Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH ‘D’, NEW DELHI
Before: Sh. Amit Shukla
ORDER Per Amit Shukla, Judicial Member:
The aforesaid appeal has been filed by the assessee against final assessment order dated 17.12.2013 passed u/s 144C(5) r.w.s. 143(3)/254 with a direction given by the Dispute Resolution Panel-1, New Delhi vide order dated 24.10.2013.
2. In the grounds of appeal, assessee has raised following grounds:
2 Idiada Automotive Technology “1. That having regards to the facts and circumstances of the case Ld. AO/ Hon'ble DRP has erred in law and on facts in bringing to tax amount of Rs.4,89,36,723/- by holding inter-alia that the entire receipts receivable under the contract with NATRIP was taxable as business income in India and that too on the ground that assessee had a Permanent Establishment (PE) in India.
2. That in any case and in any view of the matter the action of Ld. AO/DRP in bringing to tax amount of Rs. 4,89,36,723/- by holding inter-alia that the entire receipts receivable under the contract with NATRIP was taxable as business income in India and that too on the ground that assessee had a Permanent Establishment (PE) in India is bad in law and against the facts and circumstances of the case.
3. That having regards to the facts and circumstances of the case Ld. AO/DRP has erred in law and on facts in presuming 75% of total receipts as attributable to the alleged PE.
4. That having regards to the facts and circumstances of the case Ld. AO/ Hon'ble DRP has erred in law and on facts in disallowing the aggregate expenditure paid to M/s GPO Ingeneria S.A., M/s AVL Iberica S.A., Mr. Alex Punset incurred for the purpose of earning income in connection with DRIP and Engineering Services in relation to NATRIP Project.
5. That having regards to the facts and circumstances of the case Ld. AO/ Hon'ble DRP has erred in law and on facts in disallowing the expense of Rs. 70,00,000/- paid to M/s IMaCs for non-deduction of tax at source u/s 40(a)(ia).
6. That having regards to the facts and circumstances of the case Ld. AO/ Hon'ble DRP has erred in law and on facts in disallowing the following expenses:
3 Idiada Automotive Technology • Legal fees of Rs.9,61,054/- paid to M/s Garrigues towards their charges in connection with vetting bank guarantee and Project Consultancy agreement. • Charges of Rs.2,83,258/- paid to COPCA, New Delhi from Spain for occupying their premises from September 2006 to November 2006. • Bank Charges ofRs. 3,62,938/- paid to La Caixa Bank for Bank Guarantee commission in respect of bank guarantee provided to NAPTRIP as per Project Consultancy Agreement.
7. That without prejudice to the assessee's claim that no part of its revenue for the subject year could be attributed to the alleged PE in India, the Ld. AO as well as Ld. DRP has grossly erred in facts and law in not allowing deduction for the personnel expenses and travel expenses incurred by it in relation to visits made by its Personnel in India, while assigning any reason for not allowing the deduction.
8. That the Ld. AO has grossly erred in facts and law in initiating the penalty proceedings u/s 271(1)(c) of the act.”
3. Facts in brief are that in this case, original assessment was passed on 25.10.2010 following the directions of the ld. DRP. However, the Tribunal has set aside the matter to the file of the AO for deciding it afresh without specific directions. Thus, this is the order passed under set aside proceedings. The assessee, M/s Idiada Automotive Technology is a company incorporated in Spain (in short IDIADA). A consortium led by IDIADA was selected by Government of India as Global Consultants for “National Automotive Testing and R&D Infrastructure project” (NATRIP), through global tendering 4 Idiada Automotive Technology process, providing consultancy and advising on the matter pertaining to implementation of the project which principally envisaged the following activity: (i) setting up of full regulatory and pre-competitive developmental testing facilities in northern India; (ii) setting up of full regulatory and pre-competitive developmental testing facilities in Southern India; (iii) major up-gradation of facilities at ARAI and VRDE located in the West; (iv) setting up of world class proving grounds at a suitable location to be decided in consultation with experts/global consultants; (v) setting up of National facility for testing of tractors and off-road vehicles. Regional in use Vehicle Management Center together with National Accident Analysis facility and also Specialized Driving Training School at Rae Bareilly; (vi) setting up of National Specialized Hill Area Driving Training Centre and Regional in use Vehicle Management Center for the North East at Silchar.
