Gifford & Partners Ltd.(since merged with Gifford LLP), Kolkata V. DDIT, International Taxation - 1(1), Kolkata, Kolkata

ITA 2082/KOL/2010

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 5040 (ITAT-KOLKATA)
• Duration Of Justice: 5 year(s) 4 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-04-2016
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 16-03-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 19-11-2010
• Court: TRIBUNAL
• Department Lawyers: G MALLIKARJUNA
• Assessee Lawyers: S K AGARWAL
• Keywords: Capital asset; Business income; Transfer pricing; Residential status; Double taxation relief; Rule of consistency; Services rendered outside India; Deemed to accrue or arise in india; Retrospective amendment; Permanent establishment; Procedural lapse; Revised return
• Section: 142(1); 5(2); 234B; 80IB; 201(1); 90

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH C, KOLKATA [BEFORE HONBLE SHRI N.V.VASUDEVAN, JM & SHRI WAS EEM AHMED, AM] ITA NO.2082/KOL/2010 ASSESSMENT YEAR : 2007-08 GIFFORD AND PARTNERS LTD. -VERSUS- DEPUTY DIRECTO R OF INTERNATIONAL (SINCE MERGED WITH TAXATION (1), KOLKATA GIFFORD LLP),KOLKATA (PAN:AACCG2101R) (APPELLANT ) (RESPONDENT) ITA NO.1489KOL/2011 ASSESSMENT YEAR : 2005-06 GIFFORD AND PARTNERS LTD. -VERSUS- ASSISTANT DIR ECTOR OF INTERNATIONAL (SINCE MERGED WITH TAXATION -1(1),KOLKATA GIFFORD LLP),KOLKATA (PAN:AACCG2101R) (APPELLANT ) (RESPONDENT) FOR THE APPELLANT : SHRI S.K.AGARWAL, FCA FOR THE RESPONDENT : SHRI G.MALLIKARJUNA, CIT (DR) DATE OF HEARING : 16.03.2016. DATE OF PRONOUNCEMENT : 6.4.2016 ORDER 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. THE ASSESSEE IS A FOREIGN COMPANY INCORPORATED IN UNITED KINGDOM. IT IS ENGAGED IN THE BUSINESS OF PROVIDING CONSULTANCY SERVICES F OR EXECUTION OF PROJECTS. GARDEN RESEARCH SHIPBUILDERS AND ENGINEERS LTD.,(GRSE) IS A GOVERNMENT COMPANY. GRSE WAS DESIROUS OF CARRYING OUT MODERNISATION OF ITS E XISTING SHIPYARD AND APPROACHED THE ASSESSEE TO PROVIDE CONSULTANCY SERVICES FOR MODERN ISATION OF GRSES GARDEN ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 2 RESEARCH SHIPYARD. THE TERMS OF THE AGREEMENT BETW EEN THE ASSESSEE AND GRSE IS CONTAINED IN AN AGREEMENT DATED 29.4.2004 WHICH LAT ER WAS AMENDED BY MEMORANDUM OF AMENDMENT TO ORIGINAL AGREEMENT ON DIFFERENT OCC ASIONS. THE NATURE OF SERVICES TO BE PERFORMED BY THE ASSESSEE IS SET OUT IN APPEN DIX 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 PROVI DES 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 SERVI CES; 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 ST AGE. 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 THIRTEE N THOUSAND FOUR HUNDRED SIXTY SEVEN ONLY) THE CONTRACT WILL BE A LUMP-SUM TYPE OF CONTRACT WI TH STAGE-WISE PAYMENTS. ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 3 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 TAS K 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 AG REEMENT, WHICH READS THUS: 1.10. TAXES AND DUTIES THE FOREIGN CURRENCY PORTION OF THE FEES WILL BE RE MITTED DIRECTLY TO THE BANK NOMINATED BY THE CONSULTANT NET OF TAXES. THE LOCA L CURRENCY PAYMENTS MADE TO THE CONSULTANTS WILL BE SUBJECT TO THE DEDUCTION OF APPROPRIATE TAXES, LEVIES AND OTHER IMPOSITIONS UNDER THE INDIAN LAW, AS APPL ICABLE. IF FOREIGN PERSONNEL ARE LIABLE FOR TAXES FOR THEIR EARNINGS IN INDIA, T HE CONSULTANT WILL BE RESPONSIBLE TO ENSURE THAT THEY MEET SUCH LIABILITY . THE PAYMENT OF CONSIDERATION BY GRSE TO THE ASSESSE E 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 PROCEEDE D ON THE BASIS THAT THE TAX LIABILITY OF THE ASSESSEE, IF ANY, ON INCOME THAT A CCRUES TO THE ASSESSEE IN INDIA WAS TO BE BORNE BY GRSE. 3. THE PROVISIONS OF INCOME TAX ACT, 1961 (ACT), I N BRIEF, WITH REGARD TO TAXATION OF INCOME OF A NON-RESIDENT COMPANY NEED TO BE SET OUT . A BODY CORPORATE INCORPORATED BY OR UNDER THE LAWS OF A COUNTRY OUTSIDE INDIA, IS ALSO A COMPANY UNDER THE ACT. THERE IS NO DISPUTE THAT THE STATUS UNDER THE ACT FOR THE PURPOSE OF ASSESSMENT OF INCOME IS NON-RESIDENT COMPANY. SECTION 4(1) OF THE ACT PROVIDES THAT WHERE ANY CENTRAL ACT ENACTS THAT INCOME-TAX SHALL BE CHARGED FOR ANY ASSESSMENT YEAR AT ANY RATE OR RATES, INCOME-TAX AT THAT RATE OR THOSE RAT ES SHALL BE CHARGED FOR THAT YEAR IN ACCORDANCE WITH, AND SUBJECT TO THE PROVISIONS (INC LUDING PROVISIONS FOR THE LEVY OF ADDITIONAL INCOME-TAX) OF, THIS ACT IN RESPECT OF T HE TOTAL INCOME OF THE PREVIOUS YEAR OF EVERY PERSON. SEC.5(2) OF THE ACT (2) THE TOTAL INCOME OF ANY PREVIOUS YEAR OF A ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 4 PERSON WHO IS A NON-RESIDENT INCLUDES ALL INCOME FR OM 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 ARIS E TO HIM IN INDIA DURING SUCH YEAR. SEC.9 OF THE ACT PROVIDES WHEN INCOME ACCRUES OR AR ISES OR IS DEEMED ACCRUE OR ARISE IN INDIA TO A NON-RESIDENT. INCOME DEEMED TO ACCRUE OR ARISE IN INDIA HAS DIFFE RENT 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 INDI A, (B) THROUGH OR FROM ANY PROPERTY IN INDIA, (C) THROUGH OR FROM ANY ASSET OR SOURCE OF INCOME I N INDIA (D) THROUGH THE TRANSFER OF ANY CAPITAL ASSET IN IN DIA. 2) INCOME WHICH FALLS UNDER THE HEAD SALARIES; IF IT IS EARNED IN INDIA. 3) INCOME FROM SALARIES WHICH IS PAYABLE BY GOVER NMENT 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 RESID ENT 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 ASSES SEE. IN OTHER WORDS THE TAXABILITY AS WELL THE QUANTUM OF INCOME AND RATE AT WHICH THEY H AVE 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 SPECIFIE D TERRITORY OUTSIDE INDIA, AS THE CASE MAY BE, UNDER SUB-SECTION (1) OF SEC.90 FOR GR ANTING RELIEF OF TAX, OR AS THE CASE MAY BE, AVOIDANCE OF DOUBLE TAXATION, THEN, IN RELA TION TO THE ASSESSEE TO WHOM SUCH ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 5 AGREEMENT APPLIES, THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTENT THEY ARE MORE BENEFICIAL TO THAT ASSESSEE. 4. IT IS NOT IN DISPUTE IN THE PRESENT CASE THAT T HERE EXISTS AN AGREEMENT FOR AVOIDANCE OF DOUBLE TAXATION OF INCOME (DTAA) BETWEEN INDIA A ND UNITED KINGDOM (INDIA-UK DTAA) AND THAT THE ASSESSEE IS A TAX RESIDENT OF UK ENTITLED TO THE BENEFITS AS PROVIDED FOR BY THE SAID DTAA. 5. WITH THIS BACKGROUND, WE WILL PROCEED TO EXAMIN E THE ISSUES THAT ARISE FOR CONSIDERATION IN THE PRESENT APPEAL. GIFFORD & PAR TNER LTD. ('GIFFORD' OR 'THE ASSESSEE') HAD ENTERED INTO A CONTRACT WITH GARDEN REACH SHIPBUILDING ENGINEERS ('GRSE') IN INDIA FOR RENDERING THE FOLLOWING SERVI CES WITH REGARD TO MODERNISATION OF THE EXISTING SHIPYARD OF GRSE:- PREPARATION OF CONCEPT PAPERS, PRELIMINARY PROJECT REPORT (PPR); DETAILED PROJECT REPORT (DPR); ENGINEERING SERVICES; PROJECT MANAGEMENT SERVICES; AND POST - CONSTRUCTION SERVICE THE SAID SERVICES WERE TO BE PERFORMED BOTH FROM INDIA AS WELL AS FROM THE UNITED KINGDOM ('UK'). THE LOCAL SERVICES WERE RENDERED TH ROUGH INDEPENDENT INDIAN SUB- CONTRACTORS AND THE FOREIGN SERVICES WERE RENDERED PARTLY BY AN INDEPENDENT FOREIGN SUB-CONTRACTOR I.E. APPLEDORE AND PARTLY BY THE ASS ESSEE, FROM ITS HEAD OFFICE IN THE UK. FEES FOR THE SAID SERVICES WERE PAYABLE IN TWO PA RTS I.E. FOREIGN CURRENCY PAYMENT IN USD AND LOCAL CURRENCY PAYMENTS IN INR. THE WORK ON THE SAID CONTRACT WAS STARTED IN APRI L 2004 AND THE ASSESSEE HAS SINCE BEEN FILING TAX RETURNS IN INDIA FOR INCOMES EARNED FROM THE SAID CONTRACT. ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 6 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 I N PROFIT AND LOSS ACCOUNT. THE CORRESPONDING EXPENDITURE IN CONNECTION WITH EXECU TION OF WORK IN INDIA OF RS.1,06,81,827/- WAS DEBITED AS AN EXPENDITURE IN T HE 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 S ETTING OFF BROUGHT FORWARD LOSSES OF RS.2,240,274. THE ASSESSEE ALSO CLAIMED CREDIT OF T DS 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 OFFERE D 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 INFO RMATION/CLARIFICATION FROM THE ASSESSEE, WAS ALSO ISSUED ON 3 AUGUST 2009. 7. THE FOLLOWING ISSUES WERE RAISED BY THE AO DURI NG THE COURSE OF THE ASSESSMENT PROCEEDINGS:- 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-CO NSULTANTS. THE AMOUNTS PAID TO THE SUB-CONSULTANTS WERE CLAIMED AS DEDUCTI ON/EXPENDITURE IN ARRIVING AT THE INCOME DECLARED IN THE RETURN OF INCOME. AC CORDING TO THE AO, THE PAYMENTS MADE TO SUB-CONSULTANTS WERE IN THE NATURE OF FEES FOR PROFESSIONAL/TECHNICAL SERVICES AND TAX AT SOURCE O UGHT 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. A S A CONSEQUENCE, THE AO WAS OF THE VIEW THAT THE EXPENDITURE CLAIMED AS DED UCTION 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 SE CTIONS 30 TO 38 , THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMPUTIN G THE INCOME CHARGEABLE UNDER THE HEAD `PROFITS AND GAINS OF BUS INESS OR PROFESSION . ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 7 .. (IA) ANY INTEREST, COMMISSION OR BROKERAGE, FEES FO R PROFESSIONAL SERVICES OR FEES FOR TECHNICAL SERVICES PAYABLE TO A RESIDENT, OR AMOUNTS PAYABLE TO A CONTRACTOR OR SUB-CONTRACTOR, BEING RE SIDENT, FOR CARRYING OUT ANY WORK (INCLUDING SUPPLY OF LABOUR FOR CARRYI NG OUT ANY WORK), ON OR, AFTER DEDUCTION, HAS NOT BEEN PAID DURING THE P REVIOUS YEAR, OR IN THE SUBSEQUENT YEAR BEFORE THE EXPIRY OF THE TIME PRESC RIBED 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 PAYMENT S TO NON-RESIDENTS IN INDIA UNDER THE ACT M/S.APPLEDORE, U.K., WHO ACT ED AS SUB-CONSULTANTS. THE ASSESSEE ENTERED IN A CONTRACT WITH GRSE FOR RENDER ING CONSULTANCY SERVICES FOR MODERNISATION OF THEIR SHIPYARD PROJECT. THE SC OPE OF WORK ENVISAGED- PREPARATION OF CONCEPT PLAN, PRELIMINARY PROJECT RE PORT (PPR) AND DETAILED PROJECT REPORT (DPR). DESIGN, DETAILED ENGINEERING, DRAWING AND TENDER DO CUMENTS FOR WORKS CONTRACT. PROJECT MANAGEMENT AND CONSTRUCTION SUPERVISION SER VICES. ACCORDING TO THE ASSSESSEE, THE SCOPE OF CONSULTANC Y 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 OB TAINED 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 SERV ICES TOWARDS PREPARATION OF CONCEPT PLAN, PRELIMINARY PROJECT REPORT AND DET AILED PROJECT REPORT, AND RENDER EVALUATION. THE TERMS OF THE AGREEEMENT BET WEEN THE ASSESSEE AND M/S.APPLEDORE ARE CONTAINED IN AN AGREEMENT DATED 2 0.5.2004 (COPY OF THE SAME IS AT PAGES 128 TO 133 OF THE PAPER BOOK). SCH EDULE-1 TO THIS AGREEMENT DETAILS THE FOLLOWING AS THE SERVICES TO BE RENDERE D BY M/S.APPLEDORE, VIZ., CONCEPTUAL AND OUTLINE DESIGN, TECHNICAL SPECIFICAT IONS FOR PLANT AND EQUIPMENT, REVIEW AND COMMENT ON PREQUALIFICATION D OCUMENTS, REVIEW AND COMMENT ON BIDDERS PROPOSAL TENDER DOCUMENTS, REVIE W AND COMMENT ON QUALITY MANUALS AND METHOD STATEMENTS OF CONTRACTOR S. ALL THESE SERVICES WERE RENDERED BY APPLEDORE IN THE UK AND THE CONSID ERATION OF RS.L0,637,462 FOR RENDERING SUCH SERVICES WAS PAID BY THE HEAD OF FICE OF THE ASSESSEE FROM THEIR STERLING ACCOUNT, MAINTAINED IN THE UK. NO PA RT OF THE APPLEDORE'S FEES WAS PAID IN INDIA. NO TAXES WERE DEDUCTED BY THE AS SESSEE ON THE REMITTANCES ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 8 MADE TO APPLEDORE. IN COURSE OF THE ASSESSMENT PRO CEEDINGS, THE LD. AO REQUESTED THE ASSESSEE TO EXPLAIN AS TO WHY THE PAY MENT, 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 SUBMIT TED THAT:- PAYMENTS MADE BY THE ASSESSEE TO APPLEDORE WAS NO T 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 S ECTION 195 OF THE ACT WHEN ANY SUM CHARGEABLE TO TAX UNDER THE PROVISIONS OF T HE ACT, IS PAID TO A NON- RESIDENT, NOT BEING A COMPANY, OR TO A FOREIGN COMP ANY. ACCORDING TO THE ASSESSEE PAYMENT WAS MADE BY GIFFORD WHO IS A RESID ENT IN THE UK TO APPLEDORE WHO IS ALSO A RESIDENT IN THE UK. SUCH PA YMENTS WERE MADE FOR AND SERVICES RENDERED IN THE UK. THE ASSESSEE SUBMITTE D THAT APPLEDORE, BEING A NON-RESIDENT IN TERMS OF SECTION 5(2) OF THE ACT, W OULD 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 I S 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 DEEM ED 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 I NDIA. THEREFORE, ONLY BY REASONS OF THE FACT THAT THE PAYMENT WAS MADE TO AP PLEDORE 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 CLAIME D AS DEDUCTION/EXPENDITURE IN ARRIVING AT THE INCOME DEC LARED IN THE RETURN OF INCOME. ACCORDING TO THE AO, THE PAYMENTS MADE TO SUB-CONSULTANTS WERE PAYMENTS MADE TO NON-RESIDENTS AND THEREFORE IN TER MS OF SEC.195 OF THE ACT, THE ASSESSEE OUGHT TO HAVE DEDUCTED AT SOURCE ON SU CH PAYMENTS IN TERMS OF SECC.194J OF THE ACT. THE ASSESSEE HAD NOT DEDUCTE D 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 DEDUCTI ON IN VIEW OF THE PROVISIONS OF SEC.40(A)(I) OF THE ACT WHICH READS T HUS: 40. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTIO NS 30 TO 38, THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMPUTIN G THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUS INESS OR PROFESSION', ( A) IN THE CASE OF ANY ASSESSEE ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 9 ( I) ANY INTEREST (NOT BEING INTEREST ON A LOAN I SSUED FOR PUBLIC SUBSCRIPTION BEFORE THE 1ST DAY OF APRIL, 1938), RO YALTY, FEES FOR TECHNICAL SERVICES OR OTHER SUM CHARGEABLE UNDER THIS ACT, WH ICH IS PAYABLE, (A) OUTSIDE INDIA; OR (B) IN INDIA TO A NON-RESIDENT, NOT BEING A C OMPANY 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 PROPOSE D TO INCREASE THE INCOME OR RECEIPTS OF THE ASSESSEE AS PROVIDED U/S.195A OF THE ACT. 8. DURING THE COURSE OF THE ASSESSMENT PROCEEDING S THE ASSESSEE FILED ITS SUBMISSION ON 18 TH DECEMBER 2009, WHEREIN THE FOLLOWING CONTENTIONS W ERE MADE BY THE ASSESSEE:- 1. THE ASSESSEE DOES NOT HAVE A PERMANENT ESTABLIS HMENT ( PE) IN INDIA; 2. THE CONTRACT BETWEEN THE ASSESSSEE AND GRSE HAS TWO LIMBS- I) OFFSHORE SERVICES, II) ON SHORE SERVICES 3. THE PAYMENTS MADE BY GRSE IN USD ARE FOR OFF-SHO RE SERVICES AND THOSE MADE IN INDIAN RUPEE (INR) ARE FOR ON-SHORE SERVICE S 4. THE ASSESSEE ALSO CONTENDED THAT THE ENTIRE RECE IPTS OF THE ASSESSEE IN USD ARE MEANT FOR OFF-SHORE SERVICES RENDERED FROM THE UK AND ARE NOT TAXABLE IN INDIA ON ACCOUNT OF THE FOLLOWING THREE FACTORS: ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 10 I) NO PROFITS FROM THESE SERVICES ARE ATTRIBUTABLE TO THE PE IN INDIA II) SERVICES HAVE TO BE RENDERED IN INDIA, FOR TAXA BILITY IN INDIA, AS PER THE RATIO OF THE HON'BLE SUPREME COURT IN THE CASE OF ISHIKAW AJIMA HARIMA HEAVY INDUSTRIES LTD. III) THE SERVICES CANNOT BE TAXED UNDER FTS OWING T O THE 'MAKE-AVAILABLE' CLAUSE CONTAINED IN ARTICLE 13 OF THE DTAA 9. WITH RESPECT TO THE SUBMISSION FILED ON 18 DECE MBER 2009 AS STATED ABOVE, THE ASSESSEE ALSO FILED AN APPLICATION UNDER SECTION 14 4A 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 AC T, 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 EXAMIN E 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 :- 1. THE ADIT HELD THAT THE ASSESSEES CLAIM THAT THE RE WAS NO ACCRUAL OF INCOME IN INDIA AND THEREFORE THE SUMS RECEIVED FROM GRSE CANNOT BE BROUGHT TO TAX IN INDIA, IS CONTRARY ITS OWN RETURN OF INCOME WHE REIN THE ASSESSEE HAD OFFERED THE SUM IN QUESTION TO TAX. HE ALSO HELD THAT SUCH A CLAIM CANNOT BE MADE WITHOUT FILING A REVISED RETURN OF INCOME. IN THIS REGARD THE AO REFERRED TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F GOETZ INDIA LTD. 157 TAXMANN 1 (SC) WHEREIN IT WAS HELD THAT THE AO HAS NOT POWER TO ENTERTAIN ANY CLAIM BY AN ASSESSEE WHICH IS NOT SUPPORTED BY A REVISED RETURN OF INCOME. THE CONTENTION OF THE ASSESSEE REGARDING THE NON TA XABILITY OF THE AMOUNT RECEIVED IN USD, WAS REJECTED. IN COMING TO THE AB OVE CONCLUSION, THE ADIT HELD THAT THE CONTRACT BETWEEN THE PARTIES DID NOT PROVIDE RENDERING OF TWO TYPES OF SERVICES VIZ., (1) TO BE RENDERED FROM UK AND (2) SERVICES TO BE RENDERED IN INDIA. ACCORDING TO ADIT, THE CONTRACT REFERS TO A SINGLE, CONSOLIDATED CONTRACT FOR RENDERING OF SERVICES AND THERE IS NO SPLIT OF THE SERVICES INTO ONSHORE AND OFFSHORE SERVICES AS REFE RRED TO BY THE ASSESSEE. 2. WITHOUT PREJUDICE TO THE REJECTION OF THE CLAIM OF THE ASSESSEE, A FINDING WAS GIVEN THAT THERE WAS A 'LIVE LINK' BETWEEN THE SERV ICES STATED TO HAVE BEEN ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 11 RENDERED IN THE UK AND 'THE SERVICES RENDERED BY TH E 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 SERV ICES 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. W ITH REGARD TO POINT NO.(3) ON THE EXISTENCE OF PE OF THE ASSESSEE IN INDIA AND TAXAB ILITY OF RECEIPTS IN USD, FOR SERVICES RENDERED FROM UK, THE AO FIRST MADE A REFE RENCE TO THE VARIOUS TERMS OF THE CONTRACT BETWEEN THE ASSESSEE AND GRSE AND CAME TO THE FOLLOWING CONCLUSIONS: 1. THE AO REFERRED TO A LETTER DATED 14.9.2009 BY THE ASSESSEES REPRESENTATIVE TO THE AO WHEREIN THEY HAD ADMITTED THAT IT HAD A P E IN INDIA AND ALL INCOME ARISING OR ACCRUING TO IT IS ACCOUNTED FOR AND TAXE S ARE PAID. THE AO REFERRED TO THE RETURN OF INCOME FILED BY THE ASSESSEE WHEREIN INCOME WAS OFFERED TO TAX. THE AO ALSO REFERRED TO THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE WHEREIN THE ENTIRE RECEIPTS OF THE ASSESSEE FROM GRSE WHETHER I N USD OR INR IS DULY CREDITED. THUS THE ASSESSEE CANNOT NOW GO BACK ON HIS STAND THAT INCOME IN QUESTION IS NOT TAXABLE IN INDIA. 2. ACCORDING TO THE AO THE CONTRACT BETWEEN THE AS SESSEE AND GRSE PROVIDED FOR COMPLETION OF PROJECT IN THREE STAGES. ACCORDI NG TO THE AO THE SCOPE OF WORK AS PER THE CONTRACT WAS SUCH AS TO REQUIRE CON TINUOUS INVOLVEMENT OF THE ASSESSEE AND ITS SUB-CONSULTANTS/ASSOCIATES WITH GR SE AT THE PROJECT SITE OF GRSE. EVEN IN RESPECT OF REPORTS PREPARED AT UK, T HE NECESSARY TECHNICAL DETAILS HAD TO BE COLLECTED AND SCRUTINIZED BY THE ASSESSEE AND ITS SUB- CONSULTANTS/ASSOCIATES. 3. ACCORDING TO THE AO, APPENDIX 1.3 OF THE CONTRA CT BETWEEN THE ASSESSEE AND GRSE CONTAINED DETAILS OF FOREIGN STAFF AND CON SULTANTS OF THE ASSESSEE AS WELL AS ITS ASSOCIATES, M/S.APPLEDORE INTERNATIONAL AND THEIR INVOLVEMENT IN THE VARIOUS STAGES OF WORK INSIDE GRSE PREMISES AT KOLK ATA. THE AO ALSO HELD THAT ACCORDING TO THE CONTRACT DOCUMENT BETWEEN THE ASSESSEE AND GRSE IT IS NOWHERE MENTIONED THAT THERE ARE TWO PARTS OF THE C ONTRACT, I.E. OFFSHORE SERVICES AND ONSHORE SERVICES. THE ID. AO WAS OF TH E VIEW THAT FROM A READING OF THE CONTRACT, IT WAS CLEAR THAT THE CONTRACT WAS ONLY FOR RENDERING OF CONSULTANCY SERVICES AND THAT THE WHOLE SCOPE OF WO RK HAS TO BE COMPLETED IN ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 12 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 B IFURCATION OF THE TOTAL CONSIDERATION TO BE PAID TO THE ASSESSEE, IN USD AN D IN INR, WITHOUT ANY MENTION OF THE SERVICES BEING 'OFFSHORE' OR 'ONSHOR E'. THE AO ALSO REFERRED TO APPENDIX 1.4 OF THE CONTRACT WHICH PROVIDED THAT GR SE WILL BE REQUIRED TO MAKE AVAILABLE TO THE CONSULTANT, AIR-CONDITIONED O FFICE 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 SIT E AND THE ENQUIRY MADE BY HIM AT THE PROJECT SITE. THE INSPECTOR HAD REPORTE D THAT ONE MR.SUBRATA MITRA, WAS THE RESIDENT ENGINEER OF THE ASSESSSEE AS PER H IS VISITING CARD. THE ASSESSEES NAME GIFFORD WAS FOUND ON THE VISITING CARD. THE VISITING CARD ALSO CONTAINED THE FOLLOWING DESCRIPTION CONSULTAN TS KOLKATA OFFICE, 43/46, GARDEN REACH ROAD, KOLKATA-700 024. 11. FOR THE ABOVE REASONS, THE AO IN HIS DRAFT ASS ESSMENT ORDER UNDER SECTION 143(3), READ WITH SECTION 144C OF THE ACT, DATED 30 DECEMBE R 2009, CAME TO THE CONCLUSION THAT THE ASSESSEE HAD A PE IN INDIA WITHIN THE MEAN ING OF ARTICLE 5 (1) AS WELL AS ARTICLE 5 (2) OF THE INDIA-UK DTAA AND THAT THE CON SULTANCY 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 A TTRIBUTABLE TO THE PE IN INDIA. THE AO FURTHER HELD THAT IT IS BECAUSE OF THE BELIEF/ PRES UMPTION OF THE EXISTENCE OF 'EFFECTIVE CONNECTION' THAT THE ASSESSEE OPTED FOR TAXATION UN DER 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 PRINCIPL E OF ACCOUNTANCY WHICH SHOULD BE FOLLOWED. THE FINAL CONCLUSION OF THE AO WAS: F)THERE EXISTS A PE IN THE CASE OF THE ASSESSEE I N INDIA WITHIN THE MEANING OF ARTICLE 5 OF THE INDO-UK DTAA. THE CONSIDERATIO N FOR CONSULTANCY SERVICES PROVIDED BY THE ASSESSEE TO GRSE IS IN THE NATURE O F 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 CAR RYING 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 CONS IDERATION FOR THESE SERVICES ARE LIABLE TO TAX IN INDIA UNDER ARTICLE 7 OF THE I NDO-UK DTAA BY VIRTUE OF THE PROVISIONS OF ARTICLE 13(6) OF THE INDO-UK DTAA. ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 13 12. THE AO THEREAFTER DISALLOWED CONSULTANCY CHARG ES 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 EXT ENT OF RS.30,09,179 ON THE GROUND THAT THE SAME RELATES TO PERIOD PRIOR TO THE PREVIO US 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. T HE 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 2 2,40,274 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 ASSESSMEN T AS CONTAINED IN THE DRAFT ASSESSMENT ORDER BEFORE THE DISPUTES RESOLUTION PAN EL (DRP) IN ACCORDANCE WITH THE PROVISIONS OF SEC.144C OF THE ACT. THE FOLLOWING I SSUES WERE RAISED BY THE ASSESSEE BEFORE THE DRP. 14. ISSUE WITH REGARD TO EXISTENCE OF PE IN INDIA. THE ASSESSEE DREW ATTENTION OF THE DRP TO THE SCOPE OF WORK OF THE ASSESSEE WITH GRSE, AS FOLLOWS: PHASE -1 ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 14 PREPARATION OF A MACRO LEVEL CONCEPT PLAN FOR THE M ODERNIZATION OF THE ENTIRE SHIP BUILDING YARD INCLUDING THE INSTALLATION OF A SHIP LIFT, CONSIDERING A NEW MODULAR SHOP AND IMPROVEMENTS TO THE MODULE BUILDIN G, 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 DR AWINGS 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 TH E ENTIRE PROJECT AND THE DETAILED ITEM WISE COST ESTIMATE FOR THE DIFFERENT PACKAGES ENVISAGED FOR THE MODERNIZATION; DETAILED REQUIREMENTS OF SERVICES/ FACILITIES, ESTI MATES OF POWER REQUIREMENTS, PROVISION OF SUB- STATION, COMPRESSED AIR ETC; PREPARATION OF DRAFT TENDER DOCUMENTS FOR THE VARIO US PACKAGES; AND OBTAINING TIMELY APPROVALS FROM VARIOUS STATUTORY B ODIES. DURING THE PREVIOUS YEAR RELEVANT TO AY 2007-08, TH E ASSESSEE WAS INVOLVED IN THE ACTIVITIES PERTAINING TO THIS PHASE . PHASE - III ISSUANCE OF THE DETAILED WORKING DRAWINGS TO THE CO NTRACTORS (SEPARATE FROM THE ASSESSEE), AS INDEPENDENTLY SELECTED BY GRSE, FOR T HE 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. IT WAS POINTED OUT THAT THE CONTRACT VALUE WAS PAYABLE PARTLY IN USD AND PARTLY IN INR. THIS WAS TO ENSURE THAT, WHILST THE FEES PA YABLE TO THE ASSESSEE FOR THE ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 15 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 T HAT DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAD TO VISIT INDIA, FOR THE PURP OSES 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 DETA ILED ABOVE) WOULD CLEARLY REVEAL THE SAID REQUIREMENT OF COLLECTION OF INFORMATION IN IN DIA. IT WAS POINTED OUT THAT EVEN THE REQUIREMENT OF DATA COLLECTION HAS BEEN AGREED BY T HE LD. AO IN HIS IMPUGNED ORDER AT PAGE 18. IT WAS SUBMITTED THAT THE INFORMATION ONC E 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 P HASE - 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 INFOR MATION, WHICH WAS NECESSARY FOR THE PURPOSES OF THE REPORTS AND THE DRAWINGS, WHICH WER E 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 PERFO RM, UNDER THE CONTRACT. 16. THE ASSESSEE FURTHER CONTENDED THAT IN THE LIG HT OF THE ABOVE FACTS IT CANNOT BE SAID THAT THE ASSESSEE HAD A PE IN INDIA, AS DEFINE D IN ARTICLE 5 OF THE DTAA. THE ASSESSEE DREW ATTENTION OF THE DRP TO THE PROVISION S OF ARTICLE 5(3)( D) OF THE DTAA, WHICH READS AS FOLLOWS: '3. THE TERM 'PERMANENT ESTABLISHMENT' SHALL NOT BE DEEMED TO INCLUDE: (A). (B) . (C) . .. ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 16 (D) THE MAINTENANCE OF A FIXED PLACE OF BUSINESS SO LELY FOR THE PURPOSE OF PURCHASING GOODS OR MERCHANDISE, OR FOR COLLECTING INFORMATION, FOR THE ENTERPRISE; (E) ..' IT WAS ARGUED THAT THE ASSESSEES INSIGNIFICANT PRE SENCE IN INDIA DURING THE PREVIOUS YEAR WAS MERELY FOR THE PURPOSE OF COLLECTION OF IN FORMATION BY THE ASSESSEE FOR EXECUTION OF THE GRSE CONTRACT AND DOING SO WOULD N OT CONSTITUTE A PE IN INDIA. 17. IT WAS FURTHER SUBMITTED THAT THAT EXPLANATION I TO SECTION 5(2) OF THE ACT, PROVIDES THAT INCOME ACCRUING OR ARISING OUTSIDE IN DIA SHALL NOT BE DEEMED TO BE ARISING IN INDIA WITHIN THE MEANING OF THIS SECTION BY REASON ONLY OF THE FACT THAT IT HAS TAKEN INTO ACCOUNT IN THE BALANCE SHEET PREPARED IN INDIA. MOREOVER, TREATMENT OF ITEM UNDER THE TAXATION REGIME IS INDEPENDENT OF ITS ACC OUNTING TREATMENT. IN THIS REGARD ATTENTION WAS DRAWN TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF KEDARNATH JUTE MFG CO LTD VS CIT (CENTRAL) CALCUTTA 82 ITR 363 (1971) (SC) WHEREIN IT WAS HELD THAT WHETHER THE ASSESSEE IS EN TITLED TO A PARTICULAR DEDUCTION OR NOT WILL DEPEND ON THE PROVISION OF LAW RELATING TH ERETO AND NOT ON THE VIEW WHICH THE ASSESSEE MIGHT TAKE OF HIS RIGHTS NOR CAN THE EXIST ENCE OR ABSENCE OF ENTRIES IN THE BOOKS OF ACCOUNT BE DECISIVE OR CONCLUSIVE IN THE M ATTER. IT WAS ARGUED THAT PREPARATION OF ACCOUNTS IN INDIA INCORPORATING THE INVOICES RAISED FROM UK DOES NOT HAVE ANY MATERIAL EFFECT ON TAXABILITY OF SUCH INCO ME IN INDIA. 18. IN WAS THUS SUBMITTED THAT THERE WAS NO PE IN INDIA IN TERMS OF ARTICLE 5 OF THE DTAA AND HENCE NO PART OF INCOME EARNED BY THE ASSE SSEE DURING THE YEAR ENDED 31 MARCH 2007, FROM EXECUTION OF THE CONTRACT OF GRSE, CAN BE TAXED IN INDIA. 19. ISSUE OF TAXABILITY OF PAYMENTS RECEIVED IN USD THE ASSESSEE SUBMITTED THAT IT HAD RENDERED SERVICE S 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 I NDEPENDENT INDIAN, SUB-CONTRACTORS AND FOREIGN SERVICES WERE RENDERED PARTLY BY ITS IN DEPENDENT FOREIGN SUB-CONTRACTOR ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 17 I.E. APPLEDORE AND PARTLY BY THE ASSESSEE, FROM ITS HEAD OFFICE IN THE UK. THE ASSESSEE FURTHER CONTENDED THAT THE CONTRACT ENVISA GES A DIVISIBLE CONTRACT HAVING TWO PARTS - ONE FOR RENDERING SERVICES FROM INDIA AND T HE OTHER FOR OFFSHORE SERVICES TO BE RENDERED FROM THE UK. THE ASSESSEE CONTENDED THAT T HE 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 AN D THE COUNTRY OF THE NON-RESIDENT, THERE IS NO QUESTION OF INVOKING SECTION 9 OF THE A CT. 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 W AS ARGUED THAT THUS, IF ANY SERVICES HAVE BEEN RENDERED BY THE HEAD OFFICE OF GIFFORD, S UCH SERVICES CANNOT BE BROUGHT TO TAX IN INDIA ONLY BECAUSE THE HEAD OFFICE IS CONNEC TED 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 IN DIA. 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 ARIS ING 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 CONN ECTION. THE ASSESSEE RELIED ON THE FOLLOWING DECISIONS WHEREIN THE CONTENTIONS REFERRE D 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 ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 18 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 PR EPARATION OF THE ENGINEERING DRAWINGS AND REPORT. THE SAID SERVICES WERE PERFORM ED AND CARRIED OUT ENTIRELY FROM THE UK WITH SOME SUPPORT OBTAINED FROM THE INDEPEND ENT INDIAN SUB-CONSULTANTS WHO WERE PAID IN INR FROM RUPEE COMPONENT OF THE CONTAC T VALUE. 20. WITHOUT PREJUDICE TO THE ABOVE CONTENTION, IT WAS CONTENDED THAT EVEN IF THE ASSESSEE IS DEEMED TO HAVE CONSTITUTED A PE IN INDI A, THEN THE TAXABILITY THEREOF, WOULD BE GOVERNED BY ARTICLE 7(1) OF THE DTAA, WHIC H READS AS UNDER:- 'THE PROFITS OF AN ENTERPRISE OF A CONTRACTING STAT E 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 PRI CE MAY BE TAXED IN THE OTHER STATE BUT ONLY SO MUCH OF THEM AS IS DIRECTLY OR INDIRECTLY A TTRIBUTABLE TO THAT PERMANENT ESTABLISHMENT. THE ASSESSEE IN THIS REGARD DREW ATTENTION OF THE D RP TO THE COMMENTARY OF KLAUS VOGEL ON DOUBLE TAXATION CONVENTIONS, WHEREIN IT HA S BEEN STATED AS UNDER: 'AS REGARDS THE PROFITS MADE BY THE ENTERPRISE IN T HE STATE OF THE PERMANENT ESTABLISHMENT, A DISTINCTION MUST ALWAYS BE MADE BE TWEEN THOSE PROFITS WHICH RESULT FROM THE PERMANENT ESTABLISHMENT'S ACTIVITIE S AND THOSE MADE, WITHOUT ANY INTERPOSITION OF THE PERMANENT ESTABLISHMENT, BY TH E HEAD OFFICE OR ANY OTHER PART OF THE ENTERPRISE .' IT WAS SUBMITTED THAT THE PROFITS OF THE ASSESSEE M AY BE TAXED IN INDIA, ONLY TO THE EXTENT OF SO MUCH OF THE PROFIT AS IS DIRECTLY OR I NDIRECTLY ATTRIBUTABLE TO THE PE IN INDIA. 