M/S. BOMBARDIER TRANSPORTATION GMBH,NEW DELHI vs. DCIT, NEW DELHI

The core issue arising for consideration in the present appeal is whether the project office of the assessee and Bombardier Transportation India Ltd. (BTIL) would constitute fixed place Permanent Establishment (PE) of the assessee in India under Article 5 of India – Germany Double Taxation Avoidance Agreement (DTAA).

Briefly the facts are, the assessee is a non-resident corporate entity incorporated under the laws of Germany and a tax resident of Germany. As stated by the Assessing Officer, the assessee is engaged in the business of integration and manufacturing of complete rolling stocks and railway applications. Delhi Metro Rail Corporation (DMRC) had floated an International Competitive Bid for design, manufacture, supply, testing, commissioning, training and transfer of technology of 340 Electrical Multiple Units (EMU) known as RS2 Contract. Intending to participate in the bid of the DMRC, the assessee entered into a Memorandum of Understanding (MoU) with BTIL to collectively participate in the bid and submit its tender. The joint bid submitted by the assessee and BTIL was accepted by DMRC and RS2 Contract was executed 2 | P a g e between the DMRC and the Consortium on 19.07.2007. As far as the terms of understanding between the Consortium partners, viz., assessee and BTIL, the scope of work under the bid was specifically defined to be performed by each of the partners. As

In terms with the contract with DMRC, the assessee made onshore supply of 58 rolling stocks (train sets) to DMRC, which 3 | P a g e were manufactured by BTIL in India. The total value of invoices raised, both in foreign currency and Indian currency, aggregated to Rs.449,26,37,686/-. Besides the aforesaid onshore supply of train sets, the assessee supplied 8 more train sets costing Rs.415,67,27,145/- to DMRC. Insofar as onshore supply of train sets are concerned, which were purchased by the assessee from BTIL and transferred to DMRC on cost to cost basis, BTIL declared income from such sales. Whereas, assessee did not offer income from such sales as the train sets were sold on cost to cost basis.

As regards offshore supply of 8 number of train sets, the assessee did not offer income from such sales to tax in India, pleading that the transfer of title over the goods took place outside India and the sale consideration was also received outside India. It was submitted by the assessee that the project office had no role to play in offshore supply of train sets. Thus, the assessee submitted, the transfer of title over goods having taken place outside the territory of India, the income would not be taxable in India. The Assessing Officer, however, was not convinced with the submissions of the assessee. He was of the view that the contract with DMRC is a composite contract and beginning with designing, 4 | P a g e manufacturing, settling, commissioning and testing. Further, the Assessing Officer held that there was active involvement of the project office, both, in relation to onshore and offshore supplies.

Thus, he held that the project office of the assessee in India constitutes a fixed place PE in India in terms of Article 5(1) of India – Germany DTAA. He further observed that the expatriate employees of the assessee have frequently visited India and spent total number of 364 man-days in India in the year under consideration. Accordingly, the Assessing Officer attributed profit, both, in respect of offshore and onshore supplies and services to the alleged PE of the assessee in India in the form of project office.

While dealing with assessee’s objection, learned DRP granted substantial relief to the assessee qua the attribution of profit in relation to onshore supply and services. However, insofar as, income from offshore supply of 8 train sets, learned DRP, though, agreed with the assessee that the project office had no involvement with offshore supply, hence, no profit attribution can be made to the PE. However, learned DRP held that the assessee had a fixed place PE in the form of BTIL. Accordingly, learned 5 | P a g e DRP directed the Assessing Officer to attribute profit to the PE in respect of income earned from offshore supply at 35%.

Before us, learned counsel appearing for the assessee submitted that the observations of the Assessing Officer and learned DRP with regard to existence of PE are based on misinterpretation of facts and incorrect application of law. He submitted, merely because the BTIL is a wholly owned subsidiary of the assessee, that by itself, would not make BTIL the PE of the assessee in terms of Article 5(7) of the treaty. In support of such contention, he relied upon the following decisions:

Proceeding further, he submitted, the departmental authorities have completely ignored the fact that the assessee and BTIL worked as a Consortium and earned profit separately from DMRC in accordance with their respective scope of work. Drawing our attention to the RS2 Contract with DMRC, learned counsel submitted, while the assessee earned income in respect of activities pursuant to Cost Centre B, such as, offshore manufacture and shipping to India, BTIL earned its income from 6 | P a g e activities under Cost Centre D, such as, inland transportation of offshore manufactured trains and commissioning. Thus, he submitted, as per the terms of the Contract, the Consortium partners, i.e., the assessee and BTIL have earned revenue in respect of specific work performed by them, as per Cost Centre B and Cost Centre D. He submitted, the entire revenue earned by BTIL under Cost Centre D has been offered to tax by it in India.

Learned counsel for the assessee submitted, in assessee’s own case in assessment year 2012-13, learned Commissioner (Appeals) being conscious of the directions of learned DRP in the impugned assessment year held that BTIL does not constitute a PE of the assessee. Further, he submitted, Tribunal’s decision in case of Nortel Networks India International Inc. Vs. DDIT (2014)

Learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned DRP.

