Sumitomo Corporation Vs. Deputy Commissioner of Income Tax - Court Judgment

Excerpt:
1. ita 5883 & 5885/del/1998 : these are appeals by the assessee against the common order dt. 31st aug., 1998 of cit(a)-xiv, new delhi, relating to the asst. yrs. 1994-95 and 1995-96. ita 3943 to 3945/del/99 are appeals by the assessee against the common order dt. 30th july, 1999 of cit(a)-xiv, new delhi, relating to the asst. yrs. 1992-93, 1993-94 and 1996-97. these appeals arise on identical facts and circumstances and involve common issues. they were heard together and we deem it convenient to pass a consolidated order.2. ita 5884/del/1998 is an appeal by the assessee against the order dt.31st aug., 1998 of cit(a)-xiv, new delhi passed under section 154 of the act relating to the asst. yr. 1995-96. this appeal however will be dealt with separately as the issue raised therein is.....

Judgment:
1. ITA 5883 & 5885/Del/1998 : These are appeals by the assessee against the common order dt. 31st Aug., 1998 of CIT(A)-XIV, New Delhi, relating to the asst. yrs. 1994-95 and 1995-96. ITA 3943 to 3945/Del/99 are appeals by the assessee against the common order dt. 30th July, 1999 of CIT(A)-XIV, New Delhi, relating to the asst. yrs. 1992-93, 1993-94 and 1996-97. These appeals arise on identical facts and circumstances and involve common issues. They were heard together and we deem it convenient to pass a consolidated order.

2. ITA 5884/Del/1998 is an appeal by the assessee against the order dt.

31st Aug., 1998 of CIT(A)-XIV, New Delhi passed under Section 154 of the Act relating to the asst. yr. 1995-96. This appeal however will be dealt with separately as the issue raised therein is different and calls for an independent adjudication.

3. The facts and circumstances under which these appeals arise are as follows: The assessee is a company incorporated as per the laws of Japan and a tax resident therein. It is a trading house and had established a liaison office (hereinafter referred to as "LO") in India at New Delhi since the year 1956, and has sub-LOs at Mumbai, Chennai, Bangalore and Calcutta. The LO in New Delhi was established with the approval of the Reserve Bank of India (hereinafter referred to as "RBI") for facilitating imports from Japan and exports from India.

After the introduction of Foreign Exchange Regulation Act, 1973 (hereinafter referred to as "FERA"), the LO was granted an extension of license by the RBI, for continuing the activities, vide its letter dt. 17th Feb., 1976, for the limited purpose of carrying liaison activities subject, inter alia, to the following conditions: o the entire expenses of the LO will be met exclusively out of the remittances received from abroad; o no commission/fee will be charged or any other remuneration received for the liaison activities to be rendered by the Indian offices; o 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 RBI.4. The LO acts as a communication channel between Indian importers (including the Government) and the assessee who sell their goods and commodities on a principal-to-principal basis to such Indian importers.

5. The stand of the assessee throughout in the past has been that normally profits on equipment sold by it from Japan, on a principal-to-principal basis (FOB) (Free on Board) foreign port to an Indian buyer is not chargeable to tax under the IT Act, 1961, hereinafter referred to as 'the Act'. The claim of the Revenue is to the contrary. However, due to certain historical reasons, without a decision as to whether such profits on equipment sold are taxable or not taxable, the tax Department has been taxing the same. The assessee had filed a writ petition against the tax Department, sometime in late 1970, pursuant to which the tax Department had certain discussions with the assessee and a compromise was arrived at between the two parties vide the letter of the tax Department, dt. 19th March, 1980. The settlement provided that the assessee's LO in India would pay tax on the profits in respect of income determined in respect of all imports into India as per the following formula: One-third (33-1/3 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. Accordingly, the assessee has been paying taxes on imports. In arriving at the settlement, neither the tax Department nor the assessee had raised the issue of existence of a Permanent Establishment (PE).

The PE concept was not very much in vogue in India at that time. The Indo-Japan DTAA came into force much later, i.e. on 1st March, 1990 only. Accordingly, the assessee submitted for taxation certain portion of its profits arising out of the LO on the basis of the settlement referred to above. According to the assessee, it paid tax to buy peace and did not wish to contend the issue of taxability vis-a-vis the DTAA, in respect of supply of equipments and income therefrom, even after the Indo-Japan DTAA.7. The assessee started expanding its activities in India. The assessee established project offices for the following: o Paint and Assembly shop for Maruti Udyog Ltd. (hereinafter called "MUL").

In the present appeals, we will be more concerned with the setting up of the project office vis-a-vis contracts with MUL. The approval for establishing a project office in connection with MUL was granted by the RBI vide its approval dt. 15th Sept., 1992. The approval was granted under Section 29(1)(a) of the FERA, 1973 for the purpose of undertaking a contract with MUL for designing, engineering, supply and installation for YE2 car project. YE2 car project of MUL is an expansion of car production between 70,000 to 90,000 cars (of capacity 1,000 CC and 1,300 CC) per year.

8. MUL had issued tenders inviting bids for purchase of different machinery and equipments in connection with modernization and expansion of its car assembly operations. In this connection MUL invited global tenders. The LO of the assessee in India was communicating publication of such global tenders and the head office would make a bid for supply of equipments. The head office through its personnel from Japan would visit India and after discussion with MUL conclude contracts for supply of equipments. The head office had secured 10 contracts for supply of equipments in previous year relevant to asst. yr. 1994-95, 25 contracts in asst. yr. 1995-96, 5 contracts in asst. yr. 1992-93, 1 contract in asst. yr. 1993-94 and 4 contracts in asst. yr. 1996-97. Under the contracts, supply of equipments were to be made by the assessee and in some contracts, the assessee was also to supervise the installation of the equipments. In some of the contracts, it was the responsibility of MUL to carry out the actual installation and the responsibility of the assessee was only to supervise the installation. The dispute in these appeals is regarding the taxability of the supervision fee received by the assessee from MUL. The supervision fee will hereinafter be referred to as "fees for technical services" (FTS).

9. The assessee filed its return of income for the asst. yr. 1994-95 returning an income of Rs. 3,49,82,616.

10. In respect of the income from supply of equipment to MUL the assessee declared income as per the formula agreed between the assessee and the Department already referred to. The assessee received FTS for supervising the installation of the machinery and equipment supplied by it to MUL of Rs. 2,35,86,939. According to the AO the sum so received by the assessee was in the nature of FTS and was chargeable to tax. The AO vide letter dt. 18th July, 1996 called upon the assessee to explain as to why the above fee was not offered to tax by the assessee. The assessee vide letter dt. 5th Aug., 1996 accepted that the sum in question was chargeable to tax as FTS. It explained that MUL deducted tax at source on the FTS paid to the assessee at 30.25 per cent and that it was under the impression that the fee in question which was already subjected to tax deduction at source need not be shown/declared in the return of income. The assessee also assured that it will in future declare such income also in its return of income.

11. By another letter dt. 19th Aug., 1996, the assessee listed all the 10 purchase orders (hereinafter referred to as "PO") under which it supplied machinery and equipment and under which it also undertook to supervise the installation of the plant and machinery.

12. The assessee submitted that each contract was independent, separate and technical aspects of work involved were different and varied. Each contract had no relationship with the other. Though they were in respect of one entity viz., MUL, the period for which supervisory activities were carried out was less than 180 days for each contract and therefore there was no PE of assessee in India vis-a-vis the rendering of supervisory services (i.e., supervisory PE) to MUL under the POs referred to above. The further stand of the assessee was that for the projects being executed by the company with Karnataka Power Corporation Ltd. (Raichur Project) and with Tamil Nadu Electricity Board (Basin Bridge Project) there was in existence a PE, which is essentially because of the nature of these contracts. The income under these projects is taxed as per the provisions of Section 44BBB of the Income-tax Act, 1961. The assessee explained that however, the contracts with MUL are not only independent in relation to each other on an individual basis but also do not in any manner hold association with the above projects, i.e., Raichur and TNEB projects.

13. In this connection the assessee also invited attention to the available commentaries on the definition and establishing of PE under the Agreements for Avoidance of Double Taxation falling under the OECD Model (India-Japan DTAA falls under this category), existence of a PE should be viewed separately for each project undertaken. This is notwithstanding the fact that the projects/contracts are undertaken for the same principal, subject however, to each contract bearing no relationship with each other. The assessee thus pleaded that tax on the fee received' had to be taxed @ 20 per cent of the fee received in terms of Article 12(2) of the Indo-Japan Treaty and not at 30 per cent by applying Article 12(5) of the Indo-Japan DTAA.14. To appreciate the stand taken by the assessee on the basis of the above facts, a reference to the relevant provisions of Article 12 of the Indo-Japan DTAA is necessary. They are as follows: 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 charged shall not exceed 20 per cent of the gross amount of the royalties or fees for technical services.

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 paras 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 PE 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 PE or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply.

15. A reading of Article 12(2) would show that FTS is chargeable to tax at 20 per cent of the gross FTS. However, under Article 12(5) if the recipient of FTS has a PE in India and the contract in respect of which FTS paid is effectively connected with such PE, then the provisions of Article 7 or 14 of DTAA shall apply.

1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a PE situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is directly or indirectly attributable to that PE. 2. Subject to the provisions of para 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a PE situated therein, there shall in each Contracting State be attributed to that PE the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE. 3. In determining the profits of a PE, there shall be allowed as deductions expenses which are incurred for the purposes of the PE, including executive and general administrative expenses so incurred, whether in the Contracting State in which the PE is situated or elsewhere.

(Clauses 4 to 6 of Article 7 are not reproduced here and they deal with computation of business profits) 16. Under Article 7 of the DTAA, if an assessee carries on business through a PE, then the profits of the assessee directly or indirectly attributable to that PE, will be taxed in India. The protocol notes exchanged between countries while entering into a DTAA are to be considered as part of the DTAA and have to be considered while interpreting tax treaties between two countries. Protocol notes on various clauses of Indo-Japan DTAA provide in paras 6 and 7 as follows (on Article 7 of the Indo-Japan DTAA).

Vide letter dt. 7th March, 1989 of Ambassador, Extraordinary and Plenipotentiary of Japan to India.

