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TMI Blog2022 (5) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... stances of the case and in law, the Ld. CIT(A) erred in determining the permanent establishment of the foreign suppliers as per the general Double Taxation Avoidance Agreements ignoring the specific finding given by the Hon'ble ITAT Jabalpur in the case of the appellant specifying treaty-wise relevant definition of 'permanent establishment' to be considered in the case of the appellant. 3.On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the order of the Assessing Officer by ignoring the submissions and documentary evidences placed by the appellant to establish that no liability to deduct tax arose for the following reasons: (i) A few foreign suppliers had not provided any installation or supervisory services and contracts were purely in nature of supply of machinery; (ii) In some cases where supervision charges were paid a separate invoice was raised on which the tax was deducted by the appellant and (iii) In some cases though the contract contained separate charges to be paid for supervision services, the installation of machinery was carried out inhouse and no supervision services were availed by the appellant. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred in referring to provision of income Tax Act even though the ITAT held that the question of chargeability under section 5 and section 9 is academic, thus making the assessment bad in law B. Since matter was set aside by ITAT for examination of agency PE only whether Ld. Assessing Officer failed to bring anything on record to establish that such a dependent agency PE existed in light of articles 5 & 6 of Double Taxation Avoidance Agreement (in short DTAAs). 3. Brief facts of the case as culled out from the records are that the assessee is a limited company engaged in the manufacturing and trading of cement. Assessee is responsible for deducting tax at source under chapter XVII of the Income Tax Act, 1961. Assessee during the course of business entered into transaction for purchase of equipment and other material to be used in the manufacturing process. The transactions under consideration for non-deduction of TDS were conducted with 8 non-resident entities. A summary of the total payment made to foreign parties on which TDS deduction is under contention is as follows: Vendor-wise List of Payments Under Consideration: Payment (Rs.) S. No. Particulars Country DTAA Refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducting tax u/s 195 of the Act. 5. Aggrieved by the order of Ld. CIT(A), assessee preferred an appeal before ITAT, Jabalpur and vide order dated 24.12.2014 in ITANo.252/Jab/2013, this Tribunal firstly held that the question whether remittance were taxable under the provision of income tax Act 1961 of particularly u/s 5(2)(b) of the Act were of only academic in nature as the provisions of Double Taxation Avoidance Agreement (DTAA) are more beneficial to the appellant and hence the provisions of the Income Tax Act 1961 could not be pressed into play in the appellant case. Secondly this Tribunal set aside the limited issue to the Ld. Assessing Officer to ascertain whether any of the foreign suppliers had a Permanent Establishment as defined in the respective DTAAs. To give effect to the order of the Tribunal dated 24.12.2014 proceedings were initiated by Ld. ITO (IT & TP) Bhopal. Ld. Assessing Officer while concluding the proceedings relied in the provisions of section 5(2)(b) r.w.s. 9(1) of the Act holding that the non-resident entities had a business connection in India and created a demand for default of non-deduction of TDS@ 41.2% along with leving interest thereby creating deman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of R.A. Bills Raised By M/s Hajee A.P. Bava& Co. for Fabrication and Erection of Coal Washery 593 to 596 13 Copy of Letter of Intent for purchase of equipment for Polycom Model No. 20/13-9 marked as POLBEC dated 15.09.2009 597 to 599 14 a) Copy of a Formal Contract Entered into Between the Appellant and Polysius AG dated 01.12.2009 for Supply of Machinery 600 to 602 b) Copy of Contract for Supply of Technical Assistance and Guidance 603 to 704 15 Copy of TDS Challans Paid in the Case of M/s Polysius AG and M/s Shengyang Heavy Machinery Co. Ltd. 705 to 708 16 Copy of Invoices for Charges for Technical Assistance and Guidance Provided by M/s Polysius AG 709 to 713 17 Copy of Order for Purchase of Vertical Roller Mill vide Purchase Order dated 14.12.2009 placed with M/s Shengyang Heavy Machinery Co. Ltd. 714 to 17 18 Copy of Invoices for Charges for Supervision Services Provided By M/s Shanyang Heavy Machinery Co. Ltd. Along with Passport Copy of Person Sent and Attendance Sheet 718 to 729 19 Copy of Agreement With M/s PARR Instruments Company for Purchase of Isoperibol Calorimeter for USD 17,370/- vide Purchase Order dated 17.09.2009 