COMMISSIONER OF INCOME TAX-III vs. M/S SUMITOMO CORPORATION

These appeals by the Revenue are directed against a common order dated 27th February 2014 passed by the Income Tax Appellate Tribunal (‘ÍTAT’) in ITA Nos. 3943, 3944 & 3945/Del/1999 relating to the Assessment Years (‘AY’) 1992-93, 1993-94, 1996-97, and, ITA Nos. 5882 and 5883/Del/1998, relating to the AYs 1994-95 and 1995-96.

By order dated 19th May 2015, while admitting these appeals, the following question of law was framed for consideration: Did the ITAT fall into error in holding that the fee for technical services received by the assessee from M/s. Maruti Udyog Limited was not taxable by reason of Article 12(2) of the Double Taxation Avoidance Agreement?

The Respondent Assessee is a company incorporated in Japan and is being assessed to tax in Japan. The Assessee supplies equipments from Japan on the basis of the global tenders floated by Maruti Udyog Ltd. (‘MUL’). The supplies were made against separate and independent purchase orders (‘POs’) issued by MUL. Separate POs were also raised for “supervision and installation”. According to the Assessee, neither the This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 04/04/2026 at 21:49:55

In the assessment orders dated 27th March 1997 and 23rd March 1998 for the AYs 1994-95 and 1995-96 respectively, the Assessing Officer (‘AO’) held that the FTS was taxable as business income under Article 7 read with Article 12(5) of the DTAA.

At this stage, it requires to be noted that it is the case of the Assessee that it had no permanent establishment (‘PE’) in India as far as offshore supplies made of equipment and spares was concerned. Pursuant to the approval granted by the Reserve Bank of India (‘RBI’), the Assessee has been having a liaison office (‘LO’) in New Delhi since 1956. It has sub-LOs in Mumbai, Chennai, Bangalore and Calcutta. After the introduction of the Foreign Exchange Regulation Act, 1973 (‘FERA’), the LO was granted an extension of licence by a letter dated 17th February 1976. It was permitted to carrying liaison activities subject to the following conditions:

Even prior to the execution of the DTAA between the India and Japan in 1989, an issue had arisen as to whether the profits earned by the Assessee on the equipments sold by it from Japan on a principal–to-principal basis, free on board (‘FOB’) foreign port to an Indian buyer, was chargeable to tax under the Act. The Assessee had filed a writ petition against the Income Tax Department ('Department') in late 1970. Pursuant thereto, a compromise was arrived at, the terms of which were crystallized in a letter dated 19th March 1980 of the Department. The terms provided that the Assessee’s LO in India would pay tax on the profits in respect of all imports into India, applying the following formula: “One third (33 1/3 per cent) of the profits arising out of the imports from Japan to India worked out on the basis of the turnover in India, multiplied by the net profit rate of the world income.”

It is not in dispute that in terms of the above formula, the Assessee has been paying taxes on its earnings arising out of the imports to India. At that stage, the concept of PE was not in vogue. The DTAA between India and Japan came into force from 29th November 1989. Article 12 of the DTAA, the relevant portions of which pertains to payment of royalties and fees for technical services, reads as under: Article 12 1.Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other contracting State may be taxed in that other Contracting State.

However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting Stage, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 20% of the gross amount of the royalties or fees for technical services.

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 and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.

The term “fees for technical services” as used in this Article means payment of any amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred to in Article 14, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel.

The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting Stage, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other Contracting Stage independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply.”

In terms of Article 7(1), unless the enterprise (i.e. the Assessee) of a contracting state (i.e. Japan), carries on the business in ‘other contracting stage’ (i.e., India) through a PE situated in India, the profits of the Assessee would be taxable only in Japan. Where the Assessee has a PE in India the profits “as is directly or indirectly” attributable to the PE will be taxed in India.

Article 5 of the DTAA defines a PE. Under Article 5 (1) a PE means “a fixed place of business through which the business of an enterprise is wholly or partly carried on.” Article 5(2) to 6) which is relevant for the present purposes reads as under:

A building site or construction, installation or assembly project constitutes a permanent establishment only if it lasts for more than six months.

An enterprise shall be deemed to have a permanent establishment in a contracting State and to carry on business through that permanent establishment if it carries on supervisory activities in that Contracting State for more than six months in connection with a building site or construction, installation or assembly project which is being undertaken in that Contracting State.

Notwithstanding the provisions of paragraphs 3 and 4 an enterprise shall be deemed to have a permanent establishment in a Contracting Stage and to carry on business through that permanent establishment if it provides services or facilities in that Contracting State for more than six months in connection with the exploration, exploitation or extraction of mineral oils in that Contracting State.