21. FURTHER, WITHOUT PREJUDICE TO THE AFORESAID AR GUMENT, RELIANCE WAS ALSO PLACED ON THE DECISION OF SUPREME COURT IN THE CASE OF ISHIKA WAJMA HARIMA HEAVY INDUSTRIES LTD. VS. CIT (SUPRA) WHEREIN THE HONBLE SUPREME CO URT HELD THAT IN A COMPOSITE CONTRACT PERFORMED IN DIFFERENT PLACES, THE PRINCIP LE OF APPORTIONMENT HAS TO BE APPLIED TO DETERMINE THE RESPECTIVE RIGHT TO TAXATI ON OF DIFFERENT COUNTRIES. THE ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 19 FOLLOWING OBSERVATIONS OF THE HONBLE SUPREME COURT IN THIS REGARD WERE BROUGHT TO THE NOTICE OF THE DRP. 'IN CASES SUCH AS THIS, WHERE DIFFERENT SEVERABLE P ARTS OF THE COMPOSITE CONTRACT IS PERFORMED IN DIFFERENT PLACES, THE PRINCIPLE OF APPORTIONMENT CAN BE APPLIED, TO DETERMINE WHICH FISCAL JURISDICTION, CAN TAX THAT P ARTICULAR 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 WHIC H WERE THE SOURCE OF THE INCOME SOUGHT TO BE TAXED HAD TO BE RENDERED IN INDIA AS W ELL AS UTILISED IN INDIA. IN THIS CASE, BOTH THESE CONDITIONS WERE NOT SATISFIED SIMU LTANEOUSLY, THEREBY EXCLUDING THE INCOME FROM THE AMBIT OF TAXATION IN INDIA. THU S, 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 B Y SUCH PERSON IN INDIA. THE APPELLANTS HAD PROVIDED SERVICES TO PERSONS RESIDEN T IN INDIA, AND THROUGH THEY HAD BEEN USED HERE, THEY HAD NOT BEEN RENDERED IN I NDIA . . ..... HOWEVER, EVEN IN RELATION TO SUCH INCOME, THE PROVISIONS OF ARTICLE 7 OF THE DTAA WOULD BE APPLICABLE, AS SERVICES RENDERED OUTS IDE INDIA WOULD HAVE NOTHING TO DO WITH PERMANENT ESTABLISHMENT IN INDIA . THUS IF ANY SERVICES HAVE BEEN RENDERED BY THE HEAD OFFICE OF APPELLANT OUTSI DE INDIA, ONLY BECAUSE THEY WERE CONNECTED WITH PERMANENT ESTABLISHMENT. EVEN I N RELATION THERETO, PRINCIPLE OF APPORTIONMENT SHALL APPLY. RELIANCE WAS ALSO PLACED ON THE DECISION IN THE CAS E OF CLIFFORD CHANCE VS. DCIT (2008) 318 ITR 237 (BOM.) WHEREIN THE TRANSACTION ENTERED INTO BY THE ASSESS EE PARTLY TOOK PLACE IN ONE TERRITORY AND PARTLY IN AN OTHER. THE HON'BLE HIGH COURT OF BOMBAY REFERRED TO THE DECISION IN THE CASE OF ISHI KAWAJMA 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 WI THIN ITS PURVIEW THE TERRITORIAL NEXUS ON THE BASIS WHEREOF TAX IS REQUIRED TO BE LE VIED, 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 I NCOME OF A NON-RESIDENT MAY NOT BE. THE ANSWER TO THE QUESTION WOULD DEPEND UPON TH E NATURE OF THE CONTRACT AND THE PROVISIONS OF THE DT A. WHAT IS RELEVANT IS REC EIPT 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. ' ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 20 22. IT WAS CONTENDED THAT IN VIEW OF THE ABOVE JUD ICIAL PRONOUNCEMENT, IT CAN BE SAID THAT IN CASE ANY PART OF THE SERVICES ARE BEING REN DERED OUTSIDE INDIA THEN INCOME SHOULD BE APPORTIONED SO THAT THE INCOME FROM THE S ERVICES RENDERED OUTSIDE INDIA IS NOT TAXED IN INDIA. IT WAS POINTED OUT THAT THE DEC ISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CLIFFORD CHANCE (SUPRA) WAS RE NDERED 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 TH AT 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 NO N-RESIDENT, WHETHER OR NOT, ( I ) THE NON-RESIDENT HAS A RESIDENCE OR PLACE OF BUS INESS 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 OB SERVED 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 IMPOS ITION OF TAX. IT ALSO LAID DOWN THAT SECTION 9(1)(VII)(C) ENVISAGES THE FULFILMENT OF TW O CONDITIONS: SERVICES WHICH ARE SOURCE OF INCOME SOUGHT TO BE TAXED IN INDIA MUST B E (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 S ECTION 9 (BY FINANCE ACT, 2010) SUGGESTS THAT CRITERION OF RESIDENCE, PLACE OF BUSI NESS OR BUSINESS CONNECTION IN INDIA HAS BEEN DONE AWAY WITH FOR FASTENING THE TAX LIABI LITY, 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. 23. IT WAS SUBMITTED THAT IN THE CASE OF THE ASSES SEE IT WOULD BE EVIDENT FROM THE CONTRACT OF THE ASSESSEE WITH GRSE, THAT SERVICES R ENDERED BY THE ASSESSEE FROM UK HAVE NOTHING TO DO WITH THE LOCAL ACTIVITIES WHICH ARE SEPARATELY PERFORMED AND ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 21 ACCOUNTED FOR. SUCH OFFSHORE SERVICES RENDERED FROM OUTSIDE INDIA ARE INDEPENDENT AND NOT CONNECTED WITH THE ACTIVITIES CARRIED ON IN IND IA. IT WAS THUS SUBMITTED THAT CONSIDERATION RECEIVED IN USD IN RESPECT OF THE OFF SHORE SERVICES, IS NOT LIABLE TO TAX IN INDIA: (I) AS THE SAID SERVICE HAS NOT BEEN RENDERED IN IN DIA; AND (II) RENDERING OF THE SAID SERVICES IS NOT ATTRIBUT ABLE TO A PE, EVEN IF ONE SUCH, IS ALLEGED TO EXIST IN INDIA; 24. APPLICABILITY OF THE PROVISIONS OF SECTION 115A WITHOUT PREJUDICE TO THE ABOVE OBJECTIONS, THE ASSE SSEE SUBMITTED THAT THE TAX LIABILITY OF THE ASSESSEE CANNOT EXCEED THE AMOUNT OF TAX CHA RGEABLE 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 FOREI GN COMPANY, INCLUDES ANY INCOME BY WAY OF ROYALTY OR FEES FOR TECHNICAL SERV ICES OTHER THAN INCOME REFERRED TO IN SUB-SECTION (1) OF SECTION 44DAJ REC EIVED FROM GOVERNMENT OR AN INDIAN CONCERN IN PURSUANCE OF AN AGREEMENT M ADE 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 IN DIAN CONCERN, THE AGREEMENT IS APPROVED BY THE CENTRAL GOVERNMENT OR WHERE IT RELATES TO A MATTER INCLUDED IN THE INDUSTRIAL POLICY, FOR THE T IME 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 INCO ME BY WAY OF FEES FOR TECHNICAL SERVICES, IF ANY, INCLUDED IN THE TOTAL I NCOME, AT THE RATE OF THIRTY PER CENT IF SUCH FEES FOR TECHNICAL SERVICES ARE RE CEIVED IN PURSUANCE OF AN AGREEMENT MADE ON OR BEFORE THE 31 ST DAY OF MAY, 1 997 AND TWENTY PER ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 22 CENT WHERE SUCH FEES FOR TECHNICAL SERVICES ARE REC EIVED 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 T HAT 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 TH E FOLLOWING CONDITIONS ARE SATISFIED:- I) THE INCOME IS RECEIVED FROM GOVERNMENT OR AN IND IAN 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 O F SUB-SECTION (1) OF SECTION 44DA OF THE ACT. 25. IT WAS CLAIMED BY THE ASSESSEE THAT IN THE INS TANT CASE, THERE IS NO DOUBT THAT THE ASSESSEE FULFILLS CONDITION (I) AND CONDITION (II) AS MENTIONED ABOVE. AS REGARDS CONDITION NO. (III), THE PROVISIONS OF SUB-SECTION (1) OF SECTION 44DA OF THE ACT NEEDS TO BE ANALYSED IN LIGHT OF THE FACTS OF THE ASSESSE E. THE SAID PROVISION IS REPRODUCED AS BELOW:- ' 44DA(1) - THE INCOME BY WAY OF ROYALTY OR FEES FOR TECHNIC AL SERVICES RECEIVED FROM GOVERNMENT OR AN INDIAN CONCERN IN PURSUANCE O F AN AGREEMENT MADE BY A NON-RESIDENT (NOT BEING A COMPANY) OR A FOREIGN COM PANY WITH GOVERNMENT OR THE INDIAN CONCERN AFTER THE 31 ST DAY OF MARCH, 20 03, WHERE SUCH NON-RESIDENT (NOT BEING A COMPANY) OR A FOREIGN COMPANY CARRIES ON BUSINESS IN INDIA THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN, OR PERF ORMS PROFESSIONAL SERVICES FROM A FIXED PLACE OF PROFESSION SITUATED THEREIN, AND THE RIGHT, PROPERTY OR CONTRACT IN RESPECT OF WHICH THE ROYALTIES OR FEES FOR TECHNICAL SERVICES ARE PAID IS EFFECTIVELY CONNECTED WITH SUCH PERMANENT ESTABLISH MENT OR FIXED PLACE OF PROFESSION, AS THE CASE MAY BE, SHALL BE COMPUTED U NDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' IN ACCORDANCE WITH THE PROVISIONS OF THIS ACT :' FTS WOULD FALL WITHIN THE PURVIEW OF SECTION 44DA(1 ) OF THE ACT, ONLY IF IT IS ACTIVELY CONNECTED TO THE PE OF THE NON-RESIDENT IN INDIA. P E FOR THE PURPOSE OF THIS SECTION HAS BEEN DEFINED IN SECTION 92F(IIIA) OF THE ACT WHICH READS AS UNDER:- ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 23 '(IIIA) 'PERMANENT ESTABLISHMENT', REFERRED TO IN C LAUSE (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 GR SE WOULD NOT FALL WITHIN THE PURVIEW OF SECTION 44DA OF THE ACT. AS SUCH, THE AS SESSEE WOULD BE ENTITLED TO THE BENEFIT OF THE PROVISIONS OF SECTION 115A OF THE AC T AND BE TAXED AT 20% OF THE GROSS RECEIPTS. 26. IT WAS CONTENDED THAT THE DEFINITION OF PE UND ER THE ACT HAS A MUCH NARROWER MEANING AS COMPARED TO THAT IN THE DTAA. AS SUCH, A N INSTANCE OF PE BEING ESTABLISHED UNDER THE PROVISIONS OF THE DTAA MAY NO T NECESSARILY RESULT IN A PE UNDER THE ACT. IT WAS SUBMITTED THAT A PE ACTUALLY POSTULATES THE EXISTENCE OF A SUBSTANTIAL ELEMENT OF AN ENDURING AND PERMANENT NA TURE OF A FOREIGN ENTERPRISE IN ANOTHER COUNTRY WHICH CAN BE ATTRIBUTED TO FIXED PL ACE IN THAT COUNTRY FROM WHERE THE BUSINESS OPERATIONS OF THE FOREIGN ENTERPRISE CAN C ONTINUE. A PE NEEDS TO BE SUCH A NATURE THAT IT WOULD AMOUNT TO A VIRTUAL PROJECTION OF A FOREIGN ENTERPRISE OF A COUNTRY INTO THE SOIL OF ANOTHER. THE FIXED PLACE OF BUSINE SS IS CONSTITUTED ONLY WHERE THERE IS A PHYSICAL LOCATION AT THE DISPOSAL OF FOREIGN ENTERP RISE. DISPOSAL WOULD IMPLY RIGHT TO USE THE PREMISES AT ANY POINT OF TIME AND FOR WHATE VER PURPOSES . IF NO RIGHT IS CREATED IN FAVOUR OF THE EMPLOYEES OF THE FOREIGN C OMPANY TO ENTER THE OFFICE OF THE INDIAN COMPANY AS THEY PLEASED FOR THE PURPOSE OF CARRYING OUT WHATEVER ACTIVITIES OF THE FOREIGN COMPANY, THEN THE OFFICE OF THE INDIAN COMPANY COULD NOT BE VIEWED AS A PROJECTION OF THE FOREIGN COMPANY'S ACTIVITIES IN INDIA. IT WAS FURTHER SUBMITTED THAT IN THE INSTANT CASE THE ASSE SSEE DID NOT HAVE A FIXED PLACE OF BUSINESS IN INDIA THROUGH WHICH THE BUSINESS OF THE ASSESSEE WAS CARRIED OUT. THE GRSE PROJECT SITE CANNOT BE TERMED AS A PLACE OF BU SINESS OF THE ASSESSEE AS THE SAME IS ONLY A FACILITY PROVIDED BY ITS CLIENT WITH REGA RD TO EXECUTION OF A PARTICULAR CONTRACT. THE SPACE OF GRSE WAS NOT AVAILABLE TO TH E ASSESSEE FOR CARRYING OUT OTHER BUSINESS OPERATIONS NOT RELATED TO GRSE'S CONTRACT. ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 24 27. IN VIEW OF THE ABOVE, IT WAS CONTENDED THAT TH E 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 WA S 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. 28. ISSUE OF CLAIMS MADE BY THE ASSESSEE WITHOUT REVISI NG THE RETURN 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 W AS CHARGEABLE TO TAX IN INDIA FOR THE REASON THAT THE SAID CLAIM WAS MADE WITHOUT FIL ING A REVISED RETURN OF INCOME AND CONTRARY TO ASSESSEES OWN CLAIM IN THE RETURN OF I NCOME 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 H ONBLE SUPREME COURT IN THE CASE OF GOETZ (INDIA) LTD. (SUPRA) WHEREIN IT WAS HELD T HAT CLAIM MADE IN THE COURSE OF ASSESSMENT PROCEEDINGS WITHOUT FILING A REVISED RET URN OF INCOME, CANNOT BE ENTERTAINED BY THE AO. IN THIS REGARD, THE ASSESSE E PLACED RELIANCE ON THE DECISION IN THE CASE OF CHICAGO PNEUMATIC INDIA LTD. VS. DCIT 15 SOT 252 (2 007) (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 IN DIAN CONSTITUTION (NO TAX CAN BE COLLECTED EXCEPT BY THE AUTHORITY OF LAW), CBDT CIR CULAR 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 AS SESSMENT PROCEEDINGS WITHOUT RECOURSE TO A REVISED RETURN. THE TRIBUNAL DEALT WI TH THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF GOETZ (INDIA) LTD., (S UPRA) 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. ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 25 HOWEVER, SUCH PROCESS WOULD RESULT INTO UNDUE HARDS HIPS, DELAY AND MULTIPLICITY OF PROCEEDINGS. THE HON'BLE APEX COURT, ON NUMEROUS OCCASIONS HAS LAID THE PROPOSITION THAT THE ASSESSING AUTHORITIES ARE BOUN D TO COMPUTE THE CORRECT INCOME ONLY AND COLLECT ONLY LEGITIMATE TAX, HENCE, MERELY FOR A PROCEDURAL LAPSE OR TECHNICALITIES, IN OUR OPINION, THE ASSESSEE SHO ULD 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 ASSESSIN G 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 RELIEF S/REFUNDS WHILE COMPLETING THE ASSESSMENT PROCEEDINGS, EVEN THOUGH SUCH CIRCULAR M AY BE AT VARIANCE WITH THE LAW, AS PRONOUNCED BY THE HON'BLE SUPREME COURT, BU T THE SAME WOULD BE BINDING ON THE SUBORDINATE INCOME-TAX AUTHORITIES. IN OUR OPINION, THEREFORE, CIRCULARS OF SAME NATURE WHICH HAVE BEEN ALREADY IS SUED WOULD NOT BECOME IRRELEVANT OR CAN BE IGNORED. ADMITTEDLY, THE CIRCU LAR ISSUED IN 1995 HAS NOT BEEN WITHDRAWN, HENCE, IT HAS GOT BINDING FORCE ON THE S UBORDINATE AUTHORITIES EVEN AS ON DATE. ACCORDINGLY, WE HOLD THAT THE ASSESSING OF FICER 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 NO T FILED REVISED RETURN, ALTHOUGH, AS PER LAW, THE ASSESSEE IS REQUIRED TO F ILE THE REVISED RETURN ..... ' FURTHER, RELIANCE WAS ALSO PLACED ON THE DECISION I N 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 A LLOWED THE CLAIM OF THE ASSESSEE WHICH WAS MADE IN COURSE OF THE ASSESSMENT PROCEEDI NGS AND NOT BY FILING REVISED RETURN. 29. IN VIEW OF THE ABOVE JUDICIAL PRONOUNCEMENTS, IT WAS SUBMITTED THAT THE ACTION OF THE LD. AO OF NOT ALLOWING THE CLAIM OF THE ASSESSE E DUE TO FAILURE TO FILE THE REVISED RETURN, IS BAD IN LAW. 30. ISSUE WITH REGARD TO DISALLOWANCE OF PAYMENTS MADE TO M/S.APPLEDORE, UK FOR NON DEDUCTION OF TAX AT SOURCE BY INVOKING THE PROV ISIONS OF SEC.40(A)(I) OF THE ACT: THE ASSESSEE SUBMITTED BEFORE THE DRP THAT IT HAD E NTERED IN A CONTRACT WITH GRSE FOR RENDERING CONSULTANCY SERVICES FOR MODERNISATIO N OF THEIR SHIPYARD PROJECT. THE SCOPE OF WORK ENVISAGED ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 26 -PREPARATION OF CONCEPT PLAN, PRELIMINARY PROJECT R EPORT (PPR) AND DETAILED PROJECT REPORT (DPR). -DESIGN, DETAILED ENGINEERING, DRAWING AND TENDER D OCUMENTS FOR WORKS CONTRACT. -PROJECT MANAGEMENT AND CONSTRUCTION SUPERVISION SE RVICES. THE SCOPE OF CONSULTANCY SERVICES WAS TO BE RENDERE D PARTLY FROM THE UK. AND PARTLY FROM INDIA. FOR THE PURPOSE OF RENDERING SERVICES F ROM THE UK, THE ASSESSEE HAD OBTAINED CERTAIN SERVICES FROM APPLEDORE, AN INDEPE NDENT SUB-CONSULTANT, WHICH IS ALSO BASED OUT OF UK. THE SERVICES IN INDIA WERE RE NDERED BY LOCAL INDEPENDENT SUB- CONSULTANTS, APPOINTED BY THE ASSESSEE. APPLEDORE WAS REQUIRED TO RENDER SERVICES TOWARDS PREPARATION OF CONCEPT PLAN, PRELIMINARY PR OJECT 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 RENDE RING SUCH SERVICES WAS PAID BY THE HEAD OFFICE OF THE ASSESSEE FROM THEIR STERLING ACC OUNT, MAINTAINED IN THE UK. NO PART OF THE APPLEDORE'S FEES WERE PAID IN INDIA. NO TA XES 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 HEARIN G PLACED THE FOLLOWING ARGUMENTS:- PAYMENTS MADE BY THE ASSESSEE TO APPLEDORE WAS NO T 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. 