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TMI Blog2025 (3) TMI 986X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of the Act and is devoid of merits and are contrary to facts on record and applicable law, and has been completed without adequate inquiries and as such is liable to be quashed. 1.2. The lower authorities have finalized their order with improper adjustments to the transaction of the Appellant, as a result of misapplying the provisions of the Act and by adopting faulty assessment procedure to finalize the adjustment, without considering the information, arguments and evidence provided by the Appellant. 2. Constitution of PE by the Appellant 2.1. The lower authorities have, in the facts and circumstances of the case and in law, erred in concluding that Appellant has PE in India based on conjectures and surmises, which are devoid of any merits. 2.2. The lower authorities have, in the facts and circumstances of the case and in law, failed in establishing that the Appellant has business connection in India as per section 9 of the Act, and hence, the income is not subject to tax under the provisions of the Act. 2.3. The lower authorities have, in the facts and circumstances of the case and in law, erred in relying on information collected and statements recorded during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the hire charge received by the Assessee is at arm's length vide order under section 92CA(3) dated October 31, 2017. Subsequently, the Assessing Officer ('AO') issued a show-cause notice (SCN) on December 23, 2017, proposing to conclude that subject receipt of hire charges should be treated as royalty and business income in the hands of the Assessee, relying on statements recorded during survey carried out on the premises of ISDPL. The Assessee in the response dated December 27, 2017 highlighted that the transaction cannot be taxed as 'royalty' as per the relevant provisions of DTAA, and that the Assessee has no place of business in India. The AO completed the assessment and passed the draft assessment order under section 143(3) r.w.s 144C(1) of the Income-tax Act, 1961 ('the Act') dated December 31, 2017 concluding that the Assessee constitutes a PE in India and arbitrarily determined the attribution as 25 percent of hire charges and taxed the same at the rate of 40 percent. Aggrieved by the addition made by the AO, the Assessee filed its objections before the Dispute Resolution Panel - 2. Bengaluru (DRP) who upheld the order of the AO without o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itution of PE as lay out under the law and Double Tax Avoidance Agreement ('DTAA') between India and Belgium. In fact, the AO has not provided cogent reasons for taxability of the Appellant's income in India. The ld. AR Shri Sriram Seshadri, C.A. for the Appellant has presented following strong elaborate arguments with solid facts and important judgments to establish that the transaction does not fall under any cases mentioned above. 4.1 Factual clarification to the AO's contentions (Ground 2.1 and 2.4): In the impugned order, the AO has made certain factually incorrect statements and assumptions, while concluding that the Appellant has a PE in India. - The AO alleges that there is a continuous relationship between DEME and ISDPL on the basis of organizational reporting and weekly update reports sent to DEME At the outset, the Appellant wish to submit that providing status update to parent company is a normal business practice adopted by multinational companies. The purpose of sending weekly reports to DEME is to optimally utilize resources of the Group in an efficient manner. This was clearly stated in the survey statements by Mr. Filiep De Zutter (Question No. 5; page 11 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f-Goemans Christophe DGM Finance 3) De Zutter Filiep Operations Manager 4) Coninx Philippe Technical Superintendent 5) Verhees Wim DGM Finance 6) Nazhi Nizar Technical Superintendent 7) Bert ASAERT Site Accountants During the course of business, even ISDPL deputes some of its employees in the projects of other group entities, on need-basis. The list of 18 employees seconded by ISDPL during the year is provided in pages 124 to 131 of the paper book. Further, out of the 8 seconded employees listed above only two were employees of the Appellant - De Zutter Filep and Verhess Wim. The employees seconded from the Appellant company were not be deployed in the dredger let out by the Appellant, as evident from the list of crew members provided by Rock Equipment SA. Secondment agreement: Without prejudice to the above, the secondment agreement (refer page 105 to 115 of the paper book) clearly states that these employees would be under the control and supervision of ISDPL during the tenure of secondment. Clause 2.1.1 of the secondment agreement (page 107 of paper book) clarifies that the seconded employee would work as an employee of ISDPL. - The AO has concluded that the Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estic tax law. A. Taxability