GIFFORD & PARTNERS LTD.(SINCE MERGED WITH GIFFORD LLP),KOLKATA vs. ADIT (INTERNATIONAL TAXATION) - 1(1), KOLKATA, KOLKATA

Per Shri N.V.Vasudevan, JM ITA No.2082/Kol/2010

This is an appeal by the Assessee against the order dated 21.9.2010 of the DDIT(IT)-1(1), Kolkata, passed u/s.143(3) read with Sec.144C of the Income Tax Act, 1961 (Act) relating to AY 2007-08.

2 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 Research Shipyard. The terms of the Agreement between the Assessee and GRSE is contained in an agreement dated 29.4.2004 which later was amended by memorandum of Amendment to original Agreement on different occasions. The nature of services to be performed by the Assessee is set out in Appendix 1.1 to the Agreement. Appendix 1.1 of the Agreement refers to Section-III of bid document which contains “Terms of Reference”. The terms of reference provides for performing various services. The same can be classified as follows: (1) Preparation of concept papers, (2) Preliminary project report (PPR); (3) Detailed project report (DPR); (4) Engineering services; (5) Project management services; and (6) Post - construction service. The consideration payable by GRSE for the services to be rendered by the Assessee is set out in Clause 5.3 of the Agreement. Clause 5.3 of the Agreement refers to Appendix-1.5 to the Agreement. Appendix 1.5 refers to three stages of work to be performed by the Assessee viz., Stage-1 Draft Project Report(DPR); Stage-2 (Design Stage); Stage-3 Construction Supervision Stage. The mode of payment for each stage of work is also given in Appendix 1.5. The relevant portion of Appendix 1.5 is as follows: “APPENDIX 1.5 FEES FOR CONSULTANCY SERVICES: Foreign Currency Payments Stage-1(DPR) US$ 424095 Stage-2(Design Stage) US$ 557986 Stage-3(Construction Supervision Stage) US$ 387576 Total US$ 1369657 (Total US Dollar Thirteen Lakhs Sixty Nine Thousand Six Hundred and Fifty Seven only)

Local Currency Payments Stage-1(DPR) INR 2070000 Stage-2(Design Stage) INR 6266449 Stage-3(Construction Supervision Stage) INR 10177018 Total INR 18513467 (Total Rupees One Crore Eighty Five Lakhs thirteen thousand four hundred sixty seven only)

The Contract will be a Lump-sum type of Contract with stage-wise payments. ………”

3 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08

Clause 1.8 of the Agreement provides for the place in which the services are to be rendered and the same reads as follows: “1.8. LOCATION The services shall be performed at the premises of Garden Reach Shipyard, Kolkata and, where the location of a particular task is not so specified, at such locations, as GRSE may approve.”

The mode of payment of consideration and the taxes if any, payable by GRSE to the Assessee have been set out in Clause 1.10 of the Agreement, which reads thus:

“1.10. Taxes and Duties The foreign currency portion of the fees will be remitted directly to the bank nominated by the Consultant net of taxes. The local currency payments made to the Consultants will be subject to the deduction of appropriate taxes, levies and other impositions under the Indian Law, as applicable. If foreign personnel are liable for taxes for their earnings in India, the Consultant will be responsible to ensure that they meet such liability.”

The payment of consideration by GRSE to the Assessee is net of taxes, i.e., tax liability, if any, of the Assessee had to be borne by GRSE. The AO/Assessee as well as the Dispute Resolution Panel (DRP) have proceeded on the basis that the tax liability of the Assessee, if any, on income that accrues to the Assessee in India was to be borne by GRSE.

4 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 person who is a non-resident includes all income from whatever source derived which— (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Sec.9 of the Act provides when income accrues or arises or is deemed accrue or arise in India to a non-resident. Income deemed to accrue or arise in India has different categories of Incomes within its ambit. They are as follows: 1) Any income accruing or arising to an assessee in any place outside India whether directly or indirectly (a) through or from any business connection in India, (b) through or from any property in India, (c) through or from any asset or source of income in India (d) through the transfer of any capital asset in India. 2) Income which falls under the head “Salaries”; if it is earned in India. 3) Income from “Salaries” which is payable by Government to a citizen of India for services rendered outside India. 4) Dividend by an Indian Company outside India 5) Interest 6) Royalty 7) Fees for technical Services

If income of a non-resident is taxable in India as per provisions of the Sec.5(2) of the Act read with Sec.9(1) of the Act, thereafter one has to see if there is any agreement between the Government of India and the Government of the country of which the non-resident sought to be taxed in India is a resident in that country, for avoidance of double taxation. If such an agreement exists then the provisions of the Act will apply to the extent they are more beneficial to the Assessee. In other words the taxability as well the quantum of income and rate at which they have to be taxed have all to be ascertained by reading such agreement. Under Sec.90 (2) of the Act it is provided that where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) of Sec.90 for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such

5 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.

• The said services were to be performed both from India as well as from the United Kingdom ('UK'). The local services were rendered through independent Indian sub- contractors and the foreign services were rendered partly by an independent foreign sub-contractor i.e. Appledore and partly by the Assessee, from its head office in the UK.

• Fees for the said services were payable in two parts i.e. foreign currency payment in USD and local currency payments in INR.

• The work on the said contract was started in April 2004 and the Assessee has since been filing tax returns in India for incomes earned from the said contract.

6 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 6. During the previous year relevant to AY 07-08, the Assessee received a sum of Rs.2,86,61,214/- from GRSE which sum was credited in profit and loss account. The corresponding expenditure in connection with execution of work in India of Rs.1,06,81,827/- was debited as an expenditure in the profit and loss account. In the return of income filed for AY 2007-08 the Assessee (filed on 8 November 2007) offered a profit of Rs. 1,57,39,112 to tax, after setting off brought forward losses of Rs.2,240,274. The Assessee also claimed credit of TDS of Rs. 44,04,830. The said return was filed by the Assessee, on the basis that, its entire profits from execution of contract with GRSE, were attributable to its PE in India. As such, the entire profits after setting-off loss of earlier years were offered to tax at the rate of 41.82%, the then prevailing tax rate for foreign companies. Notice under section 143(2) of the Act, for initiating the assessment proceedings was issued by the Id. AO on 24 July 2008. Notice under section 142(1) of the Act seeking information/clarification from the Assessee, was also issued on 3 August 2009.

I. Issue of disallowance under section 40(a)(ia) of the Act, of payments made to the Indian sub consultants, for delay in deposit of TDS effected on such payments, under section 194J of the Act. As we have already seen, the Assessee made payments to persons resident in India under the Act who acted as sub-consultants. The amounts paid to the sub-consultants were claimed as deduction/expenditure in arriving at the income declared in the return of income. According to the AO, the payments made to sub-consultants were in the nature of Fees for professional/Technical Services and tax at source ought to have been deducted at source on such payments in terms of Secc.194J of the Act. The Assessee had not deducted tax at source on such payments. As a consequence, the AO was of the view that the expenditure claimed as deduction cannot be allowed as a deduction in view of the provisions of Sec.40(a)(ia) of the Act which reads thus: “40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head `Profits and gains of business or profession’—.

7 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 ….. (ia) any interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub- section (1) of section 200 : 2. Issue of disallowance under section 40(a)(i) of the Act, of the payment made to Appledore, on account of non deduction of tax at source, under section 195 of the Act. As we have already seen, the Assessee made payments to non-residents in India under the Act M/S.Appledore, U.K., who acted as sub-consultants. The Assessee entered in a contract with GRSE for rendering consultancy services for modernisation of their shipyard project. The scope of work envisaged- Preparation of concept plan, preliminary project report (PPR) and detailed project report (DPR).

Design, detailed engineering, drawing and tender documents for works contract.

Project management and construction supervision services.

According to the Asssessee, the scope of consultancy services was to be rendered partly from the UK and partly from India. For the purpose of rendering services from the UK, the Assessee had obtained certain services from M/S.Appledore, an independent sub-consultant. The services in India were rendered by local independent sub-consultants, appointed by the Assessee. M/S.Appledore was required to render services towards preparation of concept plan, preliminary project report and detailed project report, and render evaluation. The terms of the Agreeement between the Assessee and M/S.Appledore are contained in an agreement dated 20.5.2004 (copy of the same is at pages 128 to 133 of the paper book). Schedule-1 to this agreement details the following as the services to be rendered by M/S.Appledore, viz., Conceptual and outline Design, Technical Specifications for Plant and Equipment, Review and comment on Prequalification documents, Review and comment on Bidders proposal tender documents, Review and Comment on Quality Manuals and Method statements of contractors. All these services were rendered by Appledore in the UK and the consideration of Rs.l0,637,462 for rendering such services was paid by the head office of the Assessee from their Sterling account, maintained in the UK. No part of the Appledore's fees was paid in India. No taxes were deducted by the Assessee on the remittances

8 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 made to Appledore. In course of the assessment proceedings, the ld. AO requested the Assessee to explain as to why the payment, made by the head office of Gifford, without deduction of tax, should not be disallowed u/s 40(a)(i) of the Act. In reply, the Assessee submitted that:- • Payments made by the Assessee to Appledore was not taxable in India in terms of section 9(1)(vii)(c) of the Act; • Without prejudice to the above, payments made by the Assessee to Appledore was not FTS in terms of Article 13(4)( c) of the DT AA and accordingly was not taxable; • As such, tax under section 195 of the Act was not required to be deducted by the Assessee, on payments made to Appledore.

