TMI Blog2010 (5) TMI 683X X X X Extracts X X X X X X X X Extracts X X X X ..... . There is also no projection of the assessee at this physical location in the sense that the business of the assessee is not carried out, or sought to be carried out or even projected, from these locations. When the physical locations at which consignment stock is kept do not project the assessee, it cannot be said that these locations constitute PE of the assessee. As a matter of fact, there is no sale involved in this transaction, and as such, there is no question of delivery for sale. In view of these discussions, it is clear that the revenue authorities have not been able to establish that the assessee had a PE in India. It is a settled position of law, as noted by the Special Bench of this Tribunal in the case of Motorola Inc. [ 2005 (6) TMI 226 - ITAT DELHI-A] , that the onus is on the revenue to demonstrate that a PE of the foreign enterprise exists in India. That onus is not discharged. Having said that, we may also add that, in our considered view, the business model of the assessee-company is such that in the above arrangements, a PE in the source location does not come into existence. We are of the considered opinion that the assessee-company did not have any PE i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... signatures, and as there were some complications regarding remittance of appeal fees. The assessee has moved a petition, duly supported by affidavit of one Naresh Makhijani, chartered accountant handling the taxation matters, in India, of the assessee. Having perused the petition and having heard the parties on the same, we are inclined to condone the three days delay in filing of appeal, and proceed to take up the matter for disposal on merits of the case. Delay condoned. 3. Grievances raised by the appellant, as set out in the memorandum of appeal, are as follows : "Based on the facts and circumstances of the case, and in law, the learned Commissioner of Income-tax (Appeals)-XXXI, Mumbai [hereinafter referred to as CIT(A) ] erred in upholding the assessment order dated 30-3-2001 issued by the learned Dy. CIT, Circle 2(1), Mumbai (hereinafter referred to as the Assessing Officer ) under section 143(3) of the Income-tax Act, 1961 ( the Act ) in relation to the assessment year 1998-99 in the case of Airline Rotables Ltd. a company incorporated under the laws of United Kingdom and carrying on the business of providing spares and component support for aircraft in India durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onent is not in a condition to be used or is not airworthy, the same is to be repaired or overhauled by the assessee and the assessee also has to ensure that airworthiness directives in respect of the same are to be complied with. However, if is not merely repairs and overhauling that the assessee has to do. The assessee also has to provide a replacement component which can be used by the airline during the period its original equipment is under repairs or overhauling by the assessee. Under the said agreement, the assessee is also responsible for providing replacement rotables, on exchange basis, required for an aircraft as a result of operational unserviceability. Rotable , for this purpose, is defined as "an item, with a manufacturer s serial number, that can be economically restored to a serviceable condition and in the normal course of operations rehabilitated to a fully serviceable condition over a period approximating the life of the flight equipment to which it is related". In order to ensure that the replacement components are readily available and the flight operations are not interrupted due to repairs and servicing of the components, the assessee-company provides stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kamath, stores executive of Jet Airways, which was recorded on 26-3-1998 during the course of survey proceedings, wherein it is inter alia stated that "to verify the delivery procedure from consignment stock is in conformity with their (assessee-company s) business interest, they have been deputing their executives to satisfy themselves" and that "they always have been satisfied by our performance as their agent for delivery of parts from consignment stock", it is on this basis that the Assessing Officer inferred that the stores staff of Jet Airways has been acting as agents of the assessee-company, and this relationship has resulted in a PE coming into existence. He relied upon article 5.4( b ) which provides that "A person acting in a Contracting State for or on behalf of an enterprise of the other Contracting State other than an agent of an independent status in whom para (5) of this article applies shall be deemed to be a PE of that enterprise in the first-mentioned State if ...... he habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise for or on behalf of the enterprise". He also n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia. The CIT(A) also upheld taxability @ 10 per cent of gross revenues earned from Indian operations of the assessee-company. The assessee is aggrieved and is in further appeal before us. 7. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 8. We may, at the outset, mention that in both the orders of the authorities below, there are frequent references to the order passed by the Assessing Officer (TDS) under section 195 of the Act, when Jet Airways sought permission to remit the payment of bills to the assessee, as also the appellate order thereon by the CIT(A), but none of the parties could confirm whether the said matter travelled in appeal before this Tribunal, and if so, findings thereon, by the Tribunal. It has been stated at the Bar that the matter rests with the appeal by the CIT(A) having been decided against the tax deductor. We have no reasons to doubt this statement, nor could we find anything to the contrary. It is in this backdrop that we have proceeded to decide this matter on merits and without reference to the proceedings under section 195 in the hands of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in that State. (3) The term "PE" shall not be deemed to include ( a )the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise; ( b )the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display; ( c )the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; ( d )the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise; ( e )the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information or for scientific research, being activities solely of a preparatory or auxiliary character in the trade of business of the enterprise. However, this provision shall not be applicable where the enterprise maintains any other fixed place of business in the other Contracting State for any purpose or purposes other than the purposes specified in this para; ( f )the maintenance of a fixed place of business solely for any combination of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower in the company." 10. In terms of the provisions of article 5(1), i.e., the basic rule a PE is said to exist in the other Contracting State when an enterprise of one of the Contracting States has a fixed place of business in that other Contracting State, through which business is carried out wholly or partly. There are three criteria embedded in this definition physical criterion, i.e., existence of physical location, subjective criterion, i.e., right to use that place, and functionality criterion i.e., carrying out of business through that place. It is only when these three conditions are satisfied, a PE under the basic rule can be said to have come into existence. 