The order of the Bench was delivered by
B. C. Meena, Accountant Member :-In all these appeals, the Hon'ble Delhi High Court has remanded the issue by its judgment dated 06.04.2009. The brief facts of the case are that all these five appeals were initially heard and disposed off by the ITAT vide its order dated 31.05.2007. This decision was also reported in 114 ITD 61. The assessee has preferred an appeal before the Hon'ble High Court. The Hon'ble High Court has held that the ITAT has not disposed off the additional ground on merits even the same was admitted on 15.07.2003. The assessee took the following additional ground before the ITAT :-
“Whether on the facts and in the circumstances of the case and in law, the supervision fees earned on account of the supply of equipment could be taxed as ‘fees for technical services’, even though they are integral and incidental to the supply of equipment, since the supervision fees received by it on account of the supply of equipment are inextricably and essentially linked to the supply of equipment, and hence, should in all fairness partake the same character as the supply of the equipment, as it is nothing else but a supply of equipment simpliciter.”
The Hon'ble High Court held that the admitted question is verbose and reframed the question and admitted as additional ground of appeal. This reframed question read as under :-
"Whether in the facts and circumstances of the case "fee for technical services received by the assessee from M/s Maruti Udyog Ltd was taxable under Article 12(2) or Article 12(5) read with Article 7(3) of DTAA?"
Thus, the solitary issue involved in the question framed by Hon'ble High Court is whether the fees for technical services received by the assessee from M/s. Maruti Udyog Ltd. was taxable under Article 12 (2) or Article 12(5) read with Article 7 (3) of Double Taxation Avoidance Agreement between India and Japan (hereinafter referred to as DTAA). The revenue claims that in view of the decision of Hon'ble High Court, there is no dispute about the payment received by the assessee being in nature of technical services and the only question to be decided is whether in the facts and circumstances of the case, fee for technical services received by the assessee from M/s. Maruti Udyog Ltd. is taxable under Article 12 (2) or Article 12(5) read with Article 7 (3) of DTAA.
2. On the other hand, ld. AR submitted that this question cannot be read in isolation without bringing the fact that ITAT admitted the additional ground and the Hon'ble High Court has reframed the question. The ld. AR further submitted that the additional ground of appeal admitted by ITAT stood remanded back to it without making any adverse observation and findings in respect of the decision of ITAT for admitting the additional ground dated 31.05.2007.
3. After hearing both the sides, we find that Hon'ble High Court has reframed the question after hearing both the sides and has remanded the matter back to the ITAT to be decided in respect of the question framed by Hon'ble High Court. In our considered opinion, the ITAT has no power to go beyond the question reframed by Hon'ble High Court, therefore, there is no scope for any deviation from the question framed by Hon'ble High Court. Further, assessee had prayed in its submission dated 22.06.2009 before ITAT that issue be decided at ITAT level only on the basis of facts on records before ITAT instead of restoring the matter to the Assessing Officer. As matter being old of 1992-93, it shall be difficult for assessee to furnish any additional information and material. In the written submission of dated 15.09.2009 also, assessee has given in writing that it is not willing to go back once again before the authorities below. It is also prayed that it may be decided on the basis of existing material and may be adopted the same opinion as expressed by earlier order of ITAT that fee for technical services is taxable under Article 12 (2) of DTAA (page 19 of Paper Book IX). After hearing both the sides, the issue is being decided on the basis of material available before us. The contentions raised by assessee are dealt as under.
4. The contention of the ld. AR that the question formulated by Hon'ble High Court is in two parts. Firstly, it is concerned with respect of taxability of fees for technical services under Article 12(2) or Article 12(5) read with Article 7(3) of DTAA between India and Japan as upheld by ITAT in para 81 of its order dated 31.05.2007 and second part with respect to taxability of supervision fees as business income of the assessee company under Article 7 of the DTAA. The ld. AR submitted that fee for supervision is a fee taxable under Article 12(2) of DTAA is to be taxed at the rate of 20% and it is not business profit to be taxed under Article 7(1) as the said fee has not been earned which is connected with its permanent establishment in India. Ld. AR further submitted that assessee has no permanent establishment in India in so far as it relates to supervision fee. He further submitted that in order to bring to tax as business profit as had been observed by the ITAT in its order in para 66 that there is no evidence on record to show that the contents in respect of which FTS is received was effectively connected with PE in India. The ITAT has given a finding that assessee has no supervisory PE and the supervision fee is not effectively connected with PE, the same is taxable under Article 12(2) of the DTAA, therefore, the same does not deserve to be disturbed. ITAT has held that the supervision fee is not taxable under Article 12(5) read with Article 7 of the DTAA. Ld. AR pleaded that the findings recorded by the ITAT in its order dated 31.05.2007 about the taxability of supervision fees which is not effectively connected with the PE is taxable under Article 12 (2) of the DTAA @ 20%. He further submitted that the reliance of ld. DR on the orders of the authorities below is not justified as the ITAT has already elaborately dealt with the findings of the authorities below. The findings recorded by ITAT in its order dated 31.05.2007 may not be interfered. He further submitted that ITAT in its para 67 of its earlier order insofar as the contention of the revenue that there was existence of PE of the assessee in India in respect of supply of equipment was based on the two facts that (a) the Local Office (LO) in India was in fact performing functions all that a PE would do; and (b) the supervision period of all contracts have to be aggregated and if done so the period of six months or 180 days as a condition for construing existence of a PE vis-à-vis supervisory services rendered would be satisfied and in that case, the supervision fee would stand connected with the PE attracting the provisions of Article 12(5) of the DTAA. He further submitted that the ITAT having examined the contention of both the sides has observed in various paras of its order dated 31.05.2007 has held as under :-
