Joint Director of Income-tax (IT)-4 v. Krupp Uhde GmbH

ORDER

1. All these appeals were heard together and are being disposed off by this common order for the sake of convenience.

2. The main issue arising in these appeals is whether the assessee can be said to have Permanent Establishment (PE) in India in terms of Article 5 of Double Taxation Avoidance Agreement (DTAA) between India and Germany.

3. Briefly stated the facts are these. The assessee is a company incorporated under the laws of Federal Republic of Germany. It is engaged in the business of — (i) providing technical know-how/license; (ii) providing basic engineering services; and (iii) providing supervisory activities in connection with construction or installation of the specified machineries/assembly provisions. In the assessment year 1998-99, it had received income from certain Indian parties in respect of the above services detail of which is given below :—

In addition to the above income, the assessee had also received interest from Income-tax Department amounting to Rs. 11,22,973. Thus, the total receipts were declared at Rs. 18,76,64,590 which were offered to tax at the rate of 10 per cent as per Article 12 and Article 11 of the DTAA.

4. In the course of assessment proceedings, it was noticed by the Assessing Officer that liability to pay tax at the rate 10 per cent under Article 12(2) of the DTAA would arise only if the assessee has no PE in India. On the order hand, if the assessee has a PE in India then, the rate of tax would be 30 per cent as per the provisions of section 115A of the Income-tax Act, 1961 ('the Act'). Accordingly, he proceeded to examine this aspect with reference to the material on record. It was noted by him that the term PE was defined in Article 5 of the DTAA. It was noted by him that 'a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities continue for a period exceeding six months' would be treated as PE in terms of Article 5(2)(i) of the Act. The explanation of the assessee was that it had no PE in India inasmuch as the supervisory activities never continued for more than six months.

5. After examining the facts of the case, the Assessing Officer found that the assessee had been actively engaged in assisting the installation of various projects and also continued supervisory activities. The projects on which the assessee assisted continued for many years. It was also observed by him that it was the responsibility of the assessee to supervise the operation till the project was completed. He referred to various details regarding the stay of technicians engaged in the supervisory activities on various projects and came to the conclusion that the such supervisory activities exceeded period of six months. The contention of the assessee that there should be continuous supervisory activities for more than six months for creating a PE was rejected on the ground that the ward 'continuous' is not there in the definition of PE in the DTTA. According to him, once the project started, the period is to be counted from the commencement of the project till its completion. Therefore, even if the technicians had not visited India individually for more than six months still it could be said that supervisory activities continued for a period exceeding six months because the assessee was under obligation to supervise the installation of the project till the project was completed. According to him, the projects took years for completion and therefore it could not be said that the supervisory activities did not continue for more than six months. Accordingly, it was held by him that the assessee had PE in India and therefore, the fees for technical services received by it were taxable at the rate of 30 per cent.

6. The matter was carried in appeal before the learned CIT(A) before whom it was claimed that fees for technical know-how and basic engineering services could not be taxed at the rate of 30 per cent since both these services were rendered from Germany and therefore the question of any PE in India did not arise in respect of such services. The learned CIT(A) accepted this contention. The department is not in appeal before the Tribunal against such finding of the learned CIT(A) and therefore we have not narrated the relevant arguments of the parties and the detailed reasons given by the learned CIT(A) in this regard.

7. Regarding the supervisory activities, it was contended by the assessee before the learned CIT(A) that — (i) the assessee does not maintain any place of business in India; (ii) it is not engaged in construction, installation or assembly of the project; (iii) the erection and installation of the project was carried out by the Indian concern and the assessee had rendered only the supervisory services to the Indian concern; (iv) the activity of supervision of erection, commissioning, assembly does not fall within the purview of Article 5(2)(i) of the DTAA. In view of the above, it was submitted that mere rendering of supervisory activities would not result in establishment of PE under Article 5(2)(i) of the DTAA. Reference was also made to the observations in the model of OECD commentary. It was also contended that activities incidental to supply of equipment are specifically covered under various treaties between India and other countries. Therefore, in the absence of such provisions, in India-Germany treaty, it cannot be said that the assessee had a PE in terms of Article 5(2)(i). The reliance was placed on the decision of the Tribunal in the case of Mannesmann Demag AG [IT Appeal No. 3720 (Delhi) of 1994].

8. The contention of the assessee was rejected by the learned CIT(A) by observing as under :—

"There is no basis for the A.R. to contend that for constituting PE on the basis for supervisory activities one should be engaged in both construction, installation or assembly project as well as the supervisory activities connected therewith. It would suffice to constitute PE under this clause if one is engaged in either of the followings for a period exceeding 6 months :—

(i) a building site; or
(ii) a construction, installation or assembly project; or
(iii) supervisory activities in connection ( i) or ( ii) above.

