9911796707
TMI Blog2016 (4) TMI 413X X X X Extracts X X X X X X X X Extracts X X X X ..... t between the Assessee and GRSE is contained in an agreement dated 29.4.2004 which later was amended by memorandum of Amendment to original Agreement on different occasions. The nature of services to be performed by the Assessee is set out in Appendix 1.1 to the Agreement. Appendix 1.1 of the Agreement refers to Section-III of bid document which contains "Terms of Reference". The terms of reference provides for performing various services. The same can be classified as follows: (1) Preparation of concept papers, (2) Preliminary project report (PPR); (3) Detailed project report (DPR); (4) Engineering services; (5) Project management services; and (6) Post - construction service. The consideration payable by GRSE for the services to be rendered by the Assessee is set out in Clause 5.3 of the Agreement. Clause 5.3 of the Agreement refers to Appendix-1.5 to the Agreement. Appendix 1.5 refers to three stages of work to be performed by the Assessee viz., Stage-1 Draft Project Report(DPR); Stage-2 (Design Stage); Stage-3 Construction Supervision Stage. The mode of payment for each stage of work is also given in Appendix 1.5. The relevant portion of Appendix 1.5 is as follows: "APPENDIX 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Act provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person. Sec.5(2) of the Act (2) the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Sec.9 of the Act provides when income accrues or arises or is deemed accrue or arise in India to a non-resident. Income deemed to accrue or arise in India has different categories of Incomes within its ambit. They are as follows: 1) Any income accruing or arising to an assessee in any place outside India whether directly or indirectly (a) through or from any business connection in India, (b) through or from any property in India, (c) through or fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be performed both from India as well as from the United Kingdom ('UK'). The local services were rendered through independent Indian subcontractors and the foreign services were rendered partly by an independent foreign sub-contractor i.e. Appledore and partly by the Assessee, from its head office in the UK. * Fees for the said services were payable in two parts i.e. foreign currency payment in USD and local currency payments in INR. * The work on the said contract was started in April 2004 and the Assessee has since been filing tax returns in India for incomes earned from the said contract. 6. During the previous year relevant to AY 07-08, the Assessee received a sum of Rs. 2,86,61,214/- from GRSE which sum was credited in profit and loss account. The corresponding expenditure in connection with execution of work in India of Rs. 1,06,81,827/- was debited as an expenditure in the profit and loss account. In the return of income filed for AY 2007-08 the Assessee (filed on 8 November 2007) offered a profit of Rs. 1,57,39,112 to tax, after setting off brought forward losses of Rs. 2,240,274. The Assessee also claimed credit of TDS of Rs. 44,04,830. The said return was fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, under section 195 of the Act. As we have already seen, the Assessee made payments to non-residents in India under the Act M/S.Appledore, U.K., who acted as sub-consultants. The Assessee entered in a contract with GRSE for rendering consultancy services for modernisation of their shipyard project. The scope of work envisaged- Preparation of concept plan, preliminary project report (PPR) and detailed project report (DPR). Design, detailed engineering, drawing and tender documents for works contract. Project management and construction supervision services. According to the Asssessee, the scope of consultancy services was to be rendered partly from the UK and partly from India. For the purpose of rendering services from the UK, the Assessee had obtained certain services from M/S.Appledore, an independent sub-consultant. The services in India were rendered by local independent sub-consultants, appointed by the Assessee. M/S.Appledore was required to render services towards preparation of concept plan, preliminary project report and detailed project report, and render evaluation. The terms of the Agreeement between the Assessee and M/S.Appledore are contained in an agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in a Balance sheet prepared in India. Therefore, only by reasons of the fact that the payment was made to Appledore by the head office of Gifford in the UK and that such payment is taken into account in the balance sheet of PE in India, it shall not be automatically considered that such income of Appledore is income received in India. The amounts paid to the sub-consultants were claimed as deduction/expenditure in arriving at the income declared in the return of income. According to the AO, the payments made to sub-consultants were payments made to non-residents and therefore in terms of Sec.195 of the Act, the Assessee ought to have deducted at source on such payments in terms of Secc.194J of the Act. The Assessee had not deducted tax at source on such payments. As a consequence, the AO was of the view that the expenditure claimed as deduction cannot be allowed as a deduction in view of the provisions of Sec.40(a)(i) of the Act which reads thus: "40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",- (a) in the case of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ma Heavy Industries Ltd. iii) The services cannot be taxed under FTS owing to the 'make-available' clause contained in Article 13 of the DTAA 9. With respect to the submission filed on 18 December 2009 as stated above, the Assessee also filed an application under section 144A of the Act, to the Addl. DIT(IT)-I, Kolkata ('ADIT') requesting the ADIT for issuing necessary directions to the AO in this regard. Under Section 144A of the Act, a Joint Commissioner may, on his own motion or on a reference being made to him by the Assessing Officer or on the application of an assessee, call for and examine the record of any proceeding in which an assessment is pending and, if he considers that, having regard to the nature of the case or the amount involved or for any other reason, it is necessary or expedient so to do, he may issue such directions as he thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment and such directions shall be binding on the Assessing Officer. The ADIT vide letter dated 23 December 2009 gave the following finding/direction to the AO:- 1. The ADIT held that the Assessee's claim that there was no accrual of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offered to tax. The AO also referred to the profit and loss account of the Assessee wherein the entire receipts of the Assessee from GRSE whether in USD or INR is duly credited. Thus the Assessee cannot now go back on his stand that income in question is not taxable in India. 2. According to the AO the contract between the Assessee and GRSE provided for completion of project in three stages. According to the AO the scope of work as per the contract was such as to require continuous involvement of the Assessee and its sub-consultants/associates with GRSE at the project site of GRSE. Even in respect of reports prepared at UK, the necessary technical details had to be collected and scrutinized by the Assessee and its subconsultants/ associates. 3. According to the AO, Appendix 1.3 of the contract between the Assessee and GRSE contained details of foreign staff and consultants of the Assessee as well as its associates, M/S.Appledore International and their involvement in the various stages of work inside GRSE premises at Kolkata. The AO also held that according to the contract document between the Assessee and GRSE it is nowhere mentioned that there are two parts of the contract, i.e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E is in the nature of "Fees for Technical Services"(FTS) within the meaning of Article 13 of Indo-UK DTAA. Since the FTS is arising in India and the Assessee is carrying on business in India through a PE situated in India and also since these services are "effectively connected" with the PE in India, therefore the consideration for these services are liable to tax in India under Article 7 of the Indo-UK DTAA by virtue of the provisions of Article 13(6) of the Indo-UK DTAA." 12. The AO thereafter disallowed consultancy charges paid to sub-consultants in India u/s.40(a)(ia) of the Act and payments made to Appledore, UK u/s.40(a)(i) of the Act. The AO also disallowed expenditure to the extent of Rs. 30,09,179 on the ground that the same relates to period prior to the previous year relevant to AY 2007-08. The AO also held that since taxes of the Assessee were to be borne by GRSE, the receipts of the Assessee from GRSE have to be grossed up. The AO ultimately determined the total income of the Assesssee as follows: "8. Subject to the above, the total income of the Assessee is computed as under: Net profit as per P/L. Account 1,79,79,386 Add: Disallowance of expenses as dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a composite contract, with different severable parts - services that were rendered Offshore, in the UK, by the Assessee concerned and services that were rendered Onshore, by the independent Indian sub-consultants, appointed by the Assessee. 15. It was pointed out that the Contract Value was payable partly in USD and partly in INR. This was to ensure that, whilst the fees payable to the Assessee for the services (which was rendered from the UK office of the Assessee) would be in USD, the INR part was to accommodate the payments to be made to the Indian subconsultants, by the Assessee. It was pointed out that during the relevant previous year, the Assessee had to visit India, for the purposes of the collection of data and information, which formed the basis of the reports generated in the UK. It was submitted that a look at the activities required to be performed by the Assessee in terms of Phases - I and II of the Contract (as detailed above) would clearly reveal the said requirement of collection of information in India. It was pointed out that even the requirement of data collection has been agreed by the Ld. AO in his impugned order at Page 18. It was submitted that the inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. It was argued that preparation of accounts in India incorporating the invoices raised from UK does not have any material effect on taxability of such income in India. 18. In was thus submitted that there was no PE in India in terms of Article 5 of the DTAA and hence no part of income earned by the Assessee during the year ended 31 March 2007, from execution of the contract of GRSE, can be taxed in India. 19. Issue of taxability of payments received in USD The Assessee submitted that it had rendered services and raised invoices on GRSE separately, for services rendered outside India and services rendered in India. The local services had been rendered only through its independent Indian, sub-contractors and foreign services were rendered partly by its independent foreign sub-contractor i.e. Appledore and partly by the Assessee, from its head office in the UK. The Assessee further contended that the contract envisages a divisible contract having two parts - one for rendering services from India and the other for offshore services to be rendered from the UK. The Assessee co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in INR from Rupee component of the contact value. 