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Before: Shri Amit Shukla & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the assessee against the order of ld. CIT(A)- XXIX, New Delhi for the assessment year 2002-03 on the following grounds : 1. That on the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals)- XXIX, New Delhi [hereinafter referred to as ‘the learned CIT(A)’] has erred in upholding that the Appellant constitutes a Permanent Establishment (‘PE’) in India under Article 5 of the India - USA Double Taxation Avoidance Agreement (‘India-US DTAA’) for AY 2002-03.
1.1 That on the facts and circumstances of the case and in law, the learned CIT(A) has failed to appreciate that the Appellant did not undertake any installation activities during AY 2002-03 and has therefore erred in holding that the installation PE, as existed in earlier years, continued during AY 2002-03.
2. That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in treating the consideration received by the Appellant from Hughes Network Systems India Private Limited (‘HNSIPL’) under the Support Services Contract as ‘Fees for Included Services’ (‘FIS’) under Article 12 of the India-US DTAA.
All the above grounds are without prejudice to each other.”
The brief facts of the case are that the assessee filed return of income on 28.03.2003 declaring nil income. The assessee company, HNS India VSAT is a company incorporated under the Laws of USA having its registered office in Maryland, USA. The assessee company was awarded contract work for providing support services to M/s. HNS India Ltd. in relation to the work of Maharashtra Telecom Circle. As per contract agreement dated 01.04.1998, WSS (Wireless support services), a division of HNS India VSAT was providing the support services mentioned in service contract. The Assessing Officer noticed that the assessee in the assessment year 1999-2000 and 2000-01 has declared revenue receipts from HNSI and offered for taxation as business income, but this year, service fee was received by the assessee under the said agreement. Therefore, the assessee was asked to clarify why this year income has not been offered. In reply, the assessee submitted that the scope of work has been reduced and the installation related activities have been taken out of the scope of work and during the year, there were personnel employed only for 54 days. Therefore, it does not have a fixed place of business in India. Accordingly, the sum received is not taxable in this year.
The Assessing Officer further noticed from agreement that the contract was amended in March, 2000, wherein the scope of work of appellant was restricted to exclude installation related activities. The other details were also incorporated in the assessment order. From the works detail and analysis of services rendered by the Assessee, the Assessing Officer noticed that it clearly falls under the definition of development and transfer of technical plan or design. The Assessing Officer issued show cause notice in this regard as to why the receipts from the above services/works should not be taxed under Article 12 of the DTAA. The assessee submitted the detailed reply. The Assessing Officer observed that the assessee has emphasized only that it was a transfer of technical plan or design not taxable as FIS unless the transfer enables the recipient to apply the technology contained therein. But the Assessing Officer was of the view that it was not in consonance with the example 5 of protocol of Indo USA-DTAA. The Assessing Officer further observed that even if the installation related work is taken out of the scope of contract, the fee received by the assessee company was the fee for the services included in Article 12 of the DTAA under consideration. The Assessing Officer after considering attending facts of the case and agreement dated 01.04.1998 and subsequent amendment agreement, held that the fee received by the assessee was in the nature of technical services and taxable as business income and allowed 30% of fee received for expenses incurred out of the total amount of Rs.1,18,93,073/- and determined the taxable income at Rs.83,25,151/-. Aggrieved from the above order, the assessee appealed before the ld. CIT(A), who after considering the detailed submissions of the assessee, upheld that there is PE in India and consideration received is a fee for included services and held that as per section 44D read with 9(1)(vii) and section 115A of the Act that the fee for technical services are earned in pursuance to agreement made after May, 1997, the same would be taxable @ 20% on gross basis. Aggrieved from the order of CIT(A), the assessee is in appeal before the ITAT.
4. The learned AR of the assessee submitted that employees of the assessee were employed only for 54 days during this year. Therefore, it does not satisfy the minimum required period so as to take any PE in India, considering the nature and services rendered/works done. Therefore, the whole amount received by the assessee is not taxable as business income in India. He further submitted that the work done by the assessee was in pursuance to the earlier agreement dated 01.04.1998. Therefore, consideration received is not fee for included services. He further argued that even in the case of PE in India, the rate of tax would be as applicable u/s. 115A of the IT Act. It was submitted that Article 7.1 of the DTAA may be applied in the case of assessee.
On the other hand, the ld. DR relied on the orders of the authorities below. And submitted that as per section 44D read with section 115A, the tax is on the gross basis and attribution is not allowed. He invited our attention towards clause 1 and 3 of Article 7 of the DTAA placed at paper book page 188. Therefore, the order of the authorities below should be restored.
