9911796707
TMI Blog2007 (5) TMI 260X X X X Extracts X X X X X X X X Extracts X X X X ..... passed under s. 154 of the Act relating to the asst. yr. 1995-96. This appeal however will be dealt with separately as the issue raised therein is different and calls for an independent adjudication. ITA Nos. 5883 & 5885/Del/1998 and ITA Nos. 3942 to 3945/Del/1999: 3. The facts and circumstances under which these appeals arise are as follows: The assessee is a company incorporated as per the laws of Japan and a tax resident therein. It is a trading house and had established a liaison office (hereinafter referred to as "LO") in India at New Delhi since the year 1956, and has sub-LOs at Mumbai, Chennai, Bangalore and Calcutta. The LO in New Delhi was established with the approval of the Reserve Bank of India (herein after referred to as "RBI") for facilitating imports from Japan and exports from India. After the introduction of Foreign Exchange Regulation Act, 1973 (hereinafter referred to as "FERA"), the LO was granted an extension of license by the RBI, for continuing the activities, vide its letter dt. 17th Feb., 1976, for the limited purpose of carrying liaison activities subject, inter alia, to the following conditions: * the entire expenses o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of taxability vis-a-vis the DTAA, in respect of supply of equipments and income therefrom, even after the Indo-Japan DTAA. 7. The assessee started expanding its activities in India. The assessee established project offices for the following: * Raichur project with the Karnataka Power Corporation, * Basin Bridge Project, * Paint and Assembly shop for Maruti Udyog Ltd. (hereinafter called "MUL"). In the present appeals, we will be more concerned with the setting up of the project office vis-a-vis contracts with MUL. The approval for establishing a project office in connection with MUL was granted by the RBI vide its approval dt. 15th Sept., 1992. The approval was granted under s. 29(1)(a) of the FERA, 1973 for the purpose of undertaking a contract with MUL for designing, engineering, supply and installation for YE2 car project. YE2 car project of MUL is an expansion of car production between 70,000 to 90,000 cars (of capacity 1,000 CC and 1,300 CC) per year. 8. MUL had issued tenders inviting bids for purchase of different machinery and equipments in connection with modernization and expansion of its car assembly operations. In this connection MUL invited glo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quot;) under which it supplied machinery and equipment and under which it also undertook to supervise the installation of the plant and machinery. 12. The assessee submitted that each contract was independent, separate and technical aspects of work involved were different and varied. Each contract had no relationship with the other. Though they were in respect of one entity viz., MUL, the period for which supervisory activities were carried out was less than 180 days for each contract and therefore there was no PE of assessee in India vis-a-vis the rendering of supervisory services (i.e., supervisory PE) to MUL under the POs referred to above. The further stand of the assessee was that, for the projects being executed by the company with Karnataka Power Corporation Ltd. (Raichur Project) and with Tamil Nadu Electricity Board (Basin Bridge Project) there was in existence a PE, which is essentially because of the nature of these contracts. The income under these projects is taxed as per the provisions of s. 44BBB of the Income-tax Act, 1961. The assessee explained that however, the contracts with MUL are not only independent in relation to each other on an individual basis but also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 PE or fixed base. In such case, the provisions of art. 7 or art. 14, as the case may be, shall apply." 15. A reading of art. 12(2) would show that FTS is chargeable to tax at 20 per cent of the gross FTS. However, under art. 12(5) if the recipient of FTS has a PE in India and the contract in respect of which FTS paid is effectively connected with such PE, then the provisions of art. 7 or 14 of DTAA shall apply. Article 7 of DTAA reads as follows: "1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a PE situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is directly or indirectly attributable to that PE. 2. Subject to the provisions of para 3, where an enterprise of a Contracting State carries on business in the other Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act as effective on the date of signature of this convention." 17. To determine whether the assessee has a PE in India or not one has to look at the provisions of art. 5 of the Indo-Japan DTAA which reads as follows: "Article 5 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g) a warehouse in relation to a person providing storage facilities for others; (h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; (i) a store or other sales outlet; and (j) an installation or structure used for the exploration of natural resources, but only if so used for a period of more than six months, 3........ 4. An enterprise shall be deemed to have a PE in a Contracting State and to carryon business through t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Project with Tamil Nadu Electricity Board and YE2 Car Project for MUL, the assessee had obtained NOC from RBI under the FERA, 1973. The AO has also referred to the fact that MUL before making payment to the assessee have deducted tax at source of 30.25 per cent thereby by its own conduct admitted that the assessee had a PE in India. 