20. Without prejudice to the above contention, it was contended that even if the Assessee is deemed to have constituted a PE in India, then the taxability thereof, would be governed by Article 7(1) of the DTAA, which reads as under:- "The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent, establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enter price may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment." The Assessee in this regard drew attention of the DRP to the commentary of Klaus Vogel on Double Taxation Conventions, wherein it has been stated as under: "As regards the profits made by the enterprise in the State of the permanent establishment, a distinction must always be made between those profits which result from the permanent establishment's activities and those made, without any interposition of the permanent establishment, by the head office or any other part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee partly took place in one territory and partly in another. The Hon'ble High Court of Bombay referred to the decision in the case of Ishikawajma Harima (supra). The relevant extract is stated as under: "In the above judgement, Apex Court observed that "Section 9(J)(vii) of the Act must be read with section 5 thereof, which takes within its purview the territorial nexus on the basis whereof tax is required to be levied, namely, (a) resident; and (b) receipt of accrual of income. According to Apex Court, the global income of a resident although is subjected to tax, the global income of a non-resident may not be. The answer to the question would depend upon the nature of the contract and the provisions of the DT A. What is relevant is receipt or accrual of income, as would be evident from a plain reading of section 5(2) of the Act subject to the compliance of 90 days rule. " 22. It was contended that in view of the above judicial pronouncement, it can be said that in case any part of the services are being rendered outside India then income should be apportioned so that the income from the services rendered outside India is not taxed in India. It was pointed out that the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been rendered in India; and (ii) rendering of the said services is not attributable to a PE, even if one such, is alleged to exist in India; 24. Applicability of the provisions of section 115A Without prejudice to the above objections, the Assessee submitted that the tax liability of the Assessee cannot exceed the amount of tax chargeable under section 115A of the Act on gross receipts by way of 'Fees for technical services' ('FTS') as provisions of section 44DA are not applicable from the facts and circumstances of the case. In this regard, the relevant provisions of section 115A of the Act, needs to be looked into. The same reads as under:- "115A(I) Where the total income of- (a) .......... (b) a non-resident (not being a company) or a foreign company, includes any income by way of royalty or fees for technical services other than income referred to in sub-section (1) of section 44DAJ received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31 st day of March, 1976, and where such agreement is with an Indian concern, the agreement is approved by the Central G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed place of profession, as the case may be, shall be computed under the head "Profits and gains of business or profession" in accordance with the provisions of this Act :" FTS would fall within the purview of section 44DA(1) of the Act, only if it is actively connected to the PE of the non-resident in India. PE for the purpose of this section has been defined in section 92F(iiia) of the Act which reads as under:- "(iiia) "permanent establishment", referred to in clause (iii), includes a fixed place of business through which the business of the enterprise is wholly or partly carried on;" It was claimed that in view of the above provisions it would be safe to conclude that if it is established that the Assessee does not have a PE in India in terms of section 92F(iiia) of the Act, the payments received from GRSE would not fall within the purview of section 44DA of the Act. As such, the Assessee would be entitled to the benefit of the provisions of section 115A of the Act and be taxed at 20% of the Gross receipts. 26. It was contended that the definition of PE under the Act has a much narrower meaning as compared to that in the DTAA. As such, an instance of PE being established un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already filed that the receipts in question are chargeable to tax, was not proper. In coming to the above conclusion the AO had placed reliance on the decision of the Hon'ble Supreme Court in the case of Goetz (India) Ltd. (supra) wherein it was held that claim made in the course of assessment proceedings without filing a revised return of income, cannot be entertained by the AO. In this regard, the Assessee placed reliance on the decision in the case of Chicago Pneumatic India Ltd. vs. DCIT 15 SOT 252 (2007) (ITAT) (Del). The Delhi ITAT, in the context of allow ability of new claims during the assessment proceedings without having recourse to a revised return, has, placing reliance on principle embedded in Article 265 of Indian constitution (No tax can be collected except by the authority of law), CBDT Circular No. 14 dated 11 April 1955 and explaining the ratio of the Goetz (india) Ltd. (supra) ruling, categorically held that assessee has the right to make new claims during assessment proceedings without recourse to a revised return. The Tribunal dealt with the decision of the Hon'ble Supreme Court in the case of Goetz (India) Ltd., (supra) in the following manner: "....As far a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed the judgement of Goetze allowed the claim of the Assessee which was made in course of the assessment proceedings and not by filing revised return. 