4. The project was broadly split into three categories: i. For DPIR :Rs. 8,59,00,000 ii. For Engineering Services :Rs.15,22,00,000 iii. For Construction Supervision :Rs.17,69,00,000
An agreement was signed between the IDIADA and Natrip Implementation Society (NATIS) on 27.01.2006 at a total cost of Rs.39.50 crores and following 5 Idiada Automotive Technology responsibilities were entrusted to Global Consultants under this agreement: i. To prepare a Detailed Project Implementation Report (DPIR) based on certain key deliverables; ii. To prepare detailed civil engineering drawings, designs, detailed architectural plans etc. and preparation of bid documents for civil works and equipment procurement; and iii. To undertake construction supervision and to provide assistance in procurement and commissioning and to provide training to operators and management.
One important fact noted by the AO and also highlighted before us by the ld. Counsel for the assessee is that, later on, in terms of Governing Council’s approval, the construction supervision task has been removed from IDIADA’s scope of work costing Rs.17.69 crores. Another two activities worth Rs.21.81 crores were only to be continued further. Apart from that, w.e.f. F.Y. 2009-10 i.e. assessment year 2010-11, in addition to the above, NATRIP has also availed consultancy services for pre-shipment inspection and tender evaluation of equipment tenders from IDIADA for which separate Pos were issued from time to time. As on date, NATIS has also stopped availing any consultancy services from IDIADA. During the year under consideration, the assessee has shown receipt of Rs.7,40,91,233/- from NATIS, which was stated to be in connection with project consultancy 6 Idiada Automotive Technology agreement entered into by a consortium. The assessee’s contention was that these services were in the nature of ‘fees for technical services’ rendered from Spain and since there is no permanent establishment (PE) in India in respect of rendering of these services, therefore, same is taxable u/s 115A of the Act only, in view of Article 13(4) of the India Spain DTAA where the taxable rates applicable for FTS was 10%. It was further brought on record that, only services which were to be performed through Project Office was “Construction Supervision” which would fall within the scope of Article 5(1) read with 7(1) and would be taxed in India at rates applicable to foreign companies. Another important fact brought on record is that, the assessee at the time of receiving the payment filed an application u/s 195/197 of the Act before the Department requesting to issue authorization to receive the payment in respect of consultancy contract entered into on 27.01.2006. The ITO, TDS, Ward-1(2), International Taxation after examining the contract and details, held that services performed are in the nature of Fees for Technical Services as defined under Article 13 of India Spain DTAA. The copy of order dated 14.02.2007 u/s 195/197 has been placed in the paper book at page 34 & 35.
During the course of assessment proceedings, the AO asked the assessee as to why the gross receipts shown as 7 Idiada Automotive Technology FTS should not be taxed as business profit, since they are effectively connected with PE in India. In response, the assessee filed various replies, the content of which have been summarized by the AO in the following manner: There is no permanent establishment in India in respect of rendering of services relating to Preparation of DPIR and Engineering services. The services were rendered from outside India and, therefore, such consideration is taxable u/s 15A of the Act only. The volume of documentation already submitted demonstrates that the activity of Detailed Engineering has been rendered outside India. Even if it was to be concluded that the services relating to DPIR and Engineering together with those relating to Construction Supervision are effectively connected with PE, then Article 7(1) allows the authorities in India to tax only the profits attributable to the PE under Article 7. These are in the nature of start up expenses which was in relation to the India Project Office that was set up for the purpose of Construction Supervision. The activity of Construction Supervision commenced only in fiscal year 2008-09 and therefore as per accounting principles, the expenses till 8 Idiada Automotive Technology commencement of operations were to be debited as “Start Up" expenses. No expenses relating to FTS have been incurred in India and, therefore, could not have been recognized in India. The only expenses that have been booked in the Indian records are those relating to the Project Officer activity of Construction Supervision. It was from AY 2009-10 that Assessment order has been passed holding that the assessee has a PE in respect of the entire project with NATRIP and the receipts are effectively connected with the PE. The assessee has not gone to Appeal on this account. Thus, is requested to allow all the expenses incurred in Spain & India and all the expenses of the project office should also be allowed.
