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TMI Blog2025 (3) TMI 986X X X X Extracts X X X X X X X X Extracts X X X X ..... , not taxable as 'Royalty' under Article 12 of India-Netherlands DTAA. We also note that the word 'plant' in India-Beligium DTAA under Article 12 is a typographical error for word 'plan'. This factual error has been acknowledged in the Notification S.O.54 [NO.20 (F.NO.505/2/89-FTD] Dated 19.01.2001. Hence, we are of the considered view that hire charges of bareboat charter does not fall under the garb of definition "Royalty' and hence, not taxable as 'Royalty' under Article 12 of India-Belgium DTAA. We have gone through the judgments in the cases of R.D. Aggarwal [1964 (10) TMI 9 - SUPREME COURT], Carborandum Co. [1977 (4) TMI 2 - SUPREME COURT] Ishikawajma-Harima Heavy Industries Ltd. [2007 (1) TMI 91 - SUPREME COURT], Metror Sattellite Ltd. [1979 (6) TMI 25 - GUJARAT HIGH COURT] and Netherlandsche Overzee Baggermaatsehappiji BV [2010 (5) TMI 674 - ITAT MUMBAI] and also taking guidance therefrom, it is clear from the above facts that the appellant has no business connection in India or PE. We also find that the AO without adherence to the principles laid by the Hon'ble Courts in above referred cases has held that assessee has business connection and PE in India is devoid of meri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment procedure to finalize the adjustment, without considering the information, arguments and evidence provided by the Appellant. 2. Constitution of PE by the Appellant 2.1. The lower authorities have, in the facts and circumstances of the case and in law, erred in concluding that Appellant has PE in India based on conjectures and surmises, which are devoid of any merits. 2.2. The lower authorities have, in the facts and circumstances of the case and in law, failed in establishing that the Appellant has business connection in India as per section 9 of the Act, and hence, the income is not subject to tax under the provisions of the Act. 2.3. The lower authorities have, in the facts and circumstances of the case and in law, erred in relying on information collected and statements recorded during the survey conducted in the premises of ISDPL, failing to appreciate the fact that the same cannot be considered as corroborative or conclusive evidence. 2.4. The lower authorities have, in the facts and circumstances of the case and in law, erred in making references to functions performed by 'foreign company', 'DEME Group', and "Tideway BV in the impugned order w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statements recorded during survey carried out on the premises of ISDPL. The Assessee in the response dated December 27, 2017 highlighted that the transaction cannot be taxed as 'royalty' as per the relevant provisions of DTAA, and that the Assessee has no place of business in India. The AO completed the assessment and passed the draft assessment order under section 143(3) r.w.s 144C(1) of the Income-tax Act, 1961 ('the Act') dated December 31, 2017 concluding that the Assessee constitutes a PE in India and arbitrarily determined the attribution as 25 percent of hire charges and taxed the same at the rate of 40 percent. Aggrieved by the addition made by the AO, the Assessee filed its objections before the Dispute Resolution Panel - 2. Bengaluru (DRP) who upheld the order of the AO without objectively dealing with the contentions of the Assessee. The AO passed the final assessment order ('impugned order), incorporating the directions of the DRP, under section 143(3) read with 144C(13) of the Act, determining the income of the Assessee at INR 26.41 crores, and raised a demand amounting to INR 18.40 crores. Aggrieved by the order of the AO, the Assessee is on appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action does not fall under any cases mentioned above. 4.1 Factual clarification to the AO's contentions (Ground 2.1 and 2.4): In the impugned order, the AO has made certain factually incorrect statements and assumptions, while concluding that the Appellant has a PE in India. - The AO alleges that there is a continuous relationship between DEME and ISDPL on the basis of organizational reporting and weekly update reports sent to DEME At the outset, the Appellant wish to submit that providing status update to parent company is a normal business practice adopted by multinational companies. The purpose of sending weekly reports to DEME is to optimally utilize resources of the Group in an efficient manner. This was clearly stated in the survey statements by Mr. Filiep De Zutter (Question No. 5; page 11 of assessment order) and Mr. Peyron Amedeo Giuseppe (Question No. 8; page 26 of assessment order). Further, these are reports prepared by ISDPL for the clients, which is also forwarded to the DEME entity for the reason stated above. Further, the important point to be noted here is that, the AO only alleges that ISDPL reports to DEME (the ultimate parent company of the Group) on a reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded by ISDPL during the year is provided in pages 124 to 131 of the paper book. Further, out of the 8 seconded employees listed above only two were employees of the Appellant - De Zutter Filep and Verhess Wim. The employees seconded from the Appellant company were not be deployed