20. For the above reasons the AO brought to tax the supervision fee received by the assessee at 30 per cent as per provisions of s. 115A of the Act. 21. The facts in asst. yr. 1995-96 are substantially the same. The AO in this year assigned two more reasons for rejecting the plea of the assessee that it did not have a PE in India vis-a-vis the supervisory services rendered to MUL. The AO has referred to the fact that in the last two decades the assessee has been offering substantial income to tax. The LO cannot therefore be called a LO but was in the nature of a PE. The AO has then referred to the fact that in a letter written by the LO to MUL, they have agreed to MUL deducting tax at 30.25 per cent on supervision fee paid to the assessee. This letter, according to the AO, was a clear indicator of the fact that the LO had authority to take decision a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indings of AO to the effect that the assessee company was having PE pertaining to income received on account of supervision and technical fees from MUL. The relevant concluding portion of the said order of learned CIT(A)-XIV reads as under: 'In course of the hearing the Authorised Representative has also referred to the absence of force of attraction of the PE in the OECD Model, and specifically, in the DTAA between India and Japan in support of his claim that the 10 contracts cannot be connected with the PE relating to the MUL project. It is true that the DTAA between India and Japan has adopted the OECD Convention and have decided against adopting the 'Force of attraction of the PE', but in the instant case, the facts and also the specific provisions of the DTAA clearly establish that the 10 contracts with MUL were directly or indirectly attributable to the PE as reflected in the projects undertaken relating to the assembly line, paint shop and also for the YE2 car project. The contracts even though have been split up, but were related to the assembly line, the paint shop and the YE2 car project and as they were directly or indirectly attributable to these projects, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st. yr. 1994-95 were awarded to the assessee on the basis of competitive bidding process. The description and scope of work undertaken under each contract were separate so also were the technical aspect of work involved in each contract having no inter-relation with another. (e) That para 1 of art. 7 of the DTAA between India and Japan is based on the OECD Model and was different from para 1 of art. 7 of the UN Model Convention in the sense that under the latter, the rights of primary taxation by the State in which there is a PE were much wider and also go beyond the scope as envisaged in the OECD Model. Referring to the commentary by Klaus Vogel: Double Taxation Conventions, 3rd edition (published by Kluwer Law International) and specifically to p. 402, it was pointed out that the India Japan Treaty, based on the OECD Model allows the State of the PE to tax business profits, but only so much of them as is attributable to that PE. The Model Convention has thus decided against adopting 'force of attraction of the PE' i.e. against the principle that, where there is a PE, the State of the PE should be allowed to tax all income derived by the enterprise from such source in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted a PE of the assessee in India. The CIT(A) also referred to the letter dt. 24th April, 1996of DGM of New Delhi LO agreeing to TDS at 30.25 per cent which according to CIT(A) is an admission on the part of the assessee that it had a PE in India vis-a-vis the contracts with MUL. The CIT(A) also held that the decision in the case of IAC vs. Mitsui & Co. Ltd. (1991) 39 ITD 59 (Del)(SB) wherein it was held that LO cannot constitute a PE, did not apply to the case of the assessee because facts in the assessee's case were different. Thereafter, the CIT(A) narrated the facts in the case of the assessee that the assessee was showing substantial income attributable to the LOs. According to CIT(A), the assessee was not only maintaining LOs in India but was carrying out trading, commercial or industrial activity and had also started executing purchase with Maruti Udyog Ltd., Karnataka Power Corpn. and with Tamil Nadu Electricity Board. That the assessee also obtained a no objection certificate from the RBI in 1992 itself for designing, engineering, supply and installation for YE2 car project for MUL. That the supervision fees were related to the YE2 car project and was in respect of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without any interruption. These contracts related to execution of supervision of creation and installation of machines at paint shop and assembly shop which were part of one car project viz., YE2 Project of MUL. (d) That the PE for MUL Project of the assessee in India had an effective connection with the rendering of technical services by the assessee. 28. With regard to the plea of the assessee that if there is a PE in a State/country for one activity then for all activities carried out in that State/country, that PE would be enough to say that there was a PE for all activities, being against the principle of "No Force of Attraction" which is advocated by the OECD Model and which has been adopted in the Indo-Japan DTAA, the CIT(A) held that the period spent on all activities of the assessee have to be aggregated because all contracts taken together form a coherent whole commercially and geographically. 29. For all the above reasons the CIT(A) upheld the order of AO for asst. yrs. 1994-95 and 1995-96. 