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TMI Blog2019 (12) TMI 812X X X X Extracts X X X X X X X X Extracts X X X X ..... '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 and Section 234C of the Income Tax Act, 1961. Grounds of appeal of ITA No.5799/Del/2010 A.Y.2002-03 "The Appellant respectfully submits that on the facts and circumstances of the case and in law, while passing the final assessment order under section 147 read with section 144C of the Income Tax Act, 1961 (Act'), the Deputy Director of Income Tax, Circle 3(2), International Taxation, New Delhi (hereinafter referred to as 'the learned Assessing Officer') has erred in: 1. Ini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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) while holding that the amount [i.e. revenues of Rs. 12,269,610 earned by Appellant during the subject year from contracts entered with Madurai Power Corporation Private Limited ('MPCPL'), Andhra Pradesh Transmission Corporation ('APTC') and Vishakhapatnam Industrial Water Supply Company .Limited ('VIWSCL')] is to be taxed under Article 12 of the India- Germany Double Taxation Avoidance Agreement ('tax treaty'), has erred in not providing whether the said amount should be taxed under Article 12 (2) of the tax treaty @ 10 % or under Article 12(5) read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter 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 execution of various projects during the present year (and offered to tax) was furnished along with the return of income filed by the Assessee. During the present assessment year, the Assessee earned total revenues (classified as fees for technical services ("FTS")of Rs. 91,447,305/- The same was offered to tax as under: * Rs. 62,970,914/- was offered to tax at the rate of 20 % on a gross basis under section 115A of the Income-tax Act, 1961, in respect of the contracts where a Permanent Establishment ("PE") was formed in India; and * Rs. 28,476,391/- was offered to tax at the rate of 10 per ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 91,788,012/- by including within the taxable income of the Assessee, a sum of Rs. 340,707/- relating to reimbursement of expenses at actuals. The same was subjected to tax by the Assessing Officer at the rate of 20% and an additional tax and interest demand of Rs. 4,701,670/- was raised against the assessee. 4. Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of assesse. 5. As regards Ground No.1 relating to applying "Force of Attraction" (Foa) Rule, the Ld. AR relied on the decision in the case of Sumitomo Corpn. Vs. Dy. CIT [2008] 114 ITD 61, wherein it was clarified that "Force of Attraction Rule differ from DTAA to DTAA". The Ld. AR also relied on the decision in the case DCIT Vs. Roxon OY [2007] 291 ITR (AT) 275 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 throughout India. The Ld. AR tried to demonstrate that why Baglihar Project PE was not involved in other projects by giving example in respect of agreement with Vishakhapatnam Industrial Water Supply Co. Ltd (VIWSCL). The agreement with VIWSCL related to "water management", whereas, Baglihar Project related to "Hydropower". The project was located in Vishakhapatnam (AP) and key personnel as well as subconsultant to be deputed to provide consultancy were agreed in advance and without the prior approval of VIWSCL personnel other than agreed could not have been deputed. Since the key personnel had already been decided and approved, therefore, it cannot be said that Baglih ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvance 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, under JKSPDC-Sawalkote Project, the Assessee was to provide limited services. The services under phase I and phase II was to be performed in assessee's home office in Germany and the third phase was related to Assistance in Contract Negotiations - EPC contract. Since primarily the services were to be provided in Germany, therefore, it cannot be said that same staff as for Baglihar Project was deputed. Thus, the Ld. AR submitted that in any case, the contract was with State Govt. undertaking and as such, there was no tax avoidance. 5.5 The Ld. AR submitted that even the CIT(A) did not dispute the fact that different personnel were deputed/assigned to different projects. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 is an undisputed fact that the income is in the nature of FTS. There is business connection and income accrues and arises or deemed to accrue or arise in India. There is existence of Fixed Place PE under Art-5(1) in the form of JKSPDC-BCS...." & existence of Supervisory PE under Art-5(2)(i) in the form of JKSPDC-BCS...." The Ld. DR submitted that the nature of Business of the assessee remains unchanged. The assessee is engaged in providing technical consultancy services to various projects in India and 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 be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7-08-1999[A.Y.2000- 01], Baglihar, Phase-II dt. 23-11-01[A.Y.2002-03] and Sawalkte dt. 09-12-2000[ A.Y. 2001-02]. 