TMI Blog2007 (5) TMI 260X X X X Extracts X X X X X X X X Extracts X X X X ..... adjudication. ITA Nos. 5883 5885/Del/1998 and ITA Nos. 3942 to 3945/Del/1999: 3. The facts and circumstances under which these appeals arise are as follows: The assessee is a company incorporated as per the laws ofJapanand a tax resident therein. It is a trading house and had established a liaison office (hereinafter referred to as "LO") inIndiaatNew Delhisince the year 1956, and has sub-LOs at Mumbai, Chennai,BangaloreandCalcutta. The LO inNew Delhiwas established with the approval of the Reserve Bank ofIndia(hereinafter referred to as "RBI") for facilitating imports fromJapanand exports fromIndia. After the introduction of Foreign Exchange Regulation Act, 1973 (hereinafter referred to as "FERA"), the LO was granted an extension of license by the RBI, for continuing the activities, vide its letter dt.17th Feb., 1976, for the limited purpose of carrying liaison activities subject, inter alia, to the following conditions: - the entire expenses of the LO will be met exclusively out of the remittances received from abroad; - no commission/fee will be charged or any other remuneration received for the liaison activities to be rendered by the Indian offices; - excepting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur project with the Karnataka Power Corporation, -BasinBridgeProject, - Paint and Assembly shop for Maruti Udyog Ltd. (hereinafter called "MUL"). In the present appeals, we will be more concerned with the setting up of the project office vis-a-vis contracts with MUL. The approval for establishing a project office in connection with MUL was granted by the RBI vide its approval dt.15th Sept., 1992. The approval was granted under s. 29(1)(a) of the FERA, 1973 for the purpose of undertaking a contract with MUL for designing, engineering, supply and installation for YE2 car project. YE2 car project of MUL is an expansion of car production between 70,000 to 90,000 cars (of capacity 1,000 CC and 1,300 CC) per year. 8. MUL had issued tenders inviting bids for purchase of different machinery and equipments in connection with modernization and expansion of its car assembly operations. In this connection MUL invited global tenders. The LO of the assessee inIndiawas communicating publication of such global tenders and the head office would make a bid for supply of equipments. The head office through its personnel fromJapanwould visitIndiaand after discussion with MUL conclude contracts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract had no relationship with the other. Though they were in respect of one entity viz., MUL, the period for which supervisory activities were carried out was less than 180 days for each contract and therefore there was no PE of assessee inIndiavis-a-vis the rendering of supervisory services (i.e., supervisory PE) to MUL under the POs referred to above. The further stand of the assessee was that, for the projects being executed by the company with Karnataka Power Corporation Ltd. (Raichur Project) and with Tamil Nadu Electricity Board (Basin Bridge Project) there was in existence a PE, which is essentially because of the nature of these contracts. The income under these projects is taxed as per the provisions of s. 44BBB of the Income-tax Act, 1961. The assessee explained that however, the contracts with MUL are not only independent in relation to each other on an individual basis but also do not in any manner hold association with the above projects, i.e., Raichur and TNEB projects. 13. In this connection the assessee also invited attention to the available commentaries on the definition and establishing of PE under the Agreements for Avoidance of Double Taxation falling unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading of art. 12(2) would show that FTS is chargeable to tax at 20 per cent of the gross FTS. However, under art. 12(5) if the recipient of FTS has a PE inIndiaand the contract in respect of which FTS paid is effectively connected with such PE, then the provisions of art. 7 or 14 of DTAA shall apply. Article 7 of DTAA reads as follows: "i. The profits of an enterprise of aContractingStateshall be taxable only in thatContractingStateunless the enterprise carries on business in the otherContractingStatethrough a PE situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that otherContractingStatebut only so much of them as is directly or indirectly attributable to that PE. 2. Subject to the provisions of para 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a PE situated therein, there shall in each Contracting State be attributed to that PE the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g) a warehouse in relation to a person providing storage facilities for others; (h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; (i) a store or other sales outlet; and (j) an installation or structure used for the exploration of natural resources, but only if so used for a period of more than six months, 3........ 4. An enterprise shall be deemed to have a PE in a Contracting State and to carryon business through that PE if it carries on supervisory activities in that Contracting State for more than six months in connection with a building site or construction, installation or assembly project which is being undertaken in that Contracting State. 