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TMI Blog2018 (4) TMI 504X X X X Extracts X X X X X X X X Extracts X X X X ..... rges is not taxable as FTS within the meaning of Article 12(5) of the India – Netherlands DTAA. The same is not received towards training as assumed by the ld AO. Accordingly the addition made by the ld AO in this regard is to be deleted - Decided in favour of assessee. Profits attributable to the Installation PE in India - whether only the onshore provision of services and onshore supply of equipments at 10% on gross basis as profits attributable to the Installation PE in India as against the action of the ld AO in taking the total receipts (i.e both offshore and onshore activities)? - Held that:- The consideration received in respect of offshore supply of equipments and services and profits attribution @ 10% on the same should not be added in the hands of the assessee construing it as ‘Installation PE’ in India. The assessee had received consideration in respect of onshore services to the tune of 3,53,42,381/- pursuant to 4 invoices raised on 13.8.2010. The assessee had also received a sum of 12,85,465/- (Euro 27842) towards onshore supply of equipment during the year under consideration. We hold that these two sums should be taken into account and profits attributable thereon at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the Asst Year 2011-12 under section 143(3) of the Income Tax Act, 1961, [ hereinafter referred to as the 'Act'] dated 9.2.2015, pursuant to the directions of the Learned Dispute Resolution Panel [hereinafter referred to as ld DRP] issued u/s 144C(5) r.w.s 144C(8) of the Act dated 30.12.2014. 2. The brief facts of this appeal is that the assessee is a subsidiary of HITT N.V.. It is a company incorporated as per the laws of Netherlands operating in the international market for safety, security and efficiency of nautical and air traffic. It operates in the specialized market for traffic control, navigation and port management systems. The assessee has entered into contracts with Oil and Natural Gas Corporation of India (ONGC) . Director General of Lighthouse and Lightships (DGLL) and Airports Authority of India (AAI) for supply of equipment and services. During the year under consideration, the assessee received payments in respect of performance of services and supply of equipment under the following contracts in India :- a) Supply, Installation, testing and commissioning of Advances Surfaces Movement Guidance Control System (ASMGCS) at Chennai, Mumbai and Kolkata Airports by A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see as an additional sum for Mumbai Airport for deploying additional resources to meet urgent operational requirements. The assessee reflected this additional income of Euro 45,000 under installation, commissioning and testing services . The ld AO alleged that the consideration of Euro 45,000 (Rs 28,0,6200/-) received by the assessee during the subject year for providing servies pertaining to installation, testing, commissioning etc is for provding ' training' to the customer and hence, taxable as 'Fees for Technical Services' (FTS) under the provisions of the Act as well as the DTAA between India and Netherlands. The ld AO observed that the consideration received for On-shore provision of services refers to 'training' by referring to Annexure I of the PO (page 194 of paper book) which states the scope of supply of services including installation / commissioning and training etc as separate items. This action of the ld AO was upheld by the ld DRP. Aggrieved, the assessee is in appeal before us on the following grounds :- 2.1 On the facts and in the circumstances of the case and in law, the ld. AO has erred in treating the amount of INR 28,06,200, being the consideration amount fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termined in accordance with the said DTAA. As to when a non-resident would be considered as having a PE in the other country is generally decided on the basis of the facts in each case, the criteria being the extent to which the non-Resident has set a firm foot in the soil of the other country. If a non-resident is considered as having a Permanent Establishment (PE) in the other country then income attributable to the PE will be taxed in the other country. As to whether the income attributable to the PE alone has to be taxed in the other country or any other income which accrues to the Non-Resident in the other country having no connection with the PE, can also be brought to tax in the other country, is also laid down in the various clauses of the DTAA between countries. Available Model Conventions differ in this regard. Some provide for taxing profits/income only to the extent that they are attributable to the PE, which is referred to as "No force of Attraction" principle. Some provide for taxing income/profits from direct transactions effected by the non-resident, provided the transactions are of the same or similar kind as that effected through the PE, which is referre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 008 Sir, Reference may kindly be made to your letter ref. no. 20100804_JVG dated 4th August, 2010 regarding partial delivery for one SMR only