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TMI Blog2016 (4) TMI 413X X X X Extracts X X X X X X X X Extracts X X X X ..... to such a conclusion. The fact that the Assessee filed a return of income including all receipts from the contract with GRSE cannot be the basis to come to a conclusion that there was an admission by the Assessee that it had a PE in India. Existence of PE in India has to be established on the basis of evidence and by application of the requirements as contemplated in DTAA. On the question whether the Assessee having filed a return of income admitting income on the basis that it had a PE in India can thereafter make a claim that there was no PE of the Assessee in India without filing a revised return of income 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. We therefore agree with the contention of the Assessee that there was no PE in India during the previous year. This conclusion will hold good even for AY 2005-06. As already held that there was no PE in India in the form of fixed place of business through which the business of the Assessee was wholly or partly carried on in India. As such, the Assessee would be entitled to the benefit of the provisions of section 115A of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dix 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 1.5 FEES FOR CONSULTANCY SERVICES: Foreign Currency Payments Stage-1(DPR) US$ 424095 Stage-2(Design Stage) US$ 557986 Sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outside India, is also a company under the Act. There is no dispute that the status under the Act for the purpose of assessment of income is Non-Resident Company . Section 4(1) 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 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eparation of concept papers, Preliminary project report (PPR); Detailed project report (DPR); Engineering services; Project management services; and Post - construction service The said services were 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 ₹ 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 ₹ 1,06,81,827/- was debited as an expenditure in the profit and loss account. In the return of income filed for A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evious year, or in the subsequent year before the expiry of the time prescribed under subsection (1) of section 200 : 2. Issue of disallowance under section 40(a)(i) of the Act, of the payment made to Appledore, on account of non deduction of tax at source, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is deemed to be received in India and not otherwise. Explanation I to section 5(2) provides that income accruing or arising outside India shall not be deemed to be arising in India, within the meaning 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rendered from the UK and are not taxable in India on account of the following three factors: i) No profits from these services are attributable to the PE in India ii) Services have to be rendered in India, for taxability in India, as per the ratio of the Hon'ble Supreme Court in the case of Ishikawajima Harima 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... came to the following conclusions: 1. The AO referred to a letter dated 14.9.2009 by the Assessee s representative to the AO wherein they had admitted that it had a PE in India and all income arising or accruing to it is accounted for and taxes are paid. The AO referred to the return of income filed by the Assessee wherein income was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not acceptable. 'Principle of consistency' is an important principle of accountancy which should be followed. The final conclusion of the AO was: f) there exists a PE in the case of the Assessee in India within the meaning of Article 5 of the Indo-UK DTAA. The consideration for consultancy services provided by the Assessee to GRSE 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 ₹ 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... timates of power requirements, provision of Sub- station, Compressed Air etc; Preparation of draft tender documents for the various packages; and Obtaining timely approvals from various statutory bodies. During the previous year relevant to AY 2007-08, the Assessee was involved in the activities pertaining to this phase. Phase - III Issuance of the detailed working drawings to the Contractors (separate from the Assessee), as independently selected by GRSE, for the necessary execution of the work, as required, for the construction. It was submitted that the above being the scope of work to be carried out by the Assessee for GRSE, it can be said that the Contract between the Assessee and GRSE 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) wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r arising outside India shall not be deemed to be arising in India within the meaning of this section by reason only of the fact that it has taken into account in the balance sheet prepared in India. Moreover, treatment of item under the taxation regime is independent of its accounting treatment. In this regard attention was drawn to the decision of the Hon ble Supreme Court in the case of Kedarnath Jute Mfg Co Ltd vs CIT (Central) Calcutta 82 ITR 363 (1971) (SC) wherein it was held that whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights 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. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tentions referred to above have been accepted: Ishikawajima Harima Heavy Industries Ltd. vs. CIT 288 ITR 408 (SC) CIT vs. Siemens Aktiongesellschaft (2009) 310 ITR 320 BOM) Mahindra vs. DCIT (2009-TIOL-255-ITAT-MUM-SB) Reymonds Ltd. vs. DCIT (2003) 86ITD 791, ITAT BOM Intertek Testing Services India Pvt. Ltd. (2008) 307 ITR 418AAR It was again reiterated that during the relevant AY, the Assessee was involved in Phase-II of the contract with GRSE involving the preparation of the engineering drawings and report. The said services were performed and carried out entirely from the UK with some support obtained from the independent Indian sub-consultants who were paid 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 ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed here, they had not been rendered in India . . ..... However, even in relation to such income, the provisions of Article 7 of the DTAA would be applicable, as services rendered outside India would have nothing to do with permanent establishment in India. Thus if any services have been rendered by the head office of Appellant outside India, only because they were connected with permanent establishment. even in relation thereto, principle of apportionment shall apply. Reliance was also placed on the decision in the case of Clifford Chance vs. DCIT (2008) 318 ITR 237 (Bom.) wherein the transaction entered into by the assessee 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 globa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eria of rendering service in India and the utilisation of the service in India, as laid down by the Supreme Court, remains untouched and unaffected. 23. It was submitted that in the case of the Assessee it would be evident from the contract of the Assessee with GRSE, that services rendered by the Assessee from UK have nothing to do with the local activities which are separately performed and accounted for. Such offshore services rendered from outside India are independent and not connected with the activities carried on in India. It was thus submitted that consideration received in USD in respect of the offshore services, is not liable to tax in India: (i) as the said service has 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is reproduced as below:- 44DA(1) - The income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by a non-resident (not being a company) or a foreign company with Government or the Indian concern after the 31 st day of March, 2003, where such non-resident (not being a company) or a foreign company carries on business in India through a permanent establishment situated therein, or performs professional services from a fixed place of profession 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 permanent establishment or fixed 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 cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Act and accordingly tax ought to have been levied at 20% on the Gross receipt of the Assessee under the provisions of section 115A of the Act. This contention of the Assessee was however, without prejudice to the contention that the Assessee does not have a PE in India in terms of the DTAA and its entire income is not chargeable to tax. 28. Issue of claims made by the Assessee without revising the return On the above issue, the Assessee submitted that the action of the AO in not accepting the claim of the Assessee that receipts from GRSE was chargeable to tax in India for the reason that the said claim was made without filing a revised return of income and contrary to Assessee s own claim in the return of income 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not become irrelevant or can be ignored. Admittedly, the circular issued in 1995 has not been withdrawn, hence, it has got binding force on the subordinate authorities even as on date. Accordingly, we hold that the Assessing Officer is bound to assess the correct income and for this purpose, the Assessing Officer may grant reliefs/ refunds suo motu or can do so on being pointed out by the assessee in the course of assessment proceedings for which assessee has not filed revised return, although, as per law, the assessee is required to file the revised return ..... Further, reliance was also placed on the decision in the case CIT vs Ramco International 221 CTR 491 (2008) HC (P H) wherein the 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. 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 ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident in the UK. Such payments were made for and services rendered in the UK. The Assessee also pointed out that it would be erroneous to assume as if services rendered by the head office are rendered by PE and thereby the distinction between Indian and foreign operations and the apportionment of income of the operation shall stand obliterated. Appledore, being a non-resident in terms of section 5(2) of the Act, would be chargeable to tax in India only in the event of income accrues or arises in India or is deemed to accrue or arise in India or income is received or is deemed to be received in India and not otherwise. Explanation I to section 5(2) provides that income accruing or arising outside India, shall not be deemed arising in India, within the meaning 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 P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain, requires the fulfilment of two conditions: services, which are source of income sought to be taxed in India must be (1) utilised in India and (2) rendered in India. In the present case, both these conditions have not been satisfied simultaneously. 