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TMI Blog2020 (6) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... ced of business or through any personnel in India having crossed the threshold period of six months. We hold that there is no Permanent Establishments during the relevant assessment year 2007-08 for the activities relating to DPIR and engineering services from which the assessee has earned the revenue and same cannot be taxed as business profit carried out through PE in India. It is in the nature of FTS which is to be taxed in accordance with Article 13(4) of India-Spain DTAA. - Decided in favour of the assessee. - ITA No. 1056/Del/2014 - - - Dated:- 29-5-2020 - Sh. Amit Shukla, Judicial Member And Sh. M. Bala Ganesh, Accountant Member For the Assessee : Dr. Rakesh Gupta, Adv. And Sh. Somil Aggarwal, Adv. For the Revenue : Sh. Satpal Gulati, CIT DR ORDER PER AMIT SHUKLA, JUDICIAL MEMBER: The aforesaid appeal has been filed by the assessee against final assessment order dated 17.12.2013 passed u/s 144C(5) r.w.s. 143(3)/254 with a direction given by the Dispute Resolution Panel-1, New Delhi vide order dated 24.10.2013. 2. In the grounds of appeal, assessee has raised following grounds: 1. That having regards to the facts and circumstances of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing deduction for the personnel expenses and travel expenses incurred by it in relation to visits made by its Personnel in India, while assigning any reason for not allowing the deduction. 8. That the Ld. AO has grossly erred in facts and law in initiating the penalty proceedings u/s 271(1)(c) of the act. 3. Facts in brief are that in this case, original assessment was passed on 25.10.2010 following the directions of the ld. DRP. However, the Tribunal has set aside the matter to the file of the AO for deciding it afresh without specific directions. Thus, this is the order passed under set aside proceedings. The assessee, M/s Idiada Automotive Technology is a company incorporated in Spain (in short IDIADA). A consortium led by IDIADA was selected by Government of India as Global Consultants for National Automotive Testing and R D Infrastructure project (NATRIP), through global tendering process, providing consultancy and advising on the matter pertaining to implementation of the project which principally envisaged the following activity: (i) setting up of full regulatory and pre-competitive developmental testing facilities in northern India; (ii) setting up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n date, NATIS has also stopped availing any consultancy services from IDIADA. During the year under consideration, the assessee has shown receipt of ₹ 7,40,91,233/- from NATIS, which was stated to be in connection with project consultancy agreement entered into by a consortium. The assessee s contention was that these services were in the nature of fees for technical services rendered from Spain and since there is no permanent establishment (PE) in India in respect of rendering of these services, therefore, same is taxable u/s 115A of the Act only, in view of Article 13(4) of the India Spain DTAA where the taxable rates applicable for FTS was 10%. It was further brought on record that, only services which were to be performed through Project Office was Construction Supervision which would fall within the scope of Article 5(1) read with 7(1) and would be taxed in India at rates applicable to foreign companies. Another important fact brought on record is that, the assessee at the time of receiving the payment filed an application u/s 195/197 of the Act before the Department requesting to issue authorization to receive the payment in respect of consultancy contract entered i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, the AO did not accept the assessee s contention and has incorporated the various terms of the contract and the scope of the work, etc. which has also been incorporated from page 5 to 12 of the impugned order. The nature of contract has been summarized by him and the conclusions drawn thereafter are in the following manner: 5.2. The nature of the contract can be summarized below: The very nature of the aforesaid scope of work as extracted above, and the geographical spread of the and the considerable primary data to be collected will require a substantial PE presence in India for execution and completion of deliverables. For this purpose, the consortium will create a specialized construction supervision team which will formed by experienced engineers. The team will be lead by the Construction Supervisor who will coordinate the on site teams and centralize all communications with the NATRIP office. So, if is planned to assign an on site' team for each center during all the construction works. These teams will be specialized in civil works and utilities and their principal tasks will comprise: Supervision of execution of the works in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... radation of the facilities at ARAI and VRDE, and installation of the five new automobiles test centers, The Applicants attempt to split the contract and state that these services were rendered from Spain is not supported by the activity schedule or the key deliverables which require a PE in India for execution and delivery across the huge geographical spread of the country as discussed supra. This finding is also directly corroborated by the above findings and the Methodology for DPIR (Pg 65 of PB) 'clearly lays down that study will involve primary research i.e. resulting in presence of PE involving the following: 