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of Hon'ble Gujarat High Court in the Case of Saheli Synthetics vs. CIT reported at 302 ITR 126 (Gujarat HC) 39 to 46 6 Copy of Judgement of Hon'ble Delhi Tribunal in the Case of Sheraton International Inc vs. DDIT reported at 107 ITD 120 (Delhi ITAT) 47 to 116 7 Copy of Judgement of Hon'ble Supreme Court in the Case of CIT vs. R.D. Aggarwal reported at 56 ITR 0020 117 to 126 8 Copy of Judgement of Authority for Advance Ruling in the Case of TVM Ltd. Vs. CIT reported at 237 ITR 230 AAR 127 to 142 8 Copy of Judgement of Hon'ble Tribunal in the Case of Pubmatic India Pvt. Ltd. reported at ITR 100 (Mumbai ITAT) 143 to 152 10 Copy of Judgement of the Hon'ble Tribunal in the Case of Mitsui & Co. Ltd. ITA No. 4377 (ITAT Delhi) 153 to 172 11 Copy of Judgement in the Case of Motorola Inc. (ITAT Delhi) 173 to 289 8. Per contra Ld. DR vehemently argued supporting the order of both the lower authorities and prayed for confirming the order. 9. We have heard rival contentions and perused the records placed before us. We notice that the assessee had made following payments to foreign parties in order to purchase equipment plant and machinery crushers and in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant to be "assessee-in-default" for not deducting taxes u/s 195 before remitting the gross payments to foreign suppliers. Aggrieved by the CIT(A)'s order, the appellant preferred second appeal before this TAT, Jabalpur. The appeal of the appellant was decided by this ITAT, Jabalpur in ITA No. 252/JAB/13 dated 24.12.14. In the appellate order the relevant findings of the Tribunal were at Pages 47 to 51 of the order. The ITAT held that the impugned order dated 12.09.13 was bad in law and therefore set aside with certain findings and the tribunal has held that: Although the contracts between the appellant and foreign parties were composite but the appellant had brought sufficient evidence on record which showed that the remittances during the relevant previous years were made only towards supply of plant and machinery". 12. Further it was held by This Tribunal that "wherever any supervisory or installation services were envisaged to be rendered by the foreign parties, separate payments were made by the appellant on which tax was deducted u/s 195 of the Act. The ITAT thus held that the contracts with suppliers were in substance and in essence "supply contracts" for purchase of go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia.The ITAT quashed the original order passed u/s 201(1)/(1A) dared 27.03.2012 and deleted the tax demand raised pursuant thereto and set aside the order on the limited issue to the file of the AO for verifying whether any of the foreign suppliers had a Permanent Establishment in India under the respective DTAAs. ii. While concluding his submissions, learned Departmental Representative had filed a letter dated 25th September 2014 praying that as the DTAA aspects were not taken up at the stage of the Assessing Officer or the CIT(A), and as such the revenue authorities had no occasion to examine that aspect of the matter at all, the matter should at best be restored to the file of the AO for fresh examination in the right perspective. The ITAT saw merits in learned Departmental Representative's plea to the extent that the facts stated by the assessee with regard to the PE of foreign vendors not being in existence may need to be verified, and particularly as the assessee did not make proper submissions, duly supported by the facts on this aspect of the matter, at the assessment or the appellate stage. The ITAT held that in case the Assessing Officer can bring any material on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invoice value of the related equipment, plant or machinery. The payments made to non-resident entities have no tax implications at all under the tax treaties. However, as the revenue authorities had not examined the aspects of DTAA, the matter was set aside to the file of assessing officer, it was directed that the facts as stated by the appellant with regards to 'Permanent Establishment' of foreign vendors not being in existence needs to be verified by the AO. 14. We find that the ld. AO has not followed the directions of this ITAT with regards to the issue of taxability of non-resident as per section 5(2)(b) of the Act which has already been held to be irrelevant. The Assessing Officer has in fact relied on the provisions of section 5(2)(b) read with section 9(1)(i) of the Act and passed an order u/s 201(1) r.w.s. 201(1A) of the Act holding that the nonresident entities had a 'business connection' in India. This can be evidenced by the case law quoted by the ld. Assessing officer in his assessment order. The relevant extract from the assessment order is as follows: "The landmark judgement of the Bombay High Court in the case of Abdullabhai Abdul Kadar Vs. CIT (1952) 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had