33. It was submitted that it is true that the Finance Act 2007 has amended section 9 of the Act, with retrospective effect from 1.6.1976, by insertion of an explanation after sub-section (2) providing that interest, royalty, technical fees, will be taxable in India whether or not the non-resident has a residence or place of business or business connection in India . Since the amendment is to the domestic law, the decision in Ishikawajima Harima Heavy Industries Ltd.'s case rendered in the context of DTAA between 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 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is no application of the first part of the definition in the subject case. The second part of the definition relates to the fees for rendering any technical or consultancy services which are made available to the Assessee. 35. As far as applicability of Clause ( c ) of Article 13(4) of the Indo-UK DTAA is concerned, the Assessee submitted that the said clause contemplates that fees paid should be for making available of the technical knowledge, experience, skill, etc. In other words, the technical knowledge, experience, skill, etc. must be made available to the Assessee, so as to be covered within its scope, and mere providing of such services, without making them available to the Assessee, shall not serve the purpose and hence, will be outside the ambit of the Article. Rendering 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s students on the aspects of diagnosis or techniques of surgery. that will amount to making available the technical knowledge and experience of the doctor. It was pointed out that similar view has been taken in the case of Mahindra Mahindra vs. DCIT (2009-TIOL-255- ITAT-MUM-SR) and Reymonds Ltd. vs. DCIT (2003) 86ITD 791, ITAT BOM, wherein it was held that mere rendering of service is not enough as it requires that such rendering of service should make available technical knowledge, skill, etc. to the receiver of service, who can use such knowledge in future for the business without the aid of service provider and thus, there should be some permanence of the service provided. 36. It was submitted that in the case of the Assessee, GRSE has not gained any technical knowledge, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or AY 2006-07 i.e. the period for which the work was done, or AY 2008-09 i.e. the period for which the invoices relate to. 39. Issue with regard to grossing up: As per the contract between the Assessee and GRSE, the consideration that was being paid to the Assessee by GRSE in USD, was to be paid net of taxes. Accordingly GRSE was grossing up the amount of consideration in USD and deducting tax on the same at the rate of 15%, which was borne by GRSE. During the year ended 31 March 2007, the net consideration (net of TDS borne by GRSE) received in USD (converted into INR) amounted to ₹ 24.393,589. It was submitted to the Id. AO that the 'grossing up' was done as per the provisions of section 195A of the Act, for the purpose of computation of TDS liability and that there is no need to recognize such notional income as there is no provision either in section 2(24) or in section 28 of the Act for deeming the same as income/profits and gains from business. The Id. AO, in his impugned order, expressed the view that the Assessee was deriving benefit within the meaning of section 28(iv) of the Act by way of crediting the net consideration in the audited accounts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lNR as per the convenience of the assessee. There is no mention in the Contract of the name of the foreign sub-consultant for payment in the foreign currency and the nature of consultancy services to be rendered by the foreign sub-consultant. GRSE was to make payment or remit the consideration amount on the basis of bills to be raised by the assessee as consultant in the bank account to be specified by the consultant. The consultant was responsible for technical soundness of the services rendered to GRSE and in the event of any deficiency in the services, the consultant was required to re-do such services for which GRSE was not required to pay any additional compensation. In Appendix-1.3, the personnel employed by the consultant in all the three stages included foreign staff of Gifford and its associate enterprise - 'Appledore', In Appendix-1.4, it is mentioned that GRSE would provide to the consultant i.e. the assessee air-conditioned office space of about 50 sq. mt. inside the Garden Reach Shipyard with a telephone and fax facility for the duration of the Contract and the consultant had to bear the charges for local, STD ISD calls, faxes e-mail for all the three stag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utation of business income / profits of the PE in India. d) The Panel has already expressed its view that the assessee had PE in India for the entire amount of consultancy fee received from GRSE and the income earned by it in USD was connected with its PE in India. The assessee filed the return of income as PE in India and disclosed the entire income received in