" 75 We have considered the rival submissions. We shall first deal with the question whether LO was in fact PE of the assessee in India. It may at the outset be clarified that the revenue has never made out any case that LO that existed in India for supply of equipments was in fact satisfying all the conditions of a PE. We have already noticed that the question of existence of PE vis-a-vis supply of equipment was never finally determined by the revenue either before or after the DT AA. The basis of taxation, as far as income from supply of equipments, has been the agreed formula. It is only in the year 1992 that a PE in respect of supply of equipments limited to YE2 project of Maruti Udyog had been set up in India. Prior to this there was never a case made out by the revenue that the LO constituted PE of the assessee in India. This question in our view is now purely academic in view of the conclusion that contract for which supervision fee is received by the assessee is not effectively connected with any PE. Nevertheless, we deem it proper to render a decision on this submission on behalf of the revenue. [emphasis supplied]
76 On this issue we have already referred to Article 5 of the DT AA defining "PE". The argument of the ld. DR has been that the LO was in existence for a long time i.e. since 1967-68. It has a fixed place of business viz., 3rd floor, Antriksh Bhawan, K.G.Marg, Delhi. It has also been filing return of income owning properties etc. and therefore it has all the attributes of P.E. under Article 5(1) of the DTAA, viz., durability, continuity and infrastructure frame work for its activities. The LO continues to procure contracts to the head office. Even prior to establishing PE for MUL contracts, LO procured purchase orders from MUL. In this regards, we are of the view that none of the reasons assigned by the AO to consider the LO as a PE are valid. So long as the LO performs functions which are preparatory and auxiliary in nature, there can be no allegation that they constitute a PE. The fact that the LO owned assets and incurred huge expenses can never be a ground to conclude that they constitute PE. The prohibition on the part of the LO to carryon activities generally done by a PE in the permission granted by RBI cannot be lost sight of. There has been no proceeding against the assessee by RBI in this regard. The fact that LO gave consent top deduct tax at a higher rate in respect of payments made by MUL to the head office is again no ground to hold that the LO was in fact a PE of the assessee in India. The principle to the applied in such cases has been laid down in the case of Mitsui & Co. 39 ITD 59 (SB) followed by Special Bench of Delhi in the case of Motorola & Co. 96 ITD 1 (SB) In the case of Mitsui & Co. (Supra) the following principle has been laid down.
"One is not to be led away by the enormity of the expenditure incurred in running an office in India. That would depend upon the level of the country to which the office belongs. One has to judge the expenditure incurred from that angle and not from our angle. It was not the case of the revenue that the expenditure incurred in a trading activity to show it as expenditure incurred on liaison activity. Nor was it the case of the revenue that the work carried on by the assessee in India which, according, to them amounted to trading activity produced income in India or anywhere else. This expenditure incurred in India was met out of the remittances received by the Indian branches again through the RBI. There was no evidence brought on record at any stage that the Indian branches had exceed the limits prescribed for it by the RBI. As long as the Indian officers were conducting the operations within the restricted area and so long as those activities were not considered by the RBI, which was the concerned authority, as amounting to anything other than carrying on of liaison work, no inference adverse to the assessee should be drawn or was possible to draw. The activities of the branches of the assessee in India were within the ambit of sub-clause (iiia) of clause (i) of sub-article (i) of Article IV of the DTAA between India and Japan.
We therefore do not agree with the submissions of the learned Counsel for the revenue in this regard. We should hold that LO was not the PE of the assessee in India except to the extent activities were enlarged in this regard with reference to contract with MUL, contracts with T.N.E.B., Basin Bridge, Chennai, Karnataka Power Corporation, Raichur Power Plant, Raichur. These contracts were entered into after due sanction of RBI for establishing a PE."[ emphasis supplied]
10. The Hon'ble Tribunal, thereafter in para 77 examined for its consideration whether there was a supervision fee of the assessee in India in terms of Article 5(4) of Double Taxation A voidance Agreement. It observed in that para as under:
"77 The next argument for consideration would be whether there was a supervision PE of assessee in India in terms of Article 5(4) of the DTAA. We have already narrated the scope of work under each of the purchase orders. These purchase orders were procured by the assessee through its head office pursuant to competitive bidding on global tender floated by MUL. The terms and conditions under each purchase orders were different in the sense not linked with the other purchase orders. The performance guarantee to be given by the assessee was different for different work. The work of installation and supervision were to be done independently. One purchase order was not dependent on the completion of the work of installation of some other purchase orders. The nature of the equipments supplied was to be used in different stages of production and at different sections of car manufacturing. Equipment supplied under one purchase order did not complement the equipment supplied in another purchase order. The technicians were deputed to work from Japan. The assessee did not coordinate the work of the various purchase orders and each was done accordingly to the terms of the purchase order, each one of which was independent by itself. Even MUL floated separate tenders for each of the purchase orders and the assessee was not the only bidder and there were other enterprises which were awarded purchase orders.
78 The period of supervision under each contract was less than the period of 180 days as contemplated by Article 5(4) of the DT AA. The period spend on supervision on each contracts aggregated, the period would be more than 180 days. The question is whether the period spent on different contracts have to be aggregated or not?
79 Article 5(4) replaces the permanence element for existence of a PE by the test of a minimum length of time. In a case where there are several sites where supervision is going on in a country, the rule is that the test of minimum period should be determined for each individual site or installation project Klaus Vogel in his commentary on DTC Vol. I 3rd edition page 308 has to following to say on this aspect.