6. With reference to para I of Article 7 of the Convention, it is understood that by using the term "directly or indirectly attributable to the PE", profits arising from transactions in which the PE has been involved shall be regarded as attributable to the PE to the extent appropriate to the part played by the PE in those transactions. It is also understood that profits shall be regarded as attributable to the PE to the above-mentioned extent, even when the contract or order relating to the sale or provision of goods or services in question is made or placed directly with the overseas head office of the enterprise rather than with the PE. 7. With reference to para 3 of Article 7 of the Convention, it is understood that in India the deductions in respect of the executive and general administrative expenses as referred to in the said para shall be allowed in accordance with the domestic law of India, but such deductions shall in no case be less than what are allowable under the Indian IT Act as effective on the date of signature of this convention.

17. To determine whether the assessee has a PE in India or not one has to look at the provisions of Article 5 of the Indo-Japan DTAA which reads as follows: 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

(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; (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, 4. An enterprise shall be deemed to have a PE in a Contracting State and to carry on business through that PE 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.

6. Notwithstanding the provisions of the preceding paras of this article, the term "permanent establishment" shall be deemed not to include-- (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.

18. In terms of paras 6 and 7 of protocol notes r/w Article 7(3) of the Indo-Japan DTAA, if it is found that assessee had a PE in India, profits directly or indirectly attributable to that PE, have to be computed in the manner laid down in the IT Act, 1961. Section 115A(1)(b)(B) of the Act provides that income by way of fees for technical services received by a foreign company shall be chargeable to tax @ 30 per cent if such fees are received in pursuance of an agreement made on or before 31st May, 1997. Section 115A(3) provides that no deduction of any expenditure or allowance shall be allowed to the assessee under Section 28 to 44C or Section 57 in computing such income.

19. It is in the light of the above provisions that the assessee made a claim before the AO that FTS have to be brought to tax under Article 12(2) of DTAA and not under Article 12(5) of the DTAA r/w Article 7(3) of the DTAA. The AO however rejected the plea of the assessee that it did not have a PE in India in respect of supervision of installation and commissioning of machinery for MUL. According to the AO, the assessee admittedly had a PE in India in respect of Raichur Project and Basin Bridge Project. The assessee being one entity, it is enough if the enterprise has a PE and it is not necessary that each Project should have a separate PE. The AO has also referred to the fact that the assessee had liaison offices in four metropolitan cities in India with fixed assets of the value of Rs. 2.82 crores. It took premises on lease in India paying security deposit of Rs. 57 lacs and incurred administrative and establishment expenses of Rs. 6.49 crores and Rs. 1.81 crores respectively. The AO has also referred to the fact that even for executing Raichur Project with Karnataka Power Corporation, Basin Bridge Project with Tamil Nadu Electricity Board and YE2 Car Project for MUL, the assessee had obtained NOC from RBI under the FERA, 1973. The AO has also referred to the fact that MUL before making payment to the assessee have deducted tax at source of 30.25 per cent thereby by its own conduct admitted that the assessee had a PE in India.

20. For the above reasons the AO brought to tax the supervision fee received by the assessee at 30 per cent as per provisions of Section 115A of the Act.

21. The facts in asst. yr. 1995-96 are substantially the same. The AO in this year assigned two more reasons for rejecting the plea of the assessee that it did not have a PE in India vis-a-vis the supervisory services rendered to MUL. The AO has referred to the fact that in the last two decades the assessee has been offering substantial income to tax. The LO cannot therefore be called a LO but was in the nature of a PE. The AO has then referred to the fact that in a letter written by the LO to MUL, they have agreed to MUL deducting tax at 30.25 per cent on supervision fee paid to the assessee. This letter, according to the AO, was a clear indicator of the fact that the LO had authority to take decision and therefore was a PE of the assessee in India. Consequently, the AO held that the rate of tax @ 30 per cent on the fees received by assessee for supervisory services rendered was proper.

22. The facts for asst. yr. 1996-97 are identical and the AO has referred to the assessments for asst. yrs. 1994-95 and 1995-96 and concluded that the supervision fee received for the said assessment year is liable to be taxed at 30 per cent.

23. The facts in asst. yrs. 1992-93 and 1993-94 are also identical, except for the fact that the assessments for these years were reopened under Section 147 of the Act consequent to the assessment made in asst.

yrs. 1994-95 and 1995-96. In asst. yrs. 1992-93 and 1993-94, the assessee did not declare, in the return of income filed for these years, the supervision fee as its income. The AO issued notices under Section 148 for both asst. yrs. 1992-93 and 1993-94. The assessee offered the supervision fee to tax in the return filed in response to the notice under Section 148. The assessee disputed only the rate of tax, i.e. at 20 per cent. The AO however based on the findings for the asst. yrs. 1994-95 and 1995-96 held that the supervision fee is liable to be taxed @ 30 per cent. The contentions of the assessee and the conclusions of the AO in this regard were as follows.

(i) Supervision fees received from MUL attracts tax rate of 20 per cent as per Article 12 of DTAA between India and Japan.

(ii) The assessee does not have PE in India with reference to various contracts entered into with MUL which resulted in receipt of the subject supervision fee.

(iii) Each independent contract/project executed by the assessee should be viewed separately for determining the existence of PE. The submissions made by the assessee have been considered in the assessment orders for the asst. yrs. 1994-95 and 1995-96. The mute point is whether the assessee was having a PE during the relevant period. And, if so, then the assessee is liable to tax @ 30 per cent in view of the provisions contained in Section 115A instead of assessee's claim of tax @ 20 per cent under Article 12 of DTAA. This particular aspect has been examined and discussed in extenso by learned CIT(A)-XIV, New Delhi, in his combined order (Nos. 690/97-98 and 86/98-99) dt. 31st Aug., 1998 for the asst. yrs. 1994-95 and 1995-96 wherein he has upheld the findings of AO to the effect that the assessee company was having PE pertaining to income received on account of supervision and technical fees from MUL. The relevant concluding portion of the said order of learned CIT(A)-XIV reads as under: In course of the hearing the Authorised Representative has also referred to the absence of force of attraction of the PE in the OECD Model, and specifically, in the DTAA between India and Japan in support of his claim that the 10 contracts cannot be connected with the PE relating to the MUL project. It is true that the DTAA between India and Japan has adopted the OECD Convention and have decided against adopting the 'Force of attraction of the PE', but in the instant case, the facts and also the specific provisions of the DTAA clearly establish that the 10 contracts with MUL were directly or indirectly attributable to the PE as reflected in the projects undertaken relating to the assembly line, paint shop and also for the YE2 car project. The contracts even though have been split up, but were related to the assembly line, the paint shop and the YE2 car project and as they were directly or indirectly attributable to these projects, the profits are taxable in India. Therefore, the findings of the AO are upheld for both the years and no interference is called for.

The facts relating to PE of supervision fees received from M/s MUL in the year under reference are identical as discussed in the assessment orders for the asst. yrs. 1994-95 and 1995-96. So, following the reasoning advanced in the said orders which was subsequently upheld by learned CIT(A)-XIV vide order dt. 31st Aug., 1998 (supra) and discussed in the above paras, it is held that the assessee was having PE relating to supervision and technical fees amounting to Rs. 1,97,54,459 received from MUL and further such fees would be liable to tax @ 30 per cent in accordance with the provisions contained in Section 115A of the IT Act, 1961.

24. The assessee preferred appeals before the CIT(A) for all the assessment years. There were two sets of orders by the CIT(A). A common order for asst. yrs. 1994-95 and 1995-96, dt. 31st Aug., 1998 was passed. A common order for asst. yrs. 1992-93, 1993-94 and 1996-97, dt.

30th July, 1999 was passed. The order of AO was upheld by the CIT(A) for all the assessment years. The reasons assigned by CIT(A) were identical in both the orders. Some additional reasons have been given in the second order dt. 30th July, 1999.

25. The contentions put forth on behalf of the assessee before the CIT(A) for asst. yrs. 1994-95 and 1995-96 were as follows: (a) That LOs established at five locations in India were with the prior permission of the RBI under Section 29(2)(a) of the FERA, 1973 and that the LOs acted only as a communication channel between the head office and the parties in India and that they were prohibited from undertaking any activity of a trading, commercial or industrial nature without prior permission of RBI. (b) That LOs were not PE and were merely collecting information or carrying on activities, which were preparatory or auxiliary in nature. That under Article 5(6)(d) and (e) of Indo-Japan DTAA they were not to be regarded as PE. (c) The fact that the assessee had a PE in respect of its Raichur Project and Basin Bridge Project cannot lead to the conclusion or cannot be extended to the other contracts executed by the assessee for MUL. It was submitted that existence of PE has to be viewed separately for each independent project/contract.

(d) It was pointed out that ten contracts in question for asst. yr.

1994-95 were awarded to the assessee on the basis of competitive bidding process. The description and scope of work undertaken under each contract were separate so also were the technical aspect of work involved in each contract having no inter-relation with another.

(e) That para 1 of Article 7 of the DTAA between India and Japan is based on the OECD Model and was different from para 1 of Article 7 of the UN Model Convention in the sense that under the latter, the rights of primary taxation by the State in which there is a PE were much wider and also go beyond the scope as envisaged in the OECD Model. Referring to the commentary by Klaus Vogel : Double Taxation Conventions, 3rd edition (published by Kluwer Law International) and specifically to p. 402, it was pointed out that the India Japan Treaty, based on the OECD Model allows the State of the PE to tax business profits, but only so much of them as is attributable to that PE. The Model Convention has thus decided against adopting 'force of attraction of the PE' i.e. against the principle that, where there is a PE, the State of the PE should be allowed to tax all income derived by the enterprise from such source in that State irrespective of whether or not such income is economically connected with the PE. In contrast it was pointed out that UN Model extends primary taxation by the State of the PE i.e. the profits that it allows to be attributed to the PE are not strictly limited to those resulting from the PE's own activity. Rather, they include those from direct transactions effected by the head office, though in the State of PE or those from transactions effected by a PE situated in a 3rd State to the extent that such transactions are of the same or similar kind as those effected through the PE. Referring further to the DTAA with other countries such as Australia, Canada, Denmark, Hungary, Spain, USA, etc. and the provisions of Article 7 in those agreements, which follow the UN Model it was argued that in view of the specific wordings of the India Japan DTAA, the profits of the assessee can only be taxed in India if they are directly or indirectly attributable to a PE. The existence of some other PE carrying on some other business activity was not enough. It was further contended that since in the assessee's case, the PE in regard to the Raichur Project and the Basin Birdge Project had nothing to do with the 10 contracts with MUL In respect of which the supervision fee was received and in no way was attributable to any PE, the supervision fee was not taxable under the provisions of Article 7 of the DTAA between India and Japan. It was also submitted that the LOs did not constitute PE because no business of the assessee was carried on through these PEs.

