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TMI Blog2024 (5) TMI 1417X X X X Extracts X X X X X X X X Extracts X X X X ..... 7-65 H. PE-A BROAD OVERVIEW 66-72 I. RESPONDENTS' TAKE ON PE-A RECAP 73-77 J. ANALYSING ARTICLE 5 OF THE INDIA-USA DTAA 78-80 K. THE COURT'S ANALYSIS 81-113 K.1 THE SERVICE PE 82-84 K.2. THE FIXED PLACE PE 85-95 K.3. ARTICLE 5 (3)-PREPARATORY AND AUXILIARY FUNCTIONS 96-110 K.4. ARTICLE 5 (4) AND DAPE 111-113 L. CONCLUDING OBSERVATIONS 114-138 M. OPERATIVE DIRECTIONS 139-140 A. INTRODUCTION 1. These writ petitions impugn notices issued under Section 148 of the Income Tax Act, 1961 [Act] by the first respondent. The details of the individual writ petitions are set out hereinbelow:- Relevant AY Notice issued on W.P.(C).no 2012-13 28.03.2019 12408/2019 2013-14 29.04.2019 12406/2019 2014-15 29.04.2019 12405/2019 2015-16 31.05.2019 12407/2019 2016-17 31.05.2019 12409/2019 2017-18 31.05.2019 12410/2019 2018-19 31.05.2019 12411/2019 2. The first respondent has assumed authority to initiate reassessment proceedings upon finding that the production unit of the wholly owned subsidiary of the petitioner constitutes a Fixed Place Permanent Establishment [PE], in the alternative a Service PE as well as a Dependent A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only back office and technical support services to the petitioner. 6. The petitioner asserts that neither the said Transfer Pricing Order nor any other order made by the authorities under the Act have ever found the Indian subsidiary to constitute a PE of the petitioner despite the said entity having been duly assessed for the past 25 years. It is also the case of the petitioner that the products manufactured by the Indian subsidiary are clearly distinct from those manufactured and supplied by it, and consequently it would be found that the core business activities of the petitioner and the Indian subsidiary are completely different. They have in this regard disclosed the following distinct production activities pursued by the two entities:- Petitioner Subsidiary Company i. EMD OEM components available for locomotive, marine and power generation applications. Boards, panels, consoles, desks, cabinets and other bases for a voltage exceeding 1,000V." ii. Freight and Tank Car Parts, Shortline and Industrials, Kershaw Parts, Marine and Stationary Engines. We are informed that prior to 01 September 2016, the petitioner was known as Electro Motive Diesel Inc., and whereafter its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. On 24 June 2019, the petitioner addressed a letter to the first respondent asserting that its duly allotted PAN was linked to the office of the fourth respondent and consequently questioned the issuance of notices by the first respondent additionally on this score. It was thus contended that the first respondent had wrongly assumed jurisdiction and the notices were thus liable to be withdrawn on this ground alone. On 26 June 2019, and faced with the fact that the petitioner had failed to submit its Return of Income [ROI] in compliance with the notices issued, the first respondent initiated penalty proceedings referable to Section 271F read with Section 274 of the Act. In response to the said notice, the petitioner reiterated its stance that its PAN fell within the jurisdiction of the fourth respondent, and that consequently, both the Section 148 notice as well as the penalty notice issued by the first respondent were without jurisdiction. While responding to the penalty notice, the petitioner further asserted that it had not filed its returns proceeding on the assumption that its request for grant of four months to furnish the same stood granted. 11. By way of a letter dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onclusions and findings which appear in a Transfer Pricing Order dated 18 October 2016:- "1. Reference u/s 92CA was made by the DCIT, Circle 8 (1), New Delhi, New Delhi for determination of Arm's length price for the international transactions/domestic transaction undertaken by the assessee during the FY 2012-13. In response to notice Mr. Sahil Malhotra, being the authorized representatives appeared periodically. The documentations prescribed under Rule 10D of the Income Tax Rules, 1962 and other details asked for were submitted and placed on record. 2. Introduction EMD Locomotive Technologies Pvt. Ltd. is engaged in provision of support services to EMD Group on which it is remunerated on a cost plus basis. The company provides back office support and technical support services starting from monitoring the Indian market for upcoming tenders and participating in such tender meetings to provide technical support including coordination with regard to the locomotives and spare parts / components etc. directly purchased by Indian Railways from EMD Group. 3. The international transactions entered into, by the assessee are tabulated below. S.No. Type of International Transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by EMD India is outlined below: ● Monitor upcoming tenders in the Indian market for locomotives and provide requisite support to EMD Group in preparation of the proposal. ● Attend tender opening meetings with Indian Railways and examine the terms and conditions based on which inputs/comments are provided to EMD Group. ● Coordinate with EMD Group for timely bid submission for tenders in the Indian market. ● Tracking LCs and shipments so as to provide updated information on the status of the consignment to Indian Railways. ● Regularly track the market situation to understand competitor movements and new business opportunities. ● Organise events and seminars and coordinate with industry associations such as CII, FICCI, AMCHAM in order to market the wide range of locomotives and diesel engines and technical expertise of EMD Group. ● Provide support to Indian Railways by detection of faults/issues on locomotives running in the field. ● Provide technical guidance to Indian Railways in taking corrective measures for replacement of part or rectification of the identified fault. ● Regularly update EMD Group on the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd respondent was empowered to exercise authority and which extended to areas falling within the territorial limits of the States of Uttar Pradesh and Uttarakhand. 18. It is relevant to note that in terms of the arrangement made for entities falling within the ambit of Serial No. 3, the Notification further provided that the said authority would also have the right to assess persons who may be non-residents, including foreign companies having a PE in the territories noted above. In terms of the aforesaid Notification, the Commissioner of Income Tax (International Taxation-3), Delhi, the second respondent herein, issued an order on 15 November 2014 vesting jurisdiction upon the Additional Commissioner of Income Tax [ACIT]/Joint Commissioner of Income Tax [JCIT] (Range Noida) over all foreign companies having a PE in the State of Uttar Pradesh. The said authority - ACIT (International Taxation), Range, Noida, in turn issued an order on the same date and proceeded to confer power upon the first respondent in respect of foreign companies having a PE within the territorial limits of the Chief Commissioner of Income Tax [CCIT], Ghaziabad falling in the State of Uttar Pradesh. It is on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eassessment action rests on the correctness of the view as taken by the said respondent in that respect. E. THE PE ISSUE-A BRIEF BACKGROUND 22. Since learned counsels for respective sides have addressed elaborate submissions on the concept of Fixed Place PE, Service PE and DAPE, we do not find any justification to go into the issue of PAN migration and the challenge in that respect which was addressed. This, since we would have to necessarily answer the fundamental question of whether a PE could be said to have come into existence within the territorial area over which the first respondent stood empowered to exercise powers conferred by the Act and thus examine whether the Section 148 power was justifiably invoked. 23. The question of a PE existing in the State of Uttar Pradesh would have to be answered on the basis of Article 5 of the India-USA DTAA which is extracted hereinbelow:- "ARTICLE 5 - Permanent establishment- 1. 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. 2. The term "permanent establishment" includes especially: (a) a place o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have a preparatory or auxiliary character, for the enterprise. 4. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 5 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if : (a) he has and habitually exercises in the first-mentioned State an authority to conclude on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph; (b) he has no such authority but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in the State on behalf of the enterprise have contributed to the sale of the goods or merchandise ; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /Modification/Rectification/Correction. Providing follow-ups on payments, etc. roles are played here in Varanasi. xxxx xxxx xxxx Questions 9-During the inquiry of the survey, Purchase order, Bill of lading/OPT (Overseas Transport Project), etc, were found that are related to EMD Locomotive Technology Pvt. Ltd. and Electromotive Diesel Inc USA. Kindly elaborate. Answer-In relation to this, I would like to say that the purchase order whose information regarding their payment is in USD, is related to Electromotive Diesel Inc. USA and the purchase order whose payment is in INR is related to EMD Locomotive Technology Pvt. Ltd. Noida which is subsidiary of EMD Inc USA. Question 10-Does the risk or responsibility involved in the delivery of goods bear with EMD Locomotive Technology Pvt. Ltd. Noida or Electromotive Diesel Inc. USA? Answer- The risk/ responsibility with respect to supply of goods prior to May 2018 rested with Electromotive Diesel Inc. USA and the same has been rested with EMD Locomotive Technology Pvt. Ltd. Noida for supply of goods since 2018. xxxx xxxx xxxx Q.12. Please explain in detail the services rendered to PRL Inc. USA about tenders floated in India an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orders, delivery of goods, refunds, sale and purchase of goods as received by the Indian subsidiary from the petitioner. The employee is also asserted to have stated that the emails so received are also reported to the petitioner from time to time through proper channels. 27. In the course of the survey operations, the first respondent also recorded the statements of Mr. Shivanshu Narendra Kaushik and Mr. Phaneendra Kumar Potnuru. The relevant extracts of the statement made by Mr. Shivanshu Kaushik is reproduced hereinbelow:- "Q7. Please tell whether your team gives design up gradation/technical inputs to only M/s PRIPL or these inputs are also utilized by M/s Progress Rail Locomotive Inc. (Previously known as M/s EMD Inc.) Ans. As far as my knowledge is concerned there is no India specific design office in USA in M/s PRL Inc., USA. Since, 2010 we are designing the traction system to fulfill the requirement of Indian Railways. However, If we feel any difficulty as need guidance then we take support from the USA technical team. Our designs/inputs are utilized by both the companies i.e. M/s PRIPL, India as well as M/s PRL Inc., USA. xxxx xxxx xxxx Q9. From the job profile wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sal in respect of the work done by you? Ans. As far as annual appraisal of my work is concerned, the discipline, behavior etc. are appraised by Sh. Anand Chidambram, M. D. in M/s PRIPL but the appraisal of my technical performance is done by Mr. Dave Babnic of M/s PRL Inc., USA. 28. The statement made by Mr. Potnuru is extracted hereunder: "Q4. Please tell about Directors in EMD India and to whom they report? Ans. Sir, There are 4 Directors in EMD India. Out of which 2 are foreign directors. i. Sh. Balakrishnan Chindambram-Managing Director-He reports to Mr. John Nuwman, Vice-president of EMD USA. ii. Sh. Phaneendra Potnuru-Director Finance-He reports to Mr. Balakrishnan Chidambram (MD India) and Mr. Ryan Vickers, International Finance Controller of EMD Inc., USA. iii. Mr. Paul Denton, represents to EMD Inc., USA & he reports to Mr. Martin Haycraft, Head of EMD Group which also includes EMD Inc., USA & EMD India iv. Mr. Martina Haycraft, EMD Group Head-Overall Head. Q5. Please give details of Sales products by EMD Inc. USA in India and to whom, this sales has been made? Ans. Sir, Sales products of EMD Inc. USA are followings:- Locomotive components, Power assem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of survey u/s. 133A of I.T. Act. 1961 at the office premises at Varanasi, the Rubber stamp of EMD Inc. USA (PRL Inc. USA) was found which was used as mark of identity in the statement on oath of Sales Executive of the Indian Co. b. M/s EMD Locomotive Technologies Pvt. Ltd. was authorized to take all decisions on the tenders and performed all actions w.r.t sales to DLW by EMD Inc., USA i.e. all functions relating to tenders like submission, follow-up for release of purchase orders, acceptance of purchase order, freight forwarding, tracking of delivery to DLW, follow-up of payments on behalf of EMD Inc. USA. Further, EMD India is not doing similar activities for any other entity, whether Indian or foreign. c. Key Officers numbering to around 13, of M/s. EMD Locomotive Technology Pvt. Ltd., an Indian entity like Managing Director, Finance Director, Head of Tech. Services & Sales Executive directly reports to M/s PRL Inc. In fact, the Finance Director of Indian Co. who was working as Business Support Manager in M/s Caterpillar Inc., USA which is the ultimate holding company of the group Cos has come on deputation basis to M/s EMD L.T. Pvt. Ltd. Further, as per organization ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... toms brokerage activities, Managing Customs & Trade related compliance matters, managing inventory, transportation & shipping functions relating to the sales effected by EMD Inc. USA to DLW, have also been assigned to the Indian Co. Thus, Indian Company's activities cannot be termed as preparatory or auxiliary in nature. g. Mr. Jitendra Pratap Singh, Sales Executive of M/s. EMD Locomotive Technology Pvt. Ltd., at Varanasi office has stated in his statement that this office also works for EMD Inc. USA. Before 2018, all responsibility regarding decision making of fixation of goods price/unit price of sales goods to DLW-Varanasi from EMD Inc. USA was being made by EMD Locomotive Technology Pvt. Ltd., INDIA. Print outs of Emails relating to procurements of purchase orders, correction-modification-rejection in purchase orders, delivery of goods/units, bill of lading, outstanding payments, sales and purchase of goods, etc. directions given by EMD Inc. USA to EMD Locomotive Technology Pvt. Ltd. India, were found & taken. h. Expatriates like senior officers of EMD Inc., USA visited India regularly for holding discussions with officials of Diesel Locomotive Works, Varanasi of Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. in India for the years 2011 & 2012 is Rs. 832.10 Crores & Rs. 1028.50 Crores, Sales of the said Co. for the period 1-4-2011 to 31-3-2012 relevant for A.Y. 2012-13 will be part of sales of the years 2011 (1-4-2011 to 31-12-2011) & 2012 (1-1-2012 to 31-3-2012) and considering the existence of PE of the said Non-Resident Co. in India, I have concrete reasons to believe that income exceeding Rs. 1 Lakh have escaped assessment for the A.Y. 2012-13 in the hands of the said Non-Resident Co. viz. M/s Electro Motive Diesel Inc. (now known as Progress Rail Locomotive Inc.), USA, especially as no Return of Income has ever been filed by the said Non-Resident Co. in India. Hence, for initiating proceedings u/s 147/148 sanction of the Commissioner of Income Tax is hereby sought in terms of Section 151 of the I.T. Act, 1961." F. THE CHALLENGE OF PROGRESS RAIL LOCOMOTIVE INC. CONTD. 31. Assailing the assumption of jurisdiction by the first respondent, Mr. Datar, learned senior counsel submitted that the first respondent had clearly erred in proceeding on the basis that the Noida factory constituted a Fixed Place PE of the petitioner. According to learned senior counsel, the Noida premises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arged in relation to the execution of contracts with the Indian Railways. Mr. Datar reiterated the undisputed fact of all products having been directly supplied to the Indian Railways by the petitioner in the relevant AYs', namely, AYs' 2012-13 till 2018-19. 34. Mr. Datar then questioned the opinion formed by the first respondent on the aspect of DAPE. It was contended that the factories of the Indian subsidiary, PRIPL, manufacture a completely different range of products and that the petitioner has no control or oversight over those factories or offices. It was then contended that a subsidiary which merely renders back office or technical support would not be liable to be viewed as a PE, bearing in mind the provisions contained in Article 5 (3)(e) of the India-USA DTAA. Mr. Datar submitted that the aforesaid position stands settled in light of the decision of the Supreme Court in Director of Income Tax (International Taxation), Mumbai vs. Morgan Stanley & Co. Inc. (2007) 7 SCC 1. Learned senior counsel contended that in Morgan Stanley, the Supreme Court had clearly enunciated the legal position with respect to "preparatory" or "auxiliary" services and consequently those principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 37. Mr. Datar then questioned the impugned notices on the ground that a reading thereof would establish that no prima facie view was either formed or reasons recorded in support of the charge of income having escaped assessment. It was his contention that the entire action was based solely on a survey carried out in the factory and office premises of the Indian subsidiary located at Noida and Varanasi respectively. As per Mr. Datar, the first respondent has not even expressed a prima facie view with respect to the petitioner having a PE in India and consequently a Section 148 action could have at best only been issued by the jurisdictional AO, namely, the fourth respondent. 