The fact that the appellant is so engaged is evident from the statement of facts filed by the appellant along with Form No. 35 of the present appeal. Relevant extract from the statement of facts is quoted below for ready reference :—

'During the previous year ended 31-3-1998, relevant to assessment year 1998-99 the appellants had received income from certain Indian parties on account of the following viz.

Provision of technical know how from Germany.
Consideration for providing Basic engineering services from Germany.
Carrying out supervisory activities in connection with certain installation/construction/assembly projects in India.

Insofar as the decisions of the ITAT relied upon by the appellant are concerned, it would suffice to say that both these decisions relate to assessment year 1990-91, when the old Indo-German Treaty was in existence, which did not include supervisory activities within the concept of PE in Article 5 of the Treaty. Therefore, in view of the above position this contention of the A.R. cannot be accepted."

9. Proceeding further, he examined the other contention of the assessee in the light of the other treaties between India and Spain as well as India and UK and than held as under :—

"A reading of the above provision will show that the contention of the A.R. is misplaced. Both Indo-Spain and Indo-UK DTAAs provide for constitution of PE vis-a-vis supervisory activities in the following circumstances :—

(a) Supervisory activities in connection with a building site or construction, installation or assembly project where such activities continue for a period of more than six months; or
(b) Supervisory activity being incidental to the sale of machinery or equipment where such activity continues for a period of less than six months and the charges payable for the supervisory activity exceed 10 per cent of sale price of machinery and equipment.

Now if we compare this position with the Indo-German Treaty, it will be seen that Indo-German Treaty covers only first situation (Sr. No. 'a' above) and does not provide for second situation. But this does not mean that supervisory activities of the type of first situation will not constitute PE in a given situation because the Treaty is not covering the second situation. As already discussed by me, it is an admitted position that the appellant carried out supervisory activities in connection with certain installation/construction/assembly projects in India, therefore, it is squarely covered by clause 5(2)(i) of the Treaty and comes within the purview of PE."

10. Proceeding further, he examined contention of the assessee that the minimum period of six months is to be determined with reference to each individual site/construction as well as the contention that period of six months should be calculated with reference to each Financial Year. This contention was also rejected by observing as under :—

"5.6 However, on a careful consideration I do not subscribe to the contentions of the Authorised Representative. It would be worthwhile to quote here the views of the famous author Mr. Roy Rohatgi from his book 'Basic International Taxation' published by Kluwer Law International, Netherlands on the issue of construction permanent establishment. However, before quoting the same it may be mentioned here that the concept of construction PE is part of OECD Model convention [Refer Article 5(3) of the MC]. The threshold limit provided in OECD model convention is 12 months which has been reduced to 6 months in the India-Germany Treaty. Further 'supervisory activities' are included in this concept of construction PE under UN Model. To quote the learned author now :—

'A building site or construction or installation project is a PE only if it lasts for more than 12 months. If the 12-month period is exceeded for any reason, a PE is deemed to exist from the beginning of the project. The period starts with the preparatory work in the source State, and ends when the installation is tested and formally handed over or permanently abandoned. Seasonal, intended and temporary interruptions are included. Time spent by sub-contractors is counted as time spent by the general contractor; however, their work may form their on separate PEs, if it lasts for more than 12 months. The 12-months test includes the time spent at the site by the partners and the employees in case of a partnership. Each partner is considered to have a PE, regardless of the time spent by the partner himself.

The time frame normally applies to each individual site or project. Where several contracts are factually interrelated, the 12-month period is aggregated. Thus, several geographically and commercially connected sites within a State may be treated as a single installation, even if based on different contracts. The projects for the same client, concurrently or consecutively, as part of the same constructional entity or on the same site may be identified as one project.

A building site may form a single unit even if the orders are placed by several persons (e.g., for a raw of houses). The nature of the same project may require continuous or frequent relocation as the project progresses'.

Thus it is evident from the above that the counting of period for a construction PE starts from the preparatory work itself in the source State and ends when the project is tested and formally handed over. Thus it includes seasonal, intended and temporary interruptions also. Therefore, the appellant's contention that supervisory activities should be carried out on a continuous basis for a period of 6 months and deputation of personnel on a sporadic basis should not be considered as resulting in PE, is misconceived and not acceptable. Similarly the argument that 6 months period has to be counted in each Financial Year and placing reliance on some other DTAAs (like Singapore, Spain, Canada) to bring home this proposition by the A.R. is also misconstrued. As I have already stated the period provided for in a construction PE in OECD Model is 12 months. If the contention of the A.R. is to be accepted, it will amount that for a construction site, assembly project etc. to constitute a PE the presence required in source country will be fully 365 days in the year i.e., 12 months in each financial year and absence of even one day in each year will take away the right of source country to tax that entity, which otherwise virtually has its presence in the source country for a substantial part of the year. Obviously the contention of the A.R. will result in absurdity. The reason that in some of the treaties some different wordings are used or something is explained in more detail does not mean that an all together different interpretation can be applied to another treaty, which will be contrary to general interpretation as envisaged in Model convention and commentaries. Therefore, in view of the aforesaid reasoning I uphold the action of the Assessing Officer in considering the overall period of a project for counting the period towards satisfying the threshold limit of 6 months in the present case."

