TMI Blog2019 (1) TMI 542X X X X Extracts X X X X X X X X Extracts X X X X ..... luding comments to RIL on the proposed letter of acceptance and relevant attachments. Also, asked them whether they wanted to send the e-mail themselves to RIL or for it to be sent directly. These appear to show important role for Vivek and Riccardo in the negotiating process. The e-mail chain on “CONFIDENTAL: Ad Syst” contains e-mail from Gioseppe La Moita (GE Overseas). These suggest that Gioseppe La Moita, Renato Mascii (GE Overseas) and Riccardo Procacci (GEII) were in India negotiating the BHEL contract. Rest of the correspondence is not particularly relevant. These suggest that substantive negotiation work on the BHEL contract was done in India by a mix of GE Overseas and GE India team. It is clear that in the kind of activity that GE carries out, i.e manufacture and supply of highly specialized and technically customized equipment, the “core activity” of developing the customer (identifying a client), approaching that customer, communicating the available options, discussing technical and financial terms of the agreement, even price negotiations, needed a collaborative process in which the potential client along with GE’s India employees and its experts, had to intense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no infirmity with the findings or the approach of the Tribunal in this regard. This question too is answered against the assessee and in favor of the Revenue. Decided against the assessee. - ITA 621/2017; ITA 627/2017; ITA 628/2017; ITA 629/2017; ITA 671/2017; ITA 674/2017, C.M. APPL.29470/2017; ITA 675/2017, C.M. APPL.29471; ITA 677/2017, ITA 643/2017; ITA 646/2017; ITA 655/2017; ITA 669/2017 & ITA 685/2017, ITA 644/2017; ITA 652/2017 - - - Dated:- 21-12-2018 - MR. S. RAVINDRA BHAT AND MR. A.K. CHAWLA JJ. ITA 621/2017; ITA 627/2017; ITA 628/2017; ITA 629/2017; ITA 671/2017; ITA 674/2017,C.M. APPL.29470/2017; ITA 675/2017, C.M. APPL.29471; ITA 677/2017, ITA 643/2017; ITA 646/2017; ITA 655/2017; ITA 669/2017 ITA 685/2017, ITA 644/2017; ITA 652/2017, C.M. APPL.29312/2017; ITA 653/2017; ITA 666/2017 ITA 837/2017, ITA 645/2017; ITA 654/2017; ITA 657/2017; ITA 668/2017; ITA 684/2017 ITA 688/2017, ITA 647/2017; ITA 670/2017; ITA 686/2017 ITA 687/2017, ITA 648/2017; ITA 649/2017; ITA 660/2017; ITA 661/2017; ITA 678/2017; ITA 679/2017 ITA 836/2017, ITA 650/2017; ITA 651/2017; ITA 662/2017; ITA 663/2017; ITA 664/2017; ITA 680/2017; ITA 681/2017 ITA 682/2017, ITA 656/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corporated company and is party to the Global Service Agreement (GSA) with GEIOC, for providing limited market support services to GE and its affiliates (including GEPI.). In exchange, it was remunerated on a cost-plus basis. It was assessed to income tax and also subjected to arms length price (ALP) determination by a Transfer Pricing Officer (hereafter TPO ) who held that the transaction with its associated enterprise (AE) was at arm s length. The GSA forbids GEIIPL from: (a) entering into any contract on behalf of GE Group companies (GEIOC and affiliates); (b) from acting as an agent for any GE Group company (GEIOC and affiliates). 4. GE International Inc, i.e GEII is a U.S. incorporated entity; it assumes and performs payroll responsibility for expatriates who work in India to support various businesses of the GE Group. GEIOC had on its payroll more than 50 employees and the designation of such employees was mostly as Head India Operations. These assessees contended that employees are deputed to various GE companies and they work as their employees and they remain on the payroll of GEIOC till their transfer to other entities. In terms of the application made to R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he concept of software sourcing from India and was one of the largest customers for the IT service industry of India. 7. Based on these observations, the AO continued the reassessment proceedings. The assessees resisted the move to assess them, contending that they were not subjected to income tax laws of India as they had no permanent establishment. The AO by order dated 31.12.2008 held that the appellant has a fixed place PE and DAPE in India. Further, the AO also deemed 10% of the value of supplies made to the clients in India as the profits arising from such supplies and attributed 35% of such profit to the Appellant s PE in India. These findings were appealed against by the assessees, to the Commissioner of Income Tax [CIT (A)]. 8. The CIT(A) upheld the order of the AO with respect to the initiation of proceedings under Section 147/148 of the Act and existence of PE and attribution of income but allowed appeal on the issue of levy of interest under Section 234B of the Act. Aggrieved by the order dated 30.09.2010, the appellants preferred an appeal before the ITAT. GE Group submission to the ITAT 9. The Appellant submitted that the technology and not marketing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was also held that those expats and GEIIPL employees working under expats were so working and the same was never denied by the assessee. It further stated that the primary, specific and original proven material in the form of survey documents, self-appraisals, manager assessment, etc., and showed that GE overseas concerns were selling its products in India and the core activities in regard to sale, namely, pre-sale, during-sale and postsale were being carried out in India by GE India. 12. The ITAT held that all conditions for constituting a fixed place PE in terms of paras 1, 2 and 3 of the Article 5 were met with, as the AIFCAS building was a fixed place from which business of GE overseas entities was partly carried on in India and the activities carried out from such fixed place are not of preparatory or auxiliary character. It was also held that Article 5 (4) stated that where a person, other than an agent of independent status to whom Article 5 (5) applies, and fulfils the conditions as set out in the Article 5(4), that person will constitute a PE of the enterprise. It was furthermore held that the first part of Para 5 refers to an agent of independent status and the secon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poses of the DTAA between India and USA. The Appellant is engaged in the business of manufacture and supply of highly sophisticated components and sub-assemblies of gas turbines to various clients all over the world. Similarly, other entities, part of the present batch of appeals are engaged in manufacture and supply of various equipments in the oil and gas, aviation and energy sector. Some entities are also engaged in rendering offshore services to various clients across the world. 