According to the Assessee tax is deductible under section 195 of the Act when any sum chargeable to tax under the provisions of the Act, is paid to a non- resident, not being a company, or to a foreign company. According to the Assessee payment was made by Gifford who is a resident in the UK to Appledore who is also a resident in the UK. Such payments were made for and services rendered in the UK. The Assessee submitted that Appledore, being a non-resident in terms of section 5(2) of the Act, would be chargeable to tax in India only in the event of income accrues or arises in India or is deemed to accrue or arise in India or income is received or is deemed to be received in India and not otherwise. Explanation I to section 5(2) provides that income accruing or arising outside India shall not be deemed to be arising in India, within the meaning of this section, by reason only of the fact that it has been taken into account in a Balance sheet prepared in India. Therefore, only by reasons of the fact that the payment was made to Appledore by the head office of Gifford in the UK and that such payment is taken into account in the balance sheet of PE in India, it shall not be automatically considered that such income of Appledore is income received in India. The amounts paid to the sub-consultants were claimed as deduction/expenditure in arriving at the income declared in the return of income. According to the AO, the payments made to sub-consultants were payments made to non-residents and therefore in terms of Sec.195 of the Act, the Assessee ought to have deducted at source on such payments in terms of Secc.194J of the Act. The Assessee had not deducted tax at source on such payments. As a consequence, the AO was of the view that the expenditure claimed as deduction cannot be allowed as a deduction in view of the provisions of Sec.40(a)(i) of the Act which reads thus: “40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",— ( a) in the case of any assessee—

9 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 ( i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,— (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of Section 200:” 3. Issue of grossing up of the USD component of the receipts of the Assessee as the tax on the same was being borne by GRSE at the rate of 15% by way of TDS. As we have already seen the payments to be made by GRSE are net of taxes on income if any payable in India. In other words such taxes have to be borne by GRSE. Sec.195A of the provides that in a case, where under an agreement or other arrangement, the tax chargeable on any income referred to in Chapter XVII B of the Act, then for the purposes of deduction of tax under those provisions such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement. The AO therefore proposed to increase the income or receipts of the Assessee as provided u/s.195A of the Act. 8. During the course of the assessment proceedings the Assessee filed its submission on 18th December 2009, wherein the following contentions were made by the Assessee:-

10 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 i) No profits from these services are attributable to the PE in India ii) Services have to be rendered in India, for taxability in India, as per the ratio of the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. iii) The services cannot be taxed under FTS owing to the 'make-available' clause contained in Article 13 of the DTAA 9. With respect to the submission filed on 18 December 2009 as stated above, the Assessee also filed an application under section 144A of the Act, to the Addl. DIT(IT)-I, Kolkata ('ADIT') requesting the ADIT for issuing necessary directions to the AO in this regard. Under Section 144A of the Act, a Joint Commissioner may, on his own motion or on a reference being made to him by the Assessing Officer or on the application of an assessee, call for and examine the record of any proceeding in which an assessment is pending and, if he considers that, having regard to the nature of the case or the amount involved or for any other reason, it is necessary or expedient so to do, he may issue such directions as he thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment and such directions shall be binding on the Assessing Officer. The ADIT vide letter dated 23 December 2009 gave the following finding/direction to the AO:-

11 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 rendered in the UK and 'the services rendered by the Assessee, as well as it's associates Appledore's professional and supporting staff, in India. 3. Also, without prejudice to the rejection of the claim of the Assessee, the ADIT directed the AO to examine the contentions of the Assessee with respect to: i) The existence of PE in India and ii) The taxability of the receipts in USD, for services claimed to be rendered, from the UK. 10. The ld. AO in line with the directions of the ADIT rejected the contentions of the Assessee on point (1) and (2) referred to above. With regard to point No.(3) on the existence of PE of the Assessee in India and taxability of receipts in USD, for services rendered from UK, the AO first made a reference to the various terms of the contract between the Assessee and GRSE and came to the following conclusions:

12 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 three stages. It is a single contract and is not a divisible one. According to the AO, Appendix 1.5 of the contract, contains only a bifurcation of the total consideration to be paid to the Assessee, in USD and in INR, without any mention of the services being 'Offshore' or 'Onshore'. The AO also referred to Appendix 1.4 of the contract which provided that GRSE will be required to make available to the consultant, air-conditioned office space inside the GRSE shipyard premises, for the 3 stages of the project. The AO also referred to the visit of Inspector of Income Tax to the project site and the enquiry made by him at the project site. The inspector had reported that one Mr.Subrata Mitra, was the resident engineer of the Assesssee as per his visiting card. The Assessee’s name “Gifford” was found on the visiting card. The visiting card also contained the following description “Consultant’s Kolkata Office, 43/46, Garden Reach Road, Kolkata-700 024.” 11. For the above reasons, the AO in his draft assessment order under section 143(3), read with section 144C of the Act, dated 30 December 2009, came to the conclusion that the Assessee had a PE in India within the meaning of Article 5 (1) as well as Article 5 (2) of the India-UK DTAA and that the consultancy services to be rendered are effectively connected with the PE in India and also that the whole of the income arising out of the said consultancy services, are attributable to the PE in India. The AO further held that it is because of the belief/ presumption of the existence of "effective connection" that the Assessee opted for taxation under Article 7 of the DTAA. Also, the tax liability borne by GRSE is an admission of the fact that the entire receipts are liable to be taxed in India. Now, suddenly a change in stand is not acceptable. 'Principle of consistency' is an important principle of accountancy which should be followed. The final conclusion of the AO was:

“f)…there exists a PE in the case of the Assessee in India within the meaning of Article 5 of the Indo-UK DTAA. The consideration for consultancy services provided by the Assessee to GRSE is in the nature of “Fees for Technical Services”(FTS) within the meaning of Article 13 of Indo-UK DTAA. Since the FTS is arising in India and the Assessee is carrying on business in India through a PE situated in India and also since these services are “effectively connected” with the PE in India, therefore the consideration for these services are liable to tax in India under Article 7 of the Indo-UK DTAA by virtue of the provisions of Article 13(6) of the Indo-UK DTAA.”

13 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 12. The AO thereafter disallowed consultancy charges paid to sub-consultants in India u/s.40(a)(ia) of the Act and payments made to Appledore, UK u/s.40(a)(i) of the Act. The AO also disallowed expenditure to the extent of Rs.30,09,179 on the ground that the same relates to period prior to the previous year relevant to AY 2007-08. The AO also held that since taxes of the Assessee were to be borne by GRSE, the receipts of the Assessee from GRSE have to be grossed up. The AO ultimately determined the total income of the Assesssee as follows:

“8. Subject to the above, the total income of the Assessee is computed as under: Net profit as per P/L. Account 1,79,79,386 Add: Disallowance of expenses as discussed in para-6.1 30,09,179 Disallowance of expenses u/s.40(a)(ia) 28,58,996 Disallowance u/s.40(a)(i) 31,36,682 Difference on account of “grossing up” 37,33,151 3,07,17,394 Less: Losses brought forward from AY 2006-07 22,40,274 Taxable Income 2,84,77,120 13. Aggrieved by the proposal as contained in the draft assessment order, the Assessee filed objections to the proposed assessment as contained in the draft assessment order before the Disputes Resolution Panel (DRP) in accordance with the provisions of Sec.144C of the Act. The following issues were raised by the Assessee before the DRP.

14 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 Preparation of a macro level concept plan for the modernization of the entire ship building yard including the installation of a Ship Lift, considering a new Modular shop and improvements to the module building, module handling and transporting, pre-outfitting, material planning and control and all other practices in order to achieve the level and quality of production, desired by GRSE. Phase - II Preparation of detailed designs and construction drawings for the facilities finalized and approved by GRSE during the Phase - I; Study and Review all necessary data made available by GRSE during Phase - I to ensure best possible configuration/ solution to the Ship Lift system; Preparation of detailed Block Cost estimates for the entire Project and the detailed item wise cost estimate for the different packages envisaged for the modernization; Detailed requirements of Services/ Facilities, estimates of power requirements, provision of Sub- station, Compressed Air etc; Preparation of draft tender documents for the various packages; and Obtaining timely approvals from various statutory bodies. During the previous year relevant to AY 2007-08, the Assessee was involved in the activities pertaining to this phase. Phase - III Issuance of the detailed working drawings to the Contractors (separate from the Assessee), as independently selected by GRSE, for the necessary execution of the work, as required, for the construction. It was submitted that the above being the scope of work to be carried out by the Assessee for GRSE, it can be said that the Contract between the Assessee and GRSE was a composite contract, with different severable parts - services that were rendered Offshore, in the UK, by the Assessee concerned and services that were rendered Onshore, by the independent Indian sub-consultants, appointed by the Assessee.

15 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 services (which was rendered from the UK office of the Assessee) would be in USD, the INR part was to accommodate the payments to be made to the Indian sub- consultants, by the Assessee. It was pointed out that during the relevant previous year, the Assessee had to visit India, for the purposes of the collection of data and information, which formed the basis of the reports generated in the UK. It was submitted that a look at the activities required to be performed by the Assessee in terms of Phases - I and II of the Contract (as detailed above) would clearly reveal the said requirement of collection of information in India. It was pointed out that even the requirement of data collection has been agreed by the Ld. AO in his impugned order at Page 18. It was submitted that the information once collected, was sent to the head office of the Assessee, for necessary analysis and subsequent churning of the Concept Plan and Drawings etc. It was reiterated that for Phase - I and Il, no service had been rendered in India and the limited number of visits that was made by the Assessee to the GRSE site, was only for the collection of information, which was necessary for the purposes of the reports and the drawings, which were prepared and serviced from the UK. It was contended by the Assessee that the mere collection of the information in India, can, by no stretch of imagination be called as rendering of services vis-a-vis the scope of the work that the Assessee needed to perform, under the Contract.

"3. The term "permanent establishment" shall not be deemed to include: (a)………………………. (b) . ……………………… (c) . ……………………..

16 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise; (e) ……………….." It was argued that the Assessee’s insignificant presence in India during the previous year was merely for the purpose of collection of information by the Assessee for execution of the GRSE contract and doing so would not constitute a PE in India.

