2016 (5) TMI 371 - HC - Income Tax

Fees for technical services received - computation of period of stay - whether taxable by reason of article 12(2) of the Double Taxation Avoidance Agreement with Japan? - Held that - On examination of the purchase orders, a common feature which emerged was that the supervisors were to come from Japan and Maruthi Udyog Ltd. had to bear the cost of their air tickets as well as their boarding and lodging in India. The period of supervision in the case of the individual contracts did not exceed the period of 180 days. In other words, they did not constitute a supervisory permanent establishment in terms of article 5(4) of the Double Taxation Avoidance Agreement. Fees for technical services paid to the assessee for the supervisory services is concerned, there was no effective connection between the execution of the purchase orders for supply of equipment and supervision of their installation, and, the project office for the paint and assembly shop of the YE2 car project of Maruthi Udyog Ltd. Additionally, as pointed out by Mr. Aggarwal, the supervisory fee paid by Maruthi Udyog Ltd. was on the basis of man days . The number of days per supervisor was calculated by dividing man days by the number of supervisors . If 10 supervisors had stayed for 100 man days, the supervision period would be 10 days only, though the man days are 100. Thus, the period of stay would be only of 10 days and not 100 days. A comparison of the relevant portions of article 5 of the Double Taxation Avoidance Agreement between India and Japan with the corresponding clause in some of the double taxation avoidance agreements entered into by India with other countries shows that where it is intended that the computation of the six months period for determining whether an assessee can be said to have a permanent establishment should be in the aggregate, i.e., not continuous , the double taxation avoidance agreement itself provides for it. From the wording of the article 5 of the Double Taxation Avoidance Agreement in question, it is not possible to accept the plea of the Revenue that the supervisory activities need not have been carried on for six continuous months. The court concurs with the views of ITAT that in the present case the fees for technical services was liable to be taxed at 20 per cent. under article 12(2) of the Double Taxation Avoidance Agreement. - Decided in favour of the assessee and against the Revenue.

Summary

Issues Involved:
1. Taxability of fees for technical services (FTS) under Article 12(2) of the Double Taxation Avoidance Agreement (DTAA) between India and Japan.
2. Determination of Permanent Establishment (PE) in India under Article 5 of the DTAA.
3. Applicability of tax rates under Article 12(2) versus Article 12(5) read with Article 7(3) of the DTAA.
4. Role of liaison offices and project offices in constituting a PE.

Issue-Wise Detailed Analysis:

1. Taxability of Fees for Technical Services (FTS) under Article 12(2) of the DTAA:
The primary issue was whether the fees for technical services received by the assessee from Maruti Udyog Limited (MUL) were taxable under Article 12(2) of the DTAA. The assessee, a company incorporated in Japan, contended that the supervision fee received was not taxable in India as it was integral to the provision of supplies. However, the assessee accepted that the supervision fee was taxable in India as FTS under Article 12(5) of the DTAA. The ITAT held that the supervision fee was taxable under Article 12(2) since the assessee did not have a PE in India, and the supervisory activities were not "effectively connected" to any PE in India.

2. Determination of Permanent Establishment (PE) in India under Article 5 of the DTAA:
The court examined whether the assessee had a PE in India. The assessee argued that it had no PE in India concerning offshore supplies of equipment. The liaison office in India was only for communicating information regarding global tenders. The ITAT found that the liaison office did not constitute a PE as it was involved in preparatory or auxiliary activities. The court concurred with the ITAT that the supervisory services were not connected through any of its other PEs in India and therefore, the supervision fee was taxable under Article 12(2) at 20%.

3. Applicability of Tax Rates under Article 12(2) versus Article 12(5) read with Article 7(3) of the DTAA:
The Revenue contended that the supervision fees should be taxed under Article 12(5) read with Article 7(3) of the DTAA at a higher rate of 30.25%, arguing that the assessee had a PE in India. However, the court found that the supervision activities did not exceed 180 days for each contract, and therefore, did not constitute a supervisory PE under Article 5(4) of the DTAA. The court agreed with the ITAT that the fees for technical services were taxable at 20% under Article 12(2).

4. Role of Liaison Offices and Project Offices in Constituting a PE:
The court examined the role of the liaison offices and project offices. The liaison offices were established for preparatory or auxiliary activities and did not engage in any trading, commercial, or industrial activities. The project offices were established for specific projects with approval from the Reserve Bank of India. The court found that the liaison offices were not involved in the execution of contracts and did not constitute a PE. The project offices were not effectively connected with the supervisory services provided to MUL.

Conclusion:
The court concluded that the fees for technical services received by the assessee from MUL were taxable at 20% under Article 12(2) of the DTAA. The assessee did not have a PE in India concerning the supervisory services provided. The appeals by the Revenue were dismissed, and the question was answered in favor of the assessee and against the Revenue.