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Commissioner of Income-Tax Versus Sumitomo Corporation

2016 (5) TMI 371 - DELHI HIGH COURT

Fees for technical services received - computation of period of stay - whether taxable by reason of article 12(2) of the Double Taxation Avoidance Agreement with Japan? - Held that:- On examination of the purchase orders, a common feature which emerged was that the supervisors were to come from Japan and Maruthi Udyog Ltd. had to bear the cost of their air tickets as well as their boarding and lodging in India. The period of supervision in the case of the individual contracts did not exceed the .....

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i Udyog Ltd. Additionally, as pointed out by Mr. Aggarwal, the supervisory fee paid by Maruthi 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 t .....

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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 liable to be taxed at 20 per cent. under article 12(2) of the Double Taxation Avoidance Agreement. - Decided in favour of the assessee and against the Revenue. - I. T. A. Nos. 714, 716, 717, .....

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93, 1993-94, 1996-97, and, I. T. A. Nos. 5882 and 5883/Del/1998, relating to the assessment years 1994-95 and 1995- 96-reported as Sumitomo Corporation v. Deputy CIT [2014] 31 ITR (Trib) 310 (Delhi). 2. By order dated May 19, 2015, while admitting these appeals, the following question of law was framed for consideration : "Did the Income-tax Appellate Tribunal fall into error in holding that the fees for technical services received by the assessee from M/s. Maruti Udyog Limited was not taxa .....

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;. According to the assessee, neither the monies received for the supplies, nor the supervision fee is taxable in India as supervision fee is integral to the provision of supplies. However, the assessee accepted the Revenue's contention that the supervision fee is taxable in India as fees for technical services (FTS) in terms of article 12(5) of the Double Taxation Avoidance Agreement ("DTAA") between India and Japan. 4. In the assessment orders dated March 27, 1997 and March 23, 1 .....

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ursuant 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 conditi .....

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f the DTAA between India and Japan in 1989, an issue had arisen as to whether the profits earned by the assessee on the equipment sold by it from Japan on a principal to-principal basis, free on board ("FOB") foreign port to an Indian buyer, was chargeable to tax under the Act. The assessee had filed a writ petition against the Income-tax Department ("Department") in late 1970. Pursuant thereto, a compromise was arrived at, the terms of which were crystallised in a letter dat .....

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taxes on its earnings arising out of the imports to India. At that stage, the concept of permanent establishment was not in vogue. The Double Taxation Avoidance Agreement between India and Japan came into force from November 29, 1989. Article 12 of the Double Taxation Avoidance Agreement, the relevant portions of which pertains to payment of royalties and fees for technical services, reads as under (see [1990] 182 ITR (St.) 380, 389) : "Article 12 1. Royalties and fees for technical servic .....

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technical services. 3. The term 'royalties' as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial commercial or scientific equipment, or for information concernin .....

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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 technic .....

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assessee has a permanent establishment in India the profits "as is directly or indirectly" attributable to the permanent establishment will be taxed in India. 9. Article 5 of the Double Taxation Avoidance Agreement defines a permanent establishment. Under article 5(1) a "permanent establishment" means "a fixed place of business through which the business of an enterprise is wholly or partly carried on". Article 5(2) to (6) which is relevant for the present purposes .....

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e carried on ; (i) a store or other sales outlet ; and (j) an installation or structure used for the exploration of natural resources, but only if so used for a period of more than six months. 3. A building site or construction, installation or assembly project constitutes a permanent establishment only if it lasts for more than six months. 4. An enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it .....

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e 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 t .....

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ter." 10. The case of the assessee has been that, as far as the supplies of equipment are concerned, it has no permanent establishment in India. The liaison office of the assessee in India was communicating information regarding publication of global tenders invited by Maruthi Udyog Ltd. to the head office. The bid would be submitted only by the head office in Japan. The head office through its personnel from Japan would visit India and after discussion with Maruthi Udyog Ltd. would conclud .....

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ome of the contracts, the Maruthi Udyog Ltd. carried out the actual installation while the assessee supervised such installation. 11. Another factor that requires to be noticed is that during this very period, the assessee started expanding its activities in India and established project offices for the following three separate projects : (i) A project at Raichur with the Karnataka Power Corporation. (ii) A project at Basin in Tamil Nadu. (iii) A paint and assembly shop for Maruthi Udyog Ltd. 12 .....