However, the AO did not accept the assessee’s contention and has incorporated the various terms of the contract and the scope of the work, etc. which has also been incorporated from page 5 to 12 of the impugned order. The nature of contract has been summarized by him and the conclusions drawn thereafter are in the following manner: “5.2. The nature of the contract can be summarized below: The very nature of the aforesaid scope of work as extracted above, and the geographical spread of the 9 Idiada Automotive Technology sites and the considerable primary data to be collected will require a substantial PE presence in India for execution and completion of deliverables. For this purpose, the consortium will create a specialized construction supervision team which will formed by experienced engineers. The team will be lead by the Construction Supervisor who will coordinate the ‘on site’ teams and centralize all communications with the NATRIP office. So, if is planned to assign an ‘on site' team for each center during all the construction works. These teams will be specialized in civil works and utilities and their principal tasks will comprise: Supervision of execution of the works in accordance with the technical functional specifications of the DPIR and the Detailed Civil Engineering Project. Attendance at the coordination meetings with all the contractors Supervision of the planning progress Supervision of the construction costs Supervision of the control qualify programme results Coordination of the civil contractors with the test equipments suppliers Organization of the commissioning of the utilities (electricity, HVAC, fluids, fuel supply) Organization of the commissioning of the auxiliary buildings, laboratories and civil works. Close out of the project: acceptance certificates open issue list and wrap-up meetings. 5.3. The following conclusion can be drawn after reading the general provisions of the contract is as under:
10 Idiada Automotive Technology • The project Consultancy Agreement is signed between three consortium partners and the definition of consultant and Article t of the agreement supports the finding of consortium. • The consultant has been retained for the entire project the scope of work for which end to end is as per Activity Schedule at Annexure B (refer article 1.1 of Agreement) extracted above has project milestones as per Annexure C and project sites as per Annexure C. • The services to be delivered are as per Annexure D of the Agreement and perusal of this will clearly indicate that the existence of a PE is an essential precondition of the contract. • All services are based on a detailed Site analysis which cannot be accomplished without a PE and presence of consortium member’s "on-site" teams and experts and consortium testing equipment experts for commissioning etc at the various sites including a huge geographical spread covering Manesar, Silchar, Rae Bareilly, M.P. and Chennai. • Applicants attempts to split the contract and state that these services were rendered from Spain is not supported by the activity schedule or the key deliverables which by the very nature of the scope of work as extracted above will require a PE in India for execution and delivery of deliverables. • Specialized Construction supervision teams are required to be created by the Consortium and Annexure E gives a detailed organization chart which is evidence of the substantial presence of the consortium in India. • The scope of work for the first phase is “preparation of a DPIR for upgradation of the facilities at ARAI and VRDE, and installation of the five new automobiles test centers, The Applicants attempt to split the contract and state that these services were rendered from Spain is not supported by the activity schedule 11 Idiada Automotive Technology or the key deliverables which require a PE in India for execution and delivery across the huge geographical spread of the country as discussed supra. • This finding is also directly corroborated by the above findings and the Methodology for DPIR (Pg 65 of PB) 'clearly lays down that study will involve primary research i.e. resulting in presence of PE involving the following:
6. Methodology Consultant's study will involve both primary and secondary research Under primary research, Consultant will cover the followings:
-For the site analysis, Consultant will meet Urban Local Bodies (ULBs), environmental agencies, electricity supply companies, water supply companies or water authorities, telecommunication companies and companies or organizations that can provide general existing information about the land (geology, hydrogeology, topography) and the weather conditions.
Consultant proposes to meet the following for the Market study:
1. 1. OEMs, industry associations and component manufacturers in India to gauge their requirements.
2. Government of India to understand evolvement of policies for standards and emissions norms.
3. ARAI and VRDE to understand existing tests being offered and pricing strategies.
4. Other agencies for reviewing test facilities and pricing strategies in neighboring countries and in the West. • Article 7 and 8 of the agreement regarding Report where it is laid-down that the consultant and the 12 Idiada Automotive Technology client shall meet on a regular basis and that the consultant shall ensure the availability of its personnel to attend such meetings as well as other meetings with other advisors and contractors etc. Inspection of services being performed is also provided for and the availability of personnel to discuss reports and information to be provided by the Consultant on the 4th day of each month. Clearly these cannot be achieved without a PE. • At the end of each phase a detailed project implementation report to NATIS covering deliverables is required from the Consultant as per agreement.
5.4. In lights of the above discussion the submission of the assessee is not accepted due to the following reasons: • FTS services cannot be stated to have been rendered directly from Spain and no expenses relating to these have been incurred in India. • That there was a service PE, project officer PE at each site and for rendering services relating to preparation of DPIR and engineering services. • India project Offices were set up not just for limited purpose of construction supervision activities. • Even for DIPR and Engineering Drawings the primary research had to be done in India. • The methodology under primary research shows that services are to be bases on a detailed Site analysis, collection of primary evidence, after meeting Urban Local Bodies (ULBs), environmental agencies, electricity supply companies, water supply companies or water authorities, telecommunication companies and companies or organizations that can provide general existing information about the land (geology, hydrology, topography) and the weather conditions.
13 Idiada Automotive Technology • Primary research also requires that the applicant conduct a Market study to understand OEMs, industry associations and component manufactures in India to gauge their requirements. Government of India to understand evolvement of policies for standards and emissions norms, ARAI and VRDE to understand existing tests being offered and pricing strategies, other agencies for reviewing test facilities and pricing strategies in neighboring countries and in the West. • The assessee got the contract for the purposes of providing consultancy and advising on the matter pertaining to implementation of the project. It was a consolidated agreement. Following responsibilities were entrusted to the assessee under this Agreement: To prepare a Detailed Project Implementation Report (DPIR) based on certain key deliverables; To prepare detailed civil engineering drawings, designs, detailed architectural plans etc and preparation of bid documents for civil works and equipment procurement; and To undertake construction supervision and to provide assistance in procurement and commissioning and to provide training to operators and management.