at Mumbai Airport to achieve the partial coverage of the ASMGCS at Mumbai Airport as soon as possible wherein additional financial burden due to deployment of additional resources to meet the AAI's urgent operational requirement by installation efforts beyond the contractual obligations have been indicated. AAI has approved additional cost of Euro 45,000 (Euro Forty Five Thousand only) towards the additional expenditure that HITT will encounter due to the partial delivery at Mumbai Airport and multiple commissioning efforts for commissioning with both SMR only. This cost is in addition to the cost mentioned in above referred Purchase Order towards Installation, Testing and Commissioning charges of Euro 585,162 for Mumbai Airport. Rest all the terms and conditions shall remained unchanged. Kindly acknowledge the receipt in acceptance of this amendment by signing at each page and return to AAI. Yours Sincerely S.Sundara Raman (Executive Director(CNS-P) 2.5.2. The additional amount was agreed by the AAI because multiple commissionin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse to the service provider, nor has it been the case of the authorities below. For this short reason alone, the installation, commissioning or assembly activities cannot constitute fees for technical services, or fees for included services as these are termed in Indo US tax treaty." 2.5.4. We find that the Chennai Tribunal in the case of DDIT vs Ford India Ltd reported in (2017) 78 taxmann.com 5 dated 31.1.2017 followed the decision of Birla Corporation Ltd rendered by Jabalpur Tribunal supra and held as under:- 37. The above line of reasoning apart, in Birla Corp's case (supra) also, it was noted that so far as treaties with make available clause are concerned, the payments made for installation and commissioning charges, for that reason alone, cannot be taxed as fees for technical services. The income embedded in these payments are thus not taxable as FTS, and it is not even the case of the revenue that the installation period crossed the PE installation threshold limit. These amounts cannot be taxed as business profits either. There is no other treaty provision under which these amounts can be brought to tax in India under the respective tax treaty. The law is well settl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration was fixed for the same. Hence it would be inappropriate to question the contract in this year after the completion of the contract. The main contract value was examined in the earlier years and income has been received in the past. Infact the assessee had offered close to Euro 200000 as per the contract towards training in the earlier year(s), in addition to amounts received towards installation, commissioning and testing. Hence the bifurcation of the sums towards installation and training as per the contract has been accepted by the revenue in the past and cannot be questioned in the year under consideration. Moreover, we find that there is absolutely no evidence brought on record by the ld AO that the subject mentioned receipt of ₹ 28,06,200/- from AAI is towards training. The ld DR later argued that in such a case, the year of completion of training need to be looked into and accordingly prayed for setting aside of this issue to the file of ld AO. We feel that this is not required in as much as the ld AO had not adduced any reasoning to construe the subject mentioned receipt of ₹ 28,06,200/- from AAI as attributed towards training. Hence the basic premis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for assessment year 2011-12 as FTS on gross basis @10% 3.1. During the year under consideration, the assessee had undertaken offshore supply of equipment and offshore provision of services under this project in addition to rendering onshore provision of services and supply of equipment. The ld AO in the draft assessment order had observed that the PO of the assessee is a Fixed Place PE of the assessee in India and that the assessee also had an "Installation PE" in India as per Article 5(3) of the India-Netherlands DTAA. However, the Hon'ble DRP held that since no business activity has been carried out by the defunct PO, the same cannot be treated as Fixed place PE of the assessee. However, the panel upheld the stand of Installation PE of the ld AO. The ld AO accordingly following the directions of the ld DRP stated that the assessee constitutes an 'Installation PE' in India under Article 5(3) of the India-Netherlands DTAA and attributed ₹ 77,92,867/- being 10% of total receipts of ₹ 7,79,28,669/- as profits attributable to the Installation PE. Aggrieved, the assessee is in appeal before us on the following grounds:- 3.1. On the facts and in the circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 3.4. raised by the assessee before us and dismiss the Grounds 3.1. to 3.3. raised by the assessee as not pressed. Before going into this question, we feel that it would be relevant to address the contents of Article 5(3) of the India-Netherlands DTAA which is reproduced as under:- 'Permanent Establishment' to include - "A Building site or construction, installation or assembly project constitutes a permanent establishment only where such site or project continues for a period of more than six months." 