TMI Blog2021 (8) TMI 986X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the business service agreement is a single unified agreement. On going through the clauses of the agreement, we find that no single clause is giving it a shape of multiple agreements. With regard to the contention that different services under SOFs are not inter related and are unique, it is necessary to go through the entire activity of the assessee with relation to the UNINOR - The launch of UNINOR services happened after Telenor Group finalized the transaction with Unitech Group and made the first investment into UNINOR. The statement of the Stein-Erik Vellan, Managing Director of UNINOR at the time of launch with launch in seven circles and roaming agreements in place for the rest, we have started our service in India on day one as a pan-Indian national operator. This is a proud achievement of a committed and talented team. While our launch today is indeed a milestone in a longer journey to become a significant operator in India, we are delighted to have made such a strong start augments the fact that there are only two entities involved UNINOR and Telenor, the assessee. With regard to the scheme of billing, the bills are raised on quarterly basis, consolidated i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly the 40% of the receipts as expenditure. The assessee argued that only the mark- up of 3.5 % of the cost which translates to 3.38% of the revenues could at best be considered as the income attributable to the revenues pertaining to the PE in India. We are also in agreement with the assessee that the revenues raised out of the services rendered from Norway cannot be attributed to the PE of the assessee in India. The issue of determination of the profits is remanded back to the file of the Assessing Officer to pass an order by taking into consideration, the services rendered by the assessee from India and also from Norway, the evidence of the expenses incurred as submitted by the assessee. - Appeal of assessee dismissed. - ITA No. 1307/Del/2015 - - - Dated:- 12-8-2021 - Sh. Kul Bharat, Judicial Member And Dr. B. R. R. Kumar, Accountant Member For the Assessee : Sh. Ajay Vohra, Sr. Adv. For the Revenue : Dr. Prabha Kant, CIT DR ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: The present appeal has been filed by the assessee against the order dated 27.01.2015 passed by the AO u/ s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961. 2. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Without prejudice to the above, that the Assessing Officer erred on facts and in law in computing the profits attributable to the alleged PE of the appellant in India at ₹ 8,26,76,663 without any cogent basis and without considering the provisions of the Act. 5.1 That the Assessing Officer erred on facts and in law in attributing 100% of the fee received by the appellant from Unitech Wireless for the services rendered by appellant during the relevant previous year, without appreciating that the services were partly rendered from Norway and therefore such services are not effectively connected to the alleged PE of the appellant in India. 5.2 That the Assessing Officer erred on facts and in law in not appreciating that even if it is assumed that the presence of the employees of appellant resulted in PE of the appellant in India, the income derived from such alleged PE was limited to the extent of markup of 3.5% agreed on costs incurred in rendering such services and therefore income to the extent of such markup only should be liable to tax in India. 5.3 That the Assessing Officer erred on facts and in law in holding that the markup of 3.5% on cost, ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for technical services (FTS) was effectively connected with the PE of the assessee and in terms of Article 13(5), income of the assessee was liable to be taxed as per Article 7 of the Treaty read with section 44DA of the Act. 6. The Assessing Officer, in the draft assessment order, dated 28.03.2014, passed under section 143 (3)/144C(1) of the Act, held that the assessee has a Permanent Establishment (PE) in India in terms of Article 5 (2)(1) of the Treaty. The AO held that the time spent by employees of the assessee in India during the relevant year, while rendering services to Unitech Wireless, exceeded the threshold provided in that Article and has attributed 100% of the receipts to the PE of the assessee in India and computed the income of the PE of the assessee at ₹ 8,26,76,663 in relation to the service fee received from Unitech Wireless after allowing deduction of expenses @40%. 7. The ld. DRP vide order dated 16.12.2014 gave directions u/ s 144C(5) of the Income Tax Act, 1961 to the Assessing Officer which are as under: 5.2 DRP has examined the assessment order and finds that the assessment order on page 9 has categorically stated that billing schem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed to have a PE in a contracting State if it furnishes services (including consultancy services), through employees, for activities that continue (for the same or connected project) for a period or periods exceeding 6 months in any 12 months period in that Contracting State. 