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Facts
The assessee, a non-resident engineering consultancy company, entered into several contracts for infrastructure projects in India. The dispute concerns whether these contracts created a Permanent Establishment (PE) in India and how the revenue should be taxed under the India-Germany Tax Treaty. The tax department alleged a PE existed for all projects, taxing revenues at 20% as FTS, while the assessee argued for a 10% tax rate on FTS for most projects and no PE for others.
Held
The Tribunal held that for the JAKPDC project, a PE was established and the revenue was correctly offered to tax at 20%. However, for other projects, the Tribunal found no PE was established, and thus the Force of Attraction rule did not apply. The matter concerning UJVNL and LII projects was remitted to the AO for further examination due to missing documentation. Interest and penalty grounds were allowed in favor of the assessee.
Key Issues
Whether a Permanent Establishment (PE) was created in India for various projects and whether the 'Force of Attraction' rule applies to attribute income from other projects to the PE; and the taxability of interest and penalties.
Sections Cited
144C(13), 143(3), 234A, 234B, 234C, 271(1)(c), 44D, 115A, 5(2)(c), 5(1), 5(2)(i)
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Income Tax Appellate Tribunal, DELHI ‘D’ BENCH,
Before: SHRI VIJAY PAL RAO, & SHRI NAVEEN CHANDRA
against the order dated 06.09.2012 u/s 144C(13) r.w.s 143(3) of the Income-tax Act, 1961 [the Act, for short] for A.Y 2009-10 and order respectively.
2. Since the underlying facts are common in both the appeals of the assessee and pertain to same assessee, they were heard together and are disposed of by this common order for the sake of convenience and brevity.
3. Grounds raised by the assessee read as under:
“The Appellant respectfully submits that on the facts and circumstances of the case and in law, while passing the assessment order under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 ('the Act'), the Deputy Director of Income Tax, Circle 3(2), International Taxation, New Delhi (hereinafter referred to as 'the learned Assessing Officer') has erred in: 1. Alleging that the appellant constitutes a Permanent Establishment ('PE') in India in respect of its contract with Jaypee Ventures Private Limited ('JVL'), Satluj Jal Vidyut Nigam Limited ('SJVNL'), Uttrakhand Jal Vidyut Nigam Limited ('UJVNL') and Lahmeyer International India Private Limited ('LII') as per the provisions of Article 5 of the Double Taxation Avoidance Agreement between India and Germany ('India Germany Tax Treaty').
2. Without prejudice, attributing the revenues earned by the appellant from contracts entered with JVL, SJVNL, UJVNL and LII to the PE constituted under the contract with Jammu and Kashmir State Power Development Corporation Baglihar Construction Services ('JKSPDC') by applying the rule of 'Force of Attraction' envisaged under the provisions of India- Germany Tax Treaty.
3. Levying interest under section 234A, section 234B and section 234C of the Act. 4 Initiating penalty proceedings under section 271(1)(c) of the Act for Assessment Year 2009-10, which is inappropriate. 5. Not granting credits for withholding taxes deducted by customers amounting to Rs 14,940,910. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the Appellant's case.”
Briefly stated, the facts of the case are that Lahmeyer Holding GmbH', the holding company were taken over by 'Lahmeyer International Consulting Engineers' (LICE) w.e.f. 1.8.2007. LICE is presently known as "Lahmeyer International GmbH" (LIG). Hence, receipts for the financial
Page 3 of 20 the assessee.