16. Mr. Sachit Jolly, arguing for GE, states that it is an undisputed position that research and development, design, fabrication and manufacture of all equipments are done outside India. It is also undisputed that title to the goods passes outside India. It is also not the allegation or finding by any of the lower authorities that any marketing activity is undertaken by any of the appellants in India. However, the AO found [and the CIT confirmed- as did the Dispute Resolution Panel ( DRP )] and later, the ITAT that a part of the sales function is done in India through expatriates, which are deputed by the appellants along with a team of employees of GEIIPL and, therefore, the office space occupied b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oreign enterprises. Due to the complex equipment being supplied by the appellants, to understand the technical specifications of the product, issues pertaining to warranty, pricing, time of delivery, etc., technically qualified personnel were required in India to understand the needs of the clients. 19. Mr. Jolly urged that it is a settled law that the onus on proving the existence of PE lies on the Revenue. [Refer E-Funds IT Solutions Inc (supra)]. In the present case, the fixed place PE is alleged only in respect of the sales function, which function is a small part of the overall business of research and development, design, fabrication and manufacture all of which happened outside India. Therefore, mere participation of the expatriates and employees of GEIIPL in the negotiations, (without any authority to conclude contracts) which is a small part of the sales function, cannot be said to be the core business activity for the appellants. The revenue, having failed to prove that the personnel in India had the authority to close and conclude contracts on their own volition and accord, could not have proceeded to treat the existence of the personnel as constituting a PE in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4) of the DTAA between India and USA states that notwithstanding the provisions of paragraphs 1 2, where a person acts on behalf of a foreign enterprise in India and he has the authority to conclude contracts on behalf of the foreign enterprise and he habitually exercises such authority then the foreign enterprise can be set to have a DAPE in India. However, if the activities of the so-called agent in India are preparatory and auxiliary in character then even the authority to conclude contracts does not lead to the formation of a DAPE in India. In other words, the DAPE acts as an alternative to the fixed place PE, i.e., even without the existence of a place at the disposal of the foreign enterprise, a PE can exist if the foreign enterprise carries on core business through a dependent agent in India. In support, Paras 31 and 32 of the OECD Model Tax Commentary on Article 5 are relied upon by Mr. Jolly. 23. It is argued that Article 5(5) further restricts Article 5(4) and states that if the agent in India is not dependent on the foreign principal and the agent acts in ordinary course of business, then no DAPE can be said to exist. Counsel submitted that in present case, the reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the ITAT. Counsel complains that however, the ITAT, in the impugned order has not even referred to those submissions. Reliance is placed on the detailed rebuttal made before the ITAT incorporated at Pages 54-64 of the Appeal. For instance, it is urged that the e-mail at Pg.127 of the Survey Documents-1, referred to by the ITAT in the impugned order clearly shows that personnel from Italy, i.e., La Motta, Nicoletti and Paolo negotiated and concluded contracts with prospective clients and Riccardo was merely marked on the correspondence without any authority to negotiate or finalize contracts. Similarly, e-mail at page no.195 of the Survey Documents-I, referred to by the ITAT, -if read with page no. 23 of the Survey Documents-, the proposal, both technical and commercial, were sent by Danila Araniti directly to BHEL on 28.02.2007 which is reflected in the e-mail@ page no.23.Similarly, the statements of Mr. Chandan Jain or Mr. Rupak Saha do not even remotely suggest that the expatriates or the employees of GEIIPL had the authority to conclude contracts on behalf of the appellants herein. 27. It is submitted that the impugned order has obfuscated the authority to negotiate and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overall profits could have been held to be attributable to the alleged PE in India. Reliance is placed on Director of Income Tax v. Galileo International Inc. 2011 (336) ITR 264 (Del); Anglo-French Textile Company Ltd. v. CIT 1954 (25) ITR 27 (SC). It was argued that without prejudice, even if 35% profits are to be attributed to the alleged sales function, admittedly not the entire sales function is carried on in India. A bare perusal of the e-mails which have been relied upon by the Revenue leads to the inescapable conclusions that majority of the sales function is carried outside India. Accordingly, not more than 20% of the 35% profits attributable to the sales function can be attributed to the alleged PE in India. The ITAT, therefore, erred in attributing profits equivalent to 75% of the sales function to the activities done in India. 30. On behalf of the Revenue, Mr. Ruchir Bhatia, learned counsel argued that the lower authorities correctly refused to accept the assessee s contentions that sale consideration was not taxable in India as the title in respect of the equipments was transferred outside India and the payments were also received outside India. It was pointed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and secondly, they were heading the operations of GE overseas entities in India. From the description of their job and appraisal reports with the Manager assessment, wherever given, it was clear that these expats were India country heads or working at the leading positions, managing business, securing orders and doing everything that was feasible which was needed to carry GE overseas entities India operations. It was submitted that the assessee did not and could not deny that its business model and GEII s expats role is similar in respect of all businesses in India. Furthermore, the expats were not confined to a particular GE entity but working for one of its three major business lines, viz., Infrastructure, Industrial and Healthcare. 