6. Methodology Consultant's study will involve both primary and secondary research Under primary research, Consultant will cover the followings: -For the site analysis, Consultant will meet Urban Local Bodies (ULBs), environmental agencies, electricity supply companies, water supply companies or water authorities, telecommunication companies and companies or organizations that can provide general existing information about the land (geology, hydrogeology, topography) and the weather conditions. Consultant proposes to meet the follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts. Government of India to understand evolvement of policies for standards and emissions norms, ARAI and VRDE to understand existing tests being offered and pricing strategies, other agencies for reviewing test facilities and pricing strategies in neighboring countries and in the West. The assessee got the contract for the purposes of providing consultancy and advising on the matter pertaining to implementation of the project. It was a consolidated agreement. Following responsibilities were entrusted to the assessee under this Agreement: To prepare a Detailed Project Implementation Report (DPIR) based on certain key deliverables; To prepare detailed civil engineering drawings, designs, detailed architectural plans etc and preparation of bid documents for civil works and equipment procurement; and To undertake construction supervision and to provide assistance in procurement and commissioning and to provide training to operators and management. Hence construction supervision was a part of the project. Without any f ixed place of business the contract can t be implemented. NATRIP has clarified that NATIS had entered into a consolidate consult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a whole. 5.5. In view of the above it is held that the assesseee has business connection as well as PE in India before the establishment of project office and all the receipts received from NATRIP on account of DPIR. Detailed Engineering construction supervision are effectively connected with the PE in India. 9. Thereafter he has attributed profits PE project at 75% of the income from NATRIP and brought to tax amount of ₹ 4,89,36,723/- and only sum of ₹ 66,31,701/- was allowed by him u/s 44AD of the Act. The ld. DRP has also confirmed the said finding of the AO on this point. 10. In sum and substances, the ld. DRP has held; Firstly, the nature of services rendered, i.e., with respect to preparation of DPIR would be covered under the definition of FTS not only under the domestic but also Article 13(4). Secondly, with respect to the PE, the final conclusion of the ld. DRP reads as under: 7.1 This ground of objection is without prejudice to the grounds 1 to 4 and pertains to the / existence of service PE of the assessee in India. 7.2 The AO in the draft order para 5.4 and 5.5 (reproduced earlier in these directions) has held that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity of DPIR and engineering relates to India and was also performed in India. The AO is therefore, directed to give appropriate relief on this account while passing the f inal order. 11. Before us, the ld. Counsel for the assessee, Dr. Rakesh Gupta after explaining the background of the case submitted that under the agreement dated 27.01.2006; the project was split into three main categories, i.e., a) Detailed Project Implementation Report; (DPIR) b) Engineering Services; and c) Construction Supervision. As clear from the record and also accepted by the AO, the construction supervision was cancelled and DPIR Engineering Services was to be provided directly by the head office IDIADA from Spain. It was only construction supervision which was to be provided through a project office in India. It is also a matter of record that the project office was established on 01.09.2006. Nowhere from the agreement could the nature of services be inferred that DPIR and engineering services was performed through PE in India, albeit it was performed wholly from Spain. Therefore, the assessee itself has offered the income as FTS. Since, construction supervision was a non-starter which alo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention that no part of Engineering Services has been provided through Project Office at any point in time, it may be seen that the dates of payment for DPIR and Engineering Services is before the date formation of Project Office. Therefore, the question of services being rendered through Project Office does not arise in any case. 4. The details of visits of short duration undertaken by personnel from Spain in connection with DPIR and Engineering services relating to Spain for A.Y. 2007-08 are all prior to date of formation of the Project Office as well as date of opening of Banking account. This, too, proves that the services have not been rendered through any Permanent Establishment. Therefore, it is evident from material-on record that services rendered are not attributable to any Permanent Establishment. In fact, it is further submitted that there is no material on record to establish that services have been rendered through a Permanent establishment and therefore, any assessment in accordance with Section 44DA would be based on mere presumption and not on recorded facts. Therefore, we submit once again that the nature of services rendered in 'Fees for tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (c) Major up-gradation of facilities at ARAI and VRDE located in the west. (d) Setting up of world class proving ground at a suitable location to be decided in consultation with experts/global consultants. (e) Setting up of National facility for tractors and off-road vehicles. Regional In-use vehicle Management centre together with National Accident Analysis facility and also Specialized Driving Training School at Rae Bareilly. (f) Setting up of National Specialized Hill Area Driving Training Centre and Regional use Vehicle Management centre for the North East at Silchar. 