Hence construction supervision was a part of the project. Without any fixed place of business the contract can’t be implemented. NATRIP has clarified that NATIS had entered into a consolidate consultancy agreement with IDIADA for availing services related to DPIR, Detailed Engineering and Construction Supervision. The services had been divided into project milestones and interim milestones in relation to the identified project sites only for the purpose of facilitating payment and timely implementation of the project. Hence the claim 14 Idiada Automotive Technology of the assessee that only construction supervision necessitated establishment of project office in India. The assessee further subcontracted the contract to its consortium partner namely IMACS (ICRA Management Consultancy Services) and GPO Ingeniera S.A. The confirmations of both the parties are placed on record. As per the assessee, it has itself done only construction supervision. Even if the other milestones were subcontracted to outside parties, the full and undivided responsibility and liability for ensuring the performance of obligations and coordination among parties lies with the assessee. One of the subcontracted parties is an Indian concern while the other party is a non resident. Effective coordination among parities is necessary considering the nature of project. Without having a base in India it is not practically possible to provide detailed engineering related to different project sites situated in different parts of India. The assessee has submitted that its employees have visited India for a short period and stayed in Hotels. The summary of visits is not supported by evidence. The expatriates or the officials of the assessee and were regularly visiting the NATRIP authorities regarding discussion or negotiation meeting held in India as per the details submitted during the original assessment. The details of their stay or from where they were operating their business have not been filed. This fact has also been mentioned in the original assessment proceedings, it is worthwhile to mention that Mr. Indranil Gupta whom the assessee claims to be the country head of the assessee’s business operation from 1st September 2006 was earlier in the ICRA management team as is submitted by ICRA.
15 Idiada Automotive Technology The assessee has not challenged the view of the department that it has a PE in India even for DPIR. Detailed Engineering as mentioned in the assessment order for AY 2009-10. The contract documents are intended to be correlative, complementary and mutually explanatory and the Contract is to be considered as a whole.
5.5. In view of the above it is held that the assesseee has business connection as well as PE in India before the establishment of project office and all the receipts received from NATRIP on account of DPIR. Detailed Engineering & construction supervision are effectively connected with the PE in India.”
9. Thereafter he has attributed profits PE project at 75% of the income from NATRIP and brought to tax amount of Rs.4,89,36,723/- and only sum of Rs. 66,31,701/- was allowed by him u/s 44AD of the Act. The ld. DRP has also confirmed the said finding of the AO on this point.
In sum and substances, the ld. DRP has held; Firstly, the nature of services rendered, i.e., with respect to preparation of DPIR would be covered under the definition of FTS not only under the domestic but also Article 13(4). Secondly, with respect to the PE, the final conclusion of the ld. DRP reads as under: “7.1 This ground of objection is without prejudice to the grounds 1 to 4 and pertains to the / existence of service PE of the assessee in India.
16 Idiada Automotive Technology 7.2 The AO in the draft order para 5.4 and 5.5 (reproduced earlier in these directions) has held that the facts of the case prove that service PE had been established even before the establishment of the Project Office in India on 1-9-2006.
7.3 The assessee has submitted that there was no PE in India as the DPIR was submitted on 8-8-2006 even before the setting up of the project office which was or 1.9.2006. There is fundamental difference between AY 2009-10 and the current year and therefore, the finding of existence of PE in AY 2009-10 is not relevant in AY 2007-08. It is further submitted that IMaCs performed the tasks required to be done in India in normal course of its business and therefore work through an agent of independent status cannot give rise to a PE Holding regular meetings with client about the progress of work cannot constitute a PE. Without prejudice, the assessee has submitted that even if services PE is established, 100% of the profits cannot be attributed to the PE, even though they may be effectively connected therewith.
7.4 The Panel has examined the matter, it is seen from the copy of the Agreement and its Annexures that the task of preparation of DPIR could not have to complete without detailed site visits in India and under taking detailed interaction with the persons concerned as indicated in para 3.7, 3.8.1, 3.8.2, 4.5.2 to 4.5.5 above. The task of detailed engineering, which was taken up subsequently by the assessee, also could not have been completed without extensive use of offices in India. Both these tasks have been under taken during the FY 2006-07. Moreover, there had been considerable visits to India by the expatriates for carrying out these tasks Admitted y the project office was setup on 01.09.2006. Under these facts and circumstances, it is not possible to 17 Idiada Automotive Technology accept the contention of the assessee that there was no PE in existence in the concerned period.
