TaxTMI 
TaxTMI 
2022 (5) TMI 325
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....ut jurisdiction. 2.On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in determining the permanent establishment of the foreign suppliers as per the general Double Taxation Avoidance Agreements ignoring the specific finding given by the Hon'ble ITAT Jabalpur in the case of the appellant specifying treaty-wise relevant definition of 'permanent establishment' to be considered in the case of the appellant. 3.On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the order of the Assessing Officer by ignoring the submissions and documentary evidences placed by the appellant to establish that no liability to deduct tax arose for the following reasons: (i) A few foreign suppliers had not provided any installation or supervisory services and contracts were purely in nature of supply of machinery; (ii) In some cases where supervision charges were paid a separate invoice was raised on which the tax was deducted by the appellant and (iii) In some cases though the contract contained separate charges to be paid for supervision services, the installation of machiner....
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....he above grounds of appeal. 2. From perusal of the grounds we find that following two issues needs to be adjudicated:- A. Whether Ld. Assessing Officer erred in referring to provision of income Tax Act even though the ITAT held that the question of chargeability under section 5 and section 9 is academic, thus making the assessment bad in law B. Since matter was set aside by ITAT for examination of agency PE only whether Ld. Assessing Officer failed to bring anything on record to establish that such a dependent agency PE existed in light of articles 5 & 6 of Double Taxation Avoidance Agreement (in short DTAAs). 3. Brief facts of the case as culled out from the records are that the assessee is a limited company engaged in the manufacturing and trading of cement. Assessee is responsible for deducting tax at source under chapter XVII of the Income Tax Act, 1961. Assessee during the course of business entered into transaction for purchase of equipment and other material to be used in the manufacturing process. The transactions under consideration for non-deduction of TDS were conducted with 8 non-resident entities. A summary of the total payment made to foreign p....
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....g the assessee in default for not deducting tax at source on the payment made to various non-resident being during the year under consideration for purchase, installation and supervision charges. Aggrieved assessee challenged the finding of Ld. Assessing Officer before the ld. CIT(A) who also confirmed the addition made by the ld. Assessing Officer holding the assessee to be in default for not deducting tax u/s 195 of the Act. 5. Aggrieved by the order of Ld. CIT(A), assessee preferred an appeal before ITAT, Jabalpur and vide order dated 24.12.2014 in ITANo.252/Jab/2013, this Tribunal firstly held that the question whether remittance were taxable under the provision of income tax Act 1961 of particularly u/s 5(2)(b) of the Act were of only academic in nature as the provisions of Double Taxation Avoidance Agreement (DTAA) are more beneficial to the appellant and hence the provisions of the Income Tax Act 1961 could not be pressed into play in the appellant case. Secondly this Tribunal set aside the limited issue to the Ld. Assessing Officer to ascertain whether any of the foreign suppliers had a Permanent Establishment as defined in the respective DTAAs. To give effect to the ord....
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....RHI AG 545 to 576 8 Chart Showing Details of Installation Work Done with Respect to Machinery Imported 577 9 Copy of RA Bill of M/s. Gannon Dunkerley& Co. Ltd. For Bucket Elevator 578 to 579 10 Copy of Tax Invoice and Work Order of M/s STG Refractory Services Pvt. Ltd. For Erection, Commissioning and Installation of Brick Kiln 580 to 584 11 Copy of Work Order of M/s. Gannon Dunkerley& Co. Ltd. For Coal Washery Alongwith Other Civil Work 585 to 592 12 Copy of R.A. Bills Raised By M/s Hajee A.P. Bava& Co. for Fabrication and Erection of Coal Washery 593 to 596 13 Copy of Letter of Intent for purchase of equipment for Polycom Model No. 20/13-9 marked as POLBEC dated 15.09.2009 597 to 599 14 a) Copy of a Formal Contract Entered into Between the Appellant and Polysius AG dated 01.12.2009 for Supply of Machinery 600 to 602 b) Copy of Contract for Supply of Technical Assistance and Guidance 603 to 704 15 Copy of TDS Challans Paid in the Case of M/s Polysius AG and M/s Shengyang Heavy Machinery Co. Ltd. 705 to 708 16 Copy of Invoices for Charges for Technical Assistance and Guidance Provided by....