11. However, on facts as stated by the assessee in the written submissions, the learned CIT(A) found that the threshold limit of six months was crossed in three projects, namely, projects belonging to Hindustan Organic Chemicals Ltd., Indian Petro Chemicals Corporation Ltd. and Gujarat Alkalies Chemicals Ltd. Accordingly, it was held by him that the assessee shall be deemed to have PE in respect of these three projects. Consequently, it was held that rate of tax @ 30 per cent would be applicable only in respect of fees for technical services received from the above three Indian concerns. As far as the other projects are concerned, it was held that Fees for Technical Services was liable to be taxed @ 10 per cent as per article 12(2).

12. Aggrieved by the aforesaid findings of the learned CIT(A), the revenue has preferred the appeal to the Tribunal by raising the following grounds :

"On the facts and circumstances of the case and in law, the CIT(A) erred in treating the income from supervisory fees, project-wise, applying the 6 months period to each project separately, although the entire supervisory income was attributable to the Permanent Establishment of the assessee in India, as per article 5(2)(i) of the new Double Taxation Treaty with the Federal Republic of Germany notified on 25-11-1996 and applicable from assessment year 1998-99. And thus erroneously taxed part of the supervisory fees at the concessional rate of 10 per cent under article 12(2) of DTAA between India and Germany as against section 115A of the Income-tax Act."

13. On the other hand, the assessee has challenged the findings of the learned CIT(A) by raising the following grounds :

"2. That the learned CIT(A) has erred in holding that the assessee had a 'PE' in India arising out of carrying out of supervisory activities.

3. That the learned CIT(A) has erred in holding that the assessee was engaged in carrying out supervisory activities in connection with construction, installation or assembly project.

4. That the learned CIT(A) has erred in holding that in respect of certain projects, the prescribed period of six months was exceeded and thus in relation to the same "P.E." came into existence. The learned CIT(A) has erred in not considering ground IV(2) in coming to the conclusion.

5. Without prejudice that the learned CIT(A) has erred in holding that receipts from such projects were liable to income-tax at the rate of 30 per cent on the gross amount."

14. In assessment year 1999-2000, the assessee declared gross receipts of Rs. 10,80,49,00 on account of Fees for Technical Services which included the sum of Rs. 1,54,51,060 in respect of supervision of erection and commissioning of the plant. In the course of assessment proceedings, it was explained that the stay of assessee's personnel in India under various contracts was below 180 days and therefore, it could not be said that the assessee had any PE in India. The details of stay under various projects furnished before the Assessing Officer are given below :

Project-wise details of stay of assessee's personnel in India during assessment year 1999-2000.

Project-wise details of stay of assessee's personnel in India during assessment year 2000-2001

15. However, the Assessing Officer was of the view that overall supervisory activity should be taken into consideration in determining whether there is a PE in India or not. The Assessing Officer rejected the claim of the assessee by observing as under :

"6.3 From the above details it is clear that the overall supervisory activities of the assessee-company in India exceeded six months. The assessee has taken a plea that there should be continuous supervisory activities for more than six months and 6 months test is to be applied in respect of each contract separately. Such interpretation is not acceptable, since the assessee is under obligation to supervise the installation of the projects till the project is complete. In this case, the aggregate of the assessee's presence in India to be considered while deciding the issue. If all the days are taken together, the assessee's presence in India through its technicians/employees is more than 6 months. Moreover, in the case of the assessee, the existence of the project for more than 6 months is also to be considered for deciding whether the assessee's stay in India constitutes P.E. or not. The projects in India last more than 6 months. It is, therefore, immaterial whether the technicians/employees of the assessee stay in India for more than 6 months or not. The presence of projects lasting more than 6 months will constitute P.E. in India."

16. In view of the above observations, it was held that there was supervisory PE in India and consequently the sum of Rs. 1,54,51,060 was taxed @ 30 per cent under section 115A of the Act. On appeal, the learned CIT(A), following his earlier order for the assessment year 1998-99, upheld the action of the Assessing Officer in considering the overall supervisory activities of the assessee in India for satisfying the threshold limit of six months. However, on facts, it was held by him that under each contract the period of stay of assessee's personnel in the assessment year 1999-2000 did not exceed the threshold limit of six months. Consequently, it was held that the Fee for Technical Services on account of supervisory services was to be taxed @ 10 per cent. Aggrieved by the same, the revenue is in appeal before the Tribunal. The ground raised by the revenue is similar to the ground raised in the appeal for the assessment year 1998-99.

