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TMI Blog2022 (5) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... t the Ld. AO never considered this limited issue which was set aside by the ITAT. The AO also chose to remain silent on the relevant facts and materials placed on record which showed that no installation, assembly, or supervisory services were tendered by foreign suppliers in India. In fact, it is not even the AO s case while holding that foreign suppliers had PE in India that such PE was pursuant to any installation, assembly or supervisor services rendered by any of the foreign suppliers. Instead, the AO harped on the fact that each supplier had appointed agent in India and made unsubstantiated and hypothetical allegations that terms for sale and/or contract for supplies were concluded in India through the agents in India and therefore a portion of the remittances made to such foreign suppliers were taxable in India. This Tribunal had set aside the order on the limited issue to the Ld. AO. to verify whether any of the foreign suppliers had a Permanent Establishment in Under the respective DTAAs. This ITAT has held that the installment or supervisory services in connection to sale of machinery or equipment has to cross the specified time threshold limit for the non-resident entity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endors solely based on the fact that the parties were marked in the purchase order/letter of intent sent to the vendors. Thus, it is not only a legal right to secure order but also it is to be found, as a matter of fact that agent has habitually secured order or habitually negotiates contract. Assessing officer could not bring any material on record which would establish such a relationship between the independent parties and non-resident vendors wherein habitual/sustained ability to negotiate or secure contracts could be demonstrated. The ld. assessing officer has jumped to the conclusion of existence of permanent establishment due to the involvement of local parties providing auxiliary services. The assessing officer s contention is that the communication has been routed through the agent and the agent was involved in the negotiations and discussion with the appellant to finalise the transaction. The assessing officer made the farfetched assumption that all negotiations were entered into by agents on behalf of the vendors only on the basis of marking of such parties in communication of final POs and LOIs between the appellant and the vendors. AO thus contradicts all his arguments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The above captioned appeals filed at the instance of the assessee are directed against the order of Ld. Commissioner of Income Tax(Appeal) (in short 'Ld. CIT(A)]-13, Ahmedabad dated 31.10.2019 which is arising out of the order u/s 143(3) of the Income Tax Act 1961(In short the 'Act') dated 18.11.2011 by ITO(IT & TP), Bhopal. The common grounds of appeal have been raised so we reproduce below grounds for A.Y. 2010-11: 1.On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the order of the Assessing Officer even-though the Assessing Officer has not followed the findings and directions contained in the order of the Hon'ble ITAT and was illegal and without jurisdiction. 2.On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in determining the permanent establishment of the foreign suppliers as per the general Double Taxation Avoidance Agreements ignoring the specific finding given by the Hon'ble ITAT Jabalpur in the case of the appellant specifying treaty-wise relevant definition of 'permanent establishment' to be considered in the case of the appellant. 3.On the facts and in the circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) erred in confirming the order of the Assessing Officer even though the Assessing Officer has failed to establish that the foreign suppliers had any business connection in India so that income may be charged to tax in India as per section 5(2)(b) r.w.s. 9(1)(i) of the Act. 6. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not directing the Ld. AO to allow credit for payment of tax aggregating to Rs. 1,45,00,000/- deposited to the credit of Central Government from time to time. 7. The Appellant craves to add, alter or delete all or modify any or all the above grounds of appeal. 2. From perusal of the grounds we find that following two issues needs to be adjudicated:- A. Whether Ld. Assessing Officer erred in referring to provision of income Tax Act even though the ITAT held that the question of chargeability under section 5 and section 9 is academic, thus making the assessment bad in law B. Since matter was set aside by ITAT for examination of agency PE only whether Ld. Assessing Officer failed to bring anything on record to establish that such a dependent agency PE existed in light of articles 5 & 6 of Double Taxation Avoidance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd S2CB) 8 RHI AG Purchase of Basic Brick (Ankral R2CB and S2CB) 4. In the first round the proceedings u/s 201(1)/(1A) of the Act were carried out vide order dated 27.03.2012. Ld. ACIT-TDS Jabalpur raised a demand including interest at Rs. 1,90,54,630/- and Rs.10,84,08,460/- for A.Y. 2010-11 and 2011-12 respectively. treating