USD in INR. In course of the assessment proceedings, the assessee made a fresh claim that it did not have any PE in India, and without prejudice to this claim, the income earned by it in USD was not connected to the PE in India. The AO besides dealing with the assessee's fresh claims on merits held that the assessee's fresh claims without filing a revised return could not be entertained in view of the decision of the Apex Court in the case of Goetze (I) Ltd. vs. CIT, 284 ITR 323. The assessee contested the AO's findings relying on the decisions in the case of Chicago Pneumatic India Ltd. vs. DCIT 15 SOT 252 (2007) (ITAT) (Del) and in the case of CIT vs. Ramco International 221 CTR 491 (2008) HC (P H). The ITAT Delhi in the above mentioned decision considered the decision of the Apex Court (supra) and held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. CIT, 284 ITR 323. 6. Ground No. 2 - Payments made to Appledore: a) As per the Contract, the assessee as a consultant was required to render consultancy services for GRSE project directly and / or through sub-consultants appointed by it. Further, as per the Contract the assessee had to receive the consultancy fee from GRSE. The appointment of M/s. Appledore International Ltd. ('Appledore') by the assessee was its choice and not the choice of GRSE as per the Contract. GRSE made payment directly to the consultant and not to Appledore. The head office of Gifford in UK made payment to Appledore at UK for the services provided by it to Gifford in connection with GRSE project located in India. The entire amount of consultancy fee was included in the accounts of PE and expenses by way of payment to Appledore were claimed in the accounts of PE. The place of services rendered by Appledore and also the place of payment made to Appledore were immaterial as long as the source of income was in India and the expenses were claimed against the receipts arising from the said source of income. Section 9 of the LT. Act, 1961 was amended by the Finance Act, 2010 w.e.f. 01.06.197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ledge, experience and skills. It is well known fact that the architecture is a branch of Engineering and preparation and submission of 'drawings' or 'design' by the Architect is in the nature of technical services. Therefore, the Appledore had also provided technical services by providing the design or review report as per the items of subconsultancy services specified in the 'sub-consultancy agreement'. Therefore, the AO was justified in bolding that the payment made by the assessee to Appledore was for transfer of technical plan or technical design falling within the purview of FTS in terms of the second limb to clause (c) of Article 13(4) of the DTAA. d) In view of the discussions at item (c) above, the payment made by the assessee to Appledore was covered by Article 13(4)(c) of the DTAA because the services rendered by Appledore were to 'make available' of technical knowledge, skill or expertise by Appledore. The ratio of the decision in the case of Intertek Testing Services India P. Ltd. (2008) 307 ITR 418 (AAR) supports the finding of the AO because the technical report and design prepared and submitted by Appledore were for the specific GRS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of Section 195A of the Act for the purpose of computation of TDS liability only and that there was no need to recognize such notional income either u] . 2(24) or u/s. 28 of the Act has no merits. The AO was also not correct in stating that the assessee derived benefit 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, although the addition made by him was otherwise correct in law. The amount of tax deducted at source is deemed income of the payee (i.e. the assessee) as per the provisions of Section 198 of the Act. The payer (i.e. GRSE) of the income treated the amount of TDS as part of outgoing for the purpose of claiming deduction in its computation of total income. Section 199 states that the credit for TDS can be granted to the payee only when the income on which the tax at source has been deducted is included in the computation of total income of the payee. The assessee (i.e. the payee) claimed credit of TDS on the payment made by GRSE (i.e. the payer) but did not include the full amount of receipt from GRSE. The treatment given by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es below erred in disallowing a sum of ₹ 2,858,996 on the ground of delayed deposit of tax deducted at source; VIII. For that the authorities below erred in holding that a sum of ₹ 3,733, 151 was to be added to the income on account of grossing up; IX. For that the authorities below erred in holding that any interest could be charged under section 234B and/ or 234C of the Act. The Appellant craves leave to add, alter, substitute or modify the grounds taken herein. 43. We have heard the rival submissions. The submissions made by the learned counsel for the Assessee was identical to the submissions as were made before the DRP. The submissions made by the learned DR were identical to the reasons given by the DRP for its conclusions on the various issues. 