"The question whether there is a Permanent Establishment in a specific contracting state or not should be considered separately for each business activity performed in that state, i.e. for each individual place of business, existing there as well. In this connection, the place where the individual activity is performed may very well be relocated, for instance where a road is being constructed in stages. If, in contrast, all building sites maintained in one state were treated as one single permanent establishment, this would in effect be tantamount to applying the force of attraction principle. Moreover this would violate the principle that various business activity performed by one and the same enterprise, none of which individually constitutes a permanent establishment cannot lead to a permanent establishment if combined."[ emphasis supplied]
11. And the Hon'ble Tribunal in para 80 held as under :
"80 The above rule is however subject to exceptions viz., where each building site or installation site form a coherent whole in the other country and are operated at one place and the same ordering party. The thrust of the argument of the Id. Counsel for the revenue has been on this exception to the rule. We are of the view that the case of the assessee does not fall within the exception to the rule. We have already highlighted the fact that each PO was independent and did not complement each other. The MUL YE2 project would not stand concluded with execution of these purchase orders. The assessee was not the only person rendering supervisory services. The sites were located at different places viz., assembly floor, paint shop or weld shop. It cannot be said all contracts put together formed a coherent whole, commercially or geographically. Even PO's relate to different areas of manufacture of a car. How they are commercially a coherent whole is not spelt out in the order of the AO. Such finding cannot be given without any basis. As already stated perusal of PO's clearly indicate that the various contracts were independent and were not capable of bringing in a coherent whole commercially. Mere commonality of the principal cannot be sufficient in this regard. We therefore hold that there existed no PE within the meaning of Article5(4) of the DTAA."[ emphasis supplied]
12. Thus in analyzing the facts no record, it held that the assessee since has no PE in India, the same is taxable under Article 12(2) of Double Taxation Avoidance Agreement. The finding of the Tribunal in its para 81 reads as under:
"81. The income in question for all these years were therefore to be brought to tax under Article 12(2) of the DTAA. The assessee has offered to tax the income in question in accordance with Article 12(2) of the DTAA and is the same is directed to be accepted."
Ld. AR further submitted that supervision fee is taxable as business income only when same is effected with the PE. There is no basis or material to establish that such supervision fee was connected with the alleged PE. The revenue’s contention that since the supplies have been made by the assessee from Japan to Maruti Udyog Limited, hence its PE in India is the office of Maruti Udyog Ltd. For this, ld. AR submitted that assessee has rendered the supervision to the plant and machinery supplied by it from Japan and has also undertaken to supervise installation does not and cannot be termed as having a PE in India. He further submitted that even the supplies have been made and the place is connected with the assessee supervision fee but the same is insufficient as the same is not effectively connected as has been observed by the ITAT in para 66 in the earlier order. Before us also, in oral pleadings, the ld. AR submitted that assessee is not willing to go back to the authorities below for deciding the issue and it was submitted that the issue may be decided only on the basis of existing material available on record before the ITAT. It is also submitted that it may be held that such supervision fees represent fee for technical services under Article 12 (2) of the DTAA between India and Japan. The ld. AR submitted that tax was deducted at source @ 30.25% but the same is not in the shape of determining the nature and character of the supervision fee whether business income or fee taxable under Article 12(2) of DTAA. It is the duty of the payer to deduct tax at the applicable rate and the TDS @ 30.25% was without application of DTAA. The assessee has submitted the parawise rebuttal of the contention of the revenue in written submissions. The same are reproduced as under :-
S.No. |
Contention of the Revenue |
Rebuttal of the assessee |
1 |
There is no dispute about the payment received by the assessee being of the nature of fee for technical services and only issue to be decided is whether the same is taxable under Article 12 (2) or Article 12(5) read with Article 7 (3) of the DTAA. |
As submitted above that the issue as to whether the supervision fee is taxable under Article 12 (2) or Article 12(5) read with Article 7 (3) has already been decided by the Hon'ble Tribunal in the appellant’s own case. It has been submitted that, mere fact that, appellant had PE in respect of the Raichur project and Basin Bridge project, it cannot be held that, the income earned in supervisory services is also at attributable to such PE. Infact, the Hon'ble Tribunal had held the aforesaid view at page 1634 of Master Paper Book (‘MPB’) in para 53 as under : “53. If a non-resident is considered as having a PE in the other country then whether the income attributable to the PE alone has to be taxed in the other country or any other income which accrues to the non-resident in the other country having no connection with the P E, can also be brought to tax in the other country, is again a matter of debate. Available Model Conventions differ in this regard. Some provide for taxing profits/income only to the extent that they are attributable to the PE. Some provide for taxing income/profits from direct transactions effected by the non-resident, provided the transactions are of the same or similar kind as that effected through the PE. Some provide for taxing profits/income from all transactions whether they are attributable to PE or not or whether they are of the same kind of transactions carried on by the PE or not. The third category is referred to as "full force of attraction" principle. The second category is referred to as "limited force of attraction" principle. The first category is referred to as ''No force of attraction" principle. As to which principle is applicable in a given case depends on the clauses of the convention between two countries. The OECD Model Convention generally adopts the "no force of attraction principle". The UN Model Conventions generally adopt the "limited force of attraction principle." Apart from the above even otherwise since supervisory services have not been established to be effectively connected with the PE in respect of Basin Bridge Project and Raichur Project. The contention is otherwise contrary to Article 12(5) of DTAA as has been also observed by Hon'ble Tribunal in para 55 at pages 1635-1636 of MPB as under: 55. At the outset, we may clarify that neither the AO nor the CIT(A) has examined the applicability of art. 12(5) of DTAA in proper perspective, in the light of the facts of the present case. Article 12(5) is being reproduced for the sake of clarity. Article 12(5) of Indo-Japan DTAA: "The provisions of paras 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 m the other Contracting State in which the royalties or fees for technical services arise, through a PE situated therein, or