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TMI Blog2024 (5) TMI 1417X X X X Extracts X X X X X X X X Extracts X X X X ..... e it was significantly observed that a PE must qualify and meet the tests of stability, productivity and dependence. Of equal significance were the observations which explained the phrases at the disposal of and through . Tested on the aforesaid precepts also, the impugned notices and the reasons set out for initiating action u/s 147/148 woefully fail to rest on any evidence which could have possibly compelled us in acknowledging that a Fixed Place PE had come into being. Undisputedly, the Noida factory premises and the Varanasi office would clearly not fall under any of the categories which stand specifically enumerated in Article 5 (2) and sub-clauses (a) to (k) of the India-USA DTAA. We also bear in mind the distinct and divergent categories of products, and in the manufacture of which, the petitioner and the Indian subsidiary were engaged. Of equal significance was the Noida outfit undertaking manufacturing activity in its own right and supplying products to various arms of the Indian Railways. All of the above, in our considered opinion, when viewed cumulatively, would have been sufficient to dispel any presumption of the petitioner conducting its business activity from a perm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the petitioner. It may only be observed that the engagement of Indian personnel in connection with global tenders that were proposed to be submitted or one in which the petitioner intended to participate would also clearly fall within the ambit of work of an auxiliary or preparatory character and not be in furtherance of the core activity of the petitioner. All that need be observed is that merely because the submission of those tenders was aided by a collaborative exercise between employees of the petitioner and those of the Indian subsidiary, the same would clearly not meet the test of a complete takeover, a virtual projection or for that matter the Indian subsidiary being liable to be viewed as an alter ego . We are of the firm opinion that the respondents have clearly failed to appreciate that a collaborative team comprising of Indian and foreign employees would really not be indicative or evidence of the Noida or Varanasi premises having been virtually placed fully at the disposal of the petitioner. To meet that test, it would have to be found on facts that the Indian establishment was a mere conduit created for the business interests of the petitioner. Article 5 (4) and DA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sarily come to the conclusion that the core business of a foreign entity was being carried on through a PE. The core business of the petitioner is the manufacture of a wide range of products, details whereof have been set out in the preceding parts of this decision. As we view and weigh the import of the statements which have been heavily relied upon by the respondents, it becomes apparent that the view as taken is rendered wholly untenable and proceeds on various assumptions which cannot possibly be countenanced. Regard must also be had to the fact that the respondents do not allege that the products being supplied by the petitioner to DLW or other arms of the Indian Railways were being manufactured in India and through the Indian subsidiary. This is a factor which weighs heavily against the respondents. Issues emanating from the MES Agreement including the General Services Agreement dated 01 January 2011 which has been taken into consideration, those and issues arising therefrom would have to be necessarily evaluated bearing in mind the significant observations which appear in the TPO s order, which not only speaks of the Noida premises providing back office support and technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) and stipulations contained therein being satisfied. This, since it is not the case of the respondents that the Indian entity had been authorized to affix that seal on any document or contract. This, quite apart from there being no material that the seal was in fact affixed on any contract or agreement to which the petitioner was a party. The reasons recorded by the first respondent in support of the proposed action under Sections 147/148, also does not refer to any contract that the petitioner may have entered into with the Indian Railways, and which may have been executed for and on its behalf by the Indian subsidiary. The conclusions recorded on this score thus clearly appear to proceed on surmises and conjecture. Even clause (c) of Article 5 (4) would not stand attracted since undisputedly the Indian subsidiary had independent transactions with DLW and other Indian Railway entities. It was thus not a mere arm or an extension of the petitioner established to secure orders on its behalf and that too wholly or almost wholly for it. We are of the considered opinion that the opinion as formed by the first respondent on the issue of a PE is wholly perverse and untenable. We find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndya, Jr.SC along with Mr. Utkarsh Tiwari and Mr. Amaan Ahmed Khan, Advs. JUDGMENT YASHWANT VARMA, J. S. No. Particulars Paragraph Nos. A. INTRODUCTION 1-6 B. FACTUAL NARRATIVE 7-12 C. SUBMISSIONS OF PROGRESS RAIL LOCOMOTIVE INC. 13-16 D. CBDT NOTIFICATION DATED 03 NOVEMBER 2014 17-21 E. THE PE ISSUE- A BRIEF BACKGROUND 22-30 F. THE CHALLENGE OF PROGRESS RAIL LOCOMOTIVE INC. CONTD. 31-56 G. TAX AUTHORITY S RESPONSE 57-65 H. PE-A BROAD OVERVIEW 66-72 I. RESPONDENTS TAKE ON PE-A RECAP 73-77 J. ANALYSING ARTICLE 5 OF THE INDIA-USA DTAA 78-80 K. THE COURT S ANALYSIS 81-113 K.1 THE SERVICE PE 82-84 K.2. THE FIXED PLACE PE 85-95 K.3. ARTICLE 5 (3)-PREPARATORY AND AUXILIARY FUNCTIONS 96-110 K.4. ARTICLE 5 (4) AND DAPE 111-113 L. CONCLUDING OBSERVATIONS 114-138 M. OPERATIVE DIRECTIONS 139-140 A. INTRODUCTION 1. These writ petitions impugn notices issued under Section 148 of the Income Tax Act, 1961 [Act] by the first respondent. The details of the individual writ petitions are set out hereinbelow:- Relevant AY Notice issued on W.P.(C).no 2012-13 28.03.2019 12408/2019 2013-14 29.04.2019 12406/2019 2014-15 29.04.2019 12405/2019 2015-16 31.05.2019 12407/2019 2016-17 31.05.2019 12409/2019 2017 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is assessed to tax in New Delhi where its registered office is situate and has also been subjected to transfer pricing studies by virtue of being an Associated Enterprise [AE] of the petitioner. The petitioner has relied upon one such order dated 18 October 2016 pertaining to AY 2013-14 and which holds that the subsidiary provides only back office and technical support services to the petitioner. 6. The petitioner asserts that neither the said Transfer Pricing Order nor any other order made by the authorities under the Act have ever found the Indian subsidiary to constitute a PE of the petitioner despite the said entity having been duly assessed for the past 25 years. It is also the case of the petitioner that the products manufactured by the Indian subsidiary are clearly distinct from those manufactured and supplied by it, and consequently it would be found that the core business activities of the petitioner and the Indian subsidiary are completely different. They have in this regard disclosed the following distinct production activities pursued by the two entities:- Petitioner Subsidiary Company i. EMD OEM components available for locomotive, marine and power generation applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be evident from its response dated 28 May 2019. It also sought further documentation including the statements taken from the employees of PRIPL as well as a copy of all the documents/information collected by the petitioner during the course of those survey proceedings in terms of its letter dated 06 June 2019. 10. On 24 June 2019, the petitioner addressed a letter to the first respondent asserting that its duly allotted PAN was linked to the office of the fourth respondent and consequently questioned the issuance of notices by the first respondent additionally on this score. It was thus contended that the first respondent had wrongly assumed jurisdiction and the notices were thus liable to be withdrawn on this ground alone. On 26 June 2019, and faced with the fact that the petitioner had failed to submit its Return of Income [ROI] in compliance with the notices issued, the first respondent initiated penalty proceedings referable to Section 271F read with Section 274 of the Act. In response to the said notice, the petitioner reiterated its stance that its PAN fell within the jurisdiction of the fourth respondent, and that consequently, both the Section 148 notice as well as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AYs 2012-13 to 2018-19. Mr. Datar submitted that the said subsidiary had been regularly assessed to tax in Delhi by virtue of the location of its registered office which was situate in that jurisdiction and had also been subjected to transfer pricing assessments. 14. Mr. Datar took us through the following conclusions and findings which appear in a Transfer Pricing Order dated 18 October 2016:- 1. Reference u/s 92CA was made by the DCIT, Circle 8 (1), New Delhi, New Delhi for determination of Arm's length price for the international transactions/domestic transaction undertaken by the assessee during the FY 2012-13. In response to notice Mr. Sahil Malhotra, being the authorized representatives appeared periodically. The documentations prescribed under Rule 10D of the Income Tax Rules, 1962 and other details asked for were submitted and placed on record. 