44. We have given a very careful consideration to the rival submissions. As we have already seen, the Assessee is a foreign company incorporated in United Kingdom. It is engaged in the business of providing consultancy services for execution of projects. Garden Research Shipbuilders and Engineers Ltd.,(GRSE) is a Government Company. GRSE was desirous of carrying out modernisation of its existing shipyard and appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the actual implementation of the suggestions as given in the project report of the Assessee. Post construction the Assessee has to submit As-built drawings to authorities like KMC/KPT/Inspector of factories and obtain completion certificate/occupancy certificate. 47. During the previous year, the Assessee was involved in activities pertaining to phase-II of the project set out above. Clause 3.10 of the Agreement provides as follows: 3.10. DOCUMENTS PREPARED BY THE CONSULTANT TO BE THE PROPERTY OF GRSE All plans, drawings, specifications, designs, reports and other documents prepared by the Consultant in performing the Services shall become and remain the exclusive property of GRSE, and the Consultant shall =, not later than upon termination or expiration of this Contract, deliver all such documents to GRSE, together with a detailed inventory thereof. The Consultant shall not use the said documents for purposes unrelated to this Contract in any manner whatsoever. 48. The Contract between the Assessee and GRSE gives the general nature of services for which the Assessee was being engaged as follows: WHEREAS GRSE intends to and/or is desirous of carrying out Mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed to have been rendered from UK and the billing in India rupee are for services rendered in India. 50. From the nature of the services to be rendered by the Assessee there can be no doubt that the payment in question falls within the definition of Fees for Technical Services as given in Sec.9(1)(vii) (b) read with Explanation 2 to the Act and that the same is deemed to accrue or arise in India. The services rendered by the Assessee were in the nature of technical or consultancy services. Sec.9(1) The following incomes shall be deemed to accrue or arise in India :- (vii) income by way of fees for technical services payable by- (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised 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 : Explanation [ 2].-For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in that case was applicability of Sec.9(1)(i) of the Act regarding existence of business connection. The Special Bench noticed that the view taken by the Tribunal and the High Court in Clifford Chance (Supra) was that if Article 15 of the India-UK Treaty is not applicable because the stay of the partner exceeded 90 days, then the taxability of the income would be determined by s. 9(1)(i) of the Act. It was held that for determination of income u/s 9(1)(i), the territorial nexus doctrine plays an important part and if the income arises out of operations in more than one jurisdiction, it would not be correct to contend that the entire income accrues or arises in each of the jurisdictions. The High Court applied the law laid down by the Supreme Court in the context of s. 9(1)(i) that if all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to the operations carried out in the taxable territories. The applicability of the Amendment referred to above viz., insertion of explanation to Sec.9(2) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received ; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received ; or (c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design. 6. The provisions of paragraphs 1 and 2 of this Article 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 permanent establishment situated therein, or performs in that other State independent 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 permanent establishment or f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee that the contract with GRSE envisaged only for rendering consultancy services for modernisation of the shipyard project and did not involve transfer of any right to use property for which royalties are payable. Hence, there is no application of the first part of the definition in the subject case. The second part of the definition relates to the fees for rendering any technical or consultancy services which are made available to the Assessee. 54. As far as applicability of Clause (c) of Article 13(4) of the Indo-UK DTAA is concerned, it has been the contention of the Assessee that the said clause contemplates that fees paid should be for making available of the technical knowledge, experience, skill, etc. In other words, the technical knowledge, experience, skill, etc. must be made available to the Assessee, so as to be covered within its scope, and mere providing of such services, without making them available to the Assessee, shall not serve the purpose and hence, will be outside the ambit of the Article. Rendering of any technical or consultancy service is followed by which made available technical knowledge, experience, skill and know-how . The contention of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in that other State independent 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 permanent establishment or fixed base. In such case, the provisions of Article 7 (Business profits) or Article 15 (Independent personal services) of this Convention, as the case may be, shall apply. 