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....E NO. 1 Copy of Judgement of Hon'ble Bombay High Court in the Case of CIT vs. Indo-Aden Salt Works Company reported at (1959) 36 ITR 0429 (Bom.) 1 to 4 2 Copy of Judgement of Hon'ble Ahmedabad Tribunal in the Case of Krishna TerinePvt. Ltd. vs. ACIT reported at 130 ITD 0411 (Ahd.) 4 to 22 3 Copy of Judgement of Hon'ble Allahabad High Court in the Case of S P Kocchar vs. ITO reported at 13 Taxmann 414 (Allahabad HC) 23 to 30 4 Copy of Judgement of Hon'ble Madras High Court in the Case of Neeta Sunil Shah vs. ITO reported at 112 Taxmann 213 (Madras HC) 31 to 38 5 Copy of Judgement of Hon'ble Gujarat High Court in the Case of Saheli Synthetics vs. CIT reported at 302 ITR 126 (Gujarat HC) 39 to 46 6 Copy of Judgement of Hon'ble Delhi Tribunal in the Case of Sheraton International Inc vs. DDIT reported at 107 ITD 120 (Delhi ITAT) 47 to 116 7 Copy of Judgement of Hon'ble Supreme Court in the Case of CIT vs. R.D. Aggarwal reported at 56 ITR 0020 117 to 126 8 Copy of Judgement of Authority for Advance Ruling in the Case of TVM Ltd. Vs. CIT reported at 237 ITR 230 AAR 127 to 142 8 Copy of Judgement of Hon'ble Trib....
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.... POLBEC 3 Rexnord NV Purchase of Bucket Elevator 4 Thermo Fisher Scientific Ecublens SARL Purchase of X-Ray Analytical Model ADVANT'X INTELLPOWER 5 MMD Asia Pacific Ltd. Purchase of complete coal crusher 6 Shanyang Heavy Machinery Co. Ltd. Vertical Roller Mill for Coal Grinding Work 7 RHI AG Purchase of Basic Brick (Ankral R2CD and S2CB) 8 RHI AG Purchase of Basic Brick (Ankral R2CB and S2CB) 10. Ld. Assessing Officer in the second round of the proceedings again held the assessee in default and levied tax @ 41.2% for non-deduction of tax u/s 195 of the Act and charging interest thereon. First issue raised by the assessee is that the ld. Assessing Officer exceeded his jurisdiction and ignored the finding of this Tribunal. 11. We notice that in the first round the CIT(A) confirmed the AO's order and held the appellant to be "assessee-in-default" for not deducting taxes u/s 195 before remitting the gross payments to foreign suppliers. Aggrieved by the CIT(A)'s order, the appellant preferred second appeal before this TAT, Jabalpur. The appeal of the appellant was decided by this ITAT, Jabalpur in ITA No. 252/JAB/13 dated 24....
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....S ought to be deducted. i. The ITAT further observed that although the appellant had deducted tax on the payments made to some of foreign suppliers from whom supervisory services were availed under Article 12 of the respective DTAAs in the subsequent financial years; but even such installation, assembly, and supervisory services, if any, rendered by foreign suppliers were not chargeable to tax in India since such services did not fall within the purview of Article 12 of the respective DTAAs. In support of this proposition, the ITAT referred to the definition of 'permanent establishment' outlined in Article 2 of the respective DTAAs wherein it was stated that unless the installation or assembly project or supervisory activities in connection with supply of any plant or project does not cross the specified threshold time limit, the non-resident enterprise cannot be treated to have a permanent establishment in India.The ITAT quashed the original order passed u/s 201(1)/(1A) dared 27.03.2012 and deleted the tax demand raised pursuant thereto and set aside the order on the limited issue to the file of the AO for verifying whether any of the foreign suppliers had a Permanent Est....