in the dredger let out by the Appellant, as evident from the list of crew members provided by Rock Equipment SA. Secondment agreement: Without prejudice to the above, the secondment agreement (refer page 105 to 115 of the paper book) clearly states that these employees would be under the control and supervision of ISDPL during the tenure of secondment. Clause 2.1.1 of the secondment agreement (page 107 of paper book) clarifies that the seconded employee would work as an employee of ISDPL. - The AO has concluded that the Appellant has a PE in India, based on reference made to 'DEME', 'Tideway BV' and 'foreign company' The AO has made various references to 'foreign company' and 'DEME' in the impugned order while concluding that the Appellant constituted PE in India. The Appellant fails to understand how the detailed discussion on the functions performed by DEME, would lead to the conclusion that Appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reproduced below for reference. "(3) (a) The term "royalties" as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience." It is evident from the above definition that the term "Royalty" does not include payment for use or right to use industrial, commercial or scientific equipment, as mentioned by the AO in the SCN. Hence, hire charges paid to the non-resident lessors is not subject to tax in India as per India-Belgium DTAA. The Hon'ble Jurisdictional High Court in the case of CIT v. Van Oord ACZ Equipment BV (2015) 373 ITR 133 page 13 of Case Law Compilation ('CLC' in short), in the context of India-Netherlands DTAA, upheld that hire charges are not taxable as Royalty under Article 12 of India-Netherlands DTAA. The relevant extract of the decision is as follows - 19. W.e.f.1.4.1998, sub-clause 4 of Article 12 was also modified as follows: '(4) The term "royalties" as used in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the term "Royalty" under DTAA does not include use or right to use industrial, commercial or scientific equipment. A. Decision of the Hon'ble jurisdictional High Court in the case of M/s. Poompuhar Shipping Corporation Ltd (supra) is not applicable to the Appellant's case The Appellant submits that the decision of the Hon'ble jurisdictional High Court in the case of Poompuhar Shipping (page 75 of CLC) is factually distinguishable from the Appellant's case, on the following lines: Table 3: Poompuhar Shipping vs. Appellant's case Sl.No Facts of Poompuhar Shipping Facts of the Appellant 1 It was a time-charter arrangement of a ship (involving supply of vessel along with Crew) It is a bareboat charter of Dredger. No supply of crew is involved and operating responsibility is that of the charterer (i.e. ISDPL) 2 The payments are made to non-residents of Countries like Australia, France, Germany Norway, Singapore wherein the DTAA between India and these countries the definition of the term "Royalty" includes use or right to use industrial, commercial or scientific equipment. (refer page 89 of CLC) As per India-Belgium DTAA, the definition of the term "Royalty" does not inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign company. In the present case, the subject transaction does not involve such a scenario. Thus, the Appellant refers to the conditions laid down by the Hon'ble Apex Court for constitution of 'business connection'. The Hon'ble Apex Court in the case of CIT Vs R.D. Aggarwal (56 ITR 20) laid down two principles for constitution of 'business connection', namely: 1. Relation between the businesses carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. 2. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories; a stray or isolated transaction is normally not to be regarded as a business connection. The Appellant would like to highlight that it fails to satisfy both the conditions mentioned above. - The main activity of the Appellant includes construction and development of ports and harbours, artificial islands, estuarial dams, canals and inland waterways, dyke construction and reinforcement, beach replenishment and coastal protection and salvage activities. The activity of the App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is not the contention of the AO that the Appellant renders any services to ISDPL. Therefore, the Appellant does not have a business connection in India as required under section 9(1)(i) of the Act. 4. The Appellant does not have a Permanent Establishment in India (Ground 2.2): The Appellant makes the following submission that it does not constitute a PE in India: A. Business connection cannot be equated to PE The AO has misunderstood the concept of constitution of a PE and equated the same to the establishment of business connection. This is evident from order of the AO, wherein it is concluded that: "the relationship between all activities are continuous and hence the company has a PE in India.." The relationship between activities, continuity, etc. are principles for establishment of business connection, as discussed in the earlier section. No other reasoning or reliance was placed by the AO for arriving at the conclusion that the Appellant constitutes a PE in India. In this regard, the Hon'ble Apex court in the case of Ishikawajma-Harima Heavy Industries Ltd. Vs DIT (288 ITR 408), held that: "The concepts of profits of business connection and