6.2 The Ld. DR submitted that the nature of activities carried out i.e. Technical Consultancy Services/Engineering Consultancy Services/Civil Engineering Consultancy Services remained the same for all the contracts. However, on the one hand, such services were treated and accepted to be in the nature of supervisory services and existence of PE under Art 5(2)(i) was accepted for JKSPDC & VISWL while for others it is argued by the Ld. AR that the nature of services are merely consultancy and not supervisory in nature and thus, not covered under Art-5(2)(i). The nature of activities carried out i.e. Technical Consultancy Services/Engineering Consultancy Services/Civil Engineering Consultancy Services remained the same for all the contracts. However, on the one hand whereas the assessee is arguing that no PE under Art-5(2)(i) can exist because it is not undertaking any construction or assembly itself yet, on the other hand, in order to prove its claim for presumptive taxation under section 44BBB in respect of the contract involving JIL, it claims to be involved in the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r mandated in the UN Model Convention nor in the Protocol to the India- German DTAA. In fact, this is an attempt to misinterpret the convention/provisions. and misguide the Hon'ble Bench. Coming back to the nature of "business activity" being carried on by the assessee through its PE in respect of JKSPDC and other contracts, the assessee itself has accepted that the activities are 'same or similar' in nature. * "LIG is engaged in providing technical consultancy services to various projects in India." * "Under contracts entered with MPCPL, APTC, PPN, PGCI, Louis, JKSPDC-BHP & JKSPDC- Sawalkote, the assessee provided engineering consultancy services." 6.7 As per the assessee's contention that the contracts have been carried out by independent teams under different contract managers and contract engineers, the Ld. DR submitted that this contention of the assessee is factually incorrect as can be seen from Annexure-A of the agreement. Moreover, in all contracts, there is provision of employing of local staff and the details of such staff were never produced before the lower authorities. 6.8 As per assessee's next contention that the PE is not involved in execution /performance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar to the existing ones." [cl.3.3 of Apdx-A of Stage-2] * "It goes without saying that the staff assisting PDC will be those who are involved in the ongoing Baglihar Project and thus are familiar with all aspects of the Project." [cl.3.3 of Apdx-A of Stage-2] * Same expats working for Baglihar-I as stated above and for Sawalkote as stated in p.60 0f PB-1 for 2001-02 i.e. Dr. Jokiel, Dr. Major, Dr. Schwarz, Pitz, Stable, Meschitz, Weber, Laird & Kissling. [cl.1 of Anex-B for Stage-II r.w. p. 59-60 of PB-1 for 2001-02] B. VIWSP, 6th March 2001- * Common supervisory expats - i. Hans JoachimKiessling- Sawalkote [p.58-60, PB-1;01-02] & VIWSP [p.68-69; 2002-03] ii. R. Laird - VIWSP [3.1, p.84, PB 2001-02], Baglihar-I, Baglihar- II & Sawalkote as discussed above. * Office with Local staff at Hyderabad & Visakhapatnam [Apdx-F, p.92, PB 2001-02] same as in APTC [Sch-6,p.206 PB 2001-02] C. APTC,15th May 1999- * Office with Local staff at Hyderabad & Visakhapatnam[Sch- 6,p.206 PB 2001-02] same as in VIWSP [Apdx-F, p.92, PB 2001-02] D. PGCIL, 14th Feb 2001 [effective date-25th Jan 1999]- * Appendix-C [p. 92-111] gives details of the personnel already present and worki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zaric is the Chief Resident Engineer [p.467-470 of 2010-11] iv. Provision for weekly review meetings with Client [cl.47] v. Employment of local staff& personnel [cl.46 r.w. Annex-1, p.442-446 of 2010-11] E. Louis Berger [ December 1999]- i. The Project Team shall work in Ahmedabad with home office time. [Art-6.1, p.303] ii. Employment of local staff & personnel [Appendix B at page 372 gives details of staff; page 378 of APB gives cost for office maintenance and local staff expenses etc; page 379 of APB states the details of office facilities expenses, equipments, vehicles expenses details etc.] F. Sawalkote [December 2000]- i. The Consultant will nominate mostly the same staff as for Baglihar and Kishanganga projects. [Cl.1 of Appendix-A] ii. Baglihar -1 was already having PE in the form of Project Office. G. VIWSCL [February 2001] - i. 