the assessee in default for not deducting tax at source on the payment made to various non-resident being during the year under consideration for purchase, installation and supervision charges. Aggrieved assessee challenged the finding of Ld. Assessing Officer before the ld. CIT(A) who also confirmed the addition made by the ld. Assessing Officer holding the assessee to be in default for not deducting tax u/s 195 of the Act. 5. Aggrieved by the order of Ld. CIT(A), assessee preferred an appeal before ITAT, Jabalpur and vide order dated 24.12.2014 in ITANo.252/Jab/2013, this Tribunal firstly held that the question whether remittance were taxable under the provision of income tax Act 1961 of particularly u/s 5(2)(b) of the Act were of only academic in nature as the provisions of Double Taxation Avoidance Agreement (DTAA) are more beneficial to the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i. Thermo Fisher Scientific Ecublens SARL 500 to 502 iv. MMD Asia Pacific Ltd. 503 to 511 v. TangsangSenpu Mine Equipment Co. Ltd. 512 to 530 vi. Polysius AG 531 to 544 vii. RHI AG 545 to 576 8 Chart Showing Details of Installation Work Done with Respect to Machinery Imported 577 9 Copy of RA Bill of M/s. Gannon Dunkerley& Co. Ltd. For Bucket Elevator 578 to 579 10 Copy of Tax Invoice and Work Order of M/s STG Refractory Services Pvt. Ltd. For Erection, Commissioning and Installation of Brick Kiln 580 to 584 11 Copy of Work Order of M/s. Gannon Dunkerley& Co. Ltd. For Coal Washery Alongwith Other Civil Work 585 to 592 12 Copy of R.A. Bills Raised By M/s Hajee A.P. Bava& Co. for Fabrication and Erection of Coal Washery 593 to 596 13 Copy of Letter of Intent for purchase of equipment for Polycom Model No. 20/13-9 marked as POLBEC dated 15.09.2009 597 to 599 14 a) Copy of a Formal Contract Entered into Between the Appellant and Polysius AG dated 01.12.2009 for Supply of Machinery 600 to 602 b) Copy of Contract for Supply of Technical Assistance and Guidance 603 to 704 15 Copy of TDS Challans Paid in the Case of M/s Polysius AG and M/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E LAWS RELIED UPON S. NO. PARTICULARS PAGE NO. 1 Copy of Judgement of Hon'ble Bombay High Court in the Case of CIT vs. Indo-Aden Salt Works Company reported at (1959) 36 ITR 0429 (Bom.) 1 to 4 2 Copy of Judgement of Hon'ble Ahmedabad Tribunal in the Case of Krishna TerinePvt. Ltd. vs. ACIT reported at 130 ITD 0411 (Ahd.) 4 to 22 3 Copy of Judgement of Hon'ble Allahabad High Court in the Case of S P Kocchar vs. ITO reported at 13 Taxmann 414 (Allahabad HC) 23 to 30 4 Copy of Judgement of Hon'ble Madras High Court in the Case of Neeta Sunil Shah vs. ITO reported at 112 Taxmann 213 (Madras HC) 31 to 38 5 Copy of Judgement of Hon'ble Gujarat High Court in the Case of Saheli Synthetics vs. CIT reported at 302 ITR 126 (Gujarat HC) 39 to 46 6 Copy of Judgement of Hon'ble Delhi Tribunal in the Case of Sheraton International Inc vs. DDIT reported at 107 ITD 120 (Delhi ITAT) 47 to 116 7 Copy of Judgement of Hon'ble Supreme Court in the Case of CIT vs. R.D. Aggarwal reported at 56 ITR 0020 117 to 126 8 Copy of Judgement of Authority for Advance Ruling in the Case of TVM Ltd. Vs. CIT reported at 237 ITR 230 AAR 127 to 142 8 Copy of Judgement of Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Heavy Machinery Co. Ltd. Vertical Roller Mill for Coal Grinding Work 7 RHI AG Purchase of Basic Brick (Ankral R2CD and S2CB) 8 RHI AG Purchase of Basic Brick (Ankral R2CB and S2CB) 10. Ld. Assessing Officer in the second round of the proceedings again held the assessee in default and levied tax @ 41.2% for non-deduction of tax u/s 195 of the Act and charging interest thereon. First issue raised by the assessee is that the ld. Assessing Officer exceeded his jurisdiction and ignored the finding of this Tribunal. 11. We notice that in the first round the CIT(A) confirmed the AO's order and held the appellant to be "assessee-in-default" for not deducting taxes u/s 195 before remitting the gross payments to foreign suppliers. Aggrieved by the CIT(A)'s order, the appellant preferred second appeal before this TAT, Jabalpur. The appeal of the appellant was decided by this ITAT, Jabalpur in ITA No. 252/JAB/13 dated 24.12.14. In the appellate order the relevant findings of the Tribunal were at Pages 47 to 51 of the order. The ITAT held that the impugned order dated 12.09.13 was bad in law and therefore set aside with certain findings and the tribunal has held that: Although the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd supervisory services, if any, rendered by foreign suppliers were not chargeable to tax in India since such services did not fall within the purview of Article 12 of the respective DTAAs. In support of this proposition, the ITAT referred to the definition of 'permanent establishment' outlined in Article 2 of the respective DTAAs wherein it was stated that unless the installation or assembly project or supervisory activities in connection with supply of any plant or project does not cross the specified threshold time limit, the non-resident enterprise cannot be treated to have a permanent establishment in India.The ITAT quashed the original order passed u/s 201(1)/(1A) dared 27.03.2012 and deleted the tax demand raised pursuant thereto and set aside the order on the limited issue to the file of the AO for verifying whether any of the foreign suppliers had a Permanent Establishment in India under the respective DTAAs. ii. While concluding his submissions, learned Departmental Representative had filed a letter dated 25th September 2014 praying that as the DTAA aspects were not taken up at the stage of the Assessing Officer or the CIT(A), and as such the revenue authorities had no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & TP), Bhopal. The AO held that the foreign vendors have a dependent agency permanent establishment in India and thus all payments made by the appellant are subject to TDS under section 195. 