The factual background of the case in hand are that the assessee, a non-resident, is an engineering consultancy company engaged in providing technical/consultancy services in relation to infrastructure projects mainly in relation to power projects. The assessee has filed its Return of Income of Rs 18,90,54,090/- on 31.03.2011. During the subject year, Lahmeyer has earned revenue from execution of contracts with the following contracts:
(i) J&K State Power Development Corp-Baglihar project [AY 2009-10 & 2010-11] (ii) Satluj Jal Vidyut Nigam Ltd - SJVNL [AY 2009-10 & 2010-11] (iii) Lahmeyer International (India) Pvt. Ltd. - LII [AY 2009-10 & 2010-11] (iv) Uttarakhand Jal Vidyut Nigam Ltd - UJVNL [AY 2009-10 & 2010-11] (v) Jaypee Ventures Ltd -JVL [AY 2009-10] (vi) EPURON Renewable Energy Pvt. Ltd. - EPURON [AY 2010-11] (vii) Mountain Fall India Pvt. Ltd. - MFIPL [AY 2010-11]
Project Name in AY 2009-10 Amount (Rs.) Tax Rate
Satluj Jal Vidyut Nigam Itd (SJVNL) 1,81,11,616 10 Jaypee Ventures Private Ltd. 22,95,578 10 Uttarakhand Jal Vidyut Nigam Ltd (UJVNL) 34,809,324 10 Lahmeyer International Pvt Ltd 290,150 10 J & K Power Development Corp. Baglihar 13,35,47,420/- 20 Project (JAKPDC) Total 189,054,088/-
Page 4 of 20 August 17, 1999. The assessee accepts that Lahmeyer constitutes a Permanent Establishment ('PE') in India of Article 5 of the India-Germany Double Taxation Avoidance Agreement ('Tax Treaty') and therefore gross revenue of Rs. 13,35,47,420/- from JKAPDC project has been offered to tax at 20%, in terms of Article 7 of Indo-German Tax Treaty read with Section 44D & 115A of the Act.
7. In relation to the other projects namely JVPL, SJVNL, UJVNL and Jhajjar thermal project with Lahmeyer International Pvt Ltd during the subject AY, the assessee denies having a PE in India stating that the physical presence of Lahmeyer's employees in India was less than the threshold limit of six months as specified under the provisions of Article 5 of the Tax Treaty for the constitution of a PE in India. However, given the nature of services rendered by Lahmeyer (being in the nature engineering consulting services), gross total revenues of Rs 55,506,668/- from the above mentioned projects have been offered to tax on basis @ 10% under article 12 of Tax Treaty.
8. The AO, however has held, on the direction of DRP, that PE of the assessee exists in India for all the projects and accordingly taxed the total receipts as FTS @ 20%. Aggrieved, the assessee is before us.
Page 5 of 20 the issue is squarely covered in favour of the assessee and against the Revenue by the order of the co-ordinate bench in assessee’s own case for A.Y to 2005-06 in order dated 09.10.2019 and others. The stand of the assessee is that the services were rendered from home State (Germany) and services rendered in India in respect of each contract were for a period less than 183 days. As such, there was no PE in India and that revenue from these contracts was rightly offered to tax as FTS under Article 12 of DTAA, taxable @10%.
The ld. DR fairly conceded to the fact that the employees of the assessee rendered their services in India for less than 183 days.
However, the ld. DR submitted that applying principle of "force of attraction rule", receipts from all the contracts was held to be taxable in India as 'business income', irrespective of the fact whether the assessee has PE in India in respect of the respective contract. The activities of the Appellant constituted PE in India under Articles 5(2) (i) and 5(1) of Indo-German DTAA and hence, fee for the services was taxable @ 20%.
11. It is the say of the ld. AR that there is no PE in India for all projects except JAKPDC. The stand of the assessee is that the services were Page 6 of 20 respect of each contract were for a period less than 183 days. As such, there was no PE in India and that revenue from these contracts was rightly offered to tax as FTS under Article 12 of DTAA, taxable @10%.
We have heard the rival submissions and have perused the relevant material on record. We find force in the contention of the ld. counsel for the assessee. On identical facts, in AY 2001-02 to A.Y 2005-06 in assessee’s own case in ITA 4960/Del/2004, the co-ordinate bench has given a categorical finding that the treatment given by the assessee for offering tax @20% in one project and 10% in rest of the projects was rightly done.
We further find that in A.Y 2007-08, in assessee’s own case, the co-ordinate bench has come to the same conclusion as in A.Y 2001-02 to 2005-06 and decided accordingly. In A.Y 2008-09 in assessee’s own case, the observations of the Tribunal in A.Y 2006-07 and 2007-08 were held as squarely applying to the facts of the case. We also find that in A.Y 2008-09 in assessee’s own case in ITA 5614 and 5615/D/2011 dated 31.03.2023, the co-ordinate bench, referring to the decisions in AY 2001- 02 to AY 2005-06, has held as under:
We have considered rival submissions and perused the materials on record. Insofar as the contract with JKHCL is concerned, primary factor, on which, the Assessing Officer has concluded existence of PE is, the contractee was supposed to provide/make available office space in its complex to the assessee. Though, as per Article 5(2)(c), an office constitutes PE, however, that office must be belonging to the concerned entity and some space made available by the client/contractee in its own complex. Further, on perusal of the relevant contract, it is observed that the scope of work entrusted to the assessee is to provide services as a design review consultant related to the project undertaken by JKHCL. As per the scope of work, the assessee is required to depute personnel to carry out design review work and make comments on the civil design to ensure feasibility of the project and its components and to suggest design optimization with reference to its layout. The documents to be reviewed by the assessee’s personnel are as under: i. General project drawings ii. Detailed construction drawings including geological drawings iii. Reports on geological, geotechnical investigations incl. sources of construction materials. iv. Engineering reports on stability of structures including underground excavations, hydraulic model texts, seismic risk analyses including seismic loads to be applied to individual structures, sediment transport in the river, hydrological data and flood characteristics for relevant return periods.