'Office Space' at two places i.e. Visakhapatnam & Hyderabad [Appendix-F,p.92] ii. Employment of local staff & personnel [Appendix-C, p.82-91] H. PGCIL[February 2001] - i. Presence of Resident Project Manager at all times. [Art.4.6, p. 81, 2002-03] ii. Provision of Office Space and Local staff & personnel [Appendix-F, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee does not satisfy the twin conditions prescribed under the Protocol to the India-Germany DTAA, the Ld. DR submitted that there is no dispute that the assessee has objected before the lower authorities against the application of FOA in it case. The Ld. DR submitted that both the authorities have held that rule of FOA is attracted in the case of the assessee. It is thus, fallacious to say that the lower authorities have not disputed the contentions of the assessee for in such a scenario, the rule of FOA would not have been applied or upheld or for that matter, the assessee would have been before the Tribunal on the same issue. 6.13 As regards the claim of the assessee that the assessee cannot be said to have resorted to an arrangement with a view to deliberately avoid tax in India, since most of the contracts are with Govt./semi Govt. undertakings and it can't be said that the agreements were entered to enable the assessee/PE to evade tax as the liability to pay tax was that of the client (131 ITR 578), the Ld. DR drew the attention of the Bench to the following portion of his written arguments: * Complete misinterpretation of the provisions of Model UN Convention an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Wilberforce as being 'unconstrained by technical rules of English law,or by English legal precedent, but conducted on broad principles of general acceptation. This echoes the optimistic dictum of Lord Widgery, C.J. that the words 'are to be giventheir general meaning, general to lawyer and layman alike ... the meaning of the diplomatrather than the lawyer'. [Francis Bennion: Statutory Interpretation, p. 461 [Butterworths,1992 (2nd Edn.)]."(Emphasis supplied) 6.14 The Ld. DR submitted that the clients are liable to deduct and pay the tax. However, it is the assessee which is obligated to declare and disclose its correct income and pay tax thereon. If such an obligation has not been cast upon the assessee, it had no necessity of filing its return of income too. As regards of avoidance of tax, he submitted that the Assessing Officer in Assessment Order has clearly brought out the differences in the rate of taxation with or without attribution to the PE. Fraudulent and wrong claim and availing a lower rate of taxation is as much tax avoidance since the assessee with its global presence and availability of technical support cannot claim that the same is on account of igno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DTAA between countries. Available Model Conventions differ in this regard. Some provide for taxing profits/income only to the extent that they are attributable to the PE, which is referred to as "No force of Attraction" principle. Some provide for taxing income/profits from direct transactions effected by the non-resident, provided the transactions are of the same or similar kind as that effected through the PE, which is referred to as "Limited Force of Attraction" principle. Some provide for taxing profits/income from all transactions whether they are attributable to PE or not or whether they are of the same kind of transactions carried on by the PE or not, which is referred to as "Full Force of Attraction" principle. As to which principle is applicable in a given case depends on the clauses of the convention between two countries." [HITT Holland Instituted of Traffic Technology B.V. v. DDIT (Kol.)(Trib.); ITA No. 574/Kol/2014, dt. 08.02.2017] Similar observations were also made by Arvid A. Skaar which are reproduced as under- "The UN model treaty has suggested the concept of "Force of Attraction" to prevent the disturbing effects of the OECD "business connection test" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduced by the ITAT in the case of CGG Veritas Services SA :- "49. ....... we would like to mention that principle of consistency does not operate against law. When a particular benefit is not conferred on the assessee by the statute and assessing officer allows such benefit the assessee cannot claim such benefit as a matter of right on the principle of consistency. In this regard it will be appropriate to refer to the decision of Hon'ble Supreme Court in the case of Distributor (Baroda) P. Ltd v Union of India 155 ITR 120 (SC) their Lordship summarized their views at page 124 in following words:- ".....To perpetuate an error is no heroism. To rectify it is the compulsion of the judicial conscience. In this, we derivecomfort and strength from the wise and inspiring words of justice Bronson in Pierce v. Delameter (A.M.Y. at page 18):" a judge ought to be wise enough to know that he is fallible and, therefore, ever ready to learn: great and honestenough to discard all mere pride of opinion and follow truth wherever it may lead: and courageous enough toacknowledge his errors ". In view of decision of Hon'ble Supreme Court it is clear that mistake committed earlier by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the execution of these projects at different points of