permanent establishment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ively for that particular enterprise's business purpose only and it is enough that there is certain amount of space available at its disposal. The Organization for Economic Cooperation and Development (OECD) commentary on the Model tax Convention lays down the following conditions for establishment of a fixed place PE: * the existence of a "place of business", i.e. a facility such as premises or, in certain instances, machinery or equipment. * this place of business must be "fixed", i.e. it must be established at a distinct place with a certain degree of permanence; * the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) to conduct the business of the enterprise in the State in which the fixed place is situated. In the present case, the Appellant neither has a place of business in India, nor does it directly or indirectly carry on its business in India. The Appellant places reliance on Para 36 of the OECD Commentary2017 to Article 5 (page 38 of CLC), which specifically deals with leasing of equipment: "...If an enterprise of a Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appiji BV (supra), wherein it was held that: "As per article 5 of the India-Netherlands Tax Treaty, a PE means a fixed place of business through which business of an enterprise is wholly or partly carried out. Mere provision of a dredger on dry lease basis for carrying out dredging activity in India does not result in the assessee having a PE." The Appellant also relies upon the ruling of the Delhi ITAT in the case of Maersk A/s (86 taxmann.com 77), wherein it was held as follows: "15. ............In our conclusion, firstly, the hiring of AHTS vessel of assessee by ONGC for its operation in India does not qualify to make vessel a place of management for the assessee in India; secondly, the crew and master of the vessel do not belong to the assessee and lastly, in any case master and crew of the vessel did not have power to make significant decision over the assessee, because they are under control and directive of ONGC as per the agreement. Even under Article 5(2)(j) which reads as under:- "An installation or structure used for the exploration of natural resources provided that the activities are carried on for a period or period's of 183 days or more in any twelve month ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and Macao only list "dredging projects" as examples of projects that constitute a PE. Article 5(3) of Belgium-Hong Kong DTAA reads as follows: "An enterprise shall be deemed to have a permanent establishment in a contracting party and to carry on business through that permanent establishment if: (a) It carries on supervisory activities in that Party for more than 6 months in any 12 month period in connection with a building site, or construction, assembly, installation, or dredging project which is being undertaken in that Party; or" (Emphasis supplied) It can be observed that the treaty with Hong Kong and Macao specifically includes dredging projects, but the same has been excluded in case of treaty with India, thus highlighting that there was conscious effort and negotiation behind framing the same clause in two different ways. As the DTAA with India does not include dredging projects, thus dredging project of ISDPL cannot constitute a PE for the Appellant in India. b) Dependent Agent PE The term "dependent agent" is a concept for determining whether a non-resident has a PE in a country by carrying on business through a person who acts on behalf of the non-resident. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed enterprise, that also constitutes a PE, has been remunerated on an arm's length basis taking into account all the risk-taking functions of the enterprise. In such cases nothing further would be left to be attributed to the PE." (Emphasis supplied) Thus, the Hon'ble Apex Court has equated the attribution of profit to a PE to determination of arm's length price for the transaction. In the Appellant's case, the AO referred the matter to the TPO on May 26, 2016 for determining arm's length price of all international transactions reported in Form 3CEB, which is letting out of dredgers on hire. The TPO, after analyzing the FAR analysis of the Appellant vis-à-vis its AE - ISDPL, passed the transfer pricing order on October 31, 2017, upholding that the international transaction of the Appellant was at arm's length. Thus, respectfully following the ruling of the Hon'ble Apex Court, the Appellant prays that no further attribution can be made the Appellant as the international transaction has been held to be at arm's length. The Appellant submits that section 92CA(4) of the Act mandates the AO to complete the assessment proceedings in conformity with the order issued by the TPO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is eight and a half months after the survey was conducted. Thus, the survey statements were very much available with the AO while determining the FAR and arm's length of the Appellant's international transaction. Thus, the AO is not justified in re-determining the FAR analysis based on the survey statements, which was already available with the Department at the time of TP scrutiny and no adjustment was proposed by the TPO to the Appellant's international transaction. Without prejudice to the above, the AO failed to conduct analysis of independent parties to determine the arm's length attribution as required under the DTAA, and attributed to the appellant, 25 percent of the Appellant's income to the PE on an adhoc basis. 