TMI Blog2019 (12) TMI 812X X X X Extracts X X X X X X X X Extracts X X X X ..... e PE constitute in India by the assessee under Phase-II of the contract with JKSPDC did not play any role or contributed in any manner to the execution of the other contracts or earning of FTS under other contracts and cannot thus be said to be involved with any other projects in India. Accordingly, FTS received by the assessee from rendering of technical services and other contracts cannot be said to be involved directly or indirectly in any manner to the PE constituted in India under the contract with JKSPDC- Phase-II and are formed for the purpose of deliberate avoidance of tax. We find merit in the argument of the Ld. AR that such income by way of FTS is to be subjected to tax @ 10% under article 12 of the treaty and cannot be subject to tax @ 20% as contemplated by the Assessing Officer. Regional existence of place of PE and the article 5(1) in the form of JKSPDC-BCS as well as there is existence of supervisory PE under article 5(2)(i) in the form of JKSPDC-BCS was not established by the Revenue from any documentary evidence on record. Similarly, the nature of business of the assessee remains unchanged and the assessee is engaged in the business of providing consultancy ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appeals have been filed against the orders dated 08.09.2004, 20.09.2010, 19.12.2006, 10.01.2009 and 10.01.2009 passed by the CIT(A)-XXIX, New Delhi, for Assessment Years 2001-02, 2002-03, 2003-04, 2004-05 2005- 06 respectively. 2. The grounds of appeal are reproduced as under: ITA No.4960/Del/2004 A.Y.2001-02 1. The learned Commissioner of Income Tax (Appeals)-XXIX has erred both on facts and in law in sustaining the incorrect application of the rule of Force of Attraction in the Protocol to the Double Taxation Avoidance Agreement between India and Germany by the learned assessing officer thereby subjecting to tax the entire revenues earned by the appellant during the subject year at the rate of 20% under section 115A of the Income Tax Act, 1961. 2. The learned Commissioner of Income Tax (Appeals)-XXIX has erred both on facts and in law in sustaining the learned assessing officers s contention that the reimbursement of expenses at actuals received by the appellant is taxable as its income. 3. The learned Commissioner of Income Tax (Appeals)-XXIX, has erred both on facts and in law in upholding the levy of interest under Section 234A, Section 234B an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uble Taxation Avoidance Agreement between India and Germany by the learned Assessing Officer, thereby subjecting to tax the entire revenue of ₹ 112,394,374 earned by the appellant during the subject year at the rate of 20 percent under section 115A of the Income Tax Act, 1961 ( Act ). 2. The learned CIT (A) has erred both on facts and in law in upholding the levy of interest under section 234A and 234B of the Act. Grounds of appeal of ITA No.2124/Del/2009 A.Y.2004-05 1. On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) - XXIX [ CIT (A) ] has erred in upholding the stand of the Deputy Director of Income-tax, Circle 1(2), International Taxation ( hereinafter referred to as the Teamed assessing officer ) that the Appellant is not covered under section 44BBB of the Act, thereby taxing the revenues of ₹ 16,814,835 earned by the Appellant from project with Jaiprakash Industries Limited ( JIL ) during the subject year at the rate of 20 percent under section 115A read with section 44DA of the Income Tax Act, 1961 ( Act. ). 2. On the facts and circumstances of the case and in law, the learned CIT (A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case and in law, the learned CIT (A) has erred in not adjudicating on the applicability of the rule of Force of Attraction provided in the Protocol to the tax treaty, on the basis of his conclusion that the Appellant is taxable under the provisions of Article 12 ( Royalties and Fees for Technical Services ) of the tax treaty. 4. The learned CIT (A) has erred both on facts and in law in upholding the levy of interest under section 234A, 234B and 234D of the Act. 3. We are taking up ITA No.4960/Del/2004, A.Y. 2001-02 as the lead case. Lahmeyer International GmbH (hereinafter referred to as the Assessee ), a non-resident company incorporated in Germany, is an engineering consulting company that offers wide range of planning, designing and consulting services, etc. in relation to complex infrastructure projects in India. The Assessee has been rendering engineering consulting services mainly in relation to 10 power projects. The Assessee had executed/undertaken several contracts during the financial year April 1, 2000 to March 31, 2001, relevant to the present Assessment Year 2001-02. The details of the technical services fees received by the Assessee from executio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled submissions dated 10.12.2003 providing details of the reimbursement of expenses, highlighting the distinguishing facts and the legal provisions on which