TaxTMI 
TaxTMI 
2025 (3) TMI 986
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....in violation of principles of natural justice and the provisions of the Act and is devoid of merits and are contrary to facts on record and applicable law, and has been completed without adequate inquiries and as such is liable to be quashed. 1.2. The lower authorities have finalized their order with improper adjustments to the transaction of the Appellant, as a result of misapplying the provisions of the Act and by adopting faulty assessment procedure to finalize the adjustment, without considering the information, arguments and evidence provided by the Appellant. 2. Constitution of PE by the Appellant 2.1. The lower authorities have, in the facts and circumstances of the case and in law, erred in concluding that Appellant has PE in India based on conjectures and surmises, which are devoid of any merits. 2.2. The lower authorities have, in the facts and circumstances of the case and in law, failed in establishing that the Appellant has business connection in India as per section 9 of the Act, and hence, the income is not subject to tax under the provisions of the Act. 2.3. The lower authorities have, in the facts and circumstances of th....
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.... Pricing Officer (TPO) to determine the arm's length price of the international transaction with ISDPL. The TPO confirmed that the hire charge received by the Assessee is at arm's length vide order under section 92CA(3) dated October 31, 2017. Subsequently, the Assessing Officer ('AO') issued a show-cause notice (SCN) on December 23, 2017, proposing to conclude that subject receipt of hire charges should be treated as royalty and business income in the hands of the Assessee, relying on statements recorded during survey carried out on the premises of ISDPL. The Assessee in the response dated December 27, 2017 highlighted that the transaction cannot be taxed as 'royalty' as per the relevant provisions of DTAA, and that the Assessee has no place of business in India. The AO completed the assessment and passed the draft assessment order under section 143(3) r.w.s 144C(1) of the Income-tax Act, 1961 ('the Act') dated December 31, 2017 concluding that the Assessee constitutes a PE in India and arbitrarily determined the attribution as 25 percent of hire charges and taxed the same at the rate of 40 percent. Aggrieved by the addition made by the AO, the Asse....
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....ciating the functions performed, assets utilized and risks ('FAR') undertaken by the Appellant. Further, the AO failed to establish business connection and constitution of PE as lay out under the law and Double Tax Avoidance Agreement ('DTAA') between India and Belgium. In fact, the AO has not provided cogent reasons for taxability of the Appellant's income in India. The ld. AR Shri Sriram Seshadri, C.A. for the Appellant has presented following strong elaborate arguments with solid facts and important judgments to establish that the transaction does not fall under any cases mentioned above. 4.1 Factual clarification to the AO's contentions (Ground 2.1 and 2.4): In the impugned order, the AO has made certain factually incorrect statements and assumptions, while concluding that the Appellant has a PE in India. - The AO alleges that there is a continuous relationship between DEME and ISDPL on the basis of organizational reporting and weekly update reports sent to DEME At the outset, the Appellant wish to submit that providing status update to parent company is a normal business practice adopted by multinational companies. The purpose of sending weekly reports to DEM....
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....wing employees of the Appellant were seconded to ISDPL: Table 2: Appellant's employees seconded to ISDPL Employee name Designation 1) De Callatay Marc-Antoine Engineering Support 2) Struyf-Goemans Christophe DGM Finance 3) De Zutter Filiep Operations Manager 4) Coninx Philippe Technical Superintendent 5) Verhees Wim DGM Finance 6) Nazhi Nizar Technical Superintendent 7) Bert ASAERT Site Accountants During the course of business, even ISDPL deputes some of its employees in the projects of other group entities, on need-basis. The list of 18 employees seconded by ISDPL during the year is provided in pages 124 to 131 of the paper book. Further, out of the 8 seconded employees listed above only two were employees of the Appellant - De Zutter Filep and Verhess Wim. The employees seconded from the Appellant company were not be deployed in the dredger let out by the Appellant, as evident from the list of crew members provided by Rock Equipment SA. Secondment agreement: Without prejudice to the above, the secondment agreement (refer page 105 to 115 of the paper book) clearly states that these employees would be under the control and s....