rendered installation, assembly or supervisory services and/or carried out such project in India in connection with the supply of plant and machineries and whether the period of rendition of such services exceeded the prescribed threshold limit in the respective DTAAs so as to constitute an installation/assembly/supervisory PE in India. It is noticed that the Ld. AO never considered this limited issue which was set aside by the ITAT. The AO also chose to remain silent on the relevant facts and materials placed on record which showed that no installation, assembly, or supervisory services were tendered by foreign suppliers in India. In fact, it is not even the AO's case while holding that foreign suppliers had PE in India that such PE was pursuant to any installation, assembly or supervisor services rendered by any of the foreign suppliers. Instead, the AO harped on the fact that each supplier had appointed agent in India and made unsubstantiated and hypothetical allegations that terms for sale and/or contract for supplies were concluded in India through the agents in India and therefore a portion of the remittances made to such foreign suppliers were taxable in India. 19. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner of Income-tax, [1979] 120 ITR 861 (CAL.) wherein the Hon'ble jurisdictional High Court has held as follows: "In the case before us, if the entire assessment order had been set aside, the contention of Mr. J.C. Paul would have been unassailable but unfortunately the fact is not so. There was no dispute with regard to the assessability of the sale proceeds of the loom hours at any stage of the proceedings. The AAC also did not consider that question at all, inasmuch as, that was not one of the points before him in appeal. The order of the AAC setting aside the assessment was only partial and to the extent as to the question of treatment of a loss in speculative transaction, as clearly indicated in the order itself. The order of the AAC, if read as a whole, in its proper context would clearly show that it was neither the intent nor the purpose nor the import of the order that the whole assessment was set aside and everything is kept at large so as to allow the ITO to make a fresh assessment on all the aspects of the matter and give a free hand to the assessee to make all claims and all arguments in that assessment. In that view of the matter, we are unable to accept the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e final between the parties because nobody pointed out if the said order was challenged by the Revenue before the Hon'ble High Court. It is also settled law that in the set aside proceedings the authorities below are bound to decide as per the direction contained in the order and it is not open to conduct fresh enquiry. The authorities below are precluded from entertaining a new plea. It appears that the authority is confined to the subject-matter on remand by the Tribunal, no other question could be considered or to enlarge the scope of the proceedings in contradiction to the findings given by the Tribunal. We are fortified in our view by the judgment of the Hon'ble Andhra Pradesh High court in the case of PulipatiSubbarao& Co. vs. AAC (1959) 35 ITR 673 (AP), decision of the Hon'ble Calcutta High court in the case of Katihar Jute Mills (P) Ltd. vs. CIT (1979) 120 ITR 861 (Cal), decision of Allahabad High court in the case of S.P. Kochhar vs. ITO (1983) 37 CTR (All) 49 (1984) 145 ITR 255 (Ail), Sri Vindhya Vasini Prasad Gupta vs. CIT (1990) 186 ITR 253 (Art) and the decision of the Hon'ble Madhya Pradesh High Court in the case of CIT vs. Hope Textiles Ltd. 09g7) 143 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid conclusion as the purchase orders/letter of intent stated that "discussions your representative had with us.....we are pleased to release the detailed order for the following on the undernoted terms and conditions." As per the AO's assessment order, "The assessee also stating in purchase order that - we are pleased to release this detailed order for the following on the undernoted terms and conditions", means that all the terms and conditions has been decided through discussion with the agent and based on that the assessee has placed the order" b. The agent was fully involved during the transaction and played important role while making discussion, negotiation, communication and finalizing the deal. In this way the agent is deemed authorized to conclude the contract on behalf of non-resident" 25. Ld. counsel for the assessee submitted that on the basis of purchase order, the AO has concluded that Non-resident Vendors had an Agency Permanent Establishment in India since a third party is marked in the communication and the letter refers to certain "discussions with representatives". Apart from this ld. Assessing officer has brought nothing on record to suggest that thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (Pages491 to 576 of Paper Book-I) as well as the bill of entry (Pages 491 to 576 of Paper Book-I). As far as the role of these Indian entities is concerned it can be only termed as preparatory/auxiliary in nature. Further, the non-resident entities/vendors have provided the appellant with certificates confirming that they did not have any permanent establishment in India during the relevant period and the same were submitted before the Assessing Officer (Pages 948 to 953 of Paper Book-I). 