However, there is force in the assessee s arguments that the entre profit cannot to be attributable to the PE in India The AO has computed the income from the receipts during the year determining gross total income at Rs.6,74,55,532/- without apportioning any income to the head office m Spam As the major activity was being performed in India and for the project of India it would be appropriate if the gross, total income to the extent of 75% is attributed to the income from India and rest 25% to the head office for the reason that the substantive part of activity of DPIR and engineering relates to India and was also performed in India. The AO is therefore, directed to give appropriate relief on this account while passing the final order.”
11. Before us, the ld. Counsel for the assessee, Dr. Rakesh Gupta after explaining the background of the case submitted that under the agreement dated 27.01.2006; the project was split into three main categories, i.e., a) Detailed Project Implementation Report; (DPIR) b) Engineering Services; and c) Construction Supervision. As clear from the record and also accepted by the AO, the construction supervision was cancelled and DPIR & Engineering Services was to be provided directly by the head office IDIADA from Spain. It was only construction supervision which was to be provided through a project office in India. It is also a matter of record that the project office was established on 01.09.2006. Nowhere from the agreement could the 18 Idiada Automotive Technology nature of services be inferred that DPIR and engineering services was performed through PE in India, albeit it was performed wholly from Spain. Therefore, the assessee itself has offered the income as FTS. Since, construction supervision was a non-starter which alone could have been considered and rendered through project office. Therefore, during this period for other services no PE could have constituted in India and that is the reason why, Order u/s 195/197 was passed after considering the entire agreement as well as material placed on record that services rendered has purely in the category of FTS. One very important fact which he pointed out that, all the payment was made prior to 01.09.2006 i.e. before the establishment of project office in India which is evident from TDS certificate placed in the paper book at page 80. This clearly shows that the entire payment has been received from the period 01.05.2006 to 31.08.2006. Thus, prior to earning of income, project office was not even established in India. In support, he drew our attention to the certificate of establishment of project office which has been placed at paper book page 54 which has been established w.e.f. 01.09.2006 issued by Registrar of Companies. He also drew our attention to a reply submitted before the AO dated 18.12.2009, the relevant contents for the sake of ready reference is reproduced herein below:
19 Idiada Automotive Technology “We have already submitted documents to establish that these services were rendered from Spain (for example: letters exchanged between assessee and the client, NATRIP). We now wish to reiterate the following:
1. Reference may be made to letter dt. 20.11.2009 issued by NATRIP, wherein they have confirmed that all the payments relate to DPIR and Engineering and no payment relates to Construction Supervision.
In their said letter dt. 20.11.2009, NATRIP have also mentioned that they are liable to pay service tax as service recipient under Import of Services Rules. The reference is to the “TAXATION OF SERVICES (PROVIDED FROM OUTSIDE INDIA AND RECEIVED IN INDIA) RULES 2006". In other words, NATRIP has paid service tax as service recipient because the services have been provided from Spain. Had the services been provided from any Permanent Establishment, then the import of service rules would not apply at all. This, too, confirms that services were rendered from Spain and not from any Permanent Establishment.
The confirmations from NATRIP vide their letter above-mentioned is matching in full with the TDS certificate issued by them during the year. The TDS certificate has already been submitted to you. Without prejudice to our contention that no part of Engineering Services has been provided through Project Office at any point in time, it may be seen that the dates of payment for DPIR and Engineering Services is before the date & formation of Project Office. Therefore, the question of services being rendered through Project Office does not arise in any case.
20 Idiada Automotive Technology 4. The details of visits of short duration undertaken by personnel from Spain in connection with DPIR and Engineering services relating to Spain for A.Y. 2007-08 are all prior to date of formation of the Project Office as well as date of opening of Banking account. This, too, proves that the services have not been rendered through any Permanent Establishment.
Therefore, it is evident from material-on record that services rendered are not attributable to any Permanent Establishment. In fact, it is further submitted that there is no material on record to establish that services have been rendered through a Permanent establishment and therefore, any assessment in accordance with Section 44DA would be based on mere presumption and not on recorded facts.
Therefore, we submit once again that the nature of services rendered in 'Fees for technical services’ as defined in Explanation 2 to Section 9(1)(vii). We also submit that since the material on record as well as clear inferences from / other documents submitted by us establish that no services are attributable to any Permanent Establishment; Section 44DA finds no applicability in the instant matter. Furthermore, if no services are attributable to any Permanent Establishment, then Article 7 read with Article 5 of the DTAC, too, does not apply and the payments are covered by Article 13.”