13. We notice that to give effect to the order of this Tribunal dated 24.12.2014 proceedings were initiated by ITO (IT&TP), Bhopal in the case of the appellant. As per para 58 of the ITAT's order, it was held by the ITAT that the scope of Section 5(2)(b) of the Act is academic since India does not have the right to tax income in respect of rendition of installation, commissioning, or assembly services, embedded in the invoice value of the related equipment, plant or machinery. The payments made to non-resident entities have no tax implications at all under the tax treaties. However, as the revenue authorities had not examined the aspects of DTAA, the matter was set aside to the file of assessing officer, it was directed that the facts as stated by the appellant with regards to 'Permanent Establishment' of foreign vendors not being in existence needs to be verified by the AO. 14. We find that the ld. AO has not followed the directions of this ITAT with regards to the issue of taxab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to completely different definition of 'permanent establishment' which is not acceptable This Tribunal has referred to the definition of 'permanent establishment' wherein it has been stated that unless the installation or assembly project or supervisory activities in connection with supply of any plant or project does not cross the specified threshold time limit, the non-resident enterprise cannot be treated to have of 'permanent establishment' in India. 18. The scope of enquiry and assessment of remittances made to foreign parties abroad was limited to the question whether any of the foreign suppliers had rendered installation, assembly or supervisory services and/or carried out such project in India in connection with the supply of plant and machineries and whether the period of rendition of such services exceeded the prescribed threshold limit in the respective DTAAs so as to constitute an installation/assembly/supervisory PE in India. It is noticed that the Ld. AO never considered this limited issue which was set aside by the ITAT. The AO also chose to remain silent on the relevant facts and materials placed on record which showed that no installation, assembly, or supe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d law that in a 'set aside' proceedings the authorities below are bound to decide as per the direction contained in the order and it is not open for the authorities to conduct fresh enquiry. The authorities below are precluded from entertaining a new plea. The authority is confined to the subject-matter on remand by the Tribunal, no other question could be considered or to enlarge the scope of the proceedings in contradiction to the findings given by the Tribunal. 3. Attention in this regard, is craved to the following decisions: • The Decision of the Hon'ble Calcutta High Court in KatiharJuteMills (P.) Ltd. vs. Commissioner of Income-tax, [1979] 120 ITR 861 (CAL.) wherein the Hon'ble jurisdictional High Court has held as follows: "In the case before us, if the entire assessment order had been set aside, the contention of Mr. J.C. Paul would have been unassailable but unfortunately the fact is not so. There was no dispute with regard to the assessability of the sale proceeds of the loom hours at any stage of the proceedings. The AAC also did not consider that question at all, inasmuch as, that was not one of the points before him in appeal. The order of the AAC setting a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be read as restricting the scope of the inquiry by the AAC only to the question of merits affecting the claim for relief from super-tax. We must, however, observe that there is in this case scope for the contention very strongly pressed before us by Mr. Joshi on the consideration of the matter, we prefer to take the view that the order of the Tribunal required the AAC to enquire only into the matter of relief from super-tax on its merits." • The decision of the Hon'ble ITAT Ahmedabad in the case of Krishna Terine (P.) Ltd. vs. ACIT reported at 130 ITD 0411 (Ahd)that has held as under: "12. …..The order of the Tribunal is stated to be final between the parties because nobody pointed out if the said order was challenged by the Revenue before the Hon'ble High Court. It is also settled law that in the set aside proceedings the authorities below are bound to decide as per the direction contained in the order and it is not open to conduct fresh enquiry. The authorities below are precluded from entertaining a new plea. It appears that the authority is confined to the subject-matter on remand by the Tribunal, no other question could be considered or to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erely academic as we have already quashed the assessment order being illegal and bad in law but still will deal the same for academic purpose. 