32. The revenue relied on the following findings and submitted that they are factual, which ought not to be disturbed: 27.4 Now, we will discuss the role of the employees of GEIIPL in assisting the expats in Indian operations of GE overseas entities, as unfolding from the survey documents. i. Nalin Jain - Pages 247 and 264 of the Survey documents PB contain profile of Nalin Jain duly signed by him which shows his designation in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of the presence of the expatriates who are working for the business of the appellant in India along with employees of GEIIPL. The business activities carried out through GEHPL results into a business connection of the nature referred to in Explanation 2 of Section 9(1)(i) of the Act. 34. It was argued that the activities carried out by the expatriates and the activities of GEIOC, LO are not preparatory or auxiliary in nature as claimed by the appellant. The activities of various GE entities in India, carried out through their expatriate employees, are related to marketing and sales which is a core activity and integral part of any business. Marketing and sales activities of the GE entities in India contribute to the income of the concerned entity. According to the appellants GEIOC, LO acts as a communication channel only and is providing support services. However, all the employees (of the LO) are deputed to different GE entities. Its office space, facilities and staff are being used by GE Overseas entities for their business. The agreement for providing support services by GEHPL to GEIOC and affiliates is with GEIOC which means that GEIOC, LO is providing all the facilities a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Analysis and Conclusions: 38. The relevant provision of the DTAA, i.e the Indo-US DTAA reads as follows: Article 5.1. For the purposes of this Convention, the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term permanent establishment includes especially: (a) a place of management; (c) an office; (d) to (l) 3. Notwithstanding the preceding provisions of this Article, the term permanent establishment shall be deemed not to include any one or more of the following : (a) to (d) (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise. 4. Notwithstanding the provisions of paragraphs 1 and 2, where a person- other than an agent of an independent status to whom paragraph 5 applies- is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Moreover, having space at disposal does not require a legal right to use that place mere continuous usage is sufficient if it indicates being at disposal. (Ref Para 4.1 of OECD MTC). 41. In the decision in Formula One, (supra), the Supreme Court had occasion to deal with what is a permanent establishment. After reviewing several previous authorities and legal commentaries, the court stated as follows: The term place of business is explained as covering any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. It is clarified that a place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. Further, it is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise. A certain amount of space at the disposal of the enterprise which is used for business activities is sufficient to constitute a place of business. No formal legal right to use that place is required. Thus, whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y dock at a customer s warehouse every day for a number of years for the purpose of delivering goods purchased by that customer. In that case, the presence of the road transportation enterprise at the delivery dock would be so limited that that enterprise could not consider that place as being at its disposal so as to constitute a permanent establishment of that enterprise. Fourth example is that of a painter, who, for two years, spends three days a week in the large office building of its main client. In that case, the presence of the painter in that office building where he is performing the most important functions of his business (i.e. painting) constitute a permanent establishment of that painter. It also states that the words through which must be given a wide meaning so as to apply to any situation where business activities are carried on at a particular location which is at the disposal of the enterprise for that purpose. For this reason, an enterprise engaged in paving a road will be considered to be carrying on its business through the location where this activity takes place. 42. Applying the standard to the facts at hand, the ITAT and the lower appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he enterprise. 46. The ITAT s finding on this aspect was that the assessee s arguments with respect to the activities being preparatory or auxiliary character were unfounded. The relevant part of the discussion, which is fairly detailed after analyzing several documents and e-mails, and on the basis of survey recovered documents, reads as follows: 28.1. The third condition for constituting a fixed place PE, to the extent it is relevant for our purpose, is that the activities carried on from such fixed place should not be of preparatory or auxiliary character. If the activities done from such fixed place fall within the purview of preparatory or auxiliary , the fixed place sheds its character of a permanent establishment. The term preparatory activity is understood in common parlance as some job concerned with the preparation of the main task to be undertaken. It is pursued before the taking up of the actual activity. Black s Law Dictionary 7th Edition at page 130 defines the term auxiliary to mean as aiding or supporting, subsidiary. An activity becomes auxiliary if it is in support or aid of the core income generating activity. The Hon ble jurisdictional High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selves. 28.3. Section 2(e) of Foreign Exchange Management (Establishment in India of Branch of Office or Other place of business) Regulations, 2000 defines Liaison office to mean a place of business to act as a channel of communication between the principal place of business or HO and entities in India, but which does not undertake any commercial/trading/industrial activity and maintains itself out of inward remittances received from abroad through normal banking channel. From the definition of Liaison office seen in juxtaposition to the above referred judgments, it becomes clear that acting as a communication channel is an activity of auxiliary character and hence does not constitute a PE in India. 