TMI Blog2009 (3) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... oposed to lay cross-country pipelines for transportation of hydro-carbons from Jamnagar to Bhopal and from Goa to Hyderabad. In connection therewith, the applicant was awarded contract for providing various services viz. (i) engineering and procurement services, (ii) project management services, (iii) construction advisory and commissioning advisory services. Three agreements were entered into between the applicant and Reliance during the year 2001. However, all the activities contemplated to be performed under these agreements were not carried out as the contract was terminated in the mid-way i.e. in March 2003. As far as the third agreement is concerned (construction and commissioning advisory), no services were at all performed. The Phase-I of first agreement was executed fully and only a portion of the work under the second agreement was done by the date of termination. The first agreement under which the applicant received a substantial amount is the agreement entered into on 13th August, 2001 (effective from 14th May, 2001) styled as "Engineering and Procurement Services Agreement". Even in respect of this agreement, phase-II thereof which relates to 'detailed engineering' an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing stage. The list of long lead procurement items in phase-I is given in item (12). 1.2. The scope of work under phase-II inter alia comprises of 'detailed engineering' and services related to procurement of 'balance items'. The former services include finalization of all reports prepared in phase-I to incorporate detailed engineering and vendor-data related updates, approval for construction drawings of all disciplines of engineering including pipelines. As noted already, phase-II has not been carried out. It is seen from para 5 of Appendix I that the primary responsibility for basic engineering, detailed engineering and procurement/contract services is that of the applicant and Reliance played supportive role. Para 3 stipulates that provision should be made for 7 Reliance project Team members to be stationed at contractor's head office during phase-I and at consultant's Indian office during phase-II. It is noted in para D(1) of Art.III that between the zero day (21st May 2001) and the date of execution of the agreement, the parties have begun discussions and analysed with respect to the overall basic engineering of the project including design criteria and other information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the details of the names of the employees and the duration of their stay in India has been furnished. The alleged discrepancy pointed out by the Revenue between the details furnished in the application and the affidavit of Mr. R.Brooke Smith was clarified in the rejoinder statement. It is seen from the chart that the first arrival of the applicant's employee in India was in October 2001 and he stayed for 75 days. Then, in November 2001, 4 employees stayed in India for duration of 8 days. The applicant stated that no services were rendered during the financial year 2003-04 by reason of closure of the contracts. The applicant clarified in its written submissions that Mr. Mark Vaughan acted as the project manager and that he and his team members were provided with office space in the office of the local engineering contractor of Reliance, namely, Jacobs Engineering Ltd. at Jacobs House, Andheri East, Mumbai. However, the nature of work/or services done by the applicant's employees who stayed in Mumbai has not been indicated specifically anywhere. 1.7. Procurement Services contemplated by the Ist Phase of the Agreement relate to long lead items and the services relating to proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime responsibility are stated to be: (i) Overall Project Management including preparation of functional procedure; (ii) Project Controls, progress monitoring and reporting on a weekly and monthly basis; (iii) Project Cost estimation, monitoring, control and reporting; and (iv) Project documentation control, the major responsibilities of the Contractor to perform the above mentioned functions and to ensure compliance with project cost, Schedule, Resources and quality requirements are stated in para II of Section B. Some of them are: Coordinating with various departments and third parties to ensure scheduled milestone dates to be are met, inter-facing management with local engineering contractor, preparation and implementation of the project execution and automation plans, forewarning and highlighting key issues and taking steps to resolve the same, maintaining and analyzing control - level schedules and data bases, ensuring implementation of quality assurance plan for all deliverables, coordinating with Reliance for their inputs, preparing close-out reports, organizing training to Reliance personnel on project management related software are some of the responsibilities of the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the amounts received by it in terms of the two agreements constitute "royalty" income, that the applicant had a PE* in India where quite a number of technical and management personnel were deployed as per the details given in the application. It is the further contention of the applicant that both the agreements under which the contracted work was performed either wholly or partly should be seen as one integrated agreement. If so viewed and even otherwise, the services/receipts being effectively connected with the permanent establishment, they go out of the purview of "royalty" provisions by virtue of Art.XII.4 of the DTAA between India and Australia and the income shall then be deemed to be business income and be dealt with in accordance with Article VII of DTAA. It is then submitted that on an application of Article VII, only that part of the profits attributable to the PE is liable to be taxed as business income under the Income Tax Act, 1961 and the balance receipts are not chargeable to tax in India. Even otherwise, it is contended that royalty payable on services rendered outside India is not liable to be taxed in India on the principle laid down by the Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of other royalties: (i) during the first 5 years of income for which this Agreement has effect: xx xx xx xx xx xx xx , (ii) during all subsequent years of income: 15 per cent of the gross amount of the royalties. 