38. Mr. Datar then questioned the fairness of the action impugned on the ground that the statements have been selectively extracted and taken into consideration in order to initiate reassessment proceedings against the petitioner. It was his submission that none of the complete statements have been noticed or holistically examined prior to the formation of opinion. It was also submitted that the partial statements which have been extracted in the "reasons to believe" for initiating action under Sections 147 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a-USA DTAA and to therefore contend that the activities of the Indian subsidiary could not be said to fall within the ambit of that provision. In this backdrop, our attention was also drawn to the following chart which sets out details of the income derived by the Indian subsidiary from transactions with the petitioner between FYs' 2011-12 to 2017-18 and which is extracted hereinbelow:- "S.No FY Service Income received from US Co. Other income Total income Percentage of total income received from US Co. 1. 2011-12 9,832,370 3,760,831 13,593,201 72.33% 2. 2012-13 222,314,720 200,160,033 422,474,753 52.62% 3. 2013-14 241,513,441 2,436,970,440 2,678,483,881 9.02% 4. 2014-15 325,496,881 1,732,056,593 2,057,553,474 15.82% 5. 2015-16 290,187,274 1,111,341,569 1,401,528,843 20.71% 6. 2016-17 221,431,732 2,040,244,440 2,261,676,172 9.79% 7. 2017-18 157,000,000 2,507,000,000 2,664,000,000 5.89%" 42. According to Mr. Datar, the aforesaid chart would establish the minuscule percentage of income which the Indian subsidiary earned from transactions entered into with the petitioner when compared to its total income, and all of which would establis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eques/drafts and sending the same to the beneficiaries in India. The Indian Subsidiary was providing support services like - supporting the front office functions of parent company in fixed income and equity research, providing IT enabled services such as data processing support centre The Indian Subsidiary provides back office support services in the nature of marketing and technical support services to the EMD Group at a cost-plus basis. (para 4 at page 2 and 3 of the Transfer Pricing Order dated 18/10/2016) Held by Supreme Court Activities of liaison offices were of preparatory or auxiliary character, same would fall within excepted category under Article 5 (3)(e) of India-UAE DTAA. (Para 11) The back-office functions performed by Indian Subsidiary falls under Article 5 (3) (e) of the India-USA DTAA. (Para 12) Therefore, the same principle should be followed in the case of Petitioner since the Indian Subsidiary, like in the case of Morgan Stanley and UAE, provides back office support services which are activities of 'preparatory or auxiliary character'." 44. Mr. Datar then drew our attention to the following pertinent observations as rendered by the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to enable us to have the benefit of a broad conceptualization of principles pertaining thereto, Mr. Datar firstly drew our attention to certain passages as appearing in Permanent Establishment, Erosion of a Tax Treaty Principle [Permanent Establishment, Erosion of a Tax Treaty Principle, Wolters Kluwer, 2nd edition (1991)] authored by Arvid Aage Skaar. By way of a historical background, Skaar's work contains the following illuminating passages:- "36.2.2 Historical Background Early in the history of PE, the opinion seems to have been that related, independent companies should constitute a PE. Thus, the first model treaty submitted by the Group of Technical Experts to the League of Nations included "affiliated companies" as a PE" and had some influence on bilateral treaties. However, the model treaties submitted by the conference of Governmental Experts in 1928 omitted "affiliated companies" from the "positive list." During the 1930s the principle of protecting related companies from PE taxation through the activity of each other prevailed in several bilateral treaties and was also briefly mentioned in the 1933 Report of the Fiscal Committee of the League of Nations. The uncertai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appears in various tax treaties and how the same has been examined in the commentaries pertaining to Organization for Economic Cooperation and Development [OECD] model treaties, Skaar observes as follows:- "36.3.2 The Subjectivity of the Subsidiary PE xxxx xxxx xxxx b) The Agency Clause The commentaries to the pre-2017 OECD model treaties were somewhat ambiguous on the significance of share control for the "dependence test" under the agency clause. It was generally stated that a "subsidiary is not to be considered dependent upon its parent company solely because of the parent's ownership of the share capital." The reality is, of course, that a subsidiary is dependent upon the parent company, both legally and economically. Although the statement in the pre-2017 OECD commentaries seems to create a presumption that the subsidiary is independent, until the opposite is proved, the underlying significance of the commentaries was that they established the principle that the same rules apply to subsidiaries as to other "persons." The evidence necessary to prove that a subsidiary is "dependent" will therefore be the same as for other agents. In the OECD 2017 model treaty, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enterprise" is conducting a joint business activity, which may qualify for a PE. The main problem pertaining to the subsidiary PE is whether the parent company performs the business activity of the subsidiary or vice versa. With one exception, the general basic-rule provisions also apply to the subsidiary PE. It is expressly stated in the commentaries that the parent company cannot be the subsidiary's "place of management," even if extensive management and supervision services are provided." 49. As would be evident from the aforesaid passage, the author suggests that the functionality test is met where it is found that the asserted PE is engaged in the carrying on of the business activities of the taxpayer. After noticing the various precedents handed down with respect to a subsidiary PE, including some rendered by Tribunals in India, Skaar enunciates the legal position by way of the following conclusions:- "36.4.10 Conclusions In conclusion, when a separate legal entity exists, the treaty presumes that the activity performed is the subsidiary's own business. This also applies when separate legal entities cooperate extensively. Nevertheless, the facts in the case may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are in fact "alter egos" and undertake a "joint business activity". It further significantly holds that performance of shareholder activities, including having a say in the operational top management would not in itself be dispositive of the question. It ultimately refers to the "principal purposes" test as propounded in the commentary relating to OECD tax treaties. The aforesaid position is explained in greater detail in Para 36.6 which is extracted hereinbelow:- "36.6 SUMMARY AND CONCLUSIONS: PRESSURE ON THE PE CONCEPT AS AN ALTERNATIVE TO UNITARY TAXATION? The starting point de lege fata is that a parent company's control and supervision cannot justify subsidiary-PE taxation. Source-state taxation of a foreign enterprise's business activities with related domestic companies is the kind of taxation at source which the subsidiary clause is specifically designed to prevent. Thus, as a general rule, the normal management contribution of a parent company does not create a place of management of the subsidiary. However, the subsidiary clause aims at protecting related companies from PE taxation beyond what unrelated enterprises are subject to. Thus, a related company may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d companies, a subsidiary PE must be the result among related entities. Thus, a subsidiary PE between related companies will be constituted under circumstances where an unrelated company would also have been a PE under the basic rule. To counteract tax planning through related companies, tax authorities in some countries have adopted special versions of the unitary allocation method. In other cases, the authorities have claimed taxing jurisdiction over the foreign headquarters of the group, under the assumption that it has a PE in the country through the domestic subsidiary there. This has been done even if the subsidiary has only performed auxiliary functions, or no functions at all, for a related foreign construction enterprise. The impression left from the discussion of the subsidiary PE is that the conditions for subsidiary PE may be subject to creative interpretation in the future, as a method of counteracting tax planning through use of captive companies. Instead of dealing with the imperfections of the arm's-length principle through implementation of a unitary taxation system, tax authorities may aim at imposing PE taxation based on related companies. The unitary all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re were two separate businesses even though the parent may closely monitor the subsidiary's activities and/or second employees to the subsidiary to assist in the subsidiary's business. In this case, the Full Federal Court also rejected a separate argument that the overseas parent was carrying on business in Australia as a PË as a holding company managing and financing the Australian subsidiary." 