reliance was placed by the Assessee while contending non-taxability of reimbursement of expenses. As regards the contracts/agreements entered into by the Assessee under which it had earned income during the year, the Assessee submitted that it was in the process of collecting copy of the contracts and would furnish the same in due course during the assessment proceedings. The assessment order dated 24.12.2003 was passed under section 143(3) of the Act wherein the entire receipts of the Assessee during the present assessment year was subjected to tax at the rate of 20% by applying the principle of Force of Attraction under the Treaty; and the reimbursement of expenses received by the Assessee during the present assessment year was subjected to tax at the rate of 20%, as was done in earlier years. Thus, the Assessing Officer determined the Assessee's taxable income at ₹ 91,788,012/- by including within the taxable income of the Assessee, a sum of ₹ 340,707/- relating to reimbursement of expenses at actuals. The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision in the case of CIT v. Smt. Bani Roy Chowdhury Ors (1981) 131 ITR 578 @ 588 (Cal). Thus, the Ld. AR submitted that there was no device to avoid tax in entering different agreements and also there cannot be any allegation of tax avoidance. The Ld. AR further submitted that the condition of involvement of PE was not met in the present case. There is no finding that 'Baglihar Project PE' was in any way involved in any other project across the Indian territories. Each agreement is different and was entered into with different parties. Thus, the involvement of PE cannot be presumed. Its involvement should be real/actual and cannot be superficial as held by the Assessing Officer. The Ld. AR further submitted that risks involved are different and none of the seven agreements had any underline motive, which has been carried out by the assessee at any stage. The Ld. AR submitted that Baglihar project was in respect of hydro-power and its PE cannot be said to be involved in projects in the field of water management or thermal power. Due to geographical reasons, Baglihar project PE located in Jammu Kashmir could not be involved in other projects at far of places throu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt with Gujarat Infrastructure Development Board Society (GIDBS), the Ld. AR submitted that the agreement related to the field of Public Transit System for the city of Ahmedabad. In contrast, Baglihar Project related to Hydropower and the same was located in Vishakhapatnam (AP). In agreement with GIDBS, the Assessee was associated consultant. The main consultant was Louis Berger International Inc and it was Louis Berger who was responsible to GIDBS for all the obligations. Besides the assessee, Dalai Consultants and Engineers Ltd, Balaji Rail-road Systems Ltd. and ICICI Ltd. were also the consultants. Personnel's who were to perform the services were agreed in advance and without the prior approval of GIDBS personnel other than agreed could not have been deputed. The Ld. AR further submitted in respect of agreement with JKSPDC-Sawalkote Project, the same was for consultancy services only and the consultancy services were to be provided prior to signing of EPC. In contrast, under JKSPDC- Baglihar Project, the assessee was Engineer-in-charge for implementation of Hydropower Project including project management, hydropower design review and supervision of civil works. Thus, un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnected. The Ld. AR relied upon the decision of Sumitomo Corpn. v. DCIT (2008) 114 ITD 61 and Worlev Parsons Services Ptv. Ltd. (2009) 312 ITR 273 wherein it was observed that PE should be engaged in royalty generating services or fee for technical service or at least, it should facilitate the performance of such services. Onus is on Revenue to show that other projects were effectively connected to PE in respect of Baglihar project. The Ld. AR relied upon decision of ADIT v. Valentine Maritime (Mauritius) Ltd. (2011) 45 SOT 34(Mum) 5.7 As regards to applicability of Section 44D, the Ld. AR submitted that the question of applicability of section 44D does not arise because except for fee received in respect of Baglihar project, the fee received in respect of other agreements was taxable under Article 12 of DTAA. Since DTAA is more beneficial to the assessee, therefore, it would prevail. The Ld. AR submitted that the assessee opted to be taxed under DTAA and Section 44D would apply only, if FTS is held to be business income by virtue of effective connection under Article 12(5). In that case, Article 7 would apply and consequentially section 44D. 6. The Ld. DR submitted that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ggr.), 446 Louis Berger, 2nd Dec 99 303, 320,378,379 Sawalkote, 9th Dec 00 388,414 PGCIL, 14th Feb 01 Cl.4.6 Resident Project Manager, Cl. 5.4 r.w. Appx-F [p.114,02-03] VIWSCL, 6th March 01 Appendix-F [p.92] Baglihar Stage-II, 23rd Nov 01 Appendix-B(4) JIL, 18th August 03 6[05-06], 80[04-05] Chief Design Engineer 6.1 The Ld. DR pointed out the contradictions such as for the same contract [JKSPDC- Baglihar, Phase-I] part of revenue was offered to tax @10% and rest @20%. The Ld. DR further submitted that the contract was artificially split at the convenience of the assessee as can be seen from the following table- 2000-01 2001-02 2002-03 2003-04 2004-05 JKSPDC-Phase- I JKSPDC-Phase- II JKSPDC-Phase- I JKSPDC-Phase- I (BHP Design Contract) [@10% p.65 r.w.p.61 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Baglihar, Stage-II, it is only an extension of Stage-I and the employees of Stage-I shall be involved. Yet the assessee treats them as separate and independent projects. 