30. In appeals for asst. yrs. 1992-93, 1993-94 and 1996-97, the CIT(A) had assigned identical reasons for upholding the order of the AO. He has also referred to severa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above question would depend on the answer to the following points: (i) Whether the assessee had a PE in India?; (ii) Whether the contract in respect of which supervision fee is paid is effectively connected to such PE within the meaning of art. 12(5) of the Indo-Japan DTAA? (d) If the answer to the above point (c) is in the affirmative then what is the quantum of supervision fee that can be taxed as attributable directly or indirectly to that PE? 33. We shall first take up for consideration issues (a) and (b) for consideration. As far as issue (a) regarding the very chargeability to tax of the receipts in the form of supervision fee on the ground that it forms part of the contract for supply of equipments and since the ownership of the equipments was transferred by sale to MUL outside the Indian territory i.e. at Japan, no income can be said to have accrued to the assessee, we have to, at the outset, point out that the said issue was not raised in the proceedings before the Revenue authorities. Even before the Tribunal there is neither original ground of appeal nor any request for raising any additional ground to the above effect. Nevertheless, the learned counsel for the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment and supervision of the installation was of a composite nature and therefore the fee received for supervision of installation of equipments was not fees for technical services rendered. His further argument was that the supply of equipments took place FOB, Japan, and therefore title to the equipments passed on to MUL outside India and therefore no income either in respect of supply of equipments or for supervision fee accrued in India and could be brought to tax in India. 36. Alternatively, it was argued that since the supervision fee payable was part of the contract of supply of equipment, they can at best be taxed only in the manner in which the income from supply of equipments is taxed. We may at this juncture recall the historical background of this case whereby the dispute between the assessee and the Revenue regarding income from supply of equipment was taxed pursuant to a compromise formula worked out at the intervention of the Court in a pending litigation, whereby it was agreed vide letter dt. 19th March, 1980of the ITO, that 1/3rd of the profits arising out of the imports from Japan to India will be offered to tax in India. The profits for this purpose were to be wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it was only on 23rd April, 2003 that the assessee for the first time, i.e. after 7 years, took a stand that FTS is part of consideration for equipment supply and therefore has to be taxed in the same manner in which the income from supply of equipments is taxed. According to him, permitting the assessee to do so will be allowing an assessee to change the very complexion of the case as originally brought before the Tribunal. That the assessee cannot approbate and reprobate. That the principle of promissory estoppel will apply and the assessee should not be allowed to go back on his stand at this belated stage of the proceedings. That the assessee is guilty of laches on its part. The counsel for the Revenue in this regard placed reliance on the following decisions: (a) CIT vs. Ram Kumar Agarwal Bros. (1994) 116 CTR (SC) 98 : (1994) 205 ITR 251 (SC); (b) Indian Steel Wire Products Ltd. vs. CIT (1994) 121 CTR (Cal) 335 : (1994) 208 ITR 740 (Cal); (c) Sterling Machine Tools vs. CIT (1980) 123 ITR 181 (All); (d) Banta Singh Kartar Singh vs. CIT (1980) 125 ITR 239 (P&H); (e) Jeevat Lal Pratapshri vs. CIT (1967) 65 ITR 261 (Bom); (f) Sahu & Co. vs. CIT (1981) 24 CTR (Ori) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verify the claim of the assessee. 40. His further submission was that the Tribunal while admitting the additional ground of appeal only thought it fit to examine the issue raised therein subject to the availability of facts necessary for such examination being already available on record. The assessee having itself admitted that the supervision fee received is FTS, there was no occasion for the Revenue authorities to examine the fact whether supervision fee was part of the contract of supply of equipments. Thus, according to him the additional ground has to be dismissed on the ground that facts necessary for adjudication of the additional ground of appeal are not available on record and new facts cannot be raised before the Tribunal for the first time. 41. On the argument of the learned counsel for the assessee that the AO in the assessment order has held that supervision fee is integral part of contract of supply of equipment, the learned counsel for the Revenue pointed out that there is no such finding by the AO. He pointed out that the AO has only held that the project office and receipt of FTS were connected in the sense the project office was executing the supervision work i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried out by MUL and the assessee was to depute supervisors to oversee testing and commissioning of the equipments because the assessee was familiar with the equipment supplied. According to the assessee under art. 12(2) of Indo-Japan DTAA only 20 per cent tax has to be levied on FTS because the assessee did not have a PE in India which was effectively connected with the contract in respect of which FTS was received by the assessee from MUL. If such PE did exist then under art. 12(5) r/w art. 7(3) of Indo-Japan DTAA, FTS has to be brought to tax at 30 per cent of the gross receipts. The limited contention of the assessee was that since the 10 contracts were independent and did not complete each other, the existence of the PE has to be judged in the light of art. 5(4) of Indo-Japan DTAA wherein there was a requirement that supervisory activities shall be done for 180 days (more than 6 months) to consider existence of a PE in respect of supervisory services, and that the period of supervision in India should not be computed by aggregating the period in all the 10 contracts and has to be counted independently. Even before the CIT(A), the very same arguments were reiterated. 44. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrect. The assessee never put forth such a plea before the AO or CIT(A) and there was no occasion for the AO or CIT(A) to consider any such plea. The admitted plea of the assessee before the AO was that the sum in question was "fees for technical services" but was taxable at 20 per cent thereof under art. 12(2) of the DTAA and not at a higher percentage under art. 12(5) of DTAA as there was no PE of the assessee in India. In support of such contention, the assessee submitted that to constitute a supervisory PE under art. 5(4) of DTAA, the assessee should carryon supervision activities for more than 6 months. According to the assessee, each contract for supply of equipment was separate and therefore existence of supervisory PE has to be judged by considering each contract for supply of equipment separately and therefore even supervision period for each contract has to be determined separately without aggregating the supervisory period for all the contracts. It was in this context that the AO made the following observations: "A perusal of the relevant purchase orders under which the assessee was to review the technical/supervision fee reveals two things-(i) the supe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue are not available on record. The matter could not also be remanded at this point of time. The delay or laches on the part of the assessee in this regard has to be viewed as a factor against the assessee. From the decision of the Hon'ble Supreme Court in the case of National Thermal Power Corporation vs. CIT (1999) 157 CTR (SC) 249 : (1998) 229 ITR 383 (SC), the following principles emerge regarding the right of parties to raise a new plea for the first time before the Tribunal, viz., (a) it is the discretion of the Tribunal to admit or not to admit a new ground to be raised before it; (b) if the Tribunal is required to only consider a question of law arising from the facts which are on record in the assessment proceedings such question should be allowed to be raised; (c) that the proceedings before the tax authorities are for correctly assessing the tax liability of an assessee in accordance with law. 47. The learned counsel for the assessee relies on the circumstance that the Tribunal has admitted the additional ground of appeal for adjudication and therefore the same must be adjudicated irrespective of facts being available on record. This submission, in our view, cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riefly narrate the scheme of taxation of non-resident assessees, such as the assessee in the present case, in the light of the Indo-Japan DTAA. Under s. 4 of the Act, the charge to tax is on the total income of every person. Sec. 5 of the Act explains the scope of total income of every person. Sec. 5(2) lays down the scope of total income of every person who is a non-resident. Any income received or deemed to be received in India and any income which accrues or arises in India or is deemed to have accrued and arisen in India shall be included in his total income. Sec. 9 of the Act lays down as to when income shall be deemed to have accrued or arisen in India. Sec. 9(1)(vii)(b) lays down that income by way of fees for technical services payable by a person resident in India to a nonresident will be deemed to have accrued in India. Only exception in such case will be a case where the payment is for services utilized in a business carried on outside India or for the purpose of making of earning any income from a source outside India. The supervision fee earned by the assessee in the present case is from MUL (a person resident in India) and not falling within the exception. They are th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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". 54. With the above broad principles in mind, let us now consider the facts of the present case and the rival contentions on behalf of the assessee and the Revenue. 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 in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rying 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 PE con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 PE is the existence of the PE at the time when whatever decisively caused the profits to accrue, actually occurred. 59. 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 in real substance. The income producing activity should be closely connected in terms of relationship besides being connected economically also with the PE. 60. In the light of the above broad principles, we may examine the various purchase orders. All the purchase orders are by MUL: Asst. yr. 1992-93: Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 1. 12.4.90 MUL:PE:310:99 3,13,10,000 16,90,000 - Nature of the Contract and Mandays: 1. For supply, supervision, installation and commissioning of "on line NC charging equipment." 2. Clause 3 of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther terms identical as above; (c) 1 supervisor for 4 days. Asst. yr. 1996-97 Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 1. 