29. In view of the above judicial pronouncements, it was submitted that the action of the ld. AO of not allowing the claim of the Assessee due to failure to file the revised return, is bad in law. 30. Issue with regard to disallowance of payments made to M/S.Appledore, UK for non deduction of tax at source by invoking the provisions of Sec.40(a)(i) of the Act: The Assessee submitted before the DRP that it had entered in a contract with GRSE for rendering consultancy services for modernisation of their shipyard project. The scope of work envisaged -Preparation of concept plan, preliminary project report (PPR) and detailed project report (DPR). -Design, detailed engineering, drawing and tender documents for works contract. -Project management and construction supervision services. The scope of consultancy services was to be rendered partly from the UK. and partly from India. For the purpose of rendering services from the UK, the Assessee had obtained certain services from Appledore, an independent sub-consultant, which is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this section, by reason only of the fact that it has been taken into account in a Balance sheet prepared in India. Therefore, only by reasons of the fact that the payment was made to Appledore by the head office of Gifford in the UK and that such payment is taken into account in the balance sheet of PE in India, it shall not be automatically considered that such income of Appledore is income received in India. Although the PE is required to carry out certain activities in India, the consideration for offshore services rendered by Appledore in the UK, which is not attributable to the work of the PE, should not be considered as income deemed to accrue or arise in India by virtue of section 9(l)(vii)(c) of the Act. 32. Again reliance was placed on the decision of the Hon'ble Supreme Court, in the case of Ishikawajima Harima Heavy Industries Ltd. vs. CIT (2007) (288 ITR 408, SC), wherein it was held "That, in relation to offshore services, section 9(I)(vii)(c) required two conditions to be met: to be taxable in India the services which were the source of the income sought to be taxed had to be rendered in India as well as utilised in India. In this case, both these conditions wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India and Japan cannot be taken to be overruled. The place of accrual of income may be required to be determined with reference to DTAA. It was pointed out that even after introduction of an explanation to Section 9 of the Act, through Finance Act 2007, the Bombay High Court has considered the issue in a recent case in the matter of Cl'I' vs. Siemens Aktiongesellschaft (2009) 310 ITR 320 BOM). The issue was whether the Double Taxation Avoidance Agreement between India and Germany overrides the domestic law, which treats the royalty to be taxable as Indian income. Double Taxation Avoidance Agreement between India and Germany provides that in respect of Royalty and Technical Fees, where it is paid as a part of business agreement, the element of Royalty and Technical Fees cannot be separately considered in view of Article III(1) of the Indo-German Agreement providing for tax liability in Germany where it is part of commercial profits. It was pointed out that where such amount is part of commercial profits it is only the home state which will have the jurisdiction to assess the same following the decision in the case of Ishikawajima Harima Heavy Industries Ltd. It was finally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering of any technical or consultancy service" is followed by "which made available technical knowledge, experience, skill and know-how". In this context it becomes imperative to understand the meaning of the expression "make available" as used in this article. It was submitted that the meaning of the expression "make available" has been aptly considered in the case of Intertek Testing Services India P. Ltd. [(2008) 307 ITR 418 (AAR) as under:- "Now, we shall proceed to analyse further clause (c) of article 13(4). Rendering of service and making use of service go together. They are two sides of the same coin. But clause (c) of article 13 (4) does not stop at that. 1t carves out a qualification thereto by employing the words "which make available technical experience, skill, know-how or processes". Rendering technical or consultancy service is followed by a relative pronoun "which" and it has the effect of qualifying the services. That means, the technical or consultancy service rendered should be of such a nature that "make available" to the recipient technical knowledge, know-how and the like. The service should be aimed at end result in transmitting the technical knowledge, etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... skill, etc. as a result of service provided to it, which can be subsequently utilized by it. Thus, payments made by it, for services provided do not fall within the scope of FTS, as laid out in Article l3( 4)( c) of DT AA and, as such, the payments made by the Assessee were not taxable in India and the Assessee was not under obligation to deduct tax. It was thus submitted that Article 13 of the DTAA does not apply to the instant case. Payment made by head office of Gifford to Appledore for rendering services in the nature of preparation of concept papers, preliminary project report ('DPR') and detailed project report ('DPR') without making available the expertise and technical knowledge, etc. for carrying out such technical work , cannot be taxed in India. 