(f) It was argued that the fact the LO in India had substantial assets in India or incurred huge expenditure was not relevant. So, also the concession by the LO of assessee in India agreeing to be taxed at 30.25 per cent before the officer in TDS proceedings.

26. The CIT(A) after making a reference to the various articles of Indo-Japan DTAA posed the question whether the LO in India would constitute a PE. The CIT(A) noticed that apart from the income declared in respect of Raichur Project and MUL Project the assessee had shown income from liaison office for a long time. According to CIT(A) though the income so declared was pursuant to an agreement between the Department and the assessee, the fact remains that the assessee was carrying out business activity through the LO. The CIT(A) therefore held that the LO constituted a PE of the assessee in India. The CIT(A) also referred to the letter dt. 24th April, 1996 of DGM of New Delhi LO agreeing to TDS at 30.25 per cent which according to CIT(A) is an admission on the part of the assessee that it had a PE in India vis-a-vis the contracts with MUL. The CIT(A) also held that the decision in the case of IAC v. Mitsui & Co. Ltd. (1991) 39 ITD 59 (Del)(SB) wherein it was held that LO cannot constitute a PE, did not apply to the case of the assessee because facts in the assessee's case were different. Thereafter, the CIT(A) narrated the facts in the case of the assessee that the assessee was showing substantial income attributable to the LOs. According to CIT(A), the assessee was not only maintaining LOs in India but was carrying out trading, commercial or industrial activity and had also started executing purchase with Maruti Udyog Ltd., Karnataka Power Corpn. and with Tamil Nadu Electricity Board. That the assessee also obtained a no objection certificate from the RBI in 1992 itself for designing, engineering, supply and installation for YE2 car project for MUL. That the supervision fees were related to the YE2 car project and was in respect of the said project purchases orders. That the LOs were no longer collecting information or carrying on an activity of a preparatory or auxiliary nature but were also actively associated with the project. That the very fact that the LOs had communicated to MUL regarding the rate of deduction of tax in respect of the contracts also indicated the nature of their involvement with these projects. Keeping in view the above facts, the CIT(A) held that the decision of the Tribunal in the case of IAC v. Mitsui & Co. Ltd. (supra) can be distinguished and he held that in the case of the assessee the LOs in India were no longer only collecting information or carrying on activities of a preparatory or auxiliary nature, their presence was substantial. It was a case where the assessee incorporated in Japan, was not merely trading with India but was actually trading in this country (India). The CIT(A) thereafter referred to the decision in the case of CIT v. Visakhapatnam Port Trust , wherein His Lordship Justice Jannardhana Rao had observed, "the words 'PE' postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country". The CIT(A) held that activities of the LOs were in the nature of "PE". That there was a PE in respect of the MUL's paint shop and assembly shop.

27. With regard to the contention of the assessee that existence of a PE regarding the supervision fee in respect of the POs with MUL received has to be judged by considering each PO as a separate contract and that the time spent on each PO has to satisfy the test of six months as laid down in Article 5(4) of Indo-Japan DTAA, the CIT(A) held as follows: (a) That the assessee had a project office for execution of POs with MUL for the YE-2 Car Project.

(c) The six months test laid down in Article 5(4) of Indo-Japan DTAA cannot be circumvented by splitting the 10 POs. These contracts were to be considered as one though they were performed at several sites.

The activities in the ten contracts had to be performed without any interruption. These contracts related to execution of supervision of creation and installation of machines at paint shop and assembly shop which were part of one car project viz., YE2 Project of MUL.

(d) That the PE for MUL Project of the assessee in India had an effective connection with the rendering of technical services by the assessee.

28. With regard to the plea of the assessee that if there is a PE in a State/country for one activity then for all activities carried out in that State/country, that PE would be enough to say that there was a PE for all activities, being against the principle of "No Force of Attraction" which is advocated by the OECD Model and which has been adopted in the Indo-Japan DTAA, the CIT(A) held that the period spent on all activities of the assessee have to be aggregated because all contracts taken together form a coherent whole commercially and geographically, 29. For all the above reasons the CIT(A) upheld the order of AO for asst. yrs. 1994-95 and 1995-96.

30. In appeals for asst. yrs. 1992-93, 1993-94 and 1996-97, the CIT(A) had assigned identical reasons for upholding the order of the AO. He has also referred to several rulings by the AAR (Authority for Advance Rulings). Aggrieved by the orders of CIT(A), the assessee has preferred these appeals.

31. In the grounds of appeal the assessee has challenged the findings of the Revenue authorities that the assessee had a PE in India in respect of contracts executed for MUL. Apart from the original grounds the assessee has also raised the following additional ground which has already been admitted for adjudication.

Whether on the facts and in the circumstances of the case and in law, the supervision fees earned on account of the supply of equipment 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 simpliciter.

32. We have heard at length the submissions of the learned Counsel for the assessee and the special counsel for the Revenue. We shall first formulate the points for consideration in these appeals: (a) Whether the sum received by the assessee from MUL offered to tax by the assessee as supervision fee is not taxable in India because it forms part of the contract of supply of equipments to MUL and since the ownership of the equipments was transferred by sale at Japan and therefore no income arose or accrued in India.

The above point will arise for consideration only if the answer to the following point is in the affirmative.

(i) Whether the assessee having offered the supervision fee as income in the returns of income, and having not raised this issue before the authorities below can be permitted to raise this issue before the Tribunal for the first time? (b) Whether the claim of the assessee that supervision fee being of the same nature as that of income from supply of equipments the same should be charged to tax on the same basis as the income from supply of equipment is charged and brought to tax by the Revenue can be accepted? (c) Whether the supervision fee is taxable @ 20 per cent as per Article 12(2) or at 30.25 per cent as per Article 12(5) r/w Article 7(1) of the Indo-Japan DTAA to tax in India and at what rate of tax? The answer to the above question would depend on the answer to the following points: (ii) Whether the contract in respect of which supervision fee is paid is effectively connected to such PE within the meaning of Article 12(5) of the Indo-Japan DTAA? (d) If the answer to the above point (c) is in the affirmative then what is the quantum of supervision fee that can be taxed as attributable directly or indirectly to that PE? 33. We shall first take up for consideration issues (a) and (b) for consideration. As far as issue (a) regarding the very chargeability to tax of the receipts in the form of supervision fee on the ground that it forms part of the contract for supply of equipments and since the ownership of the equipments was transferred by sale to MUL outside the Indian territory i.e. at Japan, no income can be said to have accrued to the assessee, we have to, at the outset, point out that the said issue was not raised in the proceedings before the Revenue authorities.

Even before the Tribunal there is neither original ground of appeal nor any request for raising any additional ground to the above effect.

Nevertheless, the learned Counsel for the assessee sought to raise this new plea in the written submissions dt. 29th Aug., 2006. His submission was that notwithstanding the fact that the assessee declared supervision fee as part of its total income in the return of income, yet it was in law, entitled to take such plea because any income which is not taxable under the provisions of law, shall not become taxable merely because the assessee declared it as part of its taxable income in the return of income. The learned Counsel for the assessee in this regard placed reliance on the decision of the Hon'ble Supreme Court in the case of CIT v. V. MR.P. Firm , wherein it has been held that if a particular income is not taxable under the Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. He also relied on the decision of Hon'ble Calcutta High Court in the case of Ajit Kumar Ghosh v. CIT laying down a similar proposition. Further reliance was placed on the decision of the Hon'ble Delhi High Court in the case of CIT v. Bharat General Reinsurance Co. Ltd. , wherein the Hon'ble Delhi High Court had held that an assessee was entitled to take a stand that an item of income wrongly declared in an assessment year was in fact chargeable to tax in another assessment year.

34. His next submission was that even the AO in the order of assessment for the asst. yr. 1994-95 had clearly stated that supervision of installation of equipment was closely related to the supply of materials and equipments. According to him if the supervision of installation of equipment was part of the contract for supply of equipment, no income would accrue in India as the supervision fee would not be considered as fees for technical services under Section 9(1)(vii) of the Act. References to the following cases were made for the above proposition:CIT v. Neyveli Lignite Corporation Ltd. (1999) 152 CTR (Mad) 9 : (2000) 244 ITR 459 (Mad); 35. The learned Counsel for the assessee submitted that the contract for supply of equipment and supervision of the installation was of a composite nature and therefore the fee received for supervision of installation of equipments was not fees for technical services rendered. His further argument was that the supply of equipments took place FOB, Japan, and therefore title to the equipments passed on to MUL outside India and therefore no income either in respect of supply of equipments or for supervision fee accrued in India and could be brought to tax in India.

36. Alternatively, it was argued that since the supervision fee payable was part of the contract of supply of equipment, they can at best be taxed only in the manner in which the income from supply of equipments is taxed. We may at this juncture recall the historical background of this case whereby the dispute between the assessee and the Revenue regarding income from supply of equipment was taxed pursuant to a compromise formula worked out at the intervention of the Court in a pending litigation, whereby it was agreed vide letter dt. 19th March, 1980 of the ITO, that 1/3rd of the profits arising out of the imports from Japan to India will be offered to tax in India. The profits for this purpose were to be worked out on the basis of the turnover in India multiplied by the net profit rate of the world income. This arrangement is stated to be followed even today. The learned Counsel for assessee submitted that at best it could not be taxed more than the income arrived at by application of the above formula in respect of the supervision foe received by the assessee. The learned Counsel for assessee also submitted that at this stage the assessee does not want to take a stand that the income from supply of equipments cannot be taxed as the supply of equipments was completed outside India and therefore no income arose in India in respect of supply of equipments and the compromise formula would continue to apply to taxation of such income. This is the sum and substance of the argument of the learned Counsel for assessee on the issue raised in issues (a) and (b).