57. The question therefore is as to whether Fees for Technical Services (FTS) should be taxed under Article 13(2) or Article 7 of the DTAA. That would depend on the question whether the Assessee had a permanent establishment in India. In all Double Taxation Avoidance Agreement the basic concept is that an enterprise should be liable for tax on profits earned in a country that is not the country of residence of the enterprise, unless the enterprise has a real and significant or substantial economic nexus with the country in which the profits accrue. An enterprise will only have such a real and significant or substantial nexus if it carries on business in the other country through a permanent establishment in that country. Article 5 of the DTAA lays down rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paragraph 1 of Article 10 (Associated enterprises) and continue for a period or periods aggregating more than 30 days within any twelve-month period: Provided that for the purposes of this paragraph an enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it provides services or facilities in connection with, or supplies plant and machinery on hire used or to be used in, the prospecting for, or extraction or production of, mineral oils in that state. 3. . The term permanent establishment shall not be deemed to include: (a) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er agent of an independent status, where such persons are acting in the ordinary course of their business. However, if the activities of such an agent are carried out wholly or almost wholly for the enterprise (or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it or are subject to same common control) he shall not be considered to be an agent of an independent status for the purposes of this paragraph. 6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other. 7. For the purposes of this Article the term control , in relation to a company, means the ability to exercise control over the company's affairs by means of the direct or indirect holding of the greater part of the issued share capital or voting power in the company. 58. As per Article 5(1), the term permanent establishment means a fixed place of business through wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see it has been mentioned that the employees of the Assessee at the GRSE premises would have to observe the rules and regulations of GRSE. 60. In this regard it is worthwhile to mention that as per Para 5.2 of the contract, GRSE was required to make available to the consultant's personnel (Assessee s personnel) for the purposes of services office space inside the Garden Reach Shipyard. It was the stand of the Assessee that the Office space provided by GRSE is for restrictive and exclusive purpose of providing services under the contract for modernisation of shipyard and not for any other purposes. Therefore, office premises provided by GRSE cannot be available for carrying out the business in India by Assessee. The Office place provided by GRSE therefore cannot be occupied by Assessee or their personnel as a right for carrying out their business in India. It has been the further stand of the Assessee that the use of such premises is further restricted as Appendix 1.3 of the contract specifically provides that the consultant when working inside the premises of GRSE, shall observe GRSE's rules and regulations and special permissions shall be obtained when it is necessary t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zed as a fixed place of business. It was only the facility offered to the employees of Ericsson gratis that they could enter the office of ECI for the work of Ericsson. That did not create any right in the favour of the employees of Ericsson to enter the office of ECI as they pleased for the purpose of carrying out the activities of Ericsson. Nor did it create any impression in the minds of the business customers of Ericsson in India that the office of ECI could be viewed as a projection of Ericsson 's activities in India . 64. Reliance was also placed on the decision of ITAT in case of Airlines Rotables Ltd vs. JDIT (2010) 131 TTJ 385 (Mum.) wherein it has been held that: ..... The physical test. i.e., place of business test, requires that there should be a physical location at which the business is carried out. However. mere existence of a physical location is not enough. This location should also be at the disposal of the foreign enterprise and it must be used for the business of foreign enterprise as well. A place of business should be at the disposal of the foreign enterprise for the purpose of its own business activities. This place has to be owned, rented or ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 5 of the India-UK DTAA defines the term 'permanent establishment' to include 'an office' and in the instant case, the assessee has in fact maintained an office inside the Garden Reach Shipyard. In Appendix 1.4 of the Contract Document, it is mentioned that GRSE would provide to the assessee air-conditioned office space of about 50 sq.mt. inside the Garden Reach Shipyard with telephone and fax facility for the duration of the contract and the assessee had to bear the charges for local, STD ISD calls, faxes e-mails for all the three stages of the project. b) It the course of assessment proceedings, the A.O. sent his Inspector to the Garden Reach Shipyard to conduct enquiry and the enquiry revealed that one Shri Subrata Mitra was available there as Resident Engineer of Gifford and