performs in that other Contracting 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 technical services are paid is effectively connected with such P E or fixed base. In such case, the provisions of art. 7 or art. 14, as the case may be, shall apply. " The requirements for applicability of art. 12(5) are the following: (1) The beneficial owner of the FTS being a resident of Japan should carry on business in India in which the FTS arises through a PE. (2) The contract in respect of which FTS is paid should be effectively connected with such PE. If the above two conditions are satisfied, then the provisions of art. 7 will apply and the FTS has to be brought to tax in accordance with art. 7 of DT AA as business profits. The AO and the CIT(A) proceeded on the basis: (a) That the LO in India was in fact acting as a PE of the assessee in India. (b) That since the assessee had a PE in India in respect of its Raichur Project and Basin Bridge Project prior to 15th Sept., 1992 and from 15th Sept., 1992, it had a PE in India in respect of designing, engineering, supply and installation for YE2 car project of MUL, the supervision period in the 10 contracts had to be aggregated to find out if there was a PE for rendering supervisory services for more than 6 months in India. Another reasoning adopted by them was that since the contract for supervision was for one principal viz., MUL, in respect of the paint and assembly shop of MUL, the time spent on each contract has to be aggregated to see if it satisfied the test of existence PE. Thereafter, the Revenue authorities have held that the income from contracts for supervision arose directly or indirectly from the PE. The above approach of the Revenue authorities in our view was fallacious and contrary to the intents and purpose of art. 12(5) of the DTAA." [Emphasis supplied} In fact, the Hon'ble Tribunal had further held after noting the facts in para 56, para 57, para 59 and para 60at pages 1636 to 1639 of MPB as under: "56. We shall therefore examine the existence of the conditions for applicability of art. 12(5) of DTAA to the facts and circumstances of the present case. Admittedly, the assessee had a PE in India in respect of its Raichur Project (Karnataka State), Basin Bridge Project (at Chennai) during the previous year relevant to asst. yr. 1992-93. From 15th Sept., 1992, the assessee got permission from RBI to have a PE in respect of designing, engineering and installation for YE2 project of MUL. Even as early as 1956, the assessee has been carrying on business of supply by way of import to buyers in India of equipments. According to the assessee, normally equipment sold on a principal-to-principal basis (FOB) (Free on Board) foreign port to an Indian buyer is not chargeable to tax under the Act. The claim of the Revenue is to the contrary. The assessee had filed a writ petition against the tax Department, sometime in late 1970, pursuant to which the tax Department had certain discussions with the assessee and a compromise was arrived at between the two parties vide the letter of the tax Department, dt. 19th March, 1980. The settlement provided that the assessee 's LO in India would pay tax on the profits in respect of income determined in respect of all imports into India as per the following formula: "One-third (33-1/3 per cent) of the profits arising out of the imports from Japan to India worked out on the basis of the turnover in India, multiplied by the net profit rate of the world income". The assessee has been paying taxes on supply of equipments as per the agreed formula. In arriving at the settlement, neither the tax Department nor the assessee had raised the issue of existence of a PE. The P E concept was not very much in vogue in India at that time. The Indo-Japan DTAA came into force much later i.e. on 1st March, 1990 only. With effect from 15th Sept., 1992 i.e., after setting up of a PE in respect of supply of equipments etc., the position stood altered vis-a-vis the supply of equipments etc., to MUL for its YE2 car project. 57. The supervision fee in dispute in all these appeals relates to fees received for supervision of installation of equipments supplied to MUL some of which relate to YE2 car project. Can fee received under a contract for rendering supervisory services to MUL after 15th Sept., 1992 be considered as a contract which could be said to be a contract which is effectively connected with the PE? " 59. Article 12(5) of the DTAA between India and Japan is on the lines of the OECD Model Convention. The above clause allows the State where PE is located to tax only those profits which are economically attributable to the PE. The income should arise as a result of activities of PE. The clause makes a distinction between those incomes which are the result of activities of PE and the income which arises by reason of direct dealings' by the enterprise from the head office without the aid or assistance of the PE. The State where the PE is located can tax the income only, if a connection exists, between the income and the P E. Thus, art. 12(5) adopts "No Force of Attraction Principle". The reason behind this rule as stated" by Klaus Vogel, third edition, Vol-L at p. 410 is as follows: (Though the comments are on art. 7(1) of OECD Model Convention, the same would also apply in the context of art. 12(5) of DTAA). "This distribution of taxation according to the economic connection of the profits concerned is preferable to the principle of 'attraction force' because the former method proceeds from the enterprise's individual organizational structure and avoids restricting entrepreneurial freedom of disposition through fictitiously allocating profits by way of generalizing standards. While OECD committee on fiscal affairs recognized that such extensive freedom of entrepreneurial disposition might also involve the risk of being abused, it thought that this risk should not be given undue weight and that much more importance should be attached to ensuring, both for tax purposes and otherwise, that international business contacts can be shaped according to commercial requirement. " Another principle that should be kept in mind is the material date for determination of accrual of income arising through the P E is the existence of the PE at the time when whatever decisively caused the profits to accrue, actually occurred. 60. The term "effectively connected" used in art. 12(5) of the DTAA is not to be construed as the opposite of "legally connected" but in the sense of something "really connected". The connection has to be seen not in the form but m real substance. The income producing activity should be closely connected in terms of relationship besides being connected economically also with the PE. " Further, it could be seen from the order of the High court that the Hon'ble High Court has merely set aside the order of the Hon'ble Tribunal to decide the additional ground of appeal as reformulated by the Hon'ble Court. However, Hon'ble High Court did not comment on the other findings of the Tribunal wherein Hon'ble Tribunal has held that the supervision fee is not effectively connected with PE, as such, finding recorded by the Tribunal have become final and such finding of the Tribunal cannot be disturbed 10 the instant set aside proceedings. Thus, it is submitted that, the contention of learned DR is not tenable. |
2 |
Assessee's liaison office had informed the MUL to deduct tax at source @ 30.25%. This it evidence that the assessee was conscious of the fact of the taxation due to the same being effectively connected with the Permanent Establishment. (page 3 first bullet point) |