37. Issue with regard to disallowance of Rs. 30,09,179/-: During the FY 2006-07 the Assessee has debited total expenses of Rs. 10,681,827 to the profit and loss account. Out of the same, an expenditure of Rs. 9,684,307 was been booked as 'Consultancy charges'. The invoices relating to the same were submitted to the AO. The Id. AO, in the impugned order, was of the view that the following invoices, pert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it within the meaning of section 28(iv) of the Act by way of crediting the net consideration in the audited accounts and claiming the credit of TDS on the 'grossed up' amount. The certificates of GRSE totalled to Rs. 28,126,740 whereas the Assessee has accounted for only Rs. 24,393,588 in the audited profit and loss accounts. Therefore the difference of Rs. 37,33,151 was added back to the total income of the Assessee. The limited prayer of the Assessee before DRP was to direct the Id. AO be directed to give consequential relief to the Assessee with regard to grossing up of the income, once the first grounds of objection is decided in favour of the Assessee. 40. Besides the above objections, the Assessee also raised issues with regard to the action of the AO in not granting credit for taxes deducted at source as claimed by the Assessee. The levy of interest u/s.234-B & 234-C of the Act was also questioned by the Assessee before the DRP. It was submitted that the person making payment to the Assessee was duty bound to deduct tax at source u/s.195 of the Act on payment made to the Assessee, as the Assessee was a non-resident. It was submitted that in estimating the advance ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt had to bear the charges for local, STD & ISD calls, faxes & e-mail for all the three stages of the project. These facts as per the Contract clearly indicate that the assessee maintained permanent office in India for rendering consultancy services to GRSE. Article-5 of DTAA between India & the UK defines the term 'permanent establishment' to include 'an office'. The assessee has maintained office at the place of GRSE in India, therefore, the assessee had permanent establishment in India in the year under consideration for rendering consultancy for all the stages. The direct enquiry made by the AO revealed that one Shri Mitra is Resident Engineer of Gifford and address printed on his visiting card is - "Consultant's Kolkata Office, 43/46, Garden Reach Road, Kolkata- 700024". Moreover, the assessee filed its returns for the year under consideration as well as for earlier years as PE in India and accounted for the entire consultancy fees received from GRSE both in foreign currency as well as in rupees and also claimed deduction of all the expenses. The assessee has not disputed the taxability of consultancy fees received in rupees as PE in India and disputed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above mentioned decision considered the decision of the Apex Court (supra) and held that the revised claim u/s.80HH & 801 should be allowed in view of the CBDT's Circular F. No. 81/27/65-ITCB), dated 18th May, 1965. The facts of the cited case law were that the assessee made claim for deductions u/s.80HH & 801 in the original return and later filed a revised return in which the claim of deductions u/s.80HH & 801 was not revised; however, the assessee made revised claim of said deductions by filing a revised working during the assessment proceedings. It is evident that the claim of deductions u/s.80HH & 801 was not a fresh claim. The above mentioned Board's Circular permits the AO to allow any deduction, although not claimed in the return, if the same is allowable being a patent mistake of fact or law. This Circular does not permit the AO to allow any fresh or new claim made by the assessee during the assessment proceeding, if such claim is debatable, contrary to the facts on record and assessee's own treatment given in earlier years and there being two possible views on the issue involved in the claim. In the assessee's case, the fresh claims as above were contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 of the LT. Act, 1961 was amended by the Finance Act, 2010 w.e.f. 01.06.1976 by substituting the Explanation occurring after sub-Section 2 as under: "Explanation. - For the removal of doubts, it is hereby declared that for the purpose of this Section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-Section (1) and shall be included in the total income of the nonresident, whether or not, - (i) the non-resident has residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India." In view of the above stated amendment, the income by way of fees for technical services payable by a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India, was deemed to accrue or arise in India, whether or not the non- resident had PE in India and whether or not the non-resident rendered services in India. Therefore, the AO was justified in holding that the payment made by the assessee to Appled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epared and submitted by Appledore were for the specific GRSE project and the same was to be utilized only by GRSE and no one else for the entire period until the completion of the said. project and even afterwards for diagnosing and correcting any fault in the project, if noticed at a later date. As such, the technical knowledge, design and experience of Appledore were made available to the assessee who in turn made the same available to GRSE for permanent use in its project. Therefore, the AO was justified in holding that that payment made to Appledore was falling within the purview of Article 13(4)(c) of the DTAA, as there was 'make available' of technical knowledge, skill or expertise by Appledore. e) In view of the aforesaid amendment to Section 9 of the LT. Act, 1961 by the Finance Act, 2010, the payment made by the assessee to Appledore was chargeable to tax under the provisions of LT. Act, 1961 and accordingly the assessee was required to deduct tax at source u/s. 195 of the Act. If the assessee had a view that the said payment was not chargeable to tax under the Act, then it would have made an application under sub-Section - 2 of Section 195 of the Act to the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipt from GRSE. The treatment given by the assessee in its accounts as well as in computation of its total income was contrary to the provisions of Section 198 & 199 of the Act. In view of this legal position, the difference amount of Rs. 37,33,151 was correctly added by the AO to the total income of the assessee." 