52. The subject of subsidiary PEs and group of companies, and as that subject is treated by authorities in Belgium was explained in Paras 11.2.6 and 11.2.7 of that work and which are reproduced hereunder:- "11.2.6. Subsidiary companies as PE of the parents (and vice versa) A subsidiary does not ipso facto constitute a PE of the parent company or vice versa. This is also not the case if two subsidiaries are held by a common parent company. A subsidiary will only be deemed to be a PE of the parent company (or vice versa) if the criteria of article 5 (1) or (5) of the OECD Model are fulfilled. The above is also applicable to a BE. If a parent company is given the possibility to dispose of the premises that belong to a subsidiary and it carries on its business through that place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirms the general principle applicable under Belgian domestic law according to which the conditions of a basic rule PE (article 5 (5) of the OECD Model) or an agency PE (article 5 (5) of the OECD Model) need to be met in order that a closely related enterprise could trigger the recognition of a PE. The Belgian tax authorities have not provided any guidance on the interpretation of the notion "control"." 53. In Chapter 16 of that publication, the Indian position relating to subsidiary companies was explained in the following terms:- "16.2.6. Subsidiary companies as PE of the parents (and vice versa) Under the BC provision of the domestic law, a subsidiary created a per se BC although no profits could be allocated unless some activities were undertaken in India. With the introduction of a specific provision relating to agency from 2003, even the scope of creating such BC has become limited. Although the IR asserts the existence of a PE through a subsidiary wherever it comes across any evidence of close interaction between the principal and the subsidiary, whether through presence of employees or transactions with other group companies, courts in India have not always sided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture by transferring business or back office operations to the Indian subsidiary, it would not by itself create a fixed place or location PE. As for the existence of a service PE under the relevant treaty, the Supreme Court held that if any customer is rendered a service in India, whether resident in India or outside India, a "service PE" would be established in India. When all the customers of the foreign entity receive services only in locations outside India, there will be no service PE when only auxiliary operations that facilitate such services are carried out in India. In another case, it has also been held that if only support services are rendered, then there will also be no PE. - The existence of a PE may result in attribution of a part of the income of the enterprise. In some cases, the existence of a PE may be favourable to the taxpayer, particularly in the context of the treaties containing the FTS article if the same is held to be effectively connected to the PE. Indian judicial authorities have given such benefits whenever any provision is beneficial to the taxpayer." 54. Mr. Datar also placed for our consideration extracts from the Double Taxation Conventions, A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such enterprise exercising such an activity cannot get the benefits of sub-paragraph e). A fixed place of business which has the function of managing an enterprise or even only a part of an enterprise or of a group of the concern cannot be regarded as doing a preparatory or auxiliary activity, for such a managerial activity exceeds this level. If enterprises with international ramifications establish a so-called "management office" in States in which they maintain subsidiaries, permanent establishments, agents or licensees, such office having supervisory and coordinating functions for all departments of the enterprise located within the region concerned, a permanent establishment will normally be deemed to exist, because the management office may be regarded as an office within the meaning of paragraph 2. Where a big international concern has delegated all management functions to its regional management offices so that the functions of the head office of the concern are restricted to general supervision (so-called polycentric enterprises), the regional management offices even have to be regarded as a "place of management" within the meaning of sub-paragraph a) of paragraph 2. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tually displayed at the trade fair or convention. 5C.30. A fixed place of business used both for activities which rank as exceptions 5C.30 (paragraph 4) and for other activities would be regarded as a single permanent establishment and taxable as regards both types of activities. This would be the case, for instance, where a store maintained for the delivery of goods also engaged in sales. 5C.31. It is a generally accepted principle that an enterprise should be treated as having a permanent establishment in a State if there is under certain conditions a person acting for it, even though the enterprise may not have a fixed place of business in that State within the meaning of paragraphs 1 and 2. This provision intends to give that State the right to tax in such cases. Thus paragraph 5 stipulates the conditions under which an enterprise is deemed to have a permanent establishment in respect of any activity of a person acting for it. The paragraph was redrafted in the 1977 Model Convention to clarify the intention of the corresponding provision of the 1963 Draft Convention without altering its substance apart from an extension of the excepted activities of the person. 5C.32. Per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It would be irrelevant, for instance, if the person had authority to engage employees for the enterprise to assist that person's activity for the enterprise or if the person were authorised to conclude, in the name of the enterprise, similar contracts relating to internal operations only. Moreover the authority has to be habitually exercised in the other State; whether or not this is the case should be determined on the basis of the commercial realities of the situation. A person who is authorised to negotiate all elements and details of a contract in a way binding on the enterprise can be said to exercise this authority "in that State", even if the contract is signed by another person in the State in which the enterprise is situated or if the first person has not formally been given a power of representation. The mere fact, however, that a person has attended or even participated in negotiations in a State between an enterprise and a client will not be sufficient, by itself, to conclude that the person has exercised in that State an authority to conclude contracts in the name of the enterprise. The fact that a person has attended or even participated in such negotiations coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of AC-AC traction system as well as locomotives of the global tenders of M/s PRL Inc. USA. Q10.Please state for which global projects/tenders of M/s PRL lnc., USA you or your team have worked till date? Ans. I have worked for orders of following countries on behalf of M/s PRL Inc., USA- Country Order No. Year Congo 20118584 2011 to 2013 Botswania 20138952 2015-16 Tanzania 20138903 2013 to 2015 Bangladesh 20159278 Currently As far as the full team is concerned I am not aware about the exact details as everyone has expertise in different field but others have also worked for global contracts of M/s PRL Inc., USA. xxxx xxxx xxxx Q14. When did you last work on any Indian Contract/Project? Ans. I have not worked on any Indian project for last 4-5 years. However, at times I have given suggestions to my other colleagues working on Indian projects." 58. Besides the aforesaid statements, Mr. Agarwal also relied upon the fact that while signing the aforesaid statements, the employees of PRIPL were affixing the seal of the petitioner. Therefore, and in this backdrop, it was contended that PRIPL was acting for and on behalf of the petitioner and that PRIPL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e providing the services. In the latter case, no time threshold test must be met for a permanent establishment to exist. The determination of whether persons are related for purposes of this test is made in accordance with the rules of Article 9 (Associated Enterprises). Under the U.S. Model such activities would constitute a permanent establishment only if they are exercised through a fixed place of business or by a dependent agent. (See explanation below of Ad Article 5 of the Protocol for a description of the rule applicable when the 90 day time period extends over two taxable years.)" 61. Relying upon the aforesaid explanation, Mr. Agarwal contended that even a single visit by employees of the petitioner to oversee PRIPL's India operations would constitute a Service PE, especially when there is no requirement of a specific time period for the furnishing of service by the parent enterprise for its "related enterprise". 