3.2.1. We find that the ld AO in para 35 of his final assessment order had held as under:- 35. A perusal of the 'Purchase Orders' submitted by the assessee along with Annex-I to the copy of the Consortium Agreement dt 02.09.2003 reveals the fact that the contract for the establishment of Vessel Traffic Services in the Gulf of Kuchch involves the installation, testing and commissioning of various complex equipments such as the 'VTS Master Control Center Equipments' among others, wherein the assessee has been assigned the 'Primary Responsibility'. Therefore, it is concluded that the contract for implementation of Vessel Traffic Services is in the nature of an 'installation proj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the offshore supply of equipment would be taxable in India since the transfer of property in the goods as well as the payment, were carried on outside the Indian soil. In this case, the AAR placed reliance on the judgement of the Hon'ble Supreme Court in the case of Ishakiwajima Harima supra. 3.2.4. We find that the Co-ordinate Bench of Mumbai Tribunal in the case of Atomstroy Export vs DDIT reported in (2017) 80 taxmann.com 178 (Mumbai ITAT) held as under:- 15. Therefore, after analyzing the various case laws, statutory provisions, DTAA provisions and contractual terms and respectfully following judgment of Hon'ble Supreme Court in Ishikawajma-Harima Heavy Industries Ltd., (supra) we are inclined to hold that Offshore Supply contracts were 'carried and concluded' outside India and hence no income there-from deemed to accrue or arise in India as per Section 9(1) and DTAA provisions and accordingly, not chargeable to tax. The receipts thereof do not form part of receipts for the purpose of computational provisions of Section 44BBB. Explanation 4 could not overcome the limitation imposed by Explanation 1(a) to Section 9(1)(i) and hence, the impugned income do not form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall be determined only on the basis of that part of the contract which is effectively carried out by the permanent establishment in the State where the permanent establishment is situated. The profits related to that part of the contract which is carried out by the head office of the enterprise shall be taxable only in the State of which the enterprise is a resident. (underlining provided by us) 2. ……… 3……….. We hold that even as per the Protocol clause in the Indo-Netherlands Treaty, only the profits attributable to the activities carried out in India shall be taxable and accordingly only the onshore services rendered by the assessee would have to be considered by the ld AO for taxing the onshore receipts at 10% . Accordingly, the Grounds 3.1 to 3.3 raised by the assessee are dismissed as not pressed and Ground No. 3.4. is allowed. 4. ONGC AMC Project The brief facts of this project are that the assessee was awarded a contract by ONGC for supply, installation, testing and commissioning of Vessel and Air Traffic Management System (VATMS) along with the provision of maintenance services. This contract envisaged a warranty period of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivity was carried out in A.Y. 2011-12 and hence, it cannot lead to the constitution of an 'Installation PE' or any other form of PE in India. 4.3 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the ld. AO has grossly erred in making ad-hoc attribution of profits to the alleged Installation PE at INR 6,259,009, being 50% of the gross consideration amount, which is wrong and very excessive. 4.4 Without prejudice to the above, on the facts and in the circumstances of the case and in law, the ld. AO has failed to appreciate that the AMC services are not covered by the scope of FTS, as defined under Article 12(5) of the India- Netherlands DTAA. 4.2. The ld DR argued that the assessee by employing a subcontractor to execute the AMC service contract, had made its presence indirectly in India . He argued that AMC is not a separate contract and it had only flowed from the earlier contract of doing installation and commissioning. As per Article 5 of the Treaty, PE includes 'place of business'. Place of business should have a location. All items included in the PE definition represent 'place of business'. Assessee has place in India through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce by the assessee from the Netherlands. Accordingly, such maintenance services cannot be considered as 'Installation activity' leading to creation of an 'Installation PE' of the assessee in India under Article 5(3) of the India-Netherlands DTAA. It was therefore submitted that in view of the above stated facts, since the essential condition of carrying out' Installation activity' is not fulfilled in the case of the assessee, it cannot be held that the assessee has an 'Installation PE' in lndia during the subject year. The ld AR placed reliance on the following decisions in support of his contentions, wherein it was held that in the absence of installation activity, the assessee could not be said to have an 'Installation PE ' in India:- a) Decision of Hon'ble Andhra Pradesh High Court in the case of CIT vs Vishakapatnam Port Trust