37. The learned Counsel for the Revenue on this issue has made the following submissions. That in the course of assessment proceedings for asst. yr. 1994-95 it came to the notice of the AO that supervision fee was received by the assessee and he confronted the assessee to show-cause why the same should not be added to the total income of the assessee. The assessee vide its letter dt. 5th Aug., 1996 unequivocally offered the said income to tax taking a stand that it was FTS (fees for technical services) and chargeable to tax. For asst. yr. 1995-96 the assessee filed a revised return of income offering FTS to tax. For asst. yr. 1996-97, even in the original ROI the FTS was offered as income chargeable to tax. In asst. yrs. 1992-93 and 1993-94 reassessment proceedings were initiated and in response thereto the assessee offered the FTS to tax. In the course of assessment proceedings the only issue raised by the assessee was whether FTS is chargeable to tax at 20 per cent as laid down in Article 12(2) or at 30 per cent in view of it being connected with a PE in India of the assessee as laid down in Article 12(5) of the DTAA between India and Japan.

38. The learned Counsel for Revenue further pointed out that even in the appeal by the assessee before the CIT(A) as well as before the Tribunal, in the grounds of appeal (original grounds before the Tribunal), the grievance raised by the assessee was as to whether FTS has to be taxed either at 20 per cent or 30 per cent. It was pointed out by the learned Counsel for Revenue that it was only on 23rd April, 2003 that the assessee for the first time, i.e. after 7 years, took a stand that FTS is part of consideration for equipment supply and therefore has to be taxed in the same manner in which the income from supply of equipments is taxed. According to him, permitting the assessee to do so will be allowing an assessee to change the very complexion of the case as originally brought before the Tribunal. That the assessee cannot approbate and reprobate. That the principle of promissory estoppel will apply and the assessee should not be allowed to go back on his stand at this belated stage of the proceedings. That the assessee is guilty of laches on its part. The counsel for the Revenue in this regard placed reliance on the following decisions:Jeevat Lal Pratapshri v. CIT Reference was also made to the provisions of Section 115 of the Evidence Act regarding the principle of estoppel. It was submitted that the assessee cannot blow hot and cold and should not be allowed to take up inconsistent position. Reference was made to the following decisions in this regard:Baijnath Brijmohan & Sons (P) Ltd v. CIT 39. The learned Counsel for the assessee (Revenue) also distinguished the ratio laid down in the cases relied upon by the learned Counsel for the assessee as one on the admitted facts of the respective cases and application of the law to such admitted facts and not a case where facts were not admitted. In this regard the learned Counsel for the Revenue submitted that as to whether the supervision services were part of the supply of equipments is essentially a question of fact and the existence of such fact cannot be assumed as contended by the learned Counsel for the assessee. As to whether supervision fee is part of equipment supply or an independent service de hors the supply of equipment cannot be decided without perusal of the various purchase orders under which equipments were supplied by the assessee to MUL. The tests laid down even in cases where the supply of equipment and installation supervision is under one contract is to see (a) as to whether the considerations for both are specified separately; (b) time schedule for performance of both whether separate; (c) payment terms whether have been mentioned separately; (d) damages for non-performance whether independent and to examine; (e) overall the intention of the parties. Reference in this regard was made by the learned Counsel for the assessee to the following decisions: The learned Counsel for the Revenue pointed out that the assessee has not even placed the entire material i.e. all the relevant purchase orders in its paper book, so as to even verify the claim of the assessee.

40. His further submission was that the Tribunal while admitting the additional ground of appeal only thought it fit to examine the issue raised therein subject to the availability of facts necessary for such examination being already available on record. The assessee having itself admitted that the supervision fee received is FTS, there was no occasion for the Revenue authorities to examine the fact whether supervision fee was part of the contract of supply of equipments. Thus, according to him the additional ground has to be dismissed on the ground that facts necessary for adjudication of the additional ground of appeal are not available on record and new facts cannot be raised before the Tribunal for the first time.

41. On the argument of the learned Counsel for the assessee that the AO in the assessment order has held that supervision fee is integral part of contract of supply of equipment, the learned Counsel for the Revenue pointed out that there is no such finding by the AO. He pointed out that the AO has only held that the project office and receipt of FTS were connected in the sense the project office was executing the supervision work in India. These observations were rendered in the context of the FTS being connected with PE so as to attract the provisions of Article 12(5) of the. DTAA with Japan, so as to tax the FTS at 30 per cent. It was therefore submitted by the learned Counsel for Revenue that the Revenue has never proceeded on the footing that supervision fee is an integral part of sale consideration for supply of equipments.

42. In reply, the learned Counsel for assessee submitted that while admitting the additional ground, the Tribunal has considered all aspects and therefore adjudication of the same on merits is necessary.

In this regard he relied on the decision of the Hon'ble Supreme Court in the case of CIT v. Mahalakshmi Textile Mills Ltd. , wherein it has been laid down that the Tribunal while deciding an appeal is not restricted to determination of questions which were raised before the Revenue authorities. He again laid emphasis on the findings of the AO that supervision fee is linked to the supply of equipments. Besides the above, submissions were made to the effect that factually supervision fee and contract for supply of equipment were one and the same transaction. These submissions will be dealt with later, if found necessary.

43. We have considered the rival submissions and perused relevant material on record. In the course of assessment proceedings for asst.

yr. 1994-95, the AO on examination of the assessee's application for remitting surplus profits outside India, noticed that the assessee has been deriving receipts by way of technical and supervision fee from MUL. The AO called upon the assessee to explain as to why the technical and supervision fee was not declared as income. The assessee vide its letters dt. 5th Aug., 1996 and 19th Aug., 1996 admitted that the sum in question was FTS and chargeable to tax and also expressed its no objection for the sum in question being brought to tax as FTS. The contents of this letter have already been set out in paras 10 and 11 of this order and are not being repeated. The assessee in a letter dt.

19th Aug., 1996 addressed to the AO however took a stand that the assessee executed about 10 orders for supply of equipments to MUL and all these 10 purchase orders were independent and did not complement each other. As per the terms of the supply of equipments, the installation of the equipment was to be carried out by MUL and the assessee was to depute supervisors to oversee testing and commissioning of the equipments because the assessee was familiar with the equipment supplied. According to the assessee under Article 12(2) of Indo-Japan DTAA only 20 per cent tax has to be levied on FTS because the assessee did not have a PE in India which was effectively connected with the contract in respect of which FTS was received by the assessee from MUL.

If such PE did exist then under Article 12(5) r/w Article 7(3) of Indo-Japan DTAA, FTS has to be brought to tax at 30 per cent of the gross receipts. The limited contention of the assessee was that since the 10 contracts were independent and did not complete each other, the existence of the PE has to be judged in the light of Article 5(4) of Indo-Japan DTAA wherein there was a requirement that supervisory activities shall be done for 180 days (more than 6 months) to consider existence of a PE in respect of supervisory services, and that the period of supervision in India should not be computed by aggregating the period in all the 10 contracts and has to be counted independently.

Even before the CIT(A), the very same arguments were reiterated.

44. It is for the first time the issue whether the supervision fee was part of the contract for supply of equipments or not has been raised in the form of additional grounds of appeal. By a letter dt. 24th April, 2003, the assessee sought to raise this issue in the form of additional grounds of appeal. There were no reasons assigned for raising this additional ground for the first time before the Tribunal. By submission dt. 6th May, 2003, the assessee has explained that if it is found that the assessee has a PE in India for supervisory services rendered to MUL in connection with supply of equipment, the same being inextricably linked to the supply of equipment, the same should be taxed in India like the supply of equipment i.e. the formula agreed between the assessee and the Department. The Tribunal passed an order dt. 15th July, 2005, admitting the additional ground for adjudication. In paras 11 and 12 of its order the Tribunal has given the following reasons for admitting additional grounds.

11. The judgment of the Hon'ble Calcutta High Court in the case of Indian Steel Wire Products Ltd. (supra) no doubt to some extent supports the stand taken by the learned Departmental Representative on behalf of the Revenue but the Hon'ble Supreme Court in the case of National Thermal Power Corporation v. CIT took the view that a question of law arising from the facts found by the tax authorities and having a bearing on the tax liability of the assessee was required to be adjudicated upon in case the same was pressed forth by means of an additional/new ground raised.

12. Respectfully following the aforesaid judgment of the Hon'ble Supreme Court, we admit the additional ground raised by the assessee and the same would be decided along with other grounds of appeal raised.

It is thus clear from the above order of the Tribunal that the issue raised in the additional ground has to be decided on the basis of facts already found by the tax authorities and having a bearing on the tax liability of the assessee.

45. The contention of the learned Counsel for the assessee has been that even according to the AO (in asst. yr. 1994-95), supervision of installation is closely related to the supply of materials and equipments. It is therefore necessary to examine whether this plea of the learned Counsel for assessee is correct. The assessee never put forth such a plea before the AO or CIT(A) and there was no occasion for the AO or CIT(A) to consider any such plea. The admitted plea of the assessee before the AO was that the sum in question was "fees for technical services" but was taxable at 20 per cent thereof under Article 12(2) of the DTAA and not at a higher percentage under Article 12(5) of DTAA as there was no PE of the assessee in India. In support of such contention, the assessee submitted that to constitute a supervisory PE under Article 5(4) of DTAA, the assessee should carry on supervision activities for more than 6 months. According to the assessee, each contract for supply of equipment was separate and therefore existence of supervisory PE has to be judged by considering each contract for supply of equipment separately and therefore even supervision period for each contract has to be determined separately without aggregating the supervisory period for all the contracts. It was in this context that the AO made the following observations: A perusal of the relevant purchase orders under which the assessee was to review the technical/supervision fee reveals two things--(i) the supervision of installation contract is closely related to the supply of material and equipments contracts in most of the cases.

