TMI Blog2004 (6) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... and signed proposals in USA and submitted the same. The GOAP awarded contract for package-2 and package-3 to the applicant. We are not concerned with package 1 which was awarded to some third party. Accordingly, the applicant through its authorized Country Manager (Mr. Naresh Goel) at Hyderabad entered into two contracts with the "GOAP" - the first on 14.6.2002 for supply installation and commissioning of gauging equipment and associate systems and ancillary services termed as Package-3 and the second on 25.6.2002 for supply of installation and commissioning of Satellite Telemetry and associated systems and ancillary services termed as Package-2. The contracts relate to supply of foreign equipments and providing local material and services including internal insurance, custom clearance, inland transportation, civil and mechanical works, installation, commissioning, acceptance and warranty for two years and annual maintenance for a period of four years for the consideration specified in the contracts. Each contract comprises of two parts (1) supply of goods and erection of three to six specimen remote stations and on the spot training of personnel and (ii) providing local material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the Income-tax Act, 1961 or can be deemed to accrue or arise under the said Act, to the non-resident applicant company in India? Q.2. Whether on the facts and circumstances of the case the non resident applicant company can be said to have permanent establishment in India as defined in the Double Taxation Avoidance Agreement (DTAA) with United States of America? Q.3. Without prejudice to the foregoing main contentions of the applicant company, if the applicant company is found liable to pay any tax under the Income-tax Act, 1961, what would be the proportion of the net income content in the total receipts? Q.4. Whether on the facts and circumstances of the case and without prejudice to the main contention of the non resident applicant company, Is any part of their income liable to tax deduction at source and if yes at what rates. 2. In his comments, the jurisdictional Commissioner, the Director of Income-tax (International Taxation), Delhi , states that: the applicant appointed Mr. Naresh Goel as its Country Manager in India . He collects information about the invitation of tenders by various concerned in India including the Central and the State Governments for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Nos. 3 and 4. With regards to questions No. 1 and 2 he argued that the sale of the machinery and plant is outside India, therefore, no income accrues or arises to the applicant or is deemed to accrue or arise to the applicant under section 9 of the Act; according to Article 7(1) of DTAA, the profit of the applicant would be taxable only in USA and not in India; the applicant has no business connection or permanent establishment in India and the residential address of Mr. Naresh Goel, the Country Manager of the applicant, cannot be treated as permanent establishment. Mr Abidi, Additional Commissioner of the jurisdictional Commissioner submitted that Mr. Naresh Goel is the agent of the applicant in India ; he has authority to negotiate and enter into contract and, indeed, he has signed the contracts with GOAP. It is asserted that the applicant has business connection within the meaning of section 9(1)(i) of the Act and also permanent establishment in India within the meaning of Article 7(4) of DTAA. Therefore, requirements of both section 9 as well as of DTAA are satisfied. It is not a case of sale of goods and supplying services but a contract of turnkey project. 4. Before adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accrue/arise to the applicant partly in India . Therefore, neither clause (a) nor clause (b) of sub-section (2), except the deeming provision will apply. We shall advert to the deemed accrual/arising of profits presently. 7. In support of his contention that where the goods are sold outside India , no income can be said to accrue/arise in India, Mr. Vajpai relied on the following decision of the Andhra Pradesh High Court. Additional Commissioner of Income-tax vs.Skoda Export, Praha [172 ITR 358], in that case a Government of India Undertaking(for short "the Undertaking") entered into two agreements with the non-resident company.The second agreement was in respect of delivery of machinery and equipment F.O.B. European and the time for the fulfillment of the delivery was the date of bills lading. On consideration of the relevant clauses of the agreement the Income-tax Appellate Tribunal held that the sale of machinery took place outside India and no part of the profit arising therefrom could be said to arise in India to the non-resident company. On a reference, the A.P. High Court held that the sale of machinery was not an independent or isolated transaction. It was part and parc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of India or who is resident in India, no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph in India;] A perusal of the provisions extracted above shows that all income accruing or arising whether directly or indirectly through or from any business connection in India or from any property in India or through any assets or source of income in India or through transfer of capital assets situate in India, shall be deemed to accrue or arise in India. The mandate contained in the Explanation is that for the purpose of aforementioned clause where the business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. Here, for the deeming provisions to apply we need to examine whether any income accrues or arises to the applicant (whether directly or indirectly) through or from any 'business connection' in India. 10. The important aspect we have to consider here is whether the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... side the taxable territories and the trading activities within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity". 