3. The term "royalties" in this Article means payments or credits, whether periodical or not , and however described or computed, to the extent to which they are made as consideration for: (a) the use of , or the right to use , any copyright, patent, design or model, plan, secret formula or process, trade mark or other like property or right; (b) the use of, or the right to use, and industrial , commercial or scientific equipment; (c) the supply of scientific, technical, industrial or commercial knowledge or information; (d) the rendering of any technical or consultancy services (including those of technical or other personnel) which are ancillary and subsidiary to the application or enjoyment of any property or right as is mentioned in sub-paragraph (a), or any such equipment as is mentioned in sub-paragraph(c); xx xx xx xx xx xx xx xx (g) the rendering of any services (including those of technical or other personnel ), which make available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch are incurred for the purposes of the business of the permanent establishment (including executive and general administrative expenses so incurred), whether incurred in the Contracting State in which the permanent establishment is situated or elsewhere. xx xx xx xx 7. Where profits include items of income which are dealt with separately in other Article of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article. Section 9 of the Income-tax Act, 1961 (the 'Act') 9. Income deemed to accrue or arise in India. (1) The following incomes shall be deemed to accrue or arise in India. (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. Explanation: For the purposes of this clause - (a) in the case of a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rning FTS. Nature of Services 7. On an analysis of the scope of work and services under the Ist Agreement, it is clear that most of the services fall within the ambit of the latter part of clause (g) of para 3 of Art. 12, i.e. development and transfer of technical plan and design as well as clause (c) read with clause (d) i.e. rendering of consultancy and technical services which are ancillary and subsidiary to the supply of scientific, technical or commercial information/knowledge. More or less similar clauses in the definition of 'royalty' contained in Explanation 2 to Section 9(1)(vi) of the Act would be attracted. Hence, in view of the agreement of both sides that the services constitute 'royalty' income within the meaning of Art.XII.3 of DTAA as well as section 9(1)(vi) of the Income-tax Act, 1961, there is no need to discuss this aspect further. Permanent Establishment 8. It is appropriate at this stage to refer to the definition of PE as contained in Art. V of the DTAA. ARTICLE V - 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yalties arising in a contracting State and beneficially owned by a resident of the other contracting State shall be taxable only in that other State." There is no provision in Article 12 of OECD corresponding to Article 12.2 of India-Japan Treaty or India-Australia Treaty which empowers the contracting State in which the royalties arise to tax such income. Thus, there is a material difference between the two provisions. The discussion in the later part of judgment would reveal that the learned judges did recognize the power of the source country to tax the income from f.t.s* and the income arising from the operations of the permanent establishment. We find that the excerpts from OECD Model Convention given at P.441 are not correct. There are some apparent mistakes. That is perhaps the reason why their Lordships made the observation extracted in the 1st sentence above. 9.2. Proceeding further, Para 3 of Article XII defines 'royalty'. Para 4 of the Article enjoins that the provisions of paragraphs (1) (2) shall not apply if the beneficial owner of royalties, that is to say, the recipient of royalty income carries on business in the other contracting state in which the royalti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me into the fold of business income. Art.VII(7) has no bearing on the scope and extent of exclusion contained in para (4) of Art.XII. That has to be answered on the terms of Art.XII(4) itself. A controversy in this regard is adverted to at para 15 infra. 