under the India-Belgium DTAA- Post Amendment w.r.e.f 1stApril, 1998 The subject payment of hire charges would not be liable to tax under Article 12 of the India-Belgium DTAA, which deals with taxability of payments in the nature of royalty and fees for technical services. The terms 'Royalty' as defined under the Article 12 of the India Belgium DTAA are reproduced below for reference. "(3) (a) The term "royalties" as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience." It is evident from the above definition that the term "Royalty" does not include payment for use or right to use industrial, commercial or scientific equipment, as mentioned by the AO in the SCN. Hence, hire charges paid to the non-resident lessors is not subject to tax in India as per India-Belgium DTAA. The Hon'ble Jurisdictional High Court in the case of CIT v. Van Oord ACZ Equipment BV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um DTAA dealing is pari-matria the same as that of India-Netherlands DTAA. The Appellant would also like to rely on this Hon'ble Tribunal's decision in the case of M/s. International Seaport Dredging Ltd - ITA No. 418/Mds/2015 dated 22nd July, 2016 (page 1 of CLC), wherein it has upheld that the hire of bareboat charter would not constitute Royalty under the DTAA, if the definition of the term "Royalty" under DTAA does not include use or right to use industrial, commercial or scientific equipment. A. Decision of the Hon'ble jurisdictional High Court in the case of M/s. Poompuhar Shipping Corporation Ltd (supra) is not applicable to the Appellant's case The Appellant submits that the decision of the Hon'ble jurisdictional High Court in the case of Poompuhar Shipping (page 75 of CLC) is factually distinguishable from the Appellant's case, on the following lines: Table 3: Poompuhar Shipping vs. Appellant's case Sl.No Facts of Poompuhar Shipping Facts of the Appellant 1 It was a time-charter arrangement of a ship (involving supply of vessel along with Crew) It is a bareboat charter of Dredger. No supply of crew is involved and operating responsibility is that of the charterer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the AO is that, the Appellant has a business connection in India. According to section 9(1)(i) of the Act, a foreign company shall pay taxes in India on income that is deemed to accrue or arise through a 'business connection' in India. The law provides an inclusive definition of business connection which includes any business activity carried out by a person on behalf of a foreign company. In the present case, the subject transaction does not involve such a scenario. Thus, the Appellant refers to the conditions laid down by the Hon'ble Apex Court for constitution of 'business connection'. The Hon'ble Apex Court in the case of CIT Vs R.D. Aggarwal (56 ITR 20) laid down two principles for constitution of 'business connection', namely: 1. Relation between the businesses carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. 2. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories; a stray or isolated transaction is normally not to be regarded as a business connection. The Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided by clause (vi), once we come across the question of royalty, we have only to look at that clause (vi) and not to the more general provision of clause (i) of section 9(1)." As stated earlier in section 3 of this submission, the AO has established a 'continuous relationship' between ISDPL and the 'foreign entity', based on the alleged activities carried out by the DEME. It is not the contention of the AO that the Appellant renders any services to ISDPL. Therefore, the Appellant does not have a business connection in India as required under section 9(1)(i) of the Act. 4. The Appellant does not have a Permanent Establishment in India (Ground 2.2): The Appellant makes the following submission that it does not constitute a PE in India: A. Business connection cannot be equated to PE The AO has misunderstood the concept of constitution of a PE and equated the same to the establishment of business connection. This is evident from order of the AO, wherein it is concluded that: "the relationship between all activities are continuous and hence the company has a PE in India.." The relationship between activities, continuity, etc. are principles for establishment of business c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rried on. Article 5(2) contains an inclusive definition of PE to include a place of management, a branch, an office, a factory, a workshop or a warehouse, a mine, an oil or gas well, a quarry or any other place of extract of natural resources, a building site or construction or installation project, etc. Fixed place of business is again explained that the place need not be exclusively for that particular enterprise's business purpose only and it is enough that there is certain amount of space available at its disposal. The Organization for Economic Cooperation and Development (OECD) commentary on the Model tax Convention