17. Both the parties have been heard at length. The learned Counsel for the assessee has assailed the orders of lower authorities by raising various contentions. The first contention is that the lower authorities were not justified in taking the overall view of the stay of the assessee's personnel in India under the various contracts with different parties. It has been submitted by him that each contract is an independent contract with various parties and under no circumstances are inter-linked or dependent on each other. Therefore, one has to look in respect of the stay of the assessee's personnel in India with reference to each contract. In this connection, he invited our attention to the provisions of Article 5 in various treaties entered into by India with various countries. A comparative chart in respect of various countries has been provided to point out that wherever the contracting parties intended to consider different sites together while determining the scope of PE they had specifically provided as such. For example, treaty between India and Denmark has specifically provided that all sites should be taken together. Similar provisions are made in the treaties entered into with China, Australia, USA, Canada, etc. In view of the same, it has been submitted that the contracting States, while drafting the DTAA between India and Germany, were aware of such provisions in other treaties and despite that they did not make similar provisions under article 5 in the DTAA between India and Germany. Therefore, the period of stay in respect of other sites could not be taken into consideration by the lower authorities while determining the existence of PE in India.

18. The second contention of the assessee's counsel is that the commencement of the period of PE qua the supervisory activity should have been taken from the date when the supervisory activity itself commenced and not from the date when the project was started by the Indian concern. It has been contended that there may be different independent contracts awarded by an Indian company to various persons or even to the same persons and in such cases, there would be different PE's under each contract as held by the Tribunal in the case of Sumitumo Corpn. v. Dy. CIT [2008] 114 ITD 61 (Delhi) .

19. The third contention of the assessee is that in determining the scope of PE, one should look into the actual stay of the foreign technicians and consequently the intervening period should be excluded.

20. On the other hand, the learned D.R. has supported the orders of the lower authorities. It has been contended by him that the activity of the assessee is not restricted to supervisory activities since it is also engaged in the business of supply of plant and machinery as well as its erection and commission. According to him, the assessee is responsible for successful running of Plant and Machinery and therefore, the PE would come into existence from the date when the project itself was started. He referred to the provisions of Article 5(2)(i) of the DTAA to submit that the words 'such site' refers to building site or the project site and therefore, the PE would come into existence when such building site or project site commenced. Accordingly, the lower authorities would be justified in counting the period of PE right from the commencement of the project itself. In this connection, he referred to the three agreements entered into between the assessee and Kothari Sugars and Chemicals Ltd. (KSCL), Chemfab Alkalies Ltd. (CAL) and Gujarat Alkalies and Chemicals Ltd. (GACL). He referred to the preamble and scope of the contract to point out that the assessee had also supplied the plant and machinery and it was the responsibility of the assessee for running the plant and machinery successfully. Therefore, Assessing Officer was justified in considering the date when project itself started. Proceeding further it was submitted that once the commencement date is fixed then the PE continues till the date when the contract is completed. Therefore, the intervening period cannot be excluded. Consequently, it was also submitted that the learned CIT(A) was not justified in counting the period of six months year-wise. According to him, if the supervisory activity is not concluded in one year, it cannot be said that supervisory activity came to an end by the end of the year. It was reiterated that the period of supervisory activity has to be counted till its completion irrespective of the years involved. He relied on the portion of the commentary by the Klause Vogel quoted by the learned CIT(A) in his order. Reliance was also placed on the decision of the Tribunal in the case of Steel Authority of India Ltd. v. Asstt. CIT [2007] 105 ITD 679 (Delhi) .

21. In reply, it has been submitted by the learned Counsel for the assessee that the assessee is not engaged in the business of supply of plant and machinery and the activity is restricted to activities for providing the basic engineering services, technical know-how and supervisory activities in connection of the establishment of the plant. In this connection, the assessee was asked to file an affidavit. In response to the same, an affidavit of Shri C.S. Mathur, holding power of attorney of the assessee, has been filed and the same would be discussed at the appropriate place if required.

22. Rival submissions of the parties have been considered carefully. The first question for our determination is whether the overall view should be taken into consideration in determining the existence of PE. The stand of the revenue is that all the sites under different contracts should be taken together while determining the existence of PE while the stand of the assessee is that each contract should be considered separately and independently. The scope of the PE is defined in Article 5 of the DTAA which reads as under:

"Article 5. Permanent Establishment.—(1) For the purposes of this Agreement, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

(2) The term 'permanent establishment' includes especially,—

(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, including an installation or structure used for the exploration or exploitation;
(g) a warehouse or sales outlet;
(h) a farm, plantation or other place where agricultural, forestry, plantation or related activities are carried on; and
(i) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities, continue for a period exceeding six months.