In this regard, it is submitted that LO was only facilitating the communication of the Head Office with MUL and was nowhere involved in the supervisory activities. Further, the letter for higher rate of TDS was given only to expedite the payment from MUL and was not an acceptance of the final rate which could be determined by filing return and in the course of regular assessment. The appellant had offered the supervisory income to tax @ 20% in the return of income (without realizing that the same was not taxable as per correct position under the Act and DTAA) and claimed the balance as refund. Without prejudice to above, it is duty of the tax authority to guide the assessee if he has applied the law correctly. Further, Hon'ble Tribunal has already held that the liaison office is not a PE of the appellant. The same is discussed in para 76 of the Hon'ble ITAT order placed at pages 1664- 1666 of MPB. Thus, this argument does not hold any ground. |
3 |
Purchases and supervision services continued for a very long period of time and liaison office was also involved in the contract. (page 3) |
At the outset, it is submitted that mere fact appellant company has a LO cannot be made a basis to allege that, the appellant has a PE in India. In fact as it is a matter of record that LO of the appellant company was not permitted to carry out any trading, commercial or industrial activity. Further, the RBI authorities have at no point of time even alleged the Appellant that it had violated any of the conditions laid down. in the relevant approvals issued to the Appellant despite the annual reports submitted by it and duly so scrutinized by Reserve Bank of India, the controlling authority. In fact whenever the personnel from the LO were present at the meetings with MUL, they merely accompanied the persons deputed from Japan. It must be noted that at all times the personnel of the LO acted under the instructions of the head office at Japan. Its role was no more than a mere communication channel between the head office and various Indian parties. In view thereof it is obvious that RBI also had not raised any objection in respect of activities of the LO of the appellant company. In fact neither the learned AO nor the learned CIT(A) had even alleged that, the LO was engaged in execution of purchase orders. This was also discussed in para 76 of the Hon'ble ITAT order placed at pages 1664-1666 of Master Paper Book. Thus, this argument does not hold any ground. |
4 |
Supervision period has exceeded 180 days in respect of purchases pursuant to the same tender. |
It is submitted that, at times there could be two purchase orders for one global tender depending on the requirements of M/s Maruti Udhyog Limited. It is submitted that mere fact that two purchase orders had been issued separately for one global tender cannot in any manner be a ground to allege, assume or conclude that such purchase orders are not separate, independent and mutually exclusive from each others. Thus, the contention of the learned DR does not hold good. |
5 |
Assessee has not filed a copy of the application, the approval of the RBI and annual activity report along with annual accounts III respect of the Project office as it is obliged to submit to RBI. |
The appellant established project offices for each separate project with approval of the RBI. The application made to RBI for opening a project office and approval thereof are already filed along with rejoinder submission dated 01.11.2006. (Refer pages 1506 to 1518 of the MPB). It is submitted that there is no presumption in law or of facts that, since the appellant has opened a PO, it could be held that, either LO or PO were engaged in executing purchase orders for supply of imported equipments and supervision of equipments. |
6 |
The existence of Project office amounts to permanent establishment of the assessee as per paragraph 1 & 2 of the Article 5 of the DT AA. |
It is submitted that, the appellant had a PO with specific approval of the RBI which could constitute as PE as per article 5(2) of the DTAA. It is submitted that in certain purchase orders, the appellant company was also obliged to supply indigenous equipments/carry out installation and, commissioning of certain equipments in India. The supply of indigenous equipments and, installation and, commissioning of equipments at MUL by the appellant was carried out by PO at MUL of the appellant company. The income arising out of such activity was offered to tax on net income basis as part of profits of MUL, which too is not disputed. It is further submitted that there are only 2 purchase orders out of 10 purchase orders, where installation and, commissioning has been carried out by the PO of the appellant company. In fact, no installation and, commissioning of equipments were carried out by the PO in the A.Y. 92-93, 93-94 and, A.Y. 96-97. In other words, it was only carried out in the Assessment Years 1994-95 & 1995-96. It is submitted that since the supervision fee is not effectively connected with the PO as such, same cannot be taxed under Article 12(5) read with Article 7 of the DTAA, as has also been held and found by the Hon'ble Tribunal in para 55 at pages 1635-1636 of the MPB. |
7 |
Various purchase orders were issued in connection with Tenders, and therefore what is important is that the expansion of profit and tenders and all sales and provision of supervisory services needs to be considered as a whole. Individual purchase orders are irrelevant because for a particular tender awarded to Sumitomo all purchase orders will be issued to it and under no circumstances can be issued to other parties. |
The appellant in rebuttal to submits this issue has been specifically examined by the Hon'ble Tribunal and after examining the same has held in para 80 at page 1668 of MPB as under: "80. The above rule is however subject to exceptions viz., where each building site or installation site forms a coherent whole in the other country and is operated at one place and the same ordering party. The thrust of the argument of the learned counsel for the Revenue has been on this exception to the rule. We are of the view that the case of the assessee does not fall within the exception to the rule. We have already highlighted the fact that each purchase order was independent and did not complement each other. The MUL YE2 project would not stand concluded with execution of these purchase orders. The assessee was not the only person rendering supervisory services. The sites were located at different places viz., assembly floor, paint shop or weld shop. It cannot be said all contracts put together formed a coherent whole, commercially or geographically. Even purchase orders relate to different areas of manufacture of a car. How they are commercially a coherent whole is not spelt out in the order of the AO. Such finding cannot be given without any basis. As already stated, perusal of purchase orders clearly indicates that the various contracts were independent and were not capable of bringing in a coherent whole commercially. Mere commonality of the principal cannot be sufficient in this regard. We therefore hold that there existed no PE within the meaning of art.5 (4) of the DTAA. "[Emphasis supplied] Apart from the above, after extracting each of the purchase orders in para 61 at pages 1639 to 1653 of MPB, the Hon'ble Tribunal has specifically held in paras 62, 63 and 66 as under: "62. Perusal of the various purchase orders shows that a common feature in all of the purchase orders is the fact that supervisors were to come from Japan and MUL bears the cost of their air ticket and provides for their boarding and lodging in