1996 (8) TMI 545 - AT - Income Tax

Summary

Issues Involved:
1. Permanent Establishment (PE) under the Agreement for Avoidance of Double Taxation (AADT) between India and West Germany.
2. Taxability of profits attributable to the PE.
3. Interpretation of supervisory services in relation to PE.

Detailed Analysis:

1. Permanent Establishment (PE) under the Agreement for Avoidance of Double Taxation (AADT) between India and West Germany:

The primary issue was whether the assessee had a PE in India as defined in the AADT between India and West Germany. The CIT(A) held that the assessee had a PE in India, based on the installation project site of the Indian customer being considered as the PE of the non-resident assessee under Article II(1)(h)(cc) of the AADT. The assessee contended that they were merely rendering supervisory services and did not have a PE in India. The Tribunal noted that the definition of PE in Article II(1)(h)(cc) includes a building site or construction or installation project lasting more than six months. The Tribunal concluded that the supervisory services provided by the assessee did not equate to an installation project, and therefore, the assessee did not have a PE in India.

2. Taxability of profits attributable to the PE:

The AO and CIT(A) held that the profits attributable to the PE should be taxed in India. The Tribunal examined Article III of both the 1960 and 1985 Agreements, noting that while there were some improvements in the 1985 Agreement, the substance remained the same-taxability is limited to profits attributable to the PE. The Tribunal emphasized that the supervisory services provided by the assessee did not constitute an installation project, and thus, the profits from these services were not attributable to a PE in India.

3. Interpretation of supervisory services in relation to PE:

The assessee argued that their services were limited to supervision and did not involve actual installation, which should not be considered as creating a PE. The Tribunal referred to the Andhra Pradesh High Court decision in CIT vs. Visakhapatnam Port Trust, where it was held that mere supervision by German engineers did not constitute a PE. The Tribunal also referred to other Tribunal decisions, such as Dy. CIT vs. CIT Alcatel and Boudier Christian vs. ITO, which supported the view that supervisory services do not amount to an installation project. The Tribunal concluded that since the assessee was only supervising and not actually installing, they did not have a PE in India.

Conclusion:

The Tribunal decided in favor of the assessee, concluding that the supervisory services provided did not constitute a permanent establishment in India under the AADT between India and West Germany. Consequently, the profits from these services were not taxable in India.