31 25 Nyborg, Espen 6-May- 09 16-May- 09 Moe, Oyvind Solberg 11-May- 09 15-May- 09 Revhaug, Jon Omund 11-May- 09 15-May- 09 Moe, Qyvind Solberg 20-May- 09 29-May- 09 May Talmoen, Ivar 24-May- 09 5-Jun- 09 Revhaug, Jon Omund 25-May- 09 29-May- 09 Soby, Lars Christian 25-May- 09 4-Jun- 09 Nyborg, Espen 27-May- 09 5-Jun- 09 Lindseth, Bjarn 2-Jun- 09 24-Jun- 09 Jun....
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.... Nature of activity Page No. of Paper Book Details of services provided Copy of SOF Details of days spent in India Details of days spent in India-Clubbed 1 Sourcing activities 152 158 137 179-180 10 Sourcing activities 154 169 144 15 Sourcing activities 155 174 149 2 Market activities 152-153 159 138 181 11 Market activities 154 170 145 16 Market activities 155 175 150 3 IT/ IS activities 153 160 139 92 of CL PB 4 IT/ IS activities 153 161 140 7 IT/ IS activities 154 166 142 12 IT/ IS activities 154 171 146 17 IT/ IS activities 155 176 - 6 HR activities 153 163-165 141 182 18 HR activities 155 177 - 5 Other contracts 153 162 - - 8 Other contracts 154 167 143 - 9 Other contracts 154 168 - - 13 Other contracts 155 172 147 - ....
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....argued that the Article 5(2)(1) doesn' t distinguish between same or similar type of services. He argued that it is an inclusive definition of services and mandates that the services including consultancy services of the same are to be treated as connected projects. The arguments of the ld. DR in writing are as under: "4. The appellant has challenged the AO' s addition based on the ground that, a) that services specified in various SOFs constituted separate projects. It is submitted that services governed by uniform terms and conditions agreed between the parties and mere mention of the varying services in a common Agreement, does not make it one consolidated project. b) Further, the appellant submitted that different services under SOFs for Marketing Activities have been provided by different departments with different area of expertise. Similarly, the services related to Sourcing Activities have been by different departments. Thus, it Is submitted that each SOF, and in some cases, each service under a SOF, is separate and independent. c) The services rendered under each SOF are unique. d) The appellant submitted that the words " sa....
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....ivities, may be considered as part of the same activity or project and even then the number of days spent in India in aggregate during the relevant year under each such activity/ contract do not exceed the time threshold prescribed in Article 5(2)(i) of the Treaty. k) In paragraph 5 of Article 13 of the Treaty implies that the permanent establishment of a foreign enterprise must first be existing or situated in the other Contracting State, and the earning of fees for technical services must be effectively connected with such existing PE. Reliance is placed, in this regard, on the decision off the Delhi Bench of the Tribunal in the case of Guardian International Corporation: ITA No. 101(Del) 97. l) In terms of paragraph (1) of Article 7 of the Treaty, even if a Norwegian enterprise carries on business through a PE in India, only those profits which are attributable to that PE can be brought to tax in India. m) the appellant clarified that the services were partly rendered from India and partly from Norway through phone, emails, etc. for work performed outside India, no profit can be taxed in India, whether or not an appellant has a PE in India. n)....
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....f the article 5(2)(i) highlights that the scope of services covered under the clause are not l imited to one project but also to connected project. Thus, that the services, similar or not, but of the same project and connected project need to be aggregated to check the total duration of the activity. 8. Coming to the OECD commentary on the explanation towards " same" or " connected projects" in the clause article 5(2)(i), it is clarified that the explanation is towards the same or connected project and not services per se. Further, the example taken in this interpretation only clarifies that if there are two different projects of a service provider pertain to one project of a particular customer, then such unconnected projects would not be taken as same or connected merely because of one customer. So, it provides that merely the service is towards UNINOR group will not make it similar project. However, in the present case, it is only a single project even at the end of the service provider which has been entered through single business service agreement and single invoice has been raised across services off the same project. Thus, the aforesaid explanation of OECD is limit....
