TMI Blog2014 (3) TMI 291X X X X Extracts X X X X X X X X Extracts X X X X ..... ly connected". Producing activities should be closely connected in terms of relationship besides being connected economically also with the PE - LO was only facilitating the communication of the Head Office with MUL and was nowhere involved in the supervisory activities - Simply existence of the LO cannot be merely a basis that assessee was having supervisory PE in India - LO was not permitted to carry out any trading, commercial or industrial activity - There is no evidence whether the LO has violated the conditions laid down by RBI in this regard - The assessee has established a project office with the approval of RBI for each separate project. Equipments supplied under one purchase order were not complemented to the equipment supplied in another purchase order - The installation of equipments was to be carried out by MUL. The technicians were deputed for supervisions of work from Japan. Separate tenders were floated for each of the purchase orders and the assessee was not the only bidder and there were other enterprises which were awarded purchase orders also. There are finding of ITAT that the period of supervision under each contract was less than the period of 180 days ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncidental to the supply of equipment, since the supervision fees received by it on account of the supply of equipment are inextricably and essentially linked to the supply of equipment, and hence, should in all fairness partake the same character as the supply of the equipment, as it is nothing else but a supply of equipment simpliciter. The Hon'ble High Court held that the admitted question is verbose and reframed the question and admitted as additional ground of appeal. This reframed question read as under :- Whether in the facts and circumstances of the case fee for technical services received by the assessee from M/s Maruti Udyog Ltd was taxable under Article 12(2) or Article 12(5) read with Article 7(3) of DTAA? Thus, the solitary issue involved in the question framed by Hon'ble High Court is whether the fees for technical services received by the assessee from M/s. Maruti Udyog Ltd. was taxable under Article 12 (2) or Article 12(5) read with Article 7 (3) of Double Taxation Avoidance Agreement between India and Japan (hereinafter referred to as DTAA). The revenue claims that in view of the decision of Hon'ble High Court, there is no dispute about the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DTAA between India and Japan as upheld by ITAT in para 81 of its order dated 31.05.2007 and second part with respect to taxability of supervision fees as business income of the assessee company under Article 7 of the DTAA. The ld. AR submitted that fee for supervision is a fee taxable under Article 12(2) of DTAA is to be taxed at the rate of 20% and it is not business profit to be taxed under Article 7(1) as the said fee has not been earned which is connected with its permanent establishment in India. Ld. AR further submitted that assessee has no permanent establishment in India in so far as it relates to supervision fee. He further submitted that in order to bring to tax as business profit as had been observed by the ITAT in its order in para 66 that there is no evidence on record to show that the contents in respect of which FTS is received was effectively connected with PE in India. The ITAT has given a finding that assessee has no supervisory PE and the supervision fee is not effectively connected with PE, the same is taxable under Article 12(2) of the DTAA, therefore, the same does not deserve to be disturbed. ITAT has held that the supervision fee is not taxable under Articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any PE. Nevertheless, we deem it proper to render a decision on this submission on behalf of the revenue. [emphasis supplied] 76 On this issue we have already referred to Article 5 of the DT AA defining PE . The argument of the ld. DR 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 P.E. under Article 5(1) of the DTAA, viz., durability, continuity and infrastructure frame work 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 regards, we are of the view that none of the reasons assigned by the AO to consider the LO as a PE are valid. So long as the LO performs functions which are preparatory and auxiliary in nature, there can be no allegation that they constitute a PE. The fact that the LO owned assets and incurred huge expenses can never be a ground to conclude that they constitute PE. The prohibition on the part of the LO to carryon activitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f RBI for establishing a PE. [ emphasis supplied] 10. The Hon'ble Tribunal, thereafter in para 77 examined for its consideration whether there was a supervision fee of the assessee in India in terms of Article 5(4) of Double Taxation A voidance Agreement. It observed in that para as under: 77 The next argument for consideration would be whether there was a supervision PE of assessee in India in terms of Article 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 orders were different in the sense not linked with the other purchase orders. The performance guarantee to be given by the assessee was different for different work. The work 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. Equip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hrust of the argument of the Id. Counsel for the revenue has been on this exception to the rule. We are of the view that the case of the assessee does not fall within the exception to the rule. We have already highlighted the fact that each PO 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 PO's 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 PO's clearly indicate 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 Article5(4) of the DTAA. [ emphasis supplied] 12. Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 There is no dispute about the payment received by the assessee being of the nature of fee for technical services and only issue to be decided is whether the same is taxable under Article 12 (2) or Article 12(5) read with Article 7 (3) of the DTAA. As submitted above that the issue as to whether the supervision fee is taxable under Article 12 (2) or Article 12(5) read with Article 7 (3) has already been decided by the Hon'ble Tribunal in the appellant s own case. It has been submitted that, mere fact that, appellant had PE in respect of the Raichur project and Basin Bridge project, it cannot be held that, the income earned in supervisory services is also at attributable to such PE. Infact, the Hon'ble Tribunal had held the aforesaid view at page 1634 of Master Paper Book ( MPB ) in para 53 as under : 53. If a non-resident is considered as having a PE in the other country then whether the income attributable to the PE alone has to be taxed in the other country or any other income which accrues to the non-resident in the other country having no connection with the P E, can also be brought to tax in the other country, is aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(5) are the following: (1) The beneficial owner of the FTS being a resident of Japan should carry on business in India in 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 DT AA as business profits. The AO and the CIT(A) proceeded on the basis: (a) That the LO in India was in fact acting as a PE of the assessee in India. (b) That since the assessee had a PE in India in respect of its Raichur Project and Basin Bridge Project prior to 15th Sept., 1992 and from 15th Sept., 1992, it had a PE in India in respect of designing, engineering, supply and installation for YE2 car project of MUL, the supervision period in the 10 contracts had to be aggregated to find out if there was a PE for rendering supervisory services for more than 6 months in India. Another reasoning adopted by them was that since the contract for supervision was for one principal viz., MUL, in respect of the paint and assembly shop of MUL, the time spent on each contract has to be aggregated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 between India and Japan is on the lines of the OECD Model Convention. The above clause allows the State where PE is located to tax only those profits which are economically attributable to the PE. The income should arise as a result of activities of PE. The clause makes a distinction between those incomes which are the result of activities of PE and the income which arises by reason of direct dealings' by the enterprise from the head office without the aid or assistance of the PE. The State where the PE is located can tax the income only, if a connection exists, between the income and the P E. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s liaison office had informed the MUL to deduct tax at source @ 30.25%. This it evidence that the assessee was conscious of the fact of the taxation due to the same being effectively connected with the Permanent Establishment. (page 3 first bullet point) In this regard, it is submitted that LO was only facilitating the communication of the Head Office with MUL and was nowhere involved in the supervisory activities. Further, the letter for higher rate of TDS was given only to expedite the payment from MUL and was not an acceptance of the final rate which could be determined by filing return and in the course of regular assessment. The appellant had offered the supervisory income to tax @ 20% in the return of income (without realizing that the same was not taxable as per correct position under the Act and DTAA) and claimed the balance as refund. Without prejudice to above, it is duty of the tax authority to guide the assessee if he has applied the law correctly. Further, Hon'ble Tribunal has already held that the liaison office is not a PE of the appellant. The same is discussed in para 76 of the Hon'ble ITAT order placed at pages 1664- 1666 of MPB. Thus, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts III respect of the Project office as it is obliged to submit to RBI. The appellant established project offices for each separate project with approval of the RBI. The application made to RBI for opening a project office and approval thereof are already filed along with rejoinder submission dated 01.11.2006. (Refer pages 1506 to 1518 of the MPB). It is submitted that there is no presumption in law or of facts that, since the appellant has opened a PO, it could be held that, either LO or PO were engaged in executing purchase orders for supply of imported equipments and supervision of equipments. 6 The existence of Project office amounts to permanent establishment of the assessee as per paragraph 1 2 of the Article 5 of the DT AA. It is submitted that, the appellant had a PO with specific approval of the RBI which could constitute as PE as per article 5(2) of the DTAA. It is submitted that in certain purchase orders, the appellant company was also obliged to supply indigenous equipments/carry out installation and, commissioning of certain equipments in India. The supply of indigenous equipments and, installation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erent 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. [Emphasis supplied] Apart from the above, after extracting each of the purchase orders in para 61 at pages 1639 to 1653 of MPB, the Hon'ble Tribunal has specifically held in paras 62, 63 and 66 as under: 62. Perusal of the various purchase orders shows that a common feature in all of the purchase orders is the fact that supervisors were to come from Japan and MUL bears the cost of their air ticket and provides for their boarding and lodging in India. The period of supervision in the case of individual contracts did not exceed a period of 180 days and they did not constitute a supervisory PE in terms of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not apply and therefore art. 12(2) would alone apply. The assessee has rightly offered its income in the form of supervision fee to tax under art. 12(2) of the DTAA. However, we notice that in asst. yr. 1995-96, details of contract Nos. 19 to 25 are not available. The question of taxability of the sum received as FTS for these contracts will be decided by the AO on the lines indicated in this order. The assessee will produce copy of these contracts before the AO. If the AO finds FTS in respect of these contracts taxable then the assessee will be entitled to advance arguments regarding attribution and allowability of expenses. The AO will consider the same and decide the same in accordance with law. [Emphasis supplied] Further, as submitted in point no 4 above that, at times there could be two purchase orders for one global tender depending on the requirements of M/s MUL. It is submitted that mere fact that two purchase orders had been issued