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Smart Summary

Structured Summary of the Opinion: Sumitomo Corporation v. Deputy CIT

Factual and Procedural Background

These appeals were filed by the Revenue against a common order dated February 27, 2014, of the Income-tax Appellate Tribunal ("ITAT") in I.T.A. Nos. 3943, 3944 and 3945/Del/1999 (assessment years 1992-93, 1993-94, 1996-97) and I.T.A. Nos. 5882 and 5883/Del/1998 (assessment years 1994-95 and 1995-96). The ITAT's order is reported as Sumitomo Corporation v. Deputy CIT, [2014] 31 ITR (Trib) 310 (Delhi).

By an earlier order dated May 19, 2015 (when these appeals were admitted), this court framed the principal question of law whether the ITAT erred in holding that fees for technical services (FTS) received by the assessee from Maruti Udyog Ltd. ("MUL") were not taxable other than under article 12(2) of the Indo-Japan Double Taxation Avoidance Agreement ("DTAA").

The respondent (assessee) is a Japan-incorporated company supplying equipment to MUL under separate purchase orders, some of which included separate purchase orders for supervision and installation. The Assessing Officer treated the supervision fees as taxable in India as business income under article 7 read with article 12(5) of the DTAA. The assessee contended there was no permanent establishment (PE) in India in relation to the offshore supplies and that supervision fees were integral to supplies; it accepted that supervision fees could fall under article 12(5) but disputed existence of a PE and the applicability of article 12(5) in the facts.

The assessee maintained a liaison office (LO) in India since 1956 (with sub-offices) approved by RBI subject to restrictions (expenses met from abroad, no commission or remuneration for liaison activities, no trading/commercial activities without permission). Earlier, a compromise in 1980 had led to a formula by which the LO paid taxes on profits arising out of imports to India.

The DTAA between India and Japan entered into force on November 29, 1989. Issues included whether supervision services created a PE in India (article 5) and whether FTS should be taxed under article 12(2) (20% cap for beneficial owner) or under article 12(5) read with article 7 (taxable as business profits attributable to a PE).

Procedurally, after assessment and appellate steps (Assessing Officer and Commissioner (Appeals) against the assessee), the ITAT in a May 31, 2007 order had held the supervision fee taxable under article 12(2) because no PE existed for the supervisory activities, but had declined to decide an additional ground by the assessee for lack of necessary facts and had remanded certain issues. This court on April 6, 2009 remanded the matter to ITAT to decide the additional ground. On remand, ITAT by the impugned February 27, 2014 order held no PE existed and supervision fees were taxable under article 12(2) at 20%. The Revenue appealed to this court; both parties made submissions before the court in the present hearing.

Legal Issues Presented

  1. Whether the Income-tax Appellate Tribunal erred in holding that the fees for technical services received by the assessee from Maruti Udyog Ltd. were taxable under article 12(2) of the Indo-Japan DTAA (i.e., taxed in India at the capped rate of 20%) rather than being taxable as business profits attributable to a permanent establishment under article 12(5) read with article 7?
  2. Whether, for the supply of equipment (with or without supervision of installation), the assessee had a permanent establishment in India such that supervisory fees would be effectively connected to that PE and taxable as business profits under article 7 and article 12(5)?
  3. Whether the supervisory activities, considered across multiple contracts and assessed by reference to "man days" or aggregate periods, constituted supervisory activities in India for more than six months (i.e., a PE under article 5(4) of the DTAA)?