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....the Act. However, under section 90(2) of the Act a non-resident can take recourse to the provisions of the DTAA with the country in which it is a resident, if the same is beneficial with respect to the scope and rate of tax in comparison to the domestic tax law. A. Taxability under the India-Belgium DTAA- Post Amendment w.r.e.f 1stApril, 1998 The subject payment of hire charges would not be liable to tax under Article 12 of the India-Belgium DTAA, which deals with taxability of payments in the nature of royalty and fees for technical services. The terms 'Royalty' as defined under the Article 12 of the India Belgium DTAA are reproduced below for reference. "(3) (a) The term "royalties" as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience." It is evident from the above definition that the term "Royalty" does not include payment for use or right to use industrial, commerc....
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....reaty, royalty cannot be brought to tax in view of the amendments" made in Article 12 of the India-Netherlands DTAA. The above rulings though rendered in the context of India-Netherlands DTAA, it would squarely applicable the Appellant, as the term "Royalty" as defined under the amended Article 12 of India-Belgium DTAA dealing is pari-matria the same as that of India-Netherlands DTAA. The Appellant would also like to rely on this Hon'ble Tribunal's decision in the case of M/s. International Seaport Dredging Ltd - ITA No. 418/Mds/2015 dated 22nd July, 2016 (page 1 of CLC), wherein it has upheld that the hire of bareboat charter would not constitute Royalty under the DTAA, if the definition of the term "Royalty" under DTAA does not include use or right to use industrial, commercial or scientific equipment. A. Decision of the Hon'ble jurisdictional High Court in the case of M/s. Poompuhar Shipping Corporation Ltd (supra) is not applicable to the Appellant's case The Appellant submits that the decision of the Hon'ble jurisdictional High Court in the case of Poompuhar Shipping (page 75 of CLC) is factually distinguishable from the Appellant's case, on the following lines: Ta....
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....of the Hon'ble Jurisdictional High Court in the case of Van Oord ACZ Equipment BV, it is humbly submitted that the payments received from ISDPL for bareboat hire of dredger would not be taxable under the provisions of the Act, neither as business income nor Royalty. 3. The Appellant does not have a Business Connection in India (Ground 2.2): The primary contention of the AO is that, the Appellant has a business connection in India. According to section 9(1)(i) of the Act, a foreign company shall pay taxes in India on income that is deemed to accrue or arise through a 'business connection' in India. The law provides an inclusive definition of business connection which includes any business activity carried out by a person on behalf of a foreign company. In the present case, the subject transaction does not involve such a scenario. Thus, the Appellant refers to the conditions laid down by the Hon'ble Apex Court for constitution of 'business connection'. The Hon'ble Apex Court in the case of CIT Vs R.D. Aggarwal (56 ITR 20) laid down two principles for constitution of 'business connection', namely: 1. Relation between the businesses carried on by a non-resident which ....
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....ecific type of income, namely, income by way of royalty, whereas clause (i) of section 9(1) is a more general provision, which deals with all income accruing or arising, whether directly or indirectly, through or from any business connection in India. Income by way of royalty is specific or one of the categories of a larger class mentioned in clause (i) of section 9(1) and hence, the specific instance having been provided by clause (vi), once we come across the question of royalty, we have only to look at that clause (vi) and not to the more general provision of clause (i) of section 9(1)." As stated earlier in section 3 of this submission, the AO has established a 'continuous relationship' between ISDPL and the 'foreign entity', based on the alleged activities carried out by the DEME. It is not the contention of the AO that the Appellant renders any services to ISDPL. Therefore, the Appellant does not have a business connection in India as required under section 9(1)(i) of the Act. 4. The Appellant does not have a Permanent Establishment in India (Ground 2.2): The Appellant makes the following submission that it does not constitute a PE in India: A. Business conn....