Both these aspects form a single contract, (ii) most of these project purchase orders reveal that the supervision fee is determined on the basis of the number of man days involved in the supervision of installation and the total number of man days for which the assessee received the supervision fee in the relevant previous year is more than 180 days (though it is not necessary to examine this aspect, once the enterprise is found to have an office in India.) 46. Firstly, no conscious decision has been taken by the AO in this regard as can be seen from the underlined, italicised in print, portion of observations of the AO. Secondly, the observation that supervision of installation contract is closely related to the supply of material and equipments contract and that these aspects form a single contract does not mean that the supervision contract is part and parcel of the supply contract. The question whether supervision fee is integral part of the contract for supply of equipment has to be judged keeping in mind several aspects viz., (a) whether the considerations for supervision and equipment are mentioned separately or in one lump sum; (b) the time for rendering service and mode of payment for the service if indicated separately or together in the contract; (c) consequences for breach if mentioned separately; (d) above all, the intention of the parties as gathered from several circumstances. In other words, this is purely a question of fact and has to be tested in each case on the parameters mentioned above. In the present case, all the purchase orders were not available before the AO. In the light of assessee's own admission that the sum in question was "fees for technical services", there was no occasion for the AO to go into this question at all. If at this stage, we were to look into the purchase orders and to investigate as to whether the supervision fee was part of the contract for supply of equipments, then that might involve investigating several circumstances requiring even examination of parties. The transactions in question relate to asst. yr. 1994-95 and before. At this point of time viz., after 14 years this question cannot be investigated. In other words, the facts necessary for adjudication of the issue are not available on record. The matter could not also be remanded at this point of time. The delay or laches on the part of the assessee in this regard has to be viewed as a factor against the assessee. From the decision of the Hon'ble Supreme Court in the case of National Thermal Power Corporation v. CIT , the following principles emerge regarding the right of parties to raise a new plea for the first time before the Tribunal, viz., (a) it is the discretion of the Tribunal to admit or not to admit a new ground to be raised before it; (b) if the Tribunal is required to only consider a question of law arising from the facts which are on record in the assessment proceedings such question should be allowed to be raised; (c) that the proceedings before the tax authorities are for correctly assessing the tax liability of an assessee in accordance with law.

47. The learned Counsel for the assessee relies on the circumstance that the Tribunal has admitted the additional ground of appeal for adjudication and therefore the same must be adjudicated irrespective of facts being available on record. This submission, in our view, cannot be accepted. Merely because the Tribunal has admitted additional grounds, it does not mean that stand taken therein is accepted by the Tribunal. The acceptability of the same is a matter for determination by the Tribunal at the time of final hearing. The Hon'ble Delhi High Court in the case of Maruti Udyog v. ITAT (2001) 169 CTR (Del) 366 : (2001) 252 ITR 482 (Del) has taken the above view. The decisions relied upon by the learned Counsel for the Revenue, clearly support the stand of the Revenue on this issue. We are of the view that the sum received by the assessee from MUL and offered to tax by the assessee as supervision fee (fees for technical service) cannot be now said to be not taxable in India because it forms part of the contract of supply of equipments to MUL and since the ownership of the equipments was transferred by sale at Japan and therefore not in the nature of fees for technical services or that such income did not arise or accrue in India before the Tribunal for the first time. The assessee had offered the supervision fee as income in the form of fees for technical services, in the returns of income, and did not raise this issue before the authorities below. The assessee cannot be permitted to raise this issue before the Tribunal for the first time and thereby change the very basis of assessment. In the facts and circumstances of the present case, we are of the view that it would be proper not to exercise discretion in favour of the assessee by permitting them to raise this issue for the first time before the Tribunal. In view of our conclusions as above, the claim of the assessee that supervision fee being of the same nature as that of income from supply of equipments should be charged to tax on the same basis as the income from supply of equipment is charged, does not arise for consideration at all. We therefore hold against the assessee on issues (a) and (b).

48. The only other issue that remains for consideration is regarding the existence of PE of the assessee in India and whether the contract in respect of which supervision fee was received by the assessee was effectively connected with the PE in India. If the answer to the above question is in the affirmative what is the supervision fee that can be taxed as attributable to the PE and at what rate shall the tax be levied.

49. Before we proceed to discuss the above issue we may briefly narrate the scheme of taxation of non-resident assessees, such as the assessee in the present case, in the light of the Indo-Japan DTAA. Under Section 4 of the Act, the charge to tax is on the total income of every person.

Section 5 of the Act explains the scope of total income of every person. Section 5(2) lays down the scope of total income of every person who is a non-resident. Any income received or deemed to be received in India and any income which accrues or arises in India or is deemed to have accrued and arisen in India shall be included in his total income. Section 9 of the Act lays down as to when income shall be deemed to have accrued or arisen in India. Section 9(1)(vii)(b) lays down that income by way of fees for technical services payable by a person resident in India to a nonresident will be deemed to have accrued in India. Only exception in such case will be a case where the payment is for services utilized in a business carried on outside India or for the purpose of making of earning any income from a source outside India. The supervision fee earned by the assessee in the present case is from MUL (a person resident in India) and not falling within the exception. They are therefore within the charging section, viz., Section 4 of the Act. The charge to tax of an income of a non-resident in the manner aforesaid is generally referred to as "the source" rule.

50. Section 90 of the Act provides that Central Government may enter into an agreement with the Government of any country outside India for avoidance of double taxation of income under the Act and under the corresponding law in force in that country. Section 90(2) provides that where such agreement exists with any country outside India, then in relation to an assessee to whom such agreement applies, the provisions of the Act shall apply only to the extent they are more beneficial to that assessee.

51. India and Japan have entered into an agreement for avoidance of double taxation w.e.f. 29th Dec, 1989 and therefore the taxability of the fees for supervision received by the assessee who is non-resident in India, will have to be made in accordance with the same. We have already referred to the various clauses of the Indo-Japan DTAA and the same are not being reproduced here.

52. As to when a non-resident would be considered as having a PE in the other country is generally decided on the basis of the facts in each case, the criteria being the extent to which the non-resident has set a firm foot in the soil of the other country.

53. If a non-resident is considered as having a PE in the other country then whether the income attributable to the PE alone has to be taxed in the other country or any other income which accrues to the non-resident in the other country having no connection with the PE, can also be brought to tax in the other country, is again a matter of debate.

Available Model Conventions differ in this regard. Some provide for taxing profits/income only to the extent that they are attributable to the PE. Some provide for taxing income/profits from direct transactions effected by the non-resident, provided the transactions are of the same or similar kind as that effected through the PE. Some provide for taxing profits/income from all transactions whether they are attributable to PE or not or whether they are of the same kind of transactions carried on by the PE or not. The third category is referred to as "full force of attraction" principle. The second category is referred to as "limited force of attraction" principle. The first category is referred to as "No force of attraction" principle. As to which principle is applicable in a given case depends on the clauses of the convention between two countries. The OECD Model Convention generally adopts the "no force of attraction principle". The UN Model Conventions generally adopt the "limited force of attraction principle".

54. With the above broad principles in mind, let us now consider the facts of the present case and the rival contentions on behalf of the assessee and the Revenue.

55. At the outset, we may clarify that neither the AO nor the CIT(A) has examined the applicability of Article 12(5) of DTAA in proper perspective, in the light of the facts of the present case. Article 12(5) is being reproduced for the sake of clarity.

The provisions of paras 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 PE 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 PE or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply.

(1) The beneficial owner of the FTS being a resident of Japan should carry on business in India in which the FTS arises through a PE. (2) The contract in respect of which FTS is paid should be effectively connected with such PE.If the above two conditions are satisfied, then the provisions of Article 7 will apply and the FTS has to be brought to tax in accordance with Article 7 of DTAA as business profits. The AO and the CIT(A) proceeded on the basis: (a) That the LO in India was in fact acting as a PE of the assessee in India.

(b) That since the assessee had a PE in India in respect of its Raichur Project and Basin Bridge Project prior to 15th Sept., 1992 and from 15th Sept., 1992, it had a PE in India in respect of designing, engineering, supply and installation for YE2 car project of MUL, the supervision period in the 10 contracts had to be aggregated to find out if there was a PE for rendering supervisory services for more than 6 months in India. Another reasoning adopted by them was that since the contract for supervision was for one principal viz., MUL, in respect of the paint and assembly shop of MUL, the time spent on each contract has to be aggregated to see if it satisfied the test of existence PE. Thereafter, the Revenue authorities have held that the income from contracts for supervision arose directly or indirectly from the PE.The above approach of the Revenue authorities in our view was fallacious and contrary to the intents and purpose of Article 12(5) of the DTAA.56. We shall therefore examine the existence of the conditions for applicability of Article 12(5) of DTAA to the facts and circumstances of the present case. Admittedly, the assessee had a PE in India in respect of its Raichur Project (Karnataka State), Basin Bridge Project (at Chennai) during the previous year relevant to asst. yr. 1992-93.

From 16th Sept., 1992, the assessee got permission from RBI to have a PE in respect of designing, engineering and installation for YE2 project of MUL. Even as early as 1956, the assessee has been carrying on business of supply by way of import to buyers in India of equipments. According to the assessee, normally equipment sold on a principal-to-principal basis (FOB) (Free on Board) foreign port to an Indian buyer is not chargeable to tax under the Act. The claim of the Revenue is to the contrary. The assessee had filed a writ petition against the tax Department, sometime in late 1970, pursuant to which the tax Department had certain discussions with the assessee and a compromise was arrived at between the two parties vide the letter of the tax Department, dt. 19th March, 1980. The settlement provided that the assessee's LO in India would pay tax on the profits in respect of income determined in respect of all imports into India as per the following formula: One-third (33-1/3 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.

The assessee has been paying taxes on supply of equipments as per the agreed formula. In arriving at the settlement, neither the tax Department nor the assessee had raised the issue of existence of a PE.The PE concept was not very much in vogue in India at that time. The Indo-Japan DTAA came into force much later i.e. on 1st March, 1990 only. With effect from 15th Sept., 1992 i.e., after setting up of a PE in respect of supply of equipments etc., the position stood altered vis-a-vis the supply of equipments etc., to MUL for its YE2 car project.

57. The supervision fee in dispute in all these appeals relates to fees received for supervision of installation of equipments supplied to MUL some of which relate to YE2 car project. Can fee received under a contract for rendering supervisory services to MUL after 15th Sept., 1992 be considered as a contract which could be said to be a contract which is effectively connected with the PE? 59. Article 12(5) of the DTAA between India and Japan is on the lines of the OECD Model Convention. The above clause allows the State where PE is located to tax only those profits which are economically attributable to the PE. The income should arise as a result of activities of PE. The clause makes a distinction between those incomes which are the result of activities of PE and the income which arises by reason of direct dealings by the enterprise from the head office without the aid or assistance of the PE. The State where the PE is located can tax the income only, if a connection exists, between the income and the PE. Thus, Article 12(5) adopts "No Force of Attraction Principle". The reason behind this rule as stated by Klaus Vogel, third edition, Vol-I, at p. 410 is as follows : [Though the comments are on Article 7(1) of OECD Model Convention, the same would also apply in the context of Article 12(5) of DTAA].

This distribution of taxation according to the economic connection of the profits concerned is preferable to the principle of 'attraction force' because the former method proceeds from the enterprise's individual organizational structure and avoids restricting entrepreneurial freedom of disposition through fictitiously allocating profits by way of generalizing standards.