Arguments of the Parties

Revenue's Arguments

  • Both the Assessing Officer and the Commissioner (Appeals) concurrently found that the assessee had a permanent establishment in India.
  • The assessee admitted during assessment proceedings that there were multiple contracts all related to Maruti Udyog Ltd., and the assessee's Indian office had agreed to deduction of tax at source at 30.25%, which would indicate applicability of article 12(5) read with article 7(3) of the DTAA.
  • A perusal of purchase orders (set out in tabular form in the ITAT's 2007 order) shows specification of supervision days as the basis for supervision fees; some orders involved very large values and supervisors' man-days of 364, 478, 730, suggesting supervisory activity sufficient to create a PE.
  • Supervision fees were related to the YES car project for which the assessee had a project office; liaison offices were actively associated with the project and not merely performing preparatory or auxiliary functions. The liaison office's involvement (including correspondence about TDS) demonstrates its substantive role and presence as a PE.
  • Under article 5(4) there is no requirement of six continuous months; aggregate supervisory periods exceeding six months suffice to constitute a supervisory PE.

Assessee's Arguments

  • The ITAT's earlier order (May 31, 2007) findings were reiterated: the assessee did not have a PE in India for the supplies in question; supervisory services were not effectively connected to any PE in India for the purchase orders in issue.
  • The wording of the Indo-Japan DTAA differs from DTAAs with other countries — where aggregate computation of six months was intended the agreement expressly stated so; the Indo-Japan DTAA's article 5 requires supervisory activities lasting for more than six (continuous) months to constitute a PE.
  • The "force of attraction" principle does not apply — separate purchase orders and separate projects cannot be aggregated to attribute supervisory activity of the LO to project offices or other PEs.
  • Any alleged admission by the assessee that tax could be deducted at 30.25% was retracted; MUL had an independent legal obligation to deduct tax at source and that does not estop the assessee from asserting the correct rate of tax (20%) under the DTAA and claiming refunds.

Table of Precedents Cited

Precedent / Order Rule or Principle Cited For Application by the Court
Sumitomo Corporation v. Deputy CIT, [2014] 31 ITR (Trib) 310 (Delhi) (ITAT order dated February 27, 2014) ITAT's finding that the assessee had no PE in India for the supervisory activities and that supervision fees were taxable under article 12(2) of the Indo-Japan DTAA at 20%. This court considered and concurred with the ITAT's conclusion on remand that the supervisory activities did not create a PE and that the FTS was taxable under article 12(2).
ITAT order dated May 31, 2007 (earlier assessment of the same matter) ITAT's earlier examination of the purchase orders, holding that supervision fee was taxable under article 12(2) but declining to decide an additional factual ground for lack of necessary facts and remanding for further enquiry. The court noted this earlier ITAT order, its reasoning and that it had remanded limited issues; the court referred to that factual analysis in assessing the nature and duration of supervisory activities.
Order of this court dated April 6, 2009 (remand to ITAT) Procedural direction that ITAT should decide an additional ground framed by the assessee on remand. The court relied on the subsequent ITAT decision made on remand (February 27, 2014) in resolving the present appeals.
Text of the Indo-Japan DTAA (reproduced in the opinion; cited as [1990] 182 ITR (St.) 380) Article 5 (definition of PE), Article 7 (business profits), Article 12 (royalties and fees for technical services), including article 12(2) and 12(5) and article 5(4). The court analyzed these DTAA provisions to determine the tax characterisation of supervision fees and whether a PE existed; the court applied article 12(5)'s "no force of attraction" rationale and article 5(4)'s six-month supervisory PE rule.

Court's Reasoning and Analysis

The court's analysis proceeded by a textual and contextual application of the Indo-Japan DTAA provisions (articles 5, 7 and 12) to the facts recorded in the assessment and ITAT proceedings.