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.... dredger in India. Without the knowledge on the category of PE allegedly constituted by the Appellant in India, the Appellant makes the following submission, demonstrating that the Appellant does not fall within any of the three PEs in the India-Belgium DTAA. a) Fixed Place PE: The Article 5 of India-Belgium DTAA, states that 'permanent establishment' means a fixed place of business through which the business of the enterprise is wholly or partly carried on. Article 5(2) contains an inclusive definition of PE to include a place of management, a branch, an office, a factory, a workshop or a warehouse, a mine, an oil or gas well, a quarry or any other place of extract of natural resources, a building site or construction or installation project, etc. Fixed place of business is again explained that the place need not be exclusively for that particular enterprise's business purpose only and it is enough that there is certain amount of space available at its disposal. The Organization for Economic Cooperation and Development (OECD) commentary on the Model tax Convention lays down the following conditions for establishment of a fixed place PE: * the ex....
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......If the fixed place of business is leased to another enterprise, it will normally only serve the activities of that enterprise instead of the lessor's; in general, the lessor's permanent establishment ceases to exist, except where he continues carrying on a business activity of his own through the fixed place of business". The above paragraph highlights that the Appellant is said to constitute a PE only when it carries its own business activities through such PE. In the present case, the Appellant does not carry on its business activities through the dredger in India, instead ISDPL carries on its dredging projects by hiring dredgers from the Appellant. Thus, from the above it is clear that the Appellant will not constitute a fixed place PE in India. The Appellant further relies on the Hon'ble Coordinate Bench ruling in the case of DDIT v. Nederlandsche Overzee Baggermaatsehappiji BV (supra), wherein it was held that: "As per article 5 of the India-Netherlands Tax Treaty, a PE means a fixed place of business through which business of an enterprise is wholly or partly carried out. Mere provision of a dredger on dry lease basis for carrying out dredging a....
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....ed. 36. We are not inclined to accept such a plea, as in the case on hand the dredging equipment was leased out on bareboat basis viz., without Master and Crew. Therefore, it will not come under the permanent establishment and the entire control over the equipment was not with the Foreign company, but with the Indian Company. Therefore, the above said plea is not accepted." (Emphasis supplied) The Appellant further submits that the scope of construction/installation PE under the Article 5(2)(j) of India- Belgium DTAA is a restricted one as it excludes a "Dredger". The relevant portion is extracted below: "building site or construction, installation or assembly project or supervisory activities 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, or..." The Appellant submits that the Belgium's DTAA with Hong Kong and Macao only list "dredging projects" as examples of projects that constitute a PE. Article 5(3) of Belgium-Hong Kong DTAA reads as follows: "An enterprise shall be deemed to have a permanent establishment in a c....
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....m's length with the enterprise of which it is a permanent establishment". (Emphasis supplied) Interpreting the above, the Hon'ble Supreme Court in the case of DIT vs. Morgan Stanley & Co (292 ITR 416), held that, once a transaction has been established to be at arm's length in accordance with the TP provisions under the Act, it extinguishes any further attribution of profits to such PE. Thus, the law of the land is settled that, any attribution of profit to a PE has to satisfy the arm's length test. The relevant extract is reproduced below: "Under the impugned ruling delivered by the AAR, remuneration to MSAS was justified by a transfer pricing analysis and, therefore, no further income could be attributed to the PE (MSAS). In other words, the said ruling equates an arm's length analysis (ALA) with attribution of profits. It holds that once a transfer pricing analysis is undertaken; there is no further need to attribute profits to a PE. The impugned ruling is correct in principle insofar as an associated enterprise, that also constitutes a PE, has been remunerated on an arm's length basis taking into account all the risk-taking functions of the enterprise. In such ca....
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....er pricing regime in an efficient manner, it is clarified that though AO has the power under section 92C to determine the ALP of international transactions or specified domestic transactions, determination of ALP should not be carried out at all by the AO in a case where reference is not made to the TPO." In summary, irrespective of whether a reference has been made to the TPO or not, the AO has no jurisdiction to make a transfer pricing adjustment. Thus, the impugned order of the AO making an attribution (which is equated to a transfer pricing adjustment by the Hon'ble Supreme Court) is beyond the jurisdiction of the AO, as the same is contrary to the provisions of the Act and instruction issued by the CBDT which is binding on the AO. Further, the critical information relied upon by the AO for re-determining the FAR of the Appellant and ISDPL is the statements recorded during survey. The Appellant submits that the survey was conducted in the premises of ISDPL on February 17, 2017, whereas the TP order was passed by the TPO only on October 31, 2017, which is eight and a half months after the survey was conducted. Thus, the survey statements were very much available with the A....