India. The period of supervision in the case of individual contracts did not exceed a period of 180 days and they did not constitute a supervisory PE in terms of art. 5(4) of the DTAA. The learned Departmental Representative's reliance in this regard was on the fact that there were technicians on the payrolls of the PE in India established for contracts with MUL for the year ending 31st March, 1994 and this fact by itself would go to show that the PE in India and the contract for rendering technical services were "effectively connected." We do not think that this aspect alone would be conclusive in such matters/The fact of the matter is that the PE did the job of installation also in a few contracts and the income therefrom had been offered to tax by the assessee separately. What is in dispute is only the FTS. As far as FTS received by the assessee for rendering supervisory services is concerned the material on record suggests that there was no effective connection between the PE and the rendering of technical services. The contracts for the various supply, installation and supervision were entered into between the head office and MUL. The involvement of the PE in the actual rendering of supervisory services does not emanate from the material on record. In this regard no presumption can be drawn regarding such involvement of the PE. 63. It has been argued on behalf of the Revenue that in some of the purchase orders there was a necessity for the assessee to purchase certain equipments indigenously and this could not be done without the involvement of the PE in India. On this argument we are of the view that contracts for supply and installation were different from the contract for rendering supervisory services. The terms of the various contracts, which we have already set out above would clearly show that supervision services were treated distinctly. Moreover, the assessee has been offering income from supply of equipment and installation on agreed formula as per settlement with the Revenue and after the MUL project office became functional has been offering income attributable to project office. 66. As already stated, perusal of the various purchase orders shows that supervisors were to come from Japan and MUL was to bear the charges of airfare and stay in India. The contract (or supervision was a severable contract and had to be viewed separately. There is no evidence on record to show that the contract in respect of which FTS is received was effectively connected with a PE in India. Article 12(5) of the DTAA did not apply and therefore art. 12(2) would alone apply. The assessee has rightly offered its income in the form of supervision fee to tax under art. 12(2) of the DTAA. However, we notice that in asst. yr. 1995-96, details of contract Nos. 19 to 25 are not available. The question of taxability of the sum received as FTS for these contracts will be decided by the AO on the lines indicated in this order. The assessee will produce copy of these contracts before the AO. If the AO finds FTS in respect of these contracts taxable then the assessee will be entitled to advance arguments regarding attribution and allowability of expenses. The AO will consider the same and decide the same in accordance with law." [Emphasis supplied] Further, as submitted in point no 4 above that, at times there could be two purchase orders for one global tender depending on the requirements of M/s MUL. It is submitted that mere fact that two purchase orders had been issued separately for one global tender cannot in any manner be a ground to allege, assume or conclude that such purchase orders are not separate, independent and mutually exclusive from each others. Thus in light of the aforesaid specific findings, it is submitted that, the contention of the learned DR is contrary to factual position and therefore, not tenable. |
8 |
All purchase orders are Refer rebuttal at point 7 of this table inextricably linked and issued and executed with the sole objective of executing the MUL project. |
Refer rebuttal at point 7 of this table. |
9 |
Sumitomo has rendered supervisory services in all the years under consideration and the YE2 expansion project continued for a long time an certainly more than 180 days as is seen from the issue of purchase orders in respect of same tender in various years |
The contention of the Learned DR that the supervisory services for YE2 expansion project continued for a long years is also misconceived. The Learned DR has factually erred in presuming the date of issue of purchase order as date of commencement of supervisory services. In this regard, it is submitted that the firstly the appellant supplies the equipment and thereafter it sends supervisors for supervision of installation as per the requirement. The summary of supervision period i.e. no of days spent by the supervisors in India for each purchase order was submitted at page 24 to 26 of Paper Book IX. It is submitted that, though the purchase order may have been for the same principle or at times for the same project, yet there is no material to allege or establish that, such purchase order were capable of completing the entire project for MUL, even if the entire purchase orders are clubbed together. It is not as if the assessee was responsible to complete the entire project of YE2 of Maruti Udyog Ltd. Thus, In a situation, where all the contracts awarded to the Appellant were to be aggregated, they do not form a commercial whole, i.e. the contract executed by the appellant would not have either completed or completed the entire project of MUL, whereby it could make a complete car. Thus, the purchase orders in aggregate do not form a "whole" much less a "commercial whole". Detailed submissions have already been made by the appellant company at pages 1228 to 1232 of MPB and, pages 1300-1307 of MPB, wherein distinction between various treaties have clearly been brought out by the appellant. The learned counsel has not been able to rebut the submissions and, as such in the absence thereof, it must be held that, since DTAA does specifically provides for the aggregation, as is the case in other countries, it held that, each purchase order is a separate order. It is submitted that YE2 project of MUL is a large project. Infact, the appellant had supported only few portions of this large MUL project along with other vendors appointed by MUL. It may be stated here that, all the purchase orders are not connected with the YE2 car project, as tabulated at page 1522 of the MPB. Infact, it would be seen therefrom, that none of these orders pertained to YE2 car project in Assessment Year 1992-93 and 1993-94 and 1996-99 and hence, general submissions made cannot be a ground to allege that there was a supervision PE of the appellant under Article 5(4) of the DTAA. Further, as submitted in point no 4 of this table that, at times there could be two purchase orders for one global tender depending on the requirements of M/s MDL. It is submitted that mere fact that two purchase orders had been issued separately for one global tender cannot in any manner be a ground to allege, assume or conclude that such purchase orders are not separate, independent and mutually exclusive from each other. Lastly as regards the contention that period must be aggregated is also untenable as has been established at pages 1441 to 1445 of MPB read with pages 1227-1232 and 1243 to 1245 of MPB |
10 |
