LAHMEYER HOLDING GMBH,GERMANY vs. DDIT, 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.5614/Del/2011 Assessment Year: 2008-09 Lahmeyer International Vs. DDIT, GmbH, Circle-3(2), Friedberger Strasse 173, International Taxation, 61118 Bad Vilbel, New Delhi Deutschland (Germany) PAN :AAACL6802E (Appellant) (Respondent) With ITA No.5615/Del/2011 Assessment Year: 2008-09 Lahmeyer Holding GmbH Vs. DDIT, (Formerly Lahmeyer Circle-3(2), International International GmbH), Taxation, Friedberger Strasse 173, New Delhi 61118 Bad Vilbel, Deutschland (Germany) PAN :AAACL6802E (Appellant) (Respondent)

Appellant by Sh. Satyan Sethi, Advocate Department by Ms. Rashmita Jha, CIT(DR) Date of hearing 04.01.2023 Date of pronouncement 31.03.2023 ORDER PER SAKTIJIT DEY, JM: Captioned appeals have been filed by the assessees against

the final assessment orders passed by the Assessing Officer for

ITA Nos.5614 & 5615/Del/2011 AY: 2008-09

the assessment year 2008-09, in pursuance to the directions of

learned Dispute Resolution Panel (DRP). Since, the grounds

raised in both the appeals are identical, except variation in the

figures, for the sake of brevity, the grounds raised in ITA

No.5614/Del/2011 are reproduced hereunder for ease of

reference:

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decision of the departmental authorities in taxing the receipts

from the contract with Jaypee Karcham Hydro Corporation

Limited (‘JKHCL’) and Jaypee Ventures Limited (‘JVL’) under

section 44DA of the Act.

non-resident corporate entity incorporated under the laws of

Germany and a tax resident of Germany. The assessee was earlier

known as ‘Lahmeyer International GmbH’. However,

subsequently, due to business restructuring its name changed to

‘Lahmeyer Holding GmbH’. As stated, the assessee is an

engineering consulting company offering plan, design and

consultancy in relation to complex infrastructure projects. In the

assessment years under dispute, the assessee, as stated, had

undertaken contract work with certain Government/Semi-

Government projects, such as, Jammu and Kashmir State Power

Development Corporation– Baglihar Project (JKSPDC-BCS),

JKHCL and JVL projects. Insofar as receipts from contract with

JKSPDC- Baglihar Project, the assessee itself admitted of

existence of PE and offered the income to tax by applying the rate

of 20%. However, insofar as the other two projects are concerned, 3 | P a g e

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viz., JKHCL and JVL, though, the assessee by treating such

receipts as Fee for Technical Services (FTS) under Article 12 of

India-Germany Double Taxation Avoidance Agreement (DTAA)

offered to tax @10% on gross basis, however, the Assessing Officer

did not accept assessee’s claim. As far as the contract with

JKHCL is concerned, the Assessing Officer referring to clause 4.3

of the contract observed, since JKHCL has made office space

available to the assessee, it will constitute a Permanent

Establishment (PE) of the assessee in India in terms of Article 5(2)

read with Article 5(1) of the tax treaty. Further, the Assessing

Officer observed that since the assessee has a PE in respect of

JKSPDC- Baglihar Project, the activities of other contracts being

connected to that PE, would be taxable in India under section

44DA of the Act.

irrespective of the fact whether PE in respect of JKHCL and JVL

projects are existing or not, since, the assessee had a PE in India

in the form of JKSPDC-Baglihar Project, applying the Force of

Attraction Rule all receipts earned in India would be connected to

the said PE. Hence, taxable under Section 44DA. Accordingly, he

brought to tax the receipts by applying the provisions of section 4 | P a g e

ITA Nos.5614 & 5615/Del/2011 AY: 2008-09

44D/44DA of the Act. The assessee contested the aforesaid

decision of the Assessing Officer by filing objections before learned

DRP. However, learned DRP sustained the additions made by the

Assessing Officer.