11. As observed by a Co-ordinate Bench in the case of Western Union Financial Services Inc. v. Asstt. DIT [2007] 104 ITD 34 (Delhi), "a PE should project in the foreign enterprises in India (the other Contracting State)". In the case of CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146 , Hon ble Andhra Pradesh High Court, after an elaborate survey of worldwide judicial precedents and technical literature on this issue, has observed that, "in our opinion, the words PE postulate the existenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner of the premises ." [Emphasis supplied]. 13. It is thus necessary that, in order to give a positive finding about existence of the PE, not only that there should be a physical location through which the business of the foreign enterprise is carried out, but also such a place should be at the disposal of the foreign enterprise in the sense that foreign enterprise should have some sort of a right to use the said physical location for its own business. 14. The third and final test for existence of PE under the basic rule is the functionality test, i.e., the fixed place of business should be used for the purposes of business of the foreign enterprise. As observed by the Special Bench of this Tribunal in the case of Motorola Inc. ( supra ), such a use should not be confined to mere doing the work for owner of the enterprise owning that physical location and must extend to carrying on of the business of the foreign enterprise. The business carried out at that place should be such as to amount to, as was observed by Hon ble Andhra Pradesh High Court in the case of Visakhapatnam Port Trust ( supra ), "virtual projection of enterprise of one country into soil of another cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auling can be taxed in India. The existence of PE in a country cannot warrant or justify taxation of all the profits arising to a foreign enterprise in that country. Even if there is a PE, one cannot infer application of the force of attraction principle and proceed to bring to tax all the profits of the foreign enterprise whether or not they relate to the PE. As far as the consideration for use or right to use the replacement equipments are concerned, the location of such equipments so given for use or right to use cannot be viewed as a place of carrying on its business, which, as we understand, is limited to, qua that consignment, the consignment so having been given for use or right to use. The business with regard to that consignment is over when that consignment is given for standby purposes to the airline. It is thus clear that not only that the assessee did not have any right to use the location of consignment stock, such a location was also not used for the purposes of assessee s business. There is also no projection of the assessee at this physical location in the sense that the business of the assessee is not carried out, or sought to be carried out or even projected, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l directly or through a dependent agent who, being a dependent agent, is integrated into principal s business to a substantial extent. In case the tax position is to be based on whether or not the business activities are carried out directly or through the agent, it would be a bit too easy to circumvent the PE taxation if no PE taxation is applied on business through the dependent agent PE. This is the unmistakable underlying principle behind the dependent agency PE clause in tax treaties. It is thus clear that dependent agency PE can come into existence only when business is carried out through the dependent agent. In the situation before us, no business is carried out through the agent, even if there be an agent in keeping the consignment stock, because this consignment stock with the airlines is the end result of assessee s business and not an intermediate step to get business. What the assessee is paid for, vis-a-vis the consignment stock, is consideration for so placing the consignment stock at the disposal of the airlines. The only other part of the consideration received by the assessee is for repairs and overhauling of aircraft rotables a work which is entirely carried ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to sales because the assessee is being paid for repairing the component owned by the airline. It is difficult to understand how can one sell something to a person who already owns that thing. The delivery is for standby use of equipment and not for its sales. As a matter of fact, there is no sale involved in this transaction, and as such, there is no question of delivery for sale. In view of these discussions, it is clear that the revenue authorities have not been able to establish that the assessee had a PE in India. It is a settled position of law, as noted by the Special Bench of this Tribunal in the case of Motorola Inc. ( supra ), that the onus is on the revenue to demonstrate that a PE of the foreign enterprise exists in India. That onus is not discharged. Having said that, we may also add that, in our considered view, the business model of the assessee-company is such that in the above arrangements, a PE in the source location does not come into existence. 17. In view of the above discussions, we are of the considered opinion that the assessee-company did not have any PE in India, and, accordingly, the entire income attributable to the India operations could not have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( bb )20 per cent of the gross amount of such royalties or fees for technical services in all other cases; and ( ii )during subsequent years, 15 per cent of the gross amount of such royalties or fees for technical services; and ( b )in the case of royalties within para 3( b ) of this article and fees for technical services defined in para 4( b ) of this article, 10 per cent of the gross amount of such royalties and fees for technical services. 3. For the purposes of this article, the term "royalties" means ( a )payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and ( b )payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pendent personal services) of this convention as the case may be, shall apply. 7. Royalties and fees for technical services shall be deemed to arise in a Contracting State where the payer is that State itself, a political sub-division, a local authority or a resident of a Contracting State or not, has in a Contracting State a PE or a fixed base in connection with which the obligation to make payments was incurred and the payments are borne by that PE or fixed base then the royalties or fees for technical services shall be deemed to arise in the Contracting State in which the PE or fixed base is situated. 8. Where, owing to a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services paid exceeds for whatever reason the amount which would have been paid in the absence of such relationship, the provisions of this article shall apply only to the last mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this convention. 9. The provisions of this ..... X X X X Extracts X X X X X X X X Extracts X X X X
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