Key steps in the court's reasoning were:

  1. Interpretation of Article 12 and Article 12(5): The court noted that article 12(5) is on the lines of the OECD Model Convention and embodying the principle that only profits economically attributable to a PE may be taxed by the source State; article 12(5) adopts the "no force of attraction" principle (i.e., income arising from direct dealings by the head office without the aid of a PE should not be attributed to the PE).
  2. Determination of whether a PE existed under Article 5: The court examined article 5(4) (supervisory activities) and considered whether supervisory activities, in the facts of the case, were carried on in India for more than six months such as to constitute a PE. It emphasised the wording of the Indo-Japan DTAA, observing that where aggregate computation rather than continuous periods was intended the treaty expressly provided for it — which the Indo-Japan DTAA does not.
  3. Examination of the factual matrix and purchase orders: The ITAT had tabulated purchase orders and noted common features: supervisors were brought from Japan and MUL bore their travel and boarding costs; the supervisory period for individual contracts did not exceed 180 days; periods calculated on the basis of "man days" did not necessarily indicate continuous presence — e.g., 100 man days for 10 supervisors could mean 10 days' stay for each supervisor, not 100 continuous days.
  4. Disconnection between supervisory fees and PE/project offices: The court accepted ITAT's finding that there was no effective connection between the execution of the purchase orders for supply/supervision and the separate project office for the YES car project. Similarly, the liaison offices were found to have been performing liaison/communicative functions and facilitating communication rather than carrying on substantive trading/commercial activities that would create a PE under the DTAA terms and the RBI licence conditions.
  5. On the estoppel/letter about TDS: The court found plausible the assessee's explanation that correspondence regarding deduction of tax at source was given to expedite payment and that this did not estop the assessee from asserting the proper tax position under the DTAA; the assessee had offered the fees to tax at 20% and sought refund.
  6. Treaty comparison and construction: By comparing other DTAAs where aggregate periods were explicitly provided, the court concluded that article 5 of the Indo-Japan DTAA requires continuity (i.e., more than six continuous months) and that the Revenue's contention that aggregated periods could be used was not supported by the treaty wording.
  7. Conclusion on tax characterisation: Given that supervisory activities did not constitute a PE under article 5, and were not effectively connected to any PE under article 12(5), the court concluded that the supervision fees were taxable under article 12(2) subject to the 20% cap for beneficial owners.

Holding and Implications

Holding: The court answered the question in favour of the assessee and against the Revenue. The appeals by the Revenue were dismissed. The core ruling is stated as:

Appeals dismissed; the fees for technical services received by the assessee from Maruti Udyog Ltd. are taxable under article 12(2) of the Indo-Japan DTAA and subject to the 20% cap provided therein.

Implications:

  • The direct effect on the parties is that the supervision fees in question are to be treated as income taxable under article 12(2) at 20% rather than being attributable to a permanent establishment and taxed as business profits under article 7 read with article 12(5).
  • The Revenue's contention that supervisory activities, taken across multiple contracts or measured by aggregate "man days", constituted a supervisory PE under article 5(4) was rejected in these facts.
  • The court did not indicate that a new legal principle or broader precedent was being laid down beyond the application of the treaty text to the facts; accordingly, no new precedent beyond the resolution of these appeals is identified in the opinion.

This summary is limited strictly to the contents of the provided opinion and does not introduce information beyond that text.

Show full summary ...

    Commissioner Of Income-Tax v. Sumitomo Corporation

    1. These appeals by the Revenue are directed against a common order dated February 27, 2014, passed by the Income-tax Appellate Tribunal (“HAT”) in I.T.A. Nos. 3943, 3944 and 3945/Del/1999 relating to the assessment years (“AY”) 1992-93,1993-94,1996-97, and, I.T.A. Nos. 5882 and 5883/Del/1998, relating to the assessment years 1994-95 and 1995-96, reported as Sumitomo Corporation v. Deputy CIT, [2014] 31 ITR (Trib) 310 (Delhi).

    2. By order dated May 19, 2015, while admitting these appeals, the following question of law was framed for consideration:

    “Did the Income-tax Appellate Tribunal fall into error in holding that the fees for technical services received by the assessee from M/s. Maruti Udyog Limited was not taxable by reason of article 12(2) of the Double Taxation Avoidance Agreement?”