2. Introduction EMD Locomotive Technologies Pvt. Ltd. is engaged in provision of support services to EMD Group on which it is remunerated on a cost plus basis. The company provides back office support and technical support services starting from monitoring the Indian market for upcoming tenders and participating in such tender m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng technical assistance with regard to the locomotives and spare parts/ components etc. directly purchased by it from EMD Group. In return for these services, the Company is remunerated on a cost plus basis. The nature of the services rendered by EMD India is outlined below: ● Monitor upcoming tenders in the Indian market for locomotives and provide requisite support to EMD Group in preparation of the proposal. ● Attend tender opening meetings with Indian Railways and examine the terms and conditions based on which inputs/comments are provided to EMD Group. ● Coordinate with EMD Group for timely bid submission for tenders in the Indian market. ● Tracking LCs and shipments so as to provide updated information on the status of the consignment to Indian Railways. ● Regularly track the market situation to understand competitor movements and new business opportunities. ● Organise events and seminars and coordinate with industry associations such as CII, FICCI, AMCHAM in order to market the wide range of locomotives and diesel engines and technical expertise of EMD Group. ● Provide support to Indian Railways by detection of faults/issues on locom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the fifth respondent could exercise the powers otherwise conferred upon it under the Act. Mr. Datar then drew our attention to Serial No. 3 of that Notification, and which spelt out the areas over which the second respondent was empowered to exercise authority and which extended to areas falling within the territorial limits of the States of Uttar Pradesh and Uttarakhand. 18. It is relevant to note that in terms of the arrangement made for entities falling within the ambit of Serial No. 3, the Notification further provided that the said authority would also have the right to assess persons who may be non-residents, including foreign companies having a PE in the territories noted above. In terms of the aforesaid Notification, the Commissioner of Income Tax (International Taxation-3), Delhi, the second respondent herein, issued an order on 15 November 2014 vesting jurisdiction upon the Additional Commissioner of Income Tax [ACIT]/Joint Commissioner of Income Tax [JCIT] (Range Noida) over all foreign companies having a PE in the State of Uttar Pradesh. The said authority ACIT (International Taxation), Range, Noida, in turn issued an order on the same date and proceeded to confer po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pradesh. The decision of the first respondent on the issue of PE thus emerges as being not only the central point of contestation, but also of significant import since the very foundation of the impugned reassessment action rests on the correctness of the view as taken by the said respondent in that respect. E. THE PE ISSUE-A BRIEF BACKGROUND 22. Since learned counsels for respective sides have addressed elaborate submissions on the concept of Fixed Place PE, Service PE and DAPE, we do not find any justification to go into the issue of PAN migration and the challenge in that respect which was addressed. This, since we would have to necessarily answer the fundamental question of whether a PE could be said to have come into existence within the territorial area over which the first respondent stood empowered to exercise powers conferred by the Act and thus examine whether the Section 148 power was justifiably invoked. 23. The question of a PE existing in the State of Uttar Pradesh would have to be answered on the basis of Article 5 of the India-USA DTAA which is extracted hereinbelow:- ARTICLE 5 - Permanent establishment- 1. For the purposes of this Convention, the term permanent es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise. 4. Notwithstanding the provisions of paragraphs 1 and 2, where a person other than an agent of an independent status to whom paragraph 5 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if : (a) he has and habitually exercises in the first-mentioned State an authority to conclude on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph; (b) he has no such authority but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in the State on behalf of the enterprise have contribute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on behalf of D.L.W. with companies situated in Noida and USA and vice-versa, providing information regarding any type of Rejection/Modification/Rectification/Correction. Providing follow-ups on payments, etc. roles are played here in Varanasi. xxxx xxxx xxxx Questions 9- During the inquiry of the survey, Purchase order, Bill of lading/OPT (Overseas Transport Project), etc, were found that are related to EMD Locomotive Technology Pvt. Ltd. and Electromotive Diesel Inc USA. Kindly elaborate. Answer -In relation to this, I would like to say that the purchase order whose information regarding their payment is in USD, is related to Electromotive Diesel Inc. USA and the purchase order whose payment is in INR is related to EMD Locomotive Technology Pvt. Ltd. Noida which is subsidiary of EMD Inc USA. Question 10- Does the risk or responsibility involved in the delivery of goods bear with EMD Locomotive Technology Pvt. Ltd. Noida or Electromotive Diesel Inc. USA? Answer - The risk/ responsibility with respect to supply of goods prior to May 2018 rested with Electromotive Diesel Inc. USA and the same has been rested with EMD Locomotive Technology Pvt. Ltd. Noida for supply of goods since 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to have stated that those emails were concerned with directions for procurement, modification of purchase orders, delivery of goods, refunds, sale and purchase of goods as received by the Indian subsidiary from the petitioner. The employee is also asserted to have stated that the emails so received are also reported to the petitioner from time to time through proper channels. 27. In the course of the survey operations, the first respondent also recorded the statements of Mr. Shivanshu Narendra Kaushik and Mr. Phaneendra Kumar Potnuru. The relevant extracts of the statement made by Mr. Shivanshu Kaushik is reproduced hereinbelow:- Q7. Please tell whether your team gives design up gradation/technical inputs to only M/s PRIPL or these inputs are also utilized by M/s Progress Rail Locomotive Inc. (Previously known as M/s EMD Inc.) Ans . As far as my knowledge is concerned there is no India specific design office in USA in M/s PRL Inc., USA. Since, 2010 we are designing the traction system to fulfill the requirement of Indian Railways. However, If we feel any difficulty as need guidance then we take support from the USA technical team. Our designs/inputs are utilized by both the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng on Indian projects. Q15. Who does your evaluation/appraisal in respect of the work done by you? Ans . As far as annual appraisal of my work is concerned, the discipline, behavior etc. are appraised by Sh. Anand Chidambram, M. D. in M/s PRIPL but the appraisal of my technical performance is done by Mr. Dave Babnic of M/s PRL Inc., USA. 28. The statement made by Mr. Potnuru is extracted hereunder: Q4. Please tell about Directors in EMD India and to whom they report? Ans . Sir, There are 4 Directors in EMD India. Out of which 2 are foreign directors. i. Sh. Balakrishnan Chindambram-Managing Director-He reports to Mr. John Nuwman, Vice-president of EMD USA. ii. Sh. Phaneendra Potnuru-Director Finance-He reports to Mr. Balakrishnan Chidambram (MD India) and Mr. Ryan Vickers, International Finance Controller of EMD Inc., USA. iii. Mr. Paul Denton, represents to EMD Inc., USA he reports to Mr. Martin Haycraft, Head of EMD Group which also includes EMD Inc., USA EMD India iv. Mr. Martina Haycraft, EMD Group Head-Overall Head. Q5. Please give details of Sales products by EMD Inc. USA in India and to whom, this sales has been made? Ans . Sir, Sales products of EMD Inc. USA are followings: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A of I.T. Act. 1961 at the office premises at Varanasi, the Rubber stamp of EMD Inc. USA (PRL Inc. USA) was found which was used as mark of identity in the statement on oath of Sales Executive of the Indian Co. b. M/s EMD Locomotive Technologies Pvt. Ltd. was authorized to take all decisions on the tenders and performed all actions w.r.t sales to DLW by EMD Inc., USA i .e. all functions relating to tenders like submission, follow-up for release of purchase orders, acceptance of purchase order, freight forwarding, tracking of delivery to DLW, follow-up of payments on behalf of EMD Inc. USA. Further, EMD India is not doing similar activities for any other entity, whether Indian or foreign. c. Key Officers numbering to around 13, of M/s. EMD Locomotive Technology Pvt. Ltd., an Indian entity like Managing Director, Finance Director, Head of Tech. Services Sales Executive directly reports to M/s PRL Inc. In fact, the Finance Director of Indian Co. who was working as Business Support Manager in M/s Caterpillar Inc., USA which is the ultimate holding company of the group Cos has come on deputation basis to M/s EMD L.T. Pvt. Ltd. Further, as per organization chart of the Indian Co., there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compliance matters, managing inventory, transportation shipping functions relating to the sales effected by EMD Inc. USA to DLW, have also been assigned to the Indian Co. Thus, Indian Company's activities cannot be termed as preparatory or auxiliary in nature. g. Mr. Jitendra Pratap Singh, Sales Executive of M/s. EMD Locomotive Technology Pvt. Ltd., at Varanasi office has stated in his statement that this office also works for EMD Inc. USA. Before 2018, all responsibility regarding decision making of fixation of goods price/unit price of sales goods to DLW-Varanasi from EMD Inc. USA was being made by EMD Locomotive Technology Pvt. Ltd., INDIA. Print outs of Emails relating to procurements of purchase orders, correction-modification-rejection in purchase orders, delivery of goods/units, bill of lading, outstanding payments, sales and purchase of goods, etc. directions given by EMD Inc. USA to EMD Locomotive Technology Pvt. Ltd. India, were found taken. h. Expatriates like senior officers of EMD Inc., USA visited India regularly for holding discussions with officials of Diesel Locomotive Works, Varanasi of Indian Railways w.r.t sales effected by the said foreign company and for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said Co. for the period 1-4-2011 to 31-3-2012 relevant for A.Y. 2012-13 will be part of sales of the years 2011 (1-4-2011 to 31-12-2011) 2012 (1-1-2012 to 31-3-2012) and considering the existence of PE of the said Non-Resident Co. in India, I have concrete reasons to believe that income exceeding Rs. 1 Lakh have escaped assessment for the A.Y. 2012-13 in the hands of the said Non-Resident Co. viz. M/s Electro Motive Diesel Inc. (now known as Progress Rail Locomotive Inc.), USA, especially as no Return of Income has ever been filed by the said Non-Resident Co. in India. Hence, for initiating proceedings u/s 147/148 sanction of the Commissioner of Income Tax is hereby sought in terms of Section 151 of the I.T. Act, 1961. F. THE CHALLENGE OF PROGRESS RAIL LOCOMOTIVE INC. CONTD. 