24. During the course of assessment proceeding the assessee submitted various documents related with the foreign vendor including purchase orders in response to the AO's roving queries so as to prove that alleged non-resident have no PE in India. However, Ld. AO held that these foreign vendors had an agency PE in India on the following grounds: a. The communication has been routed through agent and the agent was involved in the negotiations and discussion with appellant to finalise the transaction. The AO has arrived at the aforesaid conclusion as the purchase orders/letter of intent stated that "discussions your representative had with us…..we are pleased to release the detailed order for the following on the undernoted terms and conditions." As per the AO's assessment order, "The assessee also stating in purchase order that - we are pleased to release this detailed order for the following on the undernoted terms and conditions", means that all the terms and conditions has been decided through discussion with the agent and based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee and non-resident vendors we find that the entire transactions were carried out with the nonresidents on a principal-to-principal basis. As can be seen from the purchase orders and contracts of purchase entered into with the non-resident suppliers, that these Indian entities(agents) did not have any authority to bind the non-resident or the appellant. All the purchase orders were directly raised by the appellant in the name of the non-resident parties. The delivery of the machineries were taken directly by the appellant from the non-resident entities without any involvement of the Indian concerns as can be seen from the invoices raised by the non-resident entities (Pages491 to 576 of Paper Book-I) as well as the bill of entry (Pages 491 to 576 of Paper Book-I). As far as the role of these Indian entities is concerned it can be only termed as preparatory/auxiliary in nature. Further, the non-resident entities/vendors have provided the appellant with certificates confirming that they did not have any permanent establishment in India during the relevant period and the same were submitted before the Assessing Officer (Pages 948 to 953 of Paper Book-I). 29. Further, the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isdictions above are as follows: Indo Austria tax treaty ARTICLE 5 Permanent Establishment 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: (i)a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (for the same or connected project, site or activities) continue for a period of more than six months. (Emphasis by underlining supplied by us; portion not reproduced not relevant for our purposes) Indo Belgium tax treaty Article 5 Permanent Establishment 1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: (j) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, proje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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; (Emphasis by underlining supplied by us; portion not reproduced not relevant for our purposes) Indo US tax treaty ARTICLE 5 Permanent Establishment 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: (k) 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 120 days in any twelve month period; (Emphasis by underlining supplied by us; portion not reproduced not relevant for our purposes) "37. The underlying principle in all the above definition, even as there is a variance on the threshold tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixed place of business would not make this fixed place of business a permanent establishment under the provisions of that paragraph; or (b) has no such authority, but habitually maintains in the first-mentioned State a stock of goods merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same control, as that enterprise." ii. Further, as per Article 5(6) of the said DTAA, "an enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise itself or on behalf of that enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bench Delhi held as follows: "It is not the case of the Assessing Officer that MIPL habitually exercised authority to conclude contracts. It is also not the case of the Assessing Officer that MIPL habitually maintains a stock of goods or merchandise. Thus, the condition of (a) and (b) are not fulfilled. The third condition in (c) is habitually securing orders for the assessee. In this regard we note that the Assessing Officer has made this allegation on the basis that commission has been paid by the assessee company to the MIPL. On this basis it has been assumed that MIPL is securing orders. This contention of the Assessing Officer does not appear to be correct. As per the agreement which has been quoted by the Assessing Officer in the assessment order, MIPL is supposed to put best effort to collect information with regard to Instant Noodle project etc. to make the best effort to find the best candidate, to attend/take care of the visitor from Japan, to make the best effort to analyze the feasibility report. None of these clauses can be interpreted to mean that MIPL is securing orders. On the basis of this clause the Assessing Officer was wrong in assuming that MIPL is securing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a principal-to-principal basis and thus agency PE cannot be established." 