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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 ..... er the action of Ld. AO/DRP in bringing to tax amount of Rs. 4,89,36,723/- by holding inter-alia that the entire receipts receivable under the contract with NATRIP was taxable as business income in India and that too on the ground that assessee had a Permanent Establishment (PE) in India is bad in law and against the facts and circumstances of the case. 3. That having regards to the facts and circumstances of the case Ld. AO/DRP has erred in law and on facts in presuming 75% of total receipts as attributable to the alleged PE. 4. That having regards to the facts and circumstances of the case Ld. AO/ Hon'ble DRP has erred in law and on facts in disallowing the aggregate expenditure paid to M/s GPO Ingeneria S.A., M/s AVL Iberica S.A., Mr. Alex Punset incurred for the purpose of earning income in connection with DRIP and Engineering Services in relation to NATRIP Project. 5. That having regards to the facts and circumstances of the case Ld. AO/ Hon'ble DRP has erred in law and on facts in disallowing the expense of Rs. 70,00,000/- paid to M/s IMaCs for non-deduction of tax at source u/s 40(a)( ia). 6. That having regards to the facts and circumstances of the case Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether with National Accident Analysis facility and also Specialized Driving Training School at Rae Bareilly; (vi) setting up of National Specialized Hill Area Driving Training Centre and Regional in use Vehicle Management Center for the North East at Silchar. 4. The project was broadly split into three categories: i. For DPIR :Rs. 8,59,00,000 ii. For Engineering Services :Rs. 15,22,00,000 iii. For Construction Supervision :Rs. 17,69,00,000 5. An agreement was signed between the IDIADA and Natrip Implementation Society (NATIS) on 27.01.2006 at a total cost of Rs. 39.50 crores and following responsibilities were entrusted to Global Consultants under this agreement: i. To prepare a Detailed Project Implementation Report (DPIR) based on certain key deliverables; ii. To prepare detailed civil engineering drawings, designs, detailed architectural plans etc. and preparation of bid documents for civil works and equipment procurement; and iii. To undertake construction supervision and to provide assistance in procurement and commissioning and to provide training to operators and management. 6. One important fact noted by the AO and also highlighted before us by the ld. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following manner: * There is no permanent establishment in India in respect of rendering of services relating to Preparation of DPIR and Engineering services. * The services were rendered from outside India and, therefore, such consideration is taxable u/s 15A of the Act only. * The volume of documentation already submitted demonstrates that the activity of Detailed Engineering has been rendered outside India. * Even if it was to be concluded that the services relating to DPIR and Engineering together with those relating to Construction Supervision are effectively connected with PE, then Article 7(1) allows the authorities in India to tax only the profits attributable to the PE under Article 7. * These are in the nature of start up expenses which was in relation to the India Project Office that was set up for the purpose of Construction Supervision. The activity of Construction Supervision commenced only in fiscal year 2008-09 and therefore as per accounting principles, the expenses till commencement of operations were to be debited as "Start Up" expenses. * No expenses relating to FTS have been incurred in India and, therefore, could not have been recognized in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ap-up meetings. 5.3. The following conclusion can be drawn after reading the general provisions of the contract is as under: * The project Consultancy Agreement is signed between three consortium partners and the definition of consultant and Article t of the agreement supports the finding of consortium. * The consultant has been retained for the entire project the scope of work for which end to end is as per Activity Schedule at Annexure B (refer article 1.1 of Agreement) extracted above has project milestones as per Annexure C and project sites as per Annexure C. * The services to be delivered are as per Annexure D of the Agreement and perusal of this will clearly indicate that the existence of a PE is an essential precondition of the contract. * All services are based on a detailed Site analysis which cannot be accomplished without a PE and presence of consortium member's "on-site" teams and experts and consortium testing equipment experts for commissioning etc at the various sites including a huge geographical spread covering Manesar, Silchar, Rae Bareilly, M.P. and Chennai. * Applicants attempts to split the contract and state that these services were rendered from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs etc. Inspection of services being performed is also provided for and the availability of personnel to discuss reports and information to be provided by the Consultant on the 4 th day of each month. Clearly these cannot be achieved without a PE. * At the end of each phase a detailed project implementation report to NATIS covering deliverables is required from the Consultant as per agreement. 