31. Assailing the assumption of jurisdiction by the first respondent, Mr. Datar, learned senior counsel submitted that the first respondent had clearly erred in proceeding on the basis that the Noida factory constituted a Fixed Place PE of the petitioner. According to learned senior counsel, the Noida premises could have by no stretch of imagination be considered to be a virtual projection of the holding com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact of all products having been directly supplied to the Indian Railways by the petitioner in the relevant AYs , namely, AYs 2012-13 till 2018-19. 34. Mr. Datar then questioned the opinion formed by the first respondent on the aspect of DAPE. It was contended that the factories of the Indian subsidiary, PRIPL, manufacture a completely different range of products and that the petitioner has no control or oversight over those factories or offices. It was then contended that a subsidiary which merely renders back office or technical support would not be liable to be viewed as a PE, bearing in mind the provisions contained in Article 5 (3)(e) of the India-USA DTAA. Mr. Datar submitted that the aforesaid position stands settled in light of the decision of the Supreme Court in Director of Income Tax (International Taxation), Mumbai vs. Morgan Stanley Co. Inc. (2007) 7 SCC 1. Learned senior counsel contended that in Morgan Stanley, the Supreme Court had clearly enunciated the legal position with respect to preparatory or auxiliary services and consequently those principles are clearly attracted to the facts of the present case. It was also highlighted by Mr. Datar that the petitioner ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view was either formed or reasons recorded in support of the charge of income having escaped assessment. It was his contention that the entire action was based solely on a survey carried out in the factory and office premises of the Indian subsidiary located at Noida and Varanasi respectively. As per Mr. Datar, the first respondent has not even expressed a prima facie view with respect to the petitioner having a PE in India and consequently a Section 148 action could have at best only been issued by the jurisdictional AO, namely, the fourth respondent. 38. Mr. Datar then questioned the fairness of the action impugned on the ground that the statements have been selectively extracted and taken into consideration in order to initiate reassessment proceedings against the petitioner. It was his submission that none of the complete statements have been noticed or holistically examined prior to the formation of opinion. It was also submitted that the partial statements which have been extracted in the reasons to believe for initiating action under Sections 147/148 of the Act would also not sustain the reassessment action as initiated. He had in this regard referred to the following mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attention was also drawn to the following chart which sets out details of the income derived by the Indian subsidiary from transactions with the petitioner between FYs 2011-12 to 2017-18 and which is extracted hereinbelow:- S.No FY Service Income received from US Co. Other income Total income Percentage of total income received from US Co. 1. 2011-12 9,832,370 3,760,831 13,593,201 72.33% 2. 2012-13 222,314,720 200,160,033 422,474,753 52.62% 3. 2013-14 241,513,441 2,436,970,440 2,678,483,881 9.02% 4. 2014-15 325,496,881 1,732,056,593 2,057,553,474 15.82% 5. 2015-16 290,187,274 1,111,341,569 1,401,528,843 20.71% 6. 2016-17 221,431,732 2,040,244,440 2,261,676,172 9.79% 7. 2017-18 157,000,000 2,507,000,000 2,664,000,000 5.89% 42. According to Mr. Datar, the aforesaid chart would establish the minuscule percentage of income which the Indian subsidiary earned from transactions entered into with the petitioner when compared to its total income, and all of which would establish that it was less than 75%, a threshold which was recognized in the decision in Speciality Magazines. For this reason also, according to Mr. Datar, the opinion as formed by the first respondent is clearly rendered u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices such as data processing support centre The Indian Subsidiary provides back office support services in the nature of marketing and technical support services to the EMD Group at a cost-plus basis. (para 4 at page 2 and 3 of the Transfer Pricing Order dated 18/10/2016) Held by Supreme Court Activities of liaison offices were of preparatory or auxiliary character, same would fall within excepted category under Article 5 (3)(e) of India-UAE DTAA . (Para 11) The back-office functions performed by Indian Subsidiary falls under Article 5 (3) (e) of the India-USA DTAA. (Para 12) Therefore, the same principle should be followed in the case of Petitioner since the Indian Subsidiary, like in the case of Morgan Stanley and UAE, provides back office support services which are activities of 'preparatory or auxiliary character'. 44. Mr. Datar then drew our attention to the following pertinent observations as rendered by the Supreme Court in UAE Exchange Centre:- 36. Having said thus, it must follow that the respondent was not carrying on any business activity in India as such, but only dispensing with the remittances by downloading information from the main server of the respondent i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of a Tax Treaty Principle, Wolters Kluwer, 2nd edition (1991)] authored by Arvid Aage Skaar. By way of a historical background, Skaar s work contains the following illuminating passages:- 36.2.2 Historical Background Early in the history of PE, the opinion seems to have been that related, independent companies should constitute a PE. Thus, the first model treaty submitted by the Group of Technical Experts to the League of Nations included affiliated companies as a PE and had some influence on bilateral treaties. However, the model treaties submitted by the conference of Governmental Experts in 1928 omitted affiliated companies from the positive list. During the 1930s the principle of protecting related companies from PE taxation through the activity of each other prevailed in several bilateral treaties and was also briefly mentioned in the 1933 Report of the Fiscal Committee of the League of Nations. The uncertainty within this field led the US negotiators to ask for a specific provision on the issue in the first general US double taxation treaty, concluded with France in 1932. It was not until the Mexico model of 1943 that this issue became subject to a more comprehensive trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use The commentaries to the pre-2017 OECD model treaties were somewhat ambiguous on the significance of share control for the dependence test under the agency clause. It was generally stated that a subsidiary is not to be considered dependent upon its parent company solely because of the parent's ownership of the share capital. The reality is, of course, that a subsidiary is dependent upon the parent company, both legally and economically. Although the statement in the pre-2017 OECD commentaries seems to create a presumption that the subsidiary is independent, until the opposite is proved, the underlying significance of the commentaries was that they established the principle that the same rules apply to subsidiaries as to other persons. The evidence necessary to prove that a subsidiary is dependent will therefore be the same as for other agents. In the OECD 2017 model treaty, the closely related test was introduced in the agency clause, stating that person working exclusively or almost exclusively for a closely related enterprise shall not be considered independent in this respect. This rule appears to admit that the intra group-relationship is significant for the independence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commentaries that the parent company cannot be the subsidiary's place of management, even if extensive management and supervision services are provided. 