    3. The respondent assessee is a company incorporated in Japan and is being assessed to tax in Japan. The assessee supplies equipment from Japan on the basis of the global tenders floated by Maruthi Udyog Ltd. (“MUL”). The supplies were made against separate and independent purchase orders (“POs”) issued by MUL. Separate purchase orders were also raised for “supervision and installation”. According to the assessee, neither the monies received for the supplies, nor the supervision fee is taxable in India as supervision fee is integral to the provision of supplies. However, the assessee accepted the Revenue's contention that the supervision fee is taxable in India as fees for technical services (FTS) in terms of article 12(5) of the Double Taxation Avoidance Agreement (“DTAA”) between India and Japan. In the assessment orders dated March 27, 1997 and March 23, 1998, for the assessment years 1994-95 and 1995-96 respectively, the Assessing Officer (“AO”) held that the fees for technical services was taxable as business income under article 7, read with article 12(5) of the Double Taxation Avoidance Agreement between India and Japan.

    4. At this stage, it requires to be noted that it is the case of the assessee that it had no permanent establishment (“PE”) in India as far as offshore supplies made of equipment and spares was concerned. Pursuant to the approval granted by the Reserve Bank of India (“RBI”), the assessee has been having a liaison office (“LO”) in New Delhi since 1956. It has sub-liaison offices in Mumbai, Chennai, Bangalore and Calcutta. After the introduction of the Foreign Exchange Regulation Act, 1973 (“FERA”), the liaison office was granted an extension of licence by a letter dated February17, 1976. It was permitted to carrying liaison activities subject to the following conditions:

    “(i) The entire expense of the liaison office will be met exclusively out of the remittances received from abroad;

    (ii) no commission/fee will be charged or any other remuneration received for the liaison activities to be rendered by the Indian offices;

    (iii) Excepting the said liaison work, the Indian offices will not undertake any activity of a trading, commercial or industrial nature without the prior permission of the Reserve Bank of India.”

    5. Even prior to the execution of the DTAA between India and Japan in 1989, an issue had arisen as to whether the profits earned by the assessee on the equipment sold by it from Japan on a principal-to-principal basis, free on board (“FOB”) foreign port to an Indian buyer, was chargeable to tax under the Act. The assessee had filed a writ petition against the Income-tax Department (“Department”) in late 1970. Pursuant thereto, a compromise was arrived at, the terms of which were crystallised in a letter dated March 19, 1980 of the Department. The terms provided that the assessee's liaison office in India would pay tax on the profits in respect of all imports into India, applying the following formula:

    “One third (33 ⅓ per cent.) of the profits arising out of the imports from Japan to India worked out on the basis of the turnover in India, multiplied by the net profit rate of the world income.”

    6. It is not in dispute that in terms of the above formula, the assessee has been paying taxes on its earnings arising out of the imports to India. At that stage, the concept of permanent establishment was not in vogue. The Double Taxation Avoidance Agreement between India and Japan came into force from November 29, 1989. Article 12 of the Double Taxation Avoidance Agreement, the relevant portions of which pertains to payment of royalties and fees for technical services, reads as under (see [1990] 182 ITR (St.) 380, 389):

    “Article 12

    1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.

    2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so chargedshall not exceed 20 per cent, of the gross amount of the royalties or fees for technical services.

    3. The term royalties' as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience:

    4. The term fees for technical services' as used in this article means payment of any amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred to in article 14, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel.

    5. The provisions of paragraphs 1 and 2 shall not apply 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 the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other contracting State independent personal services from a fixed 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 such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply.”

    7. In terms of article 7(1), unless the enterprise (i.e. the assessee) of a Contracting State (i.e., Japan), carries on the business in “other Contracting State” (i.e., India) through a permanent establishment situated in India, the profits of the assessee would be taxable only in Japan. Where the assessee has a permanent establishment in India the profits “as is directly or indirectly attributable to the permanent establishment will be taxed in India.