9.4. As regards the inter-play between Art.XII and Art.VII, it would be appropriate to refer to the following passage cited by the Counsel from Mr. Philip Baker's treatise on "Double Taxation Conventions"# I "Article 7(7): Specific articles override Article 7(1) Article 7(7) concerns both of the situations covered by Article 7(1) (i.e. where the enterprise does or does not have a permanent establishment). Where an enterprise receives any type of income dealt with by any of the specific Articles of the Convention, the specific Articles are not affected by Article 7. Many of the other Articles-specifically Articles 10(4), 11(4), 12(3) and 21(2)-contain paragraphs which provide that, where the share holding, indebtedness, etc. is "effectively connected" with the permanent establishment, Article 7 should apply. According to paragraph 35 of the Commentary, such payments may then be regarded as "profits" of the permanent establis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ablishment". It must be noted that the effective connection should be between the royalty generating services and the permanent establishment. The expression 'services' is significant and should be given due weight. It is not enough that there is a permanent establishment of the non-resident in the source country carrying out some activities in connection with the project or the work. The PE may be effectively connected with the project and the contract from a broader perspective but the connection contemplated by Para 4 of Art.XII is in respect of the services that fall within the purview of royalty. The PE or fixed base set up in the source country should be engaged in the performance of royalty generating services, irrespective of what other activities it performs. Atleast, it should facilitate the performance of such services. The terminology 'effective connection' denotes a real and intimate connection. Clear co-relation between the services which give rise to royalty income and the PE is a key factor for the purpose of exclusion of paragraphs 1 2 of Art.XII. Prof. Klaus Vogel in his commentary on the provisions of Model Convention stated thus in the chapter dealing with "pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attending to minimal or negligible work may not be recognized as "PE through which business is carried on" within the contemplation of Art.XII(4). Otherwise, it would lead to unintended results involving tax avoidance. However, we are not saying that in this case, the PE is nominal and the activities of PE are insignificant. We are ruling out the application of Art.XII(4) on a different ground, i.e., the test of effective connection not being satisfied as far as basic engineering and procurement services are concerned. 12. Now, we have to examine the facts of the present case to ascertain whether the PE set up in India by the applicant in connection with the pipeline project work is effectively connected with the services performed by the applicant under the two agreements. Here, it must be noted that two separate agreements were entered into covering different phases of work with different rights and obligations. Though the works under the two Agreements are part of one project and contract, we have to look into the provisions and features of each agreement separately. In Ishikiwajama case, even a composite contract of turnkey project was held to be divisible and the various s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and procurement of long lead items, the averment of the applicant that procurement services were essentially performed from India is quite contrary to the terms of the Agreement. In Art. VII which refers to "price and price basis", the break-up of lump sum price in respect of Jamnagar to Bhopal and Goa to Hyderabad pipelines is given. In para A.1 and B.1 of Art. VII it is specifically stated : "lump sum fixed price for Phase 1 - basic engineering and procurement services of long lead items from Perth." Even in the written submissions dated 11.2.2008, the applicant clarified at page 2 that "the contractor was to provide basic engineering and procurement services from Perth, Australia and detailed engineering and procurement services from Mumbai." Further, para 3 of Appendix I which says that provision shall be made for seven Reliance project team members to be stationed at Contractor's head-office during phase I work reinforces the fact that phase I of the work was to be carried out from the head-office in Perth. It is not known on what basis the applicant has stated that services relating to procurement of long lead items were essentially performed in India. Assuming that somethi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... studies'. So also for preparing the documents under item 3 as a prelude to statutory approval process such as environmental clearance etc., site inspections may be necessary. But, this process of on-the-spot observations and collection of data would have been done much before the PE became functional in India. As already noted, the visits of applicant's personnel to India and their stay at Mumbai commenced only in October, 2001 by which date the services under the Ist Phase of Agreement were to be completed. It is not the case of the applicant that the PE came into existence even before Oct., 2001. On the other hand, the specific averment in the application shows that there were 'few trips to India for site visits and meetings' in connection with the basic engineering services. In the absence of any details, the few short visits of the employees deputed by the applicant for going ahead with the work under the Agreement cannot be construed to give rise to a permanent establishment at the initial stage itself. Presumably, faced with this difficulty, the learned counsel for the applicant repeatedly stressed that the two agreements entered into in connection with the project and execut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he second aspect of the argument, the contention of the applicant is equally untenable. Performing and providing services from Australia under the BE P Agreement cannot, without anything more, give rise to effective connection with the PE in India. We reiterate that the effective connection contemplated by Art. XII(4) must be between the services giving rise to royalty and the PE. That there is overall connection of such services to the project and the fact that such services are essential for the execution of the project is a different aspect. Such overall connection unrelated to the role of the permanent establishment cannot be brought within the ambit of the exclusion clause contained in Art.XII(4). The words "effectively connected with the PE" are not words of redundance and should be given their due meaning, as discussed earlier. A real and perceptible connection should exist to fulfil the said criterion. 