11. The Supreme Court, speaking through Hon'ble Mr. Justice Shah (as he then was) for the purpose of Section 42 of the Income-tax Act, 1922 laid down, "business connection" contemplated by section 42 involves a relation between a business carried on by a non-resident which yields profits and gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of non-resident and the activity in the taxable territories, a stray or isolated transaction not being normally regarded as a business connection." The requirement of continuity of transactions to form 'business connection' between a non-resident and a resident was laid down by the Supreme Court as long back in 1952 in Anglo-French Textile Company Limited (23 ITR 101). Hon'ble Mr. Justice Mahajan (as he then was) speaking for the Court, observed, "an isolated transaction between a non-resident and a resid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company and execute contracts for the enterprise and perform other tasks as authorized by the applicant. Thus, it is seen that all these features are present in this case. It has, therefore, to be concluded that the applicant has business connection in India. 14. It will be apposite to notice at this stage that notwithstanding the provisions of section 5(2) and section 9(1)(i), having regard to the mandate contained in section 90(2) of the Act the provisions of the agreement entered into by the Central Government under section 90(1) of the Act will have overriding effect. It is a common ground here that such an agreement was entered into between the Government of Republic of India and the Government of USA which is referred to herein as DTTA. No authority is needed for this proposition. [However, see 263 ITR 706 in the case of Union of India Another v. Azadi Bachao Andolan Another ]. Article 7 (1) of DTAA which deals with business profits and in so far as it is evident, reads thus: Article 7: Business profits "1. The profits of an enterprise of a Contracting States shall be taxable only in that State unless the enterprises carries on business in the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es will be taxable in India if they are through permanent establishment in India . • Article 5 of the said DTAA defines permanent establishment thus: Article 5: Permanent establishment • For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. • The term "permanent establishment" includes especially: • a place of management; • branch; • an office; • to (i) x x x x x x x x x x • Notwithstanding the preceding provisions of this article, the term "permanent establishment" shall be deemed not to include any one or more of the following: • the use of facilities solely for the purpose of storage, display, or occasional delivery of goods or merchandise belonging to the enterprise; • the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or occasional delivery; • the maintenance of a stock or goods or merchandise belonging to the enterprise solely for the purpose of providing by the another enterprises; • the maintenance of a fixed place of business solely for the purpose pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not of itself constitute either company a permanent establishment of the other. A combined reading of paras 1 to 3 of Article 5 brings out the meaning of the expression 'permanent establishment'. Whereas para 1 defines the expression to mean a fixed place of business through which a business of an enterprise is wholly or partly carried on, para 2 includes seven places specified in sub clauses (a) to (k) and furnishing of services specified in sub clause (l) within the scope of the expression and para 3 excludes the facilities noted in clause (a), maintenance of stock mentioned in clauses (b) and (c) and maintenance of fixed places for the purposes indicated in clauses (d) and (e) from the scope of the expression. Para 4, which commences with nonobstante clause, says that notwithstanding the definition of the expression outlined in para 1 and 2, a person acting in contracting state on behalf of enterprise shall be deemed to have a permanent establishment in the first mentioned state, if any one of the three clauses - (a) (b) (c) thereof - applies. Clause (a) deals with a person who has and habitually exercises authority to conclude contract on behalf of the enterprise in the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two years. Rs.19246424/- Rs.3147030/- 3. Annual maintenance for a period of four years US $ 15756 And Rs.4375280/- US $ 11250 And Rs.1530000/- 17. In regard to the supply of foreign equipment under both the Packages even though the contracts were entered into in India, the delivery of the goods was in USA as goods were delivered to the carrier - Air India which was appointed as carrier of goods for and on behalf of the purchaser, GOAP. It has already been noted above that the consideration was paid in US dollars through the bankers of the applicant, Allfirst Bank, Baltimore , USA through Union Bank of California on shipment of the goods by the supplier, and the 10% had already been paid within 30 days of the signing of the contract against bank guarantee furnished by the applicant. 20% of the contract price is required to be paid between 30% of the installation upon issue of acceptance certificate by the purchaser. • It is also evident from Annexure I that consideration for providing local material and services including internal insurance, custom clearance, inland transportation, civil and mechanical works, installation and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnual maintenance for 4 years for Package 2 and Package 3. The bid was accepted. The letter of Secretary, Planning of GOAP dated 10 th October, 2002 corroborates: (i) agreements for supply of equipment under Packages 2 3 were concluded by the GOAP with M/s. Sutron Corporation, USA, duly approved by the World Bank, in the name of Sutron Corporation only, (ii) the applicant was requested to open an account in case it did not already have, to receive the Indian currency payment whenever due, and (iii) the payment will be made in the currency quoted in the contract price and question of paying the balance payments in US dollars in lieu of Indian rupees does not arise. From the above discussion it follows that the applicant alone is entitled to receive and has received payments both for sale and supply of equipments as well as for providing services indicated above. It is by internal arrangement between the applicant and Arraycom with regard to division of work and sharing of price, that it will receive part of consideration. So far as the applicant is concerned, the income/profits under the aforementioned contracts with the GOAP for sale of equipment, installation and service agree ..... X X X X Extracts X X X X X X X X Extracts X X X X
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