While OECD committee on fiscal affairs recognized that such extensive freedom of entrepreneurial disposition might also involve the risk of being abused, it thought that this risk should not be given undue weight and that much more importance should be attached to ensuring, both for tax purposes and otherwise, that international business contacts can be shaped according to commercial requirement.

Another principle that should be kept in mind is the material date for determination of accrual of income arising through the PE is the existence of the PE at the time when whatever decisively caused the profits to accrue, actually occurred.

60. The term "effectively connected" used in Article 12(5) of the DTAA is not to be construed as the opposite of "legally connected" but in the sense of something "really connected". The connection has to be seen not in the form but in real substance. The income producing activity should be closely connected in terms of relationship besides being connected economically also with the PE.61. In the light of the above broad principles, we may examine the various purchase orders. All the purchase orders are by MUL:SI. No. Date Particulars Value of Amount of Value of instill.

1. For supply, supervision, installation and commissioning of "on line A/C charging equipment." 2. Clause 3 of the agreement provides that income-tax on supervisory fee will be paid by the assessee and MUL will deduct tax at source on such fee.

4. Airfare for supervisor to oversee erection of machine to be provided by MUL.

6. Contract was entered into directly between the assessee at Japan and MUL.SI. No. Date Particulars Value of Amount of Value of instill.

1. Design, engineering, manufacture and supply of equipments and spares, supervision, installation, erection, commissioning and trial run for expansion and modification of present white body storage system in MUL weld shop.

2. Other features of the contract are the same as the first contract with the following variation: (a) Supplies to include Indian content also with a named Indian sub-contractor;SI. No. Date Particulars Value of Amount of Value of instill.

(a) Purchase order for supply, supervision for installation and commissioning of front and rear street loading lifter equipment;SI. No. Date Particulars Value of Amount of Value of instill.

(a) Supply, installation and commissioning and trial run of 8 station shattle, conveyor system in weld shop; (c) 90 mandays of supervision subject to maximum of 45 days. Time to be counted from the date of arrival of the supervisors at MUL site.SI. No. Date Particulars Value of Amount of Value of instill.

(a) Supply, supervision for installation and commissioning of one number side slip tester equipment;SI. No. Date Particulars Value of Amount of Value of instill.1.

1-7-93 MUL:PE:AS:NYE-2-T 13,07,78,500 7,70,00,000 - Line 3:613:97:1 (a) Design, engineering, manufacture, supply and supervision for installation and commissioning of Tester Line equipments;SI. No. Date Particulars Value of Amount of Value of instill.2.

12-1-95 MUL:PE:PSI:306: 6,06,42,000 - - MDC-161/140 Only design engineering, manufacture and supply of equipment for conveyor modification of Paint Shop-I. No supervisory services at all.SI. No. Date Particulars Value of Amount of Value of instill.3.

23-3-94 MUL:PE:AS:NY 3,37,500 11,15,000 - E2IMP-SHIFT:609: (a) For shifting and reinstallation of online A/C gas charging equipment. Connected with YE2 Expansion Project.SI. No. Date Particulars Value of Amount of Value of instill.4.

28-3-95 MUL:Engg.TA/MEL- - 42,00,000 - Overhauling/POSI. No. Date Particulars Value of Amount of Value of instill.

(a) Supply of timer contractor units and welding parameters measuring equipments for the new weld shop against global tender;SI. No. Date Particulars Value of Amount of Value of instill.SI. No. Date Particulars Value of Amount of Value of instill.3.

11-2-92 MULG/Engg/TAD/CH 36,96,79,200 2,13,29,200 - ADY No./PO-1SI. No. Date Particulars Value of Amount of Value of instill.4.

29-6-92 MUL:PE:AS/YE2(EA)/ 7,08,16,095 78,75,000 - 485/394 (a) Firing testing equipment for assembly shop expansion connected with YE2 Project.

(c) 2 supervisors to be completed within 75 days from the date of arrival.SI. No. Date Particulars Value of Amount of Value of instill.5.

11-6-92 MUL:PE/AS/YE2(EA)/ 17,29,95,500 1,57,50,000 - 485/372 (a) Engine assembly and testing equipment for assembly shop expansion project for start up of YE2 production 150 mandays is the time allowed to complete supervision.SI. No. Date Particulars Value of Amount of Value of instill.6.

11-6-92 MUL/Engg./TAD/EM 5,39,05,000 1,65,00,000 - AC/PO-1SI. No. Date Particulars Value of Amount of Value of instill.

(a) It is a maintenance agreement. It refers to several old supply and erection of machineries made by the assessee.SI. No. Date Particulars Value of Amount of Value of instill.8.

13-6-92 MUL:PE:AS:YE2 9,83,99,600 9,87,000 9,47,000 (a) Supply erection of assembly conveyor line No. 4, painted body storage conveyor, Headlight tester modification and online gas charging equipment.SI. No. Date Particulars Value of Amount of Value of instill.9.

19-5-92 MUL:PE:PN/267/313 8,62,75,000 1,58,60,000 11,50,000 (a) Design, engineering, supply, installation of modification in paint shop.SI. No. Date Particulars Value of Amount of Value of instill.

(1) Supply and supervision of installation and commissioning of 6 sets of Hemming Press and 6 sets of Hemming dies for YE2 model.SI. No. Date Particulars Value of Amount of Value of instill.

(1) Supply and supervision of installation and commissioning of 6 sets of Hemming Press and 6 sets of Hemming dies for YE2 model.SI. No. Date Particulars Value of Amount of Value of instill.3.

25-6-93 MUL:PE/A9YE2(EA)/4 20,77,800 19,82,000 - 85/957SI. No. Date Particulars Value of Amount of Value of instill.4.

30-3-93 MUL:PE/A9/YE2 17,69,73,700 2,32,48,333 - (EA)/485/812 (a) Purchase order for design, engineering, manufacture, supply and supervision for installation and commissioning of engine assembly and testing equipment for assembly shop expansion project.SI. No. Date Particulars Value of Amount of Value of instill.

(a) Amendment to earlier purchase order for overhauling of mass emission measuring equipment.SI. No. Date Particulars Value of Amount of Value of instill.6.

7-3-94 MUL/PE/PN/175/1/ 33,64,000 16,90,000 - OD-1 (a) Purchase order for modification of ovens to use LPG as duel fuel system in existing paint shop.SI. No. Date Particulars Value of Amount of Value of instill.7.

31-1-92 MUL/PE/AS/YE2(EA)/ 1729,95,500 33,00,000 - 485/544 (a) Amendment to purchase order for engine assembly and testing equipment for assembly shop expansion project.SI. No. Date Particulars Value of Amount of Value of instill.

(a) Purchase order for crankshaft machining line with tolling and spare parts for expansion project.SI. No. Date Particulars Value of Amount of Value of instill.

(c) 478 mandays (which will be less than normal 180 days as mentioned in DTAA)SI. No. Date Particulars Value of Amount of Value of instill.

(a) Purchase order for craskshaft machining line with toding and spare parts for expansion project.SI. No. Date Particulars Value of Amount of Value of instill.

(a) Purchase order for cylinder head machining line with tollings and spare parts for expansion project.SI. No. Date Particulars Value of Amount of Value of instill.12 24-3-93 MjUL/PE/PN/75/46 88,49,000 39,00,000 2,10,000 (a) Supply, installation, assembly conveyor line No. 4 printed body storage conveyor, headlight tester equipment. On line A/c gas charging equipment.SI. No. Date Particulars Value of Amount of Value of instill.13.

13-6-92 MUL/PE/AS/YE2 2,22,98,400 12,00,000 - (EA)/MOD/547/369SI. No. Date Particulars Value of Amount of Value of instill.14.

16-3-93 MUL/PE/201/IND/42 - 6,71,60,000 2,06,20,000 (a) Purchase order for conveyor for paint shop expansion project and white body storage.SI. No. Date Particulars Value of Amount of Value of instill.15.

16-3-93 MUL/PE/PN/201/ - 20,70,68,000 16,02,68,238 Nature of Contract and Mandays (Not available)SI. No. Date Particulars Value of Amount of Value of instill.16.

1-7-93 MUL/PE/AS/NYE2/L1 13,07,78,500 77,00,000 - NE3/613/971 Nature of Contract and Mandays : (Not available)SI. No. Date Particulars Value of Amount of Value of instill.17.

17-5-93 MUL/PE/AS/NYE2-C - 3,07,20,000 1,54,63,800 (a) Purchase for supply, supervision and installation of assembly line No. 5 and add on system. Printed body storage conveyor.SI. No. Date Particulars Value of Amount of Value of instill.18.

26-11-93 MUL/PE/PN/201/ - 93,22,500 17,46,000 (a) Purchase order for automatic painting machine for prime coat booth of new paint shop.SI. No. Date Particulars Value of Amount of Value of instill.19.

11-3-94 MUL/PE/AS/MP-1 - 93,22,500 17,46,00020 23-3-94 MUL/PE/AS/NYE2/IM - 3,37,500 11,15,00021 16-9-94 MUL/PE/WDE/213/06 - 1,74,00,000 9,81,00022.

16-9-94 MUL/PE/36/MOD-100 - 60,00,000 5,00,00025.

- MUL/PR/AS/NYE-2 - 9,90,000 - /EGA/482/977 Nature of contract and man days not available in the paper book filed by the assessee for contracts SI. Nos. 19 to 25.

62. Perusal of the various purchase orders shows that a common feature in all of the purchase orders is the fact that supervisors were to come from Japan and MUL bears the cost of their air ticket and provides for their boarding and lodging in India. The period of supervision in the case of individual contracts did not exceed a period of 180 days and they did not constitute a supervisory PE in terms of Article 5(4) of the DTAA. The learned Departmental Representative's reliance in this regard was on the fact that there were technicians on the payrolls of the PE in India established for contracts with MUL for the year ending 31st March, 1994 and this fact by itself would go to show that the PE in India and the contract for rendering technical services were "effectively connected." We do not think that this aspect alone would be conclusive in such matters. The fact of the matter is that the PE did the job of installation also in a few contracts and the income therefrom had been offered to tax by the assessee separately. What is in dispute is only the FTS. As far as FTS received by the assessee for rendering supervisory services is concerned the material on record suggests that there was no effective connection between the PE and the rendering of technical services. The contracts for the various supply, installation and supervision were entered into between the head office and MUL. The involvement of the PE in the actual rendering of supervisory services does not emanate from the material on record. In this regard no presumption can be drawn regarding such involvement of the PE.63. It has been argued on behalf of the Revenue that in some of the purchase orders there was a necessity for the assessee to purchase certain equipments indigenously and this could not be done without the involvement of the PE in India. On this argument we are of the view that contracts for supply and installation were different from the contract for rendering supervisory services. The terms of the various contracts, which we have already set out above would clearly show that supervision services were treated distinctly. Moreover, the assessee has been offering income from supply of equipment and installation on agreed formula as per settlement with the Revenue and after the MUL project office became functional has been offering income attributable to project office.