The Assessee submitted that it had rendered services and raised invoices on GRSE separately, for services rendered outside India and services rendered in India. The local services had been rendered only through its independent Indian, sub-contractors and foreign services were rendered partly by its independent foreign sub-contractor

17 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 i.e. Appledore and partly by the Assessee, from its head office in the UK. The Assessee further contended that the contract envisages a divisible contract having two parts - one for rendering services from India and the other for offshore services to be rendered from the UK. The Assessee contended that the offshore service rendered from outside India, is not liable to tax in India. It was further submitted before the Id. AO that when there is a tax treaty between India and the country of the non-resident, there is no question of invoking section 9 of the Act. Article 13 of the DTAA deals with incomes under the head 'Royalties and Fees for Technical Services'. Even in relation to income of Gifford, a resident of the UK, Article 13 of the DTAA would not help the revenue authorities to bring it in the tax net, as services rendered outside India would have nothing to do with the PE in India. It was argued that thus, if any services have been rendered by the head office of Gifford, such services cannot be brought to tax in India only because the head office is connected with its PE. If income arises without any activity of the PE, even under the DTAA, the taxation liability in respect of the said overseas services would not arise in India. This is because of the two reasons: 1) offshore services are rendered outside India where PE would have no role to play in respect thereto and in earning the said income and 2) the entire services having been rendered outside India, the income arising there from cannot be attributable to the PE so as to bring it within the charge of tax. The distinction between existence of a business connection and the income accruing or arising out of such business connection is clear and explicit. It was pointed out that in the present case, the PE's non-involvement, in this transaction, excludes it from being a part of the cause of income and thus, there is no business connection. The Assessee relied on the following decisions wherein the contentions referred to above have been accepted:

• Ishikawajima Harima Heavy Industries Ltd. vs. CIT 288 ITR 408 (SC)

• CIT vs. Siemens Aktiongesellschaft (2009) 310 ITR 320 BOM)

• Mahindra vs. DCIT (2009-TIOL-255-ITAT-MUM-SB)

• Reymonds Ltd. vs. DCIT (2003) 86ITD 791, ITAT BOM

18 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 • Intertek Testing Services India Pvt. Ltd. (2008) 307 ITR 418AAR It was again reiterated that during the relevant AY, the Assessee was involved in Phase-II of the contract with GRSE involving the preparation of the engineering drawings and report. The said services were performed and carried out entirely from the UK with some support obtained from the independent Indian sub-consultants who were paid in INR from Rupee component of the contact value.

"The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent, establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enter price may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment.” The Assessee in this regard drew attention of the DRP to the commentary of Klaus Vogel on Double Taxation Conventions, wherein it has been stated as under:

"As regards the profits made by the enterprise in the State of the permanent establishment, a distinction must always be made between those profits which result from the permanent establishment's activities and those made, without any interposition of the permanent establishment, by the head office or any other part of the enterprise ." It was submitted that the profits of the Assessee may be taxed in India, only to the extent of so much of the profit as is directly or indirectly attributable to the PE in India.

19 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 following observations of the Hon’ble Supreme Court in this regard were brought to the notice of the DRP.

"In cases such as this, where different severable parts of the composite contract is performed in different places, the principle of apportionment can be applied, to determine which fiscal jurisdiction, can tax that particular part of the transaction …… ………………………. ………………………. That, in relation to offshore services, section 9(I)(vii)(c) required two conditions to be met: to be taxable in India the services which were the source of the income sought to be taxed had to be rendered in India as well as utilised in India. In this case, both these conditions were not satisfied simultaneously, thereby excluding the income from the ambit of taxation in India. Thus, for a non-resident to be taxed on income for services, such a service had to be rendered in India, and had to be part of a business or profession carried on by such person in India. The appellants had provided services to persons resident in India, and through they had been used here, they had not been rendered in India . ……………………. ………………………… ..... However, even in relation to such income, the provisions of Article 7 of the DTAA would be applicable, as services rendered outside India would have nothing to do with permanent establishment in India. Thus if any services have been rendered by the head office of Appellant outside India, only because they were connected with permanent establishment. even in relation thereto, principle of apportionment shall apply.” Reliance was also placed on the decision in the case of Clifford Chance vs. DCIT (2008) 318 ITR 237 (Bom.) wherein the transaction entered into by the assessee partly took place in one territory and partly in another. The Hon'ble High Court of Bombay referred to the decision in the case of Ishikawajma Harima (supra). The relevant extract is stated as under:

"In the above judgement, Apex Court observed that "Section 9(J)(vii) of the Act must be read with section 5 thereof, which takes within its purview the territorial nexus on the basis whereof tax is required to be levied, namely, (a) resident; and (b) receipt of accrual of income. According to Apex Court, the global income of a resident although is subjected to tax, the global income of a non-resident may not be. The answer to the question would depend upon the nature of the contract and the provisions of the DT A. What is relevant is receipt or accrual of income, as would be evident from a plain reading of section 5(2) of the Act subject to the compliance of 90 days rule. "

20 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 22. It was contended that in view of the above judicial pronouncement, it can be said that in case any part of the services are being rendered outside India then income should be apportioned so that the income from the services rendered outside India is not taxed in India. It was pointed out that the decision of the Hon’ble Bombay High Court in the case of Clifford Chance (supra) was rendered post the amendment of section 9(1)(vii)(c) by the Finance Act, 2010 w..e.f. 1-6-1976, whereby the following explanation was added to Sec.9 of the Act.

“Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,— (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India.” It was argued that the Hon'ble Bombay High Court observed that whatever is payable by a resident to a non- resident by way of fees for services would not always come within the purview of section 9(1 )(vii) of the Act. It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax. It also laid down that section 9(1)(vii)(c) envisages the fulfilment of two conditions: services which are source of income sought to be taxed in India must be (a) utilised in India, and (b) rendered in India. Attention was also drawn to the decision in the case of Jindal Thermal Power Co. Ltd. vs. (2009) 225 CTR 220 (Kar) wherein the Hon'ble Karnataka High Court relying on the decision in the case of Ishikawajma Harima (supra) held that the Explanation incorporated in Section 9 (By Finance Act, 2010) suggests that criterion of residence, place of business or business connection in India has been done away with for fastening the tax liability, but the criteria of rendering service in India and the utilisation of the service in India, as laid down by the Supreme Court, remains untouched and unaffected.

21 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 accounted for. Such offshore services rendered from outside India are independent and not connected with the activities carried on in India. It was thus submitted that consideration received in USD in respect of the offshore services, is not liable to tax in India:

(i) as the said service has not been rendered in India; and

(ii) rendering of the said services is not attributable to a PE, even if one such, is alleged to exist in India;

Without prejudice to the above objections, the Assessee submitted that the tax liability of the Assessee cannot exceed the amount of tax chargeable under section 115A of the Act on gross receipts by way of 'Fees for technical services' ('FTS') as provisions of section 44DA are not applicable from the facts and circumstances of the case. In this regard, the relevant provisions of section 115A of the Act, needs to be looked into. The same reads as under:-

"115A(I) Where the total income of- (a) .......... (b) a non-resident (not being a company) or a foreign company, includes any income by way of royalty or fees for technical services other than income referred to in sub-section (1) of section 44DAJ received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31 st day of March, 1976, and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy, then, subject to the provisions of sub-sections (lA) and (2), the income-tax payable shall be the aggregate of,- (A) ............ (AA) .........

(B) The amount of income-tax calculated on the income by way of fees for technical services, if any, included in the total income, at the rate of thirty per cent if such fees for technical services are received in pursuance of an agreement made on or before the 31 st day of May, 1997 and twenty per

22 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 cent where such fees for technical services are received in pursuance of an agreement made after the 31st day of May, 1997 but before the 1st day of June, 2005 ; and ... "

The submission of the Assessee in this regard was that from perusal of the above provisions it can be seen that income by way of FTS received by a non- resident would be taxed at 20% on gross basis only if all the following conditions are satisfied:- i) the income is received from Government or an Indian concern in pursuance of an agreement; ii) Such agreement was made after 31st day of May, 1997 but before the 1st day of June, 2005; and iii) such income does not fall within the purview of sub-section (1) of section 44DA of the Act.

23 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 "(iiia) "permanent establishment", referred to in clause (iii), includes a fixed place of business through which the business of the enterprise is wholly or partly carried on;" It was claimed that in view of the above provisions it would be safe to conclude that if it is established that the Assessee does not have a PE in India in terms of section 92F(iiia) of the Act, the payments received from GRSE would not fall within the purview of section 44DA of the Act. As such, the Assessee would be entitled to the benefit of the provisions of section 115A of the Act and be taxed at 20% of the Gross receipts.

24 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 27. In view of the above, it was contended that the Assessee did not haveg a PE in India in terms of section 92F(iiia) of the Act and accordingly tax ought to have been levied at 20% on the Gross receipt of the Assessee under the provisions of section 115A of the Act. This contention of the Assessee was however, without prejudice to the contention that the Assessee does not have a PE in India in terms of the DTAA and its entire income is not chargeable to tax.

On the above issue, the Assessee submitted that the action of the AO in not accepting the claim of the Assessee that receipts from GRSE was chargeable to tax in India for the reason that the said claim was made without filing a revised return of income and contrary to Assessee’s own claim in the return of income already filed that the receipts in question are chargeable to tax, was not proper. In coming to the above conclusion the AO had placed reliance on the decision of the Hon’ble Supreme Court in the case of Goetz (India) Ltd. (supra) wherein it was held that claim made in the course of assessment proceedings without filing a revised return of income, cannot be entertained by the AO. In this regard, the Assessee placed reliance on the decision in the case of Chicago Pneumatic India Ltd. vs. DCIT 15 SOT 252 (2007) (ITAT) (Del). The Delhi ITAT, in the context of allow ability of new claims during the assessment proceedings without having recourse to a revised return, has, placing reliance on principle embedded in Article 265 of Indian constitution (No tax can be collected except by the authority of law), CBDT Circular No. 14 dated 11 April 1955 and explaining the ratio of the Goetz (india) Ltd. (supra) ruling, categorically held that assessee has the right to make new claims during assessment proceedings without recourse to a revised return. The Tribunal dealt with the decision of the Hon’ble Supreme Court in the case of Goetz (India) Ltd., (supra) in the following manner:

“….As far as the decision of the Hon'ble Apex Court in the case of Goetze (India) Ltd. (supra) is concerned, there is no dispute that the same is binding on everybody concerned. In the said decision, the Hon'ble Apex Court has also ruled that Appellate Tribunal may adjudicate the issue if a claim is made by any party subject to satisfaction of prescribed rules, hence, even the Hon'ble Apex Court has not barred the assessee raise it's legal claim before Appellate Authorities.