lays down the following conditions for establishment of a fixed place PE: * the existence of a "place of business", i.e. a facility such as premises or, in certain instances, machinery or equipment. * this place of business must be "fixed", i.e. it must be established at a distinct place with a certain degree of permanence; * the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) to conduct the business of the enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not carry on its business activities through the dredger in India, instead ISDPL carries on its dredging projects by hiring dredgers from the Appellant. Thus, from the above it is clear that the Appellant will not constitute a fixed place PE in India. The Appellant further relies on the Hon'ble Coordinate Bench ruling in the case of DDIT v. Nederlandsche Overzee Baggermaatsehappiji BV (supra), wherein it was held that: "As per article 5 of the India-Netherlands Tax Treaty, a PE means a fixed place of business through which business of an enterprise is wholly or partly carried out. Mere provision of a dredger on dry lease basis for carrying out dredging activity in India does not result in the assessee having a PE." The Appellant also relies upon the ruling of the Delhi ITAT in the case of Maersk A/s (86 taxmann.com 77), wherein it was held as follows: "15. ............In our conclusion, firstly, the hiring of AHTS vessel of assessee by ONGC for its operation in India does not qualify to make vessel a place of management for the assessee in India; secondly, the crew and master of the vessel do not belong to the assessee and lastly, in any case master and crew of the vesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... redger". The relevant portion is extracted below: "building site or construction, installation or assembly project or supervisory activities connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than six months, or..." The Appellant submits that the Belgium's DTAA with Hong Kong and Macao only list "dredging projects" as examples of projects that constitute a PE. Article 5(3) of Belgium-Hong Kong DTAA reads as follows: "An enterprise shall be deemed to have a permanent establishment in a contracting party and to carry on business through that permanent establishment if: (a) It carries on supervisory activities in that Party for more than 6 months in any 12 month period in connection with a building site, or construction, assembly, installation, or dredging project which is being undertaken in that Party; or" (Emphasis supplied) It can be observed that the treaty with Hong Kong and Macao specifically includes dredging projects, but the same has been excluded in case of treaty with India, thus highlighting that there was conscious effort and negotiation behind framing the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a transfer pricing analysis and, therefore, no further income could be attributed to the PE (MSAS). In other words, the said ruling equates an arm's length analysis (ALA) with attribution of profits. It holds that once a transfer pricing analysis is undertaken; there is no further need to attribute profits to a PE. The impugned ruling is correct in principle insofar as an associated enterprise, that also constitutes a PE, has been remunerated on an arm's length basis taking into account all the risk-taking functions of the enterprise. In such cases nothing further would be left to be attributed to the PE." (Emphasis supplied) Thus, the Hon'ble Apex Court has equated the attribution of profit to a PE to determination of arm's length price for the transaction. In the Appellant's case, the AO referred the matter to the TPO on May 26, 2016 for determining arm's length price of all international transactions reported in Form 3CEB, which is letting out of dredgers on hire. The TPO, after analyzing the FAR analysis of the Appellant vis-à-vis its AE - ISDPL, passed the transfer pricing order on October 31, 2017, upholding that the international transaction of the Appellant was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instruction issued by the CBDT which is binding on the AO. Further, the critical information relied upon by the AO for re-determining the FAR of the Appellant and ISDPL is the statements recorded during survey. The Appellant submits that the survey was conducted in the premises of ISDPL on February 17, 2017, whereas the TP order was passed by the TPO only on October 31, 2017, which is eight and a half months after the survey was conducted. Thus, the survey statements were very much available with the AO while determining the FAR and arm's length of the Appellant's international transaction. Thus, the AO is not justified in re-determining the FAR analysis based on the survey statements, which was already available with the Department at the time of TP scrutiny and no adjustment was proposed by the TPO to the Appellant's international transaction. Without prejudice to the above, the AO failed to conduct analysis of independent parties to determine the arm's length attribution as required under the DTAA, and attributed to the appellant, 25 percent of the Appellant's income to the PE on an adhoc basis. 