The assessee has established a project office at MUL site and of assessee's business in India of making sale and providing supervisory services was being carried out from this project office. The project office was established at a distinct place and had distinct address. The Project office contributed to rendering of supervisory services and Sumitomo earned fees for these services. Therefore the project office constitutes a permanent establishment of the assessee in India as per paragraph 1 and 2(c) of the DTAA. |
This contention of learned DR is also not correct. Please refer to our rebuttal note in point no 6 of this table. |
11 |
That supplies and supervisory services in respect of the various tenders continued in all the years under consideration, therefore the assessee has a PE as per Article 5(3) of the DTAA. |
The same is covered by point no 9 of this Table |
12 |
Sumitomo has provided supervisory services for more than six months in connection with installation and commissioning and hence Sumitomo is deemed to have PE as per the provisions of Article 5(4) of DTAA. |
The same is covered by point no 9 of this table |
13 |
A building site should be regarded as a single unit, even if it is based on several contracts provided that it forms a coherent whole commercially and geographically. |
The same is covered by point no 7 of this table |
14 |
Sumitomo has a PE in India as per the provisions of Article 5(1), Article 5(2)(c), Article 5(3) and Article 5(4) of DTAA. |
The same is covered by Point 3, 7 and 9 of this table. |
15 |
Receipt of fee has effective connection with the Permanent Establishment through which such services leading to fee are being rendered. |
The same is covered by point no 1 of this table |
16 |
Both the conditions for the applicability of Article 12(5) of DTAA are satisfied and provisions of Article 12(5) read with Article 7(3) shall apply and provisions of Paragraph 1 and 2 shall not apply. |
The same is covered by point no 7 of this table |
17 |
As the tender/contract was entered prior to 31.05.1997, FTS is taxable on gross basis by applying tax rate of 30% as per the provisions of section 115(1)(b)(B) of the Act. |
Based on the discussion in point no 7, it is evident that the in the present case Article 12(2) of the India - Japan tax treaty is applicable and not section 115A(1)(b)(B) of the Act. |
Ld. DR raised a contention that India has reservation about the word 12 months test for each individual site project. The relevant portion of Para 18 of the Commentary to the OECD Model Tax Convention is reproduced as under :-
"India, Morocco and Vietnam do not agree with the words 'the twelve months test applies to each individual site or project" found in paragraph 18 of the Commentary. They consider that a series of consecutive short term sites on projects operated by a contractor would give rise to the existence of a permanent establishment in the country concerned. "
In reply to this, the ld. AR submitted that as per Article 5(4) of the India Japan DTAA, the period of supervisory activity has to be seen for a project and the relevant Article read as under :-
"An enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it carries on supervisory activities in that Contracting State for more than six months in connection with a building site or construction, installation or assembly project which is being undertaken in that Contracting State".
Ld. AR further made a reference to the India’s DTAA entered with other countries like Belgium, Italy, UK, etc. wherein the clause similar to Article 5 (4) of Indo Japan DTAA are present but the scope is wider. Wherein it has been provided that “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” would construe a PE. Thus, in these DTAA’s, the clause specifically covers all projects. But it is not so in the case of India Japan DTAA. It was further submitted that in view of the specific agreement entered by the assessee and Japan, the reservation put by India in Para 18 of OECD commentary is of no justification. In view of the language used in the India Japan DTAA, the period of supervisory activity has to be seen for each project separately as held by ITAT in paras 77 to 80 of its order dated 31.05.2007. Ld. AR further submitted that on the perusal of the 2005 Commentary to the OECD Model Tax Convention, it is noted that it was only Morocco and Vietnam and not for India which have stated their reservation for not to agree with the commentary. India has joined hands with Morocco and Vietnam not to agree with the words 12 month test to apply to each supervision site or project only in 2008. Till the year 2008 by necessary implication, apart from the specific agreements provided in the OECD model convention, the period of supervision activity has to be seen for each project i.e. for each supervisory project which was independently taken by the assessee. India has put its reservation in 2008 only and not before that, therefore, it has no relevance for the pending appeals for which DTAA between India and Japan has already been entered without such reservation. He further submitted that mere putting up a reservation without incorporating the same in bilateral agreement with the Japan is of no consequence and any reservation made is not applicable so long it is not part of the agreement.
5. We have heard both the sides on the issue and after hearing, we find that the Hon'ble High Court has reframed the question and remanded the issue. In our considered view, there is no scope for any intervention regarding the character of the income as Hon'ble High Court has already held it to be ‘fee for technical services’. With regard to the taxability of FTS (supervisory fee) in assessee’s case for having a PE, we would like to elaborate that there are variations in accordance with the Model Conventions. Whether the income attributable to the PE alone has to be taxed in the other country or any other income which accrues to the non-resident in the other country having no connection with the PE has also been brought to tax in other country is a matter of discussion and varies according to the model of conventions. The available Model Conventions differ in this regard. Some Model Conventions provide for taxing profits/income only to the extent that they are attributable to the PE. This category is referred to as “no force of attraction” principle. The other model convention provides for taxing income/profits from direct transactions effected by the non-resident, provided the transactions are of the same or similar kind as that effected through the PE. This category is referred to as “limited force of attraction” principle and the third category convention provides for taxing profit or income from all transactions whether they are attributable to PE or not, or whether they are of the same kind of transactions carried on by the PE or not. This category of convention is referred to as "full force of attraction" principle. As held earlier in this para, the solitary issue remains is whether this fee for technical services is taxable under Article 12(2) of DTAA of India and Japan or under Article 12(5) read with Article 7(3) of the DTAA. Supervision fee can be taxed as a business income only when it is related to PE in India or there is a supervisory PE in India, otherwise the same is taxable under Article 12 (2) of the DTAA. Facts of the case show that assessee had PE in respect of the Raichur project and Basin Bridge project but the income earned in supervisory services is not attributable to any of these PE. For applying the Article 12 (5) of Indo Japan DTAA, certain requirements are to be fulfilled. Firstly, (i) the beneficial owner of the FTS being a resident of Japan should carry on business in India in which the FTS arises through a PE; (ii) the contract in respect of which FTS is paid, should be effectively connected with such