49. As would be evident from the aforesaid passage, the author suggests that the functionality test is met where it is found that the asserted PE is engaged in the carrying on of the business activities of the taxpayer. After noticing the various precedents handed down with respect to a subsidiary PE, including some rendered by Tribunals in India, Skaar enunciates the legal position by way of the following conclusions:- 36.4.10 Conclusions In conclusion, when a separate legal entity exists, the treaty presumes that the activity performed is the subsidiary's own business. This also applies when separate legal entities cooperate extensively. Nevertheless, the facts in the case may show, how- ever, that the cooperation between two or more closely related companies makes it difficult to distinguish one company from the other: The companies are alter ego companies and may be considered to perform a joint business activity through the same place of business. Under the circumstances, this may create a PE-in this work called a sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties. The aforesaid position is explained in greater detail in Para 36.6 which is extracted hereinbelow:- 36.6 SUMMARY AND CONCLUSIONS: PRESSURE ON THE PE CONCEPT AS AN ALTERNATIVE TO UNITARY TAXATION? The starting point de lege fata is that a parent company's control and supervision cannot justify subsidiary-PE taxation. Source-state taxation of a foreign enterprise's business activities with related domestic companies is the kind of taxation at source which the subsidiary clause is specifically designed to prevent. Thus, as a general rule, the normal management contribution of a parent company does not create a place of management of the subsidiary. However, the subsidiary clause aims at protecting related companies from PE taxation beyond what unrelated enterprises are subject to. Thus, a related company may in special cases constitute a place of management for another related company, if the business of the parent is managed de facto by the other company. Moreover, a subsidiary PE is constituted when the conditions for identification of construction work (a geographically and commercially coherent whole) are met. Thus, a subsidiary which participates in the completion o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n method. In other cases, the authorities have claimed taxing jurisdiction over the foreign headquarters of the group, under the assumption that it has a PE in the country through the domestic subsidiary there. This has been done even if the subsidiary has only performed auxiliary functions, or no functions at all, for a related foreign construction enterprise. The impression left from the discussion of the subsidiary PE is that the conditions for subsidiary PE may be subject to creative interpretation in the future, as a method of counteracting tax planning through use of captive companies. Instead of dealing with the imperfections of the arm's-length principle through implementation of a unitary taxation system, tax authorities may aim at imposing PE taxation based on related companies. The unitary allocation method, through which a disproportionate amount of income is allocated to the domestic entity regardless of the accounts of the enterprise, is clearly a violation of the tax treaties, as well as an inadequate method of securing source-state taxation. Subsidiary PE taxation, however, is accepted in the treaties, and consistent with the aim of securing source-state taxatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsidiary. 52. The subject of subsidiary PEs and group of companies, and as that subject is treated by authorities in Belgium was explained in Paras 11.2.6 and 11.2.7 of that work and which are reproduced hereunder:- 11.2.6. Subsidiary companies as PE of the parents (and vice versa) A subsidiary does not ipso facto constitute a PE of the parent company or vice versa. This is also not the case if two subsidiaries are held by a common parent company. A subsidiary will only be deemed to be a PE of the parent company (or vice versa) if the criteria of article 5 (1) or (5) of the OECD Model are fulfilled. The above is also applicable to a BE. If a parent company is given the possibility to dispose of the premises that belong to a subsidiary and it carries on its business through that place, the parent company will in principle dispose of a basic rule PE. The Belgian tax authorities clarified that, a subsidiary could constitute an agency PE of the parent company if it acts as an agent for the latter and it concludes contracts in the name of the parent company. We believe, however, that it is not required that a subsidiary concludes contract in the name of the parent company. The mere fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apter 16 of that publication, the Indian position relating to subsidiary companies was explained in the following terms:- 16.2.6. Subsidiary companies as PE of the parents (and vice versa) Under the BC provision of the domestic law, a subsidiary created a per se BC although no profits could be allocated unless some activities were undertaken in India. With the introduction of a specific provision relating to agency from 2003, even the scope of creating such BC has become limited. Although the IR asserts the existence of a PE through a subsidiary wherever it comes across any evidence of close interaction between the principal and the subsidiary, whether through presence of employees or transactions with other group companies, courts in India have not always sided with the IR. It has to be noted that India also has a service PE provision and therefore the risk is created of exposure to a fixed place PE, agency PE or service PE. In case of EPC contracts, there may also be a risk of construction PE exposure. Generally speaking, the following areas seem to create PE exposure: - Use of facilities of the subsidiary for any important work, including meeting clients for negotiation, secondm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n locations outside India, there will be no service PE when only auxiliary operations that facilitate such services are carried out in India. In another case, it has also been held that if only support services are rendered, then there will also be no PE. - The existence of a PE may result in attribution of a part of the income of the enterprise. In some cases, the existence of a PE may be favourable to the taxpayer, particularly in the context of the treaties containing the FTS article if the same is held to be effectively connected to the PE. Indian judicial authorities have given such benefits whenever any provision is beneficial to the taxpayer. 54. Mr. Datar also placed for our consideration extracts from the Double Taxation Conventions, A Manual on the OECD Model Tax Convention [Double Taxation Conventions, A Manual on the OECD Model Tax Convention on Income And On Capital, Philip Baker Q.C, Thomson Reuters, (2009)]. The OECD Commentary while seeking to explain the meaning liable to be ascribed to preparatory and auxiliary functions in Paras 23 and 24 observes as follows:- 23. Sub-paragraph e) provides that a fixed place of business through which the enterprise exercises sole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h they maintain subsidiaries, permanent establishments, agents or licensees, such office having supervisory and coordinating functions for all departments of the enterprise located within the region concerned, a permanent establishment will normally be deemed to exist, because the management office may be regarded as an office within the meaning of paragraph 2. Where a big international concern has delegated all management functions to its regional management offices so that the functions of the head office of the concern are restricted to general supervision (so-called polycentric enterprises), the regional management offices even have to be regarded as a place of management within the meaning of sub-paragraph a) of paragraph 2. The function of managing an enterprise, even if it only covers a certain area of the operations of the concern, constitutes an essential part of the business operations of the enterprise and therefore can in no way be regarded as an activity which has a preparatory or auxiliary character within the meaning of sub-paragraph e) of paragraph 4. 55. The subject of DAPEs is explained in 5C.28 to 5C.32.1 as under:- 5C.28. The fixed places of business mentioned i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as having a permanent establishment in a State if there is under certain conditions a person acting for it, even though the enterprise may not have a fixed place of business in that State within the meaning of paragraphs 1 and 2. This provision intends to give that State the right to tax in such cases. Thus paragraph 5 stipulates the conditions under which an enterprise is deemed to have a permanent establishment in respect of any activity of a person acting for it. The paragraph was redrafted in the 1977 Model Convention to clarify the intention of the corresponding provision of the 1963 Draft Convention without altering its substance apart from an extension of the excepted activities of the person. 5C.32. Persons whose activities may create a permanent establishment for the enterprise are so-called dependent agents i.e. persons, whether employees or not, who are not independent agents falling under paragraph 6. Such persons may be either individuals or companies. It would not have been in the interest of international eco- nomic relations to provide that the maintenance of any dependent person would lead to a permanent establishment for the enterprise. Such treatment is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rson who is authorised to negotiate all elements and details of a contract in a way binding on the enterprise can be said to exercise this authority in that State , even if the contract is signed by another person in the State in which the enterprise is situated or if the first person has not formally been given a power of representation. The mere fact, however, that a person has attended or even participated in negotiations in a State between an enterprise and a client will not be sufficient, by itself, to conclude that the person has exercised in that State an authority to conclude contracts in the name of the enterprise. The fact that a person has attended or even participated in such negotiations could, however, be a relevant factor in determining the exact functions performed by that person on behalf of the enterprise. Since, by virtue of paragraph 4, the maintenance of a fixed place of business solely for purposes listed in that paragraph is deemed not to constitute a permanent establishment, a person whose activities are restricted to such purposes does not create a permanent establishment either. 5C.33.1 The requirement that an agent must habitually exercise an authority to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details as everyone has expertise in different field but others have also worked for global contracts of M/s PRL Inc., USA. xxxx xxxx xxxx Q14. When did you last work on any Indian Contract/Project? Ans . I have not worked on any Indian project for last 4-5 years. However, at times I have given suggestions to my other colleagues working on Indian projects. 