29. Further, the appellant has provided all contracts of purchase which highlight the fact that risks and rewards of the transaction were retained with the non-resident suppliers and the appellant without the existence of an agent who holds decision making power. The ld. Assessing officer has ignored the information in these contracts available on record and only jumped to a conclusion on the basis of wording of communication between the appellant and the non-resident vendors as illustrated in his contention above. 30. It is submitted before us that the Assessing Officer has determined the permanent establishment as per DTAA ignoring the finding given by the order of the this ITAT Jabalpur in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urposes) Indo Belgium tax treaty Article 5 Permanent Establishment 1. For the purposes of this Agreement, 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: (j) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities , if any) continue for a period of more than six months, or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment. (Emphasis by underlining supplied by us; portion not reproduced not relevant for our purposes) Indo China tax treaty ARTICLE 5 Permanent Establishment 1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve month period; (Emphasis by underlining supplied by us; portion not reproduced not relevant for our purposes) "37. The underlying principle in all the above definition, even as there is a variance on the threshold time limits, is that unless the installation or assembly project or supervisory activities in connection therewith cross the specified threshold time limit, the non-resident enterprise cannot be treated to have a permanent establishment in India. However, as an exception to this general principle in the above cases, in the case of Belgian and UK tax residents, even when threshold time limit is not crossed but where the charges payable for these services exceeds 10% of the sale value of the related machinery or equipment, the profits attributable to this activity can also be brought to tax. As a corollary to this legal position, even in the case of Belgian and UK tax residents, profit relatable to installation or assembly project or supervisory activities connected therewith, which do not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise itself or on behalf of that enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph." 31. In view of the finding of the Tribunal in assessee's own case and article extracted above, we notice that Ld. Assessing Officer has not brought any other material to substantiate his allegation that may demonstrate that the agent involved has habitually concluded contracts on behalf of the vendor, or has habitually maintained the vendor's stock of goods, or has habitually secured orders for the assessee. It is to be noted that all three clauses in the DTAA use the word 'habitually'. It may be relevant to further mention that the expression 'has' shall mean a legal existence. The vendors of the appellant only used auxiliary and supplemental services in the process of proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effort to collect information with regard to Instant Noodle project etc. to make the best effort to find the best candidate, to attend/take care of the visitor from Japan, to make the best effort to analyze the feasibility report. None of these clauses can be interpreted to mean that MIPL is securing orders. On the basis of this clause the Assessing Officer was wrong in assuming that MIPL is securing orders." 33. We also observe that learned assessing officer ignored the basic requirement i.e. fulfilling one of the three conditions laid down in Article 5(5) of the DTAA. DTAAs provides for treating a person as Dependent Agent. The DTAA has to be strictly interpreted. The DTAA having prescribed the conditions, no further conditions can be read. What learned assessing officer is canvassing will mean adding new condition in the DTAA. Further, it may be relevant to note that as per the DTAA, it has been specifically provided that if a company in the contracting state is controlled by a company in the other contracting state that itself shall not itself constitute either of company a permanent establishment of the other. 