10. Quoting the rationale given by the Assessing Officer, the ld. AR argued that the words same or connected projects should be interpreted from the prospective of the service provider as clarified in Model Tax Convention on Income and on Capital. The relevant part of the Model Tax Convention relied upon by the ld. AR is as under: 161. The reference to an enterprise..performing these services for the same project should be interpreted from the perspective of the enterprise that provides the services. Thus, an enterprise may have two different projects to provide services to a single customer (e.g. to provide tax advice and to provide training in an area unrelated to tax) and whilst these may be related to a single project of the customer, one should not consider that the services are performed for the same project. 11. The ld. AR argued that the duration of stay of the employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09 15-May- 09 Revhaug, Jon Omund 11-May- 09 15-May- 09 Moe, Qyvind Solberg 20-May- 09 29-May- 09 May Talmoen, Ivar 24-May- 09 5-Jun- 09 Revhaug, Jon Omund 25-May- 09 29-May- 09 Soby, Lars Christian 25-May- 09 4-Jun- 09 Nyborg, Espen 27-May- 09 5-Jun- 09 Lindseth, Bjarn 2-Jun- 09 24-Jun- 09 June 1 27 June 29-30 28 Nyborg, Espen 8-Jun- 09 23-Jun- 09 Moe, Oyvind Solberg 19-Jun- 09 23-Jun- 09 Talmoen, Ivar 15-Jun- 09 26-Jun- 09 Revhaug, Jon Omund 22-Jun- 09 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 09 29-May- 09 Talmoen, Ivar 24-May- 09 5-Jun- 09 June 1 27 June 29-30 _ 28 Bjonness, Flalvor A. 24-May- 09 7-Jun- 09 Landergren, Anders 25-May- 09 6-Jun- 09 Wendt, Lars 28-May- 09 20-Jun- 09 Omtveit, Olav Hauge 7-Jun- 09 13-Jun- 09 Clausen, Steinar Conradi 14-Jun- 09 26-Jun- 09 Landergren, Anders 14-Jun- 09 27-Jun- 09 Talmoen, Ivar 15-Jun- 09 26-Jun- 09 Wendt, Lars 29-Jun- 09 17-Jul- 09 July 1-17 17 Clausen, St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT/ IS activities 153 161 140 7 IT/ IS activities 154 166 142 12 IT/ IS activities 154 171 146 17 IT/ IS activities 155 176 - 6 HR activities 153 163-165 141 182 18 HR activities 155 177 - 5 Other contracts 153 162 - - 8 Other contracts 154 167 143 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to India, which has been alleged by the assessing officer, as resulting in constitution of PE of assessee in India, the aforesaid FTS cannot be said to be effectively connected to any pre-existing PE and hence the provisions of paragraph 5 of Article 13 have no application. In fact, the year under consideration is the first year of operation of the assessee in India. Consequently, subject payments are taxable @10% only, in terms of Article 13(2) of the Treaty. 14. On the other hand, the ld. DR vehemently argued that the Article 5(2)(1) doesn t distinguish between same or similar type of services. He argued that it is an inclusive definition of services and mandates that the services including consultancy services of the same are to be treated as connected projects. The arguments of the ld. DR in writing are as under: 4. The appellant has challenged the AO' s addition based on the ground that, a) that services specified in various SOFs constituted separate projects. It is submitted that services governed by uniform terms and conditions agreed between the parties and mere mention of the varying services in a common Agreement, does not make it one c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of the words activities of that nature in the said Article would mean that services of the same nature should be rendered for period exceeding six months so as to constitute a service PE. j) At best, activities of the same nature could only be aggregated. Accordingly, it would be appreciated, at best the SOFs listed below under each activity head, viz., (i) Sourcing Activities, (i i) Market Activities, (ii i) Information technology/ Information system (IT/ IS) Activities and (iv) HR Activities, may be considered as part of the same activity or project and even then the number of days spent in India in aggregate during the relevant year under each such activity/ contract do not exceed the time threshold prescribed in Article 5(2)(i) of the Treaty. k) In paragraph 5 of Article 13 of the Treaty implies that the permanent establishment of a foreign enterprise must first be existing or situated in the other Contracting State, and the earning of fees for technical services must be effectively connected with such existing PE. Reliance is placed, in this regard, on the decision off the Delhi Bench of the Tribunal in the case of Guardian International Corporation: ITA No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. As regards definition of project , it is an accepted position that the project is a collection of activities that envisages bundle of services or bouquet of services. The project is, thus, a bundle of interconnected and interrelated services with underlying theme of completion of project at hand. Thus, the term project and services are distinct. The clause article 5(2)(i) not only covers services in a particular project but also connected projects. Thus, the plain reading of the article 5(2)(i) highlights that the scope of services covered under the clause are not l imited to one project but also to connected project. Thus, that the services, similar or not, but of the same project and connected project need to be aggregated to check the total duration of the activity. 