6. Reliance on information collected during survey (Ground 2.3): The AO has placed extensive reliance on the information collected and statements recorded during the survey conducted in the premises of ISDPL and concluded that Appellant has PE in India. The statement recorded during the survey formed the backbone of the entire assessment. The Appellant submits that the same are not admissible evidences and thus, dependence on documents which are non-corroborati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii. Statement of Filip Dezulter; iii. Statement of Peyron Amedeo iv. Question Nos. 5 & 7 etc; v. Organisational chart; vi. TDS survey on ISDPL date 17.02.2017. The ld.DR relied upon the orders of the ld.DRP and ld. AO and contended that there is a continuous organic relationship between assessee and ISDPL. 6. We have heard the rival submissions, perused the paper books and case laws and gone through the relevant provisions of the DTAA between India-Belgium and Income tax Act, 1961. Firstly, we will curl out the relevant paras of the judgments referred by the ld.AR of the assessee. 7. The Co-ordinate bench in the case of M/s International Seaport Dredging Ltd. Vs The DCIT [ITA No.416/Mds/2015 for AY 2010-11 dated 22.07.2016 held as under: ''4.1 The learned Assessing Officer in its draft assessment order has observed that the assessee has made payment of 50, 80, 13, 185/- to M/s. Societe De Dragage International, France for bare boat charter hire rental charges for dredger antigoon, relevant to Dhamra Project without deducting TDS. On query, why the provisions of TDS will not be applicable, the assessee explained that protocol 7 of the treaty between India and France re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle means payment of any kind received as a consideration for the use of, or the right to use industrial, commercial, or scientific equipment. These payments are in the nature of royalty. Further, in the case of India-Sweden treaty, there was no specific restrictive clause excluding the equipment hire charges from the scope of royalty. Therefore, as per treaty charging provision of the India-France treaty, the hire charges of the above equipment should be considered as Royalty payments "for the use of or the right to use of industrial, commercial or scientific equipment". Hence, the assessee's bareboat hire charges clearly forms royalty u/s. 9(1)(vi) of the Income Tax Act and accordingly the payments come under the purview of Section 195. 3.2.7 Further, as observed by the Assessing Officer, the protocol of the treaty is not categorically speaking about scope for restriction only. It also tells about adoption of lower rate in case of use of equipment and payments made thereof. Therefore, in the presence of existence of charging article already available in the India-France treaty as per article 13(5), assessee can adopt for tower rate of deduction. In the instant case, assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber of OECD, then for the purpose of taxation in India, the scope of taxation shall be restricted to such treaty signed after 01.09.1989 if its terms are beneficial to the assessee and as rightly pointed out by the assessee India has signed a treaty with Sweden subsequently wherein payments made for hiring equipments are excluded from taxing in the contracting State. Therefore, as claimed by the assessee income arising out of the payment made by the assessee towards hiring equipments will not be taxable in India, accordingly assessee will not be liable for deducting tax at source. Needless to mention that protocol will form an integral part of the convention and it has to be duly respected as the same is signed between two countries under agreement for avoidance of double taxation. Therefore, the assessee succeeds in its appeal on this issue'. 8. Similarly, Hon'ble Jurisdictional High Court in the case of CIT Vs Van Oord ACZ Equipment BV held as under: ''34. While considering the DTAA that is applicable to the present case and the DTAA that was considered in Poompuhar Shipping Corpn. Ltd's. case (supra), referred supra, we find that the amendment to Clause 4 of Article 12 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Maersk 86 Taxmann.com 77 (Delhi) as under: ''11. We have heard rival submissions and perused the relevant. finding given in the impugned order as well as material placed. on record. The main issue here in this case is, whether the revenue receipts from charterer hire of AHTS for exploration and exploitation by ONGC in offshore areas of operation in India would be taxable in the hands of the assessee in India or not under Article 7 of the Treaty by holding that the assessee has a PE in India within the meaning of Article 5(2) of India Dutch and India UK DTAA. The relevant facts have already been discussed above. However to appreciate the nature of agreement between the assessee-company and ONGC some important clauses needs to be highlighted. Under the terms of the agreement, the charterer, i.e. ONGC wants to hire AHTS vessel for its operation