TMI Blog2013 (6) TMI 333X X X X Extracts X X X X X X X X Extracts X X X X ..... then hands it over to the ship, whose flag it is carrying. The Indian Operations were started from 06.11.1989 as a branch of its German parent, who in turn is a member of International Association of Classification Societies, who decides the scope of monitoring activities of its members. The scope of Indian Branch would include Classification and certification of ships, Certification of marine related materials and components & Certification relating to International safety management Co. These activities are carried out with the technical assistance and cooperation of its HO in Germany, who, as submitted are available 24X7. On computation of its classification, invoice is raised by the Indian BO or the German HO, as the case may be, and the receipts are assigned as per the agreed standard module herein followed globally, whereby, the HO retains 30% and the BO retain 70% as per fee splitting arrangement. Thus as per Article 7 of the India Germany DTAA, the business profits of the permanent establishment in India, only are offered to tax. Treading strictly on the DTAA route, the issue becomes clear, that the split of fee which is attributed to its German parent HO, become ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. The German HO has its affiliation in over 133 countries around the world, who carry out the survey and inspection on sea vessels and send their report to their HO in Germany, who, after applying strict regulations with regard to certification decide on the issue of certificate or validation or report as the case may be. 4. It was also submitted that the assessee company carries out repairs on the damages on the instructions received from the German HO, which is working 24X7 with fleet of expert engineers who are experts on various departments of the vessels and send instructions to the local engineers, as to what is to be done and how corrective measures are to be taken to render the vessel fit for voyage. 5. It was also submitted that it is the assessee, who is performing the repairs and inspection and carries out tests for validation for sea faring and on the basis of that report, which is submitted to the HO. After critical analysis on the report, the certification, is then granted to the ship/vessel for sea voyage/faring, by the HO. 6. It was submitted that fee splitting mechanism was devised way back in 1973, which is retained globally. Indian Branch Office was est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Indian Branch submits its report, bearing the GL seal, duly signed and bringing out the extent of compliance of the ship with GL class requirements. The report so submitted is then reviewed by the HO and final certificate is issued by the HO to ship owner. From the time of communication received by the Indian Branch till the issue of final report/certificate by GL there are number of activities undertaken by the HO and the Branch. 2.5 The invoices for the above surveys are raised by the HO on the foreign ship owners. The consideration is received from the ship owners by the HO in Germany. The HO remits the share of the branch, after keeping its share for the services rendered by it in Germany. 2.6 The above explains the invoicing mechanism for survey assignments emanating from foreign ship owners. Similarly, there are instances where assignments are received by Indian Branch from its local clients and the invoices for the same are raised by Indian Branch. In these cases, the invoices are raised by the Indian Branch on its local clients. The consideration is received by it in India and it remits the share of HO for the services rendered by it in Germany. 3 Fee Split 3.1 Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said agreement. A copy of the Service agreement has been enclosed herewith as Annexure-D at page no. 714 to 716. It was agreed that for KR, the Indian Branch will cover the port of Mumbai and nearby areas. Further KR will not be registered as company or branch office in the area and the Indian Branch will be regarded as representation of KR. It was also agreed that KR shall provide an orientation and initial training course to the surveyors of Indian Branch and will also provide quality manuals and procedures, classification rules and instructions including all the standard forms and stamps required for the activities of the Indian Branch. The invoices for the fees and expensed (incurred for services performed by it) were to be raised by the Indian Branch and sent to KR head office. The settlement of invoices was also to be done between KR and Indian Branch directly. The above referred invoices were to be raised by the Indian Branch at the standard tariff of fees prescribed by the HO. Further, while making the payments for said invoices, KR was to deduct its share of 30% and pay the remaining share of fees to the Indian Branch. Your honor will appreciate that the share o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with client in order to clarify scope of survey. - Technical review of order, preparation of Instruction for survey forwarding same to responsible office, clarification with attending surveyors regarding scope. - Preparing and forwarding technical solution for technical issues. - Communication with Flag State Authorities regarding statutory matter, preparation of instruction and forwarding to surveyor. - Plan approval - in case of damages, conversions, reconstruction, plans are reviewed, approved technical solution are being worked out and suggested to client by H.O. - Technical support of the surveyors in all other matters (24/7 - round-the-clock) - Training of surveyors, organized and conducted by H.O.(up to 12 months/surveyor). xxxx xxxx xxxx xxxx 11. The DR referred to the submission made wherein the demarcation had been drawn with regard to the function of the HO BO and submitted that the job performance was conducted only in India, only the intimation was forwarded to the HO. She referred to some of the details wherein job were performed by the BO and the invoice raised mentioned the place of conduct of job, i.e. Kochi, Kolkata, Vishakpatnam etc., the DR su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scope of this provision, one may find guidance from the UN Model Convention Commentary in this regard. Therefore, the connections of 'profits indirectly attributable to permanent establishment' do indeed extend to incorporation of the force of attraction rule being embedded in article 7(1). In addition to taxability of income in respect of services rendered by the PE in India, any income in respect of the services rendered to an Indian project, which is similar to the services rendered by the permanent establishment is also to be taxed in India in the hands of the assessee irrespective of the fact whether such services are rendered through the permanent establishment, or directly by the general enterprises. There cannot be any professional services rendered in India which are not, at least indirectly, attributable to carrying out professional work in India. This indirect attribution, in view of the specific provisions of India-UK tax treaty, is enough to bring the income from such services within ambit of taxability in India. The twin conditions to be, thus satisfied for taxability of related profits are (i) the services should be similar or relatable to the services rendered by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this