    8. Article 5 of the Double Taxation Avoidance Agreement defines a permanent establishment. Under article 5(1) a “permanent establishment” means “a fixed place of business through which the business of an enterprise is wholly or partly carried on”. Article 5(2) to (6) which is relevant for the present purposes reads as under (see [1990] 182 ITR (St.) 380, 382):

    “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;

    (g) A warehouse in relation to a person providing storage facilities for others;

    (h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on;

    (i) a store or other sales outlet; and

    (j) an installation or structure used for the exploration of natural resources, but only if so used for a period of more than six months.

    3. A building site or construction, installation or assembly project constitutes a permanent establishment only if it lasts for more than six months.

    4. An enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it carries on supervisory activities in that Contracting State for more than six months in connection with a building site or construction, installation or assembly project which is being undertaken in that Contracting State.

    5. Notwithstanding the provisions of paragraphs 3 and 4 an enterprise 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 that Contracting State for more than six months in connection with the exploration, exploitation or extraction of mineral oils in that Contracting State.

    6. Notwithstanding the provisions of the proceeding paragraphs of this article, the term permanent establishment shall be deemed not to include:

    (a) the use of facilities solely for the purpose of storage 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 enterprise;

    (d) The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;

    (e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character.”

    9. The case of the assessee has been that, as far as the supplies of equipment are concerned, it has no permanent establishment in India. The liaison office of the assessee in India was communicating information regarding publication of global tenders invited by Maruthi Udyog Ltd. to the head office. The bid would be submitted only by the head office in Japan. The head office through its personnel from Japan would visit India and after discussion with Maruthi Udyog Ltd. would conclude contracts for the supply of equipment. The assessee's head office secured 10 contracts for the supply of equipment during the assessment year 1994-95, 25 contracts in the assessment year 1995-96, five contracts in the assessment year 1992-93, one contract in assessment year 1993-94 and four contracts in assessment year 1996-97. Under some of the contracts, the assessee was only to supply equipment and in some other contracts, it was also to supervise the installation of the equipment. In some of the contracts, the Maruthi Udyog Ltd. carried out the actual installation while the assessee supervised such installation.

    10. Another factor that requires to be noticed is that during this very period, the assessee started expanding its activities in India and established project offices for the following three separate projects:

    (i) A project at Raichur with the Karnataka Power Corporation.

    (ii) A project at Basin in Tamil Nadu.

    (iii) A paint and assembly shop for Maruthi Udyog Ltd.

    11. The last mentioned project office was established with the approval of the Reserve Bank of India dated September 15, 1992, granted under section 29(1)(a) of the Foreign Exchange Regulation Act, 1973. This was for the purposes of designing, engineering, supply and installation of the Yes car project, whereunder there would be expansion of the car production between 70,000 to 90,000 cars per year.

    12. For assessment year 1994-95, the assessee filed its return of income disclosing an income of Rs. 3,49,82,616. The assessee received fees fortechnical services for supervision of the installation of the machinery and equipment supplied by it to Maruthi Udyog Ltd. in the sum of Rs. 2,35,86,939. By a letter dated July 18, 1996, the Assessing Officer called upon the assessee to explain as to why the said sum received as fees for technical services should not be offered to tax by the assessee. By a reply dated August 5, 1996, the assessee informed the Assessing Officer that Maruthi Udyog Ltd. had deducted tax at source on the fees for technical service paid to the assessee at 30.25 per cent. Accordingly, the assessee was under the impression that the fee which was already subjected to tax deducted at source need not be shown or declared in the return of income. The assessee nevertheless assured that it would declare hereafter such income in its return of income.

    13. By a letter dated August 19, 1996, the assessee listed all the ten purchase orders obtained in the assessment year under consideration, in terms of which it supplied machinery and equipment and also undertook supervision and installation of the plant and machinery. The assessee contended that each contract for supply and supervision of installation was independent and separate. The technical aspects of the work involved in each of the contracts were different and varied. In other words, notwithstanding that the contracts were with Maruthi Udyog Ltd. the period for which the supervisory activities were carried out was less than 180 days for each contract. It was contended that there was no permanent establishment of the assessee in India vis-a-vis the rendering of the supervisory services to Maruthi Udyog Ltd.