42. The AO passed the fair order of assessment dated 21.9.2010 giving effect to the directions of the DRP. Aggrieved by the order of the AO dated 21.9.2010, the Assessee is in appeal before the Tribunal. The grounds of appeal raised by the Assessee reads thus: "I. For that the Assessing Officer and Dispute Resolution Panel (hereinafter collectively referred to as the 'authorities below') erred in holding that that the Appellant is having a Permanent Establishment ('PE') in India in terms of Double Taxation Avoidance Agreement between India and United Kingdom of Great Britain and Northern Ireland ('DTAA'); II. Without prejudice to the Ground No.l, the Appellant states and submits that the authorities below erred in holding that, the entire amount received by the Appellant, including those in United States Dollar ('USD'), was attributable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee to provide conlsultancy service for modernisation of GRSE's Garden Research Shipyard. The terms of the Agreement between the Assessee and GRSE is contained in an agreement dated 29.4.2004 which later was amended by memorandum of Amendment to original Agreement on different occasions. 45. The nature of services to be performed by the Assessee are set out in Appendix 1.1 to the Agreement. Appendix 1.1 of the Agreement refers to Section-III of bid document which contains "Terms of Reference". Clause 1.8 of the Agreement provides as follows: "1.8. LOCATION The services shall be performed at the premises of Garden Reach Shipyard, Kolkata and, where the location of a particular task is not so specified, at such locations, as GRSE may approve." 46. The scope of work to be carried out by the Assessee for GRSE as per the agreement can be divided into three phases: Phase -1 Preparation of a macro level concept plan for the modernization of the entire ship building yard including the installation of a Ship Lift, considering a new Modular shop and improvements to the module building, module handling and transporting, pre-outfitting, material planning and control and all other pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Project) and the Consultant, having represented themselves as technically capable of and/or possessing professional qualification, skill, personnel infrastructure and all other technical resources, have submitted their offer to provide all required technical and ancillary services for providing Consultancy Services for Modernisation of Garden Reach Shipyard and whereas GRSE have accepted the said offer of the Consultant under the terms and conditions as mentioned hereunder." 49. The manner in which the services are rendered by the Assessee under the Agreement necessarily involves visit by the Assessee's representative to the existing shipyard of GRSE, carry out study of the existing design, plan and facilities and scope for modernisation. The data so collected was sent to UK and the experts of the Assessee at UK drew the project report with inputs from M/S.Appledore, UK, which would contain plans, design, structural design, cost for actual implementation, manner of implementation etc. As we have already seen, during the previous year Stage-II of the Agreement was being carried out by the Assessee (which was only drawing of project report, plans etc.), which does not require mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction , assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". 51. Section 9 of the Act, was amended by the Finance Act, 2010 w.r.e.f. 01.06.1976 by substituting the Explanation occurring after sub-Section 2 as under: "Explanation. - For the removal of doubts, it is hereby declared that for the purpose of this Section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-Section (1) and shall be included in the total income of the nonresident, whether or not, - (i) the non-resident has residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India." In view of the above stated amendment, the income by way of fees for technical services payable by a person who is a non-resident, where the fees are payable in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the income in question accrues and arises in India and therefore taxable in India, we will now proceed to examine the taxability of the income in question under the DTAA between India and UK. Article 13 of the DTAA provides for taxation of income in the form of Fees for Technical Services between the source country (India) and the resident country (UK). The relevant clauses of the DTAA provides as follows: ARTICLE 13 ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed : (a) In the case of royalties within paragraph 3(a) of this Articles, and fees for technical services within paragraphs 4 (a) and (c) of this Article - (i) During the first five years for which this Convention has effect ; (aa) 15 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to arise in a Contracting State where the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the obligation to make payments was incurred and the payments are borne by that permanent establishment or fixed base then the royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. 52. The nature of services rendered by the Asseessee under the Agreement with GRSE was of the nature of technical or consultancy service and would be providing Technical services within the meaning of the DTAA also. In terms of Article 13(7) of the DTAA the income in the form of fees for technical services shall be deemed to arise in India because the person making payment of such fee is a resident of India. 