After hearing the rival submissions and gone through the documents available with us, we observe that the ld. CIT(A) has done good reasoned order in respect of both the grounds taken by the assessee, which reads as under :
“7.1 I have carefully gone through various submissions made by the appellant and material placed on record. The relevant facts are that the appellant entered into a Support Services Contract (step down contract) dated April 1, 1998 with Hughes Network Systems India Private Limited (HNSIPL) for providing support services related to WAN data switching installation in an integrated manner. HNSIPL in turn had an agreement (main contract) with Hughes Ispat Ltd. (HIL) under which HNSIPL had agreed to render services in relation to the establishment, installation, operation, maintenance of a basic telephone service system within Maharashtra Telecom Circle in India. For preceding AYs, the appellant had been filing its return of income declaring therein business income attributable to installation PE in India. During PY relevant to AY under consideration, the appellant took a view that there did not exist any PE in India because its earlier agreement with HNSIPL was amended so as to exclude installation activities out of scope of work of the appellant and only few of the Appellant’s employees visited India and their visits was limited to a period of 54 days during the subject year for carrying out briefing / coordination activities in India. According to appellant, the payments received by it were therefore not taxable in India. The AO rejected the contention of the appellant that the relevant agreement stood amended and accordingly held that as in earlier AYs, there exist installation PE in India.
7.2 Relevant provisions of Article 5 of Indo-USA DTAA are reproduced as below:
5(2) The term "permanent establishment” includes especially:
(k) 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 120 days in any twelve-month period.
7.3 According to Article 5(2)(k) above, installation PE shall exist if installation project continue for a period more than 120 days in any twelve month period. The appellant itself accepted that there was installation PE in preceding AYs. However, the appellant contended that there is no installation PE during AY under consideration because:
(i) there were no installation activities done by the appellant as per amended agreement (ii) period of stay of employees of the appellant in India was only 54 days.
7.4 From provisions of Article 5(2)(k), it is clear that there are only two requirement for installation PE to exist, one there should be installation project and secondly, such project should continue for a period more that 120 days. It is pertinent to note that this period of 120 days should be satisfied in any 12 months period. It means that period of 120 days is not to be seen during the FY only relevant to AY under consideration. The purpose behind this criterion of duration of 120 days is that installation project which last for insignificant period should not result into a PE. Now' once there is a installation project which continue for a period of 120 days in any 12 months period, then there exist PE within the meaning of Article 5(2)(k) of DTAA even if there is no installation activity carried on in subsequent period. In present case, it is not disputed even by the appellant that there existed installation PE in preceding AYs. Thus requirement of Article 5{2)(k) for existence of PE are satisfied. The appellant had furnished documentary evidence to support its claim that support service agreement was amended and the appellant was not required to perform installation activities as per amended agreement. This claim of the appellant does not affect the existence of PE. The original installation project remained in existence during the period under consideration and it had undisputedly continued for a period exceeding 120 days in preceding AYs. Even if appellant’s contention is accepted that it had not performed installation services during AY under consideration, it does not make any difference about existence of PE. That claim of the appellant might be relevant for computing income attributable to PE because such income has to be worked out taking into consideration various operations done through such PE. The argument of the appellant that period of stay of its employees in India was only 54 days during the period under consideration is also not relevant as requirement of the relevant Article is that installation project should continue for a period of more than 120 days in any 12 months period. Reliance placed by the appellant on ACIT vs Samcor Glass Ltd. 89 TTJ 138 (Del) is misplaced because in that case, the assessee never provided services for supervision of construction of building and erection of plant. In present case, it is undisputed that the appellant had provided installation services for a period exceeding 120 days in any twelve months period. Further reliance of the appellant on Brown and Root Inc V CIT 237 ITR 156 AAR, Advance ruling No. P-l lof 1995 and Horizontal Drilling International SA V CIT 237 ITR 142 is also misplaced as in these case laws, requirement of 120 days was not fulfilled whereas in present case under consideration, installation project has undisputedly continued for a period exceeding 120 days in any twelve months period.
7.5 In view of discussion supra, 1 hold that the appellant is having PE in India within meaning of Article 5(2)(k) of relevant DTAA. The issue is decided against the appellant.”
“10.1 I have carefully gone through various contentions raised by the appellant and material placed on record. The appellant has argued that since 'make available’ clause is not satisfied, the services provided by it do not constitute fee for included services (FIS) under Article 12(4)(b) of DTAA. However, the AO has held that these services are in nature of FIS.