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....ample any organization or project will be mix of people, processes and technology and all three are well integrated to finally shapeup the project/ organization. Thus, one cannot take a plea that HR services towards people functions are different from process functions even it the same are for the same project. 13.In view of the above, it is submitted that the facts of the present case clearly fit into article 5(2)(i) of India Norway DTAA. Thus, it is prayed to uphold the action of the AO to hold it a case of service PE. As regards the action of the AO in allowing expenses to the tune of 40% of the receipts in accordance with Rule 10, the appellant argued to apply mark up of 3. 5% on cost which translates to 3. 38% of revenue. The DRP dealt with this plea of the appellant in its order. It is highlighted by DRP that the action of the AO is correct in view of the fact that no documentary evidence was submitted in respect of incurring of expenditure. Since, the cost in this case is mainly on account of salary expenses of resources working on delivery of services, therefore, the appellant ought to have submitted evidence regarding payment of salary to such resources during ass....
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....ess (East) India P. Ltd., Unitech Wireless (West) India P. Ltd., Unitech Wireless (Delhi) India P. Ltd., Unitech Wireless (Mumbai) India P. Ltd., Unitech Wireless (Kolkata) India P. Ltd., which has been commonly referred to as UNINOR as fervidly argued that, UNINOR is not a single customer. UNINOR group entities requisitioned from time to time based on its business needs and related to different functional areas viz., sourcing, marketing, IT/IS, human resources etc. of its business which was spread across various part of India. Each such SOF, it is pertinent to note, entailed distinct scope of activities, for which employees from different departments with different areas of expertise were deputed by the assessee. It was argued that each requisition by way of issuance of separate SOF had no commercial or geographical coherence with the other SOF issued by UNINOR, therefore, the period of stay of assessee' s employees under different and separate SOF' s cannot be aggregated to determine the period of stay for the purposes of Article 5(2)(1) of the India-Norway DTAA. 18. For the sake of convenience and ready reference, the arguments of both the parties in writing are reproduced he....
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....lated to a single project of the customer, one should not consider that the services are performed for the same project." e) Intimation is required to given for services agreed through each SOF to the Audit Committee. f) During the year under consideration, Appendix A was not in force and services agreed in Appendix 1 were also not rendered. Only the services agreed vide separate SOFs were rendered by the appellant. In case such services had any connection with the main agreement, then services agreed in Appendix A and Appendix 1 would also have been rendered. g) Each requisition of employees for which separate SOF was placed had no inter connection/inter lacing with the other SOF issued by the appellant and, therefore, the period of stay of employees under different and separate SOFs could not be aggregated to determine the period of stay for purposes of Article 5(2)(1) of the Treaty. h) Unless there is commercial coherence between the said activities, the duration test of six months has to be applied with reference to each activity. i) For constituting a service PE in terms of Article 5(2)(i) of the treaty, furnishing of services invol....
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....of Telecommunication to provide Telecommunication services and the appellant has been engaged by UNINOR as a service provider to efficiently provide the services. This is the contest recorded in the business service agreement. Further, the agreement itself defines that appendixes and service order forms under the agreement shall be deemed to be read as an integral part of the agreement. (refer page 2 of the agreement). Further, clause 4.4 of the business service agreement provides that the service charge shall be invoiced quarterly and it specifies that direct charge of business service should be used unless the basis for separate charge is demonstrated. It is observed by DRP that the invoice is raised quarter wise without making any distinction SOF wise. 7. The most relevant issue in this case is that whether Article 5(2)(i) mandates the services of only similar type to be aggregated to arrive at threshold period of 183 days or the services of the same or connected projects to be aggregated? The appellant position is that the services activity period can be aggregated only if the services are of same nature. However, it is important to note that the treaty has used two di....