The terms of the contract also stipulate that the work entrusted to the assessee has to be completed within a period of 3 months
Page 8 of 20 from the date of commencement of work. Thus, from the scope of work entrusted to the assessee, it is very much clear that services rendered are of purely technical/consultancy nature, hence, the receipts from such work has to be treated as FTS. As discussed earlier, the departmental authorities have not brought on record any material to suggest that the work undertaken by the assessee was not completed within the period of 3 months. In such a scenario, it cannot be said that the so called office space provided by JKHCL to the assessee in its premises would constitute a PE under Article 5(2) of India – Germany DTAA. Further, we do not find any substance in the allegation of the Assessing Officer that assessee’s PE in respect of JKSPDC Baglihar project would constitute a PE in respect of JKHCL and JVL project. When the department is alleging involvement of the JKSPDC’s PE to be actively involved in the other two projects, it is for the department to establish such fact on record through cogent evidence. However, on analysis of facts, we are convinced that the Assessing Officer has miserably failed to do so, as, no material has been brought on record to establish the involvement of JKSPDC’s PE to be actively involved in the JKHCL and JVL project. In any case of the matter, while considering, more or less, identical issue in assessee’s own case in assessment years 2006-07 and 2007-08, the Tribunal following its earlier order has held as under:
“2.5 We have considered rival submissions and perused materials on record. Undisputedly, the projects from which the assessee has earned revenue in the year under consideration
Page 9 of 20 were continuing from preceding assessment year. We have noted, while considering identical nature of dispute arising between the parties, the Coordinate Bench in and Ors. relating to assessment years 2001- 02 to 2005-06, has not only held that there is no PE of the assessee in India, insofar as, the AP Transco project is concerned, but also held that Force of Attraction Rule will not apply. In this context, following observations of the Coordinate Bench would be relevant: “7. We have heard both the parties and perused the relevant material on record. The contention of the assessee was that the force of attraction rule is not applicable to the assessee in view of article 7(1) of the treaty between India and Germany DTAA. The contention of the assessee was that as per protocol of the treaty, the force of attraction rule in this treaty restricts the application of the rule to a case where, the PE is involved in the transaction and the transaction is restored to avoid taxation in the source state and both these contentions needs to be satisfied so as to attract the rule. The PE constituted in India by the assessee under the contract with JKSPDC- Phase-2 was not involved in any other project executed in India during the relevant previous year. For supporting this statement, the assessee submitted various contracts entered into by the assessee with different independent unrelated parties. Most of these contracting parties are government or semi government or private organisations. The Page 10 of 20 assessee constitutes PE on account of undertaking supervisory activities as provided in article 5(2)(i) of the treaty in relation to construction of Hydro Power Projects at Baglihar in the state of Jammu & Kashmir. In respect of the balance contracts, based on specific contract requirements, the assessee's personnel either performed service at the client's location or at its home office in Germany, wherein the assessee provided contract-wise, the location wherein the activities were undertaken. The above fact as per the assessee clearly demonstrates that owing to geographical region, the PE on account of JKSPDC Phase-II projects (executed in the state of Jammu & Kashmir) could not play a part or be involved in any project in India. These contracts have been carried out by the assessee by using different teams at a given point of time. In this regard, the details of the project managers/project engineers who visited India in connection with the execution of different contracts clearly shows that distinct PE of technician were involved in the execution of various projects in India. The teams of the project managers/project engineers, in relation to various projects, visited India in connection with the execution of these projects at different points of time. The scope of work, liabilities and risk involved in each of the contracts are independent of those stated in the other contracts executed with the different parties. Owing to Reserve Bank of India's stipulation, a separate project office is to be set up for each independent project. Further,