Notwithstanding the provisions of the proceeding paragraphs of this article, the term "permanent establishment" shall be deemed not to include

The case of the Assessee has been that, as far as the supplies of equipment are concerned, it has no PE in India. The LO of the Assessee in India was communicating information regarding publication of global tenders invited by MUL to the head office. The bid would be submitted only by the head office in Japan. The head office through its personnel from This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 04/04/2026 at 21:49:55

Another factor that requires to be noticed is that during this very period, the Assessee started expanding its activities in India and established project offices for the following three separate projects:

The last mentioned project office was established with the approval of the RBI dated 15th September 1992 granted under Section 29(1) (a) of the FERA. This was for the purposes of designing, engineering, supply and installation of the YE2 car project, whereunder there would be expansion of the car production between 70,000 to 90,000 cars per year.

For AY 1994-95, the Assessee filed its return of income disclosing an income of Rs.3,49,82,616. The Assessee received FTS for supervision of the installation of the machinery and equipments supplied by it to MUL in the sum of Rs.2,35,86,939. By a letter dated 18th July 1996, the AO called upon the Assessee to explain as to why the said sum received as FTS should not be offered to tax by the Assessee. By a reply dated 5th August 1996, the Assessee informed the AO that MUL had deducted tax at source on the FTS paid to the Assessee at 30.25 %. Accordingly, the Assessee was under the impression that the fee which was already subjected to TDS need not be shown or declared in the return of income. The Assessee nevertheless assured that it would declare hereafter such income in its return of income.

By a letter dated 19th August 1996, the Assessee listed all the ten POs obtained in the AY under consideration, in terms of which it supplied machinery and equipments and also undertook supervision and installation of the plant and machinery. The Assessee contended that each contract for supply and supervision of installation was independent and separate. The technical aspects of the work involved in each of the contracts were different and varied. In other words, notwithstanding that the contracts were with MUL, the period for which the supervisory activities were carried out was less than 180 days for each contract. It was contended that there was no PE of the Assessee in India vis-a-vis the rendering of the supervisory services to MUL.

The Assessee contended that for the projects being executed by it with Karnataka Power Corporation td. (Raichur Project) and with Tamil Nadu This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 04/04/2026 at 21:49:55

The AO held against the Assessee and the Commissioner of Income Tax [CIT (A)] affirmed the said additions made by the AO. Penalty proceedings was also initiated for AYs 1992-93 and 1993-94 holding the FTS as business income under Article 7 read with Article 12(5) of the DTAA. The Assessee preferred an appeal before the ITAT.

Before the ITAT, at the instance of the Assessee, an additional ground was framed on 15th July 2003 as under: "Whether on the facts and in the circumstances of the case in law, the supervision fees earned on account of the supply of equipment could be taxed as 'Tees for technical services", even though they are integral and incidental to the supply of equipment, since the supervision fees received by it on account of the supply of equipment are inextricably and essentially linked to the supply of equipment, and hence, should in all fairness partake the same character as the supply of the equipment as it is nothing else but a supply of equipment simpliciter".

By order dated 31st May 2007, the ITAT held that the supervision fee is taxable under Article 12(2) since the Assessee did not have a PE and the This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 04/04/2026 at 21:49:55

While hearing both sets of appeals together, this Court by order dated 6th April 2009 held that the ITAT ought to have decided the additional ground and accordingly remanded the matter to the ITAT for that purpose. While disposing of both sets of appeals, this Court formulated the question to be decided by ITAT as under: “Whether in the facts and circumstances of the case “fees for technical services” (FTS) received by the Assessee from Maruti Udyog Limited was taxable under Articles 12(2) or 12(5) read with Article 7(3) of the Indo-Japan Double Taxation Avoidance Agreement.”

On remand, the ITAT held by the order dated 27st February 2014 that the Assessee had no PE in India and that the supervisory services were not This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 04/04/2026 at 21:49:55

Against the aforementioned order of the ITAT, the present appeals have been filed by the Revenue.

The Court has heard the submissions of Ms. Suruchi Aggarwal, learned Senior Standing counsel for the Revenue and Mr. C.S. Aggarwal, learned Senior counsel for the Assessee.