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....on of 2nd round of GSM awards. All other SOFs are working towards the next stages of same GSM project. The sourcing activity SOF talks of preparation, execution and negotiation of IT outsourcing contract and the marketing activity SOF talks of process description of the same IT project and also about IT procurement. Further, IT/IS activity SOF also talks of IT solution architecture and IT solution scoping. The network and IS/IT activity SOF talks of benchmarking for IT outsourcing projects and its evaluation. Thereafter, project office activity SOF provides for support and assists in completing contract for the GSM network and IT support systems. Furthermore, with same theme of end to end working on GSM project and IS/IT outsourcing, there is SOF on boarding and training, HR and workshop on regulatory issues. Effectively, it is seen that all SOFs are well integrated where one SOF is the input for the subsequent SOF for example, sourcing SOF provides for first phase of preparation and execution of contract and marketing phase provides for next phase i.e. describing the process part of the contract and procurement. IT/IS phase is the next phase where the solution is designed and so o....
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....ularly in respect of Article 5(2)(1)." Rejoinder to the written submissions filed by the Ld. CIT(DR) "This has reference to the written submissions e-filed by the Ld. CIT(DR) before the Hon'ble Bench on 1st June 2021. In conjunction with written submissions filed on 06.01.2020, the appellant wishes to submit the following rejoinder to legal contentions raised by the Ld. CIT(DR): Re: Aggregation of 'services' of similar nature under different Service Order Forms ('SOFs') are an integral part of the Business Service Agreement [Para 5-6 of the submission] In the aforementioned paragraphs, the Ld. CIT (DR), has observed that the Business Service Agreement ("the Agreement") itself provides that the appendices and service order forms under the Agreement shall be deemed to be read as an integral part of the agreement. In this regard, it is submitted that the fact that SOFs form integral part of the Business Service Agreement has never been disputed by the appellant. The appellant's contention, as submitted vide the written submissions filed before the Hon'ble Bench, is that the SOFs constitute separate and independent projects, which are merely....
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.... the present case the SOF's represent a single project being entered under a single agreement for which a single invoice has been raised. In paragraphs 9-12, the Ld. CIT(DR) has contended that all the SOFs are interconnected with each other. Further, the said SOF's, it is pertinent to note, were issued by UNINOR group from time to time based on its business needs and related to different functional areas viz., sourcing, marketing, IT/IS, human resources etc. of its business which was spread across various part of India. Each such SOF, it is pertinent to note, entailed distinct scope of activities, for which employees from different departments with different areas of expertise were deputed by the appellant. It will be appreciated that UNINOR group had requisitioned services of different personnel of the appellant in relation to different functional areas viz., sourcing, marketing, IT/IS, human resources etc. of its business which was spread across various parts of India. It is respectfully submitted that each requisition by way of issuance of separate SOF had no commercial or geographical coherence with the other SOF issued by UNINOR, therefore, the perio....
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....s at whatever terms it deems fit, at its sole discretion. However, such appointment does not free UNINOR for any of the obligations under this Agreement for Services already agreed under this Agreement by way of approval of Appendix A (Appendix 1) or Service Order Form as per the format given in Schedule I." On perusal of the aforesaid, it will kindly be appreciated that the appellant was not an exclusive service provider and its services were availed by the UNINOR group only on need basis, for which separate SOF's were issued by it from time to time. In that view of the matter, the appellant, by no stretch of imagination, be construed to be carrying out a consolidated project activity comprising of different services. In fact, the appellant appropriated the manpower and other resources for rendition of services as per distinct SOF's, as and when issued. At the cost of repetition, reference is again made to the OECD's Model Tax Convention on Income and on Capital: Condensed Version 2017 wherein it has been clarified that the words "same" or "connected projects" should be interpreted from the perspective of the service provider and merely because services under dif....