Another important fact brought on record by him was that the department could not prove or there was any material to prove that there was any kind of Service PE in terms of Article 5(2)(k) of India-Spain DTAA. The number of days of the personnel visited in India during the year 21 Idiada Automotive Technology was only 77 days and not exceeded the period of 183 days. Thus, he concluded by submitting that; firstly, the project office was established only for the purpose of carrying out construction supervision activity which was a non-starter and in fact stood cancelled; secondly, the project office was established on 01.09.2006 and prior to that there was no fixed place or otherwise any place of business in India; thirdly, DPIR and engineering services were provided from Spain and none of these services were provided in India or through any personnel in India; and lastly, all the payments in connection with DPIR and engineering services rendered from Spain for the assessment year 2007-08 were prior to date of formation of Project Office as well as prior to the date of opening of banking account, therefore, it cannot be inferred that income earned during the year related to any Project Office or any PE in India.
13. On the other hand, the ld. CIT DR has filed his written submission which for the sake of ready reference is reproduced herein below: “The issue involved in this case is that whether AO is correct in holding the existence of PE or not? If yes, the attribution of income to PE in case.
22 Idiada Automotive Technology 2. The facts of the case are that the appellant led consortium signed the agreement with NATIS on 27.01.2006. The Project envisages the following:-
(a) Setting up of full regulatory and pre-competitive development testing facilities in northern India.
(b) Setting up of full regulatory and pre-competitive development testing facilities in southern India.
(c) Major up-gradation of facilities at ARAI and VRDE located in the west.
(d) Setting up of world class proving ground at a suitable location to be decided in consultation with experts/global consultants.
(e) Setting up of National facility for tractors and off-road vehicles. Regional In-use vehicle Management centre together with National Accident Analysis facility and also Specialized Driving Training School at Rae Bareilly.
(f) Setting up of National Specialized Hill Area Driving Training Centre and Regional use Vehicle Management centre for the North East at Silchar.
3. The Scope of work includes 3 tasks (refer annexure D of contract)
(a) Preparation of Detailed Project Implementation Report for the project on key deliverables
(b) Detailed avail Engineering and preparation of bed documents for civil works and equipment procurement.
23 Idiada Automotive Technology (c) Construction Supervision, procurement and commissioning assistance including training and skill development for operators and management.
The interlacing of the aforesaid 3 tasks is evident from following phrases in the annexure D for services and key deliverables. Task No 2- "Detailed civil Engineering and preparation of bid documents for civil works and equipment procurement" Starts form the phrase "The result of Detailed Engineering will he the project documentation structured in packages as defined by DPIR…………"The relevant extracts of the agreement are pasted below:
1. Detailed Civil Engineering Project
The result of the Detailed Engineering will be the project documentation structured in packages as defined by the DPIR. Each documentation package will contain all the information that the contractors would need for quotation purposes and will be the basis for them to execute the works.
5. Thus, the above terms of the agreement show that the task 2 is to the performed in accordance with task 1 i.e. DPIR. Further it mentions that the project will be developed where adaptation of master plan of each centre defined by DPIR (task 1) to the definitive sites.
6. Task No.3 - "Construction supervision..." mentions that construction supervision of implementation works in each of construction activity sites according to the master plans of the Detailed civil Engineering project. The relevant extracts of the agreement are pasted below:
Construction Supervision 24 Idiada Automotive Technology The services offered in this stage comprise the construction supervision of tie implementation works in each of the construction activity sites according to the Master Plans of the Detailed Civil Engineering Project.
For this purpose, the Consortium will create a specialized construction supervision team which will formed by experienced engineers. The team will be lead by the Construction Supervisor who will coordinate the ‘on site’ teams and centralize all communications with the NATRIP Office, So, it is planned to assign an ‘on site’ team for each center during all the construction works. These teams will be specialized in civil works and' utilities and their principal tasks will comprise:
Supervision of execution of the works in accordance with the technical functional specifications of the DPIR and the Detailed Civil Engineering Project.
7. Thus, it is evident from perusal of key deliverables of all 3 tasks that first task is the foundation for second task and the second task is foundation for third task. Effectively, all three tasks are inextricably connected in this case.
8. It is relevant to reproduce the clause k of article 5(2) of India Spain DTAA which reads as under:
"A building site or construction, installation or assembly project or supervisory activities in 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 in any twelve-months period, or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues for a period not exceeding six months and 25 Idiada Automotive Technology the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment.”