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8377; 3,49,82,616. The assessee received fees for technical services for supervision of the installation of the machinery and equipment supplied by it to Maruthi Udyog Ltd. in the sum of ₹ 2,35,86,939. By a letter dated July 18, 1996, the Assessing Officer called upon the assessee to explain as to why the said sum received as fees for technical services should not be offered to tax by the assessee. By a reply dated August 5, 1996, the assessee informed the Assessing Officer that Maruthi Ud .....

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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 c .....

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was being taxed under section 44BBB of the Act. It was stated that the contract with Maruthi Udyog Ltd. was in no manner connected with the projects at Raichur and Basin Bridge. The contention of the assessee was that the tax on the fee received had to be taxed at 20 per cent. in terms of article 12(2) of the Indo-Japan Double Taxation Avoidance Agreement and not at 30.25 per cent. under article 12(5) of the Double Taxation Avoidance Agreement. 16. The Assessing Officer held against the assesse .....

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ground was framed on July 15, 2003 as under (page 313 of 31 ITR (Trib)) : "Whether on the facts and in the circumstances of the case and in law, the supervision fees earned on account of the supply of equipment could be taxed as 'fees for technical services', even though they are integral and incidental 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 h .....

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terms of article 12(5) of the Double Taxation Avoidance Agreement. As regards the additional ground 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 n .....

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ribunal 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 (Trib)) : "Whether, on the facts and circumstances of the case 'fees for technical services' (FTS) received by the assessee from Maruthi Udyog Limited was taxable under articles 12(2) or 1 .....

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21. Against the aforementioned order of the Income-tax Appellate Tribunal the present appeals have been filed by the Revenue. 22. The court has heard the submissions of Ms. Suruchi Aggarwal, learned senior standing counsel for the Revenue and Mr. C. S. Aggarwal, learned senior counsel for the assessee. 23. It was first submitted by Ms. Suruchi Aggarwal that the concurrent findings of both the Assessing Officer and the Commissioner of Income-tax (Appeals) were that the assessee had its permanent .....

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ee, which have been set out in a tabular form in the earlier order dated May 31, 2007, passed by the Income-tax Appellate Tribunal, would show that the specification of days of supervision was essentially the basis for calculation of supervision fees which was one of the components of the order. The other component was the supply of the equipment itself. Some of the orders, having the value of ₹ 100-200 crores, involved man days of 364, 478 and 730. While the Income-tax Appellate Tribunal .....

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sociated 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 si .....

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idance Agreement between India and Japan as compared with the corresponding clauses of the double taxation avoidance agreements with other countries, which showed that where it was intended that the computation of the six months period for the purposes of determining whether there was a permanent establishment had to be in the aggregate and not continuous the relevant clause in the double taxation avoidance agreement expressly stated so. He also submitted that the theory of "force of attrac .....

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that there it could be taxed at 30.25 per cent., Mr. Aggarwal pointed out that apart from the fact that the assessee had retracted such admission, Maruthi Udyog Ltd. had a legal obligation, without reference to the assessee, to deduct tax at source from the fees for technical services paid. This by no means precluded the assessee from challenging the applicability of the rate of tax deducted at source at 30.25 per cent. 25. As far as the question framed by this court is concerned, the issue tha .....

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6. Under article 7 of the Double Taxation Avoidance Agreement, the assessee would be liable to pay taxes in India if it carried on the business through a permanent establishment. The part played by the permanent establishment in the transactions in question would determine the extent to which the profits 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 ha .....

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e 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 incom .....

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purchase orders, a common feature which emerged was that the supervisors were to come from Japan and Maruthi Udyog Ltd. had to bear the cost of their air tickets as well as their boarding and lodging in India. The period of supervision in the case of the individual contracts did not exceed the period of 180 days. In other words, they did not constitute a supervisory permanent establishment in terms of article 5(4) of the Double Taxation Avoidance Agreement. 29. As far as the fees for technical s .....

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y 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. 30. As regards the contention that the assessee had conceded the position that Maruthi Udyog Ltd. could deduct tax at 30.25 per cent., it is seen that the liaison offices only facilitated the communication between the head o .....

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