6. Reliance on information collected during survey (Ground 2.3): The AO has place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugned order made by solely relying on the information collected and statements recorded during the survey conducted in the premises of ISDPL cannot be considered to be corroborative evidence and thus the order is considered not sustainable. 5. Per contra, the ld.DR relied upon the assessment order and pointed out following references to bolster his arguments: i. Survey report; ii. Statement of Filip Dezulter; iii. Statement of Peyron Amedeo iv. Question Nos. 5 & 7 etc; v. Organisational chart; vi. TDS survey on ISDPL date 17.02.2017. The ld.DR relied upon the orders of the ld.DRP and ld. AO and contended that there is a continuous organic relationship between assessee and ISDPL. 6. We have heard the rival submissions, perused the paper books and case laws and gone through the relevant provisions of the DTAA between India-Belgium and Income tax Act, 1961. Firstly, we will curl out the relevant paras of the judgments referred by the ld.AR of the assessee. 7. The Co-ordinate bench in the case of M/s International Seaport Dredging Ltd. Vs The DCIT [ITA No.416/Mds/2015 for AY 2010-11 dated 22.07.2016 held as under: ''4.1 The learned Assessing Officer in its draft asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equipment" within its purview. Therefore the assessee claimed that the bareboat hire charges will not form part of the royalty. 3.2.6 The above claim of the assessee is not correct. Article 13 of India-France clearly defined the words Royalties and fees for technical services and payments for the use of equipment. The term "payments for the use of equipment" as used in this Article means payment of any kind received as a consideration for the use of, or the right to use industrial, commercial, or scientific equipment. These payments are in the nature of royalty. Further, in the case of India-Sweden treaty, there was no specific restrictive clause excluding the equipment hire charges from the scope of royalty. Therefore, as per treaty charging provision of the India-France treaty, the hire charges of the above equipment should be considered as Royalty payments "for the use of or the right to use of industrial, commercial or scientific equipment". Hence, the assessee's bareboat hire charges clearly forms royalty u/s. 9(1)(vi) of the Income Tax Act and accordingly the payments come under the purview of Section 195. 3.2.7 Further, as observed by the Assessing Officer, the prot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the present convention or the relevant Indian Convention, Agreement or Protocol enters into force, whichever enters into force later." 4.5 From the above, it is clear that payments for use of equipments under Article 13 of the treaty between India and France, if any convention or agreement or protocol are signed after 01.09.1989 between India and a third State which is a member of OECD, then for the purpose of taxation in India, the scope of taxation shall be restricted to such treaty signed after 01.09.1989 if its terms are beneficial to the assessee and as rightly pointed out by the assessee India has signed a treaty with Sweden subsequently wherein payments made for hiring equipments are excluded from taxing in the contracting State. Therefore, as claimed by the assessee income arising out of the payment made by the assessee towards hiring equipments will not be taxable in India, accordingly assessee will not be liable for deducting tax at source. Needless to mention that protocol will form an integral part of the convention and it has to be duly respected as the same is signed between two countries under agreement for avoidance of double taxation. Therefore, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beyond the provision of a dredger on charter hire. The dredger was operated by personnel appointed by HAM and was used by HAM for the purpose of business. Mere dry lease of an equipment does not result in a PE. Thus, we uphold the findings of the first appellate authority on this issue and dismiss the appeal of the revenue on this ground'. 