62. Mr. Agarwal then contended that PRIPL constitutes a DAPE of the petitioner in terms of Article 5 (4) of the India-USA DTAA. Learned counsel in this regard placed reliance upon the statement of Mr. Phaneendra Kumar Potnuru, and more specifically to his respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcise of reassessment is warranted. According to learned counsel, the reasons which have been recorded by the AO in support of the initiation of action cannot be said to be either patently erroneous or perverse so as to warrant the exercise of our powers conferred by Article 226 of the Constitution. H. PE- A BROAD OVERVIEW 66. While we are conscious of the limited scope of judicial scrutiny which should be brought to bear with respect to a Section 148 notice and a challenge being liable to be countenanced, only if it were to raise a serious jurisdictional question with respect to assumption of jurisdiction, we are confronted with a case, where admittedly, the first respondent would have no authority to initiate a reassessment action unless a PE were found to exist within its jurisdiction. The issue of existence of a PE and the Noida premises constituting an establishment which would fall within the ambit of Article 5 are thus aspects which form the very basis and foundation for the invocation of the Section 148 power by the first respondent. Our task thus is limited to examining whether the view as taken by the said respondent and the conclusions drawn on the basis of the materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while seeking to amplify the importance of the expression "through" when used in the context of the business of the holding company being carried on by the subsidiary, makes the following pertinent observations:- "134. Article 5 (1) OECD MC (since 1977; see supra m.no.45) requires that the business of an enterprise (for these terms, see supra m.no.27 et seq.) is carried on through the fixed POB. The preposition 'through' specifies the functional relation between the POB and the activities of the taxpayer. This relation can be described best by the notion of a functional integration of the POB in the enterprise of the taxpayer. Such functional integration contains several aspects which need to be carefully distinguished from one another. Their common denominator, however, is the type and degree of proximity of the POB to, or even identification with, the taxpayer's paramount economic activity. 135. The first function of the term 'through' is to make it clear that the taxpayer has to control the PE (see supra m.no. 106 et seq. for details). 136. Secondly, functional integration presupposes that the taxpayer 'wholly or partly carrie[s] on' his busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eous use of this language on the one hand and the terms 'used or maintained by an enterprise' on the other, in one and the same sentence in the initial phrase of Article 5(4.1) OECD and UN MC, proves how careful and attentive the 2017 Models have been drafted. This dualism is another good reason to stipulate a different meaning of 'through', as opposed to 'in' or 'at'. For all of these reasons, we do see a substantial difference between both terms. 142. It follows that on the one hand, the activities mentioned in Article 5 (1) OECD and UN MC need no longer be carried on 'in' or 'at' the POB. In this respect, the 1977 change of Article 5 (1) OECD MC has enlarged the scope of the PE definition. Especially if one thinks of an activity as a human behaviour, one can now (unlike before 1977) easily subsume unmanned facilities under the PE definition (see supra m.no. 45 and see, e.g., no. 127 OECD MC Comm. on Article 5). 143. On the other hand, the requirement of an instrumental character of the POB has become irrefutable. Even stronger than the English amendment ('through which' instead of 'in which'), the corresponding modi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case as it is possible to carry on an activity at a given place for a substantial period of time in preparation for activities that take place somewhere else. Where, for example, a construction enterprise trains its employees at one place before these employees are sent to work at remote work sites located in other countries, the training that takes place at the first location constitutes a preparatory activity for that enterprise. An activity that has an auxiliary character, on the other hand, generally corresponds to an activity that is carried on to support, without being part of, the essential and significant part of the activity of the enterprise as a whole. It is unlikely that an activity that requires a significant proportion of the assets or employees of the enterprise could be considered as having an auxiliary character. xxxx xxxx xxxx 69. [Collect information] The second part of subparagraph d) relates to a fixed place of business that is used solely to collect information for the enterprise. An enterprise will frequently need to collect information before deciding whether and how to carry on its core business activities in a State. If the enterprise does so without ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of value (e.g., all steps from agricultural production through the processing of raw materials, further refinement up to marketing, sale and delivery of the goods to final consumers) and 2) a specialized enterprise which focuses on one of these steps only (eg, on the delivery of goods). Suppose that each enterprise maintains a POB in a foreign State just for the sake of the delivery of goods. The same activity (the delivery of goods) is ancillary and subordinate for enterprise (1) while it constitutes the core business of enterprise (2). 305. The amount of value added by either enterprise is the same, and so is the potential tax revenue in the source State. An absolute standard suggests equal treatment of case (1) and (2). 306. However, the ordinary meaning of both 'preparatory' and 'auxiliary' requires the identification of a point of reference. One may say that the absolute standards are based on an analysis of the function of the core activity in relation to the entire chain of economic value added. It is more convincing, however, to apply relative standards in the sense that the value added is considered on a micro rather than a macro level, that is, tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cker rooms and coaches' rooms occupied by a baseball team while playing in venues outside the headquarters of the team do not constitute PEs of the baseball clubs. In contrast, sales activities of a manufacturing company are not of an auxiliary character. If they occur in a fixed POB, they create a PE even if the sales contracts are subject to approval by the head office or another PE." 71. The expression "habitually" as appearing in Article 5 (4) is succinctly explained by Vogel as under:- "98. [Requirement of habitual exercise] The requirement that an agent must 'habitually' conclude contracts or play the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise reflects the underlying principle in Article 5 that the presence which an enterprise maintains in a Contracting State should be more than merely transitory if the enterprise is to be regarded as maintaining a permanent establishment, and thus a taxable presence, in that State. The extent and frequency of activity necessary to conclude that the agent is 'habitually' concluding contracts or playing the principal role leading to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shorter each single period is, the more regular and the more often the activity should recur (cf. no. 32 OECD MC Comm. on Article 5). This hypothesis cannot be used in a strictly mathematical sense, however. 94. Whether or not such comprehensive project or ongoing homogeneous business can be acknowledged should be decided under the same criteria as the concept of one single project or venture (supra m.no. 64 et seq.). 95. Based on the above-mentioned standards, a PE has convincingly been acknowledged in the case of a market pitch which a taxpayer used on a regular basis year in, year out. Likewise, a PE has been acknowledged in the case of a US resident salesman who sold wares at an exhibition in Canada from a trailer and portable sales booth two weeks each year for fifteen years. However, twice he left the trailer and stand in Canada between exhibitions, allegedly for repairs. It seems to your author that this decision is not beyond doubt, however. Similarly, the Swedish Kammarrätteni Göteborg ruled that the activities of a recurrent nature of a German company constituted a PE in Sweden despite the fact that the activities lasted only for a short period of time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons performed by the Indian subsidiary to include subjects such as work relating to tenders, submission thereof, follow up for release of purchase orders, freight forwarding, tracking of delivery to DLW, Varanasi and others. 74. It then took into consideration the fact that as many as 13 key officers of the Indian entity report directly to the petitioner. Proceeding further to notice the constitution of the Board of the Indian subsidiary, the first respondent noted that of the four, two are foreign nationals and represent the petitioner in the top echelon of the management of the subsidiary. Proceeding further to highlight the functions which the Indian subsidiary performs for the petitioner, it has taken note of the Marketing and Engineering Services Agreement dated 01 January 2011 [MES Agreement] and the obligation of the Indian entity in terms thereof to provide support in relation to Marketing, Engineering, Servicing, Warehousing, Assembly and Sourcing. 