the address printed on his visiting card was - Consultant's Kolkata Office, 43/46, Garden Reach Road, Kolkata- 700 024. c) According to Appendix 1.3 of the Contract between the Asssessee and GRSE, 'Terms of Reference' , the assessee shall post at site competent and qualified engineers designated as Resident/Assistant Resident Engineer and other Site Engineers ( mini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rules and regulation and a special permission shall be obtained when it is necessary to work beyond normal working hours as per the requirement of Project work. 69. The presence of the Assessee in India during the previous year was only in connection with the Agreement for modernisation of shipyard of GRSE. The Assessee had not carried on any other business in India. The provision of office space inside the Garden Reach Shipyard cannot therefore be said to be a fixed place of business through which the business of the Assessee is carried on in India. As we have already seen Article 5(1) of the DTAA contemplates a fixed place of business through which the business of an enterprise is wholly or partly carried on. It can be said that there was some physical presence of the Assessee in India though it was restricted to rendering of services under the Agreement with GRSE. It is not enough that the Assessee has a fixed place of business in India but the Assessee should carry on business in India through that fixed place of business. This requirement of Article 5(1) of the DTAA is not satisfied in the present case. Carrying on of business involves the carrying on in a country of virtu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee that there was no PE in India during the previous year. This conclusion will hold good even for AY 2005-06. 72. Having come to the conclusion that there was no PE of the Assessee in India during the relevant previous year, the question that would now require consideration is with regard to taxability of the FTS under Article 13(2) of the treaty. A reading of Article 13(2) of the DTAA (reproduced in the earlier part of this order) would show that taxation has to be in according with the Act. The provisions contained in the Act in this regard are Sec.115A of the Act. In this regard, the relevant provisions of section 115A of the Act, needs to be looked into. We have already reproduced the provisions of Sec.115A of the Act and Sec.44AD of the Act in the earlier part of this order. U/S.115A of the Act, Income by way of FTS received by a non- resident would be taxed at 20% on gross basis only if all the following conditions are satisfied:- i) the income is received from Government or an Indian concern in pursuance of an agreement; ii) Such agreement was made after 31st day of May, 1997 but before the 1st day of June, 2005; and iii) such income does not fall within the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Del). In this regard reliance was also placed on the decision in the case of Motorola Inc. and others v. DCIT (supra), wherein the Hon'ble Tribunal has held that no interest is payable by a taxpayer if his entire tax was deductible at source, and this is true even if the tax was not actually deducted. The relevant extracts of the said decision is produced below:- All the payments made to the assessee are tax deductible at source (even assuming that they are taxable) as rightly held by the CIT(A) and also contended before us. In that case, having regard to the provisions of section 201(1) 201(1A) to which our attention was drawn on behalf of the assessees. the assessees cannot be held to have committed default in paying the advancetax. They are entitled to take into account the tax which is deductible by the payer. though not actually deducted. Consequently, there is no liability to pay interest. The decision of the CIT(A) to cancel the interest U/S 234B is upheld on merits. The issue was confirmed by the Delhi HC in the case of DIT vs. Ericsson AB [2011] 16 taxmann.com 371 (Delhi). Reliance was also placed on the decision in the case of DIT vs. Jacobs Civil Incor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cally uses the expression deductable or collectable at source . Under Sec.195 of the Act, there is an obligation on the payer, i.e. any person responsible for paying to a non-resident, to deduct income tax at source at the rates in force from such payments excluding those incomes which are chargeable under the head 'Salaries'. Therefore, the entire tax is to be deducted at source which is payable on such payments made by the payee to the nonresident. Sec.201 of the Act lays down the consequences of failure to deduct or pay. These consequences include not only the liability to pay the amount which such a person was required to deduct at source from the payments made to a non-resident but also penalties etc. Once it is found that the liability was that of the payer and the said payer has defaulted in deducting the tax at source, the Department is not remedy-less and therefore can take action against the payer under the provisions of Sec.201 of the Income Tax Act and compute the amount accordingly. No doubt, if the person (payer) who had to make payments to the non-resident had defaulted in deducting the tax at source from such payments, the non- resident is not absolved from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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