reported in (1983) 144 ITR 146 (AP) b) Decision of Mumbai Tribunal in the case of Uhde GmbH vs DCIT reported in (1997) 57 TTJ 447 c) Decision of Delhi Tribunal in the case of DCIT vs Alcatel reported in (1993) 47 ITD 275 4.4. It was further submitted that Maintenance Services performed post completion of installation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cceptance or taking delivery " 4.5. The ld AR therefore contended that maintenance activities cannot be considered a part of the "Installation activity" of the assessee in India. It was also submitted that there was no 'Fixed Place PE' of the assessee in India through which it carried on business and therefore the revenue cannot take recourse to Article 5(1) of the India-Netherlands DTAA. It was therefore contended that the assessee does not have any PE in India for the subject year. 4.6. On the question of the role of subcontractor in India and the allegation of the revenue that there was virtual presence of the assessee in India through the subcontractor, it was submitted by the ld AR that these allegations cannot be the basis to hold that the assessee had an 'Installation PE' in India since no installation activity was carried out by the assessee in India during the subject year. It was submitted that even assuming that the entire maintenance activity was performed by Elcome (an independent local contractor), it cannot be said that the business of assessee was carried out in India, so as to constitute its PE in India. In this regard, the argument of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judicial pronouncements were brought to our notice wherein, it was held that there has to be a harmonious construction of Article 5(1) and Article 5(2)/ Article 5(3) of the DTAAs: National Petroleum Construction Co. case (supra) Pintsch Bamag, In re reported in (2009) 318 ITR 190 (AAR-New Delhi) Cal Drive Marine Construction (Mauritius) Ltd. v. DIT (International Taxation) reported in (2009) 315 ITR 334 (AAR-New Delhi) 4.8. It was submitted that since the assessee was not involved in any activity at the project site in India, it does not satisfy the 'business test' as prescribed in Article 5( 1) of the India Netherlands DTAA and therefore it cannot be said to have an Installation PE in India, even if it is assumed that the installation activity has been carried out in India beyond the threshold prescribed in the India-Netherlands DTAA. Time spent by subcontractor not to be included when "entire work" carried out by such subcontractor. Reference in this regard was made to the OECD commentary on 'Taxation of Income and Capital' of Article 5(3) at Para 19 states the following with regard to subcontracting in case of installation projects: "If an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t local contractor in India, it cannot be said that the business of the Assessee has been carried out by the presence of the local contractor in India, so as to create its PE in India. The examination of whether a PE exists needs to be determined based on the activities of the foreign enterprise in India. Since no activities have been carried out by the Assessee in India with respect of such maintenance activity, it is unreasonable to conclude that the business of the Assessee was carried out in India through such subcontractor, to constitute its PE in India. We therefore hold that receipts in the form of AMC fees from ONGC on VATMS cannot be brought to tax in India as business income. In view of the above conclusion, the question of what quantum of income has to be attributed to the PE in India that is agitated in Gr.No.D-3 & 4 do not require any consideration. 4.10. In view of the aforesaid arguments and findings in the facts and circumstances of the case and respectfully following the aforesaid judicial precedent , we hold that AMC services provided post completion of installation activities at the site of customer, cannot lead to carrying out installation activities for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld. AO has erred in levying interest under Section 234B and Section 234D of the Act since the additions made in the impugned assessment order are bad in law and are liable to be deleted. 6. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the ld. AO has erred in levying interest under Section 234B of the Act even though the entire income of the appellant was subject to tax deduction at source under section 195 of the Act. 7. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the ld. AO has also erred in considering the amount of refund granted to the appellant to be INR 37,44,400, when in fact the actual refund granted to the appellant was INR 17,38,138, thereby levying an excess tax demand of INR 20,06,262.Consequent to the levy of such excess tax demand, the ld. AO has also erred in levying excess interest under section 234D of the Act. 5.2. We have heard the rival submissions. We find that the income of the foreign enterprise is to be governed by the provisions of section 195 of the Act wherein any payment made to foreign enterprise would be subjected to full deduction of tax at source ..... X X X X Extracts X X X X X X X X Extracts X X X X
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