1-7-93 MUL:PE:AS:NYE-2-T Line 3:613:97:1 13,07,78,500 7,70,00,000 - Nature of the Contract and Mandays: (a) Design, engineering, manufacture, supply and supervision for installation and commissioning of Tester Line equipments; (b) Connected with YE2 Expansion Project, (c) All other terms same as above, (d) 2 Supervisors, 35 days time to do supervision. Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 2. 12-1-95 MUL:PE:PSI:306: MDC-161/140 6,06,42,000 - - Nature of the Contract and Mandays: Only design engineering, manufacture and supply of equipment for conveyor modification of Paint Shop-I. No supervisory services at all. Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 3. 23-3-94 MUL:PE:AS:NY E2IMP-SHIFT:609: MOD:1399 3,37,500 11,15,000 - Nature of the Contract and Mandays: (a) For shifting and reinstallation of online AIC gas charging equipment. Connected with YE2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,39,05,000 1,65,00,000 - Nature of the Contract and Mandays: (a) Supply erection of AIC system for mass emission laboratory. (b) All other terms same as above. (c) 4 Supervisors to be deputed. (d) 20 days of commencement to be completed. Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 7. 26-3-93 MUL/P/Maint/101 - - - Nature of the Contract and Mandays: (a) It is a maintenance agreement. It refers to several old supply and erection of machineries made by the assessee. (b) Hotel, air ticket of supervisors to be borne by MUL. (c) Time schedule not given. Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 8. 13-6-92 MUL:PE:AS:YE2 Assy MOP:547:369 9,83,99,600 9,87,000 9,47,000 Nature of the Contract and Mandays: (a) Supply erection of assembly conveyor line No. 4, painted body storage conveyor, Headlight tester modification and online gas charging equipment. (b) All others same as above. (c) 2 supervisors. Time = 10 mandays. Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 9. 19-5-92 MUL:PE:P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sors: not specified. (c) All other terms same. Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 6. 7-3-94 MUL/PE/PN/175/1/OD-1 33,64,000 16,90,000 - Nature of Contract and Mandays: (a) Purchase order for modification of ovens to use LPG as duel fuel system in existing paint shop. (b) All other terms same as above. (c) Number of supervisors not specified. (d)Time: 13days Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 7. 31-1-92 MUL/PE/AS/YE2(EA)/485/544 17,29,95,500 33,00,000 - Nature of Contract and Mandays: (a) Amendment to purchase order for engine assembly and testing equipment for assembly shop expansion project. (b) 154 mandays/11 supervisors (c) All other terms same as above. Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 8. 24-2-93 MUL/PE/MC/93/128 36,14,28,200 1,71,88,000 - Nature of Contract and Mandays: (a) Purchase order for crankshaft machining line with tolling and spare parts for expansion project. (b) All other terms similar. (c) 124 mandays for supervision. (d) Max ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys (Not available) Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 16. 1-7-93 MUL/PE/AS/NYE2/LINE3/613/971 13,07,78,500 77,00,000 - Nature of Contract and Mandays : (Not available) Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 17. 17-5-93 MUL/PE/AS/NYE2-C/V/611/1875 - 3,07,20,000 1,54,63,800 Nature of Contract and Mandays: (a) Purchase for supply, supervision and installation of assembly line No. 5 and add on system. Printed body storage conveyor. (b) No. of mandays : 160 (c) 3 Nos. Supervisors. Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 18. 26-11-93 MUL/PE/PN/201/ INDIA/170 - 93,22,500 17,46,000 Nature of Contract and Mandays: (a) Purchase order for automatic painting machine for prime coat booth of new paint shop. (b) 92 mandays. (c) No. of persons not to exceed 3. Sl. No. Date Particulars Value of supplies Amount of supervision fee Value of instll. & Commn. 19. 11-3-94 MUL/PE/AS/MP-1 FTB/726/MOD-16 - 93,22,500 17,46,000 20 23-3-94 MUL/PE/AS/NYE2/ IMP/SHIFT/699/MOD5/139 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry 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. 63. The Revenue authorities, as already observed, have not considered as to whether there was effective connection between the contract in respect of which supervision fee is received and the PE inIndia, contemplated by art. 12(5) of the DTAA. The Revenue authorities have presumed existence of such effective connection. The Revenue authorities have not examined the various purchase orders. They have proceeded on the basis that supervision fee is closely related to the supply of material and equipment contract and that they spring from the same contract. They have proceeded on the basis that once a PE is found to be in existence inIndiathen all incomes of the assessee from MUL have to be brought to tax. They have proceeded as if the force of attraction principle applies without appre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existence of a PE vis-a-vis supervisory services rendered would be satisfied and in that case the supervision fee would stand connected with the PE attracting the provisions of art. 12(5) of the DTAA. 67. The arguments of the learned counsel for assessee on the above conclusion of the Revenue authorities were as follows. That in respect of supervisory services rendered the existence of PE inIndiahad to be judged in the light of the provisions of art. 5(4) of the DTAA. The supervisory activities if carried on for more than 6 months inIndiawould constitute PE of the assessee in India. The learned