5..... 6. Notwithstanding the provisions of the preceding paras of this article, the term "permanent establishment" shall be deemed not to includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived by the assessee at 30 per cent as per provisions of s. 115A of the Act. 21. The facts in asst. yr. 1995-96 are substantially the same. The AO in this year assigned two more reasons for rejecting the plea of the assessee that it did not have a PE inIndiavis-a-vis the supervisory services rendered to MUL. The AO has referred to the fact that in the last two decades the assessee has been offering substantial income to tax. The LO cannot therefore be called a LO but was in the nature of a PE. The AO has then referred to the fact that in a letter written by the LO to MUL, they have agreed to MUL deducting tax at 30.25 per cent on supervision fee paid to the assessee. This letter, according to the AO, was a clear indicator of the fact that the LO had authority to take decision and therefore was a PE of the assessee inIndia. Consequently, the AO held that the rate of tax @ 30 per cent on the fees received by assessee for supervisory services rendered was proper. 22. The facts for asst. yr. 1996-97 are identical and the AO has referred to the assessments for asst. yrs. 1994-95 and 1995-96 and concluded that the supervision fee received for the said assessment year is liable to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en India and Japan in support of his claim that the 10 contracts cannot be connected with the PE relating to the MUL project. It is true that the DTAA between India and Japan has adopted the OECD Convention and have decided against adopting the 'Force of attraction of the PE', but in the instant case, the facts and also the specific provisions of the DTAA clearly establish that the 10 contracts with MUL were directly or indirectly attributable to the PE as reflected in the projects undertaken relating to the assembly line, paint shop and also for the YE2 car project. The contracts even though have been split up, but were related to the assembly line, the paint shop and the YE2 car project and as they were directly or indirectly attributable to these projects, the profits are taxable inIndia. Therefore, the findings of the AO are upheld for both the years and no interference is called for.' The facts relating to PE of supervision fees received from M/s MUL in the year under reference are identical as discussed in the assessment orders for the asst. yrs. 1994-95 and 1995-96. So, following the reasoning advanced in the said orders which was subsequently upheld by learned CIT(A)-XIV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that under the latter, the rights of primary taxation by the State in which there is a PE were much wider and also go beyond the scope as envisaged in the OECD Model. Referring to the commentary by Klaus Vogel: Double Taxation Conventions, 3rd edition (published by Kluwer Law International) and specifically to p. 402, it was pointed out that the India Japan Treaty, based on the OECD Model allows the State of the PE to tax business profits, but only so much of them as is attributable to that PE. The Model Convention has thus decided against adopting 'force of attraction of the PE' i.e. against the principle that, where there is a PE, the State of the PE should be allowed to tax all income derived by the enterprise from such source in that State irrespective of whether or not such income is economically connected with the PE. In contrast it was pointed out that UN Model extends primary taxation by the State of the PE i.e. the profits that it allows to be attributed to the PE are not strictly limited to those resulting from the PE's own activity. Rather, they include those from direct transactions effected by the head office, though in the State ofPEor those from transactions effecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause facts in the assessee's case were different. Thereafter, the CIT(A) narrated the facts in the case of the assessee that the assessee was showing substantial income attributable to the LOs. According to CIT(A), the assessee was not only maintaining LOs inIndiabut was carrying out trading, commercial or industrial activity and had also started executing purchase with Maruti Udyog Ltd., Karnataka Power Corpn. and with Tamil Nadu Electricity Board. That the assessee also obtained a no objection certificate from the RBI in 1992 itself for designing, engineering, supply and installation for YE2 car project for MUL. That the supervision fees were related to the YE2 car project and was in respect of the said project purchases orders. That the Las were no longer collecting information or carrying on an activity of a preparatory or auxiliary nature but were also actively associated with the project. That the very fact that the Las had communicated to MUL regarding the rate of deduction of tax in respect of the contracts also indicated the nature of their involvement with these projects. Keeping in view the above facts, the CIT(A) held that the decision of the Tribunal in the case of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at PE would be enough to say that there was a PE for all activities, being against the principle of "No Force of Attraction" which is advocated by the OECD Model and which has been adopted in the Indo-Japan DTAA, the CIT(A) held that the period spent on all activities of the assessee have to be aggregated because all contracts taken together form a coherent whole commercially and geographically. 