Page 11 of 20 the funds of the project office are to be used only to meet the expenses of the specific projects which has been approved and cannot be used for any other purpose in India. Therefore, the funds belonging to the project office can be used to fund or support only that project (i.e. in respect of which it has been set up) and cannot be used to fund any other projects in India. The assessee under various independent contracts entered into by it, was required to undertake specific activities as per the terms of each contracts. The activities undertaken by the assessee were independent of the others since their performance was not interlinked with each other. The location where the activities would be performed by the assessee in respect of the specific projects was dictated by the client's project site or as agreed with the clients and was undertaken outside India. Further, restriction on the activities which may be undertaken by project office is stipulated in the approval issued by the Government. Therefore, it cannot be said that the PE constituted in India by the assessee under Phase-II of the contracts with JKSPDC was involved in any way in the earning of income from technical services rendered by the assessee and other contracts in India. We find force in the contention of the assessee, that the PE constitute in India by the assessee under Phase-II of the contract with JKSPDC did not play any role or contributed in any manner to the execution of the other contracts or earning of FTS under other contracts and cannot thus be said to be involved
Page 12 of 20 with any other projects in India. Accordingly, FTS received by the assessee from rendering of technical services and other contracts cannot be said to be involved directly or indirectly in any manner to the PE constituted in India under the contract with JKSPDC- Phase-II and are formed for the purpose of deliberate avoidance of tax. Therefore, we find merit in the argument of the Ld. AR that such income by way of FTS is to be subjected to tax @ 10% under article 12 of the treaty and cannot be subject to tax @ 20% as contemplated by the Assessing Officer. As per the Revenue's contention, it is undisputed fact that the income earned by the assessee was in the nature of FTS, there is business connection and income accrues and arises or deem to accrue and arise in India. The regional existence of place of PE and the article 5(1) in the form of JKSPDC-BCS as well as there is existence of supervisory PE under article 5(2)(i) in the form of JKSPDC-BCS was not established by the Revenue from any documentary evidence on record. Similarly, the nature of business of the assessee remains unchanged and the assessee is engaged in the business of providing consultancy services to various projects in India. The assessee is an engineering consultancy services that offers wide range of planning, designing and consultancy services etc. in relation to complex infrastructure projects in. India. The assessee rendered engineering consultancy services mainly in relation to power projects.
Page 13 of 20 7.1 From the perusal of the records and contradictory aspect pointed out by the Ld. DR, it can be seen that the PE in respect of JKSPDC Baglihar Phase - II Project has rightly been offered to tax at 20% by the assessee as it is the only project which has PE. The Force of Attraction rule will not be applicable in other projects as the same do not constitute either PE or does not come under: 2.6 In the facts of the present appeal, it has been brought to our notice by learned counsel appearing for the assessee that duration of services rendered for AP Transco project in terms with the agreement is for a period of less than 6 months. The aforesaid factual position has not been controverted by the Revenue. That being the case, there is no PE in terms with Article 5(1) read with Article 5(2)(i) of the Tax Treaty. Therefore, the decision of the Coordinate Bench (supra) will squarely apply to the facts of the present appeal. That being the case, respectfully following the decision of the Coordinate Bench, we direct the Assessing Officer to delete the addition. Ground nos. 1 and 2 are allowed.
After carefully examining the facts involved in the earlier assessment years as decided by the Tribunal and the impugned assessment year, we are of the view, though, the projects are different, however, the facts relating to the issue in dispute are more or less identical. Therefore, the observations of the Tribunal in Page 14 of 20
assessment years 2006-07 and 2007-08 would squarely apply to the facts of the present appeals.”
Respectfully following the above decisions of the co-ordinate benches, and the facts in this instant year being identical, we hold that the assessee has correctly offered the receipts from various projects such as SJVNL, and JVL @ 10% and 20% from the JAKPDC. With respect to UJVNL, it was stated that the assessee had filed the agreement between it and UJVNL but had not filed the Annexure to the agreement. Similarly, with respect to the project LII, the agreement with respect to the consultancy project was not filed. We deem it appropriate to remit the matter involving the project at UJVNL and LII to the file of the AO to examine, in the light of documents to be filed as discussed above, and ascertain whether they establish any PE of the assessee with respect to the projects at UJVNL and LII. Ground 1 is partly allowed.