PE. When these two conditions are satisfied then only provisions of Article 7 of the Indo Japan DTAA will apply. In that situation only, the fee for technical services has to be brought to tax in accordance with Article 7 of DTAA as “business profits”. In the assessee’s case, the revenue authorities had proceeded to invoke Article 7 of DTAA on the basis that the assessee’s Local Officer in India was in fact acting as a PE of the assessee, the assessee had a PE in India in respect of its Raichur Project and Basin Bridge Project prior to 15.09.1992 and PE in India in respect of designing, engineering, supply and installation for YE2 car project of MUL from 15.09.1992, the supervision period in respect of 10 contracts had to be aggregated to find out if there was a PE for rendering supervisory services for more than 180 days in India, and the contract for supervision was for one principal, i.e., MUL, in respect of the paint and assembly shop of MUL. Therefore, the time spent on each contract has to be aggregated to satisfy the test of existence PE. On this basis, the Revenue authorities treated the income from contracts for supervision as arisen directly or indirectly from the PE. In our considered view, for applying the Article 12 (5) of DTAA, we have to consider the conditions which are required to apply this Article to the facts and circumstances of the assessee’s case. The supervision fee in dispute in all these appeals relate to fee received for installation of equipments supplied to MUL. Article 12 (5) of DTAA between India and Japan is on the line of OECD Model Convention wherein the clause allows the state where the PE is located to tax only those profits which are economically attributable to the PE. The income should arise as a result of activities of PE. The state where the PE is located can tax the income only, if a connection exists, between the income and the PE. Thus, Article 12(5) of Indo Japan DTAA adopts "No Force of Attraction” principle. Similarly, the term “effectively connected” used in the language of Article 12 (5) of DTAA between Indo Japan is not to be construed as the opposite of "legally connected" but in the sense of something "really connected". The connection must be real in substance. In fact producing activities should be closely connected in terms of relationship besides being connected economically also with the PE. The facts of the case shows that LO was only facilitating the communication of the Head Office with MUL and was nowhere involved in the supervisory activities. Simply existence of the LO cannot be merely a basis that assessee was having supervisory PE in India. The facts show that LO was not permitted to carry out any trading, commercial or industrial activity. There is no evidence whether the LO has violated the conditions laid down by RBI in this regard. The assessee has established a project office with the approval of RBI for each separate project. The supply of indigenous equipments, installation and commissioning of equipments at MUL by the assessee was carried out by the project office at MUL of the assessee company and the income arising out of such activity was offered to tax on net income basis as part of profits of MUL, which is not disputed. The revenue has tried to establish that the assessee was having PE in respect of supply of equipments and this was based on the assumption that local office in India was in fact performing all functions which a PE would do and supervision period of all the contracts have to be aggregated and the same becomes more than six months or 180 days. The ITAT in earlier order has clearly held that revenue has never made out any case that local office existed in India for supply of equipment was in fact satisfying all the conditions of a PE. In the earlier order, ITAT has held that so long as the LO performs functions which are preparatory and auxiliary in nature, that shall not constitute a PE. In respect of the supervision PE, it has been also observed that the purchase orders were procured by the assessee through its head office pursuant to competitive bidding on global tender floated by MUL and the terms and conditions of each purchase orders were different in the sense not linked with the other purchase orders. The performance guarantee given by the assessee was also different for different work. The work of installation and supervision were done independently. One purchase order was not dependent on the completion of work of installation of some other purchase orders. The nature of the equipments supplied by the assessee was used in different stages of production and at different sections of car manufacturing process. Even equipments supplied under one purchase order were not complemented to the equipment supplied in another purchase order. The installation of equipments was to be carried out by MUL. The technicians were deputed for supervisions of work from Japan. Separate tenders were floated for each of the purchase orders and the assessee was not the only bidder and there were other enterprises which were awarded purchase orders also. There are finding of ITAT that the period of supervision under each contract was less than the period of 180 days as contemplated in Article 5(4) of the DTAA. It is also held that where there are several sites where supervision is going on in a country, the rule is that the test of minimum period should be determined for each individual site or installation project. The assessee rendered supervision to the plant and machinery supplied by it from Japan. To supervise installation cannot be termed as having a PE in India when the same is not effectively connected with any PE in India. The rate of the tax at which the TDS has been deducted cannot be a determining factor for nature and character of the income. There is no dispute remains about the payment received by the assessee the same is fee for technical services. The LO was only facilitating the communication of the Head Office with MUL. There is no evidence on record to establish that LO was involved in the supervisory activities. The LO was not allowed to do any trading, commercial or industrial activity as per RBI guidelines. There is no evidence on record that the LO has violated any of the conditions laid down by Reserve Bank of India in this regard. The personnel of LO present in the meetings with MUL were only accompanying the persons deputed from Japan and they were not having any role in the meeting. Considering all these facts and oral and written submissions by both sides, we hold that the income is taxable as “fee for technical services” as per Article 12(2) of the DTAA between India and Japan. In view of the above observations and findings, we hold that the FTS received by the assessee for Assessment Years 1992-93, 1993-94, 1994- 95 and 1996-97 are covered under Article 12 (2) of the Indo Japan DTAA and liable for the tax @ 20%. Apropos Assessment Year 1995-96, since, in earlier order, ITAT has found that details of contract No.19 to 25 were not available there for question of taxability of F.T.S. was referred to Assessing Officer. In view of these facts, we remand the issue to the file of Assessing Officer for Assessment Year 1995-96 to be decided on the line indicated above. Assessee shall submit necessary details. We decide the question referred by Hon'ble High Court accordingly.
6. In the result, four appeals of the assessee for Assessment Years 1992- 93, 1993-94, 1994-95 and 1996-97 are allowed and for Assessment Year 1995-96, the appeal is set aside and allowed for statistical purposes.
The order pronounced in the open court on 27th day of February, 2014.
|