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The Tax Publishers Gifford & Partners Ltd. v. Dy. DIT [ITA No. 2082/Kol/2010, ITA No. 1489/Kol/2011, dt. 6-4-2016] : 2016 TaxPub(DT) 1824 (Kol-Trib) EPC contract whether single contract or split and whether PE exists *Facts:* Assessee a UK resident company was engaged in the business of project consultancy. Arising out of a contract with a Govt. company GRSE it had to consult by way of prefeasibility, preliminary report, project report, engineering services, project management services and post construction services. The project was since April 2004. During the assessment year 2007-08 the assessee offered the income what was paid in India to tax after deducting all expenses on the premise that they were a PE. The contract had a clause where by the payments were to be made grossed for TDS. The contract had stage wise payments and there was offshore as well as onshore payments. The assessing officer in a scrutiny had the following points and held as under :-- The contract was a single contract subject to FTS. There were payments made by the non-resident to one Appledore in the UK also a sub-contractor which was paid from the offshore unit of the assessee. No TDS was done on the same but was claimed as an expense. Assessing Officer subjected it to section 40(a)(ia) disallowance. Assessee plea was that the payment happened outside India and in the absence of a PE in India no part of it can be subject to TDS disallowance. This was on the premise that even if a PE only the income attributable to PE can be taxed i.e. the India received income and since this was a payment outside India did not attract TDS. The fact that they filed a return basing themselves as a PE is also to be noted. On inquiry by assessing officer he read that there was a project location for the assessee thus a PE existed. Income fell in the scope of 44DA. Benefit of section 115A will not be available. The assessee having claimed to be a PE in the return now cannot take a reverse stand without filing a revised return. Explanation inserted in section 9(1)(vii) post Ishikawajima Harima Heavy Industries Ltd. v. CIT (2007) (288 ITR 408 SC) have done away with the twin condition that the source taxed in India must be rendered in India utilized in India. Vide Indo-UK DTAA also it is taxable. Above was also upheld by the DRP, thus assessee went in appeal: Held in favour of the assessee as under :-- The place provided by the GRSE was to facilitate the project but this was not put to use or was not utilized by the assessee thus no PE exists. To be called a PE The fact that an enterprise has a certain amount of space at its disposal, which is used for business activity is sufficient to constitute a place of business. No formal legal right to use that place is therefore the requirement. (c) The enterprise should not only have a fixed place of business but also wholly or partly business should be carried on thought that fixed place. Carrying on of business involves the carrying on in a country of virtually any activity related to the business of the enterprise. Article 5(1) contains what is referred to as basic-rule PE. Article 5(2)(a) to (k) contains examples (positive definitions) of rule contained in Article 5(1) and Article 5(3) are exceptions to PE (negative definition). The place was only meant for ancillary activities of collecting information. Thus no PE exists. Once no PE exists the assessee does not have any business income thus section 44DA is not applicable. If no PE exists TDS obligations to Appledore do not survive. The claim on return that PE exists now retraction without a revised return is possible and acceptable (possibly not at assessing officer level but at higher level). No interest for advance tax is applicable. No PE existed even for assessment year 2005-06. The incomes fall in the scope of section 9(1)(vii). The explanation in section 9(1) inserted post Ishikawajima case do not help the assessee. The services provided by assessee make available technology as per the DTAA with UK with assessee. Assessee is eligible to the benefits of section 115A. "A requirement of the fixed place of business. Which is implicit in Article 5(1) is that he 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." "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. 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. Note: - The ITAT looked at benefit test for a PE. Once this was not there, the TDS obligations fell apart. The fact that the services were provided from abroad was no longer a good ground. The TDS obligation also failed because of the lack of PE. The contract being split had PE been read - force of attraction rule would have kicked in.

The Tax Publishers

Gifford & Partners Ltd. v. Dy. DIT [ITA No. 2082/Kol/2010, ITA No. 1489/Kol/2011, dt. 6-4-2016] : 2016 TaxPub(DT) 1824 (Kol-Trib)

EPC contract whether single contract or split and whether PE exists

Facts:

Assessee a UK resident company was engaged in the business of project consultancy. Arising out of a contract with a Govt. company GRSE it had to consult by way of prefeasibility, preliminary report, project report, engineering services, project management services and post construction services. The project was since April 2004. During the assessment year 2007-08 the assessee offered the income what was paid in India to tax after deducting all expenses on the premise that they were a PE. The contract had a clause where by the payments were to be made grossed for TDS. The contract had stage wise payments and there was offshore as well as onshore payments. The assessing officer in a scrutiny had the following points and held as under :--

The contract was a single contract subject to FTS. There were payments made by the non-resident to one Appledore in the UK also a sub-contractor which was paid from the offshore unit of the assessee. No TDS was done on the same but was claimed as an expense. Assessing Officer subjected it to section 40(a)(ia) disallowance. Assessee plea was that the payment happened outside India and in the absence of a PE in India no part of it can be subject to TDS disallowance. This was on the premise that even if a PE only the income attributable to PE can be taxed i.e. the India received income and since this was a payment outside India did not attract TDS. The fact that they filed a return basing themselves as a PE is also to be noted. On inquiry by assessing officer he read that there was a project location for the assessee thus a PE existed. Income fell in the scope of 44DA. Benefit of section 115A will not be available. The assessee having claimed to be a PE in the return now cannot take a reverse stand without filing a revised return. Explanation inserted in section 9(1)(vii) post Ishikawajima Harima Heavy Industries Ltd. v. CIT (2007) (288 ITR 408 SC) have done away with the twin condition that the source taxed in India must be rendered in India utilized in India.

Vide Indo-UK DTAA also it is taxable.

Above was also upheld by the DRP, thus assessee went in appeal:

Held in favour of the assessee as under :--

The place provided by the GRSE was to facilitate the project but this was not put to use or was not utilized by the assessee thus no PE exists. To be called a PE The fact that an enterprise has a certain amount of space at its disposal, which is used for business activity is sufficient to constitute a place of business. No formal legal right to use that place is therefore the requirement. (c) The enterprise should not only have a fixed place of business but also wholly or partly business should be carried on thought that fixed place. Carrying on of business involves the carrying on in a country of virtually any activity related to the business of the enterprise. Article 5(1) contains what is referred to as basic-rule PE. Article 5(2)(a) to (k) contains examples (positive definitions) of rule contained in Article 5(1) and Article 5(3) are exceptions to PE (negative definition). The place was only meant for ancillary activities of collecting information. Thus no PE exists. Once no PE exists the assessee does not have any business income thus section 44DA is not applicable. If no PE exists TDS obligations to Appledore do not survive. The claim on return that PE exists now retraction without a revised return is possible and acceptable (possibly not at assessing officer level but at higher level). No interest for advance tax is applicable. No PE existed even for assessment year 2005-06. The incomes fall in the scope of section 9(1)(vii). The explanation in section 9(1) inserted post Ishikawajima case do not help the assessee. The services provided by assessee make available technology as per the DTAA with UK with assessee. Assessee is eligible to the benefits of section 115A. "A requirement of the fixed place of business. Which is implicit in Article 5(1) is that he 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."

"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.

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.

Note: - The ITAT looked at benefit test for a PE. Once this was not there, the TDS obligations fell apart. The fact that the services were provided from abroad was no longer a good ground. The TDS obligation also failed because of the lack of PE. The contract being split had PE been read - force of attraction rule would have kicked in.