10.2 Annexure-A to contract dated 01.04.1998 between the appellant and HNSIPL is statement of work and its clause 2 deals with responsibilities of the appellant. Relevant sub clauses are being reproduced as below:
2.2 SERVICE TASKS Tasks to be performed by WSiS' include: a) Program progress and status reporting (See Section 2.1) b) Network RF Coverage Services and RF frequency plan (See Section 2.3, 2.4) c) Indoor Cabling and Cable trays (See Section 2.5) d) Grounding (See Section 2.6) e) BSC Site Requirements (See Section 2.7) f) BSC Equipment Installation (See Section 2.8) g) OMC Equipment Installation (See Section 2.9) h) Echo Canceller and DSX Panels Installation (See Section 2.10) i) BTS Battery and DC Power installation (See Section 2.11) j) BTS Equipment and WLL Antenna and Tower (See Section 2.12) k) BTS Site Equipment Grounding (See Section 2.13) l) BTS Site Lightning Protection Grounding (See Section 2.14) m) WLL System Installation (See Section 2.15) n) Connection to IIIL provided AC/DC power equipment at exchange to wireless equipment o) Connection to H1L provided audio alarm system from wireless equipment alarm interface 2.3. NETWORK RF COVERAGE SERVICES HNSI will obtain geographical and topographical maps of relevant areas as required for provisioning coverage maps. H1L through IINSI will provide assistance in obtaining maps, as required. WSS will provide RF coverage services as follows: a) HNS1 will propose candidate Cell Sites in order of preference based on a search map showing desired RF coverage area to be prepared by WES pursuant to specifications provided by IIIL b) HIL will secure sites from the candidate list provided by WSS c) WSS will provide a predicated RF Coverage map based on the sites secured by HIL d) HNSI will perform drive tests after the site is installed for measuring actual RF coverage for comparison to the predicted simulation coverage plots. e) WSS will adjust antenna and RF power levels to optimize RF coverage f) WSS will provide Final Coverage Map.
2.4. RF FREQUENCY PLAN WSS will provide an RF Frequency Plan based upon the frequency spectrum secured by HIL and the predicted RF coverage. HIL through HNS1 will review and approve the proposed frequency plan by the date reasonably requested by WSS in order for WSS to comply with its obligations.
2.5. INDOOR CABLING AND CABLE TRAYS WSS will install the indoor cabling and cable Hays for ail equipment to be installed by WSS.
2.6. GROUNDING WSS will provide a building ground to meet the required specifications and will install the Equipment ground cables to the building ground connection point(s).
2.7. BSC SITE REQUIREMENTS HNS1 will perform a survey of the proposed BSC site(s). HNSI will collect information regarding general building condition, floor and wall space utilization, existing telecommunications equipment type and function, existing power and battery plants, existing electrical wiring and grounding, existing cable routing, air conditioning, ventilation. HIL through HNSI will provide existing building and Site engineering drawings if applicable.
After collecting this information WSS will prepare and detailed list called BSC Site Requirements containing the Site specific requirements for power and current breakers, conditioning, floor space, a floor plan and floor loading specification, cable runs, and trays, grounding, switch and BTS connections.
HNSI will provide the Site-specific equipment configuration worksheets pursuant to HIL’s specifications.
WSS will provide a Site illustration showing the floor plan with equipment layout, indoor cable and cable tray location, grounding requirement, air conditioning placement, AC power distribution and surge protector location, hatch plate location, lighting and AC power outlet locations pursuant to equipment specifications provided by HIL.
HIL is responsible for survey of alt switch sites. HIL will provided HNSI with drawings showing layout of the Switch site equipment. WSS will integrate this with the BSC equipment layout and prepare an integrated site layout illustration for HIL ’s approval. HIL through HNSI will promptly provide approval in accordance with the program schedule.
Under sub-clauses 2.8 to 2.15, the appellant is responsible for installation of various equipments. The appellant had contended that as per amended scope of work, it did not perform installation activities during the period under consideration.
10.3. Analysis of scope of work as mentioned in sub-clauses 2.2 to 2.7 above shows that the appellant had to provide RF coverage map, RF frequency plan, site illustration showing floor plan with equipment layout etc., drawings showing layout of switch site equipment and an integrated site layout illustration. This means that services provided by the appellant involved development and transfer of a technical plan or technical design. These services are highly technical and undisputedly fall in the definition of technical services within the meaning of Explanation 2 to section 9(1)(vii) of the Act. Now, we have to see whether such services could be called technical services under DTAA. Relevant Article 12(4) of Indo-USA DTAA is reproduced as below:
For purposes of this Article '"Fee for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:- are ancillary and subsidiary to the application or enjoyment of the right, property or (a) information, for which a payment described in paragraph 3 is received : or make available technical knowledge, experience, skill, know-how or processes, or (b) consist of the development and transfer of a technical plan or technical design.