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....allation/assembly or supervisory PE in India, only then the AO was given the liberty to ascertain income attributable to such activities rendered by the suppliers in India through such PE and raise tax demand thereon. iv. Subsequent to passing of the said appellate order, assessment proceedings were reconducted by the ITO (IT & TP), Bhopal. The AO held that the foreign vendors have a dependent agency permanent establishment in India and thus all payments made by the appellant are subject to TDS under section 195. 13. We notice that to give effect to the order of this Tribunal dated 24.12.2014 proceedings were initiated by ITO (IT&TP), Bhopal in the case of the appellant. As per para 58 of the ITAT's order, it was held by the ITAT that the scope of Section 5(2)(b) of the Act is academic since India does not have the right to tax income in respect of rendition of installation, commissioning, or assembly services, embedded in the invoice value of the related equipment, plant or machinery. The payments made to non-resident entities have no tax implications at all under the tax treaties. However, as the revenue authorities had not examined the aspects of DTAA, the matter....
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.... TangsangSenpu Mine Equipment Co. Ltd. China Article 5(4) 6 Rexnord NV Belgium Article 5(4)(a) 7 Thermo Fisher Scientific Ecublens SARL Switzerland Article 5(5)(i) 8 MMD Asia Pacific Ltd. UK Article 5(4) 17. We observe that instead of following the findings of the order of this Tribunal in the case of the appellant pertaining to 'permanent establishment', the Assessing Officer has referred to completely different definition of 'permanent establishment' which is not acceptable This Tribunal has referred to the definition of 'permanent establishment' wherein it has been stated that unless the installation or assembly project or supervisory activities in connection with supply of any plant or project does not cross the specified threshold time limit, the non-resident enterprise cannot be treated to have of 'permanent establishment' in India. 18. The scope of enquiry and assessment of remittances made to foreign parties abroad was limited to the question whether any of the foreign suppliers had rendered installation, assembly or supervisory services and/or carried out such project in India in connection with the supply of plant and machin....
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....f law sought to be raised by the Revenue could not be considered." 20. In support of the above, the appellant made the following submissions on the scope and ambit of an assessment when the matter has been 'set aside' by this ITAT: 1. As per settled law, the order of the Tribunal u/s 254(1) of the Act must be read and understood in the proper context and in the light of all that is stated in the order itself. 2. It is also settled law that in a 'set aside' proceedings the authorities below are bound to decide as per the direction contained in the order and it is not open for the authorities to conduct fresh enquiry. The authorities below are precluded from entertaining a new plea. The authority is confined to the subject-matter on remand by the Tribunal, no other question could be considered or to enlarge the scope of the proceedings in contradiction to the findings given by the Tribunal. 3. Attention in this regard, is craved to the following decisions: * The Decision of the Hon'ble Calcutta High Court in KatiharJuteMills (P.) Ltd. vs. Commissioner of Income-tax, [1979] 120 ITR 861 (CAL.) wherein the Hon'ble jurisdictional High Court has held....
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....oring of the appeal must be read. It is true that read by itself the last sentence of the order would suggest that the AAC was being directed to deal with the entire appeal on its own merits. The order of the Tribunal must, however, be read and understood in the proper context and in the light of all that is stated in the order itself and if we do so, as indeed we should do so, there is considerable force in the submission on behalf of the assessee that the order must be read as restricting the scope of the inquiry by the AAC only to the question of merits affecting the claim for relief from super-tax. We must, however, observe that there is in this case scope for the contention very strongly pressed before us by Mr. Joshi on the consideration of the matter, we prefer to take the view that the order of the Tribunal required the AAC to enquire only into the matter of relief from super-tax on its merits." * The decision of the Hon'ble ITAT Ahmedabad in the case of Krishna Terine (P.) Ltd. vs. ACIT reported at 130 ITD 0411 (Ahd)that has held as under: "12. .....The order of the Tribunal is stated to be final between the parties because nobody pointed out if the s....