of exploration and exploitation of oil and natural gas in the offshore areas of operation in India. The contractor/owner, i.e., the assessee-company is the owner of the AHTS vessel, that is, the assessee-company has agreed to provide to supply the vessel along with crew and master and operate and maintain the AHTS on the terms and conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the direction of the charterer. The owner shall ensure the vessel is available for operations as per the directions of the charter. ♦ Clause 6.7 The members of the crew shall maneuver the vessel and operate the vessel for cariying out the charters operation. The Master and Crew, although appointed by the contractor, shall be under the orders and directions of the Charterer (i.e. ONGC) as regard deployment of the vessel and carrying out Charterer's operations. The charterer will furnish to the Master all instructions and sailing directions. The vessel thus will be in control of the charterer. ♦ Clause 6.8 contains assurance from the Owner, i.e. assessee that the vessel shall carry out functions and duties in accordance with the Charterer's directives, ♦ Para 12 sets out the obligations of the charterer (i.e. ONGC) ♦ Clause 12.1 requires to provide free of cost following to the Owner; supply of all lubricants, greases. However, in the event of non-availability of any lubricants/grease, the Owner could procure the same on reimbursable basis at actual cost; and supply of fuels and water required by the vessel. However the Charterer will recov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services in India, stands buttressed or substantiated by any material on record. It has also failed to prove that it was MCL which was responsible for the entire operations of the PSV. It has not been shown that MCL was having right on the work produced and bearing the relative responsibility and risks of the services of the expatriate personnel........" 13. Further we find that the issue, whether the employee belong to assessee-company or not has also been settled by the Hon'ble Uttarakhand High Court vide judgment and order dated 23.11.2012 in ITA No. 28/Del/2011, wherein the revenue has challenged the aforesaid finding and order of the Tribunal and the said appeal of the revenue has been dismissed by the Hon'ble High Court. In view of this fact, the arguments of the Id. DR that employees belong to the assessee stands negated by the Tribunal in assessee's own case and also affirmed by the Hon'ble High Court. Whence the employees do not belong to the assessee; nor are they within the direction and control of the assessee, then it cannot be reckoned that these employees constitute a PE in terms of either 'Service PE' or the assessee is rendering its activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar property, are let or leased to third parties through a fixed place of business maintained by an enterprise of a Contracting State in the other State, this activity will, in general, render the place of business a permanent establishment. The same applies if capital is made available through a fixed place of business. If an enterprise of State lets or leases facilities, ICS equipment, building or intangible property, as such, will not constitute a permanent establishment of the lessor provided the contract is limited to the mere leasing of the ICS equipment, etc. This remains the case even when, for example. the lessor supplies personnel after installation to operole the equipment provided that their responsibility is limited solely to the operation or maintenance of the ICS equipment under the direction, responsibility and control of lessee. If the personnel have wider responsibilities, for example participation in the decisions regarding the work for which the equipment is used, or if they operate, service, inspect and maintain the equipment under the responsibility and control of the lessor, the property, the activity of the lessor, the activity of the lessor may go beyo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period or period's of 183 days or more in any twelve month period." It cannot he held that assessee has some kind of. PB, because the assessee vessel cannot be reckoned as installation or structure used for exploration and exploitation of national resources as it is being done by the ONGC. The ONGC has only hired the vessel from assessee for carrying out exploration of oil and natural gases and therefore, under this clause also it cannot be held that the assessee's vessel/ AHTS constitute a PE in India. Thus, in our view there exists no PE of assessee in India and therefore, the revenue from ONGC cannot be taxed in India in terms of Article 7 of DTAA. On this ground alone the assessee gets relief from taxation. 11. We find that on facts the Appellant merely supplies dredger to ISDPL on hire on bareboat basis. As evident from Article 12 of India-Netherlands DTAA that term 'Royalty' does not include payments for the use or right to use industrial, commercial or scientific equipment, as mentioned by the AO in the SCN. The judgment in the case of Van Oord ACZ Equipment BV and orders of the Tribunal in the case of DDIT v. Nederlandsche Overzee Baggermaatsehappiji BV (2010) 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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