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....f the Treaty [refer pages 103 to 107 of case law paper book]. Re: Attribution of Income [Para 13 of the Ld. CIT(DR)'s submission] With regard to the alternate contention of the appellant, w.r.t. attribution of income, the appellant, had submitted as under: A. In terms of Explanation 1(a) to section 9(1)(i) of the Income-tax Act, 1961 ("the Act") read with paragraph (1) of Article 7 of the India- Norway DTAA, only the income relating to the services actually rendered by appellant's employees in India could be attributed to the alleged PE in India; B. Only the mark up of 3.5% of cost [as per Article 4.2 of the Agreement], which translates to 3.38% of revenues, could at best be considered as the income attributable to the revenues pertaining to the alleged PE in India; C. The assessing officer ought to have applied the global operating profit/ (loss) margin of the appellant to the revenues relatable to alleged PE, the same being a rational and accepted method of computing income of PE. Since the appellant has, in fact, incurred losses globally during the financial year 2009-10, there is no income attributable to the alleged PE in India on t....
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.... India-USA DTAA, while the case of appellant requires application of India-Norway DTAA, particularly in respect of Article 5(2)(1). It is, respectfully submitted that the language of Article 5(2)(1) of India- Norway DTAA, which relates to constitution of a service PE, has no relevance inasmuch as the decision of Guardian International Corporation (supra) was cited by the appellant in the context of taxation of FTS income in absence of a pre-existing PE. The language of relevant DTAA's in this regard is reproduced herein below for ready reference: India-Norway DTAA "ARTICLE 13 ROYALTIES AND FEES FOR TECHNICAL SERVICES ................. 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or perform in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for....
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....e the assessee had PE in India by way of PO & LO, even the supervision fee was taxable in India as business income, being attributable to the PE in India. The issue for consideration was whether the supervision fee being in the nature of FTS could be said to be effectively connected with the PE and thus brought to tax as business profits in India. The High Court, after considering the language of Article 12(5) of the Indo-Japan DTAA [which is similarly worded as Article 13(5) of India- Norway DTAA], observed that the clause makes a distinction between those incomes which are the result of activities of the PE and the income that arises by reason of direct dealings by the enterprise from the head office without the aid or assistance of the PE. Accordingly, the Court held that only income which is connected with the activities of a pre-existing PE could be brought to tax as business profits, and therefore, supervision fee was not taxable as business profits in this case." 19. We have gone through the Business Service Agreement (PB 89 to 108), copies of invoice (PB 109 to 115), details of employees (PB 116 to 119), project wise agreements, details of activities, scheme of ....
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....ave gone through the various service order forms wherein it has been mentioned continuously that the contracts are performed in accordance with the service agreement between UNINOR and Telenor ASA, referred as the contractor and UNINOR referred as the recipient for all the services. 23. We have gone through the various SOFs which involve sourcing activities, marketing activities, ITeS activities, network activities, project activities. The entire schemes of activities are as under: SOF 1: Sourcing Activities * Preparation, execution and negotiation of 2nd round of GSM awards * Preparation, execution and negotiation of IT outsourcing contract.. * Preparation, execution and negotiation of IN contract award ...................... SOF 2: Market Activities * Device strategy development.. * Product development ..................... SOF 3: IT/IS Activities * IS/IT Solution, architecture and business scoping * Service Delivery platform solution and architecture ............. SOF 4: Network and IS/IT Activities * Benchmarking for IT outcourcing project; commercial workstream ....
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....reted from the perspective of the enterprise that provides the services. Thus, an enterprise may have two different projects to provide services to a single customer (e.g. to provide tax advice and to provide training in an area unrelated to tax) and whilst these may be related to a single project of the customer, one should not consider that the services are performed for the same project." 25. With reference to the 'connected project' the commentary further held as under: " The reference to ' connected projects' is intended to cover cases where the services are provided in the context of separate projects carried on by an enterprise but these projects have a commercial coherence.The determination of whether projects are connected will depend on the facts and circumstances of each case but factors that would generally be relevant for that purpose include: - Whether the projects are covered by a single master contract; - Where the projects are covered by different contracts, whether these different contracts were concluded with the same person or with related persons and whether the conclusion of the additional contracts would reasonable have been expe....