The appellant has raised a contention that services provided by it do not make available any technical knowledge, experience, skill, know-how or processes and therefore it does not amount to FIS. The appellant has relied upon various judicial decisions regarding meaning given to term ‘make available’. In this regard, provisions contained in clause (b) of Article 12(4) needs to be critically examined, which consists of two limbs with conjunction ‘OR’ as below: - make available technical knowledge, experience, skill, know-how or processes, OR - consist of the development and transfer of a technical plan or technical design. - It is to be noted that ‘make available’ goes with first limb only. Clearly it does not go with second limb and therefore services involving development and transfer of a technical plan or technical design shall be FIS even if recipient is not made available the technology/expertise to perform such activities in future on its own without resorting back to the appellant. This has been held so by Hon’ble ITAT Kolkata in case of Gentex Merchants Pvt. Ltd. vs, DDIT [2005- TTI-07-1TAT-KOL-1NTL). In present case, the appellant has developed and transferred technical designs or plans for use of HNSLPL and thus clearly fall under second limb of Article 12(4)(b) of DTAA. This view is also supported by Example 5 of protocol of Indo-USA DTAA which has also been relied upon by the AO. Further, the payer HNSIPL has rightly deducted tax at source while making payments to the appellant Neither the payer nor the appellant thought it prudent to obtain certificate for no deduction of taxes u/s 195(2)/(3) of the Act probably because they were clear about nature of payment.
10.4 The appellant has further argued that even where preparation of RF frequency plans etc. is regarded as development and transfer of technical plans or design, the said scope of work forms a very small part of the total work scope to be executed by the Appellant under the amended Support Services Agreement. Accordingly, only so much of the consideration received by the Appellant as is attributable to preparation of RF frequency plans should be taxed in the hands of the Appellant as FIS under Article 12 of India-US Tax Treaty. This contention of the appellant is not factually tenable as during the period under consideration, the appellant has not done any installation activity and other activities as per scope of work discussed supra mainly relate to development of technical plans/designs only. 10.5 In view discussion supra, I hold that payments received by the appellant are in nature of fee for technical services both under domestic act and under DTAA. Further, it has been held supra that the appellant has PE in India. Though, the appellant has claimed that it has not done installation activities during the period under consideration, the development of technical designs/plans is intimately connected with PE as surveys of various sites at PE has to be done for purpose of development of such technical designs. Therefore, FIS received by the appellant are attributable to such PE in India. The term ‘attributable’ has a wider meaning than term ‘effectively connected’ and Indo-USA DTAA has purposely used the term ‘attributable’ in Article 12(6).”
From the above order, it is clear that the ld. CIT(A) has rightly held that there is PE in India. It was the continuation of works done/services rendered. During the course of hearing, the ld. AR fairly admitted that there is PE in India. The minimum working period is considered in totality and not financial year wise. Therefore, the ld. CIT(A) has rightly decided the issue as narrated above.
In respect of ground No. 2, the assessee has amended his agreement and as per amended contract, scope of work has been enhanced as noted above. The argument of the ld. AR that it is not FIS is also not correct because the services provided is make available any technical knowledge, expenses skill, know how or process. As per Article 12(4)(b) consists two limbs as below - (i) make available technical knowledge expenses, skill know how or process or (ii) consists of the development and transfer of a technical plan or technical design. The above two limbs have rightly been explained by the CIT(A) that ‘make available’ goes to first limb only. It does not go with second limb. Therefore, the ld. CIT(A) has rightly held that FIS would include those services also which involve development and transfer of technical designs and plans for use of HNSIPL. Therefore, it clearly falls under the second limb of Article 12(4)(b) of the DTAA and it also falls under the example 5 of Protocol of Indo- USA DTAA. As per findings noted by the lower authorities, the payments received by the assessee company clearly falls in the nature of fee for technical services under domestic Act and DTAA and we hold that the assessee has PE in India. In the totality of facts and circumstances of the case and above findings, the ld. CIT(A) is justified in confirming the order of the Assessing Officer. Therefore, the appeal of the assessee is found to have no merits and deserves to be dismissed.