58. Besides the aforesaid statements, Mr. Agarwal also relied upon the fact that while signing the aforesaid statements, the employees of PRIPL were affixing the seal of the petitioner. Therefore, and in this backdrop, it was contended that PRIPL was acting for and on behalf of the petitioner and that PRIPL was a virtual projection of the petitioner. He also additionally contended that the premises of PRIPL were at the complete disposal of the petitioner, thereby constituting a Fixed Place PE in India. To buttress his submissions, he also relied upon the judgment of the Supreme Court in Formula One World Championship vs. CIT, International Taxation 3, Delhi Anr (2017) 15 SCC 602. 59. Mr. Agarwal then submitted that PRIPL constituted a Service PE of the petitioner. In support of the aforesaid proposition, learned counsel first rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y time period extends over two taxable years.) 61. Relying upon the aforesaid explanation, Mr. Agarwal contended that even a single visit by employees of the petitioner to oversee PRIPL s India operations would constitute a Service PE, especially when there is no requirement of a specific time period for the furnishing of service by the parent enterprise for its related enterprise . 62. Mr. Agarwal then contended that PRIPL constitutes a DAPE of the petitioner in terms of Article 5 (4) of the India-USA DTAA. Learned counsel in this regard placed reliance upon the statement of Mr. Phaneendra Kumar Potnuru, and more specifically to his response to Question No. 7, whereby Mr. Potnuru stated that PRIPL communicates on behalf of the petitioner with DLW, Varanasi and Indian Railways. Therefore, and in this backdrop, Mr. Agarwal contended that PRIPL acts as a DAPE for the petitioner and that it falls within the contours of Article 5 (4) (a) of the India-USA DTAA, since it had the authority to conclude contracts on behalf of the petitioner. 63. Mr. Agarwal also contended that the activities of PRIPL do not fall within the negative list as specified in Article 5 (3) of the India-USA DTAA an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n with respect to assumption of jurisdiction, we are confronted with a case, where admittedly, the first respondent would have no authority to initiate a reassessment action unless a PE were found to exist within its jurisdiction. The issue of existence of a PE and the Noida premises constituting an establishment which would fall within the ambit of Article 5 are thus aspects which form the very basis and foundation for the invocation of the Section 148 power by the first respondent. Our task thus is limited to examining whether the view as taken by the said respondent and the conclusions drawn on the basis of the material that existed is legally sustainable and one which could have been plausibly rendered. We thus proceed to examine the challenge that stands raised, cognizant and mindful of the narrow expanse over which our power of review must extend. 67. Mr. Datar had with his characteristic erudition and clarity not only sketched out the well-recognised principles governing the question of a PE, he had also placed for our consideration various academic texts and treatises to enable us to obtain a broader perspective on the concept of a PE. We, however, deem it apposite to addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l integration of the POB in the enterprise of the taxpayer. Such functional integration contains several aspects which need to be carefully distinguished from one another. Their common denominator, however, is the type and degree of proximity of the POB to, or even identification with, the taxpayer's paramount economic activity. 135. The first function of the term 'through' is to make it clear that the taxpayer has to control the PE (see supra m.no. 106 et seq. for details). 136. Secondly, functional integration presupposes that the taxpayer 'wholly or partly carrie[s] on' his business (Article 5 (1) OECD MC; the OECD MC Comm. uses the verb 'carried out' synonymously (no. 35 OECD MC Comm. on Article 5)). However, like 'business' and 'enterprise' (cf. supra m.no.27 et seq.), these words do not function as a substantive filter either. While early draft Model Conventions contained the condition that the fixed POR should have a productive character, this requirement was never adopted by the OECD Model (see no. 35 OECD MC Comm. On Article 5). None of the current MCs provide a specific productivity test. It follows that POBs may constitute a PE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'in' or 'at' the POB. In this respect, the 1977 change of Article 5 (1) OECD MC has enlarged the scope of the PE definition. Especially if one thinks of an activity as a human behaviour, one can now (unlike before 1977) easily subsume unmanned facilities under the PE definition (see supra m.no. 45 and see, e.g., no. 127 OECD MC Comm. on Article 5). 143. On the other hand, the requirement of an instrumental character of the POB has become irrefutable. Even stronger than the English amendment ('through which' instead of 'in which'), the corresponding modification of the French text ('par l 'interm diaire de laquelle instead of 'o ') has stressed the functional integration of the POB in the business. 144. The OECD MC Comm. has weakened the meaning of 'through' since 2003. The Commentary holds the view that the requirement of a functional integration is met as soon as the taxpayer exercises the business in a fixed POB which is at his disposal (no. 20 OECD MC Comm. on Article 5 (added on 28 January 2003)). This is the reason for the characterization of the famous painter example (i.e., the fictitious case of a painter who, for two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivity of the enterprise as a whole. It is unlikely that an activity that requires a significant proportion of the assets or employees of the enterprise could be considered as having an auxiliary character. xxxx xxxx xxxx 69. [Collect information] The second part of subparagraph d) relates to a fixed place of business that is used solely to collect information for the enterprise. An enterprise will frequently need to collect information before deciding whether and how to carry on its core business activities in a State. If the enterprise does so without maintaining a fixed place of business in that State, subparagraph d) will obviously be irrelevant. If, however, a fixed place of business is maintained solely for that purpose, subparagraph d) will be relevant and it will be necessary to determine whether the collection of information of information goes beyond the preparatory or auxiliary threshold. Where, for example, an investment fund sets up an office in a State solely to collect information on possible investment opportunities in that State, the collecting of information through that office will be a preparatory activity. The same conclusion would be reached in the case of an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e State. An absolute standard suggests equal treatment of case (1) and (2). 306. However, the ordinary meaning of both preparatory' and 'auxiliary' requires the identification of a point of reference. One may say that the absolute standards are based on an analysis of the function of the core activity in relation to the entire chain of economic value added. It is more convincing, however, to apply relative standards in the sense that the value added is considered on a micro rather than a macro level, that is, that the core activity should be compared to the entirety of all activities exercised by the enterprise. This relative view would deny a PE in case (1), and assume a PE in case (2). This view is shared by no. 60 OECD MC Comm. on Article 5 as well as by most authors. 307. It seems to your author, however, that the strict and exclusive application of relative standards would not do justice to cases where an enterprise of type (1) above (supram.no. 283) is so large that POBs which, from an absolute perspective, are respectable entities with valuable assets, a considerable number of employees and fully- fledged bureaucratic and administrative facilities of their own, j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re routinely concluded without material modification by the enterprise reflects the underlying principle in Article 5 that the presence which an enterprise maintains in a Contracting State should be more than merely transitory if the enterprise is to be regarded as maintaining a permanent establishment, and thus a taxable presence, in that State. The extent and frequency of activity necessary to conclude that the agent is 'habitually' concluding contracts or playing the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise will depend on the nature of the contracts and the business of the principal. It is not possible to lay down a precise frequency test. Nonetheless, the same sorts of factors considered in paragraph 6 would be relevant in making that determination. 72. Of equal significance are the following principles which are set out by the author while seeking to emphasize the necessity of it being found that the subsidiary or asserted PE carries on activities which are recurrent in nature:- 91. Within the permanence test, a crucial problem arises wherever the taxpayer enterprise does not perf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in Canada from a trailer and portable sales booth two weeks each year for fifteen years. However, twice he left the trailer and stand in Canada between exhibitions, allegedly for repairs. It seems to your author that this decision is not beyond doubt, however. Similarly, the Swedish Kammarr tteni G teborg ruled that the activities of a recurrent nature of a German company constituted a PE in Sweden despite the fact that the activities lasted only for a short period of time every year. In the case at hand a German company tested a special software for cars during the winter in northern Sweden. The activities in Sweden lasted only for three or four month search year with alternating employees. The Kammarr tten ruled that the company had fixed POB in Sweden although it was not present in Sweden for more than six months, given that the company was testing its software in Sweden for several years at the same place. Quite far-fetched, yet again not unjustifiable is the Formula One (F1) judgement of the Indian High Court of 30 November 2016 where the Court acknowledged an Indian PE of a UK resident company that had access to an Indian company s premises for up to six weeks during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Engineering Services Agreement dated 01 January 2011 [MES Agreement] and the obligation of the Indian entity in terms thereof to provide support in relation to Marketing, Engineering, Servicing, Warehousing, Assembly and Sourcing. 