29. For all the above reasons the CIT(A) upheld the order of AO for asst. yrs. 1994-95 and 1995-96. 30. In appeals for asst. yrs. 1992-93, 1993-94 and 1996-97, the CIT(A) had assigned identical reasons for upholding the order of the AO. He has also referred to several rulings by theAAR(Authority for Advance Rulings). Aggrieved by the orders of CIT(A), the assessee has preferred these appeals. 31. In the grounds of appeal the assessee has challenged the findings of the Revenue authorities that the assessee had a PE inIndiain respect of contracts executed for MUL. Apart from the original grounds the assessee has also raised the following additional ground which has already been admitted for adjudication. "Whether on the facts and in the circumstances of the case and in law, the superv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) regarding the very chargeability to tax of the receipts in the form of supervision fee on the ground that it forms part of the contract for supply of equipments and since the ownership of the equipments was transferred by sale to MUL outside the Indian territory i.e. at Japan, no income can be said to have accrued to the assessee, we have to, at the outset, point out that the said issue was not raised in the proceedings before the Revenue authorities. Even before the Tribunal there is neither original ground of appeal nor any request for raising any additional ground to the above effect. Nevertheless, the learned counsel for the assessee sought to raise this new plea in the written submissions dt.29th Aug., 2006. His submission was that notwithstanding the fact that the assessee declared supervision fee as part of its total income in the return of income, yet it was in law, entitled to take such plea because any income which is not taxable under the provisions of law, shall not become taxable merely because the assessee declared it as part of its taxable income in the return of income. The learned counsel for the assessee in this regard placed reliance on the decision of the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract of supply of equipment, they can at best be taxed only in the manner in which the income from supply of equipments is taxed. We may at this juncture recall the historical background of this case whereby the dispute between the assessee and the Revenue regarding income from supply of equipment was taxed pursuant to a compromise formula worked out at the intervention of the Court in a pending litigation, whereby it was agreed vide letter dt.19th March, 1980of the ITO, that 1/3rd of the profits arising out of the imports fromJapantoIndiawill be offered to tax inIndia. The profits for this purpose were to be worked out on the basis of the turnover inIndiamultiplied by the net profit rate of the world income. This arrangement is stated to be followed even today. The learned counsel for assessee submitted that at best it could not be taxed more than the income arrived at by application of the above formula in respect of the supervision fee received by the assessee. The learned counsel for assessee also submitted that at this stage the assessee does not want to take a stand that the income from supply of equipments cannot be taxed as the supply of equipments was completed outside I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k on his stand at this belated stage of the proceedings. That the assessee is guilty of laches on its part. The counsel for the Revenue in this regard placed reliance on the following decisions: (a) CIT vs. Ram Kumar Agarwal Bros. (1994) 116 CTR (SC) 98 : (1994) 205 ITR 251 (SC); (b) Indian Steel Wire Products Ltd. vs. CIT (1994) 121 CTR (Cal) 335 : (1994) 208 ITR 740 (Cal); (c) Sterling Machine Tools vs. CIT (1980) 123 ITR 181 (All); (d) Banta Singh Kartar Singh vs. CIT (1980) 125 ITR 239 (P H); (e) Jeevat Lal Pratapshri vs. CIT (1967) 65 ITR 261 (Bom); (f) Sahu Co. vs. CIT (1981) 24 CTR (Ori) 70 : (1981) 132 ITR 122 (Ori). Reference was also made to the provisions of s. 115 of the Evidence Act regarding the principle of estoppel. It was submitted that the assessee cannot blow hot and cold and should not be allowed to take up inconsistent position. Reference was made to the following decisions in this regard: (i) Deoniti Prasad Singh vs. CIT (1947) 15 ITR 165 (Pat); (ii) CT Narayanan Chettiar vs. CIT (1966) 60 ITR 690 (Mad); (iii) Baijnath Brijmohan Sons (P) Ltd. vs. CIT (1986) 52 CTR (Bom) 266 : (1986) 161 ITR 234 (Bom); (iv) CIT vs. Army Navy Stores ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ground that facts necessary for adjudication of the additional ground of appeal are not available on record and new facts cannot be raised before the Tribunal for the first time. 41. On the argument of the learned counsel for the assessee that the AO in the assessment order has held that supervision fee is integral part of contract of supply of equipment, the learned counsel for the Revenue pointed out that there is no such finding by the AO. He pointed out that the AO has only held that the project office and receipt of FTS were connected in the sense the project office was executing the supervision work inIndia. These observations were rendered in the context of the FTS being connected with PE so as to attract the provisions of art. 12(5) of the DTAA withJapan, so as to tax the FTS at 30 per cent. It was therefore submitted by the learned counsel for Revenue that the Revenue has never proceeded on the footing that supervision fee is an integral part of sale consideration for supply of equipments. 