Ground No.2 pertains to Issue of applicability of "Force of Attraction" (FoA) rule. The Assessing Officer has applied FoA rule to tax the income JVPL, SJVNL, UJNL and Jhajjar Thermal Project @ 20% by holding that the PE in JAKPDC project office is effectively connected to the other projects.
Page 15 of 20 07 & 2007-08], ITAT following the order for earlier years has recorded following findings on the issue of FoA Rule in para 2.5 (page 5-8 of the order):
"We have noted, while considering identical nature of dispute arising between the parties, the Coordinate Bench in and Ors. relating to assessment years 2001-02 to 2005-06, has not only held that there is no PE of the assessee in India, insofar as, the AP Transco project is concerned, but also held that Force of Attraction Rule will not apply. In this context, following observations of the Coordinate Bench would be relevant:"
Further, in ITA 5614/Del/2011 for AY 2008-09 dated 31.3.2023, the order for AY 2006-07 was followed to hold that FoA is not applicable as under:
In ground no. 3, the assessee has raised the issue of applicability of Force of Attraction Rule. While deciding ground nos. 1 and 2 in the foregoing paragraphs, we have held that the PE in relation to JKSPDC -Baglihar Project cannot be construed to be the PE in respect of JKHCL and JVL Projects. Insofar as, the applicability of Force of Attraction Rules, while deciding identical issue in assessee's own case in assessment years 2006-07 and 2007-08, the Tribunal has held that such rule will not apply, unless, even a remote link between the activities of other projects is established with the PE in relation to PKSPDC-Baglihar Project. That being the case, we hold that Force of Attraction Rule does not apply. This ground is allowed.
Page 16 of 20 hold that the FoA rule does not apply for considering the PE of JKSPDC as PE for other projects as listed above. The ground is allowed.
Ground No. 3 with regard to levy interest u/s 234A, 234B & 234C of the Act is covered in favour of the assessee vide paras 11 to 13 of the order of ITAT dated 9.10.2019. As a result, the grounds of appeal are allowed.
ITA No. 784/DEL/2014 [A.Y 2010-11]
Grounds raised by the assessee read as under:
“The Appellant respectfully submits that on the facts and circumstances of the case and in law, while passing the assessment order under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 ('the Act'), the Deputy Director of Income Tax, Circle 3(2), International Taxation, New Delhi (hereinafter referred to as 'the learned Assessing Officer') has erred in: 1. Alleging that the appellant constitutes a Permanent Establishment ('PE') in India in respect of its contract with Satluj Jal Vidyut Nigam Limited ('SJVNL'), Uttrakhand Jal Vidyut Nigam Limited ('UJVNL'), Lahmeyer International India Private Limited ('LII'), EPURON Renewable Energy PVt Ltd [EPURON] and Moutnain Fall India Private Limited [MFIPL] as per the provisions of Article 5 of Page 17 of 20 the Double Taxation Avoidance Agreement between India and Germany ('India Germany Tax Treaty').
Without prejudice, attributing the revenues earned by the appellant from contracts entered with SJVNL, UJVNL, LII, EPURON and MFIPL to the PE constituted under the contract with Jammu and Kashmir State Power Development Corporation Baglihar Construction Services ('JKSPDC') by applying the rule of 'Force of Attraction' envisaged under the provisions of India- Germany Tax Treaty.
Not granting credits for withholding taxes deducted by customers amounting to Rs 33,44,095/-. At the time of computing the tax demand for the appellant. 4 Initiating penalty proceedings under section 271(1)(c) of the Act for Assessment Year 2009-10, which is inappropriate.”
For AY 2010-11, the facts being identical to the facts for AY 2009- 10, the decision rendered in AY 2009-10 as above, would apply mutatis mutandis with a caveat that the projects at UJVNL, LII, and Mountain Fall India Pvt Ltd be remitted back to the file of the AO to examine and ascertain whether they establish any PE of the assessee with respect to the projects at UJVNL and LII as the requisite Agreements/documents were not filed before the AO. Ground 1 is partly allowed.
Ground No.2 pertaining to Issue of applicability of "Force of Attraction" (FoA) rule has been decided as per the ground 2 of the appeal for AY 2009-10. Page 18 of 20
Ground 3 is with respect to non-granting of credit of withholding taxes deducted by the customers. We direct the AO to factually verify the assessee’s claim and grant credit of TDS as per law.
Ground 4 regarding levy of penalty is pre-mature.