53. Article 13(4) defines FTS to mean payments of any kind, to any person, in consideration for the rendering of any technical or c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable" to the recipient technical knowledge, know-how and the like. The service should be aimed at end result in transmitting the technical knowledge, etc., so that the payer of service could derive an enduring benefit and utilize the knowledge or know-how in future on his own without the aid of the service provider. By making available the technical skill or know-how, the recipient of the service will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider. 1n other words, to fit into the terminology "make available", the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. The services offered may be the product of intense technological effort and a lot of technical knowledge and experience of the service provider would have gone into it. 55. We have already seen clause 3.10 of the Agreement between the Assessee and GRSE (see para-47 of this order) which provides that all plans, drawings, specifications, designs, reports and other documents prepared by the Consultant in performing the Services shall become and remain the exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oses 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" shall include especially : (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) premises used as a sales outlet or for receiving or soliciting orders; (g) a warehouse in relation to a person providing store facilities for others; (h) a mine, an oil or gas well, quarry on other place of extraction of natural resources; (i) an installation or structure used for the exploration or exploitation of natural resources; (j) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than six months, or where such project or supervisory activity, being incidental to the sale or machinery or equipment, continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment; (k) the furnish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ombination is of a preparatory or auxiliary character. 4. A person acting in a Contracting State for or on behalf of an enterprise of the other contracting State - other than an agent of an independent status to whom paragraph (5) of this Article applies, shall be deemed to be a permanent establishment of that enterprise in the first mentioned State if: (a) he has, and habitually exercises in that State, an authority to negotiate and enter into contracts for or on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; or (b) he habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise for or on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and the enterprises controlling, controlled by, or subject to the same common control, as that enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee that for a place or an office to be treated as PE. it must be at the disposal of the enterprise i.e. the assesssee must be able to occupy the premises in its own right and use the same for the purpose of carrying its business in India. It has been the stand of the Assessee that it does not have any office branch or fixed place of business in India. It was maintaining its books of accounts relating to the GRSE project and complying with taxation matters in India through its consultant, L.B.Jha & Co., Chartered Accountants. The technical analysis for the purpose of review report etc. was carried out by the Assessee only in the UK, based on such information received from India. As such in terms of Article 5(3)(d) of the DTAA. maintenance of a fixed place of business merely for collection of information, will not constitute a PE in India. It has also been the contention of the Assessee that the said office space provided to the Assessee, by GRSE at the project site, does not satisfy the 'Fixed place of business test' as the said premises was not used by the Assessee for its own business, but rather it was used only for the limited purposes of executing the contract undertake ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sense of having some right to use the premises for the purposes of its business and not solely for the purposes of the project undertaken on behalf of the owner of the premises." 62. Reference was made to the OECD guidelines which states as follows: "Whilst no formal legal right to use a particular place is required for that place to constitute a permanent establishment, the mere presence of an enterprise at a particular location does not necessarily mean that that location is at the disposal of that enterprise. " 63. Attention was also drawn to the decision of the Special Bench ITAT in the case of Motorola Inc. 95 ITD 269 (Delhi-SB) wherein while dealing with the issue of 'Disposal Test' the Special Bench has held as under: "Disposal would imply right to use the premises at any point of time for whatever purposes. In other words, there should be nothing to indicate that whenever any employee of assessee visited India, he could straightway walk into the office of Indian company and occupy a space or table. Merely because the Indian company allowed the visiting employees to use certain facilities occasionally, it cannot be said that the assessee had at its disposal, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's business. There is also no projection of the assessee at this physical location in the sense that the business of the assessee is not carried out, or sought to be carried out or even projected, from these locations. When the physical locations at which consignment stock is kept do not project the assessee, it cannot be said that these locations constitute PE of the assessee. " 65. In conclusion it was submitted that :- - Office premises provided by GRSE is only for the purposes of discharging services under the contract with GRSE. - It cannot be used for any other purposes or for carrying out any other business of the Assessee in India - The Assessee cannot occupy such office premises in its own right and it does not satisfy the disposal test so as to make it a PE. - Even the use of the premises for providing services under the contract is restricted as the Assessee and its personnel had to observe GRSE's Rules and Regulations and require special permission to use such office premises beyond normal working hours. 