28.4 Now, let us examine if the activities carried out in India by the GE overseas entities through GE India are of preparatory or auxiliary character. Main focus of the ld. AR was to establish that the activities done by GE India were of preparatory or auxiliary character. As per the application made to RBI and permission obtained, the LO of GEIOC was to act as a communication channel between the head office and the customers in India. Thus, there remains no doubt that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormation pertaining to market trends, key policy changes in the industry, etc. 28.8.1. For the second stage of Bid/no bid and Proposal development , the ld. AR contended that the assessee stated during the course of the assessment proceedings that on receipt of communication from GE India regarding an identified viable business opportunity, GE Overseas analyses the same independently for deciding whether the same is worth pursuing. In case GE Overseas requires any inputs/clarifications/additional information (as part of its decision making process), it may request GE India to provide the same. GE Overseas examines the opportunity in detail and thus arrives at an independent decision of whether to pursue the identified business opportunity or not. Entire technical and commercial evaluation of the opportunity at this stage is carried out by GE Overseas with inputs from its various functional personnel spanning operations, finance, marketing, etc. In the event, GE Overseas decides to pursue the identified business opportunity, it commences the proposal development process and intimates GE India in this regard. GE India (on receipt of such intimation and under the explicit i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiation process internally amongst its various overseas functional heads/approving authorities (operations, finance, legal, etc.) so as to decide whether or not to go-ahead with the contract on the agreed terms and conditions with the customer. If the negotiated contract terms are approved and accepted both by GE Overseas and the end-customer, the contract documents are prepared and executed/signed by GE Overseas. Local inputs are obtained from GE India at this stage on a need basis. 28.9.2. Here again we find that the assessee s submissions are only partly true. Pages 101-103 of the Survey documents PB-II, as discussed above, evidence GE India finalizing MOU with the Indian customer, Pump Design Department of IOC, and advising accordingly to the GE Overseas. Then, there is a mail showing that the change was permitted in the terms of MOU by the Indian team, which was conveyed by GE India to the customer, with a copy to another member of GE India. GE India was negotiating terms with the Indian customers is also borne out from page 195 of Survey Documents PB-I as discussed above, whereby Indian customer was requesting GE India to revise the offer. Similarly, page 82 of Survey ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly without consulting GE India. The mere fact that the contracts were formally signed outside India by GE Overseas does not in any manner undermine the doing of core activity of sales by GE India. It is so for the reason that GE India finds customers in India, understands their requirements, negotiates necessary terms and conditions with them, prepares or helps in preparing MOU and finalizes the deal with them. With the doing of all the above activities, when MOU is prepared in India and the Indian customer signs it first in India and then it is sent to GE overseas for signature, for all practical purposes, it will have to be concluded that core sales activity was undertaken by GE India alone. 28.12. Next leg of the submissions to bolster the argument of the preparatory or auxiliary services rendered by GE India was reference to the Roles and responsibilities of some of the expats and employees of GEIIPL etc. supplied by the assessee to Department pursuant to the judgment of the Hon ble High Court. Based on such details, it was argued that GE India was simply assisting GE Overseas and their role was not more than that of a support staff to GE Overseas, who, in turn, was taking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of role and responsibilities shows that William was to act as a mere communication channel between the customers in India and GE Overseas. In contrast, when we see his Job description given under his own signature in the documents as discussed above, it transpires that he was to: Organize local aviation team including commercial and military sales leaders; Conduct compliance risk assessments, audits and support training for aviation team members in India; Develop aviation growth strategy for India and obtain HQ support for same. In other words, he was responsible for all the activities of sales in India and only the requisite support was to be taken from HQ. There is an apparent contradiction between what William said in a document signed by him and the picture of his role which the assessee portrayed after the conclusion of assessment. It goes without saying that the primary document duly signed by William showing his job responsibilities will have precedence over what the assessee stated by way of Annexure after the termination of assessment. ii. Kumar Pratyush- Annexure 12 to the assessee s letter pursuant to the Hon ble High Court s order explains his roles and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that the assessee did not properly state the role and responsibilities of Ashfaq in the letter filed post assessment, on which the ld. AR has relied to canvass that the role played by GE India was only auxiliary and preparatory. iv. Pierson Kenneth- Annexure 19 to the assessee s letter pursuant to the Hon ble High Court s order explains his role and responsibilities. It has been written, inter alia, that,: Kenneth s profile was more of locating opportunity and providing marketing development strategies for the GE overseas entity.... Kenneth had no authority to take any decision with respect to the sale of product/parts in the signaling business. All prices and terms and conditions were negotiated and finalized only by the GE overseas entity. Kenneth being technical person did not have any authority to negotiate any terms of contracts in India. Now let us have a look at his Assignment letter, which shows his position as Sales Marketing Manager of GE Transportation. We fail to comprehend as to what a Sales Marketing Manager will do without any authority to take any decision w.r.t. sale. Fallacy of the assessee s claim in the postassessment letter is established from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lationship with Indian customers....Most of commercial negotiations were done by the commercial operation team sitting in Italy... Riccardo never took any decision or negotiated on behalf of the GE overseas entity. ... and he was merely acting as channel between the Commercial team and the Customers . Here again, the assessee misled by stating wrong facts about the working of Ricardo in the post-assessment letter. His Assignment letter shows his position as Oil Gas, India Country Leader of GE Energy. We have noticed from the survey documents above that Ricardo was not only negotiating and finalizing the terms and conditions with customers in India but also not allowing GE Overseas to alter any such terms without the consent of GE India. The assessee did not furnish his Appraisal report and Manager assessment