    14. The assessee contended that for the projects being executed by it with the Karnataka Power Corporation Ltd. (Raichur Project) and with the Tamil Nadu Electricity Board (Basin Bridge Project) there were permanent establishments. It was pointed out that the income from the said projects was being taxed under section 44BBB of the Act. It was stated that the contract with Maruthi Udyog Ltd. was in no manner connected with the projects at Raichur and Basin Bridge. The contention of the assessee was that the tax on the fee received had to be taxed at 20 per cent, in terms of article 12(2) of the Indo-Japan Double Taxation Avoidance Agreement and not at 30.25 per cent, under article 12(5) of the Double Taxation Avoidance Agreement.

    15. The Assessing Officer held against the assessee and the Commissioner of Income-tax (Appeals) affirmed the said additions made by the Assessing Officer. Penalty proceedings was also initiated for the assessment years 1992-93 and 1993-94 holding the fees for technical services as business income under article 7 read with article 12(5) of the Double TaxationAvoidance Agreement. The assessee preferred an appeal before the Income-tax Appellate Tribunal.

    16. Before the Income-tax Appellate Tribunal, at the instance of the assessee, an additional ground was framed on July 15, 2003 as under (page 313 of 31 ITR (Trib)):

    “Whether on the facts and in the circumstances of the case and in law, the supervision fees earned on account of the supply of equip ment could be taxed as fees for technical services, even though they are integral and incidental to the supply of equipment, since the supervision fees received by it on account of the supply of equipment are inextricably and essentially linked to the supply of equipment, and hence, should in all fairness partake the same character as the supply of the equipment as it is nothing else but a supply of equipment sim-pliciter.”

    17. By order dated May 31, 2007, the Income-tax Appellate Tribunal held that the supervision fee is taxable under article 12(2) since the assessee did not have a permanent establishment and the supervisory activities in respect of the installation of the equipment were not “effectively connected” to permanent establishment in India in terms of article 12(5) of the Double Taxation Avoidance Agreement. As regards the additional ground permitted by the Income-tax Appellate Tribunal to be urged by order dated July 15, 2003, the Income-tax Appellate Tribunal held that necessary facts were not available on record in order to establish whether the supervision activities were inextricably linked to the supply of equipment and should be treated in the same manner as the supply of the equipment itself. Thus the additional ground was not disposed of. The Revenue filed an appeal before this court on the question whether the supervision fee is taxable under article 12(2) or under article 7 read with article 12(5) of the Double Taxation Avoidance Agreement. The assessee filed a cross-appeal on the question whether the Income-tax Appellate Tribunal ought to have decided the additional ground raised by it.

    18. While hearing both sets of appeals together, this court by order dated April 6, 2009, held that the Income-tax Appellate Tribunal ought to have decided the additional ground and accordingly remanded the matter to the Income-tax Appellate Tribunal for that purpose. While disposing of both sets of appeals, this court formulated the question to be decided by the Income-tax Appellate Tribunal as under (page 313 of 31 ITR (Trib)):

    Whether, oh the facts and circumstances of the case ‘fees for technical services’ (FTS) received by the assessee from Maruthi UdyogLimited was taxable under articles 12(2) or 12(5) read with article 7(3) of the Indo-Japan Double Taxation Avoidance Agreement?”

    19. On remand, the Income-tax Appellate Tribunal held by the order dated February 27, 2014, that the assessee had no permanent establishment in India and that the supervisory services were not connected through any of its other permanent establishments in India and that since the supervision fee was earned in India it is taxable under article 12(2) of the Double Taxation Avoidance Agreement at 20 per cent.

    20. Against the aforementioned order of the Income-tax Appellate Tribunal the present appeals have been filed by the Revenue.