5.4. In l ights of the above discussion the submission of the assessee is not accepted due to the following reasons: * FTS services cannot be stated to have been rendered directly from Spain and no expenses relating to these have been incurred in India. * That there was a service PE, project officer PE at each site and for rendering services relating to preparation of DPIR and engineering services. * India project Offices were set up not just for limited purpose of construction supervision activities. * Even for DIPR and Engineering Drawings the primary research had to be done in India. * The methodology under primary research shows that services are to be bases on a detailed Site analysis, collection of primary evidence, after meeting Urban Local Bodies (ULBs), environmental ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to outside parties, the full and undivided responsibility and liability for ensuring the performance of obligations and coordination among parties lies with the assessee. * One of the subcontracted parties is an Indian concern while the other party is a non resident. Effective coordination among parities is necessary considering the nature of project. Without having a base in India it is not practically possible to provide detailed engineering related to different project sites situated in different parts of India. * The assessee has submitted that its employees have visited India for a short period and stayed in Hotels. The summary of visits is not supported by evidence. The expatriates or the officials of the assessee and were regularly visiting the NATRIP authorities regarding discussion or negotiation meeting held in India as per the details submitted during the original assessment. The details of their stay or from where they were operating their business have not been filed. This fact has also been mentioned in the original assessment proceedings, it is worthwhile to mention that Mr. Indranil Gupta whom the assessee claims to be the country head of the assessee's busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat even if services PE is established, 100% of the profits cannot be attributed to the PE, even though they may be effectively connected therewith. 7.4 The Panel has examined the matter, it is seen from the copy of the Agreement and its Annexures that the task of preparation of DPIR could not have to complete without detailed site visits in India and under taking detailed interaction with the persons concerned as indicated in para 3.7, 3.8.1, 3.8.2, 4.5.2 to 4.5.5 above. The task of detailed engineering, which was taken up subsequently by the assessee, also could not have been completed without extensive use of offices in India. Both these tasks have been under taken during the FY 2006-07. Moreover, there had been considerable visits to India by the expatriates for carrying out these tasks Admitted y the project office was setup on 01.09.2006. Under these facts and circumstances, it is not possible to accept the contention of the assessee that there was no PE in existence in the concerned period. However, there is force in the assessee s arguments that the entre profit cannot to be attributable to the PE in India The AO has computed the income from the receipts during the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of project office which has been placed at paper book page 54 which has been established w.e.f. 01.09.2006 issued by Registrar of Companies. He also drew our attention to a reply submitted before the AO dated 18.12.2009, the relevant contents for the sake of ready reference is reproduced herein below: "We have already submitted documents to establish that these services were rendered from Spain (for example: letters exchanged between assessee and the client, NATRIP). We now wish to reiterate the following: 1. Reference may be made to letter dt. 20.11.2009 issued by NATRIP, wherein they have confirmed that all the payments relate to DPIR and Engineering and no payment relates to Construction Supervision. 2. In their said letter dt. 20.11.2009, NATRIP have also mentioned that they are liable to pay service tax as service recipient under Import of Services Rules. The reference is to the "TAXATION OF SERVICES (PROVIDED FROM OUTSIDE INDIA AND RECEIVED IN INDIA) RULES 2006". In other words, NATRIP has paid service tax as service recipient because the services have been provided from Spain. Had the services been provided from any Permanent Establishment, then the import of servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys. Thus, he concluded by submitting that; * firstly, the project office was established only for the purpose of carrying out construction supervision activity which was a non-starter and in fact stood cancelled; * secondly, the project office was established on 01.09.2006 and prior to that there was no fixed place or otherwise any place of business in India; * thirdly, DPIR and engineering services were provided from Spain and none of these services were provided in India or through any personnel in India; and * lastly, all the payments in connection with DPIR and engineering services rendered from Spain for the assessment year 2007-08 were prior to date of formation of Project Office as well as prior to the date of opening of banking account, therefore, it cannot be inferred that income earned during the year related to any Project Office or any PE in India. 