31. IT WAS SUBMITTED THAT 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. PAYMENT WAS MADE BY GIFFORD WHO IS A RESIDENT IN THE UK TO APPLEDORE WHO IS ALSO A RESIDENT IN THE U K. SUCH PAYMENTS WERE MADE FOR AND SERVICES RENDERED IN THE UK. THE ASSESSEE ALSO POINTED OUT THAT IT WOULD BE ERRONEOUS TO ASSUME AS IF SERVICES RENDERED BY THE HEAD OFFICE ARE RENDERED BY PE AND ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 27 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 CHARGEAB LE TO TAX IN INDIA ONLY IN THE EVENT OF INCOME ACCRUES OR ARISES IN INDIA OR IS DEEMED T O ACCRUE OR ARISE IN INDIA OR INCOME IS RECEIVED OR IS DEEMED TO BE RECEIVED IN INDIA AN D NOT OTHERWISE. EXPLANATION I TO SECTION 5(2) PROVIDES THAT INCOME ACCRUING OR ARISI NG 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 SH EET PREPARED IN INDIA. THEREFORE, ONLY BY REASONS OF THE FACT THAT THE PAYMENT WAS MA DE 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 CONSI DERED THAT SUCH INCOME OF APPLEDORE IS INCOME RECEIVED IN INDIA. ALTHOUGH THE PE IS REQ UIRED TO CARRY OUT CERTAIN ACTIVITIES IN INDIA, THE CONSIDERATION FOR OFFSHORE SERVICES R ENDERED BY APPLEDORE IN THE UK, WHICH IS NOT ATTRIBUTABLE TO THE WORK OF THE PE, SH OULD NOT BE CONSIDERED AS INCOME DEEMED TO ACCRUE OR ARISE IN INDIA BY VIRTUE OF SEC TION 9(L)(VII)(C) OF THE ACT. 32. AGAIN RELIANCE WAS PLACED ON THE DECISION OF T HE HONBLE SUPREME COURT, IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES LTD. VS. CIT (2007) (288 ITR 408, SC) , WHEREIN IT WAS HELD 'THAT, IN RELATION TO OFFSHORE SERVICES, SECTION 9( I)(VII)(C) REQUIRED TWO CONDITIONS TO BE MET: TO BE TAXABLE IN INDIA THE SERVICES WHIC H WERE THE SOURCE OF THE INCOME SOUGHT TO BE TAXED HAD TO BE RENDERED IN INDIA AS W ELL AS UTILISED IN INDIA. IN THIS CASE, BOTH THESE CONDITIONS WERE NOT SATISFIED SIMU LTANEOUSLY, THEREBY EXCLUDING THE INCOME FROM THE AMBIT OF TAXATION IN INDIA. THU S, FOR A NON-RESIDENT TO BE TAXED ON INCOME FOR SERVICES, SUCH A SERVICE HAD TO BE RENDERED WITHIN 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 RESIDEN T IN INDIA, AND THOUGH THEY HAD BEEN USED HERE, THEY HAD NOT BEEN RENDERED IN I NDIA. ' IT WAS SUBMITTED THAT SECTION 9(L)(VII) MUST BE REA D IN CONJUNCTION WITH SECTION 5 THEREOF WHICH TAKES WITHIN ITS PURVIEW THE TERRITOR IAL NEXUS ON THE BASIS WHEREOF TAX IS REQUIRED TO BE LEVIED. WHATEVER IS PAYABLE TO A NON - RESIDENT BY WAY OF FTS WOULD NOT ALWAYS COME WITHIN THE PURVIEW OF SECTION 9(1)(VII) (C) OF THE ACT. IT MUST HAVE SUFFICIENT TERRITORIAL NEXUS WITH INDIA SO AS TO FU RNISH A BASIS FOR IMPOSITION OF TAX. ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 28 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-RESIDE NT 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 L IVE 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 M ADE BETWEEN RENDITION OF SERVICES AND UTILISATION THEREOF. SECTION 9(1 )(VII)( C) CLE ARLY STATES ' .....'. WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILISED IN A BUSINE SS 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 S OURCE OF INCOME SOUGHT TO BE TAXED IN INDIA MUST BE (1) UTILISED IN INDIA AND (2) REND ERED IN INDIA. IN THE PRESENT CASE, BOTH THESE CONDITIONS HAVE NOT BEEN SATISFIED SIMUL TANEOUSLY. 33. IT WAS SUBMITTED THAT IT IS TRUE THAT THE FINA NCE ACT 2007 HAS AMENDED SECTION 9 OF THE ACT, WITH RETROSPECTIVE EFFECT FROM 1.6.1976, B Y INSERTION OF AN EXPLANATION AFTER SUB-SECTION (2) PROVIDING THAT INTEREST, ROYALTY, T ECHNICAL FEES, WILL BE TAXABLE IN INDIA 'WHETHER OR NOT THE NON-RESIDENT HAS A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA'. SINCE THE AMENDMENT IS TO THE DOMESTIC LAW, THE DECISION IN ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES LTD.'S CASE RE NDERED IN THE CONTEXT OF DTAA BETWEEN INDIA AND JAPAN CANNOT BE TAKEN TO BE OVERR ULED. THE PLACE OF ACCRUAL OF INCOME MAY BE REQUIRED TO BE DETERMINED WITH REFERE NCE TO DTAA. IT WAS POINTED OUT THAT EVEN AFTER INTRODUCTION OF AN EXPLANATION TO S ECTION 9 OF THE ACT, THROUGH FINANCE ACT 2007, THE BOMBAY HIGH COURT HAS CONSIDERED THE ISSUE IN A RECENT CASE IN THE MATTER OF CL'I' VS. SIEMENS AKTIONGESELLSCHAFT (2009) 310 ITR 320 BOM ). THE ISSUE WAS WHETHER THE DOUBLE TAXATION AVOIDANCE AGR EEMENT BETWEEN INDIA AND GERMANY OVERRIDES THE DOMESTIC LAW, WHICH TREATS TH E ROYALTY TO BE TAXABLE AS INDIAN INCOME. DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND GERMANY PROVIDES THAT IN RESPECT OF ROYALTY AND TECHNICAL FEES, WHER E IT IS PAID AS A PART OF BUSINESS AGREEMENT, THE ELEMENT OF ROYALTY AND TECHNICAL FEE S CANNOT BE SEPARATELY CONSIDERED IN VIEW OF ARTICLE III(1) OF THE INDO-GE RMAN AGREEMENT PROVIDING FOR TAX LIABILITY IN GERMANY WHERE IT IS PART OF COMMERCIAL PROFITS. IT WAS POINTED OUT THAT ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 29 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 FI NALLY DECIDED THAT IN VIEW OF THE SPECIAL PROVISION UNDER THE INDO-GERMAN AGREEMENT T HE AMENDMENT UNDER THE DOMESTIC LAW CAN HAVE NO EFFECT. THEREFORE, THE DEC ISION OF THE SUPREME COURT IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES LTD. I S STILL A VALID LAW AND THE SAID DECISION IS SQUARELY APPLICABLE TO THE SUBJECT CASE . 34. IT WAS SUBMITTED THAT ARTICLE 13(4) DEFINES FTS TO MEAN PAYMENTS OF ANY KIND, TO ANY PERSON, IN CONSIDERATION FOR THE RENDERING OF A NY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SERVICES OF TECHNICAL S ERVICES OR OTHER PERSONNEL) WHICH: (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A PAYMENT DESCRIBED IN PAR AGRAPH 3(A) OF THIS ARTICLE IS RECEIVED; OR (B) ARE ANCILLARY AND SUBSIDIARY TO THE ENJOYMENT O F THE PROPERTY FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 3(B) OF THIS ARTICLE IS RECE IVED: 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 ANCILLA RY 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 SERVI CES FOR MODERNISATION OF THE SHIPYARD PROJECT AND DID NOT INVOLVE TRANSFER OF AN Y RIGHT TO USE PROPERTY FOR WHICH ROYALTIES ARE PAYABLE. HENCE, THERE IS NO APPLICATI ON 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 AV AILABLE TO THE ASSESSEE. ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 30 35. AS FAR AS APPLICABILITY OF CLAUSE ( C ) OF ART ICLE 13(4) OF THE INDO-UK DTAA IS CONCERNED, THE ASSESSEE SUBMITTED THAT THE SAID CLA USE CONTEMPLATES THAT FEES PAID SHOULD BE FOR MAKING AVAILABLE OF THE TECHNICAL KNO WLEDGE, EXPERIENCE, SKILL, ETC. IN OTHER WORDS, THE TECHNICAL KNOWLEDGE, EXPERIENCE, S KILL, 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 ASSE SSEE, 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 AVA ILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL AND KNOW-HOW'. IN THIS CONTEXT IT BECOMES IMPERATIVE TO UNDERSTAND THE MEANING OF THE EXPRESSION 'MAKE AVAILABLE' AS U SED 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. T HEY ARE TWO SIDES OF THE SAME COIN. BUT CLAUSE (C) OF ARTICLE 13 (4) DOES NOT STO P AT THAT. 1T CARVES OUT A QUALIFICATION THERETO BY EMPLOYING THE WORDS 'WHICH MAKE AVAILABLE TECHNICAL EXPERIENCE, SKILL, KNOW-HOW OR PROCESSES'. RENDERIN G TECHNICAL OR CONSULTANCY SERVICE IS FOLLOWED BY A RELATIVE PRONOUN 'WHICH' A ND IT HAS THE EFFECT OF QUALIFYING THE SERVICES. THAT MEANS, THE TECHNICAL OR CONSULTANCY SERVICE RENDERED SHOULD BE OF SUCH A NATURE THAT 'MAKE AVAI LABLE' TO THE RECIPIENT TECHNICAL KNOWLEDGE, KNOW-HOW AND THE LIKE. THE SER VICE 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 KN OWLEDGE 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 S ERVICE 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 INT O THE TERMINOLOGY 'MAKE AVAILABLE', THE TECHNICAL KNOWLEDGE, SKILLS, ETC., MUST REMAIN WITH THE PERSON RECEIVING THE SERVICES EVEN AFTER THE PARTICULAR CO NTRACT COMES TO AN END. THE SERVICES OFFERED MAY BE THE PRODUCT OF INTENSE TECH NOLOGICAL EFFORT AND A LOT OF TECHNICAL KNOWLEDGE AND EXPERIENCE OF THE SERVICE P ROVIDER WOULD HAVE GONE INTO IT. BUT THAT IS NOT ENOUGH TO ALL WITHIN THE DESCRI PTION OF SERVICES WHICH MAKE AVAILABLE THE TECHNICAL KNOWLEDGE, ETC. THE TECHNIC AL 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 FUTU RE 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 ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 31 WITHIN THE AMBIT OF THE SAID EXPRESSION IN CLAUSE ( C). SUPPOSING A PRESCRIPTION AND ADVICE IS GIVEN BY THE DOCTOR AFTER EXAMINING T HE PATIENT AND GOING THROUGH THE CLINICAL REPORTS. THE SERVICE RENDERED BY THE D OCTOR CANNOT BE SAID TO HAVE MADE AVAILABLE TO THE PATIENT, THE KNOWLEDGE AND EX PERTISE POSSESSED BY THE DOCTOR. ON THE OTHER HAND, IF THE SAME DOCTOR TEACH ES 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 REND ERING OF SERVICE SHOULD MAKE AVAILABLE TECHNICAL KNOWLEDGE, SKILL, ETC. TO THE R ECEIVER OF SERVICE, WHO CAN USE SUCH KNOWLEDGE IN FUTURE FOR THE BUSINESS WITHOUT THE AI D OF SERVICE PROVIDER AND THUS, THERE SHOULD BE SOME PERMANENCE OF THE SERVICE PROV IDED. 36. IT WAS SUBMITTED THAT IN THE CASE OF THE ASSES SEE, GRSE HAS NOT GAINED ANY TECHNICAL KNOWLEDGE, SKILL, ETC. AS A RESULT OF SER VICE PROVIDED TO IT, WHICH CAN BE SUBSEQUENTLY UTILIZED BY IT. THUS, PAYMENTS MADE BY IT, FOR SERVICES PROVIDED DO NOT FALL WITHIN THE SCOPE OF FTS, AS LAID OUT IN ARTICL E L3( 4)( C) OF DT AA AND, AS SUCH, THE PAYMENTS MADE BY THE ASSESSEE WERE NOT TAXABLE IN INDIA AND THE ASSESSEE WAS NOT UNDER OBLIGATION TO DEDUCT TAX. IT WAS THUS S UBMITTED THAT ARTICLE 13 OF THE DTAA DOES NOT APPLY TO THE INSTANT CASE. PAYMENT MADE BY HEAD OFFICE OF GIFFORD TO APPLEDORE FOR RENDERING SERVICES IN THE NATURE OF P REPARATION OF CONCEPT PAPERS, PRELIMINARY PROJECT REPORT ('DPR') AND DETAILED PRO JECT REPORT ('DPR') WITHOUT MAKING AVAILABLE THE EXPERTISE AND TECHNICAL KNOWLEDGE, ET C. FOR CARRYING OUT SUCH TECHNICAL WORK , CANNOT BE TAXED IN INDIA. 37. ISSUE WITH REGARD TO DISALLOWANCE OF RS.30,09,179/- : DURING THE FY 2006-07 THE ASSESSEE HAS DEBITED TOTA L EXPENSES OF RS. 10,681,827 TO THE PROFIT AND LOSS ACCOUNT. OUT OF THE SAME, AN EX PENDITURE OF RS. 9,684,307 WAS BEEN BOOKED AS 'CONSULTANCY CHARGES'. THE INVOICES RELAT ING TO THE SAME WERE SUBMITTED TO THE AO. THE ID. AO, IN THE IMPUGNED ORDER, WAS OF THE VIEW THAT THE FOLLOWING ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 32 INVOICES, PERTAINED TO WORK DONE DURING THE PERIOD PRIOR TO THE RELEVANT PREVIOUS YEAR RELATING TO AY 2008-09. HE THEREFORE DISALLOWED TH E CLAIM OF THE ASSESSEE FOR DEDUCTION OF THE FOLLOWING EXPENSES AS PRIOR PERIOD EXPENSES: INVOICE RAISED BY AMOUNT (RS.) DESCRIPTION OF WORK PERIOD OF WORK DATE OF INVOICE TKRA 17,13,499 JOB GRSE MODERNISATION 10.01.05 TO 18.08.05 22.06.07 IMC 12,95,680 INFRUCTUOUS COMPONENTS 12.02.05 TO 30.06.05 AND AFTER 05.06.07 38. THE ASSESSEE SUBMITTED BEFORE THE DRP THAT THE AO IN THE IMPUGNED ORDER HAS NOT RAISED ANY DOUBT ABOUT THE GENUINENESS OF THE C ONSULTANCY CHARGES AMOUNTING TO RS. 30,09,179. AS SUCH, THE SAID EXPENSES WITHOUT D OUBT WERE INCURRED BY THE ASSESSEE IN COURSE OF ITS ORDINARY BUSINESS ACTIVIT IES AND THEREFORE THE ASSESSEE IS ELIGIBLE FOR THE BENEFIT OF DEDUCTION OF SUCH EXPEN SES IN COMPUTATION OF ITS TOTAL INCOME. THE ONLY AREA OF DOUBT IS THE PERIOD FOR WH ICH SUCH DEDUCTION IS TO BE CLAIMED. THE ID. AO IN THE IMPUGNED ORDER HAS NOT A LLOWED THE DEDUCTION FOR THE SAID EXPENSES DURING THE YEAR UNDER REVIEW, HOWEVER, THE ID. AO DID NOT COMMENT ON THE PERIOD IN WHICH THE DEDUCTION SHOULD BE ALLOWED. TH E LIMITED PRAYER OF THE ASSESSEE BEFORE THE DRP WAS TO GIVE CREDIT FOR SUCH CONSULTA NCY CHARGES AMOUNTING TO RS. 30,09,179, EITHER IN COMPUTATION OF TOTAL INCOME FO R AY 2006-07 I.E. THE PERIOD FOR WHICH THE WORK WAS DONE, OR AY 2008-09 I.E. THE PER IOD FOR WHICH THE INVOICES RELATE TO. 39. ISSUE WITH REGARD TO GROSSING UP: 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. D URING THE YEAR ENDED 31 MARCH 2007, THE NET CONSIDERATION (NET OF TDS BORNE BY GR SE) RECEIVED IN USD (CONVERTED ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 33 INTO INR) AMOUNTED TO RS. 24.393,589. IT WAS SUBMIT TED TO THE ID. AO THAT THE 'GROSSING UP' WAS DONE AS PER THE PROVISIONS OF SEC TION 195A OF THE ACT, FOR THE PURPOSE OF COMPUTATION OF TDS LIABILITY AND THAT TH ERE 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 GAIN S FROM BUSINESS. THE ID. AO, IN HIS IMPUGNED ORDER, EXPRESSED THE VIEW THAT THE ASS ESSEE 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 WHE REAS THE ASSESSEE HAS ACCOUNTED FOR ONLY RS. 24,393,588 IN THE AUDITED PROFIT AND L OSS ACCOUNTS. THEREFORE THE DIFFERENCE OF RS. 37,33,151 WAS ADDED BACK TO THE T OTAL INCOME OF THE ASSESSEE. THE LIMITED PRAYER OF THE ASSESSEE BEFORE DRP WAS TO DI RECT 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. 40. BESIDES THE ABOVE OBJECTIONS, THE ASSESSEE ALS O RAISED ISSUES WITH REGARD TO THE ACTION OF THE AO IN NOT GRANTING CREDIT FOR TAXES D EDUCTED AT SOURCE AS CLAIMED BY THE ASSESSEE. THE LEVY OF INTEREST U/S.234-B & 234-C O F THE ACT WAS ALSO QUESTIONED BY THE ASSESSEE BEFORE THE DRP. IT WAS SUBMITTED THAT THE PERSON MAKING PAYMENT TO THE ASSESSEE WAS DUTY BOUND TO DEDUCT TAX AT SOURCE U/S .195 OF THE ACT ON PAYMENT MADE TO THE ASSESSEE, AS THE ASSESSEE WAS A NON-RESIDENT . IT WAS SUBMITTED THAT IN ESTIMATING THE ADVANCE TAX PAYABLE THE ASSESSEE WAS BOUND TO TAKE NOTE (GIVE CREDIT TO) OF TAX DEDUCTIBLE AT SOURCE (WHETHER ACTUALLY D EDUCTED OR NOT). IF SUCH CREDIT IS GIVEN THEN THERE WOULD BE NO LIABILITY TO PAY ADVAN CE TAX OF THE ASSESSEE WOULD BE LESS THAN RS.5000 AND THEREFORE NO INTEREST U/S.234 B OF THE ACT COULD BE LEVIED. THE ASSESSEE IN THIS REGARD PLACED RELIANCE ON THE DECI SION OF THE ITAT DELHI IN THE CASE OF SEDCO FOREX INTERNATIONAL DRILLING VS. DCIT 72 I TD 415 (DEL). 