75. Dealing with the Second Amendment to that agreement, it also proceeded to observe that the Indian entity was also discharging functions pertaining to compliance, inventory management, transportation and shipping functions. On the basis of the aforesaid, it came to hold that the activities discharged by the Indian subsidiary could not be said to be preparatory or of an auxiliary character. 76. The first respondent also highlights the statement of Mr. Jeetendra Pratap Singh, who is asserted to have stated that the office to which he was attached also worked for the petitioner. He is also asserted to have stated that all decisions relating to pricing of goods intended to be supplied to DLW, Varanasi by the petitioner was being controlled by the Indian subsidiary. The first respondent also bore in consideration the visits by senior officers of the petitioner to India during the period in question. On the basis of the aforesaid, it ultimately came to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... habitually exercise an authority to conclude contracts is one of the first categories which the treaty would recognize as constituting a DAPE. A similar conclusion would be liable to be drawn if it were found that the establishment habitually maintains a stock of goods or merchandise for supply on behalf of an enterprise situated outside that Contracting State. The last of the categories which stand culled out in terms of Article 5 (4) are those enterprises who while situated in one of the Contracting States are engaged in habitually securing orders wholly or almost wholly for the foreign enterprise. K. THE COURT S ANALYSIS 81. Having broadly set out the construct of Article 5 and the three categories of PEs which are envisaged therein, this would be an appropriate juncture to commence the evaluation of the conclusions recorded by the first respondent. As we read the reasons recorded for initiating action under Sections 147/148 of the Act, it becomes manifest that the first respondent has sought to place the petitioner in all three conceivable silos of PEs , namely, a Fixed Place PE, Service PE and DAPE. K.1. THE SERVICE PE 82. However, and insofar as the asserted stand of the fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existence. The visit of employees of the parent company, their interaction with employees of the Indian subsidiary, discussion on subjects of mutual concern or interest is not the rendering of a service. Such forays are principally concerned with sharing of best practices, experiences and problem solving. It cannot possibly be understood to constitute the rendering of a service. Similarly, the periodic visits of employees of the petitioner to India were at best liable to be recognised as an extension of the right of the holding company to oversee India operations and exercise broad managerial oversight. These are, as some authors have chosen to describe, normal management contribution . Therefore, and in light of the aforesaid discussion, we find that the argument addressed on Article 5 (2) (l) of the DTAA is wholly misconceived and untenable. K.2. THE FIXED PLACE PE 85. That leads us to examine the correctness of the opinion as formed with respect to the Noida factory and the Varanasi office constituting a Fixed Place PE. Decades before global commerce attained the degree of complexity which attaches to it today, the Andhra Pradesh High Court in Commissioner of Income Tax, Andhra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch physically located premises have to be at the disposal of the enterprise. For this purpose, it is not necessary that the premises are owned or even rented by the enterprise. It will be sufficient if the premises are put at the disposal of the enterprise. However, merely giving access to such a place to the enterprise for the purposes of the project would not suffice. The place would be treated as at the disposal of the enterprise when the enterprise has right to use the said place and has control thereupon. xxxx xxxx xxxx 38. Taking cue from the word through in the article, Vogel has also emphasised that the place of business qualifies only if the place is at the disposal of the enterprise. According to him, the enterprise will not be able to use the place of business as an instrument for carrying on its business unless it controls the place of business to a considerable extent. He hastens to add that there are no absolute standards for the modalities and intensity of control. Rather, the standards depend on the type of business activity at issue. According to him, disposal is the power (or a certain fraction thereof) to use the place of business directly . 39. OECD commentary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x xxxx xxxx 74. As per Article 5 of the DTAA, the PE has to be a fixed place of business through which business of an enterprise is wholly or partly carried on. Some examples of fixed place are given in Article 5 (2), by way of an inclusion. Article 5 (3), on the other hand, excludes certain places which would not be treated as PE i.e. what is mentioned in clauses (a) to (f) as the negative list . A combined reading of sub-articles (1), (2) and (3) of Article 5 would clearly show that only certain forms of establishment are excluded as mentioned in Article 5 (3), which would not be PEs. Otherwise, sub- article (2) uses the word include which means that not only the places specified therein are to be treated as PEs, the list of such PEs is not exhaustive. In order to bring any other establishment which is not specifically mentioned, the requirements laid down in sub-article (1) are to be satisfied. Twin conditions which need to be satisfied are: (a) existence of a fixed place of business; and (b) through that place business of an enterprise is wholly or partly carried out. xxxx xxxx xxxx 85. We are of the opinion that the test laid down by the Andhra Pradesh High Court in Visakhapat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an establishment or premises placed at the constant disposal of the enterprise, it would satisfy the test of a Fixed Place PE as contemplated under Articles 5 (1) and 5 (2)(a)-(k) of the DTAA. 89. The principles governing Fixed Place PE were again spelt out and enunciated by the Supreme Court in Morgan Stanley Co. Inc and Samsung Heavy Industries Company Limited . In Morgan Stanley Co. Inc, and where the following pertinent observations came to be rendered: 8. With globalisation, many economic activities spread over to several tax jurisdictions. This is where the concept of PE becomes important under Article 5 (1). There exists a PE if there is a fixed place through which the business of an enterprise, which is multinational enterprise (MNE), is wholly or partly carried on. In the present case MSCo is a multinational entity. As stated above it has outsourced some of its activities to MSAS in India. A general definition of PE in the first part of Article 5 (1) postulates the existence of a fixed place of business whereas the second part of Article 5 (1) postulates that the business of MNE is carried out in India through such fixed place. One of the questions which we are called upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of PEs with which we are concerned in the present case : fixed place of business PE under Articles 5 (1) and 5 (2) (a) to 5 (2 )(k); service PE under Article 5 (2) (l) and agency PE under Article 5 (4). Specific and detailed criteria are set out in the aforesaid provisions in order to fulfil the conditions of these PEs existing in India. The burden of proving the fact that a foreign assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE is initially on the Revenue. With these prefatory remarks, let us analyse whether the respondents can be brought within any of the sub-clauses of Article 5. 