    21. The court has heard the submissions of Ms. Suruchi Aggarwal, learned senior standing counsel for the Revenue and Mr. C.S. Aggarwal, learned senior counsel for the assessee.

    22. It was first submitted by Ms. Suruchi Aggarwal that the concurrent findings of both the Assessing Officer and the Commissioner of Income-tax (Appeals) were that the assessee had its permanent establishment in India. It was admitted by the assessee during the course of assessment proceedings that there were multiple contracts all related to Maruthi Udyog Ltd. The assessee's office in India agreed to the deduction of tax at source at 30.25 per cent, which in fact would locate the transaction within article 12(5) read with article 7(3) of the Double Taxation Avoidance Agreement. It was further submitted that a perusal of the purchase orders placed by Maruthi Udyog Ltd. on the assessee, which have been set out in a tabular form in the earlier order dated May 31, 2007, passed by the Income-tax Appellate Tribunal, would show that the specification of days of supervision was essentially the basis for calculation of supervision fees which was one of the components of the order. The other component was the supply of the equipment itself. Some of the orders, having the value of Rs. 100-200 crores, involved man days of 364, 478 and 730. While the Income-tax Appellate Tribunal answered the question for the assessment year 1995-96, it remanded the matter to the Assessing Officer on the ground that the facts on record were not sufficient to come to a definite conclusion. It was further submitted that the supervision fees were related to the YES car project which was a separate project for which the assessee had a project office. The liaison offices were not merely collecting information or carrying on an activity of a preparatory or auxiliary nature but were actively associated with the said project. The fact that the liaison office had written to Maruthi Udyog Ltd. regarding deduction of tax at source in respect of the contracts also showed the nature of its involvement in the projects. Therefore, the liaison office was in fact its permanent establishment. Finally, it was submitted that there was no requirement in terms of article 5(4) of the Double Taxation Avoidance Agreement that the permanent establishment should carry on the supervisory activities for six continuous' months. It was enough if the aggregate period for which the supervision took place was six months or more.

    23. In reply, Mr. C.S. Aggarwal, learned senior counsel for the assessee, referred to the earlier findings rendered in the order dated May 31, 2007, of the Income-tax Appellate Tribunal which according to him bore the reiteration by the Income-tax Appellate Tribunal in the present impugned order. He referred to the difference in the wording of the Double Taxation Avoidance Agreement between India and Japan as compared with the corresponding clauses of the double taxation avoidance agreements with other countries, which showed that where it was intended that the computation of the six months period for the purposes of determining whether there was a permanent establishment had to be in the aggregate and not continuous the relevant clause in the double taxation avoidance agreement expressly stated so. He also submitted that the theory of “force of attraction” would not apply. In other words, there were separate purchase orders relating to other projects undertaken by the assessee and there could be no presumption that the liaison officers were “effectively connected” with the said project offices. He supported the impugned order of the Income-tax Appellate Tribunal and submitted that the fees for technical services in the present case was taxable under article 12(2) at 20 per cent. As regards the alleged admission by the assessee that there it could be taxed at 30.25 per cent., Mr. Aggarwal pointed out that apart from the fact that the assessee had retracted such admission, Maruthi Udyog Ltd. had a legal obligation, without reference to the assessee, to deduct tax at source from the fees for technical services paid. This by no means precluded the assessee from challenging the applicability of the rate of tax deducted at source at 30.25 per cent.

    24. As far as the question framed by this court is concerned, the issue that arises is whether the tax deducted at source from the fees for technical services paid by Maruthi Udyog Ltd. to the assessee should be 20 per cent, in terms of article 12(2) or 12(5) read with article 7 of the Double Taxation Avoidance Agreement? This in turn raises the question of whether, for the activity of supply of equipment by the assessee to Maruthi Udyog Ltd., with or without supervision of the installation, it could be said that the assessee had a permanent establishment in India?