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....enable and unsustainable therefore, the order of the Ld. AO is quashed on the ground of being illegal and beyond jurisdiction and demand raised in the said order are deleted. Common legal issues raised in ground no.1 & 2 of assessee's appeals for A.Y. 2010-11 & 2011-12 are allowed. 23. As regards the second common issue about the existence of Permanent Establishment (in short (PE) of the alleged non-resident in India is concerned though the issue has become merely academic as we have already quashed the assessment order being illegal and bad in law but still will deal the same for academic purpose. 24. During the course of assessment proceeding the assessee submitted various documents related with the foreign vendor including purchase orders in response to the AO's roving queries so as to prove that alleged non-resident have no PE in India. However, Ld. AO held that these foreign vendors had an agency PE in India on the following grounds: a. The communication has been routed through agent and the agent was involved in the negotiations and discussion with appellant to finalise the transaction. The AO has arrived at the aforesaid conclusion as the purchase orders/lette....
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....AO ought to have carried out thorough verification with the said parties. Instead, the AO has simply relied on the wordings of the purchase orders without verifying the complete facts of the case. No material has been brought on record by the AO to show that these Indian entities habitually acted on behalf of the non-resident entities. The finding arrived at by the AO are based on irrelevant and insufficient material. 28. From perusal of all the communication (through purchase orders and others) between the assessee and non-resident vendors we find that the entire transactions were carried out with the nonresidents on a principal-to-principal basis. As can be seen from the purchase orders and contracts of purchase entered into with the non-resident suppliers, that these Indian entities(agents) did not have any authority to bind the non-resident or the appellant. All the purchase orders were directly raised by the appellant in the name of the non-resident parties. The delivery of the machineries were taken directly by the appellant from the non-resident entities without any involvement of the Indian concerns as can be seen from the invoices raised by the non-resident entities (Pa....
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....under DTAA". There is not even whisper of a suggestion that the non-resident vendors had a place of business in India. We have carefully perused the material on record and the orders of the authorities below and we do not find that suggestion anywhere. The case of existence of the PE thus hinges on whether by the virtue of, what is normally termed as, installation PE as could come up by the nature of the activities leading to the income impugned before us. The related provisions in respect of all these jurisdictions above are as follows: Indo Austria tax treaty ARTICLE 5 Permanent Establishment 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: (i)a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (for the same or connected project, site or activities) continue for a period of more than six months. (Emphasis by underlining suppli....
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....phasis by underlining supplied by us; portion not reproduced not relevant for our purposes) India UK tax treaty ARTICLE 5 Permanent establishment 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" shall include especially: (j) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than six months, 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; (Emphasis by underlining supplied by us; portion not reproduced not relevant for our purposes) Indo US tax treaty ARTICLE 5 Permanent Establishment 1. For the purposes of this Convention, ....
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....or installation or assembly project, or supervisory activities connected therewith, exceed 10% of the value of related plant, machinery or equipment." i. Further As per Article 5(5) of the DTAA between India and Austria, "Where a person - other than an agent of an independent status to whom paragraph 6 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 such a person: (a) has, and habitually exercises, in that State an authority to conclude contracts in the name of the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business would not make this fixed place of business a permanent establishment under the provisions of that paragraph; or (b) has no such authority, but habitually maintains in the first-mentioned State a stock of goods merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) habitually secures orders in the first-mentioned State, wholly or almo....
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....s and non-resident vendors wherein habitual/sustained ability to negotiate or secure contracts could be demonstrated. The ld. assessing officer has jumped to the conclusion of existence of permanent establishment due to the involvement of local parties providing auxiliary services. The assessing officer's contention is that the communication has been routed through the agent and the agent was involved in the negotiations and discussion with the appellant to finalise the transaction. The assessing officer made the farfetched assumption that all negotiations were entered into by agents on behalf of the vendors only on the basis of marking of such parties in communication of final POs and LOIs between the appellant and the vendors. 32. In the case of Mitsui & Co Ltd vs DCIT ITA No 4377, Coordinate Bench Delhi held as follows: "It is not the case of the Assessing Officer that MIPL habitually exercised authority to conclude contracts. It is also not the case of the Assessing Officer that MIPL habitually maintains a stock of goods or merchandise. Thus, the condition of (a) and (b) are not fulfilled. The third condition in (c) is habitually securing orders for the assessee. In....