(Clauses 3 to 7 are not relevant and hence not reproduced)."

23. It is the common ground of both the parties that in the present case, the scope of PE is to be examined under clause (i) of Article 5(2). There is nothing in the language provided in the above clause to indicate that different sites on which work is carried on by the assessee can be considered together in determining the scope of PE. No precedent is available on this aspect of the issue. Since the language is not clear, we must look into the commentaries and other material to ascertain the intention of the contracting parties Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC).

24. We have gone through the various treaties referred to by the learned counsel for the assessee. The perusal of such treaties shows that whenever the contracting parties intended that different sites should be taken together, they had expressly provided so. For example, in the Indo-Denmark Treaty, Article 5(2)(k) provides as under :

"Article 5. Permanent Establishment.—(1)******

(2) The term 'permanent establishment' includes especially :

(k)a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of 183 days or more.

(Since sub-clauses (a) to (j) are not relevant, the same are not reproduced above)."

Similar provisions have been made in Article 5 of the various treaties entered into by India with China, USA, Canada, Italy etc. It is pertinent to note that Indo-German Treaty came into existence vide notification dated 29-11-1996 while the other treaties mentioned above (except Canada) were in existence prior to 29-11-1996. Hence, it is clear beyond doubt that India was aware of such provisions while drafting Indo-German Treaty. Therefore, it appears to us that contracting parties deliberately deviated from such provisions by not including the words 'together with other such sites, projects or activities'. Accordingly, it cannot be said that other sites can also be taken together for determining the scope of PE in India.

25. We have also gone through the Commentary (Third Edition) by Klause Vogel. At Page 308, it is said 'the rule is that a minimum period should be determined for each building, site or construction or installation project concerned (Cour d' Appel Anvers 25 ET 224, 225 (1985) : DTR Belgium/Netherlands). The question whether there is PE in a specific contracting State or not should be considered separately for each business activity performed in that State i.e. for each individual place of business existing there as well (Hoge Road, Rol No. 16305, BNB 1970/71: DTC Germany/Netherlands).'

26. In this connection, it would also be useful to refer to para 31.4 at page 115 of the book 'Principles of International Taxation' which is reproduced as under :

"31.4 The time test applies to each individual site or project. No account should be taken of the time spent by the contractor concerned on other sites that are totally unconnected with the tested site. On the other hand, a site should be regarded as a single unit, even if it is based on several contracts, provided that it forms a coherent whole, commercially and geographically."

27. We may also refer to the decision of the co-ordinate Bench in the case of Sumitumo Corpn. ( supra) wherein it has been held that there could be different PE's with reference to different unconnected contracts even though such contracts may be entered into by the same parties. In that case, Maruti Udyog Limited awarded various supervisory contracts on Sumitumo Corporation which were to be executed independently at different sites in the factory of Maruti Udyog Ltd. Since there was no effective connection between such contracts, it was held that minimum period of 180 days was to be counted separately for each contract and could not be aggregated.

28. In view of the above discussion, it is held that in computing the minimum period of 6 months, various sites cannot be considered together particularly when different contracts had no effective interconnection with each other. In the present case, the assessee had entered into various contracts with various parties in respect of various independent projects located at different places. Hence, the lower authorities were not justified in considering the various sites together while computing the minimum period of six months prescribed in Article 5(2)(i) of the DTAA.

29. The next question for our consideration is whether on the facts of the case; it can be said that the minimum period of six months commences from the date when the project or building site itself commenced. The contention of the revenue is that it is the responsibility of the assessee that the entire project is commissioned successfully. Therefore, the date of commencement of the project can be considered as the date of commencement of the PE. On the other hand, the case of the assessee is that it was concerned only with the supervisory activity since other work was done by the Indian party. Therefore, the date of commencement of the PE would be the date when the activity of supervision commenced. In our opinion, the contention of the revenue is too extreme to be accepted. There may be different contracts for carrying out the different works even at the same place. For example, the contracts for the construction of building, supply of plant and machinery, installation of plant and machinery, commissioning of such plant and supervision work in connection with the above work may be awarded to various independent parties. It would be absurd if all the contracts are considered together. A project may start, for instance, in May, 1993 with construction of building which may be computed in June, 1994, then installation of plant and machinery may take another two years and commissioning of the same may be done in August, 1996. In such case, a person may be awarded the supervisory work for commissioning of the project which may commence in August, 1996 i.e., after installation of the Plant. The supervisory work in connection with commissioning of the project may only take three months. In such case, can it be said that the person carrying out the supervisory activity alone had a PE in India on the ground that minimum period of six months commenced from 1993. In our opinion, the answer is No. In our opinion, it would be absurd to hold that the period unconnected with the contract should be taken into consideration. This view is also supported by the decision of the Co-ordinate Bench in the case of Sumitumo Corpn. (supra) wherein it has been held that in computing the minimum period of 180 days, the various contracts which are independent contracts in all respects cannot be taken into consideration. The co-ordinate Bench has also taken into consideration the commentary by Klause Vogel. In our opinion, there is no reason to deviate from the view taken by the co-ordinate Bench in this regard. However, it is made clear that where one contract involves various activities which are dependent on each other than the minimum period may commence from the date when the first activity commenced. For example, one single indivisible contract may be awarded to a non-resident for supply of Plant and Machinery, installation and erection thereof as well as commission of the project. In such case, in our opinion, the minimum period would commence from the date of supply of the plant and machinery itself. Even in such case, the period of construction of building cannot be taken into consideration since contract of construction of building is separate and independent contract. Thus, the date of commencement of the threshold limit of six months would depend on the facts of each case considering the terms of contract.