8. Coming to the OECD commentary on the explanation towards same or connected projects in the clause article 5(2)(i), it is clarified that the explanation is towards the same or connected project and not services per se. Further, the example taken in this interpretation only clarifies that if there are two different projects of a service provider pertain to one project of a particular customer, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re talks of same or similar type of services. It only mandates the services including consultancy services of the same or connected project. First, it is inclusive definition of services. In the present case, the service provider has worked on only one project which has various interlaced phases spanning over sourcing, marketing etc. 12.It may be relevant to add that any project is bound to have various verticals to ensure the end to end completion of project. For example any organization or project will be mix of people, processes and technology and all three are well integrated to finally shapeup the project/ organization. Thus, one cannot take a plea that HR services towards people functions are different from process functions even it the same are for the same project. 13.In view of the above, it is submitted that the facts of the present case clearly fit into article 5(2)(i) of India Norway DTAA. Thus, it is prayed to uphold the action of the AO to hold it a case of service PE. As regards the action of the AO in allowing expenses to the tune of 40% of the receipts in accordance with Rule 10, the appellant argued to apply mark up of 3. 5% on cost which translates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected services, it was argued that in the present case the SOF s do not represent a single project being entered under a single agreement for which a single invoice has been raised. On this issue, it was argued that the assessee, in terms of the Business Service Agreement, provided services agreed from time to time under independent SOFs to Unitech Wireless (Tamil Nadu) India P. Ltd.; Unitech Wireless (South) India P. Ltd., Unitech Wireless (North) India P. Ltd., Unitech Wireless (East) India P. Ltd., Unitech Wireless (West) India P. Ltd., Unitech Wireless (Delhi) India P. Ltd., Unitech Wireless (Mumbai) India P. Ltd., Unitech Wireless (Kolkata) India P. Ltd., which has been commonly referred to as UNINOR as fervidly argued that, UNINOR is not a single customer. UNINOR group entities requisitioned from time to time based on its business needs and related to different functional areas viz., sourcing, marketing, IT/IS, human resources etc. of its business which was spread across various part of India. Each such SOF, it is pertinent to note, entailed distinct scope of activities, for which employees from different departments with different areas of expertise were deputed by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vention of income and on Capital: Condensed Version 2017 as follows: 161. The reference to an enterprise..performing these services for the same project should be interpreted from the perspective of the enterprise that provides the services. Thus, an enterprise may have two different projects to provide services to a single customer (e.g. to provide tax advice and to provide training in an area unrelated to tax) and whilst these may be related to a single project of the customer, one should not consider that the services are performed for the same project. e) Intimation is required to given for services agreed through each SOF to the Audit Committee. f) During the year under consideration, Appendix A was not in force and services agreed in Appendix 1 were also not rendered. Only the services agreed vide separate SOFs were rendered by the appellant. In case such services had any connection with the main agreement, then services agreed in Appendix A and Appendix 1 would also have been rendered. g) Each requisition of employees for which separate SOF was placed had no inter connection/inter lacing with the other SOF issued by the appellant and, therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no income attributable to the alleged permanent establishment in India on the above basis. 5. With reference to the above arguments of the appellant, at the outset, it may be relevant to take note of the facts off the present case in respect of business service agreement and SOFs (Service order Form). 6. It is noted that UNINOR has been issued United Access Service Licenses by the Department of Telecommunication to provide Telecommunication services and the appellant has been engaged by UNINOR as a service provider to efficiently provide the services. This is the contest recorded in the business service agreement. Further, the agreement itself defines that appendixes and service order forms under the agreement shall be deemed to be read as an integral part of the agreement. (refer page 2 of the agreement). Further, clause 4.4 of the business service agreement provides that the service charge shall be invoiced quarterly and it specifies that direct charge of business service should be used unless the basis for separate charge is demonstrated. It is observed by DRP that the invoice is raised quarter wise without making any distinction SOF wise. 7. The most relevant iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant to appreciate that all SOFs are interlaced. Once cannot start SOF of Marketing till SOF of sourcing is complete. Similarly, the SOF of IT/IS activity cannot be initiated till SOF of marketing is over. One SOF is the feeder for other SOF and so on. This is evident from the perusal of the description of SOF. Sourcing activity SOF provides for preparation, execution and negotiation of 2nd round of GSM awards. All other SOFs are working towards the next stages of same GSM project. The sourcing activity SOF talks of preparation, execution and negotiation of IT outsourcing contract and the marketing activity SOF talks of process description of the same IT project and also about IT procurement. Further, IT/IS