It may be relevant to appreciate the scope of terms in the phrase "building site, construction, installation or assembly project" at para 3 of article 5 of DTAA OECD commentary is of relevance in this regard. As per OECD commentary,
"The term —building site or construction or installation project includes not only the construction of buildings but also the construction of roads, bridges or canals, the renovation (involving more than mere maintenance or redecoration) of buildings bridges or canals, the laying of pipe-lines and excavating and dredging. Additionally the term —installation project is not restricted to on installation related to a construction project; it also includes the installation of new equipment, such as a complex machine, in sn existing building or outdoors. On-site planning and supervision of the erection of a building are covered by paragraph 3. States wishing to modify the text of the paragraph to provide expressly for that result are free to do so in their bilateral conventions."
10. In the present case, the services are in the nature of site planning and thus, are covered as per article 5(2)(k) of DTAA.
It is also relevant to add that issue "whether the expressions "mining projects" or "like projects" occurring in Explanation 2 to Section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas or not?" was there before Hon'ble Supreme Court. In this regard, Hon'ble Supreme Court in the case of ONGC 26 Idiada Automotive Technology (CIVIL APPEAL NO. 731 OF 2007) held that mining operations and the expressions "mining projects" or "like projects" occurring in Explanation 2 to Section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and hence payments made under such agreement to a non-resident/foreign company would be chargeable to tax under the provisions of Section 44BB and not Section 44D of the Act. It is further held that "We do not see how any other view can be taken if the works or services mentioned under a particular agreement is directly associated or inextricably connected with prospecting, extraction or production of mineral oil. Keeping in mind the above provision, we have looked into each of the contracts involved in the present group of cases and find that the brief description of the works covered under each of the said contracts as culled out by the appellants and placed before the Court is correct."
".....The above facts would indicate that the pith and substance of each of the contracts/agreements is inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of such agreement is for prospecting, extraction or production of mineral oils though there may be certain ancillary works contemplated thereunder. If that be so, we will have no hesitation in holding that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts is more appropriately assessable under the provisions of Section 44 BB and not Section 44D of the Act"
27 Idiada Automotive Technology 12. It is discussed above that the activities performed in this case are inextricably connected with construction work. Thus, the principle laid down by Hon'ble Supreme Court squarely applies in this case. Thus, the case of the appellant is covered under article 5(2)(k) of DTAA.
As regards the issue of stay of expats below threshold period, it is submitted that the duration of the activities need to be examined as against the stay of expats in India. It is also important to note that the project has to be seen in whole and not task wise because the article 5(2)(k) clearly provides for not only project and site but even other sites and projects if any. So, the activity duration needs to be seen with reference to the entire project and not task wise.
14. In this regard, it is relevant to refer to text of "Klaus Vogel on Double Taxation Conventions, Third Edition", which provided that the minimum period for considering a construction site/project as a PE of an enterprise would begin when the enterprise starts to perform business activities on the spot in connection with the building site or construction or assembly of the project and any interruptions in the minimum period should also be included for determining the minimum period. The commentary by A. Skaar supports the position that time spent on onsite planning would also be included in computing the duration while considering whether a PE of an enterprise existed.
In view of the above discussion, it is submitted that the facts of the present case are clearly fall under inclusive definition of permanent establishment as per article 5(2)(k) because the task 1 and 2 together have duration running over the complete year and thus qualifies the threshold period as laid down in article 5(2)(k) of the DTAA. Without prejudice, it is 28 Idiada Automotive Technology also important to note that the stay period of expats for supervising task 2 need to be aggregated to check the threshold period to trigger PE in this case. It is further highlighted that the appellant on its own also admitted the position of PE in subsequent years. This is the position even where the appellant claimed that the construction supervision phase could not be taken up. Thus, even in absence of construction supervision (task 3), the appellant admitted the position of PE in subsequent year(s).”
We have considered the rival submissions, perused the relevant finding given in the impugned orders as well as material referred to before us. To put it in succinct manner, IDIADA which is the Spanish based company and in terms of agreement entered with NATRIP on 27.01.2006, it was required to carry out project in India which was split into three categories, i.e., Detailed Project Implementation Report (DPIR), Engineering Services and Construction Supervision. However, it is an admitted fact that only the first two services were carried out, i.e., DPIR and Engineering Services. The construction supervision as envisaged in the agreement was never carried out. Another important fact is that, for the first time Project Office was established in India on 01.09.2006 which was for the purpose of carrying out construction supervision activity which later on was removed from IDIARA’s scope of work. Lastly, another important fact was that the assessee had received amount of Rs.7,40,91,233/- on account of DPIR and 29 Idiada Automotive Technology Engineering Services and all the payments were received between the period 01.05.2006 to 31.08.2006 which is evident from invoices raised as well as TDS certificate in Form No. 16A placed at paper book page 80. The case of the assessee all throughout has been that there was no PE in India and the Detailed Project Implementation Report was submitted to NATRIP on 08.08.2006, that is, before the setting up for the project office on 01.09.2006 and secondly, the project office was only for the purpose of carrying out construction supervision and only qua this activity PE could have said to been established in India which was not carried out nor any other activity was carried out from Project Office. From the perusal of the findings given and material on record, it emerges that the service relating to DPIR and engineering services were provided from outside India, i.e., from Spain where the head office of the IDIADA is situated. The case of the revenue is that looking to the nature of contract as discernable from the agreement various supervision and planning and construction, etc. the contract cannot be split and these are composite activities which requires lot of primary research and market research which are preparatory in nature which cannot be carried out without any PE in India before setting up of Project Office in India.