30. Even the language of Article 5(2)(i) of the DTAA, 'where such site, project or activities continue for a period excluding six months' would only mean that period of six months is to be counted for each site i.e., (i) building site or construction; (ii) installation or assembly project; and (iii) supervisory activity. Had the contracting parties intended to commence the period from the date of construction itself irrespective of various other activities, than there was no need for including the words 'project or activities' in the later part of the sentence in Article 5(2)(i) of the DTAA. As already observed in the preceding para, the period can be counted from the date of commencement of the project only where there is one single indivisible contract for various activities undertaken by the non-resident. Whether the contract is one single indivisible or not would depend on the facts of each case. Where different contracts are awarded which are not inter-dependent on each other then the period of six months would be counted separately in respect of each activity since there is no effective connection between the various contracts as held by the Co-ordinate Bench in the case of Sumitumo Corpn. (supra).

31. In view of the above discussion, it is held that if the supervisory activity is carried out under a separate and independent contract then the minimum period of six months would commence only when such activity itself had commenced and not from the date of the project.

32. The next question for our consideration is whether the intervening period caused on account of various factors should be excluded while computing the minimum period of six months. The contention of the assessee that intervening period should be excluded is without force since it is not supported either by any commentary on international law of taxation or by any case law. On the other hand, para 31.2 of the Book on 'Principles of International Taxation' states as under :

"31.2 The relevant time span begins on the day on which the foreign enterprise starts working on site, including any preparatory work, and it continues until the work is completed or permanently abandoned. It does not cease when work is temporarily discontinued. Seasonal or other temporary interruptions should be included in determining the life of a project. Such interruptions include interruptions due to bad weather or could be caused by shortage of material or by labour difficulties."

Similarly, Klause Vogel in his commentary (Third Edition) at page 308 states and under :

"(e )Interruptions of the minimum period.—Interruptions usual in the normal course of the activities should be included in determining the minimum period (para 19 MC Comm. Article 5, supra m. No. 68). Such interruptions may either be related to personnel, e.g., weekends off work or leave, or be of a technical nature, e.g., time needed by certain materials to dry (Storck, A., supra m. No. 1, p. 184). Long Interruptions lead to a suspension of the minimum time period if the continuation of the work is functionally related with the work performed prior to the interruption (see Schieber, P.H., supra m.No. 1, at 268; in contrast Skaar, A., supra m. No. 1, at 390). The mere substitution of the customer does not break the functional relationship. Whether an interruption is long enough depends on its relationship to the total time of the project (dissenting Schieber, P.H., who, invoking domestic German law, wants to treat an interruption of more than 14 days as always long enough to suspend the minimum time period : Schieber, P.H., supra m. No. 1, at 271)."

It is the settled legal proposition that when the language of the treaty is not clear than one can look into the commentaries on the subject in dispute Azadi Bachao Andolan's case (supra). We are in agreement with the above statement of law since even as per plain and natural meaning, an activity once commenced continues till its completion. Accordingly, we are of the view that the intervening period cannot be excluded.

33. The next question for our consideration is whether the period under Article 5 should be calculated with reference to each year. There is no case law on this point. But considering the rule that period commences when the activity commence and ends on the completion of the contract, we are of the view that the minimum period of six months has to be counted irrespective of the years involved. An activity may start in January and may end in July. In such case the total period is more than 6 months but falls under two financial years. If the period of each year is to be counted than in each year period would be less than 6 months. Such construction, in our opinion, would defeat the object behind such provisions. In this connection, we may also usefully refer to page 307 of Commentary by Klause Vogel wherein in para (c) it is stated as under :

"(c ). . . It makes no difference to the time test whether the activities in question extend over more than one calendar year or one assessment period. If part of the period were to be in one year, and the remainder in the next, this would not prevent a permanent establishment from coming into existence. For the calculation of the time limit when applying a DTC in the new German Lander (former GDR), see Fin Min Sachsen-Anhalt of 12-2-1992, St. Ed 157 (1992)."