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....r section 133A of the Income-tax Act is not given any evidentiary value obviously for the reason that the officer is not authorised to administer oath and to take any sworn statement which alone has evidentiary value as contemplated under law, vide Paul Mathews and Sons v. CIT [2003] 263 ITR 101 (Ker.). Finally, the word "may" used in section 133A(3)(iii) of the Act, viz., "record the statement of any person which may be useful for, or relevant to, any proceeding under this Act", as already extracted above, makes it clear that the materials collected and the statement recorded during the survey under section 133A are not conclusive piece of evidence by itself." Thus, the adjustment in the impugned order made by solely relying on the information collected and statements recorded during the survey conducted in the premises of ISDPL cannot be considered to be corroborative evidence and thus the order is considered not sustainable. 5. Per contra, the ld.DR relied upon the assessment order and pointed out following references to bolster his arguments: i. Survey report; ii. Statement of Filip Dezulter; iii. Statement of Peyron Amedeo iv. Quest....
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....areboat hire charges amounts to "royalty" for the purpose of Income Tax and becomes assessable to tax in India in the hands of the recipient. Therefore, the assessee, being the remitter of the amounts, is under the obligation of withholding the tax before making the payments. 3.2.5 The next claim of the assessee is that as per the protocol 7 of the India- France treaty, any subsequent treaty with any OECD country after 1/09/1989 in which the scope of definition of Royalty is narrower than the India-France treaty, such narrow definition of royalty shall be applicable to the India-France treaty. There was subsequent treaty between India-Sweden (entered on 25 December 1997), where there was a restrictive definition of royalty which does not specifically include "use of equipment" within its purview. Therefore the assessee claimed that the bareboat hire charges will not form part of the royalty. 3.2.6 The above claim of the assessee is not correct. Article 13 of India-France clearly defined the words Royalties and fees for technical services and payments for the use of equipment. The term "payments for the use of equipment" as used in this Article means payment of any....
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....arned Authorized Representative have merit. The relevant protocol is reproduced herein below for reference: 7. In respect of articles 11(Dividends), 12 (interest) and 13(Royalties, fees for technical services and payments for the use of equipment), if under any Convention, Agreement or Protocol signed after 01.09.1989, between India and a third State which is a member of OECD, India limits its taxation at source on dividend, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate of scope provided for in this Convention on the said items of income, the same rate of scope as provided for in that Convention, Agreement or Protocol on the said items income shall also apply under this Convention, with effect from the fate on which the present convention or the relevant Indian Convention, Agreement or Protocol enters into force, whichever enters into force later." 4.5 From the above, it is clear that payments for use of equipments under Article 13 of the treaty between India and France, if any convention or agreement or protocol are signed after 01.09.1989 between India and a third St....
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....Indian Company. Therefore, the above said plea is not accepted. 37. For the foregoing reasons, the appellate authority below has rightly considered Article 12(4) of the DTAA agreement between Netherlands and India and is right in holding that the amount received by the assessee for hiring out Dredgers to an Indian Company of the same name for use in Indian Ports is not taxable in India and the substantial question of law is answered against the Revenue/appellant. 9. In the case of Deputy Director of Income Tax, (International Taxation)-3(2) Mumbai Vs Nederlandsche Overzee Baggermaatsehappiji bv, the Mumbai Bench of Tribunal [2010] 39 SOT 556 (Mumbai)[14-05-2010] at para 23 held as under: ''23. The assessee has no personnel located in India for the purpose of the contract entered by it with HAM. The assesses does not have any responsibility beyond the provision of a dredger on charter hire. The dredger was operated by personnel appointed by HAM and was used by HAM for the purpose of business. Mere dry lease of an equipment does not result in a PE. Thus, we uphold the findings of the first appellate authority on this issue and dismiss the appeal of the revenue on....