submitted that insofar as contract with JKHCL is concerned, the

assessee provided services in relation to review of design and

duration of the contract was only for 3 months. He submitted,

assessee’s employees were in India only for 21 days. Thus, he

submitted, there is no PE of the assessee under Article 5(2) read

with Article 5(1) of India-Germany treaty. In this context, he

submitted, the Assessing Officer has made a fundamental error

by referring to the definition of PE in some other treaty, rather

than India-Germany DTAA. He submitted, assessee’s role in the

contract is only advisory and nothing else. Insofar as the contract

with JVL is concerned, learned counsel submitted, the Assessing

Officer has not even stated whether there is a PE in respect of

said contract. Thus, he submitted, the receipts from contracts

were rightly offered to tax as FTS under Article 12 of the tax

treaty. Finally, he submitted, the issue is otherwise squarely

covered by the decision of the Tribunal in assessee’s own case in 5 | P a g e

ITA Nos.5614 & 5615/Del/2011 AY: 2008-09

all preceding assessment years. In this context, he drew our

attention to order dated 16.11.2022 passed in ITA Nos.

273/Del/2011 & 5800/Del/2010 for assessment years 2006-07

and 2007-07 respectively.

the observations of the Assessing Officer and learned DRP.

materials on record. Insofar as the contract with JKHCL is

concerned, primary factor, on which, the Assessing Officer has

concluded existence of PE is, the contractee was supposed to

provide/make available office space in its complex to the

assessee. Though, as per Article 5(2)(c), an office constitutes PE,

however, that office must be belonging to the concerned entity

and some space made available by the client/contractee in its

own complex. Further, on perusal of the relevant contract, it is

observed that the scope of work entrusted to the assessee is to

provide services as a design review consultant related to the

project undertaken by JKHCL. As per the scope of work, the

assessee is required to depute personnel to carry out design

review work and make comments on the civil design to ensure

feasibility of the project and its components and to suggest design 6 | P a g e

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optimization with reference to its layout. The documents to be

reviewed by the assessee’s personnel are as under:

i. General project drawings

ii. Detailed construction drawings including geological

drawings

iii. Reports on geological, geotechnical investigations incl.

sources of construction materials.

iv. Engineering reports on stability of structures including

underground excavations, hydraulic model texts, seismic

risk analyses including seismic loads to be applied to

individual structures, sediment transport in the river,

hydrological data and flood characteristics for relevant

return periods.

entrusted to the assessee has to be completed within a period of 3

months from the date of commencement of work. Thus, from the

scope of work entrusted to the assessee, it is very much clear that

services rendered are of purely technical/consultancy nature,

hence, the receipts from such work has to be treated as FTS. As

discussed earlier, the departmental authorities have not brought

on record any material to suggest that the work undertaken by 7 | P a g e

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the assessee was not completed within the period of 3 months. In

such a scenario, it cannot be said that the so called office space

provided by JKHCL to the assessee in its premises would

constitute a PE under Article 5(2) of India – Germany DTAA.

Further, we do not find any substance in the allegation of the

Assessing Officer that assessee’s PE in respect of JKSPDC-

Baglihar project would constitute a PE in respect of JKHCL and

JVL project. When the department is alleging involvement of the

JKSPDC’s PE to be actively involved in the other two projects, it is

for the department to establish such fact on record through

cogent evidence. However, on analysis of facts, we are convinced

that the Assessing Officer has miserably failed to do so, as, no

material has been brought on record to establish the involvement

of JKSPDC’s PE to be actively involved in the JKHCL and JVL

project. In any case of the matter, while considering, more or less,

identical issue in assessee’s own case in assessment years 2006-

07 and 2007-08, the Tribunal following its earlier order has held

as under:

“2.5 We have considered rival submissions and perused materials on record. Undisputedly, the projects from which the assessee has earned revenue in the year under consideration were continuing from preceding assessment year. We have noted, while considering identical nature of dispute arising between the parties, the 8 | P a g e

ITA Nos.5614 & 5615/Del/2011 AY: 2008-09

Coordinate Bench in ITA No. 4960/Del/2004 and Ors. relating to assessment years 2001-02 to 2005-06, has not only held that there is no PE of the assessee in India, insofar as, the AP Transco project is concerned, but also held that Force of Attraction Rule will not apply. In this context, following observations of the Coordinate Bench would be relevant:

“7. We have heard both the parties and perused the relevant material on record. The contention of the assessee was that the force of attraction rule is not applicable to the assessee in view of article 7(1) of the treaty between India and Germany DTAA. The contention of the assessee was that as per protocol of the treaty, the force of attraction rule in this treaty restricts the application of the rule to a case where, the PE is involved in the transaction and the transaction is restored to avoid taxation in the source state and both these contentions needs to be satisfied so as to attract the rule. The PE constituted in India by the assessee under the contract with JKSPDC-Phase-2 was not involved in any other project executed in India during the relevant previous year. For supporting this statement, the assessee submitted various contracts entered into by the assessee with different independent unrelated parties. Most of these contracting parties are government or semi government or private organisations. The assessee constitutes PE on account of undertaking supervisory activities as provided in article 5(2)(i) of the treaty in relation to construction of Hydro Power Projects at Baglihar in the state of Jammu & Kashmir. In respect of the balance contracts, based on specific contract requirements, the assessee's personnel either performed service at the client's location or at its home office in Germany, wherein the assessee provided contract-wise, the location wherein the activities were undertaken. The above fact as per the assessee clearly demonstrates that owing to geographical region, the PE on account of JKSPDC Phase-II projects (executed in the state of Jammu & Kashmir) could not play a part or be involved in any project in India. These contracts have been carried out by the assessee by using different teams at a given point of time. In this regard, the details of the project managers/project engineers who visited India in connection with the execution of different contracts clearly shows that 9 | P a g e

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distinct PE of technician were involved in the execution of various projects in India. The teams of the project managers/project engineers, in relation to various projects, visited India in connection with the execution of these projects at different points of time. The scope of work, liabilities and risk involved in each of the contracts are independent of those stated in the other contracts executed with the different parties. Owing to Reserve Bank of India's stipulation, a separate project office is to be set up for each independent project. Further, the funds of the project office are to be used only to meet the expenses of the specific projects which has been approved and cannot be used for any other purpose in India. Therefore, the funds belonging to the project office can be used to fund or support only that project (i.e. in respect of which it has been set up) and cannot be used to fund any other projects in India. The assessee under various independent contracts entered into by it, was required to undertake specific activities as per the terms of each contracts. The activities undertaken by the assessee were independent of the others since their performance was not interlinked with each other. The location where the activities would be performed by the assessee in respect of the specific projects was dictated by the client's project site or as agreed with the clients and was undertaken outside India. Further, restriction on the activities which may be undertaken by project office is stipulated in the approval issued by the Government. Therefore, it cannot be said that the PE constituted in India by the assessee under Phase-II of the contracts with JKSPDC was involved in any way in the earning of income from technical services rendered by the assessee and other contracts in India. We find force in the contention of the assessee, that the PE constitute in India by the assessee under Phase-II of the contract with JKSPDC did not play any role or contributed in any manner to the execution of the other contracts or earning of FTS under other contracts and cannot thus be said to be involved with any other projects in India. Accordingly, FTS received by the assessee from rendering of technical services and other contracts cannot be said to be involved directly or indirectly in any manner to the PE constituted in India under the contract with JKSPDC- Phase-II and 10 | P a g e

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are formed for the purpose of deliberate avoidance of tax. Therefore, we find merit in the argument of the Ld. AR that such income by way of FTS is to be subjected to tax @ 10% under article 12 of the treaty and cannot be subject to tax @ 20% as contemplated by the Assessing Officer. As per the Revenue's contention, it is undisputed fact that the income earned by the assessee was in the nature of FTS, there is business connection and income accrues and arises or deem to accrue and arise in India. The regional existence of place of PE and the article 5(1) in the form of JKSPDC-BCS as well as there is existence of supervisory PE under article 5(2)(i) in the form of JKSPDC-BCS was not established by the Revenue from any documentary evidence on record. Similarly, the nature of business of the assessee remains unchanged and the assessee is engaged in the business of providing consultancy services to various projects in India. The assessee is an engineering consultancy services that offers wide range of planning, designing and consultancy services etc. in relation to complex infrastructure projects in. India. The assessee rendered engineering consultancy services mainly in relation to power projects. 7.1 From the perusal of the records and contradictory aspect pointed out by the Ld. DR, it can be seen that the PE in respect of JKSPDC- Baglihar Phase - II Project has rightly been offered to tax at 20% by the assessee as it is the only project which has PE. The Force of Attraction rule will not be applicable in other projects as the same do not constitute either PE or does not come under the pur v ie w of the DT AA. T he contradic tion s po inted out by the R evenue do no t de mo n str ate tha t the o ther projec ts cons ti tu te PE. In f ac t, f or applying f orce of attractio n, there should be so me co mmon lin k to e ach o f the co ntr acts /pro jec ts such as the co mm on ex pats, the co mmon nature of the con tr act/pro je cts, the co mmon al ity o f the loc ation, the co mmon con tr ac tin g par tie s e tc. wh ic h are abse nt in the pr e sen t c ase. T heref ore, th e applicabil ity of rule of f orce of attraction doe s n o t appl y in th e pr e sen t asse ss ee' s c ase. T hus, the tre a tme nt given by the asse ssee f or off ering tax @20% in one pro je ct and 10% in re s t of th e pro je cts wa s 11 | P a g e