In view of the above discussion, it is held that the minimum period of six months is to be counted from the date when activity starts till the date when the contract is computed irrespective of the year/years to which such period relates. It is surprising to note that the learned CIT(A) has taken contradictory stand in this regard. On one hand, at pages 17 and 18 of the order for the assessment year 1998-99, it is observed by him "Similarly, the argument that six months period has to be counted in each financial year and placing reliance on some other DTAA's (like Singapore, Spain, Canada) to bring home this proposition by the A.R. is also misconstrued" while on the other hand, he counted the period year-wise in holding that supervisory activities in certain cases did not cross the threshold limit of six months. Such contracting stand could not have been taken by him. Accordingly, we accept the contention of the learned D.R. that the learned CIT(A) was not justified in computing the period of six months with reference to each assessment year.

34. Coming to the facts of the present appeals, we find that only three contracts are placed on record even though the assessee entered into contracts with many other parties. We have gone through such contracts. The contracts with Kothari Sugar and Chemicals Ltd. and Chemfab Alkalies Ltd. shows that Electrolysis Plants were to be set up in India based on membrane cell Technology. As per these contracts, the assessee was selected for setting up of the plant. The Preamble of the contracts shows that the assessee was also required to supply the imported equipment for setting up of such plants. However, under these contracts, the assessee was required to provide personnel in India in connection with the establishment of such plant. Para 2 of the affidavit filed by the assessee before us also shows that critical equipments were supplied from Germany. Therefore, the assessee was not right in contending before the lower authorities as well as before us that the plant and machineries were not supplied by the assessee. However, in the absence of agreement for supply of the equipment, it is not possible to hold the contract for supervision was an integral part of contract for supply of equipment. Mere reference to the recital of the agreement is not enough for holding that the contract for supervisory activity is integral part of contract for supply of the equipment. Further, it is seen that the contract with CAL was executed on 6-9-1996 while the period of activity shown in assessment year 1998-99 is 21 days but it is not clear as to when such activity commenced. Therefore, it is not possible to ascertain the minimum period of six months under article 5(2)(i).

35. As far as contract with KSCL is concerned, it is not clear as to when this agreement was executed. However, on the first page, the date of 23-2-1995 is mentioned at the bottom of the page while on the top of the page there is stamp dated 16-3-1995. In the present case, we are concerned with the assessment year 1998-99. However, there is no material on record to determine as to when the supervisory activities commenced in respect of such contract. Accordingly, it is not possible to determine the minimum period of six months in respect of this contract, also.

36. The contract with Gujarat Alkalies and Chemicals Ltd. is only for supervisory activity. Further perusal of this contract shows that it was entered into somewhere in the calendar year 1993 which is apparent from article 9 of the contract. The date of signing the contract is not available. Article 3 of the contract provides for compensation which is relevant in the sense that payment for supervisory activities was to be made in calendar years 1994 to 1996. If this contract is taken into consideration, then certainly the threshold limit of six months would exceed in respect of this contract. However, it is not clear whether fees for technical services shown by the assessee in the years under consideration were received under the above contract or a different contract. This requires verification.

37. As far as contracts with other parties are concerned, no material is placed before us. Therefore, it is not possible to determine the minimum period of six months in respect of other contracts.

38. In view of the above discussion, the orders of the learned CIT(A) for both the years are modified and the matter is restored to the file of the Assessing Officer for fresh adjudication in accordance with our findings given above as well as on the basis of material which may be placed before him by the assessee. The assessee shall be given adequate opportunity to produce the copies of contracts entered into with various parties and any other material which would be necessary for adjudicating the issue. The Assessing Officer shall also be at liberty to make enquiries in this regard.

39. The next issue arising from the additional ground raised by the assessee is whether the assessee is liable to pay tax in respect of fees for technical services where there is no PE in India. The additional ground raised by the assessee reads as under :

"That the learned CIT(A) has erred in holding that the amount received by the assessee towards income from supervisory fees under certain contracts, where the prescribed period of six months was not exceeded were liable to income-tax @ 10 per cent. In the absence of 'P.E.' under the relevant contracts, the income attributable to these contracts, taxable as 'business profits' under article 7 of the AADT, were exempt from tax in India."

