TMI Blog2016 (5) TMI 371X X X X Extracts X X X X X X X X Extracts X X X X ..... hi Udyog Ltd. was on the basis of "man days". The number of days per supervisor was calculated by dividing "man days" by the "number of supervisors". If 10 supervisors had stayed for 100 man days, the supervision period would be 10 days only, though the "man days" are 100. Thus, the period of stay would be only of 10 days and not 100 days. A comparison of the relevant portions of article 5 of the Double Taxation Avoidance Agreement between India and Japan with the corresponding clause in some of the double taxation avoidance agreements entered into by India with other countries shows that where it is intended that the computation of the six months period for determining whether an assessee can be said to have a permanent establishment should be in the aggregate, i.e., not "continuous", the double taxation avoidance agreement itself provides for it. From the wording of the article 5 of the Double Taxation Avoidance Agreement in question, it is not possible to accept the plea of the Revenue that the supervisory activities need not have been carried on for six continuous months. The court concurs with the views of ITAT that in the present case the fees for technical services was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement between India and Japan. 5. At this stage, it requires to be noted that it is the case of the assessee that it had no permanent establishment ( PE ) in India as far as offshore supplies made of equipment and spares was concerned. Pursuant to the approval granted by the Reserve Bank of India ( RBI ), the assessee has been having a liaison office ( LO ) in New Delhi since 1956. It has sub- liaison offices in Mumbai, Chennai, Bangalore and Calcutta. After the introduction of the Foreign Exchange Regulation Act, 1973 ( FERA ), the liaison office was granted an extension of licence by a letter dated February 17, 1976. It was permitted to carrying liaison activities subject to the following conditions : (i) The entire expense of the liaison office will be met exclusively out of the remittances received from abroad ; (ii) no commission/fee will be charged or any other remuneration received for the liaison activities to be rendered by the Indian offices ; (iii) Excepting the said liaison work, the Indian offices will not undertake any activity of a trading, commercial or industrial nature without the prior permission of the Reserve Bank of India. 6. Even p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or for the use of, or the right to use, industrial commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 4. The term 'fees for technical services' as used in this article means payment of any amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred to in article 14, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel. 5. The provisions of paragraphs 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 permanent establishment 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 permanent establis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices or facilities in that Contracting State for more than six months in connection with the exploration, exploitation or extraction of mineral oils in that Contracting State. 6. Notwithstanding the provisions of the proceeding paragraphs of this article, the term 'permanent establishment' shall be deemed not 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 of collecting information, for the enterprise ; (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character. 10. The case of the assessee has been that, as far as the supplies of equipment are concerned, it has no per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... og Ltd. had deducted tax at source on the fees for technical service paid to the assessee at 30.25 per cent. Accordingly, the assessee was under the impression that the fee which was already subjected to tax deducted at source need not be shown or declared in the return of income. The assessee nevertheless assured that it would declare hereafter such income in its return of income. 14. By a letter dated August 19, 1996, the assessee listed all the ten purchase orders obtained in the assessment year under consideration, in terms of which it supplied machinery and equipment and also undertook supervision and installation of the plant and machinery. The assessee contended that each contract for supply and supervision of installation was independent and separate. The technical aspects of the work involved in each of the contracts were different and varied. In other words, notwithstanding that the contracts were with Maruthi Udyog Ltd. the period for which the supervisory activities were carried out was less than 180 days for each contract. It was contended that there was no permanent establishment of the assessee in India vis-a-vis the rendering of the supervisory services to Maruth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permitted by the Income-tax Appellate Tribunal to be urged by order dated July 15, 2003, the Income-tax Appellate Tribunal held that necessary facts were not available on record in order to establish whether the supervision activities were inextricably linked to the supply of equipment and should be treated in the same manner as the supply of the equipment itself. Thus the additional ground was not disposed of. The Revenue filed an appeal before this court on the question whether the supervision fee is taxable under article 12(2) or under article 7 read with article 12(5) of the Double Taxation Avoidance Agreement. The assessee filed a cross-appeal on the question whether the Income-tax Appellate Tribunal ought to have decided the additional ground raised by it. 19. While hearing both sets of appeals together, this court by order dated April 6, 2009, held that the Income-tax Appellate Tribunal ought to have decided the additional ground and accordingly remanded the matter to the Income-tax Appellate Tribunal for that purpose. While disposing of both sets of appeals, this court formulated the question to be decided by the Income-tax Appellate Tribunal as under (page 313 of 31 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. It was further submitted that the supervision fees were related to the YE2 car project which was a separate project for which the assessee had a project office. The liaison offices were not merely collecting information or carrying on an activity of a preparatory or auxiliary nature but were actively associated with the said project. The fact that the liaison office had written to Maruthi Udyog Ltd. regarding deduction of tax at source in respect of the contracts also showed the nature of its involvement in the projects. Therefore, the liaison office was in fact its permanent establishment. Finally, it was submitted that there was no requirement in terms of article 5(4) of the Double Taxation Avoidance Agreement that the permanent establishment should carry on the supervisory activities for six 'continuous' months. It was enough if the aggregate period for which the supervision took place was six months or more. 24. In reply, Mr. C. S. Aggarwal, learned senior counsel for the assessee, referred to the earlier findings rendered in the order dated May 31, 2007, of the Income-tax Appellate Tribunal which according to him bore the reiteration by the Income-tax Appellate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its from such transactions can be attributed to the permanent establishment. Article 5 of the Double Taxation Avoidance Agreement is relevant for determining whether the assessee could be said to have a permanent establishment in India. 27. Article 12(5) of the Double Taxation Avoidance Agreement is on the lines of the OECD Model Convention. It is noticed that the clause in the OECD Model Convention allows the State, where the permanent establishment is located, to tax only those profits which are economically attributable to the permanent establishment . The clause makes a distinction between those incomes which are the result of activities of the permanent establishment and the income that arises by reason of direct dealings by the enterprise from the head office without the aid or assistance of the permanent establishment. Thus, article 12(5) adopts the no force of attraction principle . The rationale behind the said rule was to avoid restricting entrepreneurial freedom of disposition through fictitiously allocating profits by way of generalising standards . Another principle is that the material date for determination of accrual of income arising through the permanent es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A comparison of the relevant portions of article 5 of the Double Taxation Avoidance Agreement between India and Japan with the corresponding clause in some of the double taxation avoidance agreements entered into by India with other countries shows that where it is intended that the computation of the six months period for determining whether an assessee can be said to have a permanent establishment should be in the aggregate, i.e., not continuous , the double taxation avoidance agreement itself provides for it. From the wording of the article 5 of the Double Taxation Avoidance Agreement in question, it is not possible to accept the plea of the Revenue that the supervisory activities need not have been carried on for six continuous months. 32. For the aforesaid reasons, the court concurs with the views of the Income-tax Appellate Tribunal that in the present case the fees for technical services was liable to be taxed at 20 per cent. under article 12(2) of the Double Taxation Avoidance Agreement. The question is accordingly answered in the negative, i.e. in favour of the assessee and against the Revenue. 33. The appeals are accordingly dismissed. - - TaxTMI - TMITax - In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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