It was first submitted by Ms. Suruchi Aggarwal that the concurrent findings of both the AO and the CIT (A) were that the Assessee had its PE in India. It was admitted by the Assessee during the course of assessment proceedings that there were multiple contracts all related to MUL. The Assessee’s office in India agreed to the deduction of TDS at 30.25% which in fact would locate the transaction within Article 12(5) read with Article 7(3) of the DTAA. It was further submitted that a perusal of the POs placed by the MUL on the Assessee, which have been set out in a tabular form in the earlier order dated 31st May 2007 passed by the ITAT, would show that the specification of days of supervision was essentially the basis for calculation of supervision fees which was one of the components of the order. The other component was the supply of the equipments itself. Some of the orders, having the value of Rs. 100-200 crores, involved man days of 478, 364 and 730. While the ITAT answered the question for the AY 1995- 96, it remanded the matter to the AO on the ground that the facts on record were not sufficient to come to a definite conclusion. It was further submitted This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 04/04/2026 at 21:49:55

In reply, Mr. C.S. Aggarwal, learned Senior counsel for the Assessee, referred to the earlier findings rendered in the order dated 31st May 2007 of the ITAT which according to him bore the reiteration by the ITAT in the present impugned order. He referred to the difference in the wording of the DTAA between India and Japan as compared with the corresponding clauses of the DTAAs with other countries, which showed that where it was intended that the computation of the six months period for the purposes of determining whether there was a PE had to be in the aggregate and not continuous the relevant clause in the DTAA expressly stated so. He also submitted that the theory of ‘force of attraction’ would not apply. In other words, there were separate POs relating to other projects undertaken by the Assessee and there could be no presumption that the LOs were ‘effectively connected’ with the said project offices. He supported the impugned order of the ITAT and submitted that the FTS in the present case was taxable under This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 04/04/2026 at 21:49:55

As far as the question framed by this Court is concerned, the issue that arises is whether the TDS from the FTS paid by MUL to the Assessee should be 20% in terms of Article 12(2) or 12(5) read with Article 7 of the DTAA? This in turn raises the question of whether, for the activity of supply of equipments by the Assessee to MUL, with or without supervision of the installation, it could be said that the Assessee had a PE in India?

Under Article 7 of the DTAA, the Assessee would be liable to pay taxes in India if it carried on the business through a PE. The part played by the PE in the transactions in question would determine the extent to which the profits from such transactions can be attributed to the PE. Article 5 of the DTAA is relevant for determining whether the Assessee could be said to have a PE in India.

Article 12(5) of the DTAA is on the lines of the OECD Model Convention. It is noticed that the clause in the OECD Model Convention allows the State, where the PE is located, to “to tax only those profits which are economically attributable to the PE.” The clause makes a distinction between those incomes which are the result of activities of the PE and the This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 04/04/2026 at 21:49:55

It was in the above background that the ITAT examined each of the POs for the various AYs in a tabular form. On examination of the POs, a common feature which emerged was that the supervisors were to come from Japan and MUL had to bear the cost of their air tickets as well as their boarding and lodging in India. The period of supervision in the case of the individual contracts did not exceed the period of 180 days. In other words, they did not constitute a supervisory PE in terms of Article 5(4) of the DTAA.

As far as the FTS paid to the Assessee for the supervisory services is concerned, there was no effective connection between the execution of the POs for supply of equipment and supervision of their installation, and, the project office for the paint and assembly shop of the YE2 car project of MUL. Additionally, as pointed out by Mr. Aggarwal, the supervisory fee paid by MUL was on the basis of “man days”. The number of days per This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 04/04/2026 at 21:49:55

As regards the contention that the Assessee had conceded the position that MUL could deduct tax at 30.25%, it is seen that the LO only facilitated the communication between the head office and MUL. The explanation that its letter on the rate of TDS was given only to expedite the payment from MUL, appears plausible. The Assessee offered the FTS to tax at 20% and claimed refund. The Court is unable to view the aforementioned communication of the Assessee to MUL as an estoppel against the Assessee from claiming to be taxed in accordance with law.

A comparison of the relevant portions of Article 5 of the DTAA between the India and Japan with the corresponding clause in some of the DTAAs entered into by India with other countries shows that where it is intended that the computation of the period of the six months period for determining whether an Assessee can be said to have a PE should be in the aggregate, i.e. not ‘continuous’, the DTAA itself provides for it. From the wording of the Article 5 of the DTAA in question, it is not possible to accept the plea of the Revenue that the supervisory activities need not have been carried on for six continuous months.

For the aforesaid reasons, the Court concurs with the views of the ITAT that in the present case the FTS was liable to be taxed at 20% under Article This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 04/04/2026 at 21:49:55

The appeals are accordingly dismissed.