TMI Blog2014 (10) TMI 471X X X X Extracts X X X X X X X X Extracts X X X X ..... (International Taxation), Mumbai - Had the AO examined the total period of deputing technicians to India and also examined whether establishment where assessee had any 'permanent place' to supervise the activities, then, issue could be examined in the light of service PE considerations - AO only undertook the issue of stay of technicians in India cannot be considered for examining the 'permanent establishment' of assessee in its supervising work - AO has not made out any case for invoking Article-7 of DTAA. Supervisory activities have to be in connection with the non-resident’s “building site, construction or assembly project” - the receipts of the assessee are in the nature of ‘FTS’ and do not fall under Article 7 read with Article 5, there is no need to adjudicate this contention - it is incorrect to aggregate all contracts of the foreign company in India and consider it as one - Unless otherwise linked with each other, contracts should be individually assessed with respect to the duration test – relying upon ADI T V/s. Valentine Maritime (Mauritius) Ltd. [2010 (4) TMI 1 - ITAT BOMBAY-L] - the assessee's supervisory activities do not constitute a Permanent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunch. While ITA No.2226/Hyd/2011 is directed against the order of the Commissioner of Income-tax (Appeals)-V, Hyderabad dated 31.10.2011 for the assessment year 2008-09, the remaining five are directed against the orders of assessment passed by the Assessing Officer, viz. Assistant Director of Income-tax(International Taxation)-I, Hyderabad, in pursuance of the orders of Dispute Resolution Panel(DRP) Hyderabad, for the assessment years 2005-2006 to 2009-2010. Since common issues are involved, these appeals are being disposed of by this common order for the sake of convenience. ITA No.1649/Hyd/10 -Assessment Year 2007-08 ITA No.1292/Hyd/11- Assessment year 2005-06 ITA No.1293/Hyd/11- Assessment year 2006-07 ITA No.1294/Hyd/11- Assessment year 2008-09 ITA No.1274/Hyd/12- Assessment year 2009-10 2. Facts of the case in brief are that the assessee is a foreign company incorporated in Germany. It is engaged in the activity of supervision, erection, commissioning of plant and machinery for steel and allied plants in India. Assessee filed the return of income for the assessment year 2005-06 reflecting gross receipts of ₹ 8,19,32,566 on 27.10.2005. During the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the years, we intend to decide the issue on merits first. Facts of the case, as taken from the appeal for the assessment year 2007-08, are as follows- 5. The assessee company entered into agreement with the following purchasers for the assessment year 2007-08 - (a) Tata Steel (b) SMS Demag P. Ltd. (c) SAIL (d) Jindal Steel and Power Ltd. Assessee company was awarded contract by the above purchasers for supervision, erection, ramp up, commissioning, demonstration of performance, performance guarantee test, etc. of various 'plant and machinery' for their steel and allied plants. They engaged experienced foreign technicians at the work sites and other places in India and the receipts were categorised as in the nature of 'fees for technical services'. The assessee admitted for the assessment year 2007-08 that it accounted on receipt basis, stating that receipt by way of fees for technical services are chargeable to tax in India on receipt basis as per Double Taxation Avoidance Agreement (DTAA) between India and Germany. On going through the information furnished AO noticed that some of the contracts undertaken by the assessee in India have continued fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Andhra Pradesh High Court in the case of CIT vs. Visakhapatnam Port Trust 144 ITR 146. The Disputes Resolution Panel held that the provisions of relevant contract agreement as well as the provisions of Article 5 of DTAA between Indi a and Germany clearly establish that the assessee was having Perm anent Establishment in India during the relevant period. Further with regard to the deduction of expenditure DRP held that the assesse was entitled to deduction of 50% of gross receipts from all projects towards expenditure. Thus, the DRP partly accepted the objections of the assessee and gave directions under S.144C(5) of the Act. 7. Still aggrieved, assessee is in appeal before us and the grounds of appeal, as taken by the assessee in ITA No.1649/Hyd/2010 for assessment year 2007-08, are as follows: 1. That the order of learned Asst. Director of Income-tax (International Taxation) I, Hyderabad (A.O) and the Dispute Resolution panel(DRP), Hyderabad are bad in law and on facts of the case. 2. That the learned A.O has erred in assessing income of the assessee for the relevant assessment year at ₹ 8,15,25,440/- chargeable to tax @ 40% plus applicable surcharge and educatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical personnel deputed have exceeded six months period of their stay in India. He referred to provisions of Article 12 related to fees for technical services and