75. Dealing with the Second Amendment to that agreement, it also proceeded to observe that the Indian entity was also discharging functions pertaining to compliance, inventory management, transportation and shipping functions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India-USA DTAA enumerates the conditions which if found to exist would lead to the creation of a Service PE. In terms of that Article, where it is found that the entity of a Contracting State is engaged in providing services through employees or other personnel in another Contracting State, and where those services are rendered for a "related enterprise", it would result in a Service PE coming into existence. Article 5 (3) constitutes the negative list, and in terms of which activities of the nature specified therein would result in a presumption of a PE being dispelled. 80. Article 5 (4) then proceeds to deal with what is commonly known in the context of tax treaties as DAPE. An establishment existing in one of the Contracting States which stands empowered to "habitually" exercise "an authority to conclude" contracts is one of the first categories which the treaty would recognize as constituting a DAPE. A similar conclusion would be liable to be drawn if it were found that the establishment "habitually" maintains a "stock of goods or merchandise" for supply on behalf of an enterprise situated outside that Contracting State. The last of the categories which stand culled out in te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n under Sections 147/148, the same were principally concerned with the Indian subsidiary performing functions and services for the petitioner. These reasons form the foundation for the respondent holding that the Indian subsidiary constituted a DAPE. Both are thus clearly self-contradictory. In any case, the principal agreements which were taken into consideration related to services that the Indian entity was to discharge and that too on the basis of remuneration, which was asserted to be at arm's length. 84. All that need be additionally stated in this regard is that the mere fact that if the petitioner standing in the shoes of the parent company deemed it appropriate and expedient to exercise a degree of managerial oversight, the same would not result in a Service PE coming into existence. The visit of employees of the parent company, their interaction with employees of the Indian subsidiary, discussion on subjects of mutual concern or interest is not the rendering of a service. Such forays are principally concerned with sharing of best practices, experiences and problem solving. It cannot possibly be understood to constitute the rendering of a service. Similarly, the periodic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business through which the business of an enterprise is wholly or partly carried on. It entails two requirements which need to be fulfilled: (a) there must be a business of an enterprise of a contracting State (FOWC in the instant case); and (b) PE must be a fixed place of business i.e. a place which is at the disposal of the enterprise. It is universally accepted that for ascertaining whether there is a fixed place or not, PE must have three characteristics: stability, productivity and dependence. Further, fixed place of business connotes existence of a physical location which is at the disposal of the enterprise through which the business is carried on. xxxx xxxx xxxx 33. The principal test, in order to ascertain as to whether an establishment has a fixed place of business or not, is that such physically located premises have to be "at the disposal" of the enterprise. For this purpose, it is not necessary that the premises are owned or even rented by the enterprise. It will be sufficient if the premises are put at the disposal of the enterprise. However, merely giving access to such a place to the enterprise for the purposes of the project would not suffice. The pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e an enterprise illegally occupies a certain location where it carries on its business, that would also constitute a PE. Some of the examples where premises are treated at the disposal of the enterprise and, therefore, constitute PE are: a place of business may thus be constituted by a pitch in a market place, or by a certain permanently used area in a customs depot (e.g. for the storage of dutiable goods). Again the place of business may be situated in the business facilities of another enterprise. This may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise. At the same time, it is also clarified that the mere presence of an enterprise at a particular location does not necessarily mean that the location is at the disposal of that enterprise. xxxx xxxx xxxx 74. As per Article 5 of the DTAA, the PE has to be a fixed place of business "through" which business of an enterprise is wholly or partly carried on. Some examples of fixed place are given in Article 5 (2), by way of an inclusion. Article 5 (3), on the other hand, excludes certain places which would not be treated as PE i.e. wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se a place and exercise "control" thereupon. "Control" was explained further to mean the place of business being at the "disposal" of an enterprise and which may have use of the same to a considerable extent. It was further observed that the test of place of business being under the "control" of a foreign enterprise would be met even though the said premises may not be directly owned or taken by way of lease or on rental basis. In Formula One World Championship Limited, the Supreme Court observed that even a certain amount of space which may be placed at the "disposal" of an enterprise for the purposes of the use of its business activities would be sufficient. The Supreme Court significantly observed that for the purposes of recognizing the existence of a Fixed Place PE, no formal legal right to use need be discerned or proven. It was thus held that as long as it is space in an establishment or premises placed at the constant "disposal" of the enterprise, it would satisfy the test of a Fixed Place PE as contemplated under Articles 5 (1) and 5 (2)(a)-(k) of the DTAA. 89. The principles governing Fixed Place PE were again spelt out and enunciated by the Supreme Court in Morgan Stanl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the context of a Fixed Place PE, the Supreme Court held: "24. A recent judgment of this Court, namely, E-Funds IT Solution Inc. [CIT v. E-Funds IT Solution Inc., (2018) 13 SCC 294], concerned itself with the India-US Double Taxation Avoidance Agreement with similar provisions. Dealing with what was referred to as a "fixed place", permanent establishment, this Court held : (SCC p. 310, para 16) "16. The Income Tax Act, in particular Section 90 thereof, does not speak of the concept of a PE. This is a creation only of DTAA. By virtue of Article 7(1) of the DTAA, the business income of companies which are incorporated in the US will be taxable only in the US, unless it is found that they were PEs in India, in which event their business income, to the extent to which it is attributable to such PEs, would be taxable in India. Article 5 of the DTAA set out hereinabove provides for three distinct types of PEs with which we are concerned in the present case : fixed place of business PE under Articles 5 (1) and 5 (2) (a) to 5 (2 )(k); service PE under Article 5 (2) (l) and agency PE under Article 5 (4). Specific and detailed criteria are set out in the aforesaid provisions in order to f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther of whom was qualified to perform any core activity of the assessee, ITAT chose to ignore the same. This being the case, it is clear, therefore, that no permanent establishment has been set up within the meaning of Article 5 (1) of the DTAA, as the Mumbai project office cannot be said to be a fixed place of business through which the core business of the assessee was wholly or partly carried on. Also, as correctly argued by Shri Ganesh, the Mumbai project office, on the facts of the present case, would fall within Article 5 (4) (e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the assessee and ONGC. This being the case, it is not necessary to go into any of the other questions that have been argued before us." 91. When we test the stand taken by the respondents, bearing in mind the aforesaid precepts as culled out from the various judgments noticed hereinabove, we find ourselves unable to sustain even the prima facie formation of opinion by the first respondent in this respect. It is pertinent to note that the impugned notices and the reasons set out for initiating action under Sections 147/148 nowhere allude to a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... productivity and dependence. Of equal significance were the observations which explained the phrases "at the disposal of" and "through". Tested on the aforesaid precepts also, the impugned notices and the reasons set out for initiating action under Sections 147/148 woefully fail to rest on any evidence which could have possibly compelled us in acknowledging that a Fixed Place PE had come into being. 