25. Dealing with support services rendered by an Indian company to American companies, it was held that the outsourcing of such services to India would not amount to a fixed place permanent establishment under Article 5 of the aforesaid treaty, as follows : (E- Funds IT Solution Inc. case [CIT v. E-Funds IT Solution Inc., (2018) 13 SCC 294] , SCC p. 320, para 22) 22. This report would show that no part of the main business and revenue earning activity of the two American companies is carried on through a fixed business place in India which has been p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above, we find ourselves unable to sustain even the prima facie formation of opinion by the first respondent in this respect. It is pertinent to note that the impugned notices and the reasons set out for initiating action under Sections 147/148 nowhere allude to a particular space or a part of the premises situated in Noida or Varanasi having been placed under the exclusive or significant control or disposal of the petitioner. The first respondent fails to rest its prima facie opinion with respect to Fixed Place PE on any part of the Noida or Varanasi premises which may have been set apart or exclusively placed in and under the control of the petitioner for use of its business activities and which may have tended to indicate that the space was made available for the use of the petitioner and from where it was conducting its business activities. It would have had to be shown that the control of that space answered the test of considerable extent. We recall Vogel describing this particular genre of a PE as being akin to an instrument (equalling or resembling an operating asset) for his entrepreneurial activity . The concept of virtual projection is concerned with a functional integra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above, in our considered opinion, when viewed cumulatively, would have been sufficient to dispel any presumption of the petitioner conducting its business activity from a permanent premises situate in India. We are consequently of the firm opinion that the assumption of a Fixed Place PE is misconceived and untenable. K.3. ARTICLE 5 (3)- PREPARATORY AND AUXILIARY FUNCTIONS 96. We then proceed to test the correctness of the prima facie conclusions arrived at by the first respondent on the anvil of Article 5 (3) of the India-USA DTAA. As was noticed hereinabove, Article 5 (3) excludes PEs which may otherwise fall within the ambit of Article 5 (1) or Article 5 (2), if it were found that the said PE were engaged in the discharge of functions enumerated therein. While and undisputedly sub- clauses (a), (b) and (c) of Article 5 (3) are not even invoked, even if we were to examine the correctness of the view taken by the first respondent based on sub-clauses (d) and (e), we find ourselves unable to sustain the impugned notices and the reasons set out for initiating action under Sections 147/148, basis which the impugned notices were issued. 97. In terms of Article 5 (3)(d), if a PE wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d one has to undertake what is called as a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view, we are in agreement with the ruling of AAR that in the present case Article 5 (1) is not applicable as the said MSAS would be performing in India only back office operations. Therefore to the extent of the above back office functions the second part of Article 5 (1) is not attracted. xxxx xxxx xxxx 14. There is one more aspect which needs to be discussed, namely, exclusion of PE under Article 5 (3). Under Article 5 (3) (e) activities which are preparatory or auxiliary in character which are carried out at a fixed place of business will not constitute a PE. Article 5 (3) commences with a non obstante clause. It states that notwithstanding what is stated in Article 5 (1) or under Article 5 (2) the term PE shall not include maintenance of a fixed place of business solely for advertisement, scientific research or for activities which are preparatory or auxiliary in character. In the present case we are of the view that the abovementioned back office functions proposed to be performed by MSAS in India falls under Articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s US. All networks and infrastructure for this category of services is owned by e-Funds US only. Connex was developed by a company acquired by e-Funds US. e-Funds US's associate company in United Kingdom has developed and owns the Architect software which is middleware used primarily by financial institutions in Europe (there is one customer in Chicago). This software runs on IBM and Tandem computing platforms. All of them were located outside India. In accordance with the terms of the contract with government agencies, e-Funds US is responsible for management, support and control of the electronic payment band distribution of cash benefits to program participants through its ATM and point of sale network. Services provided by e-Funds India: e-Funds India provided testing, bug fixing and other related software development support services to e-Funds US for various software/software based solutions developed by e-Funds US. Such services are required by e-Funds US in the course of development of software/software based solutions and their use in providing services to customers. The process of development of software/solutions involves testing the same with sample data to determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the customers were entered into by e- Funds US. All risks and responsibilities for performance of the contracts at all times were of e-Funds US only. Services provided by e-Funds India: e-Funds US subcontracted part of its responsibilities under professional services contract with some of its customers to e-Funds India which involve the following: (i) Data Processing Services including making outbound calls to collate data; (ii) Making soft outbound calls to customers of e-Funds US clients to follow up payment; and (iii) Responding to inbound calls from customers from dealers/customers of telecom services providers (who are customers of e-Funds US), to check on the status of applications made for new connections, change in billing plans, etc. Note: Logica Global, an independent company, had received an order from the Reserve Bank of India for development and implementation of certain software. A part of this work was subcontracted to e-Funds India directly by Logica Global. The appellant had nothing to do with this contract. 22. This report would show that no part of the main business and revenue earning activity of the two American companies is carried on through a fixed busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y virtue of deeming provision in the 1961 Act. 31. While answering the question as to whether the activity in question can be termed as other than that of preparatory or auxiliary character , we need to keep in mind the limited permission given by RBI to the respondent under Section 29 (1) (a) of the 1973 Act, on 24- 9-1996. From Para 2 of the stated permission, it is evident that RBI had agreed for establishing a liaison office of the respondent at Cochin, initially for a period of three years to enable the respondent to: (i) respond quickly and economically to enquiries from correspondent banks with regard to suspected fraudulent drafts; (ii) undertake reconciliation of bank accounts held in India; (iii) act as a communication centre receiving computer (via modem) advices of mail transfer T.T. stop payments messages, payment details, etc., originating from the respondent's several branches in UAE and transmitting to its Indian correspondent banks; (iv) printing Indian Rupee drafts with facsimile signature from the Head Office and counter-signature by the authorised signatory of the office at Cochin; and (v) following up with the Indian correspondent banks. These are the limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... primary business activities consummated by the respondent in UAE. The activities carried on by the liaison office of the respondent in India as permitted by RBI, clearly demonstrate that the respondent must steer away from engaging in any primary business activity and in establishing business connection as such. It can carry on activities of preparatory or auxiliary nature only. In that case, the deeming provisions in Sections 5 and 9 of the 1961 Act can have no bearing whatsoever. 101. The aspect of whether an Indian establishment was performing functions of a preparatory or an auxiliary character was considered by this Court in N ational Petroleum Construction Co. vs. Director of Income-tax (International Taxation) 2016 SCC Online Del 571, and where it was pertinently observed: 26. The language of sub-paragraph (e) of paragraph (3) of article 5 of the Double Taxation Avoidance Agreement is similar to the language of sub- paragraph (e) of paragraph (4) of article 5 of the Model Conventions framed by OECD, United Nations as well as the United States of America. The rationale for excluding a fixed place of business maintained solely for the purposes of carrying on activity of a pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacture and production of goods needed by railroad companies. The principal activity is concerned with the core business activity of the petitioner. That has clearly not been shown to have been undertaken at the Noida premises. Of equal significance are the observations appearing in National Petroleum, and where the Court had held that while activities undertaken by an entity which is asserted to be a permanent establishment may contribute to the productivity of the foreign enterprise, but if those functions be remote from the actual realisation of profits, the tests of a PE would not be satisfied. 103. Although, we have on an independent analysis found that the Noida and Varanasi premises would not constitute a Fixed Place PE or a Service PE, the first respondent appears to have been significantly influenced by the statements which were recorded in the course of the survey, and has thereafter come to conclude that various Indian officers and employees were working in aid of the business activities of the petitioner and providing support services. 104. As we view the statement of Mr. Jeetendra Pratap Singh, it transpires that the said officer is stated to have submitted that he w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an auxiliary function as opposed to a core business function. 107. The officer concerned was also asked to disclose details with respect to functional heads and the reporting mechanism of personnel. The employee significantly states that reporting to foreign personnel is essentially to ensure compliance with global best practices of group companies . He further stated that performance evaluation is undertaken by functional heads present in India and insofar as it relates to employees of the Indian subsidiary. The appraisal of functional heads was stated to be a function discharged by the Indian Managing Director, the HR Department of the Indian subsidiary and based on feedback received from foreign managers as well . This too is indicative of administrative control of the employees of the Indian subsidiary resting in the hands of the management situate in India. The officer lastly submitted that from 2018 onwards, the Indian subsidiary had also started importing after-market/ spare parts from the petitioner and supplying them to customers in India. This too would be liable to be recognized as an activity independently undertaken by the Indian subsidiary as opposed to the carrying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have found that the Indian subsidiary not only stood conferred with the authority to conclude contracts but also that it was in fact habitually engaged in acting in discharge of that authority. The issue of a habitual or recurrent exercise of authority does not arise at all since we have already found that an authority to conclude contracts never stood conferred. Suffice it to observe that there is not an iota of evidence which may have even remotely justified Article 5 (4) (a) being invoked. 