42. In reply, the learned counsel for assessee submitted that while admitting the additional ground, the Tribunal has considered all aspects and therefore adjudication of the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he limited contention of the assessee was that since the 10 contracts were independent and did not complete each other, the existence of the PE has to be judged in the light of art. 5(4) of Indo-Japan DTAA wherein there was a requirement that supervisory activities shall be done for 180 days (more than 6 months) to consider existence of a PE in respect of supervisory services, and that the period of supervision in India should not be computed by aggregating the period in all the 10 contracts and has to be counted independently. Even before the CIT(A), the very same arguments were reiterated. 44. It is for the first time the issue whether the supervision fee was part of the contract for supply of equipments or not has been raised in the form of additional grounds of appeal. By a letter dt.24th April, 2003, the assessee sought to raise this issue in the form of additional grounds of appeal. There were no reasons assigned for raising this additional ground for the first time before the Tribunal. By submission dt. 6th May, 2003, the assessee has explained that if it is found that the assessee has a PE in India for supervisory services rendered to MUL in connection with supply of equi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . According to the assessee, each contract for supply of equipment was separate and therefore existence of supervisory PE has to be judged by considering each contract for supply of equipment separately and therefore even supervision period for each contract has to be determined separately without aggregating the supervisory period for all the contracts. It was in this context that the AO made the following observations: "A perusal of the relevant purchase orders under which the assessee was to review the technical/supervision fee reveals two things-(i) the supervision of installation contract is closely related to the supply of material and equipments contracts in most of the cases. Both these aspects form a single contract, (ii) most of these project purchase orders reveal that the supervision fee is determined on the basis of the number of man days involved in the supervision of installation and the total number of man days for which the assessee received the supervision fee in the relevant previous year is more than 180 days (though it is not necessary to examine this aspect, once the enterprise is found to have an office in India.)" 46. Firstly, no conscious decision has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion of law arising from the facts which are on record in the assessment proceedings such question should be allowed to be raised; (c) that the proceedings before the tax authorities are for correctly assessing the tax liability of an assessee in accordance with law. 47. The learned counsel for the assessee relies on the circumstance that the Tribunal has admitted the additional ground of appeal for adjudication and therefore the same must be adjudicated irrespective of facts being available on record. This submission, in our view, cannot be accepted. Merely because the Tribunal has admitted additional grounds, it does not mean that stand taken therein is accepted by the Tribunal. The acceptability of the same is a matter for determination by the Tribunal at the time of final hearing. The Hon'ble Delhi High Court in the case of Maruti Udyog vs. ITAT (2001) 169 CTR (Del) 366 : (2001) 252 ITR 482 (Del) has taken the above view. The decisions relied upon by the learned counsel for the Revenue, clearly support the stand of the Revenue on this issue. We are of the view that the sum received by the assessee from MUL and offered to tax by the assessee as supervision fee (fees for tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. Sec. 9(1)(vii)(b) lays down that income by way of fees for technical services payable by a person resident inIndiato a nonresident will be deemed to have accrued inIndia. Only exception in such case will be a case where the payment is for services utilized in a business carried on outsideIndiaor for the purpose of making of earning any income from a source outsideIndia. The supervision fee earned by the assessee in the present case is from MUL (a person resident inIndia) and not falling within the