66. The learned DR relied on the following circumstances to substantiate the conclusion of the Revenue authorities that there existed a PE of the Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reign currency and in Indian rupees and claimed deduction of expenses in the computation of business profits of the PE. In all other respects, the DR relied on the order of the AO/DRP. 68. We have given a very careful consideration to the rival submissions. Clause 5.2 of the Agreement for rendering of consultancy and technical services between the Assessee and GRSE reads thus: "5.2. SERVICES, FACILITIES AND PROPERTY OF GRSE GRSE shall make available to the Consultant's Personnel for the purpose of the Services, facilities and property described in Appendix-1.4." APPENDIX-1.4 of the Contract reads thus: "FACILITIES TO BE PROVIDED BY GRSE GRSE will, if required, make available to the Consultant, air-condtioned office space of about 50 Sq.mtrs., inside the Garden Reach Shipyard with a telephone and fax facility for the duration of the Contract. The charges for local, STD and OSD calls, faxes and e-mail for the three stages of the Project shall be borne by the Consultant. All other requirements of the Consultant should be arranged by the Consultant themselves." Appendix 1.3 of the Contract specifically provides that the Consultants, when working inside GRSE premises shall observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India without filing a revised return of income, we find that the AO in coming to the above conclusion, had placed reliance on the decision of the Hon'ble Supreme Court in the case of Goetz (India) Ltd. (supra) wherein it was held that claim made in the course of assessment proceedings without filing a revised return of income, cannot be entertained by the AO. In this regard, the Assessee placed reliance on the decision in the case of Chicago Pneumatic India Ltd.(supra) and the decision in the case CIT vs Ramco International (supra). In the cited decisions, the tribunal and the Hon'ble High Court has taken a view that a claim made without filing a revised return of income can be entertained. In the case of Ramco International (supra) the Hon'ble Punjab and Haryana High Court, distinguished the judgement of Goetze allowed the claim of the Assessee which was made in course of the assessment proceedings and not by filing revised return. In view of the above judicial pronouncements, we are of the view that the action of the ld. AO of not allowing the claim of the Assessee due to failure to file the revised return, is bad in law. 71. We therefore agree with the contention of the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee and after such grossing up such receipts have to be taxed at 20%. We hold accordingly. 74. In view of the above conclusion, the issue with regard to disallowance of prior period expenses, disallowance u/s.40(a)(i) & 40(a)(ia) of the Act, do not require any consideration as those disallowances will not be relevant when income is taxed u/s.115A of the Act. 75. The next aspect that needs to be considered is the levy of interest u/s.234-B & 234-C of the Act. It was submitted that the person making payment to the Assessee was duty bound to deduct tax at source u/s.195 of the Act on payment made to the Assessee, as the Assessee was a non-resident. It was submitted that in estimating the advance tax payable, the Assessee was bound to take note (give credit to) of tax deductible at source (whether actually deducted or not). If such credit is given then there would be no liability to pay advance tax of the Assessee would be less than Rs. 5000 and therefore no interest u/s.234B & 2234-C of the Act could be levied. The Assessee in this regard placed reliance on the decision of the ITAT Delhi in the case of Sedco Forex International Drilling Vs. DCIT 72 ITD 415 (Del). In this regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national Inc. [2009] 309 ITR 85 (Uttaranchal); and Commissioner of Income-tax and Others v Ranchi Club Ltd (2001) 247 ITR 209. Therefore, it was submitted that the provisions of section 234B & 234C are not applicable to the Assessee. 76. We have considered the rival submissions. Under Section 209(1)(a)to (d) lays down four situations under which advance tax payable by the assessee is to be computed. In the present case we are not concerned with clauses (a) to (c). Clause (d) of sub-Section (1) of Sec.209 is relevant for the present case and it reads thus:- "(d) The income-tax calculated under clause (a) or clause (b) or clause (c) shall, in each case, be reduced by the amount of income-tax which would be deductible or collectible at source during the said financial year under any provision of this Act from any income (as computed before allowing any deductions admissible under this Act) which has been taken into account in computing the current income or, as the case may be, the total income aforesaid; and the amount of income-tax as so reduced shall be the advance tax payable." A reading of the above clause shows that the clause categorically uses the expression "deductable or ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
