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TMI Blog2014 (4) TMI 702X X X X Extracts X X X X X X X X Extracts X X X X ..... en the parties in the regular course of business - The plea of the employees being subject to change is without material - The claim of the personnel only executing planning and supervising work, is again without substance and contradictory of the contract work as profiled by the documents, and as stated here-in-before - a fixed place of business, as contemplated in the definition of PE under Art. 5, does not at all imply or is confined to a place where the top management of the company is located - A branch of an enterprises may well be its’ PE; only the profit attributable to the same being liable to be taxed in the source State - as is apparent from the modus operandi to be adopted, the regular interviews, interactions, meetings, training sessions and seminars, etc., both by the consultants and the principal consultants, forming Tier I and Tier II of the assessee’s teams deputed on the project, and which are admittedly and principally at the GPI’s premises, is as much a part of the work undertaken by the assessee-company as is the independent collection, collation, analysis and review, etc. of the data/information being sought from the organization during any phase of the projec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ross appeals for A.Y. 1999-2000, arising out of the separate orders by the first appellate authority for the relevant years, disposing the assessee s appeals contesting its assessments u/s. 143(3) of the Income Tax Act, 1961 ( the Act hereinafter) for the relevant years. The appeals raising common issues, were posted for and, accordingly, heard together, and are being disposed of vide a common, consolidated order for the sake of convenience. 2. The principal issue arising in the instant appeals is whether the assessee, a nonresident company registered in Mauritius, had a permanent establishments (PE) in India in terms of Article 5 of the India-Mauritius tax treaty during the relevant years. 3.1 It would be relevant to recount the background facts of the case, and toward which we shall, for the sake of context, advert to the facts and figures for A.Y. 1997-98, i.e., the first year under reference. The assessment for the year was initially made on 29.03.2000 at an income of Rs.514.27 lacs, including income of Rs.208.21 lacs (GBP 3,58,875) received from M/s. Godfrey Philips India Ltd. (GPI), a Indian company, on contract/s executed in India, as business income. The taxability o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oper co-ordination and team efforts. De hors a fixed place of business, it is difficult to implement the task. The matter was not viewed from that angle. 9. The assessee incurred some expenditure in India. The contextual enquiry may throw some light on the business operations of the assessee. Both the parties agreed that the matter needs to be examined afresh. We, therefore, in the interest of justice, set aside the impugned order on this count and restore the matter to the file of A.O., with direction to decide it afresh, in accordance with law, after providing adequate opportunity to the assessee of being heard. 3.2 In the set aside proceedings, the A.O. as well as the first appellate authority were of the view that there was a PE in existence in India within the meaning of India- Mauritius Double Tax Avoidance Agreement (DTAA) and, accordingly, the business income of GBP 2,08,20,596 was taxable in India. With regard to the expenditure, the assessee had claimed both direct as well as indirect expenditure, aggregating to GBP 2,87,055, including qua direct expenditure at GBP 1,02,335. The same, other than on salary (GBP 51,302) being not fully vouched, 15% thereof (GBP 51,03 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is found to have a permanent establishment in India, i.e., on the basis of the enquiry suggested by it, the assessee shall be entitled to deduction in respect of the business expenditure in terms of the DTA which would, where beneficial, prevail over the statute. Aggrieved, both the assessee and the Revenue are in appeal. 4. We have heard the parties, and perused the material on record. 4.1 We shall begin by delineating the respective cases of both the sides qua the principal issue arising in appeal, as follows: The assessee s case a) The appellant s employees deputed for the GPI project were mainly involved in planning the improved work methods for the sale force of the GPI and supervising /reviewing the results obtained by adopting the suggested improved work methods; b) The appellant company was managed by the Board of Directors located at Mauritius, which gave directions to the Principal Consultants , and who in turn looked after the assignments in India, further directing the consultants deputed on the project. The communication between the directors and the principal consultants was mainly over phone or through electronic media. The marketing and the client c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tay. There was under the circumstances no common or fixed establishment in India. Reliance was placed on the decision in the case of CIT vs. Visakhapatnam Port Trust [1983] 144 ITR 146 (AP); and Airlines Rotables Ltd. vs. Jt. DIT(IT) [2011] 44 SOT 368 (Mum), besides the tax treaty itself, even though a number of decisions find place in the compilation of case law filed by the assessee. The Revenue s case a) As apparent from the contracts dated 17.05.1996 and 26.08.1997, the same is for the application of its Performance Index Programme (PIP) for enhancing the market. Teams were deputed for the purpose, which were required to render services in relation to the implementation of PIP, which required continuous inputs from the clients for its effective implementation. The inputs are generated from the continuous interaction between the employees of the GPI and the appellant and, further, subject to - review and analysis for further course of action. The rendering of the managerial services to GPI is thus manifest in the very execution of the contract/s, shares of the GPR s product/s. There was thus