FRAPORT AG FRANKFURT AIRPORT SERVICES WORLDWIDE,NEW DELHI vs. ACIT, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘D’ NEW DELHI

BEFORE SHRI G.S. PANNU, HON’BLE PRESIDENT AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER

ITA No.3257/Del/2014 Assessment Year: 2007-08 With ITA No.3869/Del/2015 Assessment Year: 2008-09 With ITA No.3870/Del/2015 Assessment Year: 2009-10 With ITA No.3871/Del/2015 Assessment Year: 2010-11 With ITA No.1115/Del/2016 Assessment Year: 2011-12 With ITA No.287/Del/2017 Assessment Year: 2012-13 M/s. Fraport A.G. Frankfurt Vs. ACIT/ADIT, Airport Services Worldwide, International Taxation, C/o- Mohinder Puri & Co., CAs, Circle-1(2), 1-D, Vandhna Building, New Delhi 11 Tolstoy Marg, New Delhi PAN :AAACF9749E (Appellant) (Respondent)

Appellant by Sh. Rajan Bhatia, Advocate Ms. Ankita Mehra, CA Ms. Shweta Kapoor, CA Department by Ms. Rashmita Jha, CIT(DR) Sh. Sanjay Kumar, Sr. DR Date of hearing 06.01.2023 Date of pronouncement 03.04.2023

ITA Nos.3257/Del/2014;3869/Del/2015; 3870/Del/2015; 3871/Del/2015; 1115/Del/2016 & 287/Del/2017

ORDER PER SAKTIJIT DEY, JM: This is a bunch of six appeals filed by the same assessee.

One of the appeals arises out of final assessment order passed in

pursuance to the directions of learned Dispute Resolution Panel

(DRP). Whereas, rest of the appeals arise out of separate orders

passed by learned Commissioner (Appeals). The appeals relate to

assessment years 2007-08, 2008-09, 2009-10, 2010-11, 2011-12

and 2012-13. Since the issues arising in these appeals are more

or less common, they have been clubbed together and disposed of

in a consolidated order, for the sake of convenience.

year 2007-08 being ITA No. 3257/Del/2014 as lead appeal as the

decision taken by us qua the grounds raised therein would apply

to rest of the appeals.

ITA No. 3257/Del/2014 Assessment Year: 2007-08

not press ground nos. 1, 2, 4, 8 and 9. Accordingly, these

grounds are dismissed as not pressed.

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ITA Nos.3257/Del/2014;3869/Del/2015; 3870/Del/2015; 3871/Del/2015; 1115/Del/2016 & 287/Del/2017

Rs.1,46,52,283/- representing receipts from services rendered by

head office in Germany

entity and a tax resident of Germany. As stated, the assessee is a

global airport operator offering comprehensive airport

management services, including terminal and traffic

management, aviation ground handling, baggage and cargo

handling, aviation security and consulting etc. The assessee

entered into a contract with Delhi International Airport Limited

(DIAL) relating to development, modernization, expansion, up-

gradation, operation and management of Indira Gandhi

International Airport, Delhi. Further, DIAL entered into an Airport

Operator Agreement with the assessee to provide airport related

services to DIAL. As per the terms of Airport Operator Agreement,

the assessee was required to provide airport management services

to DIAL for providing following areas:

(a) General services;

(b) Manger Services;

(c) Consultancy services.

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employees, given guarantees, indemnity, provided consultancy

services, undertaken liability for liquidated damages and lent its

Intellectual Property Rights (IPR). For performing its activities

under the contract with DIAL, the assessee has received various

types of fees as under:

(a) Performance fees;

(b) Milestone fees;

(c) Consulting Charges; and

(d) Secondment Fees,

(e) Mobilization fees

(f) Fees for cost of infrastructure

project office in India, which is treated as Permanent

Establishment (PE) of the assessee. For providing the aforesaid

services, the assessee received an amount of Rs.1,46,52,283/-.

However, the aforesaid receipt was not offered to tax in India.

When called upon to explain the reason for not doing so, the

assessee submitted that the said amount received by the project

office is in respect of consultancy services directly provided by

head office in Germany, hence, not taxable in India in terms of 4 | P a g e

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India – Germany DTAA. The Assessing Officer, however, did not

accept assessee’s claim. Treating the receipt as Fee for Technical

Services (FTS) under Article 12 of India – Germany DTAA as well

as section 9(1)(vii) of the Act, the Assessing Officer held that the

amount is taxable in India. While doing so, he held that such

receipts are not effectively connected to the PE of the assessee.