12.3. In order to decide the question whether effective connection exists between the services performed under the BE P Agreement and the PE, basic facts relating to the functions exercised by the staff stationed at the PE, the work turned out by them in relation to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term 'directly or indirectly' attributable to that PE shall be referable to profits arising from transactions in which the PE has been involved and such profits are attributable to the PE to the extent appropriate to the part played by the PE in those transactions. The Supreme Court has specifically referred to para 6 of the Protocol in construing the expression 'attributable'. The observation of their Lordships though contained in one sentence would imply that there may be situations in which the services etc. have an effective connection with the PE, still attribution in terms of Art. 7.1 may not be possible. Such an attribution could only be in accordance with what has been laid down in the Protocol to the DTAA. In this context, it is important to note that there is no categorical finding or observation of the Supreme Court anywhere in that case that the offshore services were effectively connected to the PE in India. On the other hand, the learned Judges guardedly added a rider while formulating propositions 2 and 6 to the following effect : "assuming the offshore elements form an integral part of the contract" and more importantly - "even if the offshore services and the perm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectively connected to the PE, though the PE had no role in playing the actual rendering of such services. 13.3. Another proposition laid down by the Supreme Court in Ishikawajima case which needs to be explained is proposition No. 8. The legal position is stated thus: "Article 7 of the DTAA is applicable in this case and it limits the tax on business profits to that arising from the operations of the permanent establishment. In this case, the entire services have been rendered outside India, and have nothing to do with the permanent establishment and can thus, not be attributable to the permanent establishment and therefore not taxable in India." On the strength of the above passage it is possible to contend that in the instant case also, Article VII of the DTAA should be applied. As discussed earlier, Article VII comes into the picture only when the exclusion clause in XII.4 comes into play. To attract XII(4) there must be effective connection between the services giving rise to royalty income and the PE in India. In the case of Ishikawajima, it was not found as a matter of fact that the offshore services were effectively connected with the PE. On the other hand, the obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fice in India. It expected to employ about 200 to 400 employees in India and 800 employees outside India. The work to be done by 'ABC' under all the agreements involved activities in India as well as outside India. Against the background of this proposed transaction, advance ruling was sought on 13 questions. Question Nos. 4, 7 and 8 are relevant for our purpose. Question no. 4 was: " whether the activities of ABC conducted outside India as enumerated in paragraph 6 of Annexure-I are effectively connected with the activities conducted inside in India by its PE in India". Question no. 7 sought ruling on the point whether the payments under the agreements were taxable under Art. 13.2 of the DTAA or whether in terms of Art. 13.6, the said amounts were liable to be taxed under Art. 7 of the DTAA. It may be mentioned that Art. 13.6 of the DTAA with France is similar to Art. XII.4 of Indo-Australian DTAA, it being an exclusion clause. Then, followed question no. 8 which raised the query whether the profits attributable to activities inside India alone will be liable to tax in India. Answering the 4th question in the affirmative, the Authority observed, thus: "All the outside activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re was no occasion to give ruling on the basis of actual state of affairs. Excepting the version of the applicant and relevant clauses in the proposed Agreement, the Authority could not examine the actual role and functions of PE which did not come into existence till then. Nor could the applicant place any material thereon. The position here is different. As observed earlier, no material has been placed before us as to the exact role played by PE and whether it had anything to do with the BE P services, though these facts were well within the knowledge of applicant. On the other hand, there are enough indications, as stated earlier, that the PE would have been set up at a later stage by which time the BE P services would have been almost completed. Other points regarding Art. XII(4) 15. As regards Art. XII(4), another issue debated was whether in the event of holding that the services constituting 'royalty' are effectively connected to the PE in India, the entire receipts shall be taxed only in accordance with Art. VII to the complete exclusion of Article XII(2). The contention of the Revenue is that the receipts resulting from the services effectively connected to the PE s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion where it can be said that the services are effectively connected to the PE, but at the same time cannot be attributed to the PE. We need not deal with this argument in view of our finding that the services required to be performed under