despite a specific request by the AO till the completion of assessment. vi. Nalin Jain (GEIIPL)- Annexure 8 to the assessee s letter pursuant to the Hon ble High Court s order explains his role and responsibilities. It has been written, inter alia, that, : Nalin s role was to collect the market intelligence and initiate a dialog with the Indian customer to understand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India relating to sales, we will now discuss the details filed by the assessee along with the same letter about some other employees of GEIIPL who were engaged in the activities in India. Despite showing all of them as doing mainly the work of mediator, the assessee has also accepted involvement of some of them in core activities, which is as under:- i. Anand Mohan Awasthy - He is a Mechanical Engineer with Diploma in Finance and is an employees of GEIIPL working since Financial year 2000-01. His designation is Service Manager . Annexure 1 discusses his roles and responsibilities, being, Responsible for aftermarket sales (spares) and services in respect of steam turbines and generators sold by various GE overseas entities in India . ii. Anand Bansal-He is in Business Administration/Management and is an employees of GEIIPL working since Financial year 2002-03. His designation is Sales Manager . Annexure 2 discussing his roles and responsibilities provides through the second bullet point that : As a part of his job, Anand s role was to formulate marketing strategy for wind energy related equipments in India, which involved, among other things, determining a marketing s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing all the relevant aspects, finding out the technical and financial viability, and then arriving at the ultimate conclusion of the supplying and pricing. The only condition set out under the R Table process on the Indian employees working for GE overseas entities in India was that the approval was required to be sought from the GE overseas before sending the proposal to customers in India. The assessee has itself admitted through stage 2: Bid/no bid and Proposal development of the Sales process that: In some instances, the proposal development is jointly run by the GE Overseas and GE India teams. However, even in such cases, decision making authority continues to remain only with GE Overseas. vi. Sanjeev Kakkar - He did his masters in Mechanical Engineering. His designation is Sales Director . He is an employee of GEIIPL working since 2000. Annexure 10 discussing his roles and responsibilities provides through the sixth bullet point that: As a part of his job, Sanjeev would understand the requirements of clients in terms of equipment required as well as financing required and thereafter, communicate these requirements to the overseas entities. There is again a referen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in fact, such core operations were carried out in India by some other means. Except for lip service that GE Overseas was doing core sale activity and GE Overseas doing only preparatory or auxiliary activities, the assessee did not place on record even an iota of evidence to prove its contention. If we minutely consider the nature of activities done by GE Overseas and GE India, it clearly surfaces that GE India was doing core marketing and sales activity and GE Overseas was doing only auxiliary activities, in aid and support of the activities of the marketing activities carried out by GE India. 28.18. Moreover, para 26 of the OECD Commentary discussing exemption under sub-para (e), being activities of preparatory or auxiliary nature, clearly provides that : A fixed place of business which renders services not only to its enterprise but also directly to other enterprises, for example to other companies of a group to which the company owning the fixed place belongs, would not fall within the scope of subparagraph e) . This part of the Commentary explaining preparatory or auxiliary activities makes it clear that if a fixed place of business is used for rendering services to mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ones which would not fall within the ambit of the expression permanent establishment . One such exclusionary clause is found in Article 5 (3) (e) which is: maintenance of fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character. The plain meaning of the word auxiliary is found in Black s Law Dictionary 7th Edition at page 130 which reads as aiding or supporting, subsidiary . The only activity of the liaison offices in India is simply to download information which is contained in the main servers located in UAE based on which cheques are drawn on banks in India whereupon the said cheques are couriered or despatched to the beneficiaries in India, keeping in mind the instructions of the NRI remitter. Can such an activity be anything but auxiliary in character. Plainly to our minds, the instant activity is in aid or support of the main activity. The error into which, according to us, the Authority has fallen is in reading Article 5 (3) (e) as a clause which permits making a value judgment as to whether the transaction would or would not have been complete till the role played by liaison offices ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of the outsourcing operations at MSAS. The object is to protect the interest of MSCo. These stewards are not involved in day-today management or in any specific services to be undertaken by MSAS. The stewardship activity is basically to protect the interest of the customer. In the present case as held hereinabove MSAS is a service PE. It is in a sense a service provider. A customer is entitled to protect its interest both in terms of confidentiality and in terms of quality control. In such a case it cannot be said that MSCo has been rendering the services to MSAS. In our view MSCo is merely protecting its own interests in the competitive world by ensuring the quality and confidentiality of MSAS services. We do not agree with the ruling of AAR that the stewardship activity would fall under Article 5(2)(l). To this extent we find merit in the civil appeal filed by the appellant (MSCo) and accordingly its appeal to that extent stands partly allowed. 17. As regards the question of deputation, we are of the view that an employee of MSCo when deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo. As long as the lien remains w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matters is that the services are performed in the State through an individual present in that State. 50. Jebon Corporation India v. CIT 2012 Taxmann 7 (Kar) held that commercial activities including procuring orders, identifying buyers, negotiating with buyers, agreeing to the price, and requesting them to place an order with the foreign headquarters were not auxiliary or preparatory in nature. The observations and findings of the High Court are eerily similar to the facts of this case: Relying on these provisions, it is contended by the assessee that the liaison office was opened to act as a communication channel between the head office at Korea and the parties in India. They have not undertaken any other activity of a trading or commercial or industrial nature nor have they entered into any business contract in their names. They have not charged any commission or any remuneration and they have not earned any such amount in India for liaison activities. The entire existence of the office in India is made exclusively out of the funds of the head office and they have not borrowed any money. They have not acquired any properties. They have no direct commitment with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases, they are able to close the order to the satisfaction of the customer and the head office. In other cases, if the customer is not happy with the price and if he asks for more discount, the personnel at Korea will discuss the same with the suppliers to request for more discount in the price. If the supplier agrees for giving more discount, then accordingly, they quote a new discounted price to the customers and close the deal. After this, if the deal is through they have to process the order. They fill the details in the order processing chart and send the same to the head office through e-mail as an attachment. The purchase team at the head office will process and place the order to the supplier and then wait for the goods to be ready. Once the goods are ready, they will be inspected by the quality control team at the head quarters to ensure that the specifications are properly met. After that the goods are packed and shipped to the freight forwarder appointed by the customer. The same will be shipped directly to the customer by the first available flight or ship. The head office will send a copy of the commercial invoice, packing list and airway bill/bill of lading to the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppreciated by the Tribunal and it came to the conclusion that though the liaison office was set up in Bangalore with the permission of the RBI and in spite of the conditions being stipulated in the said permission preventing the liaison office from carrying on commercial activities, they have been carrying on commercial activities. 11. It was further contended that the RBI has not taken any action and therefore, such interference is not justified. Once the material on record clearly establishes that the liaison office is undertaking an activity of trading and therefore entering into business contracts, fixing price for sale of goods and merely because the officials of the liaison office are not signing any written contract would not absolve them from liability. Now that the investigation has revealed the facts, we are sure that the same will be forwarded to the RBI for appropriate action in the matter in accordance with law. But merely because no action is initiated by RBI till today would not render the findings recorded by the authorities under the IT Act as erroneous or illegal. 51. GE contends that the business activities in India must include the authority to conclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the nature of the incentive plan would clearly indicate that the purpose of the liaison office in India was not merely to advertise the products of the assessee or to act as a link of communication between the assessee and a prospective buyer but involved activities which traversed the actual marketing of the products of the assessee in India because it was on the basis of the orders generated that an incentive was envisaged for the employees. The assessee sought to explain away the incentive plan by stating before the Assessing Officer that the incentive which was provided for in the letters of the appointment was only standard language of the appointment letter of the company , which had inadvertently not been deleted from the contract of appointment by the liaison office. Such an explanation was, to say the least, far-fetched because the assessee which has a transnational business with a range of advisors cannot readily be assumed to have committed an inadvertent mistake on an issue as significant as this. The Assessing Officer has quite justifiably declined to accept the explanation. 53. Applying the above standards to the factual matrix at hand, the ITAT concluded t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opted for business development involved four steps: Stage 1-Pre-qualification; Stage 2-Bid/no bid and Proposal development; Stage 3-Bid approval and negotiations; and Stage 4-Final contract development and approval. The first step is identification of a market opportunity, involving collection of information, analysis etc. The next two steps are described elaborately as follows: survey documents, as discussed above, abundantly show GE India playing an important and proactive role in the finalization of the deal and the terms and conditions with customers in India. In reality, the major activities about sourcing of customers and finalizing the deals with them were done by GE India in consultation, wherever required, with GE Overseas. The assessee frankly admitted in the same para that: In some instances, the proposal development is jointly run by the GE Overseas and GE India teams. This is also borne out from page 104 of the Survey documents PB-II, as discussed above, which is an e-mail from Pump Design Department to GE India and copy to other members of GE India requesting the Indian team to send the draft of MOU along with complete comments, so that the same could be incor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as sent back to GE India to get it reviewed from aftermarket colleagues in India. Pages 32 and 33 of Survey documents PB-II show that when GE Overseas tried to contact directly with RIL, GE India objected to the same and wanted the entire consultations only through the Indian team, which was positively responded by GE Overseas. Page 39 of the Survey documents PB-II again shows that it is GE India which was negotiating with Indian customers and not allowing GE Overseas even to change the terms and conditions. 28.10. At this juncture, it is significant to note that the assessee is not dealing in off the shelf goods. Sales are made on the basis of a prior contract. In such cases, customer s requirements are first properly understood and thoroughly examined; then commercial and technical discussion meetings take place; then proposals are prepared after negotiations on technical and commercial aspects taking Indian laws and regulations in consideration. These are all significant and essential parts of sales activity, which have to be necessarily done in India by GE India. Ordinarily, it is not the Indian customer, who would visit GE entities overseas, but it is GE India, who has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible contracts of GE with Reliance CS-1, GE Oil Gas, Bongaigaon Refinery, Draft LOA for WHRU (E-mail from Andrea Alfani (GE Overseas) to Vivek Venkatachalam (GEIIPL) and Riccardo Procacci (GEII) on proposed email to send Reliance, including comments to RIL on the proposed letter of acceptance and relevant attachments. Also, asked them whether they wanted to send the e-mail themselves to RIL or for it to be sent directly. These appear to show important role for Vivek and Riccardo in the negotiating process. 59. The e-mail chain on CONFIDENTAL: Ad Syst contains e-mail from Gioseppe La Moita (GE Overseas). These suggest that Gioseppe La Moita, Renato Mascii (GE Overseas) and Riccardo Procacci (GEII) were in India negotiating the BHEL contract. Rest of the correspondence is not particularly relevant. These suggest that substantive negotiation work on the BHEL contract was done in India by a mix of GE Overseas and GE India team. 60. It is clear that in the kind of activity that GE carries out, i.e manufacture and supply of highly specialized and technically customized equipment, the core activity of developing the customer (identifying a client), approaching that customer, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 5 and Article 3(g), it is apparent that the second part of para 5 refers to an agent looking after the activities of a single enterprise and not multiple enterprises. GE relies on Varian India (supra) which held in para 5 it is necessary that the activities of agent must be devoted wholly or almost wholly to one enterprise. Nondisclosure of transactions are not sufficient to establish someone as agent of independent status there was needed to fulfill both conditions. Furthermore, there also was the need to show that they were not at arm s length practice. Nonetheless, ITAT held that GE India counts as agency PE. An agent of a foreign company is an agent of dependent status even if there is more than one company in the related group. If there are multiple independent customers you qualify as an agent of independent status. The fact that transactions between such an agent of dependent status and multiple related enterprises are or are not at ALP, is not relevant at the stage of establishment of a dependent agent PE in India, which is created solely due to the nature of activities of such an agent for the overseas entity. 64. The ITAT opinion focuses on Article 5(4)(a) i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in Ministry of Finance (Tax Office) v. Philip Morris (GmBH), Corte Suprema di Cassazione No.7682/02 of May 25 2002: the participation of representatives or employees of a resident company in a phase of the conclusion of a contract between a foreign company and another resident entity may fall within the concept of authority to conclude contracts in the name of the foreign company, even in the absence of a formal power of representation. Therefore, GE India s activities clearly constitute activities that would establish agency PE in India 67. As regards the question that whether the position of Varian India v. ADIT 2013 (142) ITD 692 (Mumbai) is to be followed in this case, ITAT chose to distinguish that decision since facts of that case are distinguishable. In that case, there were AEs and separate agreements and different payments this did not occur here (was not able to find proof on whether this is the case this is ITAT s finding of fact). As regards the level of activity which is required for an agent to have habitually exercised an authority to conclude on behalf of the enterprise, it is necessary to make a reference to the parties arguments. 68. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d analysis of the law in Rolls Royce Plc (supra). The assessee had a local office (LO) in India; the AO determined that it constituted dependent agent PE. Though the dependent agent had no authority to negotiate and enter into contracts for and on behalf of the assessee, it habitually secured orders for RRIL and was its PE. At the same time, this court held that Rolls Royce Plc s presence in India was also a fixed place of the assessee constituting PE. Activity at this fixed place was no auxiliary but was a core activity of marketing, selling, negotiating. RRIL was a sales office for assessee employees worked wholly and exclusively for assessee and its group. Employees of assessee in India were also present in various locations in India and reported to director of RRIL India. The following extracts of the judgment are indicative of the approach to be adopted wherever the court has to see if the entity has a PE and a dependent agent PE: 16. After holding that the assessee had business connection in India, the Tribunal adverted to the question as to whether there was any PE in India within the meaning of Article 5 of the Indo-UK DTAA. The Tribunal extracted the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of this fixed place is not a preparatory or auxiliary, but is a core activity of marketing, negotiating, selling of the product. This is a virtual extension/projection of its customer facing business unit, who has the responsibility to sell the products belonging to the group. (c) RRIL acts almost like a sales office of RR Plc and its group companies. (d) RRIL and its employees work wholly and exclusively for the Rolls Royce Plc and the Group. (e) RRIL and its employees are soliciting and receiving orders wholly and exclusively on behalf of the Rolls Royce Group. (f) Employees of Rolls Royce Group are also present in various locations in India and they report to the Director of RRIL in India. (g) The personnel functioning from the premises of RRIL are in fact employees of Rolls Royce Plc. This has been admitted by the MD Mr. Tim Jones, GM, and can be discerned from statement of Mr. Ajit Thosar and documents like terms of employment of GMS. Thus, the appellant can be said to have a PE in India within the meaning of Article 5 (1) 5 (2) and 5 (4) of the Indo UK DTAA. Since we have found that the appellant 496/2008, 497/2008, 498/2008,498/2008 584/2008, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto neat pigeon holes that the DTAAs envision. The ingenuity and innovation of the enterprise indeed its intangible wealth is to aggregate and maximizing profits in the most efficient manner possible, even while minimizing costs. The DTAAs and indeed tax regimes are based on known patterns of such organizational behavior. As Cardozo remarks that at Back of precedents are the basic juridical conceptions which are the postulates of judicial reasoning, and farther back are the habits of life, the institutions of society, in which those conceptions had their origin, and which, by a process of interaction, they have modified in turn . So the law, or even treaties, which are the result of compact between nations, deal with generalities based on the way institutions behaved in the past, and the way they would presumably behave. At the same time, these general provisions do not cater to all situations, and often courts have to grapple with the kind of intersects which this case demonstrates. 