exception. They are therefore within the charging section, viz., s. 4 of the Act. The charge to tax of an income of a non-resident in the manner aforesaid is generally referred to as "the source" rule. 50. Sec. 90 of the Act provides that Central Government may enter into an agreement with the Government of any country outside India for avoidance of double taxation of income under the Act and under the corresponding law in force in that country. Sec. 90(2) provides that where such agreement exists with any country outside India, then in relation to an assessee to whom such agreement applies, the provisions of the Act shall apply only to the extent they are more beneficial to that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (5) is being reproduced for the sake of clarity. Article 12(5) of Indo-Japan DTAA: "The provisions of paras 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a PE situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such PE or fixed base. In such case, the provisions of art. 7 or art. 14, as the case may be, shall apply." The requirements for applicability of art. 12(5) are the following: (1) The beneficial owner of the FTS being a resident ofJapanshould carryon business inIndiain which the FTS arises through a PE. (2) The contract in respect of which FTS is paid should be effectively connected with such PE. If the above two conditions are satisfied, then the provisions of art. 7 will apply and the FTS has to be brought to tax in accordance with art. 7 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the following formula: "One-third (33-1/3 per cent) of the profits arising out of the imports from Japan to India worked out on the basis of the turnover in India, multiplied by the net profit rate of the world income". The assessee has been paying taxes on supply of equipments as per the agreed formula. In arriving at the settlement, neither the tax Department nor the assessee had raised the issue of existence of a PE. The PE concept was not very much in vogue inIndiaat that time. The Indo-Japan DTAA came into force much later i.e. on1st March, 1990only. With effect from15th Sept., 1992i.e., after setting up of a PE in respect of supply of equipments etc., the position stood altered vis-a-vis the supply of equipments etc., to MUL for its YE2 car project. 57. The supervision fee in dispute in all these appeals relates to fees received for supervision of installation of equipments supplied to MUL some of which relate to YE2 car project. Can fee received under a contract for rendering supervisory services to MUL after 15th Sept., 1992 be considered as a contract which could be said to be a contract which is effectively connected with the PE? 59. Article 12(5) of the DTAA be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase orders are by MUL: Asst. yr. 1992-93: ------------------------------------------------------------- Sl. Date Particulars Value of Amount of Value of No. supplies supervision instll. fee Commn. ------------------------------------------------------------- 1. 12.4.90 MUL:PE:310:99 3,13,10,000 16,90,000 - ------------------------------------------------------------- Nature of the Contract and Mandays: 1. For supply, supervision, installation and commissioning of "on line NC charging equipment." 2. Clause 3 of the agreement provides that income-tax on supervisory fee will be paid by the assessee and MUL will deduct tax at source on such fee. 3. Supervision fee to be paid on commissioning and trial run. 4. Airfare for supervisor to oversee erection of machine to be provided by MUL. 5. One supervisor to be deputed to supervise for 20 days. 6. Contract was entered into directly between the assessee atJapanand MUL. 7. Machine for use in assembly line of MUL. 8. Hotel and local transport of supervisors to be borne by MUL. --------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te. (d) No. of supervisors: 2 ------------------------------------------------------------- Sl. Date Particulars Value of Amount of Value of No. supplies supervision instll. fee Commn. ------------------------------------------------------------- 5. 1-1-92 MUL:PE:AS:460:184 31,80,900 3,60,000 - ------------------------------------------------------------- Nature of the Contract and Mandays: (a) Supply, supervision for installation and commissioning of one number side slip tester equipment; (b) All other terms identical as above; (c) 1 supervisor for 4 days. Asst. yr. 1996-97 ------------------------------------------------------------- Sl. Date Particulars Value of Amount of Value of No. supplies supervision instll. fee Commn. ------------------------------------------------------------- 1. 1-7-93 MUL:PE:AS:NYE-2-T 13,07,78,500 7,70,00,000 - Line 3:613:97:1 ------------------------------------------------------------- Nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fee Commn. ------------------------------------------------------------- 1. 2-5-92 MUL:PE:WS/2001 3,39,64,190 15,40,000 - ------------------------------------------------------------- Nature of the Contract and Mandays: (a) Supply of timer contractor units and welding parameters measuring equipments for the new weld shop against global tender; (b) Deputation of one supervisor for 15 days; (c) All other terms same as above. ------------------------------------------------------------- Sl. Date Particulars Value of Amount of Value of No. supplies supervision instll. fee Commn. ------------------------------------------------------------- 2. 