The assessee contested the aforesaid decision of the Assessing

Officer by raising objections before learned DRP. However, learned

DRP accepted the reasoning of the Assessing Officer.

submitted, the activities under the airport operator agreement is

to be carried out by the assessee through its employees deputed

in India as well as from the head office in Germany. He

submitted, the PE is dependent on head office regarding planning,

information, data-base and know-how. He submitted, head office

provides technical advice to DIAL as well as PE and fully supports

PE. He submitted, additionally, head office does all tasks of

human resources including payroll, invoicing, legal and

administration etc. in relation to the PE in India. Thus, learned

counsel submitted, the activity of the head office and PE are

single and integrated activity of airport management and is 5 | P a g e

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complementary in nature as services cannot be exclusively

rendered as both are supporting each other and dependent on

each other. Accordingly, the receipts are taxable under Article 7

of the tax treaty, in view of exceptions provided under Article

12(5) of the treaty. He submitted, the PE is able to function

because of Head Office. Hence, in relation to work performed by

head office, both activity test and economic connection test are

satisfied, since, the work has been done by Head Office through

active participation of PE. He submitted, the entire activity of

airport management services is a single integrated activity, hence,

cannot be bifurcated between PE and the Head Office. He

submitted, applying the dominant purpose test, which is to

manage the airport, it has to be held that the services are

rendered through PE, as, the pith and substance of services was

inextricably connected to the management of the airport. In this

context, he relied upon the decision of the Hon’ble Supreme Court

in case of Oil & Natural Gas Corporation Ltd. Vs. CIT [2015] 59

taxmann.com 1 (SC). He submitted, once it is held that the

receipts are in the nature of income falling under Article 7 of the

tax treaty, then, in terms with protocol 1(b) of India – Germany

tax treaty, the receipts are not taxable in India as the services 6 | P a g e

ITA Nos.3257/Del/2014;3869/Del/2015; 3870/Del/2015; 3871/Del/2015; 1115/Del/2016 & 287/Del/2017

were rendered in connection with the PE in India. Thus, he

submitted, the receipts are not taxable in India in terms with

treaty provision. In support of such contention, learned counsel

relied upon the following decisions:

taxmann.com 1 (SC)

Income Tax (Intl. Taxation) [2011] 47 SOT 134 (Delhi –

Tribunal)

tax (IT) [2013] 35 taxmann.com 347 (Delhi – Tribunal)

[2007] 288 ITR 408 (SC)

Taxman 191 (SC)

706 (SC)

learned Departmental Representative submitted that the services

having been rendered directly from the head office are not

connected with the PE. It was submitted, since, the nature of 7 | P a g e

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services rendered falls within the category of managerial,

technical and consultancy services the receipts are in the nature

of FTS, both under Article 12 of India – Germany DTAA as well as

section 9(1)(vii) of the Act.

decisions relied upon and perused the materials on record. The

fact that the assessee has a PE in India has not been disputed by

the Assessing Officer. It is also a fact on record that in terms with

airport operator agreement, various kind of services are being

rendered in connection with the operation of the airport. Thus, it

is evident that such services cannot be rendered from the head

office of the assessee without active involvement of the PE.

Though, it may be a fact that some of the services rendered can

fall in the category of managerial or technical or consultancy

services falling within the definition of FTS under Article 12(4) of

India – Germany DTAA, however, the treaty carves out an

exception in paragraph 5 of Article 12 by providing that the

receipts will not fall within the category of royalty or FTS, if the

beneficial owner of royalty and FTS being resident of one

contracting state carries on business in the other contracting

state through a PE or fixed place of business in respect of which 8 | P a g e

ITA Nos.3257/Del/2014;3869/Del/2015; 3870/Del/2015; 3871/Del/2015; 1115/Del/2016 & 287/Del/2017

the royalty and FTS are paid. Article 12(5) further makes it clear,

in such a situation, the provisions of Article 7 or Article 14 may

apply. The receipts certainly cannot fall within the definition of

independent personal services under Article 14 of the tax treaty.

Therefore, the only provision under which the receipts can fall is

business profits as provided under Article 7 of the tax treaty.