13. On the other hand, the ld. CIT DR has filed his written submission which for the sake of ready reference is reproduced herein below: "The issue involved in this case is that whether AO is correct in holding the existence of PE or not? If yes, the attribution of income to PE in case. 2. The facts of the case a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. Task No.3 - "Construction supervision..." mentions that construction supervision of implementation works in each of construction activity sites according to the master plans of the Detailed civil Engineering project. The relevant extracts of the agreement are pasted below: 1. Construction Supervision The services offered in this stage comprise the construction supervision of tie implementation works in each of the construction activity sites according to the Master Plans of the Detailed Civil Engineering Project. 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, it 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 accordance with the technical functional specifications of the DPIR and the Detailed Civil Engineering Project. 7. Thus, it is evident from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble Supreme Court. In this regard, Hon'ble Supreme Court in the case of ONGC (CIVIL APPEAL NO. 731 OF 2007) held that mining operations and the expressions "mining projects" or "like projects" occurring in Explanation 2 to Section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and hence payments made under such agreement to a non-resident/foreign company would be chargeable to tax under the provisions of Section 44BB and not Section 44D of the Act. It is further held that "We do not see how any other view can be taken if the works or services mentioned under a particular agreement is directly associated or inextricably connected with prospecting, extraction or production of mineral oil. Keeping in mind the above provision, we have looked into each of the contracts involved in the present group of cases and f ind that the brief description of the works covered under each of the said contracts as culled out by the appellants and placed before the Court is correct." ".....The above facts would indicate that the pith and substance of each of the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ote that the stay period of expats for supervising task 2 need to be aggregated to check the threshold period to trigger PE in this case. It is further highlighted that the appellant on its own also admitted the position of PE in subsequent years. This is the position even where the appellant claimed that the construction supervision phase could not be taken up. Thus, even in absence of construction supervision ( task 3), the appellant admitted the position of PE in subsequent year(s)." 14. We have considered the rival submissions, perused the relevant finding given in the impugned orders as well as material referred to before us. To put it in succinct manner, IDIADA which is the Spanish based company and in terms of agreement entered with NATRIP on 27.01.2006, it was required to carry out project in India which was split into three categories, i.e., Detailed Project Implementation Report (DPIR), Engineering Services and Construction Supervision. However, it is an admitted fact that only the first two services were carried out, i.e., DPIR and Engineering Services. The construction supervision as envisaged in the agreement was never carried out. Another important fact is that, for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision activities. However, nowhere there is any whisper in his order as to what kind of place of business was there in India prior to 01.09.2006, i.e., before the establishment of project office from where and through which assessee has carried out DPIR and engineering services. He has not even mentioned as to how many personnel had visited India for rendering of these services and for how many days they have stayed in India. His entire conclusion is based on hypothesis that, before carrying out such services, certain primary research must have been done in India and some kind of site analysis and market strategy is required which is not possible without any PE. Assessing Officer has presumed that the entire agreement and the scope of work describe therein must have been carried out during the relevant financial year. Admittedly, the assessee's revenue was only Rs. 7.40 crores approx out of the total cost as per agreement of Rs. 39.50 crores. The amount of Rs. 7.40 crores was purely from rendering of services from Spain. Nowhere Assessing Officer from the record could establish that these services have been performed through any PE in India prior to establish on 01.09.2006, except ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, firstly, for the reason that the services have been rendered from outside India and secondly, there is no finding that any personnel of assessee have been performing any kind of such activity in India for a period of more than six months. Activity duration can be seen once any kind of such activities has been carried out on any site or any project in India, which finding is absent completely in the impugned orders, except for hypothesis and presumption without looking the real activity and the income earned. It has to come on record that there was some kind of actual activity which was carried out especially prior to 01.09.2006 through any fixed placed of business or through any personnel in India having crossed the threshold period of six months. Thus, in our opinion, in view of our finding above, 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. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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