In rejoinder, learned counsel submitted that learned DRP, while treating BTIL as fixed place PE of the assessee in India, has given two reasons that the scope of work relating to Cost Centre D and control exercised by the assessee on BTIL. He submitted, the DMRC Contract, in fact, refers the MoU between the assessee and BTIL. In this context, he drew our attention to the specific clause of the RS2 Contract. As regards the visits of the expatriates to India, learned Counsel submitted, they visited India only for supervisory work to ensure timely delivery of train sets to DMRC.

We have considered rival submissions in the light of the decision relied upon and perused the material on record. The Core issue arising for consideration is whether the profits earned on offshore supply of 8 number of train sets to DMRC can be attributed to the alleged PE of the assessee India. The materials on record reveal that the Assessing Officer has treated the project office of the assessee as PE and attributed profit from offshore supplies at 35%. Whereas, learned DRP, though, has observed that the assessee has a fixed place PE in the form of project office (PO), however, the PO has not earned any profit from Contract.

Whereas, the scope of work of BTIL is as under: • BT India will support BTG to procure and supply trains and components manufactured in India. • BT Indian will support BTG in local procurement for components and goods as well as in testing and commissioning. • BT India will support BTG to arrange for incidental services like insurances, local and overseas transportation, clearance at port, unloading at DMRC. • BT India will support BTG to manage project site and warranty sites in Delhi during DLP. • BT India will support BTG in Training of DMRC official and Transfer of Technology, if required.

The payment to be made to the assessee and BTIL under the contract is in pursuance to the Cost Centre profit under the Contract. As per the Consortium Agreement between the assessee and BTIL, the assessee is responsible for the following activities:

The responsibility of BTIL is as under: � Indigenous manufacture, factory testing, inspection and discharge, transit insurance � Inland transportation of offshore manufactured train in India. � Inland transportation of indigenous manufactured train in India. � Integrated testing and commissioning. � Onshore training etc.

The cost attached to the scope of work assigned to the Consortium partners have been put under different cost centres in the Contract with DMRC. Cost Centre B relates to offshore manufacture and shipping to India, which is the responsibility of the assessee. Whereas, Cost Centre D relates to inland transportation in India, delivery and testing in the depot of offshore manufactured trains. The activity under Cost Centre D is 13 | P a g e the responsibility of BTIL. It is further observed, the Consortium partners have raised separate invoices on DMRC according to the scope of work and falling under specific Cost Centres and payments have been made separately by DMRC to the consortium partners. While, the assessee has been paid the cost for all offshore work, such as, designing, planning, offshore manufacture and supply, offshore training etc. BTIL has been paid for all onshore activities. It is a fact on record that the payments received under Cost Centre D have been offered to tax in India by BTIL. In fact, the transaction between BTIL and the assessee have been subjected to transfer pricing analysis by the Transfer Pricing Officer (TPO) and adjustment was suggested to the Arm’s Length Price (ALP). Thus, on a conjoint reading of the contract between the DMRC and the consortium partners and the Consortium Agreement would make it clear that not only the scope of work under the contract given to Consortium partner is well defined but the cost relating to such scope of work has also been specifically demarcated under different cost centres.

Thus, it can be safely concluded that though DMRC executed a single contract with the Consortium partners, however, the scope of work to be performed by each of 14 | P a g e Consortium partner has been well defined and demarcated.

It is further relevant to observe, in assesse’s own case in assessment year 2012-13, learned Commissioner (Appeals), being 16 | P a g e conscious of the observations of learned DRP with regard to BTIL constitutes a fixed place PE of the assessee in India, has held that BTIL is not the PE of the assessee. In fact, while considering identical nature of dispute in case of Bombardier Transportation Sweden AB Vs. DCIT (supra), the Coordinate Bench, while considering the dispute relating to offshore supply made under a somewhat similar Contract with DMRC held that receipts from offshore supplies cannot be taxed in India in view of the ratio laid down by the Hon’ble Supreme Court in case of Ishikawajma Harima Heavy Industries Ltd. Vs. DIT, 158 Taxman 259.

At this stage, it is relevant to observe, learned DRP, while coming to conclusion that BTIL constitutes fixed place PE in India, has relied upon the decision of the Tribunal in case of Nortel Networks India International Inc. However, the decision of the Tribunal stands reversed by the Hon’ble Jurisdiction High Court in Nortel Networks International Inc. Vs. DIT [2016] 386 ITR 253 (Delhi). Thus, analyzing the facts and materials on record in the touchstone of the ratio laid down in the judicial precedents cited before us, we are of the view that none of the conditions of fixed place PE as enshrined under Article 5(1) of India – Germany tax treaty stand satisfied to construe BTIL as the PE of the 17 | P a g e assessee in India. Thus, in view of our aforesaid conclusion, we hold that the attribution of profit qua the receipts from offshore supplies to the alleged fixed place PE in the form of BTIL is unsustainable as, in our view, BTIL cannot be construed as PE of the assessee in India.

In view of our decision above, the other issues/grounds raised by the assessee, having become either academic or consequential, do not require adjudication.

In the result, the appeal is allowed, as indicated above.