25 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 However, such process would result into undue hardships, delay and multiplicity of proceedings. The Hon'ble Apex Court, on numerous occasions has laid the proposition that the Assessing Authorities are bound to compute the correct income only and collect only legitimate tax, hence, merely for a procedural lapse or technicalities, in our opinion, the assessee should not be compelled to pay more tax than what is due from him. Therefore, this situation has necessarily to be looked upon from the angle of duties of Assessing Authorities as stated earlier, CEDT is the Apex body for tax administration and it can also issue directions which are for the benefit of the assessee's though such directions may not be inconsonance with the provisions of law, hence, if a circular is now issued directing the assessing authorities to grant reliefs/refunds while completing the assessment proceedings, even though such circular may be at variance with the law, as pronounced by the Hon'ble Supreme Court, but the same would be binding on the subordinate income-tax authorities. In our opinion, therefore, circulars of same nature which have been already issued would not become irrelevant or can be ignored. Admittedly, the circular issued in 1995 has not been withdrawn, hence, it has got binding force on the subordinate authorities even as on date. Accordingly, we hold that the Assessing Officer is bound to assess the correct income and for this purpose, the Assessing Officer may grant reliefs/ refunds suo motu or can do so on being pointed out by the assessee in the course of assessment proceedings for which assessee has not filed revised return, although, as per law, the assessee is required to file the revised return ..... " Further, reliance was also placed on the decision in the case CIT vs Ramco International 221 CTR 491 (2008) HC (P&H) wherein the Punjab and Haryana High Court, distinguished the judgement of Goetze allowed the claim of the Assessee which was made in course of the assessment proceedings and not by filing revised return.

26 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 -Preparation of concept plan, preliminary project report (PPR) and detailed project report (DPR). -Design, detailed engineering, drawing and tender documents for works contract. -Project management and construction supervision services. The scope of consultancy services was to be rendered partly from the UK. and partly from India. For the purpose of rendering services from the UK, the Assessee had obtained certain services from Appledore, an independent sub-consultant, which is also based out of UK. The services in India were rendered by local independent sub- consultants, appointed by the Assessee. Appledore was required to render services towards preparation of concept plan, preliminary project report and detailed project report, and render evaluation. All these services were rendered by Appledore in the UK and the consideration of Rs.l0,637,462 for rendering such services was paid by the head office of the Assessee from their Sterling account, maintained in the UK. No part of the Appledore's fees were paid in India. No taxes were deducted by the Assessee on the remittances made to Appledore. In course of the assessment proceedings, the ld. AO requested the Assessee to explain as to why the payment, made by the head office of Gifford, without deduction of tax, should not be disallowed u/s 40(a)(i) of the Act. In reply, the Assessee in course of the hearing placed the following arguments:- • Payments made by the Assessee to Appledore was not taxable in India in terms of section 9(1)(vii)(c) of the Act; • Without prejudice to the above, payments made by the Assessee to Appledore was not FTS in terms of Article 13(4)( c) of the DT AA and accordingly was not taxable; • As such, tax under section 195 of the Act was not required to be deducted by the Assessee, on payments made to Appledore.

27 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 thereby the distinction between Indian and foreign operations and the apportionment of income of the operation shall stand obliterated. Appledore, being a non-resident in terms of section 5(2) of the Act, would be chargeable to tax in India only in the event of income accrues or arises in India or is deemed to accrue or arise in India or income is received or is deemed to be received in India and not otherwise. Explanation I to section 5(2) provides that income accruing or arising outside India, shall not be deemed arising in India, within the meaning of this section, by reason only of the fact that it has been taken into account in a Balance sheet prepared in India. Therefore, only by reasons of the fact that the payment was made to Appledore by the head office of Gifford in the UK and that such payment is taken into account in the balance sheet of PE in India, it shall not be automatically considered that such income of Appledore is income received in India. Although the PE is required to carry out certain activities in India, the consideration for offshore services rendered by Appledore in the UK, which is not attributable to the work of the PE, should not be considered as income deemed to accrue or arise in India by virtue of section 9(l)(vii)(c) of the Act.

28 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 Whereas a resident would come within the purview of section 9(1)(vii) of the Act, a non-resident would not, as services of a non-resident to a resident utilised in India may not have much relevance in determining whether the income of the non-resident accrues or arises in India. It must have a direct live link between the services rendered in India. When such a link is established, the same may again be subjected to any relief under the tax treaty. A distinction may be made between rendition of services and utilisation thereof. Section 9(1 )(vii)( c) clearly states " .....". where the fees are payable in respect of services utilised in a business or provision carried on by such person in India ......." It is evident that section 9(1)( vii) read in its plain, requires the fulfilment of two conditions: services, which are source of income sought to be taxed in India must be (1) utilised in India and (2) rendered in India. In the present case, both these conditions have not been satisfied simultaneously.

29 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 where such amount is part of commercial profits it is only the home state which will have the jurisdiction to assess the same following the decision in the case of Ishikawajima Harima Heavy Industries Ltd. It was finally decided that in view of the special provision under the Indo-German Agreement the amendment under the domestic law can have no effect. Therefore, the decision of the Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. is still a valid law and the said decision is squarely applicable to the subject case.

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this Article is received; or

(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received: or

(c) make available technical knowledge, experience, skill, know-how or processes, or consist of development and transfer of a technical plan or technical design.

The definition of FTS has two parts. The first part deals with rendering of any technical or consultancy services which are ancillary and subsidiary to the application or enjoyment of the right to use property for which payment is received as "Royalty" as defined in paragraph 3(a) & 3(b) of Article 13 of the DT AA. The contract with GRSE envisaged only for rendering consultancy services for modernisation of the shipyard project and did not involve transfer of any right to use property for which royalties are payable. Hence, there is no application of the first part of the definition in the subject case. The second part of the definition relates to the fees for rendering any technical or consultancy services which are made available to the Assessee.

30 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 35. As far as applicability of Clause ( c ) of Article 13(4) of the Indo-UK DTAA is concerned, the Assessee submitted that the said clause contemplates that fees paid should be for making available of the technical knowledge, experience, skill, etc. In other words, the technical knowledge, experience, skill, etc. must be made available to the Assessee, so as to be covered within its scope, and mere providing of such services, without making them available to the Assessee, shall not serve the purpose and hence, will be outside the ambit of the Article. "Rendering of any technical or consultancy service" is followed by "which made available technical knowledge, experience, skill and know-how". In this context it becomes imperative to understand the meaning of the expression "make available" as used in this article. It was submitted that the meaning of the expression "make available" has been aptly considered in the case of Intertek Testing Services India P. Ltd. [(2008) 307 ITR 418 (AAR) as under:-

"Now, we shall proceed to analyse further clause (c) of article 13(4). Rendering of service and making use of service go together. They are two sides of the same coin. But clause (c) of article 13 (4) does not stop at that. 1t carves out a qualification thereto by employing the words "which make available technical experience, skill, know-how or processes". Rendering technical or consultancy service is followed by a relative pronoun "which" and it has the effect of qualifying the services. That means, the technical or consultancy service rendered should be of such a nature that "make available" to the recipient technical knowledge, know-how and the like. The service should be aimed at end result in transmitting the technical knowledge, etc., so that the payer of service could derive an enduring benefit and utilize the knowledge or know-how in future on his own without the aid of the service provider. By making available the technical skill or know-how, the recipient of the service will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider. 1n other words, to fit into the terminology "make available", the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. The services offered may be the product of intense technological effort and a lot of technical knowledge and experience of the service provider would have gone into it. But that is not enough to all within the description of services which make available the technical knowledge, etc. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in future without depending on the provider. Taking some examples, the training given to a commercial aircraft pilot or training the staff in particular skills such as software development would fall

31 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 within the ambit of the said expression in clause (c). Supposing a prescription and advice is given by the doctor after examining the patient and going through the clinical reports. The service rendered by the doctor cannot be said to have made available to the patient, the knowledge and expertise possessed by the doctor. On the other hand, if the same doctor teaches or trains students on the aspects of diagnosis or techniques of surgery. that will amount to making available the technical knowledge and experience of the doctor. “

It was pointed out that similar view has been taken in the case of Mahindra & Mahindra vs. DCIT (2009-TIOL-255- ITAT-MUM-SR) and Reymonds Ltd. vs. DCIT (2003) 86ITD 791, ITAT BOM, wherein it was held that mere rendering of service is not enough as it requires that such rendering of service should make available technical knowledge, skill, etc. to the receiver of service, who can use such knowledge in future for the business without the aid of service provider and thus, there should be some permanence of the service provided.