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....of the Agreement and equipped with the required personnel and equipment as set out in Schedule C. ♦ Clause 6.1 provides for the obligation of the Owner (i.e., the assessee) while the vessel is in operation. It relates to supply at the cost of the owner, all equipment machinery fitted in vessel, personnel as listed in Schedule C, maintenance of vessel, work wire, Mooring lines, etc. ♦ Clause 6.2 requires the assessee to ensure efficient complement of personnel on ship, ♦ Clause 6.3 deals with personnel on ship where the details of the Crew such as all particulars / bio-data including passport, etc. is required to be submitted to the Charterer. Any change in the appointment will require prior approval of Charterer. ♦ Clause 6.4 enables the charterer to replace any member of the crew while the owner would be obliged to accept such request for replace of the crew. This means that the charterer has total control of the personnel, ♦ Clause 6.6 sets out that subject to right of the Master only to determine and advice for reasons of safety of vessel during adverse weather conditions as to whether a navigation mover ....
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....ed upon or carried by the vessel. 12. From the aforesaid clauses specifically various sub-clauses of clause 6, it can be seen that it is purely a hire agreement for AHTS vessel for exploitation and exploration of oil and natural gas by ONGC in respect of their services performed on the AHTS. Not only the vessel but also the Master and the Crew were under the direction and control of the ONGC. It has also been brought on record before us that, now it is amply settled in the case of the assessee that Master and the Crew on board of the vessel given or hire to ONGC were not the employees of the assessee, albeit were procured from RAPM, a group company. This matter has been settled by the Tribunal in assessee's own case as referred to by the Id. Sr. counsel. The relevant observation of the Tribunal in this regard reads as under:- "11. Apropos the payment aspect, the salary paid to the expatriate sonnet was not borne by MCL. MCL was also not haying any permanent establishment in India. The Income of the expatriate personnel was assessed in. Demark. That being so, article 16(3) of the Indo- Denmark DT'AA was applied. The expatriate personnel were employees of RA....
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....ties performed in the place is significant. Clearly, the performance of business activities or ownership of property does not qualify for a "place of management". On the other hand, a "place of management" does not have to be the head office. However, the place must have power to make significant decisions. It is not sufficient that the activity has a managerial character. For example, payroll functions pertaining to construction work performed at an onsite office are not "management" in this respect. This is particularly relevant for enterprises engaged in hiring out of labour where payroll functions are sometimes the only activities performed by the hiring-out company in the host country. Moreover, "management" in this respect is more than the-day-to-day carrying out of instructions by the head office abroad.' Thus, the main emphasis has been given a place where there must be power to make significant decisions and it has to be some kind of fixed place of management. UN Model also incorporates several provisions of Article 5 of OECD Model Convention and has incorporated commentary of OECD for explaining the concept of place of business.as used in Article 5. The relev....
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.... reckoned either as 'fixed place of business' or 'a place cf management'. We have already discussed in detail above that firstly, personnel do not belong to the assessee and secondly, in any case the personnel are under the control and directions of ONGC and qua the assessee these personnel do not have any wide responsibility in participation of the decisions of hiring, therefore, it cannot be held that the activity of the lessor/assessee is done by these personnel or it constitute an entrepreneurial activity which can be reckoned as PE. The reliance placed by the Assessing Officer and the Id. CIT (A) on the UN Model is thus not only misplaced but is based on misinterpretation of the UN commentary. Thus, in our conclusion, firstly, the hiring of AHTS vessel of assessee by ONGC for its operation in India does not qualify to make vessel a place of management for the assessee in India; secondly, the Crew and Master of the vessel does not belong to the assessee as settled by the Hon'ble High Court in assessee's own case; and lastly, in any case Master and Crew of the vessel do not have power to make significant decision over the assessee, because they are under ....