also clause (5) of Article 12 to submit that under the clause assessee should carry on business in the other contracting state through a permanent establishment situated therein. Then only provisions of Article 7 can be invoked. Referring to the term permanent establishment as per Article 5, it was submitted that A.O. invoked 5(2)(i) to invoke Article 7. It was the contention that fixed place of business contemplated under the sub-clause should be owned by assessee and should not be a place where their supervisors attend to work provided by the contractee. He referred to commentary of Klause-Vogel and also the decision of ACIT vs. Enron Global Exploration Production Ltd., 120 TTJ (Del.) 774. It was further submitted that provision of mere accommodation to technicians cannot be considered as a fixed place of business for non-resident and relied on the decision of A.P. High Court in the case of Visakhapatnam Port Trust (supra). It was further submitted that the tests prescribed for establishing PE have not been fulfill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 5 of the India-German DTAA. 12. Before we analyze whether the assessee has a PE by its supervisory activities, we note that the assessee has all along been assessed, accepting incomes as Fees for Technical Services (FTS) rendered to various parties in India. In assessment year 2007-08, there has been a scrutiny assessment i.e. 143(3) wherein the Assessing Officer has held that the assessee has a Permanent Establishment and should be taxable as business income. Furthermore, the expenses for this Permanent Establishment have been estimated on an ad-hoc by the Learned Dispute Resolution Panel. 12.1 As for the provisions of the Income Tax Act 1961, we find that in Clouth Gummiwerke Akrineqesellschaft vs. CIT 238 ITR 861 the jurisdictional Hon ble A.P. High Court held as follows: It is difficult to agree with the arguments of learned counsel for the assessee. The two supervisors were deputed only for the purpose of rendering technical services and nowhere is it disclosed that they were engaged for the purpose of constructing the plant. Therefore, the amounts of DM 33,000 and DM 32,542, respectively, are income under section 9 (1) (vii) of the Act and are taxable. . Henc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, including an installation or structure used for the exploration or exploitation ; (g) a warehouse or sales outlet ; (h) a farm, plantation or other place where agricultural, forestry, plantation or related activities are carried on ; and (i) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities continue for a period exceeding six months. .' 12.5 With respect to Article 5(1) i.e., whether the assessee's supervisory activities would constitute a Permanent Establishment being a fixed place of business , we refer to the decision of Special Bench of the Tribunal in the case of Motorola Inc. (supra) where in the Hon'ble Special Bench observed as follows: '127. We now turn to the provisions contained in Article 5 of the DTAA. Article 5.1 states that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Permanent Establishment in India. 12.6 Now coming to the specific PE clause, namely Article 5(2)(i) invoked by AO /DRP, a literal reading of the Article leads to the conclusion that supervisory activities by themselves cannot constitute a PE; they are to be in connection with a building, construction or assembly activity of the non-resident which is not the case here as the assessee provides only supervisory activities. We find support in the internationally renowned book of famous Author Klaus Vogel (Third Edition), it has been stated at page 306, M.,N.74 as follows: According to paragraph 17 MC Comm.Art.59 (supra m.no.66), planning and supervision is included in the term 'building site or construction project' only if carried on by the building contractor himself (that is overlooked by OstBMF 2 SWI 288 (1992); DTC Austria/Korea; correctly, OstBMF 4 SWI 6 (1994): DTA Austria/Germany; of, also infra m.no.81). Planning and supervision proper carried on by a separate enterprise is not covered, according to MC Comm. An enterprise that did no more than plan and supervise building works could at most, MC Comm. continues, constitute a permanent establishment under the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ernst (c) Icha Franz Otto. Just because these three technicians stayed in India while supervising the work undertaken by the assessee in India, it cannot be considered that their place of stay can be 'fixed place of business' for the assessee. Had the A.O. examined the total period of deputing technicians to India and also examined whether establishment where assessee had any 'permanent place' to supervise the activities, then, issue could be examined in the light of service PE considerations. However, A.O. only undertook the issue of stay of technicians in India, which in our opinion cannot be considered for examining the 'permanent establishment' of assessee in its supervising work. On this reason also, we are of the opinion that A.O. has not made out any case for invoking Article-7 of DTAA. 12.9. As for contention that the period of supervisory activities did not exceed a period of six months in all projects and such projects of the assessee do not constitute Permanent Establishment we do not find it necessary to adjudicate on this ground, as we have held that supervisory activities have to be in connection with the non-resident s building site, co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 61. 