Thus, since, the receipts are attributable to the PE, we have to

examine whether such receipts are taxable in India. In this

context, we have to refer to paragraph 1(b) under protocol

appended to India – Germany tax treaty, which reads as under:

“(b) Income derived by a resident of a Contracting State from planning, project, construction or research activities as well as income from technical services exercised in that State in connection with a permanent establishment situated in the other Contracting State, shall not attributed to that permanent establishment.”

a resident of a Contracting State from certain specified activities

including technical services provided in the other Contracting

State through a PE situated in that State shall not be attributable

to that PE. In other words, even though, the receipt/income is

earned from services rendered through the PE, however, they

cannot be attributed to the PE for the purpose of taxability. In

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sum and substance, it means such income will not be taxable in

India but in the country of residence of recipient of income. In our

view, while negating assessee’s claim made under paragraph 1(b)

of the protocol, learned DRP made a fundamental error by

observing that it only applies to Article 7. While doing so, learned

DRP completely overlooked the fact that once the receipts, even

though, may be in the nature of FTS are connected to PE, Article

12(5) get triggered. Hence, the receipts are not taxable as FTS

under Article 12 and have to be treated, either as business profit

under Article 7 or independent personal services under Article 14.

Once the receipts fall under Article 7 of the treaty, the protocol

comes into play. That being the case in terms of protocol 1(b) of

the tax treaty, the receipts even though connected to the PE

cannot be made taxable in India. However, protocol 1(b) of the

tax treaty specifically refers to income from planning, project,

construction or research activities and technical services. In other

words, income derived from aforesaid activities will be protected

under protocol 1(b) of the treaty, hence, not taxable in India.

Whereas, the rest of the income will be taxable under Article 7 of

the tax treaty. Accordingly, the Assessing Officer is directed to

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examine the nature of income and not to tax the income of the

nature specified in protocol 1(b) of the tax treaty.

office and administrative cost. Briefly the facts are, in course of

assessment proceeding, the Assessing Officer noticed that the

assessee has debited expenses of Rs.1,92,91,585/- to the profit

and loss account. While verifying the Audit Report, the Assessing

Officer noticed that the Auditor has reported that the amount

represents office and administrative overhead expenses charged

by the head office on the basis of certification by the management

and based on actual cost with no profit margin embedded therein.

Alleging that the assessee neither furnished any evidence, nor

justified the claim, the Assessing Officer disallowed the amount.

The assessee contested the disallowance before the DRP. After

examining assessee’s claim in the context of facts and materials

on record, learned DRP found that the amount, in reality,

represents a markup of 19% on the expenses under various heads

debited to the profit and loss account. However, learned DRP

found that out of the deduction claimed, an amount of

Rs.45,96,723/- forms part of mobilization expenses, which has

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ITA Nos.3257/Del/2014;3869/Del/2015; 3870/Del/2015; 3871/Del/2015; 1115/Del/2016 & 287/Del/2017

already been disallowed. Accordingly, learned DRP restricted the

disallowance to Rs.1,46,94,562/-.

related to the PE is allowable under Article 7, learned DRP held

that the amount charged by the head office is a fee of 19% on

various expenditure claimed on notional basis, hence, cannot be

allowed under Article 7 of the DTAA. Further, learned DRP has

alleged that the assessee did not furnish any evidence to establish

that the expenses were incurred by the PE at all.

submitted that the expenditure relates to various tasks

undertaken by the head office, such as, human resources,

payroll, invoicing, legal and administration etc. in relation to the

PE in India. Therefore, the expenditure incurred by the head office

is directly related to the PE. As such, he submitted, the

expenditure is to be allowed without applying the restrictions of

section 44C of the Act. In support of such contention, learned

counsel relied upon the following decisions:

(i) Bank of America NT & SA Vs. DCIT [2009] 27 SOT 97

(Mumbai- Trib.) 12 | P a g e

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(ii) DDIT Vs. Samsung Engg. Co. Ltd. [2011] 43 SOT 38

(Mumbai – Trib.)

the observations of the departmental authorities.

materials on record. From the materials on record, we find that

both the Assessing Officer as well as learned DRP have given a

concurrent finding that the assessee has not furnished any

evidence to establish that the expenses were incurred by the head

office exclusively for the PE. Additionally, in paragraph 8.4.2 of

learned DRP’s order, it has been clearly and categorically stated

that the expenditure claimed by the assessee, in reality, is 19%

markup on certain expenses. The aforesaid factual finding of the

departmental authorities has not been controverted by the

assessee through any cogent material/evidence even before us.