the BE P Agreement were not connected with the PE in India. Ishikawajima decision vis-a-vis Sec.9(1) and territorial nexus principle 17. Then, we come to the next aspect which was addressed by their Lordships in Ishikawajima case while discussing the issue of taxability of the income related to offshore services. The deemed income provision contained in Section 9(1)(vii) and territorial nexus in relation thereto was discussed and the interpretation of Section 9(1)(vii) was so adopted as to encapsulate the territorial nexus principle. It is pointed out by the learned counsel for the applicant that although the Supreme Court was interpreting Section 9(1)(vii) which relates to fees for technical services, the same interpretation and the same approach should be adopted in interpreting Section 9(1)(vi) dealing with royalty income as the opening part of both the clauses is couched in the same language. 17.1. Before we proceed to examine t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a resident [vide sub-section (1)] and the total income of a non-resident [vide sub-section (2)] respectively. Sub-section (2) of Section 5 which is material for our purpose lays down: "(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which - (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1: Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Then, Section 9 explains as to what income shall be deemed to accrue or arise in India within the meaning of clause (b) of section 5(2). 17.2A.. In the latest decision in CIT, New Delhi vs. M/s. Eli Lilly and Company (India) Pvt. Ltd#. the Supreme Court discussed the nature and scope of section 9. S.H. Kapadia , J observed thus: "a general charge of income-tax is imposed by Section 4 and 5, and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or profession carried on by such person in India or for the purposes of making or earning any income from any source in India. It may be noticed that these three sub-clauses of clause (vii) are identical to the three sub-clauses of clause (vi). 17.4. In the case of Ishikawajima as well as the present case, it is sub-clause (b) that applies because the payment was made by a resident to a non-resident for the services undertaken by the latter in respect of a contract executed in India. The fact that the appellant company was a non-resident who provided services to a person resident in India is clearly stated at page 444 and also at page 430 of I.T.R. However, instead of sub-clause(b), sub-clause(c) was referred to and interpreted. The structure and language of sub-clause (b) is quite different from sub-clause (c). After referring to Section 9(1) (vii) (c), the Supreme Court observed at pg.444: "Reading the provision in its plain sense, it can be seen that it requires two conditions to be met - the services which are the source of the income that is sought to be taxed, has to be rendered in India, as well as utilized in India, to be taxable in India. In the present case, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ages at pages 444-445 which have bearing on the interpretation of the opening part of Section 9(1)(vii) [which is in parimateria with Section 9(1)(vi)] are also relevant. "92. Section 9(1)(vii) of the Act whereupon reliance has been placed by the learned Additional Solicitor General, must be read with section 5 thereof, which takes within its purview the territorial nexus on the basis whereof tax is required to be levied, namely, (a) resident; and (b) receipt or accrual of income." "94. What is relevant is receipt or accrual of income, as would be evident from a plain reading of section 5(2) of the Act. The legal fiction created although in a given case may be held to be of wide import, but it is trite that the terms of a contract are required to be construed having regard to the international covenants and conventions. In case of this nature, interpretation with reference to the nexus to tax territories will also assume significance. Territorial nexus for the purpose of determining the tax liability is an internationally accepted principle. An endeavour should, thus, be made to construe the taxability of a non-resident in respect of income derived by it. Having regard to the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok Leyland vs. State of Tamil Nadu^ while dealing with a deeming provision in a tax statute. It was observed after referring to certain decisions on the point, "these decisions show that whenever a legal fiction is created by a Statute, the same shall be given full effect" (vide p.34). In a case arising under the CST Act, viz., Consolidated Coffee Ltd. vs. Coffee Board*, the following pertinent observations were made by the Supreme Court while explaining a deeming provision.: "The word 'deemed' is used a great deal in modern legislation in different senses and it is not that a deeming provision is every time made for the purpose of creating a fiction. A deeming provision might be made to include what is obvious or what is uncertain or to impose for the purpose of a statute an artificial construction of a word or phrase that would not otherwise prevail, but in each case it would be a question as to with what object the legislature has made such a deeming provision". 17.9 On the point of territorial nexus there is one more observation of the Supreme Court which needs to be explained. Under the same heading "offshore services" - proposition no.10 (at page 447) says : "the locati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e questions involved in the case in which it was rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words and sentences from the judgment, divorced from the context of the questions under consideration by this court, to support their reasonings". That is how the ratio of a judgment has to be ascertained and applied. In Arnit Das vs. State of Bihar*, the Supreme Court referred to the passage in State of UP vs. Synthetics Chemicals Ltd.