a place of management, power of which vested in the teams deputed for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to exist in relation to its GPI project. The matter is, therefore, principally factual, though would require an exposition and a clear understanding of the concept of PE, and toward which the parties before us have relied on the standard texts as well as the decisions by the higher courts of law. This is even otherwise incumbent as the said clear understanding must necessarily precede the application of the concept and, further, for the reason that the order by the tribunal, a judicial body, must reflect and bear out the same (understanding). The PE is an important issue in the treaty based international fiscal law, and all the three model conventions, namely, the UN, the OECD Model and the US Model, use it as an instrument to establish tax jurisdiction over a business income of a foreign entity. The basis of the concept of PE is that profit of an enterprise of one contracting state is taxable in the other state only if the enterprise maintains a PE in the latter state and, further, to the extent that profit attributable thereto (PE) (Art. 7). The PE thus seeks to compromise and harmonize the taxing jurisdiction between the source state and residence state for the purposes of taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ules in respect of an enterprises represented by an agent or an enterprises related to it. 4.3 We may proceed further by reproducing Article 5 of the DTAA, which reads as under: CHAPTER II DEFINITIONS ARTICLE 5 - Permanent establishment - 1. For the purposes of this Convention, the term permanent establishment means a fixed place of business through which the business of the enterprise is wholly or partly carried on. 2. The term permanent establishment shall include (a) a place of management ; (b) a branch ; (c) an office ; (d) a factory ; (e) a workshop ; (f) a warehouse, in relation to a person providing storage facilities for others ; (g) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources ; (h) a firm, plantation or other place where agricultural, forestry, plantation or related activities are carried on ; (i) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than nine months. 3. Notwithstanding the preceding provisions of this article, the term permanent est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting State, or which carries on business in that other Contracting State (whether through a permanent establishment or otherwise) shall not, of itself, constitute either company a permanent establishment of the other. Article 5 of the DTA is thus in sync with a standard Article 5 except that there is no clause specifically for service PE, so that the understanding arrived at with reference to the other tax treaties would thus also become applicable and relevant for the purpose of the instant case. PE is also defined u/s. 92F(iiia) of the Act to mean a fixed place of business through which the business of the enterprises is wholly or partly carried out. The same, it would be seen, is pari materia with the definition of the term under the treaty, which though is not of much consequence in-as-much as only the definition per the treaty shall hold; section 92F being applicable only with reference to sections defined thereunder and which does not include section 90. The same, however, stands referred to so as to bring forth the unanimity of the concept both under the domestic law as well as the tax treaty. The fixed place concept has thus following the elements built therein: There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tle or no doubt in the present case in-as-much as the user of the client s premises or the hotel, if and to the extent so, is only for business purposes. 4.5 It is clear that the rule to be invoked in the present case shall be the base rule of Art. 5(1), which is also commonly referred as the basic rule PE . The service rule, or any other sub-rule for that matter, is only derived from this basic rule and not in derogation thereof. Its principal ingredients stand already delineated hereinbefore. The same find expression in the decision in the case of Airlines Rotables Ltd. (supra), relied upon by the assessee, signifying its parameters, again with reference to judicial precedents and standard text in terms of the OECD commentary. The same being relevant, we may reproduce it as under: 10. In terms of the provisions of article 5(1), i.e., the basic rule a PE is said to exist in the other Contracting State when an enterprise of one of the Contracting States has a fixed place of business in that other Contracting State, through which business is carried out wholly or partly. There are three criteria embedded in this definition physical criterion, i.e., existence of physical lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or part thereof. Philip Baker, in his commentary onDouble Taxation Conventions (Third Edition), states that the fixed place is very much that of a physical location, i.e., one must be able to pinpoint to a physical location at the disposal of the enterprise through which the business is carried on. On the other hand, possession of a mailing address in a State without an office, telephone listing or bank account has been held not to constitute a PE. Further, the fixed place of business need not be owned or leased by the enterprise provided it is at the disposal of the enterprise in the sense of having some right to use the premises for the purposes of its business and not solely for the purpose of project undertaken on behalf of the owner of the premises. [Emphasis supplied]. 