ORDER
A. KALYANASUNDHARAM, A.M. :
Consequent to the assessee moving a miscellaneous application, the Tribunal, vide order dt. 18th May, 1995 in MA No. 70/Bom/1995 had recalled its order to the extent of the consideration of the issue that has been raised as ground Nos. 3.1, 3.2, 3.3 and 3.4. Accordingly the present hearing has taken place by the hearing the representative of the assessee, Mr. F. B. Andhyarujina and Mr. R. L. Rinawma, the Departmental Representative. For the sake of facility, grounds raised as 3.1 to 3.4 are reproduced below :
“3.1 The CIT(A) erred in holding that the assessee had a permanent establishment as defined in the Agreement for Avoidance of Double Taxation (AADT) between India and West Germany, in India.
3.2 The CIT(A) erred in holding that the installation project site of the Indian customer is to be held as the permanent establishment of the non-resident assessee, as per art. II(1)(h)(cc) of the AADT with West Germany.
3.3 The CIT(A) failed to appreciate that :
1. the assessee was merely rendering supervisory services and had no permanent establishment in India as alleged by the AO.
2. the supervisory services were rendered at GNFCs site.
3. the assessee merely sent experts from Germany to supervise erection of the plant being carried on by GNFC.
4. the definition in art. II(1)(h)(cc) of the AADT contemplates that the site should be that of the assessee and not of the customer.
2.4 In the circumstances, the Honble Tribunal be pleased to reverse the order of the CIT(A) on this issue and hold that the assessee has no permanent establishment in India.”
The order of the AO on this point is reproduced below :
“(c) As per the AADT, the assessee-company has permanent establishment in terms of cl. 1(h)(cc) of art. II. Consequently as per cl. 1 of art. III, the assessees profits are to be taxed in India as are attributable to the permanent establishment. Since the training imparted by the assessee-company to the personnel of GNFC come under the aegis of the contract signed by it with GNFC, the amount received for the same is to be taxable in India.”
The observations of the CIT(A) on this point as contained in paras 4 onwards, being relevant to the issue, are reproduced below :
“4. Next ground of appeal is that the Dy. CIT, in para 4(c) of his order, erred in holding that the appellants had permanent establishment in India.
4.2 The AO has observed that as per the AADT [cl. 1(h)(cc) of art. II], the assessed profits are to be taxed in India on the basis of their attribution to permanent establishment. Since the training imparted by the assessee-company to the personnel of GNFC, came under the contract signed by the appellants with GNFC, all amounts received for the same are taxable in India.
4.3 The authorised representative on the other hand, submitted that the appellants were merely offering consultancy services. They had no permanent establishment in India as alleged by the AO. The consultancy work was at the clients site. The appellants merely sent experts from their headquarters outside India and offered assistance by way of expertise. He pointed out that the definition in art. II(1)(h)(cc) did not include income by way of consultancy/technical services. Whenever in tax treaties, the Government intended a specific activity to be covered as amounting to PE, it was specifically included in the definition, for instance, the DTAA with Bangladesh and Australia, Brazil, Belgium, Canada, Finland, Hungary and Great Britain. The absence of specific word in the definition is an indication that PE was not intended to cover supervisory services/consultancy/technical services in the treaty between Government of India and Germany.
4.4 I have considered the above submission. As per Art. II(1)(h)(cc), a permanent establishment can be a building site or construction or installation project if it lasts for more than 6 months. It is not clear from these words whether the installation project referred to in the above article is that of the non-resident or the project undertaken by Indian Collaborator. As per the authorised representative, it is the installation by the non-resident that will constitute his permanent establishment. However, I am of the opinion that the words installation project used in the above article must refer to the project undertaken by Indian collaborator for which the non-residents assistance/expertise is sought. Had it been otherwise, then the appellants would not have been treated as a non-resident at all. The appellants association in a collaboration agreement (installation project) over a duration exceeding 6 months will amount to their permanent establishment in India. As regards the reference made to AADTs entered by the Govt. of India with other Government, I feel that no inference can be drawn on the basis of absence of specific words in the agreement under consideration. It can mean both ways :
(a) that the intention was not made specific in this particular agreement, or
(b) that the specific coverage of these words was not intended at all, as suggested by authorised representative.
I do not see any reason why the Government would have desired not to include these words in the agreement with the Govt. of West Germany alone. Therefore, I am not inclined to subscribe to the view/assumption that the omission was intentional. Secondly, the words now forming the definition of PE are wide enough to cover technical/consultancy/supervisory services. There is no obvious exclusion of such services in the present wording of permanent establishment. Under the circumstances, this ground of appeal fails.”