3. The Scope of work includes 3 tasks (refer annexure D of contract) (a) Preparation of Detailed Project Implementation Report for the project on key deliverables (b) Detailed avail Engineering and preparation of bed documents for civil works and equipment procurement. (c) Construction Supervision, procurement and commissioning assistance including training and skill development for operators and management. 4. The interlacing of the aforesaid 3 tasks is evident from following phrases in the annexure D for services and key deliverables. Task No 2- Detailed civil Engineeri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in DTAA which reads as under: A building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities ( together with other such sites, projects or activities, if any) continue for a period of more than six months in any twelve-months period, or where such project or supervisory activity, being incidental to the sale of 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. 9. It may be relevant to appreciate the scope of terms in the phrase building site, construction, installation or assembly project at para 3 of article 5 of DTAA OECD commentary is of relevance in this regard. As per OECD commentary, The term -building site or construction or installation project includes not only the construction of buildings but also the construction of roads, bridges or canals, the renovation (involving more than mere maintenance or redecoration) of buildings bridges or canals, the laying of pipe-lines and excavating and dredging. Additionally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereunder. If that be so, we will have no hesitation in holding that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts is more appropriately assessable under the provisions of Section 44 BB and not Section 44D of the Act 12. It is discussed above that the activities performed in this case are inextricably connected with construction work. Thus, the principle laid down by Hon'ble Supreme Court squarely applies in this case. Thus, the case of the appellant is covered under article 5(2)(k) of DTAA. 13. As regards the issue of stay of expats below threshold period, it is submitted that the duration of the activities need to be examined as against the stay of expats in India. It is also important to note that the project has to be seen in whole and not task wise because the article 5(2)(k) clearly provides for not only project and site but even other sites and projects if any. So, the activity duration needs to be seen with reference to the entire project and not task wise. 14. In this regard, it is relevant to refer to text of Klaus Vogel on Double Taxation Conventions, Third Edition , which provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had received amount of ₹ 7,40,91,233/- on account of DPIR and Engineering Services and all the payments were received between the period 01.05.2006 to 31.08.2006 which is evident from invoices raised as well as TDS certificate in Form No. 16A placed at paper book page 80. The case of the assessee all throughout has been that there was no PE in India and the Detailed Project Implementation Report was submitted to NATRIP on 08.08.2006, that is, before the setting up for the project office on 01.09.2006 and secondly, the project office was only for the purpose of carrying out construction supervision and only qua this activity PE could have said to been established in India which was not carried out nor any other activity was carried out from Project Office. From the perusal of the findings given and material on record, it emerges that the service relating to DPIR and engineering services were provided from outside India, i.e., from Spain where the head office of the IDIADA is situated. The case of the revenue is that looking to the nature of contract as discernable from the agreement various supervision and planning and construction, etc. the contract cannot be split and thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived any payment or has performed any services after the establishment of PO on 01.09.2006 or through any personnel in India or through any other fixed place in India. Merely incorporating various terms of agreement sans any actual activities carried out cannot determine the existence of PE, because what is required to be seen is, whether any income has accrued or has arisen from any activity carried out through Permanent Establishment in India. If the only activities through which the assessee has earned income is with respect to DPIR and engineering services which was carried from outside India; and if none of the other activities of clause as given agreement have come into force during this year, then holding that entire income earned during the year is from any hypothetical fixed placed of business of PE would be erroneous. 16. Before us, the ld. DR has sought to justify that there was a PE in terms of clause (k) of Article 5(2) of India- Spain DTAA which reads as under: A building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities ( together with other such sites, projects or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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