64. The Revenue authorities, as already observed, have not considered as to whether there was effective connection between the contract in respect of which supervision fee is received and the PE in India, contemplated by Article 12(5) of the DTAA. The Revenue authorities have presumed existence of such effective connection. The Revenue authorities have not examined the various purchase orders. They have proceeded on the basis that supervision fee is closely related to the supply of material and equipment contract and that they spring from the same contract. They have proceeded on the basis that once a PE is found to be in existence in India then all incomes of the assessee from MUL have to be brought to tax. They have proceeded as if the force of attraction principle applies without appreciating the conditions contemplated in Article 12(5) of the DTAA.65. The CIT(A) proceeded on the basis that LO was in fact a PE in India of the assessee and that in any event for MUL YE2 project there was a PE in existence in India and therefore supervision fee is also attributable to the PE in India and taxable as such. In coming to the above conclusion the CIT(A) held that the time spent on the various contracts by the assessee in India for MUL has to be aggregated and if done so they would exceed a period of 180 days. Therefore, there was in India supervisory PE and therefore supervision fee received is connected to such PE and hence taxable at a higher rate. The question of aggregation of the time frame of various contracts will be dealt with separately. Here again, the CIT(A) has not considered the aspect of "effectively connected" with the PE in India.

66. As already stated, perusal of the various purchase orders shows that supervisors were to come from Japan and MUL was to bear the charges of airfare and stay in India. The contract for supervision was a severable contract and had to be viewed separately. There is no evidence on record to show that the contract in respect of which FTS is received was effectively connected with a PE in India. Article 12(5) of the DTAA did not apply and therefore Article 12(2) would alone apply.

The assessee has rightly offered its income in the form of supervision fee to tax under Article 12(2) of the DTAA. However, we notice that in asst. yr. 1995-96, details of contract Nos. 19 to 25 are not available.

The question of taxability of the sum received as FTS for these contracts will be decided by the AO on the lines indicated in this order. The assessee will produce copy of these contracts before the AO.If the AO finds FTS in respect of these contracts taxable then the assessee will be entitled to advance arguments regarding attribution and allow ability of expenses. The AO will consider the same and decide the same in accordance with law.

67. Now, coming to the case of the Revenue that there was in existence a PE of the assessee in India in respect of supply of equipment for the following reasons: (a) That the LO in India was in fact performing functions all that a PE would do; (b) That the supervision period of all contracts has to be aggregated and if done so the period of 6 months or 180 days as a condition for construing existence of a PE vis-a-vis supervisory services rendered would be satisfied and in that case the supervision fee would stand connected with the PE attracting the provisions of Article 12(5) of the DTAA.68. The arguments of the learned Counsel for assessee on the above conclusion of the Revenue authorities were as follows. That in respect of supervisory services rendered the existence of PE in India had to be judged in the light of the provisions of Article 5(4) of the DTAA. The supervisory activities if carried on for more than 6 months in India would constitute PE of the assessee in India. The learned Counsel for the assessee submitted that the Revenue authorities erroneously proceeded on the premise that the period of 6 months had to be counted with reference to the enterprise. According to him since the contracts under which the supervisory activities were to be carried out were separate the period of 6 months had to be reckoned with reference to each contract and ought not to be aggregated. In this regard he highlighted the fact that each contract was for a portion of the total project of MUL and had been awarded to the assessee separately and independently pursuant to global tenders. He submitted that commonality of the principal cannot be the basis to conclude that the period of supervision under different contracts had to be aggregated. He took strong exception to the belief entertained by the Revenue authorities that the contracts for supervision had been deliberately split up and divided into smaller contracts just to circumvent the period of 6 months mentioned in Article 5(4) of DTAA. Reliance was placed on the decision of the Delhi Bench of Tribunal in the case of Dy. CIT v.Alcatel (supra) wherein it has been held that allegation of tax planning device where contract is by the Government of India cannot be accepted. In this regard, he pointed out that the whole project of MUL had not been awarded to the assessee and there were several persons other than the assessee who were awarded different contracts on the basis of tenders floated independently. He also highlighted the fact that even the equipments supplied under each contract, were different and did not complement each other. The fact that the equipments supplied by the assessee were installed by local contractors and that the assessee merely supervised such installation, according to him, would go to show that each of the contracts for supply and contracts for supervision was independent and the period of supervision under each contract should not (sic) be segregated to see if the test laid down in Article 5(4) was satisfied.

69. The learned Counsel for the assessee further highlighted the fact that Article 5(4) of the DTAA used the expression "No. of days" whereas tax treatise with other countries uses the expression "No. of mandays".

The difference in the language of the DTAA between India and Japan, according to him, is a clear indication of the intention not to aggregate period of supervision under various contracts to see if there was a PE under Article 5(4) of the DTAA.70. On the question whether LO could be considered as PE of the assessee in India, he submitted that the LO continued to perform functions like collecting information for the foreign enterprise and to carry on through LO functions which were auxiliary and preparatory in nature. According to him the fact that the LO consented to deduction of tax at source of 30.25 per cent in respect of supervision fee received from MUL will not change the character of the company. Strong reliance was placed by him on the decisions of the Special Bench Delhi Tribunal in the case of Mitsui & Co. (supra) and in the case of Motorola & Co.

v. Dy. CIT (2005) 96 TTJ (Del)(SB) 1 : (2005) 95 ITD 269 (Del)(SB) wherein it has been held that as per RBI guidelines/regulations LOs are not permitted to undertake any business activities for the foreign enterprise and that such activities are closely monitored by the RBI.71. In this regard, the learned Counsel for the assessee submitted that the LO has been submitting activity report with RBI which has been accepted by the RBI without any adverse findings. He also submitted that the LO has been offering income on sale of equipments to tax on the basis of agreed formula and therefore there was not a PE in India.

He also submitted that other reasons assigned by the AO for construing the LO as a PE cannot be sustained in law.

72. The learned Counsel for the Revenue submitted as follows. That right from asst. yr. 1967-68 income from LO is being shown in the returns filed by the assessee and the same has been brought to tax by the Revenue. From asst. yrs. 1994-95 and 1995-96 the assessee had shown income from PE in India that the LO has fixed place of business at third floor, Antariksh Bhavan, K.G. Marg, New Delhi. The LO satisfies the requirements of Article 5(1) of the DTAA viz., it had durability, continuity and infrastructure framework for its activities. It was a LO which executed various purchase orders for MUL connected with the YE2 car project. Thus, the LO's activity expanded in range and volume and included import of various equipments from Japan as well as purchase of indigenous equipment in India and also supervision of installation and commissioning thereof. According to him the following facts clearly establish that the project office carried out the terms of various purchase orders: (a) The equipment sold by the assessee to MUL included imported equipment and spare parts.

(b) The purchase orders were in relation to the assembling, paint and belt shop of MUL and connected with the YE2 car project for which RBI had granted permission to the assessee to have a project office in India.

(c) In some contracts the supplier had to carry out installation, erection as well as supervision.

(d) The purchase orders themselves indicate that the LO in India played an important role in negotiating, finalizing and formation of the contracts.

It was also contended that the version of the assessee that the purchase orders were directly executed by the head office without the intervention of the PO or LO cannot be believed. In this connection our attention was drawn to the various purchase orders to highlight the involvement of the LO in procuring various purchase orders.

73. It was also argued that after the grant of permission of RBI for setting up of a project office or PE in respect of YE2 car project and in the light of the fact that all purchase orders were in relation to the YE2 car project, it cannot be argued on behalf of the assessee that each purchase order is separate and independent. According to him the circumstances in the present case viz., use of local materials, and employment of local contractors clearly indicate the involvement of project office at every stage of execution of the purchase orders. It was argued by him that the assessee has a PE in India under Article 5(1) and 5(2). Once if it is accepted there had been a PE in India there is no need to go to Article 5(4). In support of the above contention the learned Counsel also relied on the observations by Klaus Vogel in the book on Double Tax Conventions. It was also argued that all the purchase orders taken together, geographically, commercially and technically formed a coherent whole and therefore the period under each contract had to be aggregated to see if there was a PE in existence under Article 5(4) of the DTAA.74. The learned Counsel for the assessee submitted that the LO merely acted as a communication channel between Indian importers and the appellant company, who sell their goods and commodities on a principal-to-principal basis to such Indian importers. That the LO had been regularly filing its activity report with the RBI and has always been in compliance with the aforesaid conditions imposed by the RBI and activity reports were being submitted by the LO to RBI regularly with a certificate that the activities of the LO are confined only to the terms and conditions of approval of RBI. That the LO was engaged only in liaison activities and the PO after it was established for YE2 car project did carry out some installation and commissioning of a few purchase orders. As far as supervisory services were concerned, neither the PO nor the LO had anything to do with the execution of purchase orders for supply of imported equipments from Japan. In this regard, the learned Counsel for the assessee also highlighted the fact that there was no such case made out by the Revenue and that the learned special counsel for the Revenue is putting forth such contention for the first time before the Tribunal and without any material on record to substantiate such an allegation. With regard to the contention that LO constituted PO of the assessee, the learned Counsel besides pointing out legal hurdles in doing so in the permission granted by the RBI, also highlighted the fact that the RBI in the event of such violation would have proceeded against the assessee under the provisions of FERA.He submitted that there were no such proceedings against the assessee.