26-6-92 MUL:PE:PR/30/03/11 7,20,57,018 36,26,000 - ------------------------------------------------------------- Nature of the Contract and Mandays: (a) CNC vertical boring and milling machine; (b) 3 supervisors for 14 days; (c) All other terms same as above. ------------------------------------------------------------- Sl. Date Particulars Value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 - AC/PO-1 ------------------------------------------------------------- Nature of the Contract and Mandays: (a) Supply erection of AIC system for mass emission laboratory. (b) All other terms same as above. (c) 4 Supervisors to be deputed. (d) 20 days of commencement to be completed. ------------------------------------------------------------- Sl. Date Particulars Value of Amount of Value of No. supplies supervision instll. fee Commn. ------------------------------------------------------------- 7. 26-3-93 MUL/P/Maint/101 - - - ------------------------------------------------------------- Nature of the Contract and Mandays: (a) It is a maintenance agreement. It refers to several old supply and erection of machineries made by the assessee. (b) Hotel, air ticket of supervisors to be borne by MUL. (c) Time schedule not given. ------------------------------------------------------------- Sl. Date Particulars Value of Amount of Value of No. supplies supervision i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PE:WS/2009 - 11,00,000 - ------------------------------------------------------------- Nature of the Contract and Mandays: (1) Supply and supervision of installation and comissioning of 6 sets of Hemming Press and 6 sets of Hemming dies for YE2 model. (d) All other terms same as above. (e) 3 Supervisors to be deputed fromJapan. (f) 70 Mandays time to complete erection and supervision. ------------------------------------------------------------- Sl. Date Particulars Value of Amount of Value of No. supplies supervision instll. fee Commn. ------------------------------------------------------------- 3. 25-6-93 MUL:PE/A9YE2(EA)/ 20,77,800 19,82,000 - 485/957 ------------------------------------------------------------- Nature of the Contract and Mandays: (a) Repair of damaged firing text bench. (b) 1 Supervisor to repair to be deputed. (c) 3 Mandays time to complete. (d) Other terms same as above. ------------------------------------------------------------- Sl. Date Particulars Value of Amount of Value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 544 ------------------------------------------------------------- Nature of Contract and Mandays: (a) Amendment to purchase order for engine assembly and testing equipment for assembly shop expansion project. (b) 154 mandays/11 supervisors (c) All other terms same as above. ------------------------------------------------------------- Sl. Date Particulars Value of Amount of Value of No. supplies supervision instll. fee Commn. ------------------------------------------------------------- 8. 24-2-93 MUL/PE/MC/93/128 36,14,28,200 1,71,88,000 - ------------------------------------------------------------- Nature of Contract and Mandays: (a) Purchase order for crankshaft machining line with tolling and spare parts for expansion project. (b) All other terms similar. (c) 124 mandays for supervision. (d) Maximum 9 Nos. technicians to supervise. ------------------------------------------------------------- Sl. Date Particulars Value of Amount of Value of No. supplies supervision instll. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upply, installation, assembly conveyor line No.4 printed body storage conveyor, headlight tester equipment On line A/c gas charging equipment. (b) 2 Supervisors (c) 10 days --------------------------------------------------------------- Sl. Date Particulars Value of Amount of Value of No. supplies supervision instll. fee Commn. --------------------------------------------------------------- 13. 13-6-92 MUL/PE/AS/YE2(EA)/ 2,22,98,400 12,00,000 - MOD/547/369 --------------------------------------------------------------- Mandays and Nature of Contract not available. --------------------------------------------------------------- Sl. Date Particulars Value of Amount of Value of No. supplies supervision instll. fee Commn. --------------------------------------------------------------- 14. 16-3-93 MUL/PE/201/IND/42 - 6,71,60,000 2,06,20,000 --------------------------------------------------------------- Nature of Contract a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der for automatic painting machine for prime coat booth of new paint shop. (b) 92 mandays. (c) No. of persons not to exceed 3. -------------------------------------------------------------- Sl. Date Particulars Value of Amount of Value of No. supplies supervision instll. fee Commn. -------------------------------------------------------------- 19. 