time. The scope of work, liabilities and risk involved in each of the contracts are independent of those stated in the other contracts executed with the different parties. Owing to Reserve Bank of India's stipulation, a separate project office is to be set up for each independent project. Further, the funds of the project office are to be used only to meet the expenses of the specific projects which has been approved and cannot be used for any other purpose in India. Therefore, the funds belonging to the project office can be used to fund or support only that project (i.e. in respect of which it has been set up) and cannot be used to fund any other projects in India. The assessee under various independent contracts entered into by it, was required to undertake specific activities as per the terms of each contracts. The activities undertaken by the assessee were independent of the others since their performance was not interlinked with each other. The location where the activities would be performed by the assessee in respect of the specific projects was dictated by the client's project site or as agreed with the clients and w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered to tax at 20% by the assessee as it is the only project which has PE. The Force of Attraction rule will not be applicable in other projects as the same do not constitute either PE or does not come under the purview of the DTAA. The contradictions pointed out by the Revenue do not demonstrate that the other projects constitute PE. In fact, for applying force of attraction, there should be some common link to each of the contracts/projects such as the common expats, the common nature of the contract/projects, the commonality of the location, the common contracting parties etc. which are absent in the present case. Therefore, the applicability of rule of force of attraction does not apply in the present assessee's case. Thus, the treatment given by the assessee for offering tax @20% in one project and 10% in rest of the projects was rightly done. Hence, Ground No. 1 of the assessee's appeal in ITA No. 4960/DEL/2004 for A.Y. 2001-02 is allowed. 8. As regards ground No. 2 relating to taxability of reimbursement of expenses, the Ld. AR submitted that there is no finding that the reimbursement had any element of income or there was any markup. He submitted that the issue is covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts true and correct income and prove the same, if needed. Moreover, simply because the other party to the contract is a Govt. Enterprise does not establish that the assessee has not or can't avoid tax. He submitted that the word used is 'avoid' and not 'evade'. The Ld. DR further submitted that the assessee has artificially split the Baglihar -I contract and that both Baglihar I & II uses the same personnel and are interconnected. Similarly, the fact that common expats personnel are involved in Baglihar, Sawalkote & other projects have already been reflected/established in the enclosed spreadsheet. Moreover, the spreadsheet reflects the association / involvement of expats only and do not include local personnel employed by the assessee. As long as the activities are same or similar and there are common personnel involved, whether the assessee is a sub-contractor or will attract the application of FOA. The Ld. DR pointed out that the personnel who are part of HO may be part of the some other project/field team. For example, Dr. Chongyang Du & Dr. Schwartzwere part of HO team for Sawalkote project while they were part of expat project team for Baglihar -II and Sutluj Jal Vidyut Nigam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there is any element of income involved in the said expenses as well as could not demonstrate that there was any mark up to these expenses. Therefore, Ground No. 2 of the assessee's appeal in ITA No. 4960/DEL/2004 for A.Y. 2001-02 is allowed. 11. As regards Ground no. 3, interest u/s 234A, 234B & 234C, the Ld. AR submitted that same are not chargeable. It is settled law that interest is not chargeable where tax is deductible at source. The Ld. AR relied upon the decision of Hon'ble Supreme Court in the case of IAN Peter Morris v. Asst. CIT (2016) 389 ITR 501, rendered in the context of section 192 of the Act. The Ld. AR submitted that this ratio is applicable in the present case. 12. The Ld. DR relied upon the Assessment Order and the order of the CIT(A). 13. We have heard both the parties and perused all the relevant material available on record. Interest u/s 234B and 234C is not chargeable where tax is deductible at source. The reliance placed on GE Packaged Power Inc. (supra) is apt. Hence Ground No. 3 of the assessee's appeal in ITA No. 4960/DEL/2004 for A.Y. 2001- 02 is allowed. 14. Now we take up the other appeals. First, ITA No. 5799/DEL/2010 for A.Y. 2002-03. Groun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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