37. Further, to interpret the words 'has' and 'habitually exercises', guidance taken from the Advance Ruling in the case of TVM Limited vs. Commissioner of Income Tax (199) 237 ITR 230 It was held: While the expression "has" may have reference to the legal existence of such authority on the terms of the contract between the principal and agent, the expression "habitually exercises" has certainly reference to a systematic course of conduct on the part of the agent. 38. The ld. Assessing officer has brought nothing on record to suggest that such a systematic course of conduct existed on part of the parties providing auxiliary services. We also notice that Ld. AO did not verify from these parties whether they were independent agents or acted wholly or mainly on behalf of the non-residents. The AO ought to have carried out thorough verification with the said parties. Instead, the AO has simply relied on the wordings of the purchase orders without verifying the complete facts of the case. No material has been brought on record by the AO to show that these Indian entities habitually acted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence of business connection Only issue of Agency PE as per DTAA was to be examined ITO (1997) 228 ITR 564 Held that the essence of BC is the existence of close, real, intimate, relationship, and common interest Nothing brought on record to establish this. Held that BC to be determined on the facts and circumstances of each case Correspondence between assessee company and non residents and assessee company examined to determine assessee company was handling the loan process No such between alleged agents and non residents examined Abdullabhai Abdul Kader v CIT (1952)22 ITR 241 The assessee was appointed as statutory agent as per Section 43 No document brought on record to prove agency contract. Issue was pertaining to existence of business connection as per Section 42 Only issue of Agency PE as per DTAA was to be examined Continuity of agency was established as per facts of the case and material available on record. Relationship between non-resident and assessee was established to be not of casual character with a few isolated transactions. No such material brought on record Assessee was acting as a commission agent on behalf on non-resident for several years. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of information and they were in no way connected with finalization of the terms as well as orders placed on the foreign suppliers for plant and equipment ultimately purchased. In particular it emerges that these representatives had no role whatsoever in connection either with supply of equipments or installation and commissioning of the equipment and plants at the appellant's site at Satna. 41. Also on perusal on the copies of purchase order/agreements with the foreign suppliers which contain the terms and conditions we find that these documents clearly spelt out the prices agreed to be paid by the appellant for supply of plant and machinery. These documents categorically specified the price agreed between the parties for "supply" of plant and equipments. In the original proceedings u/s 201 the appellant had filed copies of invoices raised by the foreign suppliers and other documents prepared at the time of processing of documents by the Customs department while complying import formalities and payment of duties. With reference to these documents it was clarified that the prices specified in the purchase order or agreements matched with the prices specified in the invoices raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufacture and supply of plant and equipments were carried on in India and therefore whole of the profits arising from sale were liable to be taxed in India. According to AO the profit margin of the foreign suppliers on sale of equipments was 12%. The entire profit which the foreign manufacturers allegedly earned; have been held by AO to be "income" accruing in India. In other words in AO's opinion even though the foreign suppliers conducted their manufacturing operations outside India yet the entire income from supply and sale of machinery accrued only in India and was therefore liable to be taxed in India. In the impugned order the AO failed to identify as to which specific activity giving rise to income was carried on by the agents of the foreign supplier in India and which resulted in accrual of income. The AO was not permitted to make a high pitched assessment arbitrarily; alleging that the activities carried on by the agents in India. However in the most perfunctory and high handed manner the AO estimated that 125 of the remittance amount represented income of the foreign suppliers which accrued in India from supply of plant and machinery. The entire process of quantification o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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