    25. Under article 7 of the Double Taxation Avoidance Agreement, the assessee would be liable to pay taxes in India if it carried on the business through a permanent establishment. The part played by the permanent establishment in the transactions in question would determine the extent to which the profits from such transactions can be attributed to the permanent establishment. Article 5 of the Double Taxation Avoidance Agreement is relevant for determining whether the assessee could be said to have a permanent establishment in India.

    26. article 12(5) of the Double Taxation Avoidance Agreement is on the lines of the OECD Model Convention. It is noticed that the clause in the OECD Model Convention allows the State, where the permanent establishment is located, to “tax only those profits which are economically attributable to the permanent establishment”. The clause makes a distinction between those incomes which are the result of activities of the permanent establishment and the income that arises by reason of direct dealings by the enterprise from the head office without the aid or assistance of the permanent establishment. Thus, article 12(5) adopts the “no force of attraction principle”. The rationale behind the said rule was to avoid restricting entrepreneurial freedom of disposition “through fictitiously allocating profits by way of generalising standards”. Another principle is that the “material date for determination of accrual of income arising through the permanent establishment is the existence of the permanent establishment at the time when whatever decisively caused the profits to accrue, actually accrued”. The income producing activities should be connected with the permanent establishment not only economically but also in sub-stance.

    27. It was in the above background that the Income-tax Appellate Tribunal examined each of the purchase orders for the variousassessment years in a tabular form. On examination of the purchase orders, a common feature which emerged was that the supervisors were to come from Japan and Maruthi Udyog Ltd. had to bear the cost of their air tickets as well as their boarding and lodging in India. The period of supervision in the case of the individual contracts did not exceed the period of 180 days. In other words, they did not constitute a supervisory permanent establishment in terms of article 5(4) of the Double Taxation Avoidance Agreement.

    28. As far as the fees for technical services paid to the assessee for the supervisory services is concerned, there was no effective connection between the execution of the purchase orders for supply of equipment and supervision of their installation, and, the project office for the paint and assembly shop of the YES car project of Maruthi Udyog Ltd. Additionally, as pointed out by Mr. Aggarwal, the supervisory fee paid by Maruthi Udyog Ltd. was on the basis of “man days”. The number days per supervisor was calculated by dividing “man days” by the “number of supervisors”. If 10 supervisors had stayed for 100 man days, the supervision period would be 10 days only, though the “man days” are 100. Thus, the period of stay would be only of 10 days and not 100 days.

    29. As regards the contention that the assessee had conceded the position that Maruthi Udyog Ltd. could deduct tax at 30.25 per cent., it is seen that the liaison offices only facilitated the communication between the head office and Maruthi Udyog Ltd. The explanation that its letter on the rate of tax deducted at source was given only to expedite the payment from Maruthi Udyog Ltd., appears plausible. The assessee offered the fees for technical services to tax at 20 per cent, and claimed refund. The court is unable to view the aforementioned communication of the assessee to Maruthi Udyog Ltd. as an estoppel against the assessee from claiming to be taxed in accordance with law.

    30. A comparison of the relevant portions of article 5 of the Double Taxation Avoidance Agreement between India and Japan with the corresponding clause in some of the double taxation avoidance agreements entered into by India with other countries shows that where it is intended that the computation of the six months period for determining whether an assessee can be said to have a permanent establishment should be in the aggregate, i.e., not “continuous”, the double taxation avoidance agreement itself provides for it. From the wording of the article 5 of the Double Taxation Avoidance Agreement in question, it is not possible to accept the plea of the Revenue that the supervisory activities need not have been carried on for six continuous months. For the aforesaid reasons, the court concurs with the views of the Income-tax Appellate Tribunal that in the present case the fees for technical services was liable to be taxed at 20 per cent, under article 12(2) of the Double Taxation Avoidance Agreement. The question is accordingly answered in the negative, i.e., in favour of the assessee and against the Revenue.

    31. The appeals are accordingly dismissed.

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