** wherein it was pointed out that "a decision not expressed and accompanied by reasons and not proceeded on a conscious consideration of issue cannot be deemed to be a law having binding effect as is contemplated under Art.141 of the Constitution. That which has escaped in the judgment is not the ratio decidendi". Territorial nexus - other decisions 19. Before we proceed to apply the ratio of Ishikawajima decision to the facts of the present case, we may advert to the principles laid down in some important cases on the aspect of territorial nexus. 19.1. In Hoechst Pharmaceuticals Ltd. vs. State of Bihar, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscussed in considering the validity of the legislation." Thus, the Federal Court has clearly laid down the principle that the extent and amplitude of territorial connection is not really material. 19.3. In a very recent decision,* the Supreme Court aptly noted that in Wadia's case "the Federal Court held that so long as the Statute (Income-tax Act, 1922) selected some fact or circumstance which provided some connection or nexus between the person who is subject to the tax and the country imposing the tax, its validity would not be open to challenge on the ground that it is extra-territorial in operation". Under section 9(1)(ii) which fell for consideration in the said decision, salary income 'earned in India' shall be deemed to accrue or arise in India. The Explanation to clause (ii) declared that income related to the service rendered in India shall be regarded as income earned in India. Interpreting section 9(1)(ii) in the light of the test laid down in Wadia's case, their Lordships observed that "if the payments of Home Salary abroad by the foreign company to the expatriate has any connection or nexus with his rendition of service in India then such payment would cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... territory of India. The provocation for the law must be found within India itself. Such a law may have extra-territorial operation in order to subserve the object and that object must be related to something In India. It is inconceivable that a law should be made by Parliament in India which has no relationship with anything in India. The only question then is whether the ingredients, in terms of the impugned provision, indicate a nexus. The question is one of substantial importance, especially as it concerns collaboration agreements with foreign companies and other such arrangements for the better development of industry and commerce in India. In view of the great public importance of the question, we think it desirable to refer these cases to a Constitution Bench. Application of the ratio/dicta of the decision in Ishikawajima to the facts of present case 20. As stated earlier, this Authority has to give full effect to the law laid down and the observations made by the Supreme Court vis-a-vis territorial nexus in the context of Section 9(1)(vii) (similar to Section 9(1)(vi)). There is no doubt that the facts of the present case should be tested in the light of the ratio unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iance in connection with its project in India, the fact remains that some of the activities/services contemplated by the BE P Agreement itself were carried out from India, though such activities were done without reference to any permanent establishment. Therefore, there is no legal taboo against the application of S.9(1)(vi) of I.T.Act by deeming the royalty income as having accrued or arisen in India. The deeming fiction can be given its due effect without offending the principle of territorial nexus. Project Management Services 21. Then, we turn our attention to the Project Management Services (PMS) covered by the Second Agreement. We have already referred to the main provisions therein. The case of the applicant that by the date of closure of the contract, certain project management services were performed in India through the PE has to be accepted. The nature of the services coupled with the calculation of amount payable to the applicant based on estimated man days 'at Mumbai' would lead to the conclusion that these services would not have been performed from Perth only. The presence of the applicant's personnel for considerable number of days appears to be necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lower than the rate prescribed by Section 115A of the Act, the same shall be applied. Hence, the royalty income has to be subjected to tax at the rate of 15 per cent on the gross amount. 22.1. However, the payments received under the Project Management Services Agreement are liable to be taxed to the extent attributable to PE as business profit and are to be taxed on net basis at the appropriate rate applicable to business income. Conclusions 23. In view of the foregoing discussion, the answers to the questions formulated by the applicant (vide para 3 supra) are as follows: Q.nos. (a) (b): The services rendered and the work undertaken by the applicant in terms of the Agreement for Basic Engineering and Procurement services fall within the scope of "royalties" as defined in Art. XII(3) of the DTAA between India and Australia and the receipts are taxable in India by virtue of Art. XII(2). Under the Act too, they are so taxable. Though the applicant had a PE in India set up in October, 2001 or thereafter, there is no proof to the effect that the services contemplated by the said Agreement were in anyway connected with the PE. The effective connection between the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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