112. Similar is the position which emerges when the case as set up against the petitioner is examined on the anvil of Article 5 (4) (c) of the India-USA DTAA. This would have required the respondents to have established or found, as a matter of fact, that the Indian subsidiary was engaged or created solely for the purpose of securing orders for the petitioner. Clause (c) of Article 5 (4) would have been attracted if the respondents had, even on a prima facie examination, found that the Indian subsidiary was concerned primarily with securing orders for the petitioner. This, in light of the said clause using the expression wholly or almost wholly for the enterprise . Clause (c) not only alludes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services Agreement dated 01 January 2011 which has been taken into consideration, those and issues arising therefrom would have to be necessarily evaluated bearing in mind the significant observations which appear in the TPO s order, which not only speaks of the Noida premises providing back office support and technical support services, but also takes into consideration the Indian subsidiary being duly remunerated for those services on a cost plus basis. Even if one were to take into consideration the nature of services which were rendered by the Indian subsidiary under the aforesaid agreements, it becomes apparent that all of those would really fall within the scope of supportive preparatory and auxiliary services. Be it tracking of Letters of Credit for shipments, monitoring of upcoming tenders, coordinating with the petitioner for timely bid submission for tenders in the Indian market, gathering technical details, these are all services rendered which would fall under the larger umbrella of preparatory and auxiliary services. 117. We have also had an occasion to take note of Article 5 (3) and sub-clauses (d) and (e) excluding fixed place of businesses used solely for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Salient points from the statement of Mr. Phaneendra Kumar Potnuru, Finance Director of M/s. EMD Locomotive Technology Pvt. Ltd., Noida are: Products of EMD Inc. USA are Locomotive components, Power assembly, Turbo charger, Cylinder head, Liner, Piston rings, Gas kits, Fuel Motor Pumps, Injectors, etc., 95% of which are to M/s Diesel Locomotive Works, Varanasi and rest 5% are to other Indian Railway Centers. M/s. EMD Locomotive Technology Pvt. Ltd. also work for EMD Inc. USA as under: Providing tender information - Assistance regarding tenders from Indian Railways. Tender support-follow up-paper work clearance, Procurement of Purchase Orders, Tracking of Sales of Diesel Locomotive Works-Varanasi, Payments collection and its follow up, Communication on behalf of EMD Inc. USA with DLW, Varanasi Warranty claim and support etc. 120. The first respondent failed to bear in mind that most of the functions so discharged by the Indian subsidiary were relatable to the agreements which formed part of the transfer pricing study. This, in our considered opinion, would have been sufficient to discharge any presumption of a PE that the said respondent had harboured. This, more so since not only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate. This was also not a case where the respondents had found that the Indian subsidiary was not engaged in any business activity of its own and was acting merely for the purposes of advancing the business and economic interests of the petitioner, or one which was engaged in a joint business activity through a common place of business. A subsidiary PE could be said to have become a mere alter ego provided it were found that it had no independent business activity to undertake or were working only to subserve the business interests of the petitioner. The two entities in question also do not appear to have functioned with a commonality of general purpose or of dependence. 124. The initiation of the impugned proceedings may also be examined on the anvil of Article 5 (4) of the India-USA DTAA. Although, much was argued at the behest of the respondents resting on the seal of the petitioner having been discovered during the course of the survey, the impugned notices and the reasons recorded neither rest nor proceed on the basis of the Indian subsidiary having been conferred the authority to conclude contracts on behalf of the petitioner. It becomes pertinent to note that the reassessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ote of would establish to the contrary. This, since administrative oversight, appraisal and all other HR related functions in respect of most of the Indian employees was being regulated by the Indian subsidiary. 128. Even as we go through the various statements which were recorded in the course of the survey or thereafter, we find that the functions discharged by the Indian employees could at best be said to be supportive of the business that the petitioner had with DLW and other Indian Railway entities. The follow-up of purchase orders or modification suggested and the various emails exchanged between the petitioner and the Indian subsidiary would at best lead us to conclude the latter constituting a medium of communication between the petitioner and DLW. In any case, those functions cannot possibly be countenanced as constituting the core business activity of the petitioner. The core business activity of the petitioner was the manufacture of articles and goods detailed hereinabove and their supply to DLW and other Indian Railways entities. 129. The respondents also do not rest their case on any alleged sharing of revenue between the petitioner and the Indian subsidiary in connect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16% basis or the basis of margin fixation was not known, is not relevant for determining location or fixed place PE. Similarly what were the direct or indirect costs and corporate allocations in software development centre or BPO does not help or determine location PE. Assignment or sub-contract to e-Fund India is not a factor or rule which is to be applied to determine applicability of Article 5 (1). Further whether or not any provisions for intangible software was made or had been supplied free of cost is not the relevant criteria/test. e-Fund India was/is a separate entity and was/is entitled to provide services to the assessees who were/are independent separate taxpayer. Indian entity i.e. subsidiary company will not become location PE under Article 5 (1) merely because there is interaction or cross transactions between the Indian subsidiary and the foreign Principal under Article 5 (1). Even if the foreign entities have saved and reduced their expenditure by transferring business or back office operations to the Indian subsidiary, it would not by itself create a fixed place or location PE. The manner and mode of the payment of royalty or associated transactions is not a test w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how the same is communicated to you? How you submit your work to the foreign team? Ans . The design-work is allocated by M/s PRL Inc., USA and the same is communicated through e-mail from USA. A release note is provided by e-mail in which the work allocated to me. For every such project a project head is made in USA in M/s PRL Inc. Who co- ordinates such projects and we report to him. All the team members work on common platform/ software which is accessible by all members and team Head as well. The work is automatically submitted on that platform. 134. Insofar as the MES Agreement and other allied agreements are concerned, it is clear that in terms of the said agreements, the employees of the Indian subsidiary were to keep track of monetary balances and record the movement of goods, maintain and coordinate the implementation of accounting control procedures, assist in the development of both short term and long-term strategy plans, study market trends and other such allied activities. Regard must be had to the fact that the Indian entity - PRIPL was undoubtedly a wholly owned subsidiary of the petitioner, and formed part of the multi-national group Caterpillar. There would undoub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37. Accordingly, and for all the aforesaid reasons, we are of the considered opinion that the opinion as formed by the first respondent on the issue of a PE is wholly perverse and untenable. We find ourselves unable to sustain that opinion even on a tentative, formative or prima facie basis. We are of the firm opinion that that since the very foundation on which the impugned action is based is itself rendered wholly arbitrary and unsustainable, the impugned reassessment proceedings would be liable to be quashed. 138. We bear in mind the indubitable fact that but for the PE question being liable to be answered against the petitioner, the first respondent would have no authority to proceed. It was thus incumbent for the Court to have come to a conclusion that the decision on the question of PE had been correctly decided or was at least a tenable or plausible view which could have been taken or harboured. We, for reasons aforenoted, have found ourselves unable to sustain the opinion as formed. In our considered view, the same would not sustain even if that opinion were to be tested on a prima facie basis. We also bear in mind the fact that the view as expressed by the first respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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