6.4 The Ld. DR submitted that the rule of FOA uses the term business activities and not terms of contract . The former i.e. business activity has a more general and wider connotation than the expression terms of contract which is more particular and narrow. Moreover, use of the words same or similar further expands the scope of the expression business activity . Contracts involving the same or similar business activity can have varied and different terms. What is to be established is whether the business activities are being carried on of the same or similar kind as those effected through that is permanent. It has already been accepted by the assessee that it is engaged in the business of providing engineering technology services to various clients in relation to complex infrastructure projects. The mere fact that the terms of contract are different or for that matter the parties or geographical locations are different are not material for deciding the applicability of the FOA rule. 6.5 Similarly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk hold weekly review meeting with Client s Chief Engineer. [Art-47] Chief Resident Engineer will monitor the Civil Contractor s progress [cl.2.1, Apdx-A] Duration 64 man-months for expatriate staff [cl.1.2 3, Apdx- C Annex-1] Duration of 323 man-months for Local staff [Annex-1- Breakdown of Costs] 2. Sawalkote, 9th Dec 2000 Contract signed by Robert Laird, expat already working for Baglihar-I [p.384, 2001-02 r.w.p. 59 of PB-1, 2001-02] Dr. Jokiel expat already working for Baglihar-I is one of the witness[p.384, 2001-02 r.w.p. 59 of PB-1, 2001-02] Boris Lazaric, the other witness is the Project Manager of Baglihar-I and given his address as J K[p.384, 2001-02 r.w.p. 59 of PB-1, 2001-02] The Consultant will nominate mostly the same staff as for Baglihar and Kishanganga projects. [Cl.1 3.3 of Appendix-A] 3. Baglihar Stage-II, 23rd Nov 2001 Signed by Boris Lazaric, Project Manager for Baglihar-I and witness to Sawalkote [POA by Management. p.384, 2001-02 r.w.p. 59 of PB-1, 2001-02 Preamble to Baglihar-II] Continuation of Stage-I- Baglihar Hydropower Schemes has an ultimate installed capacity of 900 MW to be developed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... however, be noted that in all contracts, there is provision of employing of local staff and the details of such staff was never produced before the lower authorities. 6.9 As regards to assessee s another claim i.e. other than the JKSPDC-BCS contract that the assessee does not maintain any site office or place of business in India, the Ld. DR submitted that the same is factually incorrect. To demonstrate, the Ld. DR submitted as under: A. PPN [May 1998]- i. Provision of office space at Chennai at the site [cl. 4.3, p.285] ii. Sub-consultant in the form of Indian subsidiary [cl.3.3 r.w. 1.5, p.284] iii. Provision for local staff personnel [p.280] B. Balaji [July 1998]- i. Location [cl.1.7 p.101] ii. Provision of site office and accommodation [cl.5.5, p.112] iii. Provision of local staff personnel [cl.1.1(o), p.100] C. APTC [May 1999]- i. Field Office at Hyderabad, Visakhapatnam and any other project site. [Art-1, p.129] ii. Establishment of Project Organization at Hyderabad. [Art- IV, p.134] iii. Cost Estimate for Main Office at Hyderabad Site Office at Visakhapatnam [Appendix-E, p.248; Appendix-D, Sch-6,7,8 p.206-208; Annex-7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sident Engineer at all times. [Art.3.1, p. 80, 87 2004-05] ii. Accommodation at Delhi [Art.2.3 p. 80, 2004-05] iii. Site at Omkareswar [Art.1.8 p. 79, 2004-05] Details of payments reimbursements [Annex-1] details of personnel [Annex-2] not furnished. 6.10 The Ld. DR submitted that as regards the claim in relation to contracts with MPCPL, APTC, PPN, PGCI, Louis, JKSPDC- BHP JKSPDC-Sawalkote projects, the physical presence of employees was less than a period of 6 months, hence in relation to the aforesaid contracts LIG did not constitute a PE under Art- 5(2)(i) of the DTAA. The Ld. DR submitted that Art-5(2)(i) provides for the presence of employees. It does not distinguish between the Foreign or Local employees. As has been held by the Hon ble Supreme Court in case of Azadi Bachao Andolan the terms used in the DTAA are to be interpreted on the basis of broad principles of general interpretation and not on a narrow or legalistic basis. 