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....ts were habitually concluded by the third parties on behalf of the non-resident vendors. No enquiry with any of the parties was conducted by the ld. Assessing officer to establish that the conditions of existence of PE as per the DTAAs were satisfied. Further, dependency of the third parties was not established by the ld. Assessing officer. It is the assessee's contention that the ld. Assessing officer has incorrectly established existence of permanent establishment without conducting sufficient enquiries and bringing sufficient material on record in light of the articles of the DTAAs. 36. The ITAT in the case of Pubmatic India Pvt. Ltd.(2013) 36 taxmann.com 100(Mum Tribunal) held that "where risks and rewards of the transaction are borne by the two contracting parties from different countries, the transaction is on a principal-to-principal basis and thus agency PE cannot be established." 37. Further, to interpret the words 'has' and 'habitually exercises', guidance taken from the Advance Ruling in the case of TVM Limited vs. Commissioner of Income Tax (199) 237 ITR 230 It was held: While the expression "has" may have reference to the legal existence of such authorit....
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....he taxable territories to purchase goods manufactured by the non-residents which the latter were not obliged to accept. The expression "business connection" postulates a real and intimate relation between trading activity (1) 22 I.T.R. 241 carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the non- resident in his trading activity. In this case such a relation is absent." 39. As regards the decisions relied by Ld. AO we find that Ld. counsel for the assessee has placed contentions by distinguishing the facts of the case relied by Ld. AO. The facts of the assessee depicted in the chart below: Case Law Facts of Case Law Facts in Assessee's Case GVK Industries v The issue was pertaining to existence of business connection Only issue of Agency PE as per DTAA was to be examined ITO (1997) 228 ITR 564 Held that the essence of BC is the existence of close, real, intimate, relationship, and common interest Nothing brought on record to establish this. Held that BC to be determined on the facts and circumstances of each case ....
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....has recorded that the foreign suppliers had PEs in India which marketed and sold the machineries to the appellant or that the contract or agreement for sale of plant and machineries were concluded in India or that the sale of machineries were concluded in India and thereby entire income on its sale accrued in India are based on no tangible or relevant material or evidence. Before recording such finding the AO did not bring any conclusive proof to substantiate such finding. The AO's findings were based on irrelevant information and material. Merely because correspondence between the appellant and the foreign suppliers was marked to the local representatives; did not ipso facto lead to conclusion that the Indian representatives were agents of the foreign companies having authority to conclude sale transactions. The appellant submits that the Indian representatives had merely liaised with the appellant for dissemination of information and they were in no way connected with finalization of the terms as well as orders placed on the foreign suppliers for plant and equipment ultimately purchased. In particular it emerges that these representatives had no role whatsoever in connection eith....
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....bitrary manner held that income embedded in supply of plant and machinery was liable to be taxed in India. 42. Further we find that Ld. AO computing income to the foreign remittance was entirely arbitrary, high pitched and based on no material evidences. The documentary evidences on record clearly show that the deliveries of plant and machinery were taken by the appellant outside India and the property in goods passed in assessee's favour outside India. It is a settled legal proposition that even if any income is to be imputed to any transaction on account of business connection then also the entire income associated with the transaction cannot be considered to be assessable in India. What is chargeable to tax in India is the income which accrues or arises as a result of business activities carried on in India. It is not AO's case nor he has proved by the cogent evidence that all business activities connected with manufacture and supply of plant and equipments were carried on in India and therefore whole of the profits arising from sale were liable to be taxed in India. According to AO the profit margin of the foreign suppliers on sale of equipments was 12%. The entire profit wh....