95. Undisputedly, the Noida factory premises and the Varanasi office would clearly not fall under any of the categories which stand specifically enumerated in Article 5 (2) and sub-clauses (a) to (k) of the India-USA DTAA. We also bear in mind the distinct and divergent categories of products, and in the manufacture of which, the petitioner and the Indian subsidiary were engaged. Of equal significance was the Noida outfit undertaking manufacturing activity in its own right and supplying products to various arms of the Indian Railways. All of the above, in our considered opinion, when viewed cumulatively, would have been sufficient to dispel any presumption of the petitioner conducting its business activity from a permanent premises situate in India. We are consequently of the firm opi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the activities undertaken by the Indian subsidiary could not be said to be of a "preparatory" or "auxiliary" character. The decision of the Supreme Court in Morgan Stanley & Co. Inc., while explaining the meaning to be ascribed to support services and activities of a "preparatory" or an "auxiliary" nature enunciates the legal position in the following terms: "10. In our view, the second requirement of Article 5 (1) of DTAA is not satisfied as regards back office functions. We have examined the terms of the Agreement along with the advance ruling application made by MSCo inviting AAR to give its ruling. It is clear from reading of the above Agreement/application that MSAS in India would be engaged in supporting the front office functions of MSCo in fixed income and equity research and in providing IT enabled services such as data processing support centre and technical services as also reconciliation of accounts. In order to decide whether a PE stood constituted one has to undertake what is called as a functional and factual analysis of each of the activities to be undertaken by an establishment. It is from that point of view, we are in agreement with the ruling of AAR that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove. (b) Electronic Payment Management e-Funds US's Electronic Payment Management segment provides products and services in two broad categories: Payment Processing Software and Electronic Payment Processing Services. The business involves processing transactions for regional automated teller machine or ATM networks in the United States and also transaction processing for retail point-of- sale terminals that accept payments from debit cards and paper cheques that have been converted into electronic transactions. xxxx xxxx xxxx Services provided by e-Funds US: e-Funds US was responsible for customer interface and customization of products and services as per the dictates of the customer. Agreement/Contracts with the customer were entered into by e- Funds US. All risks and responsibilities for performance of the contract at all times were of e-Funds US only. All software's/solutions are developed by e-Funds US. Software writing and conceptualisation of ideas were done by e-Funds US. All networks and infrastructure for this category of services is owned by e-Funds US only. Connex was developed by a company acquired by e-Funds US. e-Funds US's associate company in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess and rank the risk of fraud associated with opening an account for or accepting a payment from that consumer. e-Funds US software development centres in the United States, as well as in the US data centres and remotely at the customers' sites develop and maintain software for these service offerings. Services provided by e-Funds India: The work performed by e- Funds India involved responding to the inbound calls made by the customers located outside India to customer support centre of e-Funds US. These calls were routed to e-Funds India for enquiry on non-acceptance of cheques and opening of accounts. e-Funds India also provided software support services for SCAN and Chex process. e-Funds India was only involved in bug fixing and software maintenance. (d) Global Outsourcing Services & Professional Services xxxx xxxx xxxx Services provided by e-Funds US: e-Funds US was responsible for Customer Interface and customisation of products and services as per the dictates of the customer. Agreement/Contracts with the customers were entered into by e- Funds US. All risks and responsibilities for performance of the contracts at all times were of e-Funds US only. Services p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h, hospital, etc. with charitable activities." In Black's Law Dictionary (11th Edn.), the term "auxiliary" is defined as follows: "Auxiliary adj. 1. Aiding or supporting. 2. Subsidiary. 3. Supplementary." 30. The crucial activities in the present case are of downloading particulars of remittances through electronic media and then printing cheques/drafts drawn on the banks in India, which, in turn, are couriered or dispatched to the beneficiaries in India, in accordance with the instructions of the NRI remitter. While doing so, the liaison office of the respondent in India remains connected with its main server in UAE and the information residing thereat is accessed by the liaison office in India for the purpose of remittance of funds to the beneficiaries in India by the NRI remitters. These are combination of virtual and physical activities unlike the virtual activity of funds being remitted by telegraphic transfer through banking channels. As regards the latter, it is not the case of the Department that the same would be covered and amenable to tax liability by virtue of deeming provision in the 1961 Act. 31. While answering the question as to whether the activity in q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India are circumscribed by the permission given by RBI and are in the nature of preparatory or auxiliary character. That finding reached by the High Court is unexceptionable. xxxx xxxx xxxx 36. Having said thus, it must follow that the respondent was not carrying on any business activity in India as such, but only dispensing with the remittances by downloading information from the main server of the respondent in UAE and printing cheques/drafts drawn on the banks in India as per the instructions given by the NRI remitters in UAE. The transaction(s) had completed with the remitters in UAE, and no charges towards fee/commission could be collected by the liaison office in India in that regard. To put it differently, no income as specified in Section 2(24) of the 1961 Act is earned by the liaison office in India and more so because, the liaison office is not a PE in terms of Article 5 of DTAA (as it is only carrying on activity of a preparatory or auxiliary character). The concomitant is - no tax can be levied or collected from the liaison office of the respondent in India in respect of the primary business activities consummated by the respondent in UAE. The activities carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contracts in question, where the main business is fabrication and installation of platforms, acting as a communication channel would clearly qualify as an activity of auxiliary character-an activity which aids and supports the assessee in carrying on its main business. 29. In view of the above, the activity of the assessee's project office in Mumbai would clearly fall within the exclusionary clause of article 5 (3) (e) of the Double Taxation Avoidance Agreement and, therefore, cannot be construed as the assessee's permanent establishment in India." 102. When tested on the aforesaid principles, it becomes apparent that the activities undertaken by the Indian subsidiary clearly do not appear to travel beyond being "preparatory" or "auxiliary". It is pertinent to note that both entities do not appear to have been established with a commonality of general purpose. The expression "preparatory" has been understood to mean work which is undertaken in contemplation of the essential and significant part of the principal activity of an entity. The principal or for that matter the essential activity of the petitioner is the manufacture and production of goods needed by railroad com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to DLW and other arms of the Indian Railways. Similarly, the issue of risk and responsibility with respect to supply of goods or the quotation of rates pertained to periods both prior to and post 2018. It is however unclear from a bare reading of the extracts of that statement as to whether that function was being discharged with respect to the distinct line of products that were being supplied by the petitioner or for the Indian subsidiary. 106. In our considered opinion, even if the aforesaid officer were assumed to be working in a dual capacity and discharging supportive functions pertaining to the independent business activity of the petitioner and of the Indian subsidiary, the same would clearly not take the case of the respondents any further. Regard must be had to the fact that the following up of purchase orders or gathering information with respect to tenders is work which is clearly of an "auxiliary" or "preparatory" character or concerned with the supply or collection of information. The follow up functions, though not asserted to have been discharged with sufficient repetition or recurrence, would fall more in the ken of an "auxiliary" function as opposed to a core ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er intended to participate would also clearly fall within the ambit of work of an "auxiliary" or "preparatory" character and not be in furtherance of the core activity of the petitioner. All that need be observed is that merely because the submission of those tenders was aided by a collaborative exercise between employees of the petitioner and those of the Indian subsidiary, the same would clearly not meet the test of a complete takeover, a "virtual projection" or for that matter the Indian subsidiary being liable to be viewed as an "alter ego". 