32 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 invoices, pertained to work done during the period prior to the relevant previous year relating to AY 2008-09. He therefore disallowed the claim of the Assessee for deduction of the following expenses as prior period expenses: Invoice raised Amount (Rs.) Description of Period of work Date of invoice by work TKRA 17,13,499 Job GRSE 10.01.05 to 22.06.07 Modernisation 18.08.05 IMC 12,95,680 Infructuous 12.02.05 to 05.06.07 components 30.06.05 and after

As per the contract between the Assessee and GRSE, the consideration that was being paid to the Assessee by GRSE in USD, was to be paid net of taxes. Accordingly GRSE was grossing up the amount of consideration in USD and deducting tax on the same at the rate of 15%, which was borne by GRSE. During the year ended 31 March 2007, the net consideration (net of TDS borne by GRSE) received in USD (converted

33 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 into INR) amounted to Rs. 24.393,589. It was submitted to the Id. AO that the 'grossing up' was done as per the provisions of section 195A of the Act, for the purpose of computation of TDS liability and that there is no need to recognize such notional income as there is no provision either in section 2(24) or in section 28 of the Act for deeming the same as income/profits and gains from business. The Id. AO, in his impugned order, expressed the view that the Assessee was deriving benefit within the meaning of section 28(iv) of the Act by way of crediting the net consideration in the audited accounts and claiming the credit of TDS on the 'grossed up' amount. The certificates of GRSE totalled to Rs. 28,126,740 whereas the Assessee has accounted for only Rs. 24,393,588 in the audited profit and loss accounts. Therefore the difference of Rs. 37,33,151 was added back to the total income of the Assessee. The limited prayer of the Assessee before DRP was to direct the Id. AO be directed to give consequential relief to the Assessee with regard to grossing up of the income, once the first grounds of objection is decided in favour of the Assessee.

“5. Ground No. 1 - Permanent Establishment of the Assessee in India:

34 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 (a) On perusal of the Contract of Consultancy Services for Modernization of Garden Reach Shipyard between Gifford and GRSE, given at pages 50-77 of paper book - I, (herein after referred to as "the Contract"), it is noticed that :- The Contract came into force w.e.f. 12.04.2004. The works Contract was to be completed in three stages. There was a single Contract for modernization of Garden Reach Shipyard and all the three stages are so interconnected that unless all the three stages are completed, the Works Contract cannot be considered completed for the beneficial use by GRSE. The consultancy fee for the whole Contract was agreed upon to be paid as a lump sum amount in USD and lNR as per the convenience of the assessee. There is no mention in the Contract of the name of the foreign sub-consultant for payment in the foreign currency and the nature of consultancy services to be rendered by the foreign sub-consultant. GRSE was to make payment or remit the consideration amount on the basis of bills to be raised by the assessee as consultant in the bank account to be specified by the consultant. The consultant was responsible for technical soundness of the services rendered to GRSE and in the event of any deficiency in the services, the consultant was required to re-do such services for which GRSE was not required to pay any additional compensation. In Appendix-1.3, the personnel employed by the consultant in all the three stages included foreign staff of Gifford and its associate enterprise - 'Appledore', In Appendix-1.4, it is mentioned that GRSE would provide to the consultant i.e. the assessee air-conditioned office space of about 50 sq. mt. inside the Garden Reach Shipyard with a telephone and fax facility for the duration of the Contract and the consultant had to bear the charges for local, STD & ISD calls, faxes & e-mail for all the three stages of the project. These facts as per the Contract clearly indicate that the assessee maintained permanent office in India for rendering consultancy services to GRSE. Article-5 of DTAA between India & the UK defines the term 'permanent establishment' to include 'an office'. The assessee has maintained office at the place of GRSE in India, therefore, the assessee had permanent establishment in India in the year under consideration for rendering consultancy for all the stages. The direct enquiry made by the AO revealed that one Shri Mitra is Resident Engineer of Gifford and address printed on his visiting card is - "Consultant's Kolkata Office, 43/46, Garden Reach Road, Kolkata- 700024". Moreover, the assessee filed its returns for the year under consideration as well as for earlier years as PE in India and accounted for the entire consultancy fees received from GRSE both in foreign currency as well as in rupees and also claimed deduction of all the expenses. The assessee has not disputed the taxability of consultancy fees received in rupees as PE in India and disputed the taxability of consultancy fees received in USD only on the ground that there was no PE in India. The entire GRSE project was / is one and the same and the mutually agreed lump sum amount of consideration related to the said project. Therefore, the assessee was not entitled to take two different stands as regards the existence of PE in India, one for receipt in USD and another for receipt in INR. In view of the aforesaid facts and circumstances of the case, the Panel is of the considered view that

35 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 the AO was justified in holding that the assessee had PE in India for the entire amount of consultancy fees received from GRSE. b) In view of the discussions at (a) above, the Panel is of the considered view that the AO was justified in holding that the income earned by the assessee in USD for execution of the Contract was attributable to its PE in India and hence taxable in India. c) In view of the Panel's view as expressed above that the assessee had PE in India for the entire amount of consultancy fee received from GRSE and on the facts and circumstances of the assessee's case; it is concluded by the Panel that the provisions of Section 44DA are applicable to the assessee. As such, the gross receipt by way of fees for technical services was inc1udible in the computation of business income / profits of the PE in India. d) The Panel has already expressed its view that the assessee had PE in India for the entire amount of consultancy fee received from GRSE and the income earned by it in USD was connected with its PE in India. The assessee filed the return of income as PE in India and disclosed the entire income received in USD & in INR. In course of the assessment proceedings, the assessee made a fresh claim that it did not have any PE in India, and without prejudice to this claim, the income earned by it in USD was not connected to the PE in India. The AO besides dealing with the assessee's fresh claims on merits held that the assessee's fresh claims without filing a revised return could not be entertained in view of the decision of the Apex Court in the case of Goetze (I) Ltd. vs. CIT, 284 ITR 323. The assessee contested the AO's findings relying on the decisions in the case of Chicago Pneumatic India Ltd. vs. DCIT 15 SOT 252 (2007) (ITAT) (Del) and in the case of CIT vs. Ramco International 221 CTR 491 (2008) HC (P & H). The ITAT Delhi in the above mentioned decision considered the decision of the Apex Court (supra) and held that the revised claim u/s.80HH & 801 should be allowed in view of the CBDT's Circular F. No. 81/27/65-ITCB), dated 18th May, 1965. The facts of the cited case law were that the assessee made claim for deductions u/s.80HH & 801 in the original return and later filed a revised return in which the claim of deductions u/s.80HH & 801 was not revised; however, the assessee made revised claim of said deductions by filing a revised working during the assessment proceedings. It is evident that the claim of deductions u/s.80HH & 801 was not a fresh claim. The above mentioned Board's Circular permits the AO to allow any deduction, although not claimed in the return, if the same is allowable being a patent mistake of fact or law. This Circular does not permit the AO to allow any fresh or new claim made by the assessee during the assessment proceeding, if such claim is debatable, contrary to the facts on record and assessee's own treatment given in earlier years and there being two possible views on the issue involved in the claim. In the assessee's case, the fresh claims as above were contrary to . the assessee's stand in the earlier years and were not in the nature of any deduction which could be allowable being a patent and undisputed

36 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 mistake in the computation of income. In fact, the assessee disputed the taxability of income / receipt in USD under charging Sections of the Act and also the basic issue of its status as PE. Therefore, the decision cited by the assessee has no relevance to the facts of the assessee's case. The ratio of the decision of the Apex Court in the case of Goetze (l) Ltd. vs. CIT, 284 ITR 323 squarely applied to the assessee. In another cited decision, the Punjab & Haryana High Court directed to allow deduction u/s.80IB stating that it was not a fresh claim based on the documents and form No. lOCCB filed by the assessee in course of the assessment proceedings. The facts of this case indicate that the assessee's claim was a patent and undisputed claim allowable as per law. The ratio of this decision also does not support the assessee's contention. In view of the above discussions, the Panel is of the considered view that the AO rightly held that the fresh claims made by the assessee without filing a revised return could not be entertained in the light of the decision of Apex Court in the case of Goetze (I) Ltd. vs. CIT, 284 ITR 323.

a) As per the Contract, the assessee as a consultant was required to render consultancy services for GRSE project directly and / or through sub-consultants appointed by it. Further, as per the Contract the assessee had to receive the consultancy fee from GRSE. The appointment of M/s. Appledore International Ltd. ('Appledore') by the assessee was its choice and not the choice of GRSE as per the Contract. GRSE made payment directly to the consultant and not to Appledore. The head office of Gifford in UK made payment to Appledore at UK for the services provided by it to Gifford in connection with GRSE project located in India. The entire amount of consultancy fee was included in the accounts of PE and expenses by way of payment to Appledore were claimed in the accounts of PE. The place of services rendered by Appledore and also the place of payment made to Appledore were immaterial as long as the source of income was in India and the expenses were claimed against the receipts arising from the said source of income. Section 9 of the LT. Act, 1961 was amended by the Finance Act, 2010 w.e.f. 01.06.1976 by substituting the Explanation occurring after sub-Section 2 as under: "Explanation. - For the removal of doubts, it is hereby declared that for the purpose of this Section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-Section (1) and shall be included in the total income of the non- resident, whether or not, - (i) the non-resident has residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India." In view of the above stated amendment, the income by way of fees for technical services payable by a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from

37 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 any source in India, was deemed to accrue or arise in India, whether or not the non- resident had PE in India and whether or not the non-resident rendered services in India. Therefore, the AO was justified in holding that the payment made by the assessee to Appledore was deemed to have accrued or arisen in India. b) The aforesaid amendment to Section 9 of the LT. Act, 1961 by the Finance Act, 2010 has overcome the effect of the decision of the Supreme Court in the case of Ishikawajma Harima Heavy Industries Ltd. vs. CIT, 288 ITR 408 as well as the decision of the Bombay High Court in the case of CIT vs. Siemens Aktiongesellschaft (2009) 310 ITR 320. Therefore, the AO was justified in law by holding that the principles laid down in the above mentioned decisions did not apply to the assessee. c) The 'sub-consultancy' agreement of the assessee with Appledore was for 'Design Consultancy Services'. The items of 'sub-consultancy' services as listed in Schedule - 1 of the said agreement included Scope of Sub-Consultancy Services for Shipyard Modernization, Conceptual and Outline Design, Technical Specifications for Plant and Equipment, Review and Comment on Prequalification Documents, Review and Comment on Bidders Proposal Tender Documents, Review and Comment on Quality Manuals and Method Statements of Contractors. Considering the nature of the GRSE project one; say that the entire consultancy services for the project was in the nature of technical services involving technical knowledge, experience and skills. It is well known fact that the architecture is a branch of Engineering and preparation and submission of 'drawings' or 'design' by the Architect is in the nature of technical services. Therefore, the Appledore had also provided technical services by providing the design or review report as per the items of sub- consultancy services specified in the 'sub-consultancy agreement'. Therefore, the AO was justified in bolding that the payment made by the assessee to Appledore was for transfer of technical plan or technical design falling within the purview of FTS in terms of the second limb to clause (c) of Article 13(4) of the DTAA. d) In view of the discussions at item (c) above, the payment made by the assessee to Appledore was covered by Article 13(4)(c) of the DTAA because the services rendered by Appledore were to 'make available' of technical knowledge, skill or expertise by Appledore. The ratio of the decision in the case of Intertek Testing Services India P. Ltd. (2008) 307 ITR 418 (AAR) supports the finding of the AO because the technical report and design prepared and submitted by Appledore were for the specific GRSE project and the same was to be utilized only by GRSE and no one else for the entire period until the completion of the said. project and even afterwards for diagnosing and correcting any fault in the project, if noticed at a later date. As such, the technical knowledge, design and experience of Appledore were made available to the assessee who in turn made the same available to GRSE for permanent