activity SOF also talks of IT solution architecture and IT solution scoping. The network and IS/IT activity SOF talks of benchmarking for IT outsourcing projects and its evaluation. Thereafter, project office activity SOF provides for support and assists in completing contract for the GSM network and IT support systems. Furthermore, with same theme of end to end working on GSM project and IS/IT outsourcing, there is SOF on boarding and training, HR and workshop on regulator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntary evidence in respect of the services conducted in this case, the action of the AO to estimate expenses at 40% off the revenue is appropriate. As regards, reliance on decision of ITAT in the case of Guardian International Corporation, the same is distinguishable as the underlying DTAA in cited case is of India USA which is different from India Norway DTAA particularly in respect of Article 5(2)(1). Rejoinder to the written submissions filed by the Ld. CIT(DR) This has reference to the written submissions e-filed by the Ld. CIT(DR) before the Hon ble Bench on 1st June 2021. In conjunction with written submissions filed on 06.01.2020, the appellant wishes to submit the following rejoinder to legal contentions raised by the Ld. CIT(DR): Re: Aggregation of services of similar nature under different Service Order Forms ( SOFs ) are an integral part of the Business Service Agreement [Para 5-6 of the submission] In the aforementioned paragraphs, the Ld. CIT (DR), has observed that the Business Service Agreement ( the Agreement ) itself provides that the appendices and service order forms under the Agreement shall be deemed to be read as an integral ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etation of OECD Commentary that-whether a project is same or connected has to be seen from the perspective of service provider, has arbitrarily disputed the application of this clause in appellant s case on the ground that OECD does not make reference to a single project with a bouquet of interconnected services. As per the Ld. CIT(DR), in the present case the SOF s represent a single project being entered under a single agreement for which a single invoice has been raised. In paragraphs 9-12, the Ld. CIT(DR) has contended that all the SOFs are interconnected with each other. Further, the said SOF s, it is pertinent to note, were issued by UNINOR group from time to time based on its business needs and related to different functional areas viz., sourcing, marketing, IT/IS, human resources etc. of its business which was spread across various part of India. Each such SOF, it is pertinent to note, entailed distinct scope of activities, for which employees from different departments with different areas of expertise were deputed by the appellant. It will be appreciated that UNINOR group had requisitioned services of different personnel of the appellant in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditions of this Agreement, UNINOR, hereby appoints the Service Provider and the Service Provider hereby accepts the said appointment as non-exclusive service provider for providing Services. 2.2 UNINOR may appoint any other service provider to provide the same/similar services at any of UNINOR locations at whatever terms it deems fit, at its sole discretion. However, such appointment does not free UNINOR for any of the obligations under this Agreement for Services already agreed under this Agreement by way of approval of Appendix A (Appendix 1) or Service Order Form as per the format given in Schedule I. On perusal of the aforesaid, it will kindly be appreciated that the appellant was not an exclusive service provider and its services were availed by the UNINOR group only on need basis, for which separate SOF s were issued by it from time to time. In that view of the matter, the appellant, by no stretch of imagination, be construed to be carrying out a consolidated project activity comprising of different services. In fact, the appellant appropriated the manpower and other resources for rendition of services as per distinct SOF s, as and when issued. At the cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and (iv) HR Activities, were considered as part of the same activity or project, even then the number of days spent in India in aggregate during the relevant year under each such activity/ contract did not exceed the time threshold prescribed in Article 5(2)(1) of the Treaty [refer pages 103 to 107 of case law paper book]. Re: Attribution of Income [Para 13 of the Ld. CIT(DR) s submission] With regard to the alternate contention of the appellant, w.r.t. attribution of income, the appellant, had submitted as under: A. In terms of Explanation 1(a) to section 9(1)(i) of the Income-tax Act, 1961 ( the Act ) read with paragraph (1) of Article 7 of the India- Norway DTAA, only the income relating to the services actually rendered by appellant s employees in India could be attributed to the alleged PE in India; B. Only the mark up of 3.5% of cost [as per Article 4.2 of the Agreement], which translates to 3.38% of revenues, could at best be considered as the income attributable to the revenues pertaining to the alleged PE in India; C. The assessing officer ought to have applied the global operating profit/ (loss) margin of the appellant to the revenues relata ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant in India. Consequently, subject payments are taxable @10% only, in terms of Article 13(2) of the Treaty. The Ld. CIT(DR) has, however, submitted that the aforesaid decision if distinguishable since it deals with provisions of India-USA DTAA, while the case of appellant requires application of India-Norway DTAA, particularly in respect of Article 5(2)(1). It is, respectfully submitted that the language of Article 5(2)(1) of India- Norway DTAA, which relates to constitution of a service PE, has no relevance inasmuch as the decision of Guardian International Corporation (supra) was cited by the appellant in the context of taxation of FTS income in absence of a pre-existing PE. The language of relevant DTAA s in this regard is reproduced herein below for ready reference: India-Norway DTAA ARTICLE 13 ROYALTIES AND FEES FOR TECHNICAL SERVICES .. 