41. THE DRP DEALT WITH THE ISSUES RAISED BY THE AS SESSEE AS FOLLOWS: 5. GROUND NO. 1 - PERMANENT ESTABLISHMENT OF THE ASSES SEE IN INDIA: ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 34 (A) ON PERUSAL OF THE CONTRACT OF CONSULTANCY SERV ICES FOR MODERNIZATION OF GARDEN REACH SHIPYARD BETWEEN GIFFORD AND GRSE, GIV EN 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 CONTR ACT FOR MODERNIZATION OF GARDEN REACH SHIPYARD AND ALL THE THREE STAGES ARE SO INTERCONNECTED THAT UNLESS ALL THE THREE STAGES ARE COMPLETED, THE WORK S 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. THE RE 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 T HE 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 CONS ULTANT WAS RESPONSIBLE FOR TECHNICAL SOUNDNESS OF THE SERVICES RENDERED TO GRS E AND IN THE EVENT OF ANY DEFICIENCY IN THE SERVICES, THE CONSULTANT WAS REQU IRED TO RE-DO SUCH SERVICES FOR WHICH GRSE WAS NOT REQUIRED TO PAY ANY ADDITION AL COMPENSATION. IN APPENDIX-1.3 , THE PERSONNEL EMPLOYED BY THE CONSULTANT IN ALL T HE 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 CO NSULTANT I.E. THE ASSESSEE AIR-CONDITIONED OFFICE SPACE OF ABOUT 50 SQ. MT. INSIDE THE GARDEN REACH SHIPYARD WITH A TELEPHONE AND FAX FACILITY FO R 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 PROJ ECT. THESE FACTS AS PER THE CONTRACT CLEARLY INDICATE THAT THE ASSESSEE MAINTAI NED 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 TH E YEAR UNDER CONSIDERATION FOR RENDERING CONSULTANCY FOR ALL THE STAGES. THE D IRECT 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 DEDU CTION OF ALL THE EXPENSES. THE ASSESSEE HAS NOT DISPUTED THE TAXABILITY OF CON SULTANCY FEES RECEIVED IN RUPEES AS PE IN INDIA AND DISPUTED THE TAXABILITY O F CONSULTANCY FEES RECEIVED IN USD ONLY ON THE GROUND THAT THERE WAS NO PE IN INDI A. THE ENTIRE GRSE PROJECT WAS / IS ONE AND THE SAME AND THE MUTUALLY AGREED LUMP SUM AMOUNT OF CONSIDERATION RELATED TO THE SAID PROJECT. THEREFOR E, THE ASSESSEE WAS NOT ENTITLED TO TAKE TWO DIFFERENT STANDS AS REGARDS TH E 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 O F THE CONSIDERED VIEW THAT ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 35 THE AO WAS JUSTIFIED IN HOLDING THAT THE ASSESSEE H AD PE IN INDIA FOR THE ENTIRE AMOUNT OF CONSULTANCY FEES RECEIVED FROM GRS E. B) IN VIEW OF THE DISCUSSIONS AT (A) ABOVE, THE PAN EL IS OF THE CONSIDERED VIEW THAT THE AO WAS JUSTIFIED IN HOLDING THAT THE INCOM E 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 T HAT THE ASSESSEE HAD PE IN INDIA FOR THE ENTIRE AMOUNT OF CONSULTANCY FEE RECE IVED 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 TH E 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 TH E ASSESSEE HAD PE IN INDIA FOR THE ENTIRE AMOUNT OF CONSULTANCY FEE RECEIVED F ROM GRSE AND THE INCOME EARNED BY IT IN USD WAS CONNECTED WITH ITS PE IN IN DIA. THE ASSESSEE FILED THE RETURN OF INCOME AS PE IN INDIA AND DISCLOSED THE E NTIRE INCOME RECEIVED IN USD & IN INR. IN COURSE OF THE ASSESSMENT PROCEEDIN GS, THE ASSESSEE MADE A FRESH CLAIM THAT IT DID NOT HAVE ANY PE IN INDIA, A ND WITHOUT PREJUDICE TO THIS CLAIM, THE INCOME EARNED BY IT IN USD WAS NOT CONNE CTED TO THE PE IN INDIA. THE AO BESIDES DEALING WITH THE ASSESSEE'S FRESH CL AIMS ON MERITS HELD THAT THE ASSESSEE'S FRESH CLAIMS WITHOUT FILING A REVISED RE TURN COULD NOT BE ENTERTAINED IN VIEW OF THE DECISION OF THE APEX COURT IN THE CA SE OF GOETZE (I) LTD. VS. CIT, 284 ITR 323. THE ASSESSEE CONTESTED THE AO'S FINDIN GS RELYING ON THE DECISIONS IN THE CASE OF CHICAGO PNEUMATIC INDIA LTD. VS. DCI T 15 SOT 252 (2007) (ITAT) (DEL) AND IN THE CASE OF CIT VS. RAMCO INTER NATIONAL 221 CTR 491 (2008) HC (P & H). THE ITAT DELHI IN THE ABOVE MENT IONED DECISION CONSIDERED THE DECISION OF THE APEX COURT (SUPRA) A ND HELD THAT THE REVISED CLAIM U/S.80HH & 801 SHOULD BE ALLOWED IN VIEW OF T HE 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 ASSESS EE 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 T HE SAME IS ALLOWABLE BEING A PATENT MISTAKE OF FACT OR LAW. THIS CIRCULAR DOES N OT 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 O N RECORD AND ASSESSEE'S OWN TREATMENT GIVEN IN EARLIER YEARS AND THERE BEING TW O 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 Y EARS AND WERE NOT IN THE NATURE OF ANY DEDUCTION WHICH COULD BE ALLOWABLE BEING A P ATENT AND UNDISPUTED ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 36 MISTAKE IN THE COMPUTATION OF INCOME. IN FACT, THE ASSESSEE DISPUTED THE TAXABILITY OF INCOME / RECEIPT IN USD UNDER CHARGIN G 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 ASSES SEE'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. L OCCB FILED BY THE ASSESSEE IN COURSE OF THE ASSESSMENT PROCEEDINGS. T HE FACTS OF THIS CASE INDICATE THAT THE ASSESSEE'S CLAIM WAS A PATENT AND UNDISPUT ED CLAIM ALLOWABLE AS PER LAW. THE RATIO OF THIS DECISION ALSO DOES NOT SUPPO RT THE ASSESSEE'S CONTENTION. IN VIEW OF THE ABOVE DISCUSSIONS, THE PANEL IS OF T HE CONSIDERED VIEW THAT THE AO RIGHTLY HELD THAT THE FRESH CLAIMS MADE BY THE A SSESSEE WITHOUT FILING A REVISED RETURN COULD NOT BE ENTERTAINED IN THE LIGH T OF THE DECISION OF APEX COURT IN THE CASE OF GOETZE (I) LTD. VS. CIT, 284 I TR 323. 6. GROUND NO. 2 - PAYMENTS MADE TO APPLEDORE: A) AS PER THE CONTRACT, THE ASSESSEE AS A CONSULTAN T WAS REQUIRED TO RENDER CONSULTANCY SERVICES FOR GRSE PROJECT DIRECTLY AND / OR THROUGH SUB-CONSULTANTS APPOINTED BY IT. FURTHER, AS PER THE CONTRACT THE A SSESSEE HAD TO RECEIVE THE CONSULTANCY FEE FROM GRSE. THE APPOINTMENT OF M/S. APPLEDORE INTERNATIONAL LTD. ('APPLEDORE') BY THE ASSESSEE WAS ITS CHOICE A ND 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 PA YMENT TO APPLEDORE AT UK FOR THE SERVICES PROVIDED BY IT TO GIFFORD IN CO NNECTION 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 AP PLEDORE 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 A GAINST 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 SUBST ITUTING THE EXPLANATION OCCURRING AFTER SUB-SECTION 2 AS UNDER: 'EXPLANATION. - FOR THE REMOVAL OF DOUBTS, IT IS HE REBY DECLARED THAT FOR THE PURPOSE OF THIS SECTION, INCOME OF A NON-RESIDE NT 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 BUSI NESS OR BUSINESS CONNECTION IN INDIA; OR (II) THE NON-RESIDENT HAS RENDERED SERVICES IN INDI A.' IN VIEW OF THE ABOVE STATED AMENDMENT, THE INCOME B Y 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 BUSINE SS OR PROFESSION CARRIED ON BY SUCH PERSON IN INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 37 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 TH E NON-RESIDENT RENDERED SERVICES IN INDIA. THEREFORE, THE AO WAS JUSTIFIED IN HOLDING THAT THE PAYMENT MADE BY THE ASSESSEE TO APPLEDORE WAS DEEME D 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 O F 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 TH E 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-CO NSULTANCY' SERVICES AS LISTED IN SCHEDULE - 1 OF THE SAID AGREEMENT INCLUDED SCOP E OF SUB-CONSULTANCY SERVICES FOR SHIPYARD MODERNIZATION, CONCEPTUAL AND OUTLINE DESIGN, TECHNICAL SPECIFICATIONS FOR PLANT AND EQUIPMENT, R EVIEW AND COMMENT ON PREQUALIFICATION DOCUMENTS, REVIEW AND COMMENT ON B IDDERS PROPOSAL TENDER DOCUMENTS, REVIEW AND COMMENT ON QUALITY MAN UALS AND METHOD STATEMENTS OF CONTRACTORS. CONSIDERING THE NATURE O F THE GRSE PROJECT ONE; SAY THAT THE ENTIRE CONSULTANCY SERVICES FOR THE PROJEC T 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 ENGINEERI NG AND PREPARATION AND SUBMISSION OF 'DRAWINGS' OR 'DESIGN' BY THE ARCHITE CT IS IN THE NATURE OF TECHNICAL SERVICES. THEREFORE, THE APPLEDORE HAD AL SO PROVIDED TECHNICAL SERVICES BY PROVIDING THE DESIGN OR REVIEW REPORT A S PER THE ITEMS OF SUB- CONSULTANCY SERVICES SPECIFIED IN THE 'SUB-CONSULTA NCY AGREEMENT'. THEREFORE, THE AO WAS JUSTIFIED IN BOLDING THAT THE PAYMENT MA DE BY THE ASSESSEE TO APPLEDORE WAS FOR TRANSFER OF TECHNICAL PLAN OR TEC HNICAL DESIGN FALLING WITHIN THE PURVIEW OF FTS IN TERMS OF THE SECOND LI MB TO CLAUSE (C) OF ARTICLE 13(4) OF THE DTAA. D) IN VIEW OF THE DISCUSSIONS AT ITEM (C) ABOVE, TH E 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 AV AILABLE' OF TECHNICAL KNOWLEDGE, SKILL OR EXPERTISE BY APPLEDORE. THE RAT IO OF THE DECISION IN THE CASE OF INTERTEK TESTING SERVICES INDIA P. LTD. (20 08) 307 ITR 418 (AAR) SUPPORTS THE FINDING OF THE AO BECAUSE THE TECHNICA L REPORT AND DESIGN PREPARED AND SUBMITTED BY APPLEDORE WERE FOR THE SPECIFIC GR SE 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 APPLE DORE WERE MADE AVAILABLE TO THE ASSESSEE WHO IN TURN MADE THE SAME AVAILABLE TO GRSE FOR PERMANENT ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 38 USE IN ITS PROJECT. THEREFORE, THE AO WAS JUSTIFIED IN HOLDING THAT THA T PAYMENT MADE TO APPLEDORE WAS FALLING WITHIN THE PU RVIEW 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 TH AT EFFECT. THE ASSESSEE DID NOT DO SO AND TOOK THE PLEA OF NON TAXABILITY OF TH E PAYMENT TO APPLEDORE ONLY WHEN THE AO REQUIRED THE ASSESSEE TO EXPLAIN WHY TH E SAID PAYMENT CLAIMED AS EXPENDITURE SHOULD NOT BE DISALLOWED WITHIN THE MEA NING 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 R ELEVANT A.Y. 2007-08. THE SAID EXPENSES DID NOT CRYSTALLIZE DURING THE PREVIO US 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 DE DUCTION OF THE ABOVE EXPENSES IN A.Y. 2008-09 MAY BE CONSIDERED BY THE A O AS PER LAW. 8. GROUND NO. 4 - GROSSING UP: THE ASSESSEE'S CONTENTION THAT THE 'GROSSING UP' WA S DONE AS PER THE PROVISIONS OF SECTION 195A OF THE ACT FOR THE PURPOSE OF COMPU TATION OF TDS LIABILITY ONLY AND THAT THERE WAS NO NEED TO RECOGNIZE SUCH N OTIONAL INCOME EITHER U]. 2(24) OR U/S. 28 OF THE ACT HAS NO MERITS. THE AO W AS ALSO NOT CORRECT IN STATING THAT THE ASSESSEE DERIVED BENEFIT WITHIN THE MEANIN G OF SECTION 28(IV) OF THE ACT BY WAY OF CREDITING THE NET CONSIDERATION IN TH E AUDITED ACCOUNTS AND CLAIMING THE CREDIT OF TDS ON THE 'GROSSED UP' AMOU NT, ALTHOUGH THE ADDITION MADE BY HIM WAS OTHERWISE CORRECT IN LAW. THE AMOUN T OF TAX DEDUCTED AT SOURCE IS DEEMED INCOME OF THE PAYEE (I.E. THE ASSE SSEE) 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 O F CLAIMING DEDUCTION IN ITS COMPUTATION OF TOTAL INCOME. SECTION 199 STATES THA T 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 IN COME OF THE PAYEE. THE ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 39 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 AMOUN T 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 SECT ION 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 TH E ASSESSEE. 42. THE AO PASSED THE FAIR ORDER OF ASSESSMENT DAT ED 21.9.2010 GIVING EFFECT TO THE DIRECTIONS OF THE DRP. AGGRIEVED BY THE ORDER OF T HE AO DATED 21.9.2010, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. THE GRO UNDS OF APPEAL RAISED BY THE ASSESSEE READS THUS: I. FOR THAT THE ASSESSING OFFICER AND DISPUTE RESO LUTION PANEL (HEREINAFTER COLLECTIVELY REFERRED TO AS THE 'AUTHO RITIES BELOW') ERRED IN HOLDING THAT THAT THE APPELLANT IS HAVING A PERMANE NT ESTABLISHMENT ('PE') IN INDIA IN TERMS OF DOUBLE TAXATION AVOIDAN CE AGREEMENT BETWEEN INDIA AND UNITED KINGDOM OF GREAT BRITAIN AND NORTH ERN IRELAND ('DTAA'); II. WITHOUT PREJUDICE TO THE GROUND NO.L, THE APPEL LANT STATES AND SUBMITS THAT THE AUTHORITIES BELOW ERRED IN HOLDING THAT, T HE 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 HOLDIN G THAT ANY INCOME NOT ATTRIBUTABLE TO THE ACTIVITIES PERFORMED IN INDIA C ART 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 R ETURN: V. FOR THAT THE AUTHORITIES BELOW ERRED IN DISALLOW ING RS. 3,136,682 PAID TO M/S APPLEDORE INTERNATIONAL LTD. FOR WORKS CARRI ED OUT BY THEM IN THE UNITED KINGDOM ON THE GROUND THAT THE SAME WAS TAXA BLE IN INDIA AND TAX WAS REQUIRED TO BE DEDUCTED THEREON UNDER SECTION 1 95 OF THE ACT. THE REASONS GIVEN FOR SUCH DISALLOWANCE ARE NOT SUSTAIN ABLE ON FACTS AND IN LAW; VI. FOR THAT THE AUTHORITIES BELOW ERRED IN DISALLO WING CONSULTANCY CHARGES OF RS. 3,009,179 PAID BY THE APPELLANT AND THE REASONS AND ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 40 GROUND GIVEN THEREFORE ARE ERRONEOUS AND UNSUSTAINA BLE ON FACTS AND IN LAW; VII. FOR THAT THE AUTHORITIES BELOW ERRED IN DISALL OWING A SUM OF RS.2,858,996 ON THE GROUND OF DELAYED DEPOSIT OF TA X DEDUCTED AT SOURCE; VIII. FOR THAT THE AUTHORITIES BELOW ERRED IN HOLDI NG THAT A SUM OF RS.3,733, 151 WAS TO BE ADDED TO THE INCOME ON ACCO UNT 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 A CT. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, SUBSTITUT E OR MODIFY THE GROUNDS TAKEN HEREIN. 43. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE SUBM ISSIONS MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE WAS IDENTICAL TO THE SUBMI SSIONS AS WERE MADE BEFORE THE DRP. THE SUBMISSIONS MADE BY THE LEARNED DR WERE I DENTICAL TO THE REASONS GIVEN BY THE DRP FOR ITS CONCLUSIONS ON THE VARIOUS ISSUES. 44. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. AS WE HAVE ALREADY SEEN, T HE ASSESSEE IS A FOREIGN COMPANY INCORPORATED IN UN ITED KINGDOM. IT IS ENGAGED IN THE BUSINESS OF PROVIDING CONSULTANCY SERVICES FOR EXECUTION OF PROJECTS. GARDEN RESEARCH SHIPBUILDERS AND ENGINEERS LTD.,(GR SE) IS A GOVERNMENT COMPANY. GRSE WAS DESIROUS OF CARRYING OUT MODERNISATION OF ITS EXISTING SHIPYARD AND APPROACHED THE ASSESSEE TO PROVIDE CONLSULTANCY SER VICE FOR MODERNISATION OF GRSES GARDEN RESEARCH SHIPYARD. THE TERMS OF THE AGREEME NT BETWEEN THE ASSESSEE AND GRSE IS CONTAINED IN AN AGREEMENT DATED 29.4.2004 W HICH LATER WAS AMENDED BY MEMORANDUM OF AMENDMENT TO ORIGINAL AGREEMENT ON DI FFERENT OCCASIONS. 