38 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 use in its project. Therefore, the AO was justified in holding that that payment made to Appledore was falling within the purview of Article 13(4)(c) of the DTAA, as there was 'make available' of technical knowledge, skill or expertise by Appledore. e) In view of the aforesaid amendment to Section 9 of the LT. Act, 1961 by the Finance Act, 2010, the payment made by the assessee to Appledore was chargeable to tax under the provisions of LT. Act, 1961 and accordingly the assessee was required to deduct tax at source u/s. 195 of the Act. If the assessee had a view that the said payment was not chargeable to tax under the Act, then it would have made an application under sub-Section - 2 of Section 195 of the Act to the Assessing Officer seeking an order to that effect. The assessee did not do so and took the plea of non taxability of the payment to Appledore only when the AO required the assessee to explain why the said payment claimed as expenditure should not be disallowed within the meaning of Section 40(a)(i) of the Act. Therefore, on the facts of the case and in law, the AO was justified in disallowing the payment made by the assessee to Appledore u/s.40(a)(i) of the Act on the ground of the assessee's failure to withhold the tax u/s. 195 of the Act. 7. Ground No .. 3 - Payment of consultancy charges: The consultancy charges amounting to Rs. 30,09,179 pertained for the work done during the period prior to the previous year relevant A.y. 2007-08. The said expenses did not crystallize during the previous year relevant A.Y. 2007- 08 because the invoices were raised in the previous year relevant to A.Y. 2008- 09. The AO was, therefore, justified in disallowing the above expenses. However, the assessee's request for allowing the deduction of the above expenses in A.Y. 2008-09 may be considered by the AO as per law. 8. Ground No. 4 - Grossing up: The assessee's contention that the 'grossing up' was done as per the provisions of Section 195A of the Act for the purpose of computation of TDS liability only and that there was no need to recognize such notional income either u]«. 2(24) or u/s. 28 of the Act has no merits. The AO was also not correct in stating that the assessee derived benefit within the meaning of Section 28(iv) of the Act by way of crediting the net consideration in the audited accounts and claiming the credit of TDS on the 'grossed up' amount, although the addition made by him was otherwise correct in law. The amount of tax deducted at source is deemed income of the payee (i.e. the assessee) as per the provisions of Section 198 of the Act. The payer (i.e. GRSE) of the income treated the amount of TDS as part of outgoing for the purpose of claiming deduction in its computation of total income. Section 199 states that the credit for TDS can be granted to the payee only when the income on which the tax at source has been deducted is included in the computation of total income of the payee. The

39 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 assessee (i.e. the payee) claimed credit of TDS on the payment made by GRSE (i.e. the payer) but did not include the full amount of receipt from GRSE. The treatment given by the assessee in its accounts as well as in computation of its total income was contrary to the provisions of Section 198 & 199 of the Act. In view of this legal position, the difference amount of Rs. 37,33,151 was correctly added by the AO to the total income of the assessee.” 42. The AO passed the fair order of assessment dated 21.9.2010 giving effect to the directions of the DRP. Aggrieved by the order of the AO dated 21.9.2010, the Assessee is in appeal before the Tribunal. The grounds of appeal raised by the Assessee reads thus:

“I. For that the Assessing Officer and Dispute Resolution Panel (hereinafter collectively referred to as the 'authorities below') erred in holding that that the Appellant is having a Permanent Establishment ('PE') in India in terms of Double Taxation Avoidance Agreement between India and United Kingdom of Great Britain and Northern Ireland ('DTAA');

II. Without prejudice to the Ground No.l, the Appellant states and submits that the authorities below erred in holding that, the entire amount received by the Appellant, including those in United States Dollar ('USD'), was attributable to its alleged PE in India and taxable under section 44DA of the Income-tax Act, 196 I ('the Act');

III. For that the authorities below erred in holding that any income not attributable to the activities performed in India cart be charged to tax in India as or for any reason alleged or at all;

IV. For that the authorities below erred in holding that the Appellant's claims that it did not have any PE in India or that the income earned in respect of the activities outside India in USD was not assessable in India, could not be entertained without filing a revised return:

V. For that the authorities below erred in disallowing Rs. 3,136,682 paid to M/s Appledore International Ltd. for works carried out by them in the United Kingdom on the ground that the same was taxable in India and tax was required to be deducted thereon under section 195 of the Act. The reasons given for such disallowance are not sustainable on facts and in law;

VI. For that the authorities below erred in disallowing consultancy charges of Rs. 3,009,179 paid by the Appellant and the reasons and

40 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 ground given therefore are erroneous and unsustainable on facts and in law;

VII. For that the authorities below erred in disallowing a sum of Rs.2,858,996 on the ground of delayed deposit of tax deducted at source;

VIII. For that the authorities below erred in holding that a sum of Rs.3,733, 151 was to be added to the income on account of grossing up;

IX. For that the authorities below erred in holding that any interest could be charged under section 234B and/ or 234C of the Act.

The Appellant craves leave to add, alter, substitute or modify the grounds taken herein.”

41 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 The services shall be performed at the premises of Garden Reach Shipyard, Kolkata and, where the location of a particular task is not so specified, at such locations, as GRSE may approve.”

42 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 47. During the previous year, the Assessee was involved in activities pertaining to phase-II of the project set out above. Clause 3.10 of the Agreement provides as follows: “3.10. DOCUMENTS PREPARED BY THE CONSULTANT TO BE THE PROPERTY OF GRSE All plans, drawings, specifications, designs, reports and other documents prepared by the Consultant in performing the Services shall become and remain the exclusive property of GRSE, and the Consultant shall =, not later than upon termination or expiration of this Contract, deliver all such documents to GRSE, together with a detailed inventory thereof. The Consultant shall not use the said documents for purposes unrelated to this Contract in any manner whatsoever.”

43 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 were spent in UK. The claim of the Assessee in this regard has not been disbelieved by the revenue authorities. The sub-consultant of the Assessee in UK, M/S.Appledore, was rendering services from UK, in connection with the work to be carried out by the Assessee for GRSE in India. Some of the sub-consultants employed by the Assessee were tax resident in India and had contributed to carrying out of the work by the Assessee. The services rendered by these consultants were from India. The description of the work as contained in the invoices raised carried out by the Assessee during the previous year both by the sub-consultants in India, by the Assessee from UK and sub-consultants from UK is given at pages 107 & 108 of the paper book. The same is also given as an annexure to this order for better appreciation of facts. The billing in USD are services claimed to have been rendered from UK and the billing in India rupee are for services rendered in India.

Sec.9(1) The following incomes shall be deemed to accrue or arise in India :—

(vii) income by way of fees for technical services payable by— (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : …… Explanation [ 2].—For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does

44 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 not include consideration for any construction , assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".

In view of the above stated amendment, the income by way of fees for technical services payable by a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India, was deemed to accrue or arise in India, whether or not the non- resident had PE in India and whether or not the non-resident rendered services in India. In view of the aforesaid amendment to Section 9 of the Act, by the Finance Act, 2010 the decision of the Supreme Court in the case of Ishikawajma Harima Heavy Industries Ltd. vs. CIT, 288 ITR 408 as well as the decision of the Bombay High Court in the case of CIT vs. Siemens Aktiongesellschaft (2009) 310 ITR 320, rendered in the context of the law that prevailed prior to the aforesaid statutory amendment will not be of any help to the plea of the Assessee. As far as the decision of the Hon’ble Special Bench ITAT in the case of Clifford Chance ITA Nos. 5034/Mum/2004, 5035/Mum/2004, 7095/Mum/2004, 3021/Mum/2005 AND 2060-61/Mum/2008) (Mumbai Special Bench) dated 14.5.2013, is concerned, it was a case where the non resident had a PE in India and therefore the provisions for consideration in that case was applicability of Sec.9(1)(i) of the Act regarding existence of business connection. The Special Bench noticed that the view taken by the Tribunal and the High Court in Clifford Chance (Supra) was that if Article 15 of the India-UK Treaty is not applicable because the stay of the partner exceeded 90 days, then the taxability of the income would be

45 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 determined by s. 9(1)(i) of the Act. It was held that for determination of income u/s 9(1)(i), the territorial nexus doctrine plays an important part and if the income arises out of operations in more than one jurisdiction, it would not be correct to contend that the entire income accrues or arises in each of the jurisdictions. The High Court applied the law laid down by the Supreme Court in the context of s. 9(1)(i) that if all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to the operations carried out in the taxable territories. The applicability of the Amendment referred to above viz., insertion of explanation to Sec.9(2) of the Act in the context of Sec.9(1)(vii), was not considered at all by the Tribunal.