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rig htly do ne. Hence, Gro und No. 1 of th e asse ssee ' s appe al in IT A No. 4960/D EL /20 04 f or A.Y. 2001-02 is allo we d. 2.6 In the facts of the present appeal, it has been brought to our notice by learned counsel appearing for the assessee that duration of services rendered for AP Transco project in terms with the agreement is for a period of less than 6 months. The aforesaid factual position has not been controverted by the Revenue. That being the case, there is no PE in terms with Article 5(1) read with Article 5(2)(i) of the Tax Treaty. Therefore, the decision of the Coordinate Bench (supra) will squarely apply to the facts of the present appeal. That being the case, respectfully following the decision of the Coordinate Bench, we direct the Assessing Officer to delete the addition. Ground nos. 1 and 2 are allowed. 9. After carefully examining the facts involved in the earlier

assessment years as decided by the Tribunal and the impugned

assessment year, we are of the view, though, the projects are

different, however, the facts relating to the issue in dispute are

more or less identical. Therefore, the observations of the Tribunal

in assessment years 2006-07 and 2007-08 would squarely apply

to the facts of the present appeals.

has not even alleged the existence of PE. Merely applying Force of

Attraction Rule he has brought to tax the receipts under section

44D/44DA of the Act. In view of the aforesaid, we are inclined to

delete the additions made by the Assessing Officer under Section

44D/44DA of the Act and direct the Assessing Officer to compute

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assessee’s income under Article 12 of India – Germany DTAA.

These grounds are allowed.

applicability of Force of Attraction Rule. While deciding ground

nos. 1 and 2 in the foregoing paragraphs, we have held that the

PE in relation to JKSPDC –Baglihar Project cannot be construed

to be the PE in respect of JKHCL and JVL Projects. Insofar as, the

applicability of Force of Attraction Rules, while deciding identical

issue in assessee’s own case in assessment years 2006-07 and

2007-08, the Tribunal has held that such rule will not apply,

unless, even a remote link between the activities of other projects

is established with the PE in relation to PKSPDC-Baglihar Project.

That being the case, we hold that Force of Attraction Rule does

not apply. This ground is allowed.

interest under section 234B and 234C of the Act.

identical issue in assessee’s own case in assessment years 2006-

07 and 2007-08 (supra), the Tribunal has held as under:

“5.1 Having considered rival submissions, we find, the Coordinate Bench has decided identical issue in favour of the assessee in the

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preceding assessment years in the order referred to above. The relevant observations of the Tribunal in this regard are as under: “13. We have heard both the parties and perused all the relevant materials available on record. Interest u/s 234B and 234C is not chargeable where tax is deductible at source. The reliance placed on GE Packages Power Inc. (supra) is apt. Hence, Ground No. 3 of the assessee’s appeal in ITA No. 4960/Del/2004 for A.Y. 2001-02 is allowed.” 5.2 Respectfully following the decision of the Coordinate Bench, referred to above, we decide the ground in favour of the assessee.

(supra), we decide the ground in favour of the assessee.

granting credit for TDS.

factually verify assessee’s claim and grant credit for TDS in

accordance with law.

Order pronounced in the open court on 31st March, 2023

Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER Dated: 31st March, 2023. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi

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