11-3-94 MUL/PE/AS/MP-1 - 93,22,500 17,46,000 FTB/726/MOD-16 -------------------------------------------------------------- 20 23-3-94 MUL/PE/AS/NYE2/ - 3,37,500 11,15,000 IMP/SHIFT/699/ MOD5/1399 -------------------------------------------------------------- 21 16-9-94 MUL/PE/WDE/213/ - 1,74,00,000 9,81,000 06/MOD-30/1/MOD/98 -------------------------------------------------------------- 22. 16-9-94 MUL/PE/36/MOD-l00 - 60,00,000 5,00,000 -------------------------------------------------------------- 23. - MUL/P/Maint/04 - 33,80,000 - ------------------------------------------------------------ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he various contracts, which we have already set out above would clearly show that supervision services were treated distinctly. Moreover, the assessee has been offering income from supply of equipment and installation on agreed formula as per settlement with the Revenue and after the MUL project office became functional has been offering income attributable to project office. 64. The Revenue authorities, as already observed, have not considered as to whether there was effective connection between the contract in respect of which supervision fee is received and the PE inIndia, contemplated by art. 12(5) of the DTAA. The Revenue authorities have presumed existence of such effective connection. The Revenue authorities have not examined the various purchase orders. They have proceeded on the basis that supervision fee is closely related to the supply of material and equipment contract and that they spring from the same contract. They have proceeded on the basis that once a PE is found to be in existence inIndiathen all incomes of the assessee from MUL have to be brought to tax. They have proceeded as if the force of attraction principle applies without appreciating the conditions con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvisory services rendered would be satisfied and in that case the supervision fee would stand connected with the PE attracting the provisions of art. 12(5) of the DTAA. 68. The arguments of the learned counsel for assessee on the above conclusion of the Revenue authorities were as follows. That in respect of supervisory services rendered the existence of PE inIndiahad to be judged in the light of the provisions of art. 5(4) of the DTAA. The supervisory activities if carried on for more than 6 months inIndiawould constitute PE of the assessee inIndia. The learned counsel for the assessee submitted that the Revenue authorities erroneously proceeded on the premise that the period of 6 months had to be counted with reference to the enterprise. According to him since the contracts under which the supervisory activities were to be carried out were separate the period of 6 months had to be reckoned with reference to each contract and ought not to be aggregated. In this regard he highlighted the fact that each contract was for a portion of the total project of MUL and had been awarded to the assessee separately and independently pursuant to global tenders. He submitted that commonality o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Mitsui Co. and in the case of Motorola Co. vs. Dy. CIT (2005) 96 TTJ (Del)(SB) 1 : (2005) 95 ITD 269 (Del)(SB) wherein it has been held that as per RBI guidelines/regulations LOs are not permitted to undertake any business activities for the foreign enterprise and that such activities are closely monitored by the RBI. 71. In this regard, the learned counsel for the assessee submitted that the LO has been submitting activity report with RBI which has been accepted by the RBI without any adverse findings. He also submitted that the LO has been offering income on sale of equipments to tax on the basis of agreed formula and therefore there was not a PE inIndia. He also submitted that other reasons assigned by the AO for construing the LO as a PE cannot be sustained in law. 72. The learned counsel for the Revenue submitted as follows. That right from asst. yr. 1967-68 income from LO is being shown in the returns filed by the assessee and the same has been brought to tax by the Revenue. From asst. yrs. 1994-95 and 1995-96 the assessee had shown income from PE in India that the LO has fixed place of business at third floor, Antariksh Bhavan, K.G. Marg, New Delhi. The L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, geographically, commercially and technically formed a coherent whole and therefore the period under each contract had to be aggregated to see if there was a PE in existence under art. 5(4) of the DTAA. 74. The learned counsel for the assessee submitted that the LO merely acted as a communication channel between Indian importers and the appellant company, who sell their goods and commodities on a principal-to-principal basis to such Indian importers. That the LO had been regularly filing its activity report with the RBI and has always been in compliance with the aforesaid conditions imposed by the RBI and activity reports were being submitted by the LO to RBI regularly with a certificate that the activities of the LO are confined only to the terms and conditions of approval of RBI. That the LO was engaged only in liaison activities and the PO after it was established for YE2 car project did carry out some installation and commissioning of a few purchase orders. As far as supervisory services were concerned, neither thePOnor the LO had anything to do with the execution of purchase orders for supply of imported equipments fromJapan. In this regard, the learned counsel for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e inIndia. This question in our view is now purely academic in view of the conclusion that contract for which supervision fee is received by the assessee is not effectively connected with any PE. Nevertheless, we deem it proper to render a decision on this submission on behalf of the Revenue. 