13. It is thus necessary that, in order to give a positive finding about existence of the PE, not only that there should be a physical location through which the business of the foreign enterprise is carried out, but also such a place should be at the disposal of the foreign enterprise in the sense that foreign enterprise should have some sort of a right to use the said physical location for its own busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis that what was being carried in India were essentially preparatory or auxiliary services, excluded under Article 5(3); the employees only gathering and collating the data for being transmitted to the Head Office, and then acting on the instructions received there-from. The same, apart from the fact that, where so, could only be easily exhibited, proving the assessee s claim, is completely inconsistent with the modus operandi followed, as explained by the assessee itself, entailing rendering of extensive, if not the entire services in India, and which constitutes the assessee s business in India, i.e., to apply Renoir Performance Improvement Programme (RPIP) designed by it for improving the management performance quotient of an enterprise by enhancing the operating parameters, as reducing costs, improving the work methods/services, providing efficient management control, as delineated by the assessee s letters dated 17.05.1996 and 26.08.1997 (PB 2, pgs.1-5), which provide the framework for both, the services to be rendered and the manner in which they shall be, also specifying the objective of the exercise or its output in terms of deliverables, thereby serving as base documents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the preceding one. In fact, the base document clearly outlines that the application of RPIP would require that GPI share ideas which would be combined with that of the assessee. The clients, as the GPI, would only be unaware or only vaguely aware of RPIP, whose theory, mechanics, methodologies, etc. would be required to be explained to their personnel, and who in fact would be required to participate actively in its implementation and thus responsible for its success. Constant interaction at all levels, or at least upto the senior management level, between the personnel of the contracting parties is, thus, contemplated. The initial exchanges and interactions are to form the basis of the preliminary analysis and proposals, followed by a detailed study. The study is to be followed by its actual implementation, i.e., of the contents of the study, entailing what is required to be done and how. Constant feedback, which again has two variants thereto - formal and informal, on a regular and defined basis, and review, is contemplated, so that correctives and changes, validating or revising the assumptions made, are applied and the implementation stays on course, i.e., toward the desired o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect as well as the material on record in the form of the base documents and the communications exchanged between the parties in the regular course of business (PB- 2, pgs.7-14). The plea of the employees being subject to change is without material. Rather, the assessee commits itself to the continuity of the same personnel for the sake of better and smooth implementation of the project. Further, it is the continued presence of the assessee-company, and not of its particular person that is relevant. The contention of the personnel operating from different places, so that there is no fixed place of business, is again without merit, ignore as it does the fact that the location in case of a field job, as of a salesman, has necessarily to be a shifting one; it being fixed in terms of its operating parameter/s, and the continued physical presence in India at the different locations being as warranted by the exigencies of the contract, which is undisputed. The claim of the personnel only executing planning and supervising work, is again without substance and contradictory of the contract work as profiled by the documents, and as stated here-inbefore. Here we also clarify that a fixed p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e two have to work in tandem, complimenting each other. In fact, even working separately (as it in practice well be a combination of the two forms of work organization or guided by work imperatives), again only implies availability of a separate place/s at its disposal to the assessee s team. Secondly, as is apparent from the modus operandi to be adopted, the regular interviews, interactions, meetings, training sessions and seminars, etc., both by the consultants and the principal consultants, forming Tier I and Tier II of the assessee s teams deputed on the project, and which are admittedly and principally at the GPI s premises, is as much a part of the work undertaken by the assessee-company as is the independent collection, collation, analysis and review, etc. of the data/information being sought from the organization during any phase of the project management. That thus some place is at the disposal of the assessee or its employees during the entire period of the stay in India is, thus, manifest and eminent and follows unmistakably from the work nature/profile and the modus operandi followed. The argument thus is of no moment. 4.7 We may next consider the assessee s reliance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n on since October, 2002, i.e., after the disposal by the tribunal in the first round, wherein the tribunal has itself (vide para 13 of its order) clarified that the A.O. shall call for the relevant records and examine the veracity of the expenditure claimed. Further, even so, the ld. CIT(A) has sought to refurbish the disallowance, arising on the principal ground of non-verification of the claim, by the disclosed operating results of a comparable case DCM International Ltd. No interference, in our view, is under the given facts and circumstances of the case called for. We decide accordingly, and the assessee fails on its ground no. 2. 7. The next and the only surviving issue in these appeals is the part allowance of the business expenditure as confirmed by the first appellate authority for A.Y. 1999-2000 qua which both the parties are in appeal. 8. As regards the Revenue s appeal, it agitates the deletion of the disallowance made with reference to sections 40(a)(iii) (wrongly written as 40(a)(ia) by the A.O.) and 44C. The same is covered by the decision by the tribunal in the assessee s own case for A.Y. 1997-98, even as clarified by the first appellate authority. The li ..... X X X X Extracts X X X X X X X X Extracts X X X X
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