45. THE NATURE OF SERVICES TO BE PERFORMED BY THE ASSESSEE ARE SET OUT IN APPENDIX 1.1 TO THE AGREEMENT. APPENDIX 1.1 OF THE AGREEMEN T REFERS TO SECTION-III OF BID DOCUMENT WHICH CONTAINS TERMS OF REFERENCE. CLAU SE 1.8 OF THE AGREEMENT PROVIDES AS FOLLOWS: 1.8. LOCATION ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 41 THE SERVICES SHALL BE PERFORMED AT THE PREMISES OF GARDEN REACH SHIPYARD, KOLKATA AND, WHERE THE LOCATION OF A PARTICULAR TAS K IS NOT SO SPECIFIED, AT SUCH LOCATIONS, AS GRSE MAY APPROVE. 46. THE SCOPE OF WORK TO BE CARRIED OUT BY THE ASS ESSEE FOR GRSE AS PER THE AGREEMENT CAN BE DIVIDED INTO THREE PHASES: PHASE -1 PREPARATION OF A MACRO LEVEL CONCEPT PLAN FOR THE M ODERNIZATION OF THE ENTIRE SHIP BUILDING YARD INCLUDING THE INSTALLATION OF A SHIP LIFT, CONSIDERING A NEW MODULAR SHOP AND IMPROVEMENTS TO THE MODULE BUILDIN G, 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 DR AWINGS 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 TH E ENTIRE PROJECT AND THE DETAILED ITEM WISE COST ESTIMATE FOR THE DIFFERENT PACKAGES ENVISAGED FOR THE MODERNIZATION; DETAILED REQUIREMENTS OF SERVICES/ FACILITIES, ESTI MATES OF POWER REQUIREMENTS, PROVISION OF SUB- STATION, COMPRESSED AIR ETC; PREPARATION OF DRAFT TENDER DOCUMENTS FOR THE VARIO US PACKAGES; AND OBTAINING TIMELY APPROVALS FROM VARIOUS STATUTORY B ODIES. DURING THE PREVIOUS YEAR RELEVANT TO AY 2007-08, TH E ASSESSEE WAS INVOLVED IN THE ACTIVITIES PERTAINING TO THIS PHASE . PHASE - III ISSUANCE OF THE DETAILED WORKING DRAWINGS TO THE CO NTRACTORS (SEPARATE FROM THE ASSESSEE), AS INDEPENDENTLY SELECTED BY GRSE, FOR T HE NECESSARY EXECUTION OF THE WORK, AS REQUIRED, FOR CONSTRUCTION. SUPERVISI ON OF THE ACTUAL IMPLEMENTATION OF THE SUGGESTIONS AS GIVEN IN THE P ROJECT REPORT OF THE ASSESSEE. POST CONSTRUCTION THE ASSESSEE HAS TO SU BMIT AS-BUILT DRAWINGS TO AUTHORITIES LIKE KMC/KPT/INSPECTOR OF FACTORIES AND OBTAIN COMPLETION CERTIFICATE/OCCUPANCY CERTIFICATE. ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 42 47. DURING THE PREVIOUS YEAR, THE ASSESSEE WAS INV OLVED 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 T HE PROPERTY OF GRSE ALL PLANS, DRAWINGS, SPECIFICATIONS, DESIGNS, REPOR TS AND OTHER DOCUMENTS PREPARED BY THE CONSULTANT IN PERFORMING THE SERVIC ES 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 CO NSULTANT SHALL NOT USE THE SAID DOCUMENTS FOR PURPOSES UNRELATED TO THIS CONTR ACT IN ANY MANNER WHATSOEVER. 48. THE CONTRACT BETWEEN THE ASSESSEE AND GRSE GIV ES THE GENERAL NATURE OF SERVICES FOR WHICH THE ASSESSEE WAS BEING ENGAGED A S FOLLOWS: WHEREAS GRSE INTENDS TO AND/OR IS DESIROUS OF CARR YING OUT MODERNISATION OF ITS EXISTING SHIPYARD (HEREINAFTER REFERRED TO A S THE PROJECT) AND THE CONSULTANT, HAVING REPRESENTED THEMSELVES AS TECHNI CALLY CAPABLE OF AND/OR POSSESSING PROFESSIONAL QUALIFICATION, SKILL, PERSO NNEL INFRASTRUCTURE AND ALL OTHER TECHNICAL RESOURCES, HAVE SUBMITTED THEIR OFF ER TO PROVIDE ALL REQUIRED TECHNICAL AND ANCILLARY SERVICES FOR PROVIDING CONS ULTANCY SERVICES FOR MODERNISATION OF GARDEN REACH SHIPYARD AND WHEREAS GRSE HAVE ACCEPTED THE SAID OFFER OF THE CONSULTANT UNDER THE TERMS AN D CONDITIONS AS MENTIONED HEREUNDER. 49. THE MANNER IN WHICH THE SERVICES ARE RENDERED BY THE ASSESSEE UNDER THE AGREEMENT NECESSARILY INVOLVES VISIT BY THE ASSESSE ES REPRESENTATIVE TO THE EXISTING SHIPYARD OF GRSE, CARRY OUT STUDY OF THE EXISTING D ESIGN, PLAN AND FACILITIES AND SCOPE FOR MODERNISATION. THE DATA SO COLLECTED WAS SEN T TO UK AND THE EXPERTS OF THE ASSESSEE AT UK DREW THE PROJECT REPORT WITH INPUTS FROM M/S.APPLEDORE, UK, WHICH WOULD CONTAIN PLANS, DESIGN, STRUCTURAL DESIGN, COS T FOR ACTUAL IMPLEMENTATION, MANNER OF IMPLEMENTATION ETC. AS WE HAVE ALREADY SEEN, DU RING THE PREVIOUS YEAR STAGE-II OF THE AGREEMENT WAS BEING CARRIED OUT BY THE ASSESSEE (WHICH WAS ONLY DRAWING OF PROJECT REPORT, PLANS ETC.), WHICH DOES NOT REQUIRE MUCH OF PRESENCE OF THE REPRESENTATIVES OF THE ASSESSEE IN INDIA. THE DET AILS OF THE MAN HOURS SPENT IN INDIA AND IN UK FOR RENDERING SERVICES TO GRSE HAVE BEEN GIVEN AT PAGE-106 OF THE PAPER BOOK AND IT SHOWS THAT ONLY 234 MAN HOURS WERE SPEN T IN INDIA AND 6,360 MAN HOURS ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 43 WERE SPENT IN UK. THE CLAIM OF THE ASSESSEE IN THI S 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 C ONNECTION WITH THE WORK TO BE CARRIED OUT BY THE ASSESSEE FOR GRSE IN INDIA. SOM E 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 THE SE CONSULTANTS WERE FROM INDIA. THE DESCRIPTION OF THE WORK AS CONTAINED IN THE INV OICES RAISED CARRIED OUT BY THE ASSESSEE DURING THE PREVIOUS YEAR BOTH BY THE SUB-C ONSULTANTS IN INDIA, BY THE ASSESSEE FROM UK AND SUB-CONSULTANTS FROM UK IS GIV EN 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 BEE N RENDERED FROM UK AND THE BILLING IN INDIA RUPEE ARE FOR SERV ICES RENDERED IN INDIA. 50. FROM THE NATURE OF THE SERVICES TO BE RENDERED BY THE ASSESSEE THERE CAN BE NO DOUBT THAT THE PAYMENT IN QUESTION FALLS WITHIN THE DEFINITION OF FEES FOR TECHNICAL SERVICES AS GIVEN IN SEC.9(1)(VII) (B) READ WITH EX PLANATION 2 TO THE ACT AND THAT THE SAME IS DEEMED TO ACCRUE OR ARISE IN INDIA. THE SER VICES RENDERED BY THE ASSESSEE WERE IN THE NATURE OF TECHNICAL OR CONSULTANCY SERV ICES. SEC.9(1) THE FOLLOWING INCOMES SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA : ( VII ) INCOME BY WAY OF FEES FOR TECHNICAL SERVICES PAY ABLE BY ( A ) THE GOVERNMENT ; OR ( B ) A PERSON WHO IS A RESIDENT, EXCEPT WHERE THE FEE S ARE PAYABLE IN RESPECT OF SERVICES UTILISED IN A BUSINESS OR PROFESSION CA RRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARN ING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA ; OR ( C ) A PERSON WHO IS A NON-RESIDENT, WHERE THE FEES A RE PAYABLE IN RESPECT OF SERVICES UTILISED IN A BUSINESS OR PROFESSION CARRI ED 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 TECHNIC AL SERVICES' MEANS ANY CONSIDERATION (INCLUDING ANY LU MP SUM CONSIDERATION) FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL OR C ONSULTANCY SERVICES (INCLUDING THE PROVISION OF SERVICES OF TECHNICAL O R OTHER PERSONNEL) BUT DOES ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 44 NOT INCLUDE CONSIDERATION FOR ANY CONSTRUCTION , ASSEMBLY, MINING OR LIKE PROJECT UNDERTAKEN BY THE RECIPIENT OR CONSIDERATIO N WHICH WOULD BE INCOME OF THE RECIPIENT CHARGEABLE UNDER THE HEAD 'SALARIE S'. 51. SECTION 9 OF THE ACT, WAS AMENDED BY THE FINAN CE ACT, 2010 W.R.E.F. 01.06.1976 BY SUBSTITUTING THE EXPLANATION OCCURRING AFTER SUB -SECTION 2 AS UNDER: 'EXPLANATION. - FOR THE REMOVAL OF DOUBTS, IT IS HE REBY DECLARED THAT FOR THE PURPOSE OF THIS SECTION, INCOME OF A NON-RESIDE NT 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 BUSI NESS OR BUSINESS CONNECTION IN INDIA; OR (II) THE NON-RESIDENT HAS RENDERED SERVICES IN INDI A.' IN VIEW OF THE ABOVE STATED AMENDMENT, THE INCOME B Y 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 PROFE SSION 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 HAR IMA HEAVY INDUSTRIES LTD. VS. CIT, 288 ITR 408 AS WELL AS THE DECISION OF THE BOM BAY HIGH COURT IN THE CASE OF CIT VS. SIEMENS AKTIONGESELLSCHAFT (2009) 310 ITR 3 20, RENDERED IN THE CONTEXT OF THE LAW THAT PREVAILED PRIOR TO THE AFORESAID STATU TORY AMENDMENT WILL NOT BE OF ANY HELP TO THE PLEA OF THE ASSESSEE. AS FAR AS THE DEC ISION OF THE HONBLE 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 CONSIDERA TION IN THAT CASE WAS APPLICABILITY OF SEC.9(1)(I) OF THE ACT REGARDING EXISTENCE OF BUSIN ESS CONNECTION. THE SPECIAL BENCH NOTICED THAT T HE VIEW TAKEN BY THE TRIBUNAL AND THE HIGH COURT IN CLIFFORD CHANCE (SUPRA) WAS THAT IF ARTICLE 15 OF THE INDIA-UK TREATY IS N OT APPLICABLE BECAUSE THE STAY OF THE PARTNER EXCEEDED 90 DAYS, THEN THE TAXA BILITY OF THE INCOME WOULD BE ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 45 DETERMINED BY S. 9(1)(I) OF THE ACT. IT WAS HELD TH AT FOR DETERMINATION OF INCOME U/S 9(1)(I), THE TERRITORIAL NEXUS DOCTRINE PLAYS AN IM PORTANT 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 CONTE XT OF S. 9(1)(I) THAT IF ALL THE OPERATIONS ARE NOT CARRIED OUT IN THE TAXABLE TERRI TORIES, 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 REASONA BLY ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT IN THE TAXABLE TERRITORIES. THE APPLICA BILITY 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 TRI BUNAL. 52. HAVING HELD THAT THE INCOME IN QUESTION ACCRUE S AND ARISES IN INDIA AND THEREFORE TAXABLE IN INDIA, WE WILL NOW PROCEED TO EXAMINE TH E TAXABILITY OF THE INCOME IN QUESTION UNDER THE DTAA BETWEEN INDIA AND UK. ARTIC LE 13 OF THE DTAA PROVIDES FOR TAXATION OF INCOME IN THE FORM OF FEES FOR TECH NICAL SERVICES BETWEEN THE SOURCE COUNTRY (INDIA) AND THE RESIDENT COUNTRY (UK). THE RELEVANT CLAUSES OF THE DTAA PROVIDES AS FOLLOWS: ARTICLE 13 ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. ROYALTIES AND FEES FOR TECHNICAL SERVICES ARISING IN A CONTRACTING STATE AND PAID TO A RESIDENT OF THE OTHER CONTRACTING STATE M AY BE TAXED IN THAT OTHER STATE. 2. HOWEVER, SUCH ROYALTIES AND FEES FOR TECHNICAL SER VICES MAY ALSO BE TAXED IN THE CONTRACTING STATE IN WHICH THEY ARISE AND ACCOR DING TO THE LAW OF THAT STATE; BUT IF THE BENEFICIAL OWNER OF THE ROYALTIES OR FEE S FOR TECHNICAL SERVICES IS A RESIDENT OF THE OTHER CONTRACTING STATE, THE TAX SO CHARGED SHALL NOT EXCEED : (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 CONVENTI ON HAS EFFECT ; (AA) 15 PER CENT OF THE GROSS AMOUNT OF SUCH ROYALT IES OR FEES FOR TECHNICAL SERVICES WHEN THE PAYER OF THE ROYALTIES OR FEES FO R TECHNICAL SERVICES IS THE ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 46 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 ROYALT IES OR FEES FOR TECHNICAL SERVICES IN ALL OTHER CASES; AND (II) DURING SUBSEQUENT YEARS, 15 PER CENT OF THE GROSS A MOUNT 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. 4. FOR THE PURPOSES OF PARAGRAPH 2 OF THIS ARTICLE, A ND SUBJECT TO PARAGRAPH 5, OF THIS ARTICLE, THE TERM 'FEES FOR TECHNICAL SERVI CES' MEANS PAYMENTS OF ANY KIND OF ANY PERSON IN CONSIDERATION FOR THE RENDERI NG OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SE RVICES OF A TECHNICAL OR OTHER PERSONNEL) WHICH : ( A ) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A PAYMENT DESCRIBED IN PAR AGRAPH 3( A ) OF THIS ARTICLE IS RECEIVED ; OR ( B ) ARE ANCILLARY AND SUBSIDIARY TO THE ENJOYMENT OF TH E PROPERTY FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 3( B ) OF THIS ARTICLE IS RECEIVED ; OR ( C ) MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, S KILL KNOW-HOW OR PROCESSES, OR CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TECHNI CAL PLAN OR TECHNICAL DESIGN. 6. THE PROVISIONS OF PARAGRAPHS 1 AND 2 OF THIS ARTIC LE SHALL NOT APPLY IF THE BENEFICIAL OWNER OF THE ROYALTIES OR FEES FOR TECHN ICAL SERVICES, BEING A RESIDENT OF A CONTRACTING STATE, CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE IN WHICH THE ROYALTIES OR FEES FOR TECHNICAL SERVICES ARISE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN, OR PERFORMS IN THAT OTHER STATE INDEPENDENT PERSONAL SERVICES FROM A FIXED BASE SITUATED THEREI N, AND THE RIGHT, PROPERTY OR CONTRACT IN RESPECT OF WHICH THE ROYALTIES OR FEES FOR TECHNICAL SERVICES ARE PAID IS EFFECTIVELY CONNECTED WITH SUCH PERMANENT ESTABL ISHMENT OR FIXED BASE. IN SUCH CASE, THE PROVISIONS OF ARTICLE 7 (BUSINESS PR OFITS) OR ARTICLE 15 (INDEPENDENT PERSONAL SERVICES) OF THIS CONVENTION, AS THE CASE MAY BE, SHALL APPLY. 7. ROYALTIES AND FEES FOR TECHNICAL SERVICES SHALL BE DEEMED TO ARISE IN A CONTRACTING STATE WHERE THE PAYER IS THAT STATE ITS ELF, A POLITICAL SUB-DIVISION, A LOCAL AUTHORITY OR A RESIDENT OF THAT STATE. WHERE, HOWEVER, THE PERSON PAYING THE ROYALTIES OR FEES FOR TECHNICAL SERVICES, WHETH ER HE IS A RESIDENT OF A CONTRACTING STATE OR NOT, HAS IN A CONTRACTING STAT E A PERMANENT ESTABLISHMENT OR A FIXED BASE IN CONNECTION WITH WHICH THE OBLIGA TION TO MAKE PAYMENTS WAS ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 47 INCURRED AND THE PAYMENTS ARE BORNE BY THAT PERMANE NT ESTABLISHMENT OR FIXED BASE THEN THE ROYALTIES OR FEES FOR TECHNICAL SERVI CES SHALL BE DEEMED TO ARISE IN THE CONTRACTING STATE IN WHICH THE PERMANENT ESTABL ISHMENT OR FIXED BASE IS SITUATED. 52. THE NATURE OF SERVICES RENDERED BY THE ASSEESS EE UNDER THE AGREEMENT WITH GRSE WAS OF THE NATURE OF TECHNICAL OR CONSULTANCY SERVICE AND WOULD BE PROVIDING TECHNICAL SERVICES WITHIN THE MEANING OF THE DTAA A LSO. IN TERMS OF ARTICLE 13(7) OF THE DTAA THE INCOME IN THE FORM OF FEES FOR TECH NICAL SERVICES SHALL BE DEEMED TO ARISE IN INDIA BECAUSE THE PERSON MAKING PAYMENT OF SUCH FEE IS A RESIDENT OF INDIA. 53. ARTICLE 13(4) DEFINES FTS TO MEAN PAYMENTS OF ANY KIND, TO ANY PERSON, IN CONSIDERATION FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SERVICES OF TECHNICAL SERVICES OR OTHE R PERSONNEL) WHICH: (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A PAYMENT DESCRIBED IN PAR AGRAPH 3(A) OF THIS ARTICLE IS RECEIVED; OR (B) ARE ANCILLARY AND SUBSIDIARY TO THE ENJOYMENT O F THE PROPERTY FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 3(B) OF THIS ARTICLE IS RECE IVED: 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 ANCILLA RY 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 G RSE ENVISAGED ONLY FOR RENDERING CONSULTANCY SERVICES FOR MODERNISATION OF THE SHIPY ARD PROJECT AND DID NOT INVOLVE TRANSFER OF ANY RIGHT TO USE PROPERTY FOR WHICH ROY ALTIES ARE PAYABLE. HENCE, THERE IS NO APPLICATION OF THE FIRST PART OF THE DEFINITION IN THE SUBJECT CASE. THE SECOND PART OF THE ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 48 DEFINITION RELATES TO THE FEES FOR RENDERING ANY TE CHNICAL OR CONSULTANCY SERVICES WHICH ARE MADE AVAILABLE TO THE ASSESSEE. 