34. Further, as per Page 111 of the ld. Assessing officer's order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere independent agents or acted wholly or mainly on behalf of the non-residents. The AO ought to have carried out thorough verification with the said parties. Instead, the AO has simply relied on the wordings of the purchase orders without verifying the complete facts of the case. No material has been brought on record by the AO to show that these Indian entities habitually acted on behalf of the non- resident entities. The finding arrived at by the AO are based on irrelevant and insufficient material. The Hon'ble Supreme Court in the case of CIT vs. R.D. Aggarwal reported at 56 ITR 0020 (Refer Page No 117 to 126 of Paper Book-II) has held that: "Turning to the facts of the present case, as found by the revenue authorities, contracts for the sale of goods took place outside the taxable territories, price was received by the non-residents outside the taxable territories, and delivery was also given outside, the taxable territories. No operation such as procuring raw materials, manufacture of finished goods, sale of good or delivery of goods against price took place within the taxable territories: the assessees merely procured orders from merchants in Amritsar for purchase of goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Only issue of Agency PE as per DTAA was to be examined Continuity of agency was established as per facts of the case and material available on record. Relationship between non-resident and assessee was established to be not of casual character with a few isolated transactions. No such material brought on record Assessee was acting as a commission agent on behalf on non-resident for several years. Large number of transactions were entered into. Correspondence between assessee and non resident from 1943 to 1947 No such direct correspondence between alleged agents and non-residents TVM Limited v CIT (1999) 102 taxmann 578 The fact that TVI habitually concluded contracts on behalf of TVM was well established through facts of the case and material brought on record No material brought on record to prove habitual behaviour. Assessee has quoted extract in his submission. While the expression "has" may have reference to the legal existence of such authority on the terms of the contract between the principal and agent, the expression "habitually exercises" has certainly reference to a systematic course of conduction the part of the agent. - CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings u/s 201 the appellant had filed copies of invoices raised by the foreign suppliers and other documents prepared at the time of processing of documents by the Customs department while complying import formalities and payment of duties. With reference to these documents it was clarified that the prices specified in the purchase order or agreements matched with the prices specified in the invoices raised by the customers. It was also clarified at the time of clearance of custom barrier, custom duties was assessed on the basis of declared value of the plant. These documents thus establish beyond doubt that ownership of plant and equipment was transferred in the assessee's favour outside India and the transactional documents prepared at the material time declared the price as specified in the purchase order. The price so declared was accepted by Indian Customs Department for collecting customs duty. In other words in customs proceedings the said Revenue department accepted the declared value of plant and equipment supplied by the foreign companies and where the property in the goods supplied was transferred outside India. On these facts therefore it was wholly inappropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch resulted in accrual of income. The AO was not permitted to make a high pitched assessment arbitrarily; alleging that the activities carried on by the agents in India. However in the most perfunctory and high handed manner the AO estimated that 125 of the remittance amount represented income of the foreign suppliers which accrued in India from supply of plant and machinery. The entire process of quantification of income and the sum payable thereon was conducted by the Ld. AO only on conjecture, surmise and suspicion. The Ld. AO fail to take into consideration the material facts and evidences on record nor he considered applicable legal provisions and in violation of all cannons of taxation, he arbitrarily determined alleged income chargeable to tax. 43. We, therefore, under the given facts and circumstances of the case and on carful analyzing the purchase order, documentary evidences find that majority of the transactions are for supply of items like plant and machinery and equipment and are not for providing any other additional services relating to installation and supervision charges. In the cases where such charges were paid the same have already been subjected to tax. Ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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