110. We are of the firm opinion that the respondents have clearly failed to appreciate that a collaborative team comprising of Indian and foreign employees would really not be indicative or evidence of the Noida or Varanasi premises having been virtually placed fully at the "disposal" of the petitioner. To meet that test, it would have to be found on facts that the Indian establishment was a mere conduit created for the business interests of the petitioner. K.4. ARTICLE 5 (4) AND DAPE 111. It is pertinent to recall that in order to fall within the scope of Article 5 (4), it was imperative for the respondents to have found that the Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we go through the various statements which came to be recorded, they fail to evidence the Noida or the Varanasi premises having been placed at the constant "disposal" of the petitioner. 115. For the purposes of adjudging whether a Fixed Place PE had come into existence, one would have to necessarily come to the conclusion that the core business of a foreign entity was being carried on through a PE. The core business of the petitioner is the manufacture of a wide range of products, details whereof have been set out in the preceding parts of this decision. As we view and weigh the import of the statements which have been heavily relied upon by the respondents, it becomes apparent that the view as taken is rendered wholly untenable and proceeds on various assumptions which cannot possibly be countenanced. Regard must also be had to the fact that the respondents do not allege that the products being supplied by the petitioner to DLW or other arms of the Indian Railways were being manufactured in India and through the Indian subsidiary. This is a factor which weighs heavily against the respondents. 116. Insofar as the issues emanating from the MES Agreement including the General Servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... USA, which are following:- -Tender clarification to EMD, USA. -Technical clarification. -Tender Support-follow up-paperwork clearance. -Purchase order procurement. -Documents to agents. -Warranty Support & Warranty claim. -Tracking of sales to DLW. -Product design updation- upgradation and Engineering. -Payment follow up and its collection. -DLW and Indian Railways says that we cannot communicate to EMD USA. So we provide communication to DLW & Indian Railways we communicate on behalf of EMD USA with them. -Information Technology Services, etc." The aforesaid response would also establish that the Indian subsidiary was undertaking business activities independently and in its own right with DLW, Varanasi. This was therefore not a case where the subsidiary stood created solely for the purposes of undertaking activities and discharging functions concerned solely with the core business activity of the petitioner. 119. While taking note of the disclosures made by the Director- Finance, the first respondent chronicled the work undertaken by the Indian subsidiary for and on behalf of the petitioner by observing as follows: - III. Brief appraisal of documents found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT v. E-Funds IT Solution Inc. [CIT v. E-Funds IT Solution Inc., (2018) 13 SCC 294], it has been held that once arm's length principle has been satisfied, there can be no further profit attributable to a person even if it has a permanent establishment in India. 2. Since the impugned notice for the reassessment is based only on the allegation that the appellant(s) has permanent establishment in India, the notice cannot be sustained once arm's length price procedure has been followed. Accordingly, the impugned order(s) is set aside and the appeals are allowed." 122. It may however be clarified that the above is noticed only as an aside since our conclusions on the question of PE have been rendered uninfluenced by the order of the TPO placed before us and which pertained to AY 2013-14 only. 123. More importantly, we note that the first respondent has utterly failed to bear in consideration the aspects pertaining to a subsidiary PE, and which was elaborately canvassed for our consideration by Mr. Datar. One cannot possibly overlook or ignore the significant provisions which stand incorporated in Article 5 (6) and which forbids us from presuming the existence of a PE, merely bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the place of business to a considerable extent. We had noticed hereinabove the Manual on the OECD Model Tax Convention and which while defining a "place of business" had spoken of an establishment which was available to be used at any time of the choosing of the foreign enterprise and for its internal administrative work. 126. Authoritative texts on the subject speak of a Fixed Place PE coming into existence where a space or a part of a facility stand duly earmarked for the carrying on of the business of an enterprise. Viewed in light of the above, it becomes manifest that the assumption of a Fixed Place PE being existing is wholly perverse. We also bear in mind the undisputed fact that the Indian subsidiary was not undertaking any manufacturing activity of the petitioner. It is equally significant to note the absence of any assertion on the part of the respondents that any space or part of the Indian establishment had been exclusively set apart or earmarked for the use of the petitioner. The view as expressed in this respect thus also fails to meet the "at the disposal" test as enunciated. 127. It was also not the case of the respondents that the entire complement of staff o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of the petitioner was being managed by the Indian subsidiary de facto. 130. Regard must also be had to the fact that this Court in Director of Income Tax vs. E-Funds IT Solution Inc. 2014 SCC Online Del 555, had held that mere interaction or cross-transactions between an Indian enterprise and its foreign principal would not meet the location PE test comprised in Article 5 (1) & (2). The relevant extracts of the judgment in E-Funds IT Solutions Inc., as rendered by this Court is set out hereinbelow: "52. The assessing officer, Commissioner (Appeals) and the Tribunal have primarily relied upon the close association between e- Fund India and the two assessee and applied functions performed, assets used and risk assumed, criteria to determine whether or not the assessee has fixed place of business. This is not a proper and appropriate test to determine location PE. The fixed place of business PE test is different. Therefore, the fact that e-Fund India provides various services to the assessee and was dependent for its earning upon the two assessees is not the relevant test to determine and decide location PE. The allegation that e-Fund India did not bear sufficient risk is irre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitute a significant part of the core business activity of the petitioner. 132. The inputs that were received from the Indian design team, although not specifically shown to be in respect of products or goods supplied to Indian Railways, even if one were to proceed on that assumption, the same would also not lend any credence to the stand taken by the respondents. A collaboration between the constituents of the independently employed industrial engineers or designers has firstly not been established to be in connection with an India project. The respondents had essentially borne in consideration the collaborative activities undertaken by the Indian design team for contracts and tenders pertaining to Congo and other African nations as well as Bangladesh. That collaboration was thus not even concerned with any income that could be said to have arisen or accrued in India. Those activities in any case would not give rise to any income being earned in India. 133. Even if one were to test the conclusions arrived at by the respondents on the basis of the response proffered to Question No. 11 by Mr. Shivanshu Kaushik, the conclusion would remain the same. Question No. 11 which was post ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame are clearly not met since the respondents have failed to refer to any authority that may have been conferred upon the Indian entity "to conclude contracts" on behalf of the petitioner. The mere discovery of the seal of the petitioner is also not liable to be viewed as resulting in clause (a) and stipulations contained therein being satisfied. This, since it is not the case of the respondents that the Indian entity had been authorized to affix that seal on any document or contract. This, quite apart from there being no material that the seal was in fact affixed on any contract or agreement to which the petitioner was a party. The reasons recorded by the first respondent in support of the proposed action under Sections 147/148, also does not refer to any contract that the petitioner may have entered into with the Indian Railways, and which may have been executed for and on its behalf by the Indian subsidiary. The conclusions recorded on this score thus clearly appear to proceed on surmises and conjecture. 136. Even clause (c) of Article 5 (4) would not stand attracted since undisputedly the Indian subsidiary had independent transactions with DLW and other Indian Railway entities ..... X X X X Extracts X X X X X X X X Extracts X X X X
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