He reiterated that each contract was separate and did not together form an integral whole contract. It was also argued by him that YE2 project of MUL was a large project with involvement of several vendors and the assessee supported only a few portion of the MUL project along with several other vendors. It was also contended by him that the rule that once there is a PE under Article 5(1) or (2) of DTAA then there is no necessity to look into Article 5(4) of the DTAA will hold good only if the PE is in respect of the one and the same activity. In this regard our attention was drawn to the decision of the Mumbai Bench of the Tribunal in the case of Micoperi SPA Milano v. Dy. CIT (2003) 79 TTJ (Mumbai) 681 : (2002) 82 ITD 369 (Mumbai). It was again reiterated that in respect of supervisory services rendered, the assessee neither had a PE in terms of Article 5(1) or 5(2) or in terms of Article 5(4) of the DTAA.75. We have considered the rival submissions. We shall first deal with the question whether LO was in fact PE of the assessee in India. It may at the outset be clarified that the Revenue has never made out any case that LO that existed in India for supply of equipments was in fact satisfying all the conditions of a PE. We have already noticed that the question of existence of PE vis-a-vis supply of equipment was never finally determined by the Revenue either before or after the DTAA. The basis of taxation, as far as income from supply of equipments, has been the agreed formula. It is only in the year 1992 that a PE in respect of supply of equipments limited to YE2 project of Maruti Udyog had been set up in India. Prior to this there was never a case made out by the Revenue that the LO constituted PE of the assessee in India. This question in our view is now purely academic in view of the conclusion that contract for which supervision fee is received by the assessee is not effectively connected with any PE. Nevertheless, we deem it proper to render a decision on this submission on behalf of the Revenue.

76. On this issue we have already referred to Article 5 of the DTAA defining "PE". The argument of the learned Departmental Representative has been that the LO was in existence for a long time i.e. since 1967-68. It has a fixed place of business viz., 3rd floor, Antriksh Bhawan, K.G. Marg, Delhi. It has also been filing return of income owning properties etc. and therefore it has all the attributes of a PE under Article 5(1) of the DTAA, viz., durability, continuity and infrastructure framework for its activities. The LO continues to procure contracts to the head office. Even prior to establishing PE for MUL contracts, LO procured purchase orders from MUL. In this regard, we are of the view that none of the reasons assigned by the AO to consider the LO as a PE is valid. So long as the LO performs functions which are preparatory and auxiliary in nature, there can be no allegation that they constitute a PE. The fact that the LO owned assets and incurred huge expenses can never be a ground to conclude that they constitute PE. The prohibition on the part of the LO to carry on activities generally done by a PE in the permission granted by RBI cannot be lost sight of. There has been no proceeding against the assessee by RBI in this regard. The fact that LO gave consent to deduct tax at a higher rate in respect of payments made by MUL to the head office is again no ground to hold that the LO was in fact a PE of the assessee in India.

The principle to be applied in such cases has been laid down in the case of Mitsui &Co. (supra) followed by Special Bench of Delhi Tribunal in the case of Motorola & Co. v. Dy. CIT (supra). In the case of Mitsui & Co. (supra) the following principle has been laid down: One is not to be led away by the enormity of the expenditure incurred in running an office in India. That would depend upon the level of the country to which the office belongs. One has to judge the expenditure incurred from that angle and not from our angle. It was not the case of the Revenue that the expenditure incurred was so camouflaged as to cover the expenditure incurred in a trading activity to show it as expenditure incurred on liaison activity. Nor was it the case of the Revenue that the work carried on by the assessee in India which, according, to them amounted to trading activity produced income in India or anywhere else. This expenditure incurred in India was met out of the remittances received by the Indian branches again through the RBI. There was no evidence brought on record at any stage that the Indian branches had exceeded the limits prescribed for it by the RBI. As long as the Indian officers were conducting the operations within the restricted area and so long as those activities were not considered by the RBI, which was the concerned authority, as amounting to anything other than carrying on of liaison work, no inference adverse to the assessee should be drawn or was possible to draw. The activities of the branches of the assessee in India were within the ambit of Sub-clause (iiia) of Clause (i) of Sub-article (I) of Article IV of the DTAA between India and Japan.

We therefore do not agree with the submissions of the learned Counsel for the Revenue in this regard. We would hold that LO was not the PE of the assessee in India except to the extent activities were enlarged in this regard with reference to contract with MUL, contracts with T.N.E.B., Basin Bridge, Chennai, Kamataka Power Corporation, Raichur Power Plant, Raichur. These contracts were entered into after due sanction of RBI for establishing a PE.77. The next argument for consideration would be whether there was a supervision PE of assessee in India in terms of Article 5(4) of the DTAA. We have already narrated the scope of work under each of the purchase orders. These purchase orders were procured by the assessee through its head office pursuant to competitive bidding on global tender floated by MUL. The terms and conditions under each purchase order were different in the sense and not linked with the other purchase orders. The performance guarantee to be given by the assessee was different for different work. The works of installation and supervision were to be done independently. One purchase order was not dependent on the completion of the work of installation of some other purchase orders. The nature of the equipments supplied was to be used in different stages of production and at different sections of car manufacturing. Equipment supplied under one purchase order did not complement the equipment supplied in another purchase order. The technicians were deputed to work from Japan. The assessee did not co-ordinate the work of the various purchase orders and each was done according to the terms of the purchase order, each one of which was independent by itself. Even MUL floated separate tenders for each of the purchase orders and the assessee was not the only bidder and there were other enterprises which were awarded purchase orders.

78. The period of supervision under each contract was less than the period of 180 days as contemplated by Article 5(4) of the DTAA. The period spent on supervision on each contract if aggregated, the period would be more than 180 days. The question is whether the period spent on different contracts have to be aggregated or not? 79. Article 5(4) replaces the permanence element for existence of a PE by the test of a minimum length of time. In a case where there are several sites where supervision is going on in a country, the rule is that the test of minimum period should be determined for each individual site or installation project. Klaus Vogel in his commentary on Double Tax Conventions Vol.1 3rd edition p. 308 has the following to say on this aspect: The question whether there is a 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. In this connection, the place where the individual activity is performed may very well be relocated, for instance, where a road is being constructed in stages. If, in contrast, all building sites maintained in one State were treated as one single PE, this would in effect be tantamount to applying the force of attraction principle. Moreover, this would violate the principle that various business activities performed by one and the same enterprise, none of which individually constitutes a PE, cannot lead to a PE if combined.

80. The above rule is however subject to exceptions viz., where each building site or installation site forms a coherent whole in the other country and is operated at one place and the same ordering party. The thrust of the argument of the learned Counsel for the Revenue has been on this exception to the rule. We are of the view that the case of the assessee does not fall within the exception to the rule. We have already highlighted the fact that each purchase order was independent and did not complement each other. The MUL YE2 project would not stand concluded with execution of these purchase orders. The assessee was not the only person rendering supervisory services. The sites were located at different places viz., assembly floor, paint shop or weld shop. It cannot be said all contracts put together formed a coherent whole, commercially or geographically. Even purchase orders relate to different areas of manufacture of a car. How they are commercially a coherent whole is not spelt out in the order of the AO. Such finding cannot be given without any basis. As already stated, perusal of purchase orders clearly indicates that the various contracts were independent and were not capable of bringing in a coherent whole commercially. Mere commonality of the principal cannot be sufficient in this regard. We therefore hold that there existed no PE within the meaning of Article 5(4) of the DTAA.81. The incomes in question for all these years were therefore to be brought to tax under Article 12(2) of the DTAA. The assessee has offered to tax the income in question in accordance with Article 12(2) of the DTAA and the same is directed to be accepted.

82. The next issue for consideration is the charging of interest under Sections 234B and 234C. This issue will not arise for consideration at all, in view of our conclusions on the other issues and there may not be any liability on the part of the assessee to pay interest under Sections 234B or 234C of the Act. Nevertheless, we proceed to decide this issue also, as the same is an issue which has already been decided by the Special Bench of the Tribunal in the case of Motorola Inc.

(supra). The provisions of Sections 234B and 234C are attracted only when the advance tax is not paid by an assessee despite there being an obligation to pay advance tax. Under Section 209(1)(d) of the Act, income-tax liability has to be computed on the current income of an assessee. From such tax liability, the tax deductible at source will have to be reduced to arrive at the advance tax liability. The income in question is fees for technical services payable by MUL to the assessee. Under Section 195 there is an obligation on the part of MUL to deduct tax at source. According to the assessee, the expression "tax deductible at source" used in Section 195 of the Act, actually refers to the "tax deductible at source" though not actually deducted.

According to the assessee, the assessee being a non-resident can presume that tax which is deductible at source will be deducted and such tax so deductible can be taken as deducted, when the assessee computes its liability to pay interest under Sections 234B and 234C of the Act. If MUL fails to deduct tax at source in terms of Section 195, the assessee should not be burdened with liability in this regard for such interest. According to the learned Counsel for the Revenue, the expression "tax deductible at source" used in Section 195 of the Act refers to the "tax actually deducted" and not tax which is deductible but not deducted. In our opinion this issue had already been decided by the Special Bench in the case of Motorola Inc. (supra) after taking into consideration the submission made by the learned special counsel for the Revenue. The Special Bench of the Tribunal in the case of Motorola Inc. (supra) has held that the assessee is entitled to take into account the tax which is deductible by the payer, though not actually deducted. It has been held that having regard to the provisions of Sections 201(1) and 201(1A) of the Act, assessee cannot be held as having committed any default in paying the advance tax and consequently there was no liability to pay interest under Section 234B of the Act. Similar view has also been approved by the Hon'ble Uttranchal High Court in the case of CIT v. Sedco Forex International Drilling Co. Ltd. (2004) 186 CTR 144 (Uttranchal). In view of the above, we are of the view that there was no liability on the part of the assessee to pay interest under Section 234B or Section 234C of the Act. The issue is decided in favour of the assessee.

83. ITA No. 5884/Del/1998 : This is an appeal by the assessee against order of CIT(A)-XIV, New Delhi, relating to asst. yr. 1995-96 and arises out of order dt. 31st Aug., 1998 passed on an application under Section 154 of the Act, filed by the assessee before AC) against the action of the AO in charging interest under Section 234B of the Act on the ground that since the FTS was tax deductible at source, there was no obligation on the part of the assessee to consider the said income while calculating its liability to pay advance tax. This was rejected by the AO and confirmed by the CIT(A) which has given rise to the present appeal by the assessee before the Tribunal. In view of our conclusion on this issue in the regular appeal by the assessee, we are of the view that this appeal has become infructuous and the same is therefore dismissed.

84. In the result, the appeals ITA No. 3943 to 3945/Del/1998 and ITA No. 5882 & 5883/Del/1998 are partly allowed. ITA No. 5884/Del/1998 is dismissed as infructuous.