separately for one global tender cannot in any manner be a ground to allege, assume or conclude that such purchase orders are not separate, independent and mutually exclusive from each others. Thus in light of the aforesaid specific findings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t must be held that, since DTAA does specifically provides for the aggregation, as is the case in other countries, it held that, each purchase order is a separate order. It is submitted that YE2 project of MUL is a large project. Infact, the appellant had supported only few portions of this large MUL project along with other vendors appointed by MUL. It may be stated here that, all the purchase orders are not connected with the YE2 car project, as tabulated at page 1522 of the MPB. Infact, it would be seen therefrom, that none of these orders pertained to YE2 car project in Assessment Year 1992-93 and 1993-94 and 1996-99 and hence, general submissions made cannot be a ground to allege that there was a supervision PE of the appellant under Article 5(4) of the DTAA. Further, as submitted in point no 4 of this table that, at times there could be two purchase orders for one global tender depending on the requirements of M/s MDL. It is submitted that mere fact that two purchase orders had been issued separately for one global tender cannot in any manner be a ground to allege, assume or conclude that such purchase orders are not separate, independent and mutually exclusive from each othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall apply and provisions of Paragraph 1 and 2 shall not apply. The same is covered by point no 7 of this table 17 As the tender/contract was entered prior to 31.05.1997, FTS is taxable on gross basis by applying tax rate of 30% as per the provisions of section 115(1)(b)(B) of the Act. Based on the discussion in point no 7, it is evident that the in the present case Article 12(2) of the India - Japan tax treaty is applicable and not section 115A(1)(b)(B) of the Act. Ld. DR raised a contention that India has reservation about the word 12 months test for each individual site project. The relevant portion of Para 18 of the Commentary to the OECD Model Tax Convention is reproduced as under :- India, Morocco and Vietnam do not agree with the words 'the twelve months test applies to each individual site or project found in paragraph 18 of the Commentary. They consider that a series of consecutive short term sites on projects operated by a contractor would give rise to the existence of a permanent establishment in the country concerned. In reply to this, the ld. AR submitted that as per Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without such reservation. He further submitted that mere putting up a reservation without incorporating the same in bilateral agreement with the Japan is of no consequence and any reservation made is not applicable so long it is not part of the agreement. 5. We have heard both the sides on the issue and after hearing, we find that the Hon'ble High Court has reframed the question and remanded the issue. In our considered view, there is no scope for any intervention regarding the character of the income as Hon'ble High Court has already held it to be fee for technical services . With regard to the taxability of FTS (supervisory fee) in assessee s case for having a PE, we would like to elaborate that there are variations in accordance with the Model Conventions. Whether the income attributable to the PE alone has to be taxed in the other country or any other income which accrues to the non-resident in the other country having no connection with the PE has also been brought to tax in other country is a matter of discussion and varies according to the model of conventions. The available Model Conventions differ in this regard. Some Model Conventions provide for taxing profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out if there was a PE for rendering supervisory services for more than 180 days in India, and the contract for supervision was for one principal, i.e., MUL, in respect of the paint and assembly shop of MUL. Therefore, the time spent on each contract has to be aggregated to satisfy the test of existence PE. On this basis, the Revenue authorities treated the income from contracts for supervision as arisen directly or indirectly from the PE. In our considered view, for applying the Article 12 (5) of DTAA, we have to consider the conditions which are required to apply this Article to the facts and circumstances of the assessee s case. The supervision fee in dispute in all these appeals relate to fee received for installation of equipments supplied to MUL. Article 12 (5) of DTAA between India and Japan is on the line of OECD Model Convention wherein the clause allows the state where the PE is located to tax only those profits which are economically attributable to the PE. The income should arise as a result of activities of PE. The state where the PE is located can tax the income only, if a connection exists, between the income and the PE. Thus, Article 12(5) of Indo Japan DTAA adopts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent work. The work of installation and supervision were done independently. One purchase order was not dependent on the completion of work of installation of some other purchase orders. The nature of the equipments supplied by the assessee was used in different stages of production and at different sections of car manufacturing process. Even equipments supplied under one purchase order were not complemented to the equipment supplied in another purchase order. The installation of equipments was to be carried out by MUL. The technicians were deputed for supervisions of work from Japan. Separate tenders were floated for each of the purchase orders and the assessee was not the only bidder and there were other enterprises which were awarded purchase orders also. There are finding of ITAT that the period of supervision under each contract was less than the period of 180 days as contemplated in Article 5(4) of the DTAA. It is also held that where there are several sites where supervision is going on in a country, the rule is that the test of minimum period should be determined for each individual site or installation project. The assessee rendered supervision to the plant and machinery s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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