15.1 We heard both sides on this issue. As for interest under S.234A, the grievance of the assessee is that the same has been wrongly computed. In relation to this grievance, we direct that the Assessing Officer, while reframing the assessments for these years, to verify the claim of the assessee, and re-compute the interest correctly. As for interest under S.234B and 234C, we find that where tax is deductible at source, assessee's liability to interest under S.234B and 234C does not arise, in view of the decision of the Bombay High Court in the case of DIT (International Taxation) NGC Network Asia LLP [2009] 222 CTR 85. We accordingly direct the Assessing Officer to re-compute the interest under S.234B and 234C in the light of the decision of the Bombay High Court referred to above. This ground, is thus partly allowed. 16. Having considered that on merits there is no case for treating the fees for technical services received by the assessee as business income, we now deal with other issue of reopening under section 148 for A.Ys. 2005-06, 2006-07 and 2008-09. Consequent to the findings in A.Y. 2007-08, the A.O. reopened the assessment in other years which were origina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Disputes Resolution Panel dated 12.4.2011 for the assessment year 2005-06. 16.3 We have considered the rival submissions on the issue of legality and validity of reopening of the assessment and perused the orders of the authorities and other material on record. The Disputes Resolution has considered the objections of the assessee to the reopening of the assessment and rejected the same. The Disputes Resolution Panel has held in para 4.3 as follows- 4.3 We also do not agree with the assessee's claim that assessee's case is not covered under clause (b) of explanation 2 of section 147 In order to examine this issue, the Explanation 2 to sec 147 clause (b) is reproduced as under: Explanation 2. For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely: (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return; On going through the facts of the present case, the following facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se-iii specifically for a situation where such 'income has been made subject of excessive relief' under this Act. Therefore, under clause-(c) where assessment has been made, reopening can be done where income has been assessed to a low rate or excessive relief was allowed. However, such segregation was not made out in clause (b) where only 'relief' was mentioned and not 'at too low a rate' if at all, it can only be categorised as a case of assessing at 'too low a rate'. Assessee has offered the income under provisions of section 9(1)(vii) offering gross receipts to tax at 10% of the gross receipts whereas the A.O. considered the income at 42.23% on the net income. In fact, strictly speaking the DRP directions in allowing 50% of the amount as expenditure for earning income has resulted in total income being determined at 50% of the amount offered by the assessee as total income. In our considered opinion, the DRP has wrongly considered assessee's case as a case of claiming excess relief in the return which situation was not considered in clause (b) of the provisions of section 147. Therefore, assessee's contention that neither clause (b) nor c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on under section 143(1) is no longer appellable. It was the contention that the Ld. CIT(A) did not adjudicate the levy of additional tax and also the argument that A.O. exceeded his jurisdiction in changing the rate of tax without any basis. It is to be noted that A.O. certainly exceeded the powers granted under the provisions of section 143(1) in raising the demand without making any adjustment of the total income. Under the provisions of section 143(1). A.O. is empowered to make the adjustment (i) any arithmetic error in the return or an incorrect claim if such incorrect claim is apparent from any information in the return. The case of the assessee does not fall under either of the above adjustments permitted under section 143(1). A.O. without any mention or note in the intimation simply taxed the amount under the head Business where as assessee has offered the income as fees for technical services. In view of this, the intimation passed by the A.O. has to be modified. We have already decided the issue of taxing the income in the above appeals. Therefore, to that extent, in the order under section 143(3) read with section 147 assessee got relief, but the demand in intimation ra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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