The above ground being purely legal ground was admitted by us after hearing the parties. After hearing both the parties, we do not find force in the ground raised by the assessee. The ground raised by the assessee appears to be misconceived. Article 12(1) and (2) provide that tax can be levied in both the States in respect of royalties and fees for technical services. Article 12(2) further provides that if the non-resident assessee is the beneficial owner of the same then rate of tax shall not exceed 10 per cent. Hence, the contention of the assessee's counsel that no tax shall be levied is without force. Further, article 7 would apply only if the case of the assessee falls under article 12(5). Article 12(5) applies only where the assessee has a PE in India. However, the grounds of appeal states that Article 7 would apply in the absence of PE in India. The ground raised is therefore, misconceived. On the other hand, if Article 7 applies than the rate of tax applicable would be that which is provided under Article 115A of the Act which is 30 per cent in the year under consideration. The learned CIT(A) has directed the Assessing Officer to charge 10 per cent rate of tax where there is no PE in India. In our opinion, there is no infirmity in the order of the learned CIT(A) on this issue. The additional ground raised by the assessee, therefore, has to be dismissed.

40. The next issue arises from ground Nos. 6 and 7 in assessee's appeal which reads as under :

"6. That the learned CIT(A) has erred in holding that amounts received by the assessee towards reimbursement of expenses were liable to tax as 'Fees for Technical Services'.

7. That the learned CIT(A) has erred in holding that amounts received towards inspection fees were liable to tax as 'Fees for Technical Services'."

41. Briefly stated the facts are that the assessee entered into a contract with EID Perry Limited on 29-4-1994 for supply of imported equipments. Pursuant to the said contract, the compressor for ammonia storage tank was sent by the assessee to EID Perry. The said compressor was initially lost in transit but subsequently, found in a damaged condition. In order to inspect the damaged compressor, the assessee deputed its two technicians to EID Perry for which EID Perry remitted the sum of DM 1,70,701.37 on account of inspection fee of the technicians and DM Rs. 11,732 on account of air ticket between Germany and Madras. This amount was not offered to tax by the assessee in view of the Calcutta High Court judgment in the case of CIT v. Dunlop Rubber Co. Ltd. [1983] 142 ITR 493 and the decision of Delhi High Court CIT v. Industrial Engineering Products (P.) Ltd. [1993] 202 ITR 1014 wherein it was held that reimbursement of expenses incurred on travel and other costs cannot be taxed as there is no element of income in the reimbursement of expenses. It was also contended that inspection of equipment did not tantamount to referring to technical services. Both these submissions were rejected by the Assessing Officer. On appeal, the learned CIT(A) held that inspection fees amounted to technical services and therefore, the fees for such services were covered under article 12 of the DTAA. Regarding the reimbursement of expenses, the learned CIT(A) rejected the contention of the assessee following the decision of the Hon'ble Kerala High Court in the case of Cochin Refineries Ltd. v. Commissioner Of Income-Tax. [1996] 222 ITR 354 . Aggrieved by the same, the assessee is in appeal before the Tribunal.

42. After hearing both the parties, we do not find merit in the ground raised by the assessee as far as inspection fee is concerned. Admittedly, the technicians were sent for inspection of the equipment. In our opinion, inspection could not be done unless the personnel sent by the assessee were equipped with technical knowledge in respect of the equipment. Therefore, in our opinion, the fees received by the assessee amounted to fees for technical services. As far as reimbursement of expense is concerned, there is a difference of opinion between the judgment of Hon'ble Kerala High Court relied upon by the CIT(A) and Hon'ble Calcutta High Court relied upon by the assessee's counsel. Since there is a conflict between the two decisions, the view which is favourable to the assessee should be applied in view of the judgment in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC) . Accordingly, it is held that reimbursement of expenses does not involve the element of income and, therefore, could not be taxed under article 12 of the DTAA. Consequently, the ground No. 6 is allowed while ground No. 7 is dismissed.

43. Ground No. 8 has not been seriously argued by the learned Counsel for the assessee and therefore, the same is dismissed. Ground Nos. 1 and 9 are general in nature.

44. The last issue arises from ground No. 2 of the revenue's appeal which is common to both the appeals is whether the learned CIT(A) was justified in deleting the interest under section 234B of the Act. After hearing both the parties, we find that this issue is covered by the decision of the Special Bench in the case of Motorola Inc. v. Dy. CIT [2005] 95 ITD 269 (Delhi) as well as the decision of Uttaranchal High Court in the case of CIT v. Halliburton Offshore Services Inc. [2004] 271 ITR 395 wherein it has been held that interest under sections 234B and 234C cannot be charged where the tax is deductible at source. Admittedly, the income of the assessee was chargeable to tax under the provisions of Income-tax Act, 1961 and therefore, the tax was deductible at source under section 195 of the Act. Hence, the assessee was not required to pay advance tax in view of the aforesaid decisions. Respectfully following the same, the issue is decided against the revenue.

45. In the result, the appeals stand partly allowed.