30 Idiada Automotive Technology 15. From the perusal of the relevant finding of the Assessing Officer as incorporated above, it is seen that various kind of presumption has been drawn by him like; i) for carrying out such services, existence of PE is essential precondition; ii) all the services are based on detailed site analysis which cannot be carried out without a PE; iii) FTS cannot be held to be rendered directly from Spain because no expenses relating to FTS has been incurred in India; iv) at the same time holds that there is a Service PE as well as project office PE at each site for rendering services relating to preparation of DPIR and engineering services; and v) India project office was set up not for the limited purpose of construction and supervision activities. However, nowhere there is any whisper in his order as to what kind of place of business was there in India prior to 01.09.2006, i.e., before the establishment of project office from where and through which assessee has carried out DPIR and engineering services. He has not even mentioned as to how many personnel had visited India for rendering of these services and for how many days they have stayed in India. His entire conclusion is based on hypothesis that, before carrying out such services, certain primary research must have been done in India and some kind of site analysis and market strategy is required which is not possible without any PE. Assessing Officer has presumed that the 31 Idiada Automotive Technology entire agreement and the scope of work describe therein must have been carried out during the relevant financial year. Admittedly, the assessee’s revenue was only Rs.7.40 crores approx out of the total cost as per agreement of Rs.39.50 crores. The amount of Rs.7.40 crores was purely from rendering of services from Spain. Nowhere Assessing Officer from the record could establish that these services have been performed through any PE in India prior to establish on 01.09.2006, except for his own presumptions and surmise. He has also failed to take note of the fact that, no payments from such services have been received after 31.08.2006. Thus, neither there is any material on record or finding that assessee has received any payment or has performed any services after the establishment of PO on 01.09.2006 or through any personnel in India or through any other fixed place in India. Merely incorporating various terms of agreement sans any actual activities carried out cannot determine the existence of PE, because what is required to be seen is, whether any income has accrued or has arisen from any activity carried out through Permanent Establishment in India. If the only activities through which the assessee has earned income is with respect to DPIR and engineering services which was carried from outside India; and if none of the other activities of clause as given agreement have come into force during this year, then holding that entire 32 Idiada Automotive Technology income earned during the year is from any hypothetical fixed placed of business of PE would be erroneous.
Before us, the ld. DR has sought to justify that there was a PE in terms of clause (k) of Article 5(2) of India- Spain DTAA which reads as under: "A building site or construction, installation or assembly project or supervisory activities in 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 in any twelve-months period, or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment.”
Even if it is accepted that there was a some kind of activity which falls within clause (k), then such activity to fall within the ambit in scope of PE has to pass time period test prescribed therein, that, is 6 months in any 12 months period for which such project or supervisory activity was carried out. There is no such material or finding in the impugned order that any such kind of project or supervisory activity was carried out for more than six months in India. There has to be some kind of onsite planning and supervision activity which is completely absent here in this case, firstly, for the reason that the services have been rendered from outside India 33 Idiada Automotive Technology and secondly, there is no finding that any personnel of assessee have been performing any kind of such activity in India for a period of more than six months. Activity duration can be seen once any kind of such activities has been carried out on any site or any project in India, which finding is absent completely in the impugned orders, except for hypothesis and presumption without looking the real activity and the income earned. It has to come on record that there was some kind of actual activity which was carried out especially prior to 01.09.2006 through any fixed placed of business or through any personnel in India having crossed the threshold period of six months. Thus, in our opinion, in view of our finding above, we hold that there is no Permanent Establishments during the relevant assessment year 2007-08 for the activities relating to DPIR and engineering services from which the assessee has earned the revenue and same cannot be taxed as business profit carried out through PE in India. It is in the nature of FTS which is to be taxed in accordance with Article 13(4) of India-Spain DTAA. In the result this issue is decided in favour of the assessee.
The other grounds are general in nature and the same are not adjudicated.
In the result, the appeal of the assessee is allowed.
34 Idiada Automotive Technology Order Pronounced in the Open Court on 29/05/2020.