counsel for the assessee submitted that the Revenue authorities erroneously proceeded on the premise that the period of 6 months had to be counted with reference to the enterprise. According to him since the contracts under which the supervisory activities were to be carried out were separate the period of 6 months had to be reckoned with reference to each contract and ought not to be aggregated. In this regard he highlighted the fact that each contract was for a portion of the total project of MUL and had been awarded to the assessee separately and independently pursuant to global tenders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decisions of the Special Bench Delhi Tribunal in the case of Mitsui & Co. and in the case of Motorola & Co. vs. Dy. CIT (2005) 96 TTJ (Del)(SB) 1 : (2005) 95 ITD 269 (Del)(SB) wherein it has been held that as per RBI guidelines/regulations LOs are not permitted to undertake any business activities for the foreign enterprise and that such activities are closely monitored by the RBI. 70. In this regard, the learned counsel for the assessee submitted that the LO has been submitting activity report with RBI which has been accepted by the RBI without any adverse findings. He also submitted that the LO has been offering income on sale of equipments to tax on the basis of agreed formula and therefore there was not a PE inIndia. He also submitted that other reasons assigned by the AO for construing the LO as a PE cannot be sustained in law. 71. The learned counsel for the Revenue submitted as follows. That right from asst. yr. 1967-68 income from LO is being shown in the returns filed by the assessee and the same has been brought to tax by the Revenue. From asst. yrs. 1994-95 and 1995-96 the assessee had shown income from PE in India that the LO has fixed place of business at third flo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was also argued that all the purchase orders taken together, geographically, commercially and technically formed a coherent whole and therefore the period under each contract had to be aggregated to see if there was a PE in existence under art. 5(4) of the DTAA. 73. The learned counsel for the assessee submitted that the LO merely acted as a communication channel between Indian importers and the appellant company, who sell their goods and commodities on a principal-to-principal basis to such Indian importers. That the LO had been regularly filing its activity report with the RBI and has always been in compliance with the aforesaid conditions imposed by the RBI and activity reports were being submitted by the LO to RBI regularly with a certificate that the activities of the LO are confined only to the terms and conditions of approval of RBI. That the LO was engaged only in liaison activities and the PO after it was established for YE2 car project did carry out some installation and commissioning of a few purchase orders. As far as supervisory services were concerned, neither the PO nor the LO had anything to do with the execution of purchase orders for supply of imported equipmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made out by the Revenue that the LO constituted PE of the assessee inIndia. 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. 75. On this issue we have already referred to art. 5 of the DTAA defining "PE". The argument of the learned Departmental Representative 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 a PE under art. 5(1) of the DTAA, viz., durability, continuity and infrastructure framework 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 regard, we are of the view that none of the reasons assigned by the AO to consider the LO as a PE is valid. So long as the LO performs functions which are prepara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. 76. The next argument for consideration would be whether there was a supervision PE of assessee in India in terms of art. 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 order were different in the sense and not linked with the other purchase orders. The performance guarantee to be given by the assessee was different for different work. The works 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 80. The incomes in question for all these years were therefore to be brought to tax under art. 12(2) of the DTAA. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been held that having regard to the provisions of ss. 201(1) and 201(1A) of the Act, assessee cannot be held as having committed any default in paying the advance tax and consequently there was no liability to pay interest under s..234B of the Act. Similar view has also been approved by the Hon'ble Uttranchal High Court in the case of CIT vs. Sedco Forex International Drilling Co. Ltd. (2004) 186 CTR 144 (Uttranchal). In view of the above, we are of the view that there was no liability on the part of the assessee to pay interest under s. 234B or s. 234C of the Act. The issue is decided in favour of the assessee. 81. ITA No. 5884/Del/1998: This is an appeal by the assessee against order of CIT(A)-XIV,New Delhi, relating to asst. yr. 1995-96 and arises out of order dt. 31st Aug., 1998 passed on an application under s. 154 of the Act, filed by the assessee before AO against the action of the AO in charging interest under s. 234B of the Act on the ground that since the FTS was tax deductible at source, there was no obligation on the part of the assessee to consider the said income while calculating its liability to pay advance tax. This was rejected by the AO and confirmed by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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