54. AS FAR AS APPLICABILITY OF CLAUSE (C) OF ARTIC LE 13(4) OF THE INDO-UK DTAA IS CONCERNED, IT HAS BEEN THE CONTENTION OF THE ASSESS EE THAT THE SAID CLAUSE CONTEMPLATES THAT FEES PAID SHOULD BE FOR MAKING AVAILABLE OF TH E TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, ETC. IN OTHER WORDS, THE TECHNICAL KNOWLEDG E, 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 AVA ILABLE TO THE ASSESSEE, SHALL NOT SERVE THE PURPOSE AND HENCE, WILL BE OUTSIDE THE AM BIT OF THE ARTICLE. 'RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICE' IS FOLLOWED B Y 'WHICH MADE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL AND KNOW-HOW'. THE CO NTENTION OF THE ASSESSEE IS THAT THE MEANING OF THE EXPRESSION 'MAKE AVAILABLE' HAS BEEN CONSIDERED IN SEVERAL JUDICIAL PRONOUNCEMENTS AND THE ESSENCE OF THOSE DE CISIONS WAS THAT , THE TECHNICAL OR CONSULTANCY SERVICE RENDERED SHOULD BE OF SUCH A NA TURE THAT 'MAKE AVAILABLE' TO THE RECIPIENT TECHNICAL KNOWLEDGE, KNOW-HOW AND THE LIK E. 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 KN OWLEDGE 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 WIL L GET EQUIPPED WITH THAT KNOWLEDGE OR EXPERTISE AND BE ABLE TO MAKE USE OF IT IN FUTUR E, INDEPENDENT OF THE SERVICE PROVIDER. 1N OTHER WORDS, TO FIT INTO THE TERMINOLO GY 'MAKE AVAILABLE', THE TECHNICAL KNOWLEDGE, SKILLS, ETC., MUST REMAIN WITH THE PERSO N RECEIVING THE SERVICES EVEN AFTER THE PARTICULAR CONTRACT COMES TO AN END. THE SERVIC ES 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. 55. WE HAVE ALREADY SEEN CLAUSE 3.10 OF THE AGREEM ENT BETWEEN THE ASSESSEE AND GRSE (SEE PARA-47 OF THIS ORDER) WHICH PROVIDES THA T ALL PLANS, DRAWINGS, SPECIFICATIONS, DESIGNS, REPORTS AND OTHER DOCUMENT S PREPARED BY THE CONSULTANT IN PERFORMING THE SERVICES SHALL BECOME AND REMAIN THE EXCLUSIVE PROPERTY OF GRSE. WE ARE THEREFORE OF THE VIEW THAT THE REQUIREMENTS OF CLAUSE (C) OF ARTICLE 13(4) OF THE ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 49 DTAA ARE ALSO SATISFIED IN THE PRESENT CASE AND THE REFORE THE SOURCE COUNTRY (INDIA) HAS A RIGHT TO TAX THE FEE IN QUESTION IN ACCORDANC E WITH ARTICLE 13(2) OF THE DTAA BUT SUBJECT TO THE LIMITATION OF RATE OF TAX AS LAID DO WN 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.1 15A OF THE ACT. 56. AS CAN BE SEEN FROM A READING OF ARTICLE 13(6) OF THE DTAA, FEES FOR TECHNICAL SERVICES SHALL NOT BE TAXED UNDER ARTICLE 13(2) IF THE BENEFICIAL OWNER OF THE ROYALTIES OR FEES FOR TECHNICAL SERVICES, BEING A RESIDENT OF A CONTRACTING STATE, CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE IN WHICH TH E ROYALTIES OR FEES FOR TECHNICAL SERVICES ARISE THROUGH A PERMANENT ESTABLISHMENT SI TUATED THEREIN, OR PERFORMS IN THAT OTHER STATE INDEPENDENT PERSONAL SERVICES FROM A FI XED BASE SITUATED THEREIN, AND THE RIGHT, PROPERTY OR CONTRACT IN RESPECT OF WHICH THE ROYALTIES OR FEES FOR TECHNICAL SERVICES ARE PAID IS EFFECTIVELY CONNECTED WITH SUC H PERMANENT ESTABLISHMENT OR FIXED BASE. IN SUCH CASE, THE PROVISIONS OF ARTICLE 7 (BU SINESS PROFITS) OR ARTICLE 15 (INDEPENDENT PERSONAL SERVICES) OF THIS CONVENTION, AS THE CASE MAY BE, SHALL APPLY. 57. THE QUESTION THEREFORE IS AS TO WHETHER FEES F OR TECHNICAL SERVICES (FTS) SHOULD BE TAXED UNDER ARTICLE 13(2) OR ARTICLE 7 OF THE DT AA. THAT WOULD DEPEND ON THE QUESTION WHETHER THE ASSESSEE HAD A PERMANENT ESTAB LISHMENT IN INDIA. IN ALL DOUBLE TAXATION AVOIDANCE AGREEMENT THE BASIC CONCEPT IS T HAT AN ENTERPRISE SHOULD BE LIABLE FOR TAX ON PROFITS EARNED IN A COUNTRY THAT IS NOT THE COUNTRY OF RESIDENCE OF THE ENTERPRISE, UNLESS THE ENTERPRISE HAS A REAL AND SI GNIFICANT OR SUBSTANTIAL ECONOMIC NEXUS WITH THE COUNTRY IN WHICH THE PROFITS ACCRUE. AN ENTERPRISE WILL ONLY HAVE SUCH A REAL AND SIGNIFICANT OR SUBSTANTIAL NEXUS IF IT C ARRIES ON BUSINESS IN THE OTHER COUNTRY THROUGH A PERMANENT ESTABLISHMENT IN THAT COUNTRY. ARTICLE 5 OF THE DTAA LAYS DOWN RULES WITH REGARD TO DETERMINATION OF THE QUESTION AS TO WHEN AN ENTERPRISE CAN BE CONSIDERED AS HAVING A PE IN THE SOURCE COUNTRY (I. E., THE COUNTRY FROM WHICH INCOME ACCRUES OR ARISES TO THE ENTERPRISE). ARTICLE 5 PERMANENT ESTABLISHMENT ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 50 1. FOR THE PURPOSES OF THIS CONVENTION, THE TERM 'PER MANENT ESTABLISHMENT' MEANS A FIXED PLACE OF BUSINESS THROUGH WHICH THE B USINESS OF AN ENTERPRISE IS WHOLLY OR PARTLY CARRIED ON. 2. THE TERM 'PERMANENT ESTABLISHMENT' SHALL INCLUDE E SPECIALLY : ( 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 O F EXTRACTION OF NATURAL RESOURCES; ( I ) AN INSTALLATION OR STRUCTURE USED FOR THE EXPLORATI ON OR EXPLOITATION OF NATURAL RESOURCES; ( J ) A BUILDING SITE OR CONSTRUCTION, INSTALLATION OR AS SEMBLY PROJECT OR SUPERVISORY ACTIVITIES IN CONNECTION THEREWITH, WHERE SUCH SITE , PROJECT OR SUPERVISORY ACTIVITY CONTINUES FOR A PERIOD OF MORE THAN SIX MO NTHS, 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 SER VICES, OTHER THAN THOSE TAXABLE UNDER ARTICLE 13 (ROYALTIES AND FEES FOR TE CHNICAL SERVICES), WITHIN A CONTRACTING STATE BY AN ENTERPRISE THROUGH EMPLOYEE S OR OTHER PERSONNEL, BUT ONLY IF: (I)ACTIVITIES OF THAT NATURE CONTINUE WITHIN THAT S TATE FOR A PERIOD OR PERIODS AGGREGATING MORE THAN 90 DAYS WITHIN ANY TWELVE-MO NTH 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 TW ELVE-MONTH PERIOD: PROVIDED THAT FOR THE PURPOSES OF THIS PARAGRAPH AN ENTERPR ISE 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, MI NERAL OILS IN THAT STATE. ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 51 3. . THE TERM 'PERMANENT ESTABLISHMENT' SHALL NOT BE DE EMED TO INCLUDE: ( A ) THE USE OF FACILITIES SOLELY FOR THE PURPOSE OF STO RAGE 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 E NTERPRISE; ( 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 RE SEARCH, BEING ACTIVITIES SOLELY OF A PREPARATORY OR AUXILIARY CHARACTER IN THE TR ADE OF BUSINESS OF THE ENTERPRISE. HOWEVER, THIS PROVISION SHALL NOT BE APPLICABLE WH ERE THE ENTERPRISE MAINTAINS ANY OTHER FIXED PLACE OF BUSINESS IN THE OTHER CON TRACTING STATE FOR ANY PURPOSE OR PURPOSES OTHER THAN THE PURPOSES SPECIFIED IN THIS PARAGRAPH; ( F ) THE MAINTENANCE OF A FIXED PLACE OF BUSINESSES SOLE LY 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 BU SINESS RESULTING FROM THIS COMBINATION IS OF A PREPARATORY OR AUXILIARY CHARACTER. 4. A PERSON ACTING IN A CONTRACTING STATE FOR OR ON B EHALF OF AN ENTERPRISE OF THE OTHER CONTRACTING STATE - OTHER THAN AN AGENT O F AN INDEPENDENT STATUS TO WHOM PARAGRAPH (5) OF THIS ARTICLE APPLIES, SHALL B E DEEMED TO BE A PERMANENT ESTABLISHMENT OF THAT ENTERPRISE IN THE FIRST MENTI ONED STATE IF: ( A ) HE HAS, AND HABITUALLY EXERCISES IN THAT STATE, AN AUTHORITY TO NEGOTIATE AND ENTER INTO CONTRACTS FOR OR ON BEHALF OF THE ENTERPRISE, UNLE SS HIS ACTIVITIES ARE LIMITED TO THE PURCHASE OF GOODS OR MERCHANDISE FOR THE ENTERPRISE ; OR ( B ) HE HABITUALLY MAINTAINS IN THE FIRST-MENTIONED CONT RACTING 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 ENTE RPRISE. 5. AN ENTERPRISE OF A CONTRACTING STATE SHALL NOT BE DEEMED TO HAVE A PERMANENT ESTABLISHMENT IN THE OTHER CONTRACTING ST ATE MERELY BECAUSE IT CARRIES ON BUSINESS IN THAT OTHER STATE THROUGH A B ROKER, GENERAL COMMISSION AGENT OR ANY OTHER AGENT OF AN INDEPENDENT STATUS, WHERE SUCH PERSONS ARE ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 52 ACTING IN THE ORDINARY COURSE OF THEIR BUSINESS. HO WEVER, IF THE ACTIVITIES OF SUCH AN AGENT ARE CARRIED OUT WHOLLY OR ALMOST WHOL LY FOR THE ENTERPRISE (OR FOR THE ENTERPRISE AND OTHER ENTERPRISES WHICH ARE CONT ROLLED BY IT OR HAVE A CONTROLLING INTEREST IN IT OR ARE SUBJECT TO SAME C OMMON CONTROL) HE SHALL NOT BE CONSIDERED TO BE AN AGENT OF AN INDEPENDENT STATUS FOR THE PURPOSES OF THIS PARAGRAPH. 6. THE FACT THAT A COMPANY WHICH IS A RESIDENT OF A C ONTRACTING STATE CONTROLS OR IS CONTROLLED BY A COMPANY WHICH IS A RESIDENT O F THE OTHER CONTRACTING STATE, OR WHICH CARRIES ON BUSINESS IN THAT OTHER S TATE (WHETHER THROUGH A PERMANENT ESTABLISHMENT OR OTHERWISE), SHALL NOT OF ITSELF CONSTITUTE EITHER COMPANY A PERMANENT ESTABLISHMENT OF THE OTHER. 7. FOR THE PURPOSES OF THIS ARTICLE THE TERM 'CONTROL ', IN RELATION TO A COMPANY, MEANS THE ABILITY TO EXERCISE CONTROL OVER THE COMP ANY'S AFFAIRS BY MEANS OF THE DIRECT OR INDIRECT HOLDING OF THE GREATER PART OF THE ISSUED SHARE CAPITAL OR VOTING POWER IN THE COMPANY. 58. AS PER ARTICLE 5(1), THE TERM 'PERMANENT ESTAB LISHMENT' MEANS A FIXED PLACE OF BUSINESS THROUGH WHICH THE BUSINESS OF AN ENTERPRIS E IS WHOLLY OR PARTLY CARRIED ON. ARTICLE 5(1) STIPULATES THREE CRITERIA VIZ., (A) PL ACE OF BUSINESS I.E., SOME PHYSICAL PRESENCE E.G., SOME PREMISES OR EQUIPMENT, WHICH AR E USED IN BUSINESS; (B) PLACE OF BUSINESS SHOULD BE FIXED IN THE SENSE THAT IT IS A DISTINCT PLACE WHICH EXHIBITS SOME DEGREE OF PERMANENCE. THE FACT THAT AN ENTERPRISE HAS A CERTAIN AMOUNT OF SPACE AT ITS DISPOSAL, WHICH IS USED FOR BUSINESS ACTIVITY IS SU FFICIENT 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 BU SINESS BUT ALSO WHOLLY OR PARTLY BUSINESS SHOULD BE CARRIED ON THOUGHT THAT FIXED PL ACE. 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 REFE RRED TO AS BASIC-RULE PE. ARTICLE 5(2)(A) TO (K) CONTAINS EXAMPLES (POSITIVE DEFINITI ONS) OF RULE CONTAINED IN ARTICLE 5(1) AND ARTICLE 5(3) ARE EXCEPTIONS TO PE (NEGATIVE DEF INITION). 59. IT HAS BEEN THE CONTENTION OF THE ASSESSEE THA T FOR A PLACE OR AN OFFICE TO BE TREATED AS PE. IT MUST BE AT THE DISPOSAL OF THE ENTERPRISE I.E. THE ASSESSSEE MUST BE ABLE TO OCCUPY THE PREMISES IN ITS OWN RIGHT AND USE THE SA ME FOR THE PURPOSE OF CARRYING ITS BUSINESS IN INDIA. IT HAS BEEN THE STAND OF THE ASS ESSEE THAT IT DOES NOT HAVE ANY OFFICE ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 53 BRANCH OR FIXED PLACE OF BUSINESS IN INDIA. IT WAS MAINTAINING ITS BOOKS OF ACCOUNTS RELATING TO THE GRSE PROJECT AND COMPLYING WITH TAX ATION MATTERS IN INDIA THROUGH ITS CONSULTANT, L.B.JHA & CO., CHARTERED ACCOUNTANTS. T HE TECHNICAL ANALYSIS FOR THE PURPOSE OF REVIEW REPORT ETC. WAS CARRIED OUT BY TH E ASSESSEE ONLY IN THE UK, BASED ON SUCH INFORMATION RECEIVED FROM INDIA. AS SUCH IN TE RMS OF ARTICLE 5(3)(D) OF THE DTAA. MAINTENANCE OF A FIXED PLACE OF BUSINESS MERE LY 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 US ED 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. 60. IN THIS REGARD IT IS WORTHWHILE TO MENTION THA T AS PER PARA 5.2 OF THE CONTRACT, GRSE WAS REQUIRED TO MAKE AVAILABLE TO THE CONSULTA NT'S PERSONNEL (ASSESSEES PERSONNEL) FOR THE PURPOSES OF SERVICES OFFICE SPAC E INSIDE THE GARDEN REACH SHIPYARD. IT WAS THE STAND OF THE ASSESSEE THAT THE OFFICE SP ACE PROVIDED BY GRSE IS FOR RESTRICTIVE AND EXCLUSIVE PURPOSE OF PROVIDING SERV ICES UNDER THE CONTRACT FOR MODERNISATION OF SHIPYARD AND NOT FOR ANY OTHER PUR POSES. THEREFORE, OFFICE PREMISES PROVIDED BY GRSE CANNOT BE AVAILABLE FOR CARRYING O UT THE BUSINESS IN INDIA BY ASSESSEE. THE OFFICE PLACE PROVIDED BY GRSE THEREFO RE CANNOT BE OCCUPIED BY ASSESSEE OR THEIR PERSONNEL AS A RIGHT FOR CARRYING OUT THEIR BUSINESS IN INDIA. IT HAS BEEN THE FURTHER STAND OF THE ASSESSEE THAT THE USE OF SUCH PREMISES IS FURTHER RESTRICTED AS APPENDIX 1.3 OF THE CONTRACT SPECIFIC ALLY PROVIDES THAT THE CONSULTANT WHEN WORKING INSIDE THE PREMISES OF GRSE, SHALL OBS ERVE GRSE'S RULES AND REGULATIONS AND SPECIAL PERMISSIONS SHALL BE OBTAIN ED WHEN IT IS NECESSARY TO WORK BEYOND NORMAL WORKING HOURS AS PER THE REQUIREMENT OF PROJECT WORK. ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 54 61. RELIANCE IN THIS REGARD IS PLACED ON THE EXPLA NATION 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. WHIC H IS IMPLICIT IN ARTICLE 5(1). IS THAT THE PLACE OF BUSINESS MUST BE AT THE DISPOS AL 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 TH EY ARE AT THE DISPOSAL OF THE ENTERPRISE .... THIS HAS GIVEN RISE TO SOME DIFFICU LTIES 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 OWN ED 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 PURPO SES OF ITS BUSINESS AND NOT SOLELY FOR THE PURPOSES OF THE PROJECT UNDERTAKEN O N 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 P LACE IS REQUIRED FOR THAT PLACE TO CONSTITUTE A PERMANENT ESTABLISHMENT, THE MERE PRESENCE OF AN ENTERPRISE AT A PARTICULAR LOCATION DOES NOT NECESSARILY MEAN THA T THAT LOCATION IS AT THE DISPOSAL OF THAT ENTERPRISE. ' 63. ATTENTION WAS ALSO DRAWN TO THE DECISION OF TH E SPECIAL BENCH ITAT IN THE CASE OF MOTOROLA INC. 95 ITD 269 (DELHI-SB) WHEREIN WHILE D EALING 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 SPAC E OR TABLE. MERELY BECAUSE THE INDIAN COMPANY ALLOWED THE VISITING EMPLOYEES T O USE CERTAIN FACILITIES OCCASIONALLY, IT CANNOT BE SAID THAT THE ASSESSEE H AD AT ITS DISPOSAL, AS A MATTER OF RIGHT CERTAIN SPACE WHICH COULD BE CATEGORIZED A S A FIXED PLACE OF BUSINESS. IT WAS ONLY THE FACILITY OFFERED TO THE EMPLOYEES O F ERICSSON GRATIS THAT THEY COULD ENTER THE OFFICE OF ECI FOR THE WORK OF ERICS SON. 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 AC TIVITIES OF ERICSSON. NOR DID ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 55 IT CREATE ANY IMPRESSION IN THE MINDS OF THE BUSINE SS CUSTOMERS OF ERICSSON IN INDIA THAT THE OFFICE OF ECI COULD BE VIEWED AS A P ROJECTION OF ERICSSON 'S ACTIVITIES IN INDIA'. 