Though, in principle, we agree that the expenditure incurred by

the head office directly connected to the PE has to be allowed

without imposing the restrictions of section 44C of the Act,

however, burden is entirely on the assessee to establish on record

through authentic evidence that such expenditure was actually 13 | P a g e

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incurred by head office for the PE. In the present case, the

assessee has failed to do so. Further, Article 7(3) of the tax treaty

speaks of allowance of expenditure subject to the limitation

prescribed in domestic law. Therefore, we do not find any reason

to interfere with the decision of learned DRP on the issue. Ground

raised is dismissed.

interest under section 234A, 234B and 234D of the Act.

concerned, such levy being consequential in nature, there is no

need to adjudicate the issue. Insofar as the levy of interest under

section 234D is concerned, the same is consequential in nature,

does not require adjudication. Ground is dismissed.

require adjudication.

ITA No.3869/Del/2015 Assessment Year: 2008-09

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ITA Nos.3257/Del/2014;3869/Del/2015; 3870/Del/2015; 3871/Del/2015; 1115/Del/2016 & 287/Del/2017

No.3257/Del/2014. Accordingly, we direct the Assessing Officer

to compute income, if any, following our direction therein.

raised in ground no. 5 of ITA No. 3257/Del/2014. Following our

decision therein, we uphold the disallowance. This ground is

dismissed.

require adjudication.

ITA No.3870/Del/2015 Assessment Year: 2009-10 26. Ground nos. 1, 5 and 6 are not pressed, hence, dismissed.

ground no. 3 of ITA No.3257/Del/2014. Accordingly, we direct the

Assessing Officer to compute income, if any, following our

direction therein.

of ITA No.3257/Del/2014. Following our decision therein, we

uphold the disallowance. The ground is dismissed.

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ITA Nos.3257/Del/2014;3869/Del/2015; 3870/Del/2015; 3871/Del/2015; 1115/Del/2016 & 287/Del/2017

ITA No.3871/Del/2015 Assessment Year: 2010-11 30. Ground no. 1, 5 and 7 are not pressed, hence, dismissed.

issue raised in ground no. 3 of ITA No.3257/Del/2014.

Accordingly, we direct the Assessing Officer to compute income, if

any, following our direction therein.

of ITA No.3257/Del/2014. Following our decision therein, we

uphold the disallowance. This ground is dismissed.

ITA No.1115/Del/2016 Assessment Year 2011-12 34. Ground no. 1 and 4 are not pressed, hence, dismissed.

raised in ground no. 3 of ITA No.3257/Del/2014. Accordingly, we

direct the Assessing Officer to compute income, if any, following

our direction therein.

interest on income tax refund by applying the rate of 40% by

treating it at par with profits of business, as against the 16 | P a g e

ITA Nos.3257/Del/2014;3869/Del/2015; 3870/Del/2015; 3871/Del/2015; 1115/Del/2016 & 287/Del/2017

assessee’s claim of tax rates of 10% under Article 11(2) of India –

Germany DTAA.

decision of learned Commissioner (Appeals) in upholding the

taxation of interest on income tax refund under Article 7 of the

treaty is for the reason that it is effectively connected with the PE

in terms of Article 11(5) of India – Germany tax treaty. On going

through the Article 11(5) of the treaty, we agree with the decision

of learned Commissioner (Appeals) as the said Article specifically

carves out an exception by providing that in case the debt claim

in respect of which interest is paid is effectively connected with

the Permanent Establishment, the provisions of Article 7 or

Article 14 would apply. We are conscious of the fact that in case

of ACIT Vs. Clough Engineering Ltd. [2011] 11 taxmann.com 70

(Delhi) (SB) a view favourable to the assessee has been taken.

However, in case of B.J. Services Co. Middle East Ltd. Vs. ACIT

[2015] 60 taxmann.com 246, the Hon’ble Uttarakhand High

Court, while examining pari materia provision contained in Article

12(6) of India – UK Treaty has held that interest on income tax

refund is taxable as business profits under Article 7 of the treaty.

In our humble opinion, the decision of the Hon’ble Uttarakhand 17 | P a g e

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High Court will carry greater precedentiary value. In view of the

aforesaid, we uphold the decision of learned Commissioner

(Appeals) on the issue. This ground is dismissed.

ITA No. 287/Del/2017 Assessment Year: 2012-13

raised in ground no.3 of ITA No.1115/Del/2016. Following our

decision therein, we uphold the decision of learned Commissioner

(Appeals)

2008-09, 2009-10, 2010-11 and 2011-12 are partly allowed,

whereas, appeal for assessment year 2012-13 is dismissed.

Order pronounced in the open court on 3rd April, 2023

Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER Dated: 3rd April, 2023. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 18 | P a g e

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