contract; and (c) Whether if answers to (a) and (b) are in affirmative, the receipts from this contract are taxable only to the extent of services utilized as well as rendered in India and the receipts for services outside India were not to be taxed. xxxx xxxx xxxx xxxx Wherein as held, (extracted) ......Though as stated by the applicant, the core activities of preparation of designs and plans took place in Australia, the activities and services undertaken by the applicant at various stages (both before and after the preparation of designs and other deliverables) were, by no means, negligible or insufficient. In fact, they were essential to carry out the obligations under the contract. Hence, it cannot be said that there is no sufficient territorial nexus for the levy of tax under the Act read with the provisions of the DTAA. In the case of Ishikawajima-Harima Heavy Industries Ltd. (supra), the entire offshore services which according to the Supreme Court were inextricably linked to Offshore supply of goods, were rendered from outside India and therefore, the Supreme Court held that the deeming provisions in section 9 cannot reach such income. Therefore, the applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iction of the State which seeks to tax subject. Adopting such approach and further, applying the test of 'live line' enunciated by the Supreme Court in the very same decision, there is no difficulty in reaching to the conclusion that in the instant case, sufficient territorial nexus exists to subject the royalty income to tax in India. Not only the services have been utilized in India for work done in India and for the benefit of a resident of India, but even a part of activities/services under the contract were actually undertaken in India. Once it is held that the principle of territorial nexus is not infringed by levying tax on the income by way of royalty arising in India, the principle of apportionment pales into insignificant. Therefore, the entire receipts representing royalty income under the contract in question are liable to be taxed in India at the appropriate tare, both under the provisions of the Act as well as the DTAA between India and Australia. The splitting up of such income is not permissible. The applicant cannot draw support from the decision of the Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. (supra). 16. She also referred to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied upon by the DR in the case of Linklaters (supra) is distinct on facts and hence not reliable. To strengthen the argument, that the HO is not just a back office support office but perform the job of planning and instruction, the AR relied upon the submissions wherein it has been pointed out. in India, for the purposes of certain types of inspection/certification, the necessary survey activities are carried out with the cooperation and assistance from the technical department of the Head Office (HO) situated in Germany. GL-HO has branch office in India (GL India). Assignment of survey emanates from the arrangement between the HO and the foreign ship owner, entered into outside India. Typically, if a ship is in India, GL-HO then communicates to GL India, to assign one of the surveyors to the job. As some of the classification activities, can only be performed by surveyors employed by the GL-HO, surveys are carried out by the GL India in co-operation with the HO technical department during the course of the assignment. Upon completion of the survey, GL India submits its report bearing the GL seal, duly signed, and bringing out the extent of compliance of the ship with GL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... problems from HO to BO. 21. The AR pointed out that HO provides 24X7, i.e. continuous assistance to its BO on emails and other electronic media without actually coming to site. 22. He further pointed out that the fee attribution formula was adopted by the parent affiliate way back in 1980 after in depth study conducted by the German HO and its branches worldwide. Since India BO falls under Korean Registry, the fee attribution is based on the formula entered into by German HO and Korean Registry and in any case similar attribution is followed worldwide/globally. 23. The AR pointed out that dispute with regard to fee attribution first arose in assessment year 2001-02, wherein, the AO made additions, because the assessee was unable to provide detailed documents. These documents were produced at appellate stage and the coordinate Bench had restored the issue back to the AO. In the intervening period, the AO also initiated penalty proceedings u/s 271(1)(c) and levied the penalty. In the proceedings before CIT(A) in penalty, the CIT(A) held, "So from the above discussion, it is clear that the head office also contributes to the activities carried out by the branch office in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e during installation and commission whenever required. No doubt at the time of the conclusion of the contract it provided logistic support coordination. After the supply of machinery, during the warranty period, it was the sole responsibility of the 'Man Ronald' for breach of any warranty terms. The role of the branch office after the warranty period was only to provide support to the customers for procuring spare parts and other engineering services from time to time. The negotiations of the contract and ultimate conclusion of the contract required more efforts and since those were done in Germany by head office allocation of income at 40 per cent to the role played by the head office was justified. After the conclusion of the contract the role to be played by the branch office was of a routine nature. Considering the role played by the head office and branch office in earning this commission income, the attribution 60 per cent of commission so received to the role played by the branch office was justified. 25. He, therefore, concluded that there was no justification of making an addition of Rs. 58,13,506/-. 26. He also submitted that similar addition of Rs. 22,32,586/- and 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clear, that the split of fee which is attributed to its German parent HO, become non taxable under the Indian tax regime. This would become applicable on all the three figures that are impugned before us, because the share of Rs. 22,55,981/- is also of the similar nature character, as that of fee attributed towards HO by the Indian BO at Rs. 58,13,506/- and the expenses incurred by the HO on behalf of India BO at Rs. 3,00,754/- u/s 40A(2)(b). 34. We are in agreement with the decision of Intergrafia Print Pack GMBH (supra), where after following the India German DTAA treaty, the Coordinate Bench at Delhi had approved of the fee split arrangement. We are also in agreement to the decision of the assessee own case in penalty proceedings, wherein, the CIT(A) came to a factual finding that, "following a well defined system, the revenue earned from the activities of the HO cannot be taxed in India", which ultimately has been attributed to the HO and fully backed by the India German DTAA and Para1(b) of the Protocol, as was recited by the AR and reproduced by us earlier. 35. In these circumstances, we reverse the decision taken by the DRP and direct the AO to delete the three impug ..... X X X X Extracts X X X X X X X X Extracts X X X X
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