10. The order of Tribunal in the case of Maersk 86 Taxmann.com 77 (Delhi) as under: ''11. We have heard rival submissions and perused the relevant. finding given in the impugned order as well as material placed. on record. The main issue here in this case is, whether the revenue receipts from charterer hire of AHTS for exploration and exploitation by ONGC in offshore areas of operation in India would be taxable in the hands of the assessee in India or not under Article 7 of the Treaty by holding that the assessee has a PE in India within the meaning of Article 5(2) of India Dutch and India UK DTAA. The relevant facts have already been discussed above. However to appreciate the nature of agreement between the assessee-company and ONGC some important clauses needs to be highlighted. Under the terms of the agreement, the charterer, i.e. ONGC want ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the charterer has total control of the personnel, ♦ Clause 6.6 sets out that subject to right of the Master only to determine and advice for reasons of safety of vessel during adverse weather conditions as to whether a navigation mover can or cannot be undertaken which advice shall be considered by the charterer, the deployment and operation of the vessel shall be under the direction of the charterer. The owner shall ensure the vessel is available for operations as per the directions of the charter. ♦ Clause 6.7 The members of the crew shall maneuver the vessel and operate the vessel for cariying out the charters operation. The Master and Crew, although appointed by the contractor, shall be under the orders and directions of the Charterer (i.e. ONGC) as regard deployment of the vessel and carrying out Charterer's operations. The charterer will furnish to the Master all instructions and sailing directions. The vessel thus will be in control of the charterer. ♦ Clause 6.8 contains assurance from the Owner, i.e. assessee that the vessel shall carry out functions and duties in accordance with the Charterer's directives, ♦ Para 12 sets out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income of the expatriate personnel was assessed in. Demark. That being so, article 16(3) of the Indo- Denmark DT'AA was applied. The expatriate personnel were employees of RAPM. 'They were tax residents of Denmark. It has not been established by the department that their contention that it was MCL who was actually controlling the work of the expatriate personnel while on services in India, stands buttressed or substantiated by any material on record. It has also failed to prove that it was MCL which was responsible for the entire operations of the PSV. It has not been shown that MCL was having right on the work produced and bearing the relative responsibility and risks of the services of the expatriate personnel........" 13. Further we find that the issue, whether the employee belong to assessee-company or not has also been settled by the Hon'ble Uttarakhand High Court vide judgment and order dated 23.11.2012 in ITA No. 28/Del/2011, wherein the revenue has challenged the aforesaid finding and order of the Tribunal and the said appeal of the revenue has been dismissed by the Hon'ble High Court. In view of this fact, the arguments of the Id. DR that employees bel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticle 5 of OECD Model Convention and has incorporated commentary of OECD for explaining the concept of place of business.as used in Article 5. The relevant-para 8 of OECD as accepted by the UN Model reads as under:- "Where tangible property such as facilities, industrial. commercial or scientific/ (ICS) equipment, buildings, or intangible property such as patents, procedures and similar property, are let or leased to third parties through a fixed place of business maintained by an enterprise of a Contracting State in the other State, this activity will, in general, render the place of business a permanent establishment. The same applies if capital is made available through a fixed place of business. If an enterprise of State lets or leases facilities, ICS equipment, building or intangible property, as such, will not constitute a permanent establishment of the lessor provided the contract is limited to the mere leasing of the ICS equipment, etc. This remains the case even when, for example. the lessor supplies personnel after installation to operole the equipment provided that their responsibility is limited solely to the operation or maintenance of the ICS equipment under the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lastly, in any case Master and Crew of the vessel do not have power to make significant decision over the assessee, because they are under control and directive of ONGC as per the agreement discussed above. Even under Article 5(2)(j) which reads as under:- "An installation or structure used for the exploration of natural resources provided that the activities are carried on for a period or period's of 183 days or more in any twelve month period." It cannot he held that assessee has some kind of. PB, because the assessee vessel cannot be reckoned as installation or structure used for exploration and exploitation of national resources as it is being done by the ONGC. The ONGC has only hired the vessel from assessee for carrying out exploration of oil and natural gases and therefore, under this clause also it cannot be held that the assessee's vessel/ AHTS constitute a PE in India. Thus, in our view there exists no PE of assessee in India and therefore, the revenue from ONGC cannot be taxed in India in terms of Article 7 of DTAA. On this ground alone the assessee gets relief from taxation. 11. We find that on facts the Appellant merely supplies dredger to ISDPL on hire on ..... 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