(a) In the case of royalties within paragraph 3(a) of this Articles, and fees for technical services within paragraphs 4 (a) and (c) of this Article – (i) During the first five years for which this Convention has effect ; (aa) 15 per cent of the gross amount of such royalties or fees for technical services when the payer of the royalties or fees for technical services is the

46 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 Government of the first mentioned Contracting State or a political sub-division of that State, and (bb) 20 per cent of the gross amount of such royalties or fees for technical services in all other cases; and (ii) During subsequent years, 15 per cent of the gross amount of such royalties or fees for technical services; and (b) In the case of royalties within paragraph 3 (b) of this Article and fees for technical services defined in paragraph 4( b) of this Article, 10 per cent of the gross amount of such royalties and fees for technical services.

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received ; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received ; or (c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design.

47 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 incurred and the payments are borne by that permanent establishment or fixed base then the royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this Article is received; or

(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received: or

(c) make available technical knowledge, experience, skill, know-how or processes, or consist of development and transfer of a technical plan or technical design.

The definition of FTS has two parts. The first part deals with rendering of any technical or consultancy services which are ancillary and subsidiary to the application or enjoyment of the right to use property for which payment is received as "Royalty" as defined in paragraph 3(a) & 3(b) of Article 13 of the DT AA. It has been the contention of the Assessee that the contract with GRSE envisaged only for rendering consultancy services for modernisation of the shipyard project and did not involve transfer of any right to use property for which royalties are payable. Hence, there is no application of the first part of the definition in the subject case. The second part of the

48 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 definition relates to the fees for rendering any technical or consultancy services which are made available to the Assessee.

49 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 DTAA are also satisfied in the present case and therefore the source country (India) has a right to tax the fee in question in accordance with Article 13(2) of the DTAA but subject to the limitation of rate of tax as laid down in Article 13(2). The provisions of the Act in this regard are contained in Sec.115A of the Act. We will first deal with Article 13(6) of the DTAA before dealing with Sec.115A of the Act.

ARTICLE 5 PERMANENT ESTABLISHMENT

50 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" shall include especially : (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) premises used as a sales outlet or for receiving or soliciting orders; (g) a warehouse in relation to a person providing store facilities for others; (h) a mine, an oil or gas well, quarry on other place of extraction of natural resources; (i) an installation or structure used for the exploration or exploitation of natural resources; (j) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than six months, or where such project or supervisory activity, being incidental to the sale or 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; (k) the furnishing of services including managerial services, other than those taxable under Article 13 (Royalties and fees for technical services), within a Contracting State by an enterprise through employees or other personnel, but only if: (i)activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period; or (ii)services are performed within that State for an enterprise within the meaning of paragraph 1 of Article 10 (Associated enterprises) and continue for a period or periods aggregating more than 30 days within any twelve-month period: Provided that for the purposes of this paragraph 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 provides services or facilities in connection with, or supplies plant and machinery on hire used or to be used in, the prospecting for, or extraction or production of, mineral oils in that state.

51 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 3. . The term "permanent establishment" shall not be deemed to include: (a) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of advertising for the supply of information or for scientific research, being activities solely of a preparatory or auxiliary character in the trade of business of the enterprise. However, this provision shall not be applicable where the enterprise maintains any other fixed place of business in the other Contracting State for any purpose or purposes other than the purposes specified in this paragraph; (f) the maintenance of a fixed place of businesses solely for any combination of activities mentioned in sub-paragraphs (a) to (e) of the paragraph, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

(a) he has, and habitually exercises in that State, an authority to negotiate and enter into contracts for or on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; or (b) he habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise for or on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and the enterprises controlling, controlled by, or subject to the same common control, as that enterprise.

52 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 acting in the ordinary course of their business. However, if the activities of such an agent are carried out wholly or almost wholly for the enterprise (or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it or are subject to same common control) he shall not be considered to be an agent of an independent status for the purposes of this paragraph.

53 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 branch or fixed place of business in India. It was maintaining its books of accounts relating to the GRSE project and complying with taxation matters in India through its consultant, L.B.Jha & Co., Chartered Accountants. The technical analysis for the purpose of review report etc. was carried out by the Assessee only in the UK, based on such information received from India. As such in terms of Article 5(3)(d) of the DTAA. maintenance of a fixed place of business merely for collection of information, will not constitute a PE in India. It has also been the contention of the Assessee that the said office space provided to the Assessee, by GRSE at the project site, does not satisfy the 'Fixed place of business test' as the said premises was not used by the Assessee for its own business, but rather it was used only for the limited purposes of executing the contract undertaken for the customer, i.e. GRSE wherein in the contract between GRSE and the Assessee it has been mentioned that the employees of the Assessee at the GRSE premises would have to observe the rules and regulations of GRSE.

54 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 61. Reliance in this regard is placed on the explanation given in the Philip Baker's commentary on Treaties which states as under.- (Relevant extracts of Philips baker PB Page 348 to 350).

"A requirement of the fixed place of business. which is implicit in Article 5(1). is that the place of business must be at the disposal of the enterprise. The Commentary at paragraph -4 makes it clear that the premises need not be owned or even rented by the enterprise, provided they are at the disposal of the enterprise .... This has given rise to some difficulties where premises are made available to a foreign enterprise for the purposes of carrying out particular work on behalf of the owner of the premises in that situation, the space provided is not lit the disposal of the enterprise since it has no right to occupy the premises but is merely given access for the purposes of the project. “...... the fixed place of business need not be owned or leased by the foreign enterprise provided that it is at the disposal of the enterprise in the sense of having some right to use the premises for the purposes of its business and not solely for the purposes of the project undertaken on behalf of the owner of the premises." 62. Reference was made to the OECD guidelines which states as follows:

"Whilst no formal legal right to use a particular place is required for that place to constitute a permanent establishment, the mere presence of an enterprise at a particular location does not necessarily mean that that location is at the disposal of that enterprise. " 63. Attention was also drawn to the decision of the Special Bench ITAT in the case of Motorola Inc. 95 ITD 269 (Delhi-SB) wherein while dealing with the issue of 'Disposal Test' the Special Bench has held as under:

“Disposal would imply right to use the premises at any point of time for whatever purposes. In other words, there should be nothing to indicate that whenever any employee of assessee visited India, he could straightway walk into the office of Indian company and occupy a space or table. Merely because the Indian company allowed the visiting employees to use certain facilities occasionally, it cannot be said that the assessee had at its disposal, as a matter of right certain space which could be categorized as a fixed place of business. It was only the facility offered to the employees of Ericsson gratis that they could enter the office of ECI for the work of Ericsson. That did not create any right in the favour of the employees of Ericsson to enter the office of ECI as they pleased for the purpose of carrying out the activities of Ericsson. Nor did

55 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 it create any impression in the minds of the business customers of Ericsson in India that the office of ECI could be viewed as a projection of Ericsson 's activities in India". 64. Reliance was also placed on the decision of ITAT in case of Airlines Rotables Ltd vs. JDIT (2010) 131 TTJ 385 (Mum.) wherein it has been held that:

“..... The physical test. i.e., place of business test, requires that there should be a physical location at which the business is carried out. However. mere existence of a physical location is not enough. This location should also be at the disposal of the foreign enterprise and it must be used for the business of foreign enterprise as well. A place of business should be at the disposal of the foreign enterprise for the purpose of its own business activities. This place has to be owned, rented or otherwise at the disposal of the assessee, and a mere occasional factual use of place does not suffice. .... 13. It is thus necessary that, in order to give a positive finding about existence of the PE, not only that there should be a physical location through which the business enterprise is carried out, but also such a place should be at the disposal of the foreign enterprise in the sense that foreign enterprise should have some sort of a right to use the said physical location for its own business. .. As far as the consideration for use or right to use the replacement equipments are concerned, the location of such equipments so given for use or right to use cannot be viewed as a place of carrying on its business, which, as we understand. is limited to. qua that consignment. the consignment so having been given for use or right to use. The business with regard to that consignment is over when that consignment is given for standby purposes to the airline. It is thus clear that not only that the assessee did not have any right to use the location of consignment stock, such a location was also not used for the purposes of assessee's business. There is also no projection of the assessee at this physical location in the sense that the business of the assessee is not carried out, or sought to be carried out or even projected, from these locations. When the physical locations at which consignment stock is kept do not project the assessee, it cannot be said that these locations constitute PE of the assessee. " 65. In conclusion it was submitted that :- - Office premises provided by GRSE is only for the purposes of discharging services under the contract with GRSE. - It cannot be used for any other purposes or for carrying out any other business of the Assessee in India

56 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 - The Assessee cannot occupy such office premises in its own right and it does not satisfy the disposal test so as to make it a PE. - Even the use of the premises for providing services under the contract is restricted as the Assessee and its personnel had to observe GRSE's Rules and Regulations and require special permission to use such office premises beyond normal working hours. 66. The learned DR relied on the following circumstances to substantiate the conclusion of the Revenue authorities that there existed a PE of the Assessee in India viz., a) Article- 5 of the India-UK DTAA defines the term 'permanent establishment' to include 'an office' and in the instant case, the assessee has in fact maintained an office inside the Garden Reach Shipyard. In Appendix 1.4 of the Contract Document, it is mentioned that GRSE would provide to the assessee air-conditioned office space of about 50 sq.mt. inside the Garden Reach Shipyard with telephone and fax facility for the duration of the contract and the assessee had to bear the charges for local, STD & ISD calls, faxes & e-mails for all the three stages of the project. b) It the course of assessment proceedings, the A.O. sent his Inspector to the Garden Reach Shipyard to conduct enquiry and the enquiry revealed that one Shri Subrata Mitra was available there as Resident Engineer of "Gifford" and the address printed on his visiting card was - "Consultant's Kolkata Office, 43/46, Garden Reach Road, Kolkata- 700 024. c) According to Appendix 1.3 of the Contract between the Asssessee and GRSE, 'Terms of Reference' , the assessee shall post at site competent and qualified engineers designated as Resident/Assistant Resident Engineer and other Site Engineers ( minimum Civil Engineering Graduates) who have minimum 15 and 10 years experience respectively.