64. RELIANCE WAS ALSO PLACED ON THE DECISION OF IT AT 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 T EST, REQUIRES THAT THERE SHOULD BE A PHYSICAL LOCATION AT WHICH THE BUSINESS IS CARRIE D OUT. HOWEVER. MERE EXISTENCE OF A PHYSICAL LOCATION IS NOT ENOUGH. THI S 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 SHO ULD BE AT THE DISPOSAL OF THE FOREIGN ENTERPRISE FOR THE PURPOSE OF ITS OWN BUSIN ESS 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 GIV E 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 SE NSE THAT FOREIGN ENTERPRISE SHOULD HAVE SOME SORT OF A RIGHT TO USE THE SAID PH YSICAL 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 G IVEN FOR USE OR RIGHT TO USE CANNOT BE VIEWED AS A PLACE OF CARRYING ON ITS BUS INESS, WHICH, AS WE UNDERSTAND. IS LIMITED TO. QUA THAT CONSIGNMENT. TH E CONSIGNMENT SO HAVING BEEN GIVEN FOR USE OR RIGHT TO USE. THE BUSINESS WI TH 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 AS SESSEE DID NOT HAVE ANY RIGHT TO USE THE LOCATION OF CONSIGNMENT STOCK, SUCH A LOCAT ION WAS ALSO NOT USED FOR THE PURPOSES OF ASSESSEE'S BUSINESS. THERE IS ALSO NO P ROJECTION OF THE ASSESSEE AT THIS PHYSICAL LOCATION IN THE SENSE THAT THE BUSINE SS OF THE ASSESSEE IS NOT CARRIED OUT, OR SOUGHT TO BE CARRIED OUT OR EVEN PR OJECTED, FROM THESE LOCATIONS. WHEN THE PHYSICAL LOCATIONS AT WHICH CONSIGNMENT ST OCK IS KEPT DO NOT PROJECT THE ASSESSEE, IT CANNOT BE SAID THAT THESE LOCATION S 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 C ARRYING OUT ANY OTHER BUSINESS OF THE ASSESSEE IN INDIA ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 56 - THE ASSESSEE CANNOT OCCUPY SUCH OFFICE PREMISES I N 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 SERVIC ES 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 PREMI SES BEYOND NORMAL WORKING HOURS . 66. THE LEARNED DR RELIED ON THE FOLLOWING CIRCUMS TANCES TO SUBSTANTIATE THE CONCLUSION OF THE REVENUE AUTHORITIES THAT THERE EX ISTED A PE OF THE ASSESSEE IN INDIA VIZ., A) ARTICLE- 5 OF THE INDIA-UK DTAA DEFINES THE TER M '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 O F THE CONTRACT DOCUMENT, IT IS MENTIONED THAT GRSE WOULD PROVIDE TO THE ASSESSEE A IR-CONDITIONED OFFICE SPACE OF ABOUT 50 SQ.MT. INSIDE THE GARDEN REACH SHIPYARD WI TH TELEPHONE AND FAX FACILITY FOR THE DURATION OF THE CONTRACT AND THE ASSESSEE HAD T O 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 R EVEALED 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 BETWE EN THE ASSSESSEE AND GRSE, 'TERMS OF REFERENCE' , THE ASSESSEE SHALL POST AT S ITE COMPETENT AND QUALIFIED ENGINEERS DESIGNATED AS RESIDENT/ASSISTANT RESIDENT ENGINEER AND OTHER SITE ENGINEERS ( MINIMUM CIVIL ENGINEERING GRADUATES) WHO HAVE MINIM UM 15 AND 10 YEARS EXPERIENCE RESPECTIVELY. 67. IT WAS SUBMITTED THAT IN THE LIGHT OF THE ABOV E FACTS AND CIRCUMSTANCES, IT HAS TO BE CONCLUDED THAT THERE WAS A PE IN EXISTENCE IN INDIA . IT WAS FURTHER SUBMITTED THAT THE SERVICES RENDERED BY THE ASSESSEE TO GRSE WERE OF T ECHNICAL NATURE IN TERMS OF PROVISIONS OF SECTION 9(1)(VII) OF THE INCOME- TAX ACT, 1961 READ WITH ARTICLE 13 OF THE INDIA-UK DTAA AND THE CONTRACT AS A WHOLE IN RESPEC T OF WHICH THE FEES FOR TECHNICAL ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 57 SERVICES AROSE AND THAT SUCH PAYMENT WAS EFFECTIVEL Y 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 I N FOREIGN CURRENCY AND INDIAN CURRENCY) ARE INCLUDIBLE IN THE COMPUTATION OF BUSI NESS INCOME/ PROFITS OF THE PE IN INDIA, FOR WHICH THE PROVISIONS OF SECTION 44DA WOU LD 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 THER E EXISTED A PE OF THE ASSESSEE IN INDIA AND ACCOUNTED FOR THE ENTIRE FEES RECEIVED FROM GRS E 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 RE LIED ON THE ORDER OF THE AO/DRP. 68. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. CLAUSE 5.2 OF THE AGREEMENT FOR RENDERING OF CONSULTANCY AND T ECHNICAL SERVICES BETWEEN THE ASSESSEE AND GRSE READS THUS: 5.2. SERVICES, FACILITIES AND PROPERTY OF GRSE GRSE SHALL MAKE AVAILABLE TO THE CONSULTANTS PERSO NNEL FOR THE PURPOSE OF THE SERVICES, FACILITIES AND PROPERTY DESCRIBED IN APPE NDIX-1.4. APPENDIX-1.4 OF THE CONTRACT READS THUS: FACILITIES TO BE PROVIDED BY GRSE GRSE WILL, IF REQUIRED, MAKE AVAILABLE TO THE CONSU LTANT, 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 STAGE S 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 GRSES RULES AND REGULATION AND A SPECIAL PERMISSION SHALL BE OBTAINED WHEN IT IS NECESSARY T O WORK BEYOND NORMAL WORKING HOURS AS PER THE REQUIREMENT OF PROJECT WORK. ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 58 69. THE PRESENCE OF THE ASSESSEE IN INDIA DURING T HE 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 I NDIA. THE PROVISION OF OFFICE SPACE INSIDE THE GARDEN REACH SHIPYARD CANNOT THEREFORE B E 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 CONTEMPL ATES A FIXED PLACE OF BUSINESS THROUGH WHICH THE BUSINESS OF AN ENTERPRISE IS WHOL LY OR PARTLY CARRIED ON. IT CAN BE SAID THAT THERE WAS SOME PHYSICAL PRESENCE OF THE A SSESSEE IN INDIA THOUGH IT WAS RESTRICTED TO RENDERING OF SERVICES UNDER THE AGREE MENT 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 BU SINESS. THIS REQUIREMENT OF ARTICLE 5(1) OF THE DTAA IS NOT SATISFIED IN THE PRESENT CA SE. 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 AVAILA BILITY OF OFFICE SPACE FOR USE BY THE ASSESSEE AT THE PREMISES OF GRSE WAS FOR THE LIMITE D PURPOSE OF RENDERING OF SERVICES AGREED BETWEEN THE ASSESSEE AND GRSE. THE COMMENTA RIES 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 H AD NO PE IN INDIA. THE REVENUE CAME TO THE CONCLUSION THAT THE ASSESSEE HAD A PE I N INDIA MAINLY ON THE BASIS OF EXISTENCE OF AN OFFICE AT GRSES SHIPYARD. THAT AL ONE WAS NOT SUFFICIENT TO COME TO SUCH A CONCLUSION. THE FACT THAT THE ASSESSEE FILE D 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 EVIDENC E AND BY APPLICATION OF THE REQUIREMENTS AS CONTEMPLATED IN DTAA. 70. ON THE QUESTION WHETHER THE ASSESSEE HAVING FI LED A RETURN OF INCOME ADMITTING INCOME ON THE BASIS THAT IT HAD A PE IN INDIA CAN T HEREAFTER MAKE A CLAIM THAT THERE WAS NO PE OF THE ASSESSEE IN INDIA WITHOUT FILING A REV ISED RETURN OF INCOME, WE FIND THAT THE AO IN COMING TO THE ABOVE CONCLUSION, HAD PLACE D RELIANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF GOETZ (INDIA) LTD. (SUPRA) WHEREIN IT WAS HELD ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 59 THAT CLAIM MADE IN THE COURSE OF ASSESSMENT PROCEED INGS 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 HONBLE HIGH COURT HAS TAKEN A VIE W THAT A CLAIM MADE WITHOUT FILING A REVISED RETURN OF INCOME CAN BE ENTERTAINED. IN THE CASE OF RAMCO INTERNATIONAL (SUPRA) THE HONBLE 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 V IEW 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 RE VISED RETURN, IS BAD IN LAW. 71. WE THEREFORE AGREE WITH THE CONTENTION OF THE ASSESSEE THAT THERE WAS NO PE IN INDIA DURING THE PREVIOUS YEAR. THIS CONCLUSION WI LL HOLD GOOD EVEN FOR AY 2005-06. 72. HAVING COME TO THE CONCLUSION THAT THERE WAS N O PE OF THE ASSESSEE IN INDIA DURING THE RELEVANT PREVIOUS YEAR, THE QUESTION THA T WOULD NOW REQUIRE CONSIDERATION IS WITH REGARD TO TAXABILITY OF THE FTS UNDER ARTICLE 13(2) OF THE TREATY. A READING OF ARTICLE 13(2) OF THE DTAA (REPRODUCED IN THE EARLIE R PART OF THIS ORDER) WOULD SHOW THAT TAXATION HAS TO BE IN ACCORDING WITH THE ACT. THE PROVISIONS CONTAINED IN THE ACT IN THIS REGARD ARE SEC.115A OF THE ACT. IN THIS REGARD, THE RELEVANT PROVISIONS OF SECTION 115A OF THE ACT, NEEDS TO BE LOOKED INTO. WE HAVE ALREADY REPRODUCED THE PROVISIONS OF SEC.115A OF THE ACT AND SEC.44AD OF T HE ACT IN THE EARLIER PART OF THIS ORDER. U/S.115A OF THE ACT, INCOME BY WAY OF FTS R ECEIVED BY A NON- RESIDENT WOULD BE TAXED AT 20% ON GROSS BASIS ONLY IF ALL THE FOLL OWING CONDITIONS ARE SATISFIED:- I) THE INCOME IS RECEIVED FROM GOVERNMENT OR AN IND IAN 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 O F SUB-SECTION (1) OF SECTION 44DA OF THE ACT. ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 60 73. WE HAVE ALREADY SEEN THAT THE ASSESSEE IN THE PRESENT CASE INSTANT CASE, THERE IS NO DOUBT THAT THE ASSESSEE FULFILLS CONDITION (I) A ND CONDITION (II) AS MENTIONED ABOVE. AS REGARDS CONDITION NO. (III), THE PROVISIONS OF S UB-SECTION (1) OF SECTION 44DA OF THE ACT, FTS WOULD FALL WITHIN THE PURVIEW OF SECTION 4 4DA(1) OF THE ACT, ONLY IF IT IS ACTIVELY CONNECTED TO THE PE OF THE NON-RESIDENT IN INDIA. PE FOR THE PURPOSE OF THIS SECTION HAS BEEN DEFINED IN SECTION 92F(IIIA) OF TH E ACT WHICH READS AS UNDER:- '(IIIA) 'PERMANENT ESTABLISHMENT', REFERRED TO IN C LAUSE (III), INCLUDES A FIXED PLACE OF BUSINESS THROUGH WHICH THE BUSINESS OF THE ENTERPRISE IS WHOLLY OR PARTLY CARRIED ON;' WE HAVE IN THE EARLIER PARAGRAPHS ALREADY HELD THAT THERE WAS NO PE IN INDI IN THE FORM OF FIXED PLACE OF BUSINESS THROUGH WHICH THE BUSINE SS OF THE ASSESSEE WAS WHOLLY OR PARTLY CARRIED ON IN INDIA. AS SUCH, THE ASSESSEE WOULD BE ENTITLED TO THE BENEFIT OF THE PROVISIONS OF SECTION 115A OF THE ACT AND BE TA XED AT 20% OF THE GROSS RECEIPTS. WE ALSO HOLD THAT TAX LIABILITY BORNE BY GRSE WILL ALSO NEED TO BE GROSSED UP FOR ARRIVING AT GROSS RECEIPTS OF THE ASSESSEE AND AFTE R SUCH GROSSING UP SUCH RECEIPTS HAVE TO BE TAXED AT 20%. WE HOLD ACCORDINGLY. 74. IN VIEW OF THE ABOVE CONCLUSION, THE ISSUE WIT H REGARD TO DISALLOWANCE OF PRIOR PERIOD EXPENSES, DISALLOWANCE U/S.40(A)(I) & 40(A)( IA) OF THE ACT, DO NOT REQUIRE ANY CONSIDERATION AS THOSE DISALLOWANCES WILL NOT BE RE LEVANT WHEN INCOME IS TAXED U/S.115A OF THE ACT. 75. THE NEXT ASPECT THAT NEEDS TO BE CONSIDERED IS THE LEVY OF INTEREST U/S.234-B & 234-C OF THE ACT. IT WAS SUBMITTED THAT THE PERSON MAKING PAYMENT TO THE ASSESSEE WAS DUTY BOUND TO DEDUCT TAX AT SOURCE U/S.195 OF T HE ACT ON PAYMENT MADE TO THE ASSESSEE, AS THE ASSESSEE WAS A NON-RESIDENT. IT W AS SUBMITTED THAT IN ESTIMATING THE ADVANCE TAX PAYABLE, THE ASSESSEE WAS BOUND TO TAKE NOTE (GIVE CREDIT TO) OF TAX DEDUCTIBLE AT SOURCE (WHETHER ACTUALLY DEDUCTED OR NOT). IF SUCH CREDIT IS GIVEN THEN THERE WOULD BE NO LIABILITY TO PAY ADVANCE TAX OF T HE ASSESSEE WOULD BE LESS THAN RS.5000 AND THEREFORE NO INTEREST U/S.234B & 2234-C OF THE ACT COULD BE LEVIED. THE ASSESSEE IN THIS REGARD PLACED RELIANCE ON THE DECI SION OF THE ITAT DELHI IN THE CASE OF SEDCO FOREX INTERNATIONAL DRILLING VS. DCIT 72 I TD 415 (DEL). IN THIS REGARD ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 61 RELIANCE WAS ALSO PLACED ON THE DECISION IN THE CAS E 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 DEDU CTIBLE 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 O N BEHALF OF THE ASSESSEES. THE ASSESSEES CANNOT BE HELD TO HAVE COMMITTED DEFA ULT 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 CA SE 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 U NDER: 'NO DOUBT, IF THE PERSON (PAYER) WHO HAD TO MAKE PA YMENTS TO THE NON-RESIDENT HAD DEFAULTED IN DEDUCTING THE TAX AT SOURCE FROM S UCH PAYMENTS. THE NON - RESIDENT IS NOT ABSOLVED FROM PAYMENT OF TAXES THER EUPON. 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 FR OM THE READING OF SECTION 191 OF THE ACT ALONG WITH SECTION 209 (1) (D) OF TH E 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 MA ERSK CO. LTD. 2011) 198 TAXMAN 518 (UTTARAKHAND) (FB). SEDCO FOREX INTERNATIONAL D RILLING 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 TI DE WATER MARINE INTERNATIONAL INC. [2009] 309 ITR 85 (UTTARANCHAL); AND COMMISSIONER OF INCOME-TAX ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 62 AND OTHERS V RANCHI CLUB LTD (2001) 247 ITR 209. TH EREFORE, IT WAS SUBMITTED THAT THE PROVISIONS OF SECTION 234B & 234C ARE NOT APPLI CABLE TO THE ASSESSEE. 76. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. UNDE R SECTION 209(1)(A)TO (D) LAYS DOWN FOUR SITUATIONS UNDER WHICH ADVANCE TAX PAYABLE BY THE ASSESSEE IS TO BE COMPUTED. IN THE PRESENT CASE WE ARE NOT CONCERNE D WITH CLAUSES (A) TO (C). CLAUSE (D) OF SUB-SECTION (1) OF SEC.209 IS RELEVANT FOR THE P RESENT CASE AND IT READS THUS:- '(D) THE INCOME-TAX CALCULATED UNDER CLAUSE (A) OR CLAUSE (B) OR CLAUSE (C) SHALL, IN EACH CASE, BE REDUCED BY THE AMOUNT O F 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 BEE N 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 REDUC ED 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.1 95 OF THE ACT, THERE IS AN OBLIGATION ON THE PAYER, I.E. ANY PERSON RESPONSIBLE FOR PAYIN G TO A NON-RESIDENT, TO DEDUCT INCOME TAX AT SOURCE AT THE RATES IN FORCE FROM SUC H PAYMENTS EXCLUDING THOSE INCOMES WHICH ARE CHARGEABLE UNDER THE HEAD 'SALARIES'. TH EREFORE, THE ENTIRE TAX IS TO BE DEDUCTED AT SOURCE WHICH IS PAYABLE ON SUCH PAYMENT S MADE BY THE PAYEE TO THE NON- RESIDENT. SEC.201 OF THE ACT LAYS DOWN THE CONSEQUE NCES OF FAILURE TO DEDUCT OR PAY. THESE CONSEQUENCES INCLUDE NOT ONLY THE LIABILITY T O PAY THE AMOUNT WHICH SUCH A PERSON WAS REQUIRED TO DEDUCT AT SOURCE FROM THE PA YMENTS MADE TO A NON-RESIDENT BUT ALSO PENALTIES ETC. ONCE IT IS FOUND THAT THE LIABI LITY 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 UND ER 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 DE FAULTED 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-RESIDEN T 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 THOS E 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. ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 63 77. ITA NO.1489/KOL/11: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE AGAIN ST 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 FO R 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 O N THE SAME LINES AND REASONING AS WAS DONE IN AY 2007-08. THE DRP FOLLOWED ITS OWN DIRECTIONS GIVEN IN AY 2007- 08. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE A RE SIMILAR TO THE ONES 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 CONSIDERATIO N IN AY 2007-08 AND ON IDENTICAL FACTS AND CIRCUMSTANCES. FOR THE REASONS GIVEN WHI LE 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 ISSUE S THAT WERE CONSIDERED IN AY 2007- 08 WILL EQUALLY APPLY FOR THE ASSESSMENT FOR AY 200 5-06 ALSO. 78. IN THE RESULT ITA NO.1489/KOL/11 IS PARTLY ALL OWED. 79. IN THE RESULT, APPEALS BY THE ASSESSEE ARE PAR TLY 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: 1. GIFFORD & PARTNERS LTD. (SINCE MERGED WITH GIFFO RD LLP), C/O B.L.JHA & CO., GF-1, GILLANDER HOUSE, 8, N.S.ROAD, KOLKATA-70 0001. 2 THE D.D.I.T. (1), KOLKATA. 3. DR, KOLKATA BENCHES, KOLKATA TRUE COPY, BY ORDER, ASST. REGISTRAR , ITAT, KOLKATA BENCHES ITA NO.2082/KOL/2010&14 89/KOL/2011 GIF FORD AND PARTNERS LTD. (SINCE MERGED WITH GIFFORD L LP). A.YR.2007-08 64