2. The contention of the learned representative of the assessee was that the assessee has been providing technical services relating to supervision of erection of various kinds of plants in India including GNFC, atomic energy and others, for the last several years. The representative referred to a certificate in this regard placed at page 14 of the paperbook, that it has been accepted by the Revenue for all of the earlier assessment years and subsequent assessment years that the assessee has no permanent establishment in India. The learned representative referred to the submissions that were made before the CIT(A) in this regard and submitted that the assessee was rendering advices to its Indian clients in regard to erection of plants, etc. The nature of supervision work involved an expert in the line to examine the erection and installation. Since there were several stages of plants involved, each stage requiring a special expertise, the expert who was sent to supervise was one who was familiar with the various stages. He submitted that no one expert was familiar with all of the stages and accordingly at the completion of each stage, a supervisor would visit and examine and would return to Germany. He submitted that since the nature of work was mere supervision and not of erection or installation as such, there was never the requirement of establishing an office for the purpose. He submitted that the Double Taxation Agreement between India and Germany, art. II(1)(h)(cc) constitute a permanent establishment to mean a building site or construction or installation project only if it lasts more than six months. He contended that the Department is confusing itself to the term “installation project” as to mean even supervisory services. He submitted that there is a difference between installation of a project and supervision of the project installation because supervision of the installation does not concern with the actual installation but concerns itself or limits itself to advices being rendered in connection with the installation. He submitted that the various stages of supervision, no doubt, did take more than six months, but that by itself would not convert the supervision of the project as installation of the project. He referred to the decision of the Andhra Pradesh High Court in CIT vs. Visakhapatnam Port Trust (1983) 144 ITR 146 (AP), where a German company was supplying equipment to the Port Trust authorities, which equipment was assembled and set up by the Port Trust and the German company supervised the installation through its engineers and the question was whether the German company could be said to be having a permanent establishment in India. The conclusion of the High Court was that because the engineers who were supervising, did not actually carry on any construction, installation or assembling project or the like on behalf of the German company in India but only supervised it, such a supervision did not bring about a permanent establishment in India. He also referred to the decision of the Tribunal in Dy. CIT vs. CIT Alcatel (1993) 47 ITD 275 where a French concern was providing supervision on installation and the question was whether such supervision of installation amounted to installation or not and the Tribunal held that it does not amount to installation. He further referred to the decision of the Tribunal in Boudier Christian vs. ITO (1993) 46 ITD 114 where again a French company was only to provide technical services and the question was whether it had a permanent establishment or not. The conclusion was that there was no permanent establishment.
The contention of the Departmental Representative, on the other hand, was that the AP High Court was dealing with the Double Taxation Agreement that was signed in 1960 and the one that covers the present assessee is signed in 1985 and there has been considerable change in the two agreements. He submitted that, therefore, the finding in the AP decision may not be applicable as such. He submitted that art. III of the Double Taxation Agreement provided the manner of taxability of profits, etc. which has undergone changes from the 1960 and 1985. The further plea raised by him was the background based on which the agreements have been drawn up must be appreciated. The Departmental Representative further submitted that where the contract of supervision is integrated in the entire contract as such, then it would be part of the installation project.
3. The rival contentions in regard to the above have been very carefully considered. Our limited purview at the moment or in the instant facts of the case is whether the assessee could be said to be having a permanent establishment in India with reference to the provisions of art. II(1)(h)(aa) & (cc) of the Double Taxation Agreement. For the sake of facility, the said clause is reproduced below :
“(h)(aa). The term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
(cc). A building site or construction or installation project constitutes a permanent establishment only if it lasts more than six months.”
Because the Departmental Representative had submitted that there is substantial modification in the terms of the Agreements of 1960 and 1985 with reference to the manner of taxation, the art. III in both the agreements is reproduced below :
1985 Agreement art. III
1960 Agreement art. III
1. The profits of an enterprise of a contracting State shall be taxable only in that State unless the enterprise carries on business in the other contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
1. Subject to the provision of para. (3) below, tax shall not be levied in one of the territories on the industrial or commercial profits of an enterprise of the other territory unless profits are derived in the first-mentioned territory through a per manent establishment of the said enterprise situated in the first-mentioned territory. If profits are so derived, tax may be levied in the first mentioned territory on the profits attributable to the said per manent establishment.
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 permanent establishment situated therein, there shall in each contracting State be attributed to that permanent establishment the proofits 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 permanent establishment.
2. There shall be attributed of the permanent establishment of an enterprise of one of the territories situated in the other territory, the industrial or commercial profits which it might be expected to derive in that other territory if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arms length with the enterprise of which it is the permanent establishment. In any case, where the correct amount of profits attributable to a permanent establishment is incapable of the determination, or the ascertainment thereof presents exceptional difficulies, the profits attributable to the establishment may be estimated on a reasonable basis
3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the premanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, and according to the domestic law of the contracting State in which the permanent establishment is situated.
3. For the purpose of this agreement the term Industrial or commercial profits shall not include income in the form of rents, royalties, interest, dividends, management charges, remuneration for labour or personal services or income from the operation of ships or aircraft but shall include rents or royalties in respect of cinematographic films.
4. Insofar as it has been customary in a contracting State to determine the profits to be attributable to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in para. 2 shall preclude that contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this article.
5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.
6. For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.
7. Where profits include items of income which are dealt with separately in other articles of this agreement, then the provisions of those articles shall not be affected by the provisions of this article.
Reading of the above provisions of art. III of the 1985 and 1960 Agreements, we find that there is some improvement but in substance they remain the same i.e. taxability is to be limited with reference to that part that is attributable to the permanent establishment. The term “permanent establishment” as contained in art. II(1)(h)(cc) of the 1985 is art. II(1)(bb) in the 1960 Agreement, which is also reproduced below for the sake of facility :
“(bb) an enterprise of one of the territories shall be deemed to have a fixed place of business in the other territory if it carries on in that other territory a construction, installation of assembly project or the like.”
The only difference that we can note is that in the 1960 Agreement it is taking of assembly project and in the 1985 Agreement it is terming it as “installation project”. The facts as they are, the assessee had rendered supervisory services to the Indian concern and the erection and installation were carried on by the Indian concern. Identical facts were examined by the AP High Court (supra). Their Lordships of the AP High Court have categorically held “It is not, therefore, permissible to equate the situation with one where the German Engineer has instead of merely supervising the above operations, was himself incharge of those operations on behalf of the German company”. Since the assessee was not concerned with the actual installation, but mere supervision, which is not the same thing as installation project, the assessee cannot be said to be having a permanent establishment in India. Therefore, this point is decided in favour of the assessee.