57 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 services arose and that such payment was effectively connected with the PE in India. Therefore, Article 13(6) would apply and the gross receipts by way of fees for technical services (received by the assessee both in foreign currency and Indian currency) are includible in the computation of business income/ profits of the PE in India, for which the provisions of section 44DA would apply. He also relied on the orders of the revenue authorities and the fact that in the return of income originally filed, the assessee did not deny the fact that there existed a PE of the Assessee in India and accounted for the entire fees received from GRSE both in foreign currency and in Indian rupees and claimed deduction of expenses in the computation of business profits of the PE. In all other respects, the DR relied on the order of the AO/DRP.

“5.2. SERVICES, FACILITIES AND PROPERTY OF GRSE GRSE shall make available to the Consultant’s Personnel for the purpose of the Services, facilities and property described in Appendix-1.4.” APPENDIX-1.4 of the Contract reads thus: “FACILITIES TO BE PROVIDED BY GRSE GRSE will, if required, make available to the Consultant, air-condtioned office space of about 50 Sq.mtrs., inside the Garden Reach Shipyard with a telephone and fax facility for the duration of the Contract. The charges for local, STD and OSD calls, faxes and e-mail for the three stages of the Project shall be borne by the Consultant. All other requirements of the Consultant should be arranged by the Consultant themselves.” Appendix 1.3 of the Contract specifically provides that the Consultants, when working inside GRSE premises shall observe GRSE’s rules and regulation and a special permission shall be obtained when it is necessary to work beyond normal working hours as per the requirement of Project work.

58 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 69. The presence of the Assessee in India during the previous year was only in connection with the Agreement for modernisation of shipyard of GRSE. The Assessee had not carried on any other business in India. The provision of office space inside the Garden Reach Shipyard cannot therefore be said to be a fixed place of business through which the business of the Assessee is carried on in India. As we have already seen Article 5(1) of the DTAA contemplates a fixed place of business through which the business of an enterprise is wholly or partly carried on. It can be said that there was some physical presence of the Assessee in India though it was restricted to rendering of services under the Agreement with GRSE. It is not enough that the Assessee has a fixed place of business in India but the Assessee should carry on business in India through that fixed place of business. This requirement of Article 5(1) of the DTAA is not satisfied in the present case. Carrying on of business involves the carrying on in a country of virtually any activity related to the business of the enterprise. As we have already seen the availability of office space for use by the Assessee at the premises of GRSE was for the limited purpose of rendering of services agreed between the Assessee and GRSE. The commentaries of Philip Baker on Treaties and OECD guidelines and decisions referred to by the learned counsel for the Assessee support the plea of the Assessee that it had no PE in India. The Revenue came to the conclusion that the Assessee had a PE in India mainly on the basis of existence of an office at GRSE’s shipyard. That alone was not sufficient to come to such a conclusion. The fact that the Assessee filed a return of income including all receipts from the contract with GRSE cannot be the basis to come to a conclusion that there was an admission by the Assessee that it had a PE in India. Existence of PE in India has to be established on the basis of evidence and by application of the requirements as contemplated in DTAA.

59 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 that claim made in the course of assessment proceedings without filing a revised return of income, cannot be entertained by the AO. In this regard, the Assessee placed reliance on the decision in the case of Chicago Pneumatic India Ltd.(supra) and the decision in the case CIT vs Ramco International (supra). In the cited decisions, the tribunal and the Hon’ble High Court has taken a view that a claim made without filing a revised return of income can be entertained. In the case of Ramco International (supra) the Hon’ble Punjab and Haryana High Court, distinguished the judgement of Goetze allowed the claim of the Assessee which was made in course of the assessment proceedings and not by filing revised return. In view of the above judicial pronouncements, we are of the view that the action of the ld. AO of not allowing the claim of the Assessee due to failure to file the revised return, is bad in law.

i) the income is received from Government or an Indian concern in pursuance of an agreement; ii) Such agreement was made after 31st day of May, 1997 but before the 1st day of June, 2005; and iii) such income does not fall within the purview of sub-section (1) of section 44DA of the Act.

60 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08

61 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 reliance was also placed on the decision in the case of Motorola Inc. and others v. DCIT (supra), wherein the Hon'ble Tribunal has held that no interest is payable by a taxpayer if his entire tax was deductible at source, and this is true even if the tax was not actually deducted. The relevant extracts of the said decision is produced below:-

"All the payments made to the assessee are tax deductible at source (even assuming that they are taxable) as rightly held by the CIT(A) and also contended before us. In that case, having regard to the provisions of section 201(1) & 201(1A) to which our attention was drawn on behalf of the assessees. the assessees cannot be held to have committed default in paying the advance- tax. They are entitled to take into account the tax which is deductible by the payer. though not actually deducted. Consequently, there is no liability to pay interest. The decision of the CIT(A) to cancel the interest U/S 234B is upheld on merits. " The issue was confirmed by the Delhi HC in the case of DIT vs. Ericsson AB [2011] 16 taxmann.com 371 (Delhi). Reliance was also placed on the decision in the case of DIT vs. Jacobs Civil Incorporated [2010] 194 Taxman 495 (Delhi) (Page 726 to 742), wherein the Hon'ble Delhi High Court has held as under:

"No doubt, if the person (payer) who had to make payments to the non-resident had defaulted in deducting the tax at source from such payments. the non - resident is not absolved from payment of taxes thereupon. However, in such a case, the non-resident is liable to pay tax and the question of payment of advance tax would not arise. This would be clear from the reading of Section 191 of the Act along with Section 209 (1) (d) of the Act. For this reason. it would not be permissible for the Revenue to charge any interest under Section 234B of the Act. . Reliance was also be placed on following decisions laying down identical proposition as set out above. DIT(lnternational Taxation) v Maersk Co. Ltd. 2011) 198 Taxman 518 (Uttarakhand) (FB). Sedco Forex International Drilling v Dy ClIT [2000] 72 ITD 415 (Del); Rheinbraun Engg. & Wasser Gmbh v DCIT 1. T. A 0.1915/ Born / 96 dated 3 October 1997 (Bom); M.M. Ratnam v ITO [1997] 62 ITD 21 (Bom);Asia Satellite Telecommunications Co. Ltd v DCIT [2003] 78 TTJ 489 (Del); DIT v NGC Network Asia LLC [2009] 313 ITR 187 (Bom); CIT v Tide Water Marine International Inc. [2009] 309 ITR 85 (Uttaranchal); and Commissioner of Income-tax

62 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 and Others v Ranchi Club Ltd (2001) 247 ITR 209. Therefore, it was submitted that the provisions of section 234B & 234C are not applicable to the Assessee.

"(d) The income-tax calculated under clause (a) or clause (b) or clause (c) shall, in each case, be reduced by the amount of income-tax which would be deductible or collectible at source during the said financial year under any provision of this Act from any income (as computed before allowing any deductions admissible under this Act) which has been taken into account in computing the current income or, as the case may be, the total income aforesaid; and the amount of income-tax as so reduced shall be the advance tax payable."

A reading of the above clause shows that the clause categorically uses the expression "deductable or collectable at source". Under Sec.195 of the Act, there is an obligation on the payer, i.e. any person responsible for paying to a non-resident, to deduct income tax at source at the rates in force from such payments excluding those incomes which are chargeable under the head 'Salaries'. Therefore, the entire tax is to be deducted at source which is payable on such payments made by the payee to the non- resident. Sec.201 of the Act lays down the consequences of failure to deduct or pay. These consequences include not only the liability to pay the amount which such a person was required to deduct at source from the payments made to a non-resident but also penalties etc. Once it is found that the liability was that of the payer and the said payer has defaulted in deducting the tax at source, the Department is not remedy-less and therefore can take action against the payer under the provisions of Sec.201 of the Income Tax Act and compute the amount accordingly. No doubt, if the person (payer) who had to make payments to the non-resident had defaulted in deducting the tax at source from such payments, the non- resident is not absolved from payment of taxes thereupon. However, in such a case, the non-resident is liable to pay tax and the question of payment of advance tax would not arise. The provisions of Sec.209(1)(d) have been amended by the Finance Act, 2012 but those amendments are not relevant for the present case which relates to AY 2007-08. We therefore hold that the assessee was not liable to pay any interest under sec.234-B of the Act following the judgments referred to earlier.

63 ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08 77. ITA No.1489/Kol/11: This is an appeal by the Assessee against the against the order dated 21.9.2010 of the DDIT(IT)-1(1), Kolkata, passed u/s.143(3) read with Sec.144C of the Income Tax Act, 1961 (Act) relating to AY 2005-06. The Assessment for this Assessment year was reopened u/s.147 of the Act consequent to the stand taken by the Revenue in the assessment for AY 2007-08. Income originally declared by the Assessee, as was done in AY 2007-08, was on the premise that it had a PE in India. The AO made order of reassessment on the same lines and reasoning as was done in AY 2007-08. The DRP followed it’s own directions given in AY 2007- 08. The grounds of appeal raised by the Assessee are similar to the one’s raised by the Assessee in AY 2007-08. The issues that arise for consideration in this appeal are also identical to the issues that arose for consideration in AY 2007-08 and on identical facts and circumstances. For the reasons given while deciding the appeal of the Assessee for AY 2007-08, we partly allow appeal of the Assessee for AY 2005-06 as well. The issues and decision on the various issues that were considered in AY 2007- 08 will equally apply for the assessment for AY 2005-06 also. 78. In the result ITA No.1489/Kol/11 is partly allowed. 79. In the result, appeals by the Assessee are partly allowed. Order pronounced in the court on 6.4.2016.

Sd/- Sd/- [Waseem Ahmed] [N.V.Vasudevan] Accountant Member Judicial Member

Date:.6.4.2016 R.G.(.P.S.)

Copy of the order forwarded to:

2 The D.D.I.T. (1), Kolkata.

Asst. Registrar, ITAT, Kolkata Benches

ITA No.2082/Kol/2010&1489/Kol/2011 Gifford and Partners Ltd. (since merged with Gifford LLP). A.Yr.2007-08