76. On this issue we have already referred to art. 5 of the DTAA defining "PE". The argument of the learned Departmental Representative has been that the LO was in existence for a long time i.e. since 1967-68. It has a fixed place of business viz., 3rd floor, Antriksh Bhawan, K.G. Marg,Delhi. It has also been filing return of income owning properties etc. and therefore it has all the attributes of a PE under art. 5(1) of the DTAA, viz., durability, continuity and infrastructure framework for its activities. The LO continues to procure contracts to the head office. Even prior to establishing PE for MUL contracts, LO procured purchase orders from MUL. In this regard, we are of the view that none of the reasons assigned by the AO to consider the LO as a PE is valid. So long as the LO performs functions which are preparatory and auxiliary in nature, there can be no allegation that they constitut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with reference to contract with MUL, contracts with T.N.E.B., Basin Bridge, Chennai, Karnataka Power Corporation, Raichur Power Plant, Raichur. These contracts were entered into after due sanction of RBI for establishing a PE. 77. The next argument for consideration would be whether there was a supervision PE of assessee inIndiain terms of art. 5(4) of the DTAA. We have already narrated the scope of work under each of the purchase orders. These purchase orders were procured by the assessee through its head office pursuant to competitive bidding on global tender floated by MUL. The terms and conditions under each purchase order were different in the sense and not linked with the other purchase orders. The performance guarantee to be given by the assessee was different for different work. The works of installation and supervision were to be done independently. One purchase order was not dependent on the completion of the work of installation of some other purchase orders. The nature of the equipments supplied was to be used in different stages of production and at different sections of car manufacturing. Equipment supplied under one purchase order did not complement the equipment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the fact that each purchase order was independent and did not complement each other. The MUL YE2 project would not stand concluded with execution of these purchase orders. The assessee was not the only person rendering supervisory services. The sites were located at different places viz., assembly floor, paint shop or weld shop. It cannot be said all contracts put together formed a coherent whole, commercially or geographically. Even purchase orders relate to different areas of manufacture of a car. How they are commercially a coherent whole is not spelt out in the order of the AO. Such finding cannot be given without any basis. As already stated, perusal of purchase orders clearly indicates that the various contracts were independent and were not capable of bringing in a coherent whole commercially. Mere commonality of the principal cannot be sufficient in this regard. We therefore hold that there existed no PE within the meaning of art. 5(4) of the DTAA. 81. The incomes in question for all these years were therefore to be brought to tax under art. 12(2) of the DTAA. The assessee has offered to tax the income in question in accordance with art. 12(2) of the DTAA and the same i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying the advance tax and consequently there was no liability to pay interest under s..234B of the Act. Similar view has also been approved by the Hon'ble Uttranchal High Court in the case of CIT vs. Sedco Forex International Drilling Co. Ltd. (2004) 186 CTR 144 (Uttranchal). In view of the above, we are of the view that there was no liability on the part of the assessee to pay interest under s. 234B or s. 234C of the Act. The issue is decided in favour of the assessee. 83. ITA No. 5884/Del/1998: This is an appeal by the assessee against order of CIT(A)-XIV,New Delhi, relating to asst. yr. 1995-96 and arises out of order dt. 31st Aug., 1998 passed on an application under s. 154 of the Act, filed by the assessee before AO against the action of the AO in charging interest under s. 234B of the Act on the ground that since the FTS was tax deductible at source, there was no obligation on the part of the assessee to consider the said income while calculating its liability to pay advance tax. This was rejected by the AO and confirmed by the CIT(A) which has given rise to the present appeal by the assessee before the Tribunal. In view of our conclusion on this issue in the regular appeal ..... 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