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o MUL which was not offered to tax on the ground that said supervisory activities did not constitute a Permanent Establishment (PE) in India. However, the assessing officer held that since the assessee had PE in India by way of PO LO, even the supervision fee was taxable in India as business income, being attributable to the PE in India. The issue for consideration was whether the supervision fee being in the nature of FTS could be said to be effectively connected with the PE and thus brought to tax as business profits in India. The High Court, after considering the language of Article 12(5) of the Indo-Japan DTAA [which is similarly worded as Article 13(5) of India- Norway DTAA], observed that the clause makes a distinction between those incomes which are the result of activities of the PE and the income that arises by reason of direct dealings by the enterprise from the head office without the aid or assistance of the PE. Accordingly, the Court held that only income which is connected with the activities of a pre-existing PE could be brought to tax as business profits, and therefore, supervision fee was not taxable as business profits in this case. 19. We have gone t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irrespective of the SOFs under which the services were rendered. The common billing by the recipient and the common payments gives rise to a conclusion that this is one single contract. We have gone through the various service order forms wherein it has been mentioned continuously that the contracts are performed in accordance with the service agreement between UNINOR and Telenor ASA, referred as the contractor and UNINOR referred as the recipient for all the services. 23. We have gone through the various SOFs which involve sourcing activities, marketing activities, ITeS activities, network activities, project activities. The entire schemes of activities are as under: SOF 1: Sourcing Activities Preparation, execution and negotiation of 2nd round of GSM awards Preparation, execution and negotiation of IT outsourcing contract.. Preparation, execution and negotiation of IN contract award ...................... SOF 2: Market Activities Device strategy development.. Product development ..................... SOF 3: IT/IS Activities IS/IT Solution, architecture and business scoping Service Delivery platf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prise..performing these services for the same project should be interpreted from the perspective of the enterprise that provides the services. Thus, an enterprise may have two different projects to provide services to a single customer (e.g. to provide tax advice and to provide training in an area unrelated to tax) and whilst these may be related to a single project of the customer, one should not consider that the services are performed for the same project. 25. With reference to the connected project the commentary further held as under: The reference to connected projects is intended to cover cases where the services are provided in the context of separate projects carried on by an enterprise but these projects have a commercial coherence.The determination of whether projects are connected will depend on the facts and circumstances of each case but factors that would generally be relevant for that purpose include: - Whether the projects are covered by a single master contract; - Where the projects are covered by different contracts, whether these different contracts were concluded with the same person or with related persons and whether the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the other SOF. Thus, based on the unified agreement, consolidated billing pattern, the activities being inter related as found in the preceedings paras, we hereby hold that the existence of the PE of the assessee is undeniable. 27. Having held so, the next issue remains to be adjudicated is to determine as what is the taxable income earned by the assessee in India. We find from the records that the AO made ad-hoc disallowance of 60% of the revenues received by the assessee allowing only the 40% of the receipts as expenditure. The assessee argued that only the mark- up of 3.5 % of the cost which translates to 3.38% of the revenues could at best be considered as the income attributable to the revenues pertaining to the PE in India. We are also in agreement with the assessee that the revenues raised out of the services rendered from Norway cannot be attributed to the PE of the assessee in India. The issue of determination of the profits is remanded back to the file of the Assessing Officer to pass an order by taking into consideration, the services rendered by the assessee from India and also from Norway, the evidence of the expenses incurred as submitted by the assessee. ..... 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