74. The assessee, GE has organized its affairs in such a manner and one cannot quarrel with its intent, so as to minimize tax incidence in India. Yet, the court s task is not as easy to neatly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Having regard to Rule 10(iii), the AO came to hold that the income of non-residents was to be determined by: any such other manner as ... may deem suitable. Taking guidance from sections 44BB and 44BBB, the AO estimated profit @ 10% of sales consideration to the customers in India. Inspired by the decision of the Delhi Bench of the Tribunal in Rolls Royce PLC vs. DDIT 2007-TII-32-ITAT-DEL-INTL , in which case 35% of the total profit was held to be pertaining to marketing activities, the AO applied the same percentage to work out the income chargeable to tax in India. First appeal did not allow any relief. That is how, the assessee is aggrieved against such attribution of income. 56. We have heard the rival submissions and perused the relevant material on record. It is noticed that the exercise of attribution of income by the AO is in two parts, viz., calculation of total profit from the sales made by GE overseas entities in India, which, in the instant case, has been worked out at 10% and second, attribution of such profit to marketing activities, which the AO has taken at 35% of 10%. As regards the first component, being, the estimation of profit on the sales made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -vis the assessee. From such a comparative analysis, we are satisfied with the contention advanced by the ld. AR that the activities carried out by Rolls Royce and ZTE Corporation in India are not similar to those done by the PEs of GE overseas entities in India. While discussing above the nature of activities performed by GE India in generating sales of GE Overseas in India, we have elaborately taken note of the lead role played by GE India and GE overseas playing only a supporting role. In such circumstances, we cannot approve attribution of whole of 35% of the profits relating to sales and marketing to the PE in India. Considering all the relevant facts and adopting a holistic approach, we hold that GE India conducted core activities and the extent of activities by GE Overseas in making sales in India is roughly one fourth of the total marketing effort. Ergo, we estimate 26% of total profit in India as attributable to the operations carried out by the PE in India. Therefore, as against the AO applying 3.5% to the amount of sales made by the assessee in India, we direct to apply 2.6% on the total sales for working out the profits attributable to the PE in India. 77. The Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argeable to tax, as attributable to the PEs is computed @3.5% of the sale price. 16.4 The AR vide letter dated 23.12.2008 has claimed that GE overseas has adequately remunerated GE India Industrial Pvt. Ltd. for local marketing support provided by it. Reference in this regard can be made to remuneration paid by GE overseas to third party independent agents, who provided local marketing support with regard to offshore sales into India. Should you require, we can provide copies of these agreements for your reference? Therefore, even assuming, without admitting that GE overseas has a PE in India, placing reliance on the decision of Supreme Court in the case of DIT vs. Morgan Stanley (292 ITR 416) as affirmed by the Mumbai High Court judgment in the case of SET Satellite (Singapore) Pte. Ltd. vs. DCIT (307 ITR 205) , no further profits can be either attributed or taxed in hands of the alleged PE . This contention of the assessee is not acceptable for the following reasons: (i) The service agreement between GE Power/ GEIIPL provides for performance of very specific services and which centre around to act as a communication channel between customers and GEIOC or its af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... types PEs, discussed in this order. In this regard; reference is made to the order of the Hon ble Apex Court in the case of Morgan Stanley (Supra). As regards attribution of further profits to the P.E. of MSCo where the transaction between the two are held to be at arm s length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a P.E.) is remunerated on arm s length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the P.E. The situation would be different if the transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise, in such a case, there would be need to attribute profits to the P.E. for those functions/risks that have not been considered. The entire exercise ultimately is to ascertain whether the service charges payable or paid to the service provider (MSAS in this case) fully represent the value of the profit attributable to his service. (Emphasis supplied) Reference is also made to the DECO Commentary on Article 7, which reads as below: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jected, as the same is distinguishable on facts. Regarding the decision of Hon ble Apex Court in the case of Morgan Stanley (supra), this decision supports the position taken by this office. Without prejudice to this finding, it is also stated that the overseas entities have fixed place PE (because of presence of expatriates) and also construction PE in India and profits for all the PEs have been attributed by taking them together. 16.5 It is stated that the assessee cannot take a plea that the payments to GEIIPL, requires to be allowed as deduction from the profits worked out in this order, because the global expenses including expenses incurred in India have already been considered while working out the profits. Once the profits are worked out, the expenses cannot be allowed further, because it will lead to double allowance of the expenses. It is not the revenue, which is attributed in this case, but the profits, which takes care of global expenses, including Indian expenses. 16.6 On the basis of discussions in the order, I am satisfied that it is a fit case for initiation of penalty proceedings u/s 271(1)(c) the Act. 17. The total sales of the assessee in India du ..... X X X X Extracts X X X X X X X X Extracts X X X X
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