6.11 The Ld. DR submitted that all the projects are undertaken with the help of local staff and local personnel. Moreover, the staffs of one project are also involved in other projects. Hence, the claim of the assessee that the phys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hment. The above difference between transactions effected through the PE and transactions of same or similar kind as effected through the PE becomes even more glaring when discussed in the Commentary as reproduced by the Hon ble Tribunal as well as its own analysis. Commentary However .. establishment. . Once a PE . Article- 7. Moreover, there is no use of the term deliberate . It appears, the assessee understands and interprets the terms evasion and avoidance of tax as identical synonyms and inter-changeable. The reliance upon the case of Bani Roy Choudhury will not be of any help as the same was in the context of evasion of tax while the Protocol to the DTAA speaks about avoidance . The Ld. DR pointed out that interpretation of treaties are different from that of statutory legislations. This has been reiterated in the case of Azadi Bachao Andolan where the Hon ble Supreme Court had observed - 130. The principles adopted in interpretation of treaties are not the same as those in interpretation of a statutory legislation. While commenting on the interpretation of a treaty imported into a municipal law, Francis Bennionobserves: With ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, the Ld. DR submitted that the assessee, itself offered to tax FTS from Baglihar (A.Y. 2000-01 to 2005-06) VIWSCL (A.Y. 2002-03) @ 20% under Art-12[5] r.w. Art. 7 of the DTAA being effectively connected to the PE. Coming back to Art. 7 of the DTAA, clause-1 provides that only so much of the profits of the enterprise as is attributable to that PE can only be taxable in the other contracting state where such PE is situated. The Ld. DR further pointed out that the term or expression effectively connected although present in Art. 12[5] is absent in Art. 7. This is so because the use of this term takes away the ambit of taxation from Art. 12 and vests the same with Art. 7. Finally, the determination of the quantum of the profit attributable to the PE has to be determined on the basis of Protocol which provides for the FOA rule. The Ld. DR submitted in the context of the Ld. AR s argument that Revenue has to show that FTS earned from other projects are also effectively connected to Baglihar PE is fallacious as the same is not based on the proper appreciation of the DTAA legal provisions. If the said contentions are accepted and the revenue proves that the other contracts are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the same or similar kind as those effected through the PE This covers all business activities that are similar to the activities that are similar to the activity pursued through the PE. Thus, the nature of the activity is decisive under this alternative. [PE-Erosion of a tax treaty principle Arvid A Skaar, p.335-340] 6.16 The Ld. DR further submitted that the Ld. AR relied upon the decision of Hon ble High Court and Tribunal in the case of Sumitomo Corporation to explain the concept of effective connection , however, it may be noted that Indo-Japan DTAA is not similar to Indo-German DTAA for this very concept of FOA. Hence, the decision in the case of Sumitomo doesn t help the assessee in any manner. The Ld. DR also submitted that reliance upon the case of Valentine (supra) will not have any advantage either as it has already been proved that the assessee has been artificially splitting the contracts. 6.17 As regards to reliance upon order for A.Y. 2000-01 by the Ld. AR where Force of Attraction rule was not applied, the Ld. DR submitted that the assessee relied upon the Assessment Order for A.Y. 2000-01 where the Assessing Officer has not applied FOA princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see in view of article 7(1) of the treaty between India and Germany DTAA. The contention of the assessee was that as per protocol of the treaty, the force of attraction rule in this treaty restricts the application of the rule to a case where, the PE is involved in the transaction and the transaction is restored to avoid taxation in the source state and both these contentions needs to be satisfied so as to attract the rule. The PE constituted in India by the assessee under the contract with JKSPDC-Phase-2 was not involved in any other project executed in India during the relevant previous year. For supporting this statement, the assessee submitted various contracts entered into by the assessee with different independent unrelated parties. Most of these contracting parties are government or semi government or private organisations. The assessee constitutes PE on account of undertaking supervisory activities as provided in article 5(2)(i) of the treaty in relation to construction of Hydro Power Projects at Baglihar in the state of Jammu Kashmir. In respect of the balance contracts, based on specific contract requirements, the assessee s personnel either performed service at the cli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom technical services rendered by the assessee and other contracts in India. We find force in the contention of the assessee, that the PE constitute in India by the assessee under Phase-II of the contract with JKSPDC did not play any role or contributed in any manner to the execution of the other contracts or earning of FTS under other contracts and cannot thus be said to be involved with any other projects in India. Accordingly, FTS received by the assessee from rendering of technical services and other contracts cannot be said to be involved directly or indirectly in any manner to the PE constituted in India under the contract with JKSPDC- Phase-II and are formed for the purpose of deliberate avoidance of tax. Therefore, we find merit in the argument of the Ld. AR that such income by way of FTS is to be subjected to tax @ 10% under article 12 of the treaty and cannot be subject to tax @ 20% as contemplated by the Assessing Officer. As per the Revenue s contention, it is undisputed fact that the income earned by the assessee was in the nature of FTS, there is business connection and income accrues and arises or deem to accrue and arise in India. The regional existence of place of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the assessee is not liable to tax and it can t be alleged that the agreements are entered to avoid tax. The Ld. AR further submitted that there are independent and identified key personnel for each project and any change of such personnel can only be done with client s approval. Once the key personnel are identified and their role has been assigned, it can t be said that Baglihar PE is involved. Geographical locations are so different that it can t be said that personnel from Baglihar are coming and performing tasks in other projects. The Ld. AR further submitted that in several contracts, the assessee is a subcontractor and hence not liable to the contract. In some contracts review of work is done at Germany and hence, it can t be said as PE in India is involved. The Assessing Officer has accepted that except for Baglihar there are not any other PEs in respect of any other contracts. Thus, the Ld. AR submitted that reimbursements are on cost-to cost basis and there is no element of profit. The Ld. AR relied upon the decision of Engineering Projects Ltd. (1993) 202 ITR 1014 (Del). The Ld. AR relied upon the following decisions: a) Sumitomo Corporation [114ITD 61,ITAT 43 Taxm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer has held or concluded that there are no PEs in respect of other contracts. Moreover, once the principles of FOA attracted, the existence of PE for other projects becomes academic only. Without prejudice to the above he submitted that as has been explained earlier, there are PEs for each projects both under Art-5(1) as well as 5(4) since the assessee extensively employs and uses local personnel and the threshold limit of 180 days cannot be computed on the basis of expat personnel only. Furthermore, the Indian subsidiary of the assessee also acts as PE. In addition to the above, since the existence of PE in respect of each project is evident from the contract document itself, the Hon ble Tribunal is duty bound to consider the evidence in view of the decision of Hon ble jurisdictional High Court in the case of Jan Sampark [275 ITR 273]. The Ld. DR accordingly submitted that the onus is on the assessee to prove that there is no element of profit in the reimbursements. Moreover, the assessee itself has included the reimbursements in its taxable income for A.Y. 2000- 01. Without prejudice, it has been held by Hon ble Supreme Court in the case of Sedco Forex International Inc.[201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No. 3 is identical to the Ground No. 3 of ITA No. 4960/Del/2004, hence the same findings are applicable as nothing contradictory was pointed out by the Ld. DR. Thus, Ground No. 3 is allowed. 17. Now we take up ITA No. 1881/Del/2007 A.Y. 2003-04, Ground No. 1 is identical to the Ground No. 1 of ITA No. 4960/Del/2004, hence the same findings are applicable as nothing contradictory was pointed out by the Ld. DR. Thus, Ground No. 1 is allowed. 18. As regards to Ground No. 2 is identical to the Ground No. 3 of ITA No. 4960/Del/2004, hence the same findings are applicable as nothing contradictory was pointed out by the Ld. DR. Thus, Ground No. 2 is allowed. 19. Now we are taking up ITA No. 2124/Del/2009 for A.Y. 2004- 05 and ITA No. 2125/Del/2009 for A.Y. 2005-06 as the grounds are identical. As regards to Ground No. 1, the Ld. AR s fairly conceded that the above ground is against the assessee. Hence